Edgar Filing: AVIS BUDGET GROUP, INC.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Form 10-Q

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 September 30, 2012

¨	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. 001-10308

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 x 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.

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 106,431,978 shares as of October 31, 2012.

Table of Contents


		Page

PART I	Financial Information (Unaudited)

Item 1.	Financial Statements

	Consolidated Condensed Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2012 and 2011 (Unaudited)		3

	Consolidated Condensed Balance Sheets as of September 30, 2012 and December 31, 2011 (Unaudited)		4

	Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011 (Unaudited)		5

	Notes to Consolidated Condensed Financial Statements (Unaudited)		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		32

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		41

Item 4.	Controls and Procedures		42

PART II	Other Information

Item 6.	Exhibits		42

	Signatures		43

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report on Form 10-Q may be considered “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995. The forward-looking statements contained herein are subject to known and unknown risks, uncertainties, assumptions and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by any such forward-looking statements. Forward-looking statements include information concerning our future financial performance, business strategy, projected plans and objectives. These statements may be identified by the fact that they do not relate to historical or current facts and may use words such as “believes,” “expects,” “anticipates,” “will,” “should,” “could,” “may,” “would,” “intends,” “projects,” “estimates,” “plans,” and similar words, expressions or phrases. 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;

•

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

•

risks related to our acquisition of Avis Europe plc (“Avis Europe”), including our ability to realize the synergies contemplated by the transaction and our ability to promptly and effectively integrate the businesses of Avis Europe and Avis Budget Group, Inc.;

•

the results of operations or financial condition of the manufacturers of our cars, which could impact their ability to perform their payment obligations under the agreements we have with them, including repurchase and/or guaranteed depreciation arrangements, 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;

•

a change in travel demand, including any reduction in airline passenger traffic;

•

any change in economic conditions generally, particularly during our peak season or in key market segments;

•

our ability to continue to achieve and maintain cost savings and successfully implement our business strategies;

•

our ability to obtain financing for our operations, including the funding of our vehicle fleet via the asset-backed securities and lending market consistent with current costs;

•

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, third-party suppliers of other services and co-marketing arrangements with third parties;

•

our ability to utilize derivative instruments, and the impact of derivative instruments we currently utilize, which can be affected by fluctuations in interest rates, gasoline prices and exchange rates, changes in government regulations and other factors;

•

our ability to accurately estimate our future results;

•

a major disruption in our communication networks or information systems;

•

our exposure to uninsured claims in excess of historical levels;

•

any failure or inability by us to comply with laws, regulations or contractual obligations or any changes in laws, regulations or contractual obligations, including with respect to personally identifiable information;

•

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

•

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

•

risks related to our indebtedness, including our substantial outstanding debt obligations and our ability to incur substantially more debt;

•

our ability to meet the financial and other covenants contained in the agreements governing our indebtedness;

•

the terms of agreements among us and our former real estate, hospitality and travel distribution businesses following the separation of those businesses from us in 2006, particularly with respect to the allocation of assets and liabilities, including contingent liabilities and guarantees, the ability of each of the separated companies to perform its obligations, including 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;

•

risks associated with litigation or governmental or regulatory inquiries or investigations involving our Company;

•

risks related to tax obligations and the effect of future changes in accounting standards;

•

risks related to completed or future acquisitions or investments that we may pursue, including any incurrence of incremental indebtedness to help fund such transactions and our ability to promptly and effectively integrate any acquired businesses; and

•

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

We operate in a continuously changing business environment and new risk factors emerge from time to time. New risk factors, factors beyond our control, or changes in the impact of identified risk factors may cause actual results to differ materially from those set forth in any forward-looking statements. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. Moreover, we do not assume responsibility for the accuracy and completeness of those statements. Other factors and assumptions not identified above, including those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and other portions of our 2011 Annual Report on Form 10-K, 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.

Although we believe that our assumptions are reasonable, any or all of our forward-looking statements may prove to be inaccurate and we can make no guarantees about our future performance. Should unknown risks or uncertainties materialize or underlying assumptions prove inaccurate, actual results could differ materially from past results and/or those anticipated, estimated or projected. Except to the extent of our obligations 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. 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.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Avis Budget Group, Inc.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(In millions, except per share data)

(Unaudited)


	Three Months Ended September 30,					Nine Months Ended September 30,
	2012			2011		2012		2011
Revenues
Vehicle rental	$	1,582		$	1,211	$	4,084	$	3,163
Other		588			412		1,575		1,106

Net revenues		2,170			1,623		5,659		4,269


Expenses
Operating		1,036			783		2,882		2,166
Vehicle depreciation and lease charges, net		436			304		1,088		840
Selling, general and administrative		244			190		696		511
Vehicle interest, net		77			74		231		205
Non-vehicle related depreciation and amortization		30			22		92		65
Interest expense related to corporate debt, net:
Interest expense		67			48		208		143
Early extinguishment of debt		2			—		52		—
Transaction-related costs		11			66		21		102
Restructuring expense		7			—		26		1

Total expenses		1,910			1,487		5,296		4,033


Income before income taxes		260			136		363		236
Provision for (benefit from) income taxes		(20	)		54		27		95


Net income	$	280		$	82	$	336	$	141


Comprehensive income	$	308		$	15	$	361	$	130


Earnings per share
Basic	$	2.62		$	0.78	$	3.16	$	1.34
Diluted	$	2.38		$	0.65	$	2.77	$	1.14

See Notes to Consolidated Condensed Financial Statements (Unaudited).

Avis Budget Group, Inc.

CONSOLIDATED CONDENSED BALANCE SHEETS

(In millions, except share data)

(Unaudited)


	September 30, 2012			December 31, 2011
Assets
Current assets:
Cash and cash equivalents	$	554		$	534
Receivables		640			507
Deferred income taxes		205			120
Other current assets		527			380

Total current assets		1,926			1,541

Property and equipment, net		499			493
Deferred income taxes		1,265			444
Goodwill		348			353
Other intangibles, net		708			713
Other non-current assets		249			304

Total assets exclusive of assets under vehicle programs		4,995			3,848


Assets under vehicle programs:
Program cash		101			11
Vehicles, net		10,343			8,356
Receivables from vehicle manufacturers and other		575			380
Investment in Avis Budget Rental Car Funding (AESOP) LLC—related party		362			343

		11,381			9,090

Total assets	$	16,376		$	12,938


Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and other current liabilities	$	1,576		$	1,433
Short-term debt and current portion of long-term debt		81			37

Total current liabilities		1,657			1,470

Long-term debt		2,886			3,168
Other non-current liabilities		843			960

Total liabilities exclusive of liabilities under vehicle programs		5,386			5,598


Liabilities under vehicle programs:
Debt		2,062			990
Debt due to Avis Budget Rental Car Funding (AESOP) LLC—related party		5,813			4,574
Deferred income taxes		2,017			982
Other		307			382

		10,199			6,928

Commitments and contingencies (Note 13)

Stockholders’ equity:
Preferred stock, $0.01 par value—authorized 10 million shares; none issued and outstanding		—			—
Common stock, $0.01 par value—authorized 250 million shares; issued 137,067,601 and 137,028,464 shares		1			1
Additional paid-in capital		8,232			8,532
Accumulated deficit		(2,330	)		(2,666	)
Accumulated other comprehensive income		103			78
Treasury stock, at cost—30,183,995 and 31,551,170 shares		(5,215	)		(5,533	)

Total stockholders’ equity		791			412

Total liabilities and stockholders’ equity	$	16,376		$	12,938

See Notes to Consolidated Condensed Financial Statements (Unaudited).

Avis Budget Group, Inc.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)


	Nine Months Ended September 30,
	2012			2011
Operating activities
Net income	$	336		$	141

Adjustments to reconcile net income to net cash provided by operating activities:
Vehicle depreciation		1,100			1,034
Gain on sale of vehicles, net		(107	)		(224	)
Non-vehicle related depreciation and amortization		92			65
Amortization of debt financing fees		43			67
Net change in assets and liabilities, excluding the impact of acquisitions and dispositions:
Receivables		(146	)		(36	)
Income taxes and deferred income taxes		(12	)		58
Accounts payable and other current liabilities		28			83
Other, net		190			84

Net cash provided by operating activities		1,524			1,272


Investing activities
Property and equipment additions		(82	)		(30	)
Proceeds received on asset sales		16			9
Acquisition-related restricted cash		—			(401	)
Other, net		(30	)		(11	)

Net cash used in investing activities exclusive of vehicle programs		(96	)		(433	)


Vehicle programs:
Increase in program cash		(90	)		(19	)
Investment in vehicles		(8,962	)		(6,701	)
Proceeds received on disposition of vehicles		6,136			4,379
Investment in debt securities of Avis Budget Rental Car Funding (AESOP) LLC—related party		—			(400	)
Proceeds from debt securities of Avis Budget Rental Car Funding (AESOP) LLC—related party		—			400

		(2,916	)		(2,341	)

Net cash used in investing activities		(3,012	)		(2,774	)

Avis Budget Group, Inc.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued)

(In millions)


	Nine Months Ended September 30,
	2012			2011
Financing activities
Proceeds from long-term borrowings		654			—
Principal payments on long-term borrowings		(907	)		(6	)
Net change in short-term borrowings		1			—
Purchases of warrants		(26	)		—
Proceeds from sale of call options		38			—
Debt financing fees		(11	)		(33	)
Other, net		1			1

Net cash used in financing activities exclusive of vehicle programs		(250	)		(38	)


Vehicle programs:
Proceeds from borrowings		9,238			8,235
Principal payments on borrowings		(7,467	)		(6,568	)
Debt financing fees		(18	)		(20	)

		1,753			1,647

Net cash provided by financing activities		1,503			1,609


Effect of changes in exchange rates on cash and cash equivalents		5			(16	)


Net increase in cash and cash equivalents		20			91
Cash and cash equivalents, beginning of period		534			911

Cash and cash equivalents, end of period	$	554		$	1,002

See Notes to Consolidated Condensed Financial Statements (Unaudited).

Avis Budget Group, Inc.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)

(Unless otherwise noted, all dollar 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 worldwide. 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 the following business segments:

•

North America—provides car rentals in the United States and vehicle rentals in Canada, as well as related products and services.

•

International—provides, and licenses the Company’s brands to third parties for, vehicle rentals and ancillary products and services primarily in Europe, the Middle East, Asia, Africa, South America, central America, the Caribbean, Australia and New Zealand.

•

Truck Rental—provides truck rentals and related services to consumers and 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 (“GAAP”), management makes estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgment 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 2011 Annual Report on Form 10-K.

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 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 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.

Transaction-related Costs. The Company completed the acquisition of Avis Europe plc (“Avis Europe”) on October 3, 2011. During the three and nine months ended September 30, 2012, transaction-related costs primarily include expenses related to the integration of Avis Europe’s operations with the Company’s. In the three and nine months ended September 30, 2011, transaction-related costs include due-diligence and other costs associated with the Company’s agreement to acquire Avis Europe and its previous efforts to acquire Dollar Thrifty Automotive Group, Inc. (“Dollar Thrifty”).

Foreign-currency Transactions. The Company records the net gain or loss of foreign-currency transactions on certain intercompany loans and the unrealized gain or loss on intercompany loan hedges within interest expense related to corporate debt, net. During the three and nine months ended September 30, 2012, the Company recorded losses of $3 million and $12 million, respectively, on such items. There were no such items in the three and nine months ended September 30, 2011.

Adoption of New Accounting Standards

On January 1, 2012, the Company adopted accounting pronouncements amending (i) fair value measurement and disclosure requirements for financial assets and liabilities, (ii) the presentation of comprehensive income and (iii) the rules for testing goodwill for impairment. Other than additional disclosure for the presentation of the Company’s other comprehensive income, these pronouncements did not have a significant impact on the Company’s financial statements.

2.	Restructuring

During fourth quarter 2011, subsequent to the acquisition of Avis Europe, the Company implemented a restructuring initiative, to identify synergies across the Company, enhance organizational efficiencies and consolidate and rationalize processes and facilities. During the nine months ended September 30, 2012, as part of this process, the Company formally communicated the termination of employment to approximately 350 employees and recorded $26 million of expenses in connection with these initiatives. These expenses primarily represent costs associated with severance, outplacement services and other costs associated with employee terminations. As of September 30, 2012, the Company has terminated substantially all of these employees. The Company expects further restructuring expenses of approximately $40 million to be incurred through 2013.

The following tables summarize the changes to our restructuring-related liabilities and identify the amounts recorded within the Company’s reportable segments and by category for restructuring expenses and corresponding payments and utilizations:


	North America			International			Total
Balance as of January 1, 2012	$	1		$	1		$	2
Restructuring expense		1			25			26
Cash payment/utilization		(1	)		(16	)		(17	)

Balance as of September 30, 2012	$	1		$	10		$	11


	Personnel Related			Facility Related			Total
Balance as of January 1, 2012	$	1		$	1		$	2
Restructuring expense		26			—			26
Cash payment/utilization		(17	)		—			(17	)

Balance as of September 30, 2012	$	10		$	1		$	11

3.	Earnings Per Share

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Net income for basic EPS	$	280	$	82	$	336	$	141
Convertible note interest, net of tax		1		2		4		5

Net income for diluted EPS		281		84		340		146


Basic weighted average shares outstanding		106.8		105.4		106.5		105.1
Options, warrants and non-vested stock		2.3		2.3		2.2		2.6
Convertible debt		8.9		21.2		14.0		21.2

Diluted weighted average shares outstanding		118.0		128.9		122.7		128.9


Earnings per share:
Basic	$	2.62	$	0.78	$	3.16	$	1.34
Diluted	$	2.38	$	0.65	$	2.77	$	1.14

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 September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Options ^(a)		0.2		1.1		0.2		1.2
Warrants ^{(b) (c)}		8.9		21.2		8.9		21.2

^(a)	The weighted average exercise price for anti-dilutive options for the three and nine months ended September 30, 2012 was $17.17 and $16.35, respectively. For the three and nine months ended September 30, 2011, the weighted average exercise price for anti-dilutive options was $24.59.

^(b)	Represents all outstanding warrants as of September 30, 2012 and 2011, which had an exercise price of $22.50.

^(c)

The decrease in the number of warrants underlying the 3¹/₂% convertible notes that were anti-dilutive was related to the Company’s repurchase of a portion of its 3¹/₂% convertible notes and warrants (see Note 11—Long-term Debt and Borrowing Arrangements and Note 14—Stockholders’ Equity for more information).

4.	Acquisitions

Avis Europe

On October 3, 2011, the Company completed the acquisition of the entire issued share capital of Avis Europe for $976 million and subsequently repaid $649 million of Avis Europe’s assumed indebtedness. Avis Europe provided vehicle rental and ancillary products and services in Europe, the Middle East, Africa and Asia. The acquisition reunited the global operations of the Avis and Budget brands under one corporate umbrella.

The excess of the purchase price over the fair value of net assets acquired was allocated to goodwill, which was assigned to the Company’s International segment. The goodwill is not expected to be deductible for tax purposes. The fair value of the assets acquired and liabilities assumed reflects various fair value estimates and analyses, including work performed by third-party valuation specialists. Post-closing adjustments to the fair values of certain tangible assets and liabilities acquired, identifiable intangible assets, income and non-income based taxes, and residual goodwill did not have a material impact on the Company’s Consolidated Condensed Statements of Comprehensive Income for the three and nine months ended September 30, 2012 or the Consolidated Condensed Balance Sheets as of September 30, 2012 and December 31, 2011.

Other intangibles consisted primarily of $188 million related to license agreements and $67 million related to customer relationships. These license agreements are amortized over a weighted-average life of approximately 20 years. Customer relationships are amortized over a weighted-average life of approximately 12 years.

Other

During the nine months ended September 30, 2012, the Company reacquired its vehicle rental rights in several territories for $5 million, which included $4 million of associated vehicles and approximately $1 million valued as license agreements. This acquisition, which related to the Company’s North America segment, was not individually significant to the Company’s results of operations, financial position or cash flows.

5.	Other Current Assets

Other current assets consisted of:


	As of September 30, 2012		As of December 31, 2011
Sales and use tax	$	191	$	92
Prepaid expenses		181		179
Other		155		109

	$	527	$	380

6.	Intangible Assets

Intangible assets consisted of:


	As of September 30, 2012						As of December 31, 2011
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortized Intangible Assets
License agreements	$	254	$	37	$	217	$	252	$	29	$	223
Customer relationships		83		17		66		80		12		68
Other		2		1		1		2		1		1

	$	339	$	55	$	284	$	334	$	42	$	292


Unamortized Intangible Assets
Goodwill ^(a)	$	348					$	353

Trademarks ^(a)	$	424					$	421

^(a)	The changes in goodwill and trademarks are primarily due to fluctuations in currency exchange rates.

Amortization expense relating to all intangible assets was approximately $4 million and $1 million during third quarter 2012 and 2011, respectively. For the nine months ended September 30, 2012 and 2011, amortization expense was approximately $15 million and $2 million, respectively. Based on the Company’s amortizable assets at September 30, 2012, the Company expects amortization expense of approximately $5 million for the remainder of 2012 and approximately $18 million for each of the five fiscal years thereafter.

7.	Financial Instruments

The fair value of the Company’s financial instruments is 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 credit spread that market participants would demand for the instruments as of the measurement date. 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.

Debt Instruments

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


	As of September 30, 2012				As of December 31, 2011
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Corporate debt
Short-term debt and current portion of long-term debt ^(a)	$	81	$	81	$	37	$	37
Long-term debt, excluding convertible debt ^(a)		2,742		2,919		2,823		2,842
Convertible debt ^(a)		144		175		345		354

Debt under vehicle programs
Vehicle-backed debt due to Avis Budget Rental Car Funding (AESOP) LLC ^(a)	$	5,813	$	6,026	$	4,574	$	4,643
Vehicle-backed debt ^(a)		2,061		2,076		986		1,001
Interest rate swaps and interest rate contracts ^(b)		1		1		4		4

^(a)	The fair value measurements are based on significant observable inputs (Level 2).

^(b)	Derivatives in a liability position.

Derivative Instruments and Hedging Activities

The Company uses foreign exchange contracts to manage its exposure to changes in 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, Canadian and New Zealand dollars, the Euro and the British pound sterling. The majority of forward contracts do not qualify for hedge accounting treatment. The fluctuations in the value of these forward contracts do, however, largely offset the impact of changes in the value of the underlying risk they economically hedge. The amount of gains or losses reclassified from accumulated other comprehensive income to earnings resulting from ineffectiveness or from excluding a component of the forward contracts’ gain or loss from the effectiveness calculation for cash flow hedges during the three and nine months ended September 30, 2012 and 2011 was not material, nor is the amount of gains or losses the Company expects to reclassify from accumulated other comprehensive income to earnings over the next 12 months.

The Company uses various hedging strategies including interest rate swaps and interest rate caps to create an appropriate mix of fixed and floating rate assets and liabilities. The Company uses interest rate swaps to manage the risk related to its floating rate corporate debt and its floating rate vehicle-backed debt. The Company records the effective portion of changes in the fair value of its cash flow hedges to other comprehensive income, net of tax, and subsequently reclassifies these amounts into earnings in the period during which the hedged transaction is recognized. The Company records the gains or losses related to freestanding derivatives, which are not designated as a hedge for accounting purposes, in its consolidated results of operations. The changes in fair values of hedges that were determined to be ineffective are immediately reclassified from accumulated other comprehensive income into earnings. The Company estimates that approximately $3 million of losses deferred in accumulated other comprehensive income will be recognized over the next 12 months, which is expected to be offset in earnings by the impact of the underlying hedged items.

From time to time, the Company enters into derivative commodity contracts to manage its exposure to changes in the price of unleaded gasoline. Changes in the fair value of these derivatives are recorded within operating expenses.

Certain of the Company’s derivative instruments contain collateral support provisions that require the Company to post cash collateral to the extent that such derivatives are in a liability position. The aggregate fair value of such derivatives that are in a liability position and the aggregate fair value of assets needed to settle these derivatives as of September 30, 2012 was approximately $4 million, for which the Company has posted cash collateral in the normal course of business.

As of September 30, 2012, the Company held derivative instruments with absolute notional values as follows: interest rate caps of approximately $7.9 billion, (representing approximately $6.6 billion of interest rate caps sold, partially offset by approximately $1.3 billion of interest rate caps purchased, which amount excludes $5.3 billion of interest rate caps purchased by the Company’s Avis Budget Rental Car Funding (AESOP) LLC (“Avis Budget Rental Car Funding”) subsidiary), interest rate swaps of $625 million, foreign exchange forward contracts of $194 million, foreign exchange swaps of $832 million and commodity contracts for the purchase of 5 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 various 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 of the Company and counterparties, credit curves, counterparty creditworthiness and currency exchange rates. These factors are applied on a consistent basis and are based upon observable inputs where available.

Fair values of derivative instruments are as follows:


	As of September 30, 2012				As of December 31, 2011
	Fair Value, Asset Derivatives		Fair Value, Liability Derivatives		Fair Value, Asset Derivatives		Fair Value, Liability Derivatives
Derivatives designated as hedging instruments ^(a)
Interest rate swaps ^(b)	$	—	$	2	$	—	$	3

Derivatives not designated as hedging instruments ^(a)
Foreign exchange forward contracts ^(c)		3		8		26		1
Interest rate contracts ^(d)		1		1		2		4
Interest rate swaps ^(b)		—		12		—		—
Commodity contracts ^(c)		1		—		—		1

Total	$	5	$	23	$	28	$	9

^(a)

Amounts in this table exclude derivatives issued by 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 accumulated other comprehensive income, as discussed in Note 14—Stockholders’ Equity.

^(b)	Included in other non-current liabilities.

^(c)	Included in other current assets and other current liabilities.

^(d)	Included in assets under vehicle programs and liabilities under vehicle programs.

The effect of derivatives recognized in the Company’s Consolidated Condensed Financial Statements are as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Derivatives designated as hedging instruments
Interest rate swaps ^(a)	$	—		$	8		$	11		$	24

Derivatives not designated as hedging instruments
Foreign exchange contracts ^(b)		(2	)		(13	)		—			(29	)
Commodity contracts ^(c)		3			(3	)		4			(2	)
Interest rate contracts ^(d)		(5	)		—			(13	)		(1	)

Total	$	(4	)	$	(8	)	$	2		$	(8	)

^(a)	Recognized, net of tax, as a component of other comprehensive income within stockholders’ equity.

^(b)

For the three and nine months ended September 30, 2012, amounts are included in operating expenses. For the three months ended September 30, 2011, includes $14 million loss in transaction-related costs and a $1 million gain in operating expenses. For the nine months ended September 30, 2011, includes a $31 million loss in transaction-related costs and a $2 million gain in operating expenses.

^(c)	Included in operating expenses.

^(d)	Included in interest expense.

8.	Vehicle Rental Activities

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


	As of September 30, 2012			As of December 31, 2011
Rental vehicles	$	10,799		$	9,077
Less: Accumulated depreciation		(1,323	)		(1,258	)

		9,476			7,819
Vehicles held for sale		867			537

Vehicles, net	$	10,343		$	8,356

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Depreciation expense	$	406		$	370		$	1,100		$	1,034
Lease charges		38			10			95			30
Gain on sales of vehicles, net and cost of vehicle disposition		(8	)		(76	)		(107	)		(224	)

Vehicle depreciation and lease charges, net	$	436		$	304		$	1,088		$	840

9.	Income Taxes

The Company’s effective tax rate for the nine months ended September 30, 2012 is a provision of 7.4%. Such rate differs from the Federal statutory rate of 35.0% primarily due to an effective settlement of a $128 million unrecognized tax benefit for pre-Separation taxes, partially offset by the treatment of a portion of the expenses for the early extinguishment of corporate debt.

The Company’s effective tax rate for the nine months ended September 30, 2011 was a provision of 40.3%. Such rate differs from the Federal statutory rate of 35.0% primarily due to state taxes and the non-deductibility of certain transaction-related costs.

10.

Accounts Payable and Other Current Liabilities

Accounts payable and other current liabilities consisted of:


	As of September 30, 2012		As of December 31, 2011
Accounts payable	$	360	$	312
Accrued sales and use taxes		240		173
Accrued payroll and related		185		200
Public liability and property damage insurance liabilities – current		141		128
Income taxes payable – current		103		109
Deferred revenue		66		51
Advertising and marketing		87		77
Other		394		383

	$	1,576	$	1,433

11.

Long-term Debt and Borrowing Arrangements

Long-term and other borrowing arrangements consisted of:


	Maturity Dates		As of September 30, 2012		As of December 31, 2011
Floating rate term loan ^(a)		April 2014	$	—	$	267
Floating rate notes ^(b)		May 2014		250		250
7⁵/₈% notes		May 2014		—		200
3¹/₂% convertible notes ^(c)		October 2014		144		345
Floating rate term loan ^{(a) (d)}		May 2016		49		20
7³/₄% notes		May 2016		325		375
9⁵/₈% notes		March 2018		445		445
Floating rate term loan ^{(a) (e)}		September 2018		233		412
8¹/₄% notes		January 2019		731		602
Floating rate term loan ^{(a) (f)}		March 2019		493		—
9³/₄% notes		March 2020		250		250

				2,920		3,166
Other				47		39

Total				2,967		3,205
Less: Short-term debt and current portion of long-term debt				81		37

Long-term debt			$	2,886	$	3,168

^(a)

The floating rate term loans are part of the Company’s senior credit facility, which include its revolving credit facility maturing 2016, and 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.

^(b)	As of September 30, 2012, the floating rate notes due 2014 bear interest at three-month LIBOR, plus 250 basis points, for an aggregate rate of 2.93%.

^(c)	As of September 30, 2012, the 3¹/₂% convertible notes are convertible by the holders into approximately 9 million shares of our common stock.

^(d)	As of September 30, 2012, the floating rate term loan due 2016 bears interest at three-month LIBOR, plus 300 basis points, for an aggregate rate of 3.45%.

^(e)	As of September 30, 2012, the floating rate term loan due 2018 bears interest at the greater of three-month LIBOR or 1.25%, plus 500 basis points, for an aggregate rate of 6.25%.

^(f)	As of September 30, 2012, the floating term rate loan due 2019 bears interest at the greater of three-month LIBOR or 1.0%, plus 325 basis points, for an aggregate rate of 4.25%.

During March 2012, the Company amended its Amended and Restated Credit Agreement, dated as of May 3, 2011 (the “Credit Agreement”) to issue a $500 million term loan, at 99.0% of par, that will mature in March 2019.

During March 2012, the Company issued $125 million aggregate principal amount of 8¹/₄% Senior Notes due 2019. The notes constitute a further issuance of the $600 million aggregate principal amount issued in fourth quarter 2010. The notes pay interest semi-annually on January 15 and July 15 of each year, beginning July 2012. The notes are unsecured obligations of Avis Budget Car Rental and are guaranteed on a senior basis by the Company and certain of its domestic subsidiaries. These notes were issued at 103.5% of par. The notes rank equally with all of the Company’s existing and future senior unsecured indebtedness and are senior to all of the Company’s existing and future subordinated indebtedness. The Company has the right to redeem these notes in whole or in part at any time after October 15, 2014 at the applicable redemption price, plus any accrued and unpaid interest through the redemption date.

During June 2012, the Company borrowed an additional $30 million under its floating rate term loan due 2016, with the proceeds used primarily to repay a portion of its floating rate term loan due 2018.

During the nine months ended September 30, 2012, the Company (i) repurchased approximately $201 million of its 3¹/₂% convertible notes for approximately $239 million, plus accrued interest, (ii) repaid the $267 million outstanding principal balance of its floating rate term loan due 2014, (iii) repaid $180 million of its floating rate term loan due 2018, (iv) repaid $200 million of its 7⁵/₈% notes due 2014 and (v) repaid $50 million of its 7³/₄% notes due 2016. The Company incurred $52 million in expenses related to the early extinguishment of this debt.

Committed Credit Facilities and Available Funding Arrangements

At September 30, 2012, the committed credit facilities available to the Company and/or its subsidiaries included:


	Total Capacity		Outstanding Borrowings		Letters of Credit Issued		Available Capacity
Revolving credit facility maturing 2016 ^(a)	$	1,435	$	—	$	1,155		$	280
Other facilities ^(b)		10		3		—			7

^(a)

This revolving credit facility matures in 2016 and bears interest of one-month LIBOR, plus 300 basis points. The senior credit facility, which encompasses the floating rate term loans due 2016, 2018 and 2019 and the revolving credit facility, is secured by pledges of all of the capital stock of all of the Company’s domestic subsidiaries and up to 66% of the capital stock of each foreign subsidiary directly owned by the Company’s domestic subsidiaries, subject to certain exceptions, and liens on substantially all of the Company’s intellectual property and certain other real and personal property.

^(b)	These facilities encompass bank overdraft lines of credit, bearing interest of 4.75% to 5.69% as of September 30, 2012.

At September 30, 2012 the Company had various uncommitted credit facilities available, under which it had drawn approximately $30 million, which bear interest at rates between 0.45% and 5.97%.

The agreements governing the Company’s indebtedness contain restrictive covenants, including restrictions on dividends paid to the Company by certain of its subsidiaries, the incurrence of additional indebtedness by the Company and certain of its subsidiaries, acquisitions, mergers, liquidations, and sale and leaseback transactions. The Company’s senior credit facility contains maximum leverage and minimum interest coverage ratio requirements. As of September 30, 2012, the Company was in compliance with the financial covenants of its senior credit facility.

12.

Debt Under Vehicle Programs and Borrowing Arrangements

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


	As of September 30, 2012		As of December 31, 2011
Debt due to Avis Budget Rental Car Funding ^(a)	$	5,813	$	4,574
Budget Truck financing ^(b)		280		188
Capital leases ^(c)		500		348
Other ^(c)		1,282		454

	$	7,875	$	5,564

^(a)	The increase principally reflects increased borrowing to fund an increase in the size of the Company’s U.S. car rental fleet.

^(b)	The increase principally reflects increased borrowing to fund vehicle purchases for the Company’s U.S. truck rental fleet.

^(c)	The increase principally reflects increased borrowing to fund an increase in the size of the Company’s international vehicle rental fleet.

In 2010, the Company established a variable funding note program with a maximum capacity of $400 million of notes to be issued by Avis Budget Rental Car Funding to the Company to finance the purchase of vehicles. During the nine months ended September 30, 2012, no funding occurred under the program.

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 September 30, 2012:


	Vehicle- Backed Debt
Within 1 year ^(a)	$	1,122
Between 1 and 2 years		2,955
Between 2 and 3 years		1,258
Between 3 and 4 years		742
Between 4 and 5 years		1,033
Thereafter		765

	$	7,875

^(a)	Vehicle-backed debt maturing within one year includes term asset-backed securities of approximately $657 million and bank and bank-sponsored borrowings of $465 million.

As of September 30, 2012, 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)	$	7,318	$	5,813	$	1,505
Budget Truck financing ^(c)		295		280		15
Capital leases		529		500		29
Other ^(d)		1,545		1,282		263

	$	9,687	$	7,875	$	1,812

^(a)	Capacity is subject to maintaining sufficient assets to collateralize debt.

^(b)	The outstanding debt is collateralized by approximately $7.5 billion of underlying vehicles and related assets.

^(c)	The outstanding debt is collateralized by $448 million of underlying vehicles and related assets.

^(d)	The outstanding debt is collateralized by approximately $2.3 billion 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 and in some cases also require compliance with certain financial requirements. As of September 30, 2012, the Company is not aware of any instances of non-compliance with any of the financial or restrictive covenants contained in the debt agreements under its vehicle-backed funding programs.

13.

Commitments and Contingencies

Contingencies

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. In connection with the spin-offs of Realogy and Wyndham, the Company entered into a 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, our former Travelport subsidiary and/or the Company’s vehicle rental operations, and in each case incurred or allegedly incurred on or prior to the Separation (“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 (“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.

The Company does not believe that the impact of any resolution of contingent liabilities constituting Assumed Liabilities 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.

The Company is also named in various litigation that is primarily related to the businesses of its former subsidiaries, including Realogy, Wyndham and Travelport and their current or former subsidiaries. The Company is entitled to indemnification from such entities under the Separation Agreement for any liability resulting from such litigation.

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 October 2009, a judgment was entered against the Company in the amount of $16 million following the completion of a jury trial for damages related to breach of contract in the United States District Court for the District of Alaska. The lawsuit, which was filed in 2003, involved breach of contract and other claims by one of the Company’s licensees related to the acquisition of its Budget vehicle rental business in 2002. The Company believes the verdict in this case is unsupported by the evidence. In addition to the judgment for damages, in June 2010, the district court also entered an order against the Company in the amount of $3 million, in favor of the plaintiff’s motions for pre-judgment interest and attorneys’ fees. The Company has filed an appeal of the judgment and attorneys’ fees awarded with the United States Court of Appeals for the Ninth Circuit.

In addition to the matters discussed above, the Company is also involved in claims, legal proceedings and governmental inquiries related, among other things, to its vehicle rental operations, including with respect to contract disputes, business practices including wage-and-hour claims and anti-trust claims, insurance claims, intellectual property claims, environmental issues and other commercial, employment and tax matters, and breach of 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 such matters will not have a material 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 materially 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 under which the Company has agreed to purchase approximately $3.4 billion of vehicles from manufacturers over the next 12 months. The majority of these commitments are subject to the vehicle manufacturers’ satisfying their obligations under their respective repurchase and guaranteed depreciation agreements. 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 and guaranteed depreciation programs.

Other Purchase Commitments

In the normal course of business, the Company makes various commitments to purchase other goods or services from specific suppliers, including those related to capital expenditures. None of the purchase commitments made by the Company as of September 30, 2012 (aggregating approximately $163 million) was individually significant. These purchase obligations extend through 2017.

Concentrations

Concentrations of credit risk at September 30, 2012 include (i) risks related to the Company’s repurchase and guaranteed depreciation agreements with domestic and foreign car manufacturers, including General Motors Company, Ford Motor Company, Chrysler Group LLC, PSA Peugeot Citroën, Volkswagen Group, Toyota Motor Corporation, Kia Motors America and Fiat Group Automobiles S.p.A. and primarily with respect to receivables for program cars that have been returned to car manufacturers and (ii) risks related to Realogy and Wyndham, including receivables of $68 million and $42 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 in 2006. These guarantees relate primarily 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 these leases is estimated to be approximately $78 million, the majority of which expire by the end of 2014. At September 30, 2012, the liability recorded by the Company in connection with these guarantees was approximately $2

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, as applicable. 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

During the nine months ended September 30, 2012, concurrently with the Company’s repurchase of a portion of its 3¹/₂% convertible notes, the Company repurchased warrants for the purchase of the Company’s common stock for $26 million and sold an equal portion of its convertible note hedge for $38 million, reducing the number of shares related to each of the hedge and warrant by approximately 12 million.

Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income were as follows:


	Currency Translation Adjustments		Net Unrealized Gains (Losses) on Cash Flow Hedges			Net Unrealized Gains on Available-for Sale Securities		Minimum Pension Liability Adjustment			Accumulated Other Comprehensive Income
Balance, January 1, 2012	$	159	$	(13	)	$	2	$	(70	)	$	78
Current period change		14		11			—		—			25

Balance, September 30, 2012	$	173	$	(2	)	$	2	$	(70	)	$	103

All components of accumulated other comprehensive income 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 and other gains and losses affecting stockholders’ equity that, under GAAP, are excluded from net income.

The components of other comprehensive income were as follows:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2012		2011			2012		2011
Net income	$	280	$	82		$	336	$	141

Other comprehensive income:
Currency translation adjustment		26		(75	)		14		(37	)
Net unrealized gains (losses) on available-for-sale securities, net of tax		2		—			—		2
Net unrealized gains on cash flow hedges, net of tax		—		8			11		24

		28		(67	)		25		(11	)

Total comprehensive income	$	308	$	15		$	361	$	130

During the nine months ended September 30, 2012 and 2011, the Company’s net unrealized losses on cash flow hedges decreased by $20 million and $40 million ($11 million and $24 million, net of tax), respectively, in 2012 primarily due to the realization of losses in income, and in 2011 primarily due to unrealized gains on derivatives used to manage the interest-rate risk associated with the Company’s vehicle-backed debt and floating rate debt. Such decreases during the nine months ended September 30, 2012 and 2011 included $19 million and $39 million ($12 million and $24 million, net of tax), respectively, related to the Company’s vehicle-backed debt and were 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 estimated fair value of the award at the grant date, which is recognized over the requisite service period. The Company recorded stock-based compensation expense of $4 million and $3 million ($2 million and $2 million, net of tax) during the three months ended September 30, 2012 and 2011, respectively, and $12 million and $14 million ($7 million and $8 million, net of tax), during the nine months ended September 30, 2012 and 2011, 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 2012 and 2011 exercises of stock-based awards did not generate a cash benefit. Approximately $13 million of incremental tax benefits will be recorded in additional paid-in capital when realized in these jurisdictions.

Restricted Stock and Stock Unit Awards

During the nine months ended September 30, 2012, the Company granted 488,000 market-vesting restricted stock units, 835,000 time-based restricted stock units and 486,000 performance-based restricted stock units under the Company’s 2007 Equity and Incentive Plan. Vesting of all or a portion of the market-vesting and performance-based restricted stock units will occur on the third anniversary of the grant date or as otherwise provided by the grant, subject to continued employment through such anniversary, and (i) in the case of the market-based restricted stock units, attainment of certain Company stock price targets and (ii) in the case of the performance-based restricted stock units, attainment of certain Adjusted EBITDA targets. All of the time-based restricted stock units granted during the nine months ended September 30, 2012 vest ratably on the first three anniversaries of the grant date or as otherwise provided by the grant, subject to continued employment.

During the nine months ended September 30, 2011, the Company granted 355,000 market-vesting restricted stock units and 648,000 time-based restricted stock units under the Company’s 2007 Equity and Incentive Plan. Of the market-vesting restricted stock units granted during the nine months ended September 30, 2011, vesting of all or a portion of 262,000 units will occur on the third anniversary of the grant date, and vesting of all or a portion of 93,000 units will occur 50% on each of the third and fourth anniversary of the grant date, in each case subject to continued employment through such applicable anniversary and attainment of certain Company stock price targets for a specified number of trading days. Of the time-based restricted stock units granted during the nine months ended September 30, 2011, 617,000 units vest ratably on the first three anniversaries of the grant date and 31,000 units vest on the first anniversary of the grant date, subject in each case to continued employment.

The Company determined the fair value of its market-vesting restricted stock units granted in 2012 and 2011 using a Monte Carlo simulation model. The weighted-average fair value of each of the Company’s market-vesting restricted stock units which contain 2.5- and three-year vesting periods, issued in 2012, was estimated to be approximately $11.93 and $10.59, respectively. The weighted-average fair value of each of the Company’s market-vesting restricted stock units which contain three- and four-year vesting periods, issued in 2011, was estimated to be approximately $11.39 and $12.53, respectively. The assumptions used to estimate the weighted-average fair values of the market-vesting restricted stock awards in 2012 and 2011 were as follows:


	Nine Months Ended September 30,
	2012	2011
Expected volatility of stock price	50%	48%
Risk-free interest rate	0.30%-0.42%	0.62% - 1.21%
Valuation period	2¹/₂-3 years	3-4 years
Dividend yield	0.0%	0.0%

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


	RSUs					Options
	Number of RSUs			Weighted Average Grant Price		Number of Options			Weighted Average Exercise Price
Balance at January 1, 2012		2,998		$	12.74		3,432		$	7.90
Granted at fair market value		1,809			14.44		—			—
Vested/exercised ^(a)		(1,250	)		12.61		(603	)		0.79
Canceled		(19	)		13.06		(772	)		27.06

Balance at September 30, 2012 ^(b) (c)		3,538			13.65		2,057			2.79

^(a)	During the nine months ended September 30, 2012, 615,000 market-vesting and performance-based RSUs vested. Stock options exercised during the nine months ended September 30, 2012 had an intrinsic value of $8 million.

^(b)

As of September 30, 2012, the Company’s outstanding RSUs had an aggregate intrinsic value of $54 million; aggregate unrecognized compensation expense related to RSUs amounted to $30 million; and the balance of RSUs at September 30, 2012, consists of 1,471,000 related to time-based awards and 2,067,000 related to market-vesting and performance-based awards. Approximately 1,000 time-based RSUs are eligible to vest in 2012, if applicable service criteria are satisfied.

^(c)

As of September 30, 2012, the Company’s outstanding stock options had aggregate intrinsic value of $26 million; there were 2 million “in-the-money” stock options; and aggregate unrecognized compensation expense related to unvested stock options, was immaterial. Approximately 2 million stock options are exercisable as of September 30, 2012.

The table below summarizes information regarding the Company’s outstanding stock options as of September 30, 2012 (in thousands of shares):


Range of Exercise Prices	Weighted Average Contractual Life (years)		Number of Options
Less than $5.00		6.3		1,773
$5.01 to $10.00		—		—
$10.01 to $15.00		7.3		160
$15.01 to $20.00		0.5		110
$20.01 and above		1.4		14

		6.1		2,057

As of September 30, 2012, the Company also had approximately 0.5 million outstanding stock appreciation rights with a weighted average exercise price of $24.40, and a weighted average remaining contractual life of 0.8 years.

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, the Company’s chief executive officer, 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 “Adjusted EBITDA”, which is defined as income from continuing operations before non-vehicle related depreciation and amortization, any impairment charge, transaction-related costs, non-vehicle related interest and income taxes. The Company’s presentation of Adjusted EBITDA may not be comparable to similarly-titled measures used by other companies.


	Three Months Ended September 30,
	2012					2011
	Revenues		Adjusted EBITDA			Revenues		Adjusted EBITDA
North America	$	1,358	$	232		$	1,336	$	216
International		703		129			175		37
Truck Rental		109		14			112		22
Corporate and Other ^(a)		—		(5	)		—		(3	)

Total Company ^(b)	$	2,170		370		$	1,623		272


Less: Non-vehicle related depreciation and amortization				30					22
Interest expense related to corporate debt, net:
Interest expense				67					48
Early extinguishment of debt				2					—
Transaction-related costs ^(c)				11					66

Income before income taxes			$	260				$	136


	Nine Months Ended September 30,
	2012					2011
	Revenues		Adjusted EBITDA			Revenues		Adjusted EBITDA
North America	$	3,580	$	509		$	3,484	$	426
International		1,791		210			495		90
Truck Rental		287		32			290		40
Corporate and Other ^(a)		1		(15	)		—		(10	)

Total Company ^(b)	$	5,659		736		$	4,269		546


Less: Non-vehicle related depreciation and amortization				92					65
Interest expense related to corporate debt, net:
Interest expense				208					143
Early extinguishment of debt				52					—
Transaction-related costs ^(c)				21					102

Income before income taxes			$	363				$	236

^(a)	Includes unallocated corporate overhead and the elimination of transactions between segments.

^(b)	Adjusted EBITDA for the three months ended September 30, 2012 includes $7 million of restructuring expense. Adjusted EBITDA for the nine months ended September 30, 2012 and 2011, includes $26 million and $1 million, respectively, of restructuring expense.

^(c)

During the three and nine months ended September 30, 2012, the Company incurred $11 million and $21 million, respectively, in transaction-related costs primarily related to the integration of the operations of Avis Europe. During the three and nine months ended September 30, 2011, the Company incurred $66 million and $102 million, respectively, of costs related to due diligence and other expenses associated with its acquisition of Avis Europe, including $26 million and $49 million, respectively, of losses on foreign currency transactions related to the purchase price, and the Company’s previous efforts to acquire Dollar Thrifty.

Since December 31, 2011, there have been no significant changes in segment assets other than the Company’s North America and International segment assets under vehicle programs and North America segment non-current deferred tax assets. As of September 30, 2012 and December 31, 2011, North America segment assets under vehicle programs were approximately $8.3 billion and $6.7 billion, respectively; International segment assets under vehicle programs were approximately $2.7 billion and $2.1 billion, respectively; and North America segment non-current deferred tax assets were approximately $1.2 billion and $401 million, respectively.

17.

Guarantor and Non-Guarantor Consolidating Condensed Financial Statements

The following consolidating financial information presents Consolidating Condensed Statements of Comprehensive Income for the three and nine months ended September 30, 2012 and 2011, Consolidating Condensed Balance Sheets as of September 30, 2012 and December 31, 2011, and Consolidating Condensed Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 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, and 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 payment of principal, premium (if any) and interest on the senior notes issued by Avis Budget Car Rental. These senior notes consist of Avis Budget Car Rental’s Floating rate notes due 2014, 7³/₄% notes due 2016, 9⁵/₈% notes due 2018, 8¹/₄% notes due 2019 and 9³/₄% notes due 2020 (collectively, the “Notes”). See Note 11—Long-term Debt and Borrowing Arrangements for additional information regarding these Notes. The Notes are guaranteed by the Parent and certain subsidiaries.

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 Comprehensive Income, certain expenses incurred by the Subsidiary Issuers are allocated to the guarantor and non-guarantor subsidiaries.

Consolidating Condensed Statements of Comprehensive Income

Three Months Ended September 30, 2012


	Parent			Subsidiary Issuers			Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations			Total
Revenues
Vehicle rental	$	—		$	—		$	1,007	$	575	$	—		$	1,582
Other		—			—			294		616		(322	)		588

Net revenues		—			—			1,301		1,191		(322	)		2,170


Expenses
Operating		—			—			612		424		—			1,036
Vehicle depreciation and lease charges, net		—			—			267		312		(143	)		436
Selling, general and administrative		5			—			153		86		—			244
Vehicle interest, net		—			—			60		77		(60	)		77
Non-vehicle related depreciation and amortization		—			—			18		12		—			30
Interest expense related to corporate debt, net:
Interest expense		2			62			—		3		—			67
Intercompany interest expense (income)		(3	)		(75	)		64		14		—			—
Early extinguishment of debt		—			2			—		—		—			2
Transaction-related costs		(3	)		—			—		14		—			11
Restructuring charges		—			—			—		7		—			7

Total expenses		1			(11	)		1,174		949		(203	)		1,910

Income (loss) before income taxes and equity in earnings of subsidiaries		(1	)		11			127		242		(119	)		260
Provision for (benefit from) income taxes		—			(124	)		61		43		—			(20	)
Equity in earnings (loss) of subsidiaries		281			146			80		—		(507	)		—

Net income (loss)	$	280		$	281		$	146	$	199	$	(626	)	$	280


Comprehensive income	$	308		$	307		$	172	$	225	$	(704	)	$	308

Nine Months Ended September 30, 2012


	Parent			Subsidiary Issuers			Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations			Total
Revenues
Vehicle rental	$	—		$	—		$	2,684	$	1,400	$	—		$	4,084
Other		1			—			806		1,593		(825	)		1,575

Net revenues		1			—			3,490		2,993		(825	)		5,659


Expenses
Operating		—			3			1,739		1,140		—			2,882
Vehicle depreciation and lease charges, net		—			—			650		736		(298	)		1,088
Selling, general and administrative		16			—			433		247		—			696
Vehicle interest, net		—			—			185		232		(186	)		231
Non-vehicle related depreciation and amortization		—			1			56		35		—			92
Interest expense related to corporate debt, net:
Interest expense		7			192			—		9		—			208
Intercompany interest expense (income)		(15	)		(231	)		205		41		—			—
Early extinguishment of debt		39			13			—		—		—			52
Transaction-related costs		—			—			1		20		—			21
Restructuring charges		—			—			1		25		—			26

Total expenses		47			(22	)		3,270		2,485		(484	)		5,296

Income (loss) before income taxes and equity in earnings of subsidiaries		(46	)		22			220		508		(341	)		363
Provision for (benefit from) income taxes		(4	)		(118	)		96		53		—			27
Equity in earnings (loss) of subsidiaries		378			238			114		—		(730	)		—

Net income (loss)	$	336		$	378		$	238	$	455	$	(1,071	)	$	336


Comprehensive income	$	361		$	403		$	262	$	483	$	(1,148	)	$	361

Three Months Ended September 30, 2011


	Parent			Subsidiary Issuers			Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Eliminations			Total
Revenues
Vehicle rental	$	—		$	—		$	995	$	216		$	—		$	1,211
Other		—			—			282		512			(382	)		412

Net revenues		—			—			1,277		728			(382	)		1,623


Expenses
Operating		—			1			615		167			—			783
Vehicle depreciation and lease charges, net		—			—			246		318			(260	)		304
Selling, general and administrative		3			—			159		28			—			190
Vehicle interest, net		—			—			59		53			(38	)		74
Non-vehicle related depreciation and amortization		—			—			20		2			—			22
Interest expense related to corporate debt, net:
Interest expense (income)		3			46			—		(1	)		—			48
Intercompany interest expense (income)		—			(46	)		46		—			—			—
Transaction-related costs		66			—			—		—			—			66

Total expenses		72			1			1,145		567			(298	)		1,487

Income (loss) before income taxes and equity in earnings of subsidiaries		(72	)		(1	)		132		161			(84	)		136
Provision for (benefit from) income taxes		(27	)		—			58		23			—			54
Equity in earnings (loss) of subsidiaries		127			128			54		—			(309	)		—

Net income (loss)	$	82		$	127		$	128	$	138		$	(393	)	$	82


Comprehensive income	$	15		$	60		$	61	$	93		$	(214	)	$	15

Nine Months Ended September 30, 2011


	Parent			Subsidiary Issuers			Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Eliminations			Total
Revenues
Vehicle rental	$	—		$	—		$	2,623	$	540		$	—		$	3,163
Other		—			—			772		1,399			(1,065	)		1,106

Net revenues		—			—			3,395		1,939			(1,065	)		4,269


Expenses
Operating		2			5			1,709		450			—			2,166
Vehicle depreciation and lease charges, net		—			—			686		865			(711	)		840
Selling, general and administrative		8			—			427		76			—			511
Vehicle interest, net		—			(1	)		166		148			(108	)		205
Non-vehicle related depreciation and amortization		—			—			59		6			—			65
Interest expense related to corporate debt, net:
Interest expense (income)		7			138			—		(2	)		—			143
Intercompany interest expense (income)		(8	)		(138	)		146		—			—			—
Transaction-related costs		102			—			—		—			—			102
Restructuring charges		—			—			1		—			—			1

Total expenses		111			4			3,194		1,543			(819	)		4,033

Income (loss) before income taxes and equity in earnings of subsidiaries		(111	)		(4	)		201		396			(246	)		236
Provision for (benefit from) income taxes		(39	)		(1	)		90		45			—			95
Equity in earnings (loss) of subsidiaries		213			216			105		—			(534	)		—

Net income (loss)	$	141		$	213		$	216	$	351		$	(780	)	$	141


Comprehensive income	$	130		$	200		$	203	$	359		$	(762	)	$	130

Consolidating Condensed Balance Sheets

As of September 30, 2012


	Parent		Subsidiary Issuers		Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Total
Assets
Current assets:
Cash and cash equivalents	$	4	$	52	$	—		$	498		$	—		$	554
Receivables, net		—		—		183			457			—			640
Deferred income taxes		8		65		129			3			—			205
Other current assets		6		110		65			346			—			527

Total current assets		18		227		377			1,304			—			1,926


Property and equipment, net		—		81		273			145			—			499
Deferred income taxes		22		1,024		223			—			(4	)		1,265
Goodwill		—		—		74			274			—			348
Other intangibles, net		—		43		341			324			—			708
Other non-current assets		112		65		7			65			—			249
Intercompany receivables (payables)		246		957		(468	)		(735	)		—			—
Investment in subsidiaries		661		1,925		3,284			—			(5,870	)		—

Total assets exclusive of assets under vehicle programs		1,059		4,322		4,111			1,377			(5,874	)		4,995


Assets under vehicle programs:
Program cash		—		—		—			101			—			101
Vehicles, net		—		5		14			10,324			—			10,343
Receivables from vehicle manufacturers and other		—		—		—			575			—			575
Investment in Avis Budget Rental Car Funding (AESOP) LLC-related party		—		—		—			362			—			362

		—		5		14			11,362			—			11,381

Total assets	$	1,059	$	4,327	$	4,125		$	12,739		$	(5,874	)	$	16,376


Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and other current liabilities	$	18	$	789	$	43		$	726		$	—		$	1,576
Short-term debt and current portion of long-term debt		—		46		3			32			—			81

Total current liabilities		18		835		46			758			—			1,657

Long-term debt		144		2,733		8			1			—			2,886
Other non-current liabilities		106		97		268			376			(4	)		843

Total liabilities exclusive of liabilities under vehicle programs		268		3,665		322			1,135			(4	)		5,386


Liabilities under vehicle programs:
Debt		—		—		—			2,062			—			2,062
Due to Avis Budget Rental Car Funding (AESOP) LLC-related party		—		—		—			5,813			—			5,813
Deferred income taxes		—		—		1,878			139			—			2,017
Other		—		1		—			306			—			307

		—		1		1,878			8,320			—			10,199

Total stockholders’ equity		791		661		1,925			3,284			(5,870	)		791

Total liabilities and stockholders’ equity	$	1,059	$	4,327	$	4,125		$	12,739		$	(5,874	)	$	16,376

As of December 31, 2011


	Parent		Subsidiary Issuers		Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Total
Assets
Current assets:
Cash and cash equivalents	$	2	$	234	$	1		$	297		$	—		$	534
Receivables, net		—		61		140			306			—			507
Deferred income taxes		8		—		129			3			(20	)		120
Other current assets		7		63		76			251			(17	)		380

Total current assets		17		358		346			857			(37	)		1,541


Property and equipment, net		—		70		295			128			—			493
Deferred income taxes		36		177		229			2			—			444
Goodwill		—		—		74			279			—			353
Other intangibles, net		—		44		342			327			—			713
Other non-current assets		124		92		5			83			—			304
Intercompany receivables (payables)		348		1,158		(1,071	)		(435	)		—			—
Investment in subsidiaries		376		1,769		3,192			—			(5,337	)		—

Total assets exclusive of assets under vehicle programs		901		3,668		3,412			1,241			(5,374	)		3,848


Assets under vehicle programs:
Program cash		—		—		—			11			—			11
Vehicles, net		—		6		4			8,346			—			8,356
Receivables from vehicle manufacturers and other		—		—		—			380			—			380
Investment in Avis Budget Rental Car Funding (AESOP) LLC-related party		—		—		—			343			—			343

		—		6		4			9,080			—			9,090

Total assets	$	901	$	3,674	$	3,416		$	10,321		$	(5,374	)	$	12,938


Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and other current liabilities	$	32	$	284	$	531		$	620		$	(34	)	$	1,433
Short-term debt and current portion of long-term debt		—		8		2			27			—			37

Total current liabilities		32		292		533			647			(34	)		1,470

Long-term debt		345		2,814		9			—			—			3,168
Other non-current liabilities		112		211		262			375			—			960

Total liabilities exclusive of liabilities under vehicle programs		489		3,317		804			1,022			(34	)		5,598


Liabilities under vehicle programs:
Debt		—		3		—			987			—			990
Due to Avis Budget Rental Car Funding (AESOP) LLC-related party		—		—		—			4,574			—			4,574
Deferred income taxes		—		—		843			139			—			982
Other		—		—		—			382			—			382

		—		3		843			6,082			—			6,928

Total stockholders’ equity		412		354		1,769			3,217			(5,340	)		412

Total liabilities and stockholders’ equity	$	901	$	3,674	$	3,416		$	10,321		$	(5,374	)	$	12,938

Consolidating Condensed Statements of Cash Flows

Nine Months Ended September 30, 2012


	Parent			Subsidiary Issuers			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Total
Net cash provided by (used in) operating activities	$	(48	)	$	128		$	42		$	1,402		$	—	$	1,524


Investing activities
Property and equipment additions		—			(19	)		(26	)		(37	)		—		(82	)
Proceeds received on asset sales		—			5			3			8			—		16
Other, net		4			(3	)		(1	)		(30	)		—		(30	)

Net cash provided by (used in) investing activities exclusive of vehicle programs		4			(17	)		(24	)		(59	)		—		(96	)


Vehicle programs:
Increase in program cash		—			—			—			(90	)		—		(90	)
Investment in vehicles		—			(2	)		(19	)		(8,941	)		—		(8,962	)
Proceeds received on disposition of vehicles		—			4			2			6,130			—		6,136

		—			2			(17	)		(2,901	)		—		(2,916	)

Net cash provided by (used in) investing activities		4			(15	)		(41	)		(2,960	)		—		(3,012	)


Financing activities
Proceeds from long-term borrowings		—			654			—			—			—		654
Principal payments on long-term borrowings		(201	)		(704	)		(2	)		—			—		(907	)
Net change in short-term borrowings		—			—			—			1			—		1
Purchase of warrants		(26	)		—			—			—			—		(26	)
Proceeds from sale of call options		38			—			—			—