CAR-2014.03.31-10Q
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 March 31, 2014

OR
o
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  o
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  o
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
o
Non-accelerated filer
o
Smaller reporting company
o

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

The number of shares outstanding of the issuer’s common stock was 105,396,505 shares as of April 30, 2014.
 

Table of Contents

Table of Contents
 
 
Page
PART I
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II
 
Item 1.
Item 2.
Item 6.
 

Table of Contents

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 travel demand, including changes in airline passenger traffic;

•
a change in our fleet costs as a result of a change in the cost of new vehicles, manufacturer recalls, 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 March 2013 acquisition of Zipcar, Inc. (“Zipcar”), including our ability to realize the synergies contemplated by the transaction and our ability to promptly and efficiently integrate the business into Avis Budget Group;

•
the results of operations or financial condition of the manufacturers of our cars, which could impact their ability to perform their payment obligations under our agreements 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;

•
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 global operations, including the funding of our vehicle fleet through the issuance of asset-backed securities and use of the global lending markets;

•
an occurrence or threat of terrorism, pandemic disease, natural disasters, military conflict or civil unrest 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 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;

•
any major disruptions in our communication networks or information systems;

•
our exposure to uninsured claims in excess of historical levels;


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•
our failure or inability to comply with laws, regulations or contractual obligations or any changes in laws, regulations or contractual obligations, including with respect to personally identifiable information and taxes;

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

•
any substantial changes in the cost or 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 right of our former real estate business 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 our October 2011 acquisition of Avis Europe plc (“Avis Europe”), including our ability to realize the synergies contemplated by the transaction;

•
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 2013 Annual Report on Form 10-K may contain forward-looking statements and involve uncertainties that could cause actual results to differ materially from those projected in such statements. Such statements are based upon assumptions and known risks and uncertainties.

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.


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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 
 March 31,
 
 
 
2014
 
2013
Revenues
 
 
 
 
Vehicle rental
$
1,329

 
$
1,217

 
Other
533

 
474

Net revenues
1,862

 
1,691

 
 
 
 
 
 
Expenses
 
 
 
 
Operating
1,000

 
931

 
Vehicle depreciation and lease charges, net
433

 
386

 
Selling, general and administrative
248

 
224

 
Vehicle interest, net
64

 
57

 
Non-vehicle related depreciation and amortization
41

 
34

 
Interest expense related to corporate debt, net:
 
 
 
 
 
Interest expense
56

 
58

 
 
Early extinguishment of debt
—

 
40

 
Transaction-related costs
8

 
8

 
Restructuring expense
7

 
10

Total expenses
1,857

 
1,748

 
 
 
 
 
 
Income (loss) before income taxes
5

 
(57
)
Provision for (benefit from) income taxes
1

 
(11
)
 
 
 
 
 
 
Net income (loss)
$
4


$
(46
)
 
 
 
 
 
 
Comprehensive income (loss)
$
7

 
$
(69
)
 
 
 
 
 
 
Earnings (loss) per share
 
 
 
 
Basic
$
0.03

 
$
(0.43
)
 
Diluted
$
0.03

 
$
(0.43
)









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)
 
 
March 31, 
 2014
 
December 31,  
 2013
Assets
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
$
841

 
$
693

 
Receivables, net
646

 
619

 
Deferred income taxes
174

 
177

 
Other current assets
501

 
455

Total current assets
2,162

 
1,944

 
 
 
 
 
Property and equipment, net
613

 
614

Deferred income taxes
1,264

 
1,299

Goodwill
713

 
691

Other intangibles, net
932

 
923

Other non-current assets
362

 
361

Total assets exclusive of assets under vehicle programs
6,046

 
5,832

 
 
 
 
 
Assets under vehicle programs:
 
 
 
 
Program cash
104

 
116

 
Vehicles, net
10,617

 
9,582

 
Receivables from vehicle manufacturers and other
240

 
391

 
Investment in Avis Budget Rental Car Funding (AESOP) LLC—related party
362

 
363

 
 
11,323

 
10,452

Total assets
$
17,369

 
$
16,284

 
 
 
 
 
Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
 
Accounts payable and other current liabilities
$
1,474

 
$
1,479

 
Short-term debt and current portion of long-term debt
393

 
89

Total current liabilities
1,867

 
1,568

 
 
 
 
 
Long-term debt
3,303

 
3,305

Other non-current liabilities
840

 
847

Total liabilities exclusive of liabilities under vehicle programs
6,010

 
5,720

 
 
 
 
 
Liabilities under vehicle programs:
 
 
 
 
Debt
1,640

 
1,681

 
Debt due to Avis Budget Rental Car Funding (AESOP) LLC—related party
6,359

 
5,656

 
Deferred income taxes
2,141

 
2,177

 
Other
516

 
279

 
 
10,656

 
9,793

Commitments and contingencies (Note 10)

 

 
 
 
 
 
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 137,081,117 and 137,081,056 shares
1

 
1

 
Additional paid-in capital
7,729

 
7,893

 
Accumulated deficit
(2,356
)
 
(2,360
)
 
Accumulated other comprehensive income
120

 
117

 
Treasury stock, at cost—31,457,613 and 30,515,721 shares
(4,791
)
 
(4,880
)
Total stockholders’ equity
703

 
771

Total liabilities and stockholders’ equity
$
17,369

 
$
16,284


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) 
 
 
 
Three Months Ended 
 March 31,
 
 
 
2014
 
2013
Operating activities
 
 
 
Net income (loss)
$
4

 
$
(46
)
 
 
 
 
 
 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Vehicle depreciation
407

 
353

 
Gain on sale of vehicles, net
(11
)
 
—

 
Non-vehicle related depreciation and amortization
41

 
34

 
Amortization of debt financing fees
9

 
11

 
Net change in assets and liabilities, excluding the impact of acquisitions and dispositions:
 
 
 
 
 
Receivables
(27
)
 
(57
)
 
 
Income taxes and deferred income taxes
1

 
(21
)
 
 
Accounts payable and other current liabilities
(71
)
 
(35
)
 
Other, net
37

 
61

Net cash provided by operating activities
390

 
300

 
 
 
 
 
 
Investing activities
 
 
 
Property and equipment additions
(36
)
 
(21
)
Proceeds received on asset sales
3

 
4

Net assets acquired (net of cash acquired)
(124
)
 
(476
)
Other, net
(7
)
 
26

Net cash used in investing activities exclusive of vehicle programs
(164
)
 
(467
)
 
 
 
 
 
 
Vehicle programs:
 
 
 
 
Decrease (increase) in program cash
12

 
(24
)
 
Investment in vehicles
(3,275
)
 
(3,111
)
 
Proceeds received on disposition of vehicles
2,470

 
2,394

 
 
(793
)
 
(741
)
Net cash used in investing activities
(957
)
 
(1,208
)


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Avis Budget Group, Inc.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued)
(In millions)
(Unaudited) 

 
 
Three Months Ended 
 March 31,
 
 
2014
 
2013
Financing activities
 
 
 
Proceeds from long-term borrowings
295

 
1,225

Payments on long-term borrowings
(5
)
 
(788
)
Net change in short-term borrowings
11

 
(31
)
Purchases of warrants
—

 
(28
)
Proceeds from sale of call options
—

 
37

Repurchases of common stock
(67
)
 
—

Debt financing fees
(5
)
 
(10
)
Other, net
(1
)
 
2

Net cash provided by financing activities exclusive of vehicle programs
228

 
407

 
 
 
 
 
Vehicle programs:
 
 
 
 
Proceeds from borrowings
3,775

 
3,762

 
Payments on borrowings
(3,280
)
 
(3,279
)
 
Debt financing fees
(7
)
 
(17
)
 
 
488

 
466

Net cash provided by financing activities
716

 
873

 
 
 
 
 
Effect of changes in exchange rates on cash and cash equivalents
(1
)
 
(2
)
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
148

 
(37
)
Cash and cash equivalents, beginning of period
693

 
606

Cash and cash equivalents, end of period
$
841

 
$
569














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 dollar amounts in tables are in millions, except per share amounts)

1.
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 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 ancillary products and services, and operates the Company’s Zipcar car sharing business in North America.

•
International—provides and licenses the Company’s brands to third parties for vehicle rentals and ancillary products and services in Europe, the Middle East, Africa, Asia, South America, Central America, the Caribbean, Australia and New Zealand, and operates the Company's car sharing business in certain of these markets.

•
Truck Rental—provides truck rentals and ancillary products and services to consumers and commercial users in the United States.

In conjunction with a change in the Company’s management structure, the financial results of the Company’s Zipcar operations outside of North America will now be reported in the Company’s International segment rather than in the Company’s North America segment. The Company’s business segment financial information presented in these Notes to Consolidated Condensed Financial Statements has been recast to conform with the Company’s current business segment reporting alignment for all periods presented. The Company’s consolidated condensed results were not affected by this change.

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 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 2013 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.

Currency Transactions. The Company records the gain or loss of foreign-currency transactions on certain intercompany loans and gain or loss on intercompany loan hedges within interest expense related to corporate debt, net. During the three months ended March 31, 2014 and 2013, the Company recorded losses of $2 million and $4 million, respectively, on such items.


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Adoption of New Accounting Standards

On January 1, 2014, the Company adopted, as required, Accounting Standards Update No. 2013-04, “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligations Is Fixed at the Reporting Date,” which requires companies to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. The adoption of this pronouncement did not have a material impact on the Company’s financial statements.

2.
Restructuring Activities

Subsequent to the acquisition of Avis Europe, the Company began a restructuring initiative, identifying synergies across the Company, enhancing organizational efficiencies and consolidating and rationalizing processes. During the three months ended March 31, 2014, as part of this process, the Company formally communicated the termination of employment to approximately 130 employees and recorded $7 million of expense in connection with these initiatives. These expenses primarily represent severance, outplacement services and other costs associated with employee terminations. As of March 31, 2014, the Company has terminated approximately 90 of these employees. The Company expects further restructuring expense of approximately $15 million to be incurred in 2014.

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 expense and corresponding payments and utilizations:
 
 
 
North
America
 
International
 
Total
Balance as of January 1, 2014
 
$
1

 
$
21

 
$
22

 
Restructuring expense
 
1

 
6

 
7

 
Cash payment/utilization
 
(1
)
 
(11
)
 
(12
)
Balance as of March 31, 2014
 
$
1

 
$
16

 
$
17

 
 
 
 
 
 
 
 
 
 
 
Personnel
Related
 
Facility
Related
 
Total
Balance as of January 1, 2014
 
$
17

 
$
5

 
$
22

 
Restructuring expense
 
7

 
—

 
7

 
Cash payment/utilization
 
(12
)
 
—

 
(12
)
Balance as of March 31, 2014
 
$
12

 
$
5

 
$
17



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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 
 March 31,
 
 
2014
 
2013
Net income (loss) for basic and diluted EPS
$
4

 
$
(46
)
 
 
 
 
 
Basic weighted average shares outstanding
106.6

 
107.7

Options, warrants and non-vested stock (a) (b)
2.0

 
—

Convertible debt (c) (d)
—

 
—

Diluted weighted average shares outstanding
108.6

 
107.7

 
 
 
 
 
Earnings per share:
 
 
 
 
Basic
$
0.03

 
$
(0.43
)
 
Diluted
$
0.03

 
$
(0.43
)
__________
(a) 
For the three months ended March 31, 2014, the number of anti-dilutive securities which were excluded from the computation of diluted earnings per share was not significant.
(b) 
As the Company incurred a net loss for the three months ended March 31, 2013, 1.5 million outstanding options, 4.7 million warrants and 3.4 million non-vested stock awards have an anti-dilutive effect and therefore are excluded from the computation of diluted weighted average shares outstanding.
(c) 
For the three months ended March 31, 2014, 4.0 million issuable shares underlying the 3½% convertible notes due 2014 have an anti-dilutive effect and therefore are excluded from the computation of diluted weighted average shares outstanding.
(d) 
For the three months ended March 31, 2013, 4.7 million issuable shares underlying the 3½% convertible notes due 2014 have an anti-dilutive effect and therefore are excluded from the computation of diluted weighted average shares outstanding.

4.
Acquisitions

Edmonton

In February 2014, the Company completed the acquisition of its Budget licensee for Edmonton and certain other cities in Alberta for approximately $33 million, plus $86 million for acquired fleet. The investment will enable the Company to expand its footprint of Company-operated locations in Canada. The acquired fleet was financed under the Company's existing vehicle financing arrangements in Canada. The excess of the purchase price over preliminary fair value of net assets acquired was allocated to goodwill, which was assigned to the Company’s North America segment and most of which is expected to be deductible for tax purposes. The fair value of the assets acquired and liabilities assumed has not yet been finalized and is therefore subject to change. In connection with this acquisition, approximately $17 million was recorded in identifiable intangible assets (consisting of $11 million related to customer relationships and $6 million related to the reacquired license agreements) and $9 million was recorded in goodwill. The customer relationships will be amortized over a weighted average useful life of approximately 12 years and the license agreements will be amortized over approximately 4 years. In addition, at the time of the acquisition, the Company recorded a $3 million non-cash charge related to the unfavorable license rights reacquired by the Company.

Portugal

In February 2014, the Company reacquired the right to operate the Budget brand in Portugal for approximately $15 million. Approximately $9 million of the total consideration was paid during first quarter 2014 and the remainder is expected to be paid in 2014. The fair value of the intangible assets acquired has not yet been finalized and is therefore subject to change. In connection with this acquisition, approximately $2 million was recorded within license agreements and $13 million was recorded in goodwill. The license agreements will be amortized over 2 years. The goodwill, which was assigned to the Company’s International segment, is expected to be deductible for tax purposes.


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Brazil

In August 2013, the Company acquired a 50% ownership stake in its Brazilian licensee for $53 million, of which the remaining consideration of $6 million was paid during first quarter 2014.

Zipcar

In March 2013, the Company completed the acquisition of the entire issued share capital of Zipcar, the leading car sharing company, for $473 million, net of acquired cash. Differences between the preliminary allocation of the purchase price and the final allocation were not material.

5.
Intangible Assets

Intangible assets consisted of:
 
As of March 31, 2014
 
As of December 31, 2013
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Amortized Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
License agreements (a)(b)
$
280

 
$
55

 
$
225

 
$
272

 
$
52

 
$
220

Customer relationships (a)
177

 
39

 
138

 
166

 
35

 
131

Other
2

 
1

 
1

 
2

 
1

 
1

Total
$
459

 
$
95

 
$
364

 
$
440

 
$
88

 
$
352

 
 
 
 
 
 
 
 
 
 
 
 
Unamortized Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
Goodwill (a)(b)
$
713

 
 
 
 
 
$
691

 
 
 
 
Trademarks
$
568

 
 
 
 
 
$
571

 
 
 
 
__________
(a) 
The increases in carrying amounts reflect the acquisition of the Budget licensee for Edmonton.
(b) 
The increases in carrying amounts reflect the reacquired right to operate the Budget brand in Portugal.

Amortization expense relating to all intangible assets was approximately $7 million and $5 million during first quarter 2014 and 2013, respectively. Based on the Company’s amortizable assets at March 31, 2014, the Company expects amortization expense of approximately $25 million for the remainder of 2014 and approximately $31 million for each of the five fiscal years thereafter.

6.
Vehicle Rental Activities

The components of the Company’s vehicles, net within assets under vehicle programs were as follows: 
 
As of
 
As of
 
March 31,
 
December 31,
 
2014
 
2013
Rental vehicles
$
11,657

 
$
10,234

Less: Accumulated depreciation
(1,388
)
 
(1,411
)
 
10,269

 
8,823

Vehicles held for sale
348

 
759

Vehicles, net
$
10,617

 
$
9,582


The components of vehicle depreciation and lease charges, net are summarized below: 
 
Three Months Ended 
 March 31,
 
2014
 
2013
Depreciation expense
$
407

 
$
353

Lease charges
37

 
33

Gain on sales of vehicles, net
(11
)
 
—

Vehicle depreciation and lease charges, net
$
433

 
$
386



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At March 31, 2014 and 2013, the Company had purchases of vehicles included in payables of $498 million and $496 million, respectively, and sales of vehicles included in receivables of $231 million and $285 million, respectively.

7.
Income Taxes

The Company’s effective tax rate for the three months ended March 31, 2014 is a provision of 20.0%. Such rate differs from the Federal statutory rate of 35.0% primarily due to state income taxes.

The Company’s effective tax rate for the three months ended March 31, 2013 was a benefit of 19.3%. Such rate differs from the Federal statutory rate of 35.0% primarily due to the treatment of the expenses for the early extinguishment of corporate debt.

8.
Long-term Debt and Borrowing Arrangements

Long-term and other borrowing arrangements consisted of:
 
 
 
As of
 
As of
 
Maturity
Dates
 
March 31,
 
December 31,
 
 
2014
 
2013
3½% Convertible Notes (a)
October 2014
 
$
66

 
$
66

4⅞% Senior Notes
November 2017
 
300

 
300

Floating Rate Senior Notes (b)
December 2017
 
247

 
247

8¼% Senior Notes (c)
January 2019
 
691

 
691

Floating Rate Term Loan (d)
March 2019
 
988

 
989

9¾% Senior Notes
March 2020
 
223

 
223

6% Euro-denominated Senior Notes
March 2021
 
638

 
344

5½% Senior Notes
April 2023
 
500

 
500

 

 
3,653

 
3,360

Other
 
 
43

 
34

Total
 
 
3,696

 
3,394

Less: Short-term debt and current portion of long-term debt
 
 
393

 
89

Long-term debt
 
 
$
3,303

 
$
3,305

__________
(a) 
As of March 31, 2014, the 3½% convertible notes are convertible by the holders into approximately 4 million shares of the Company’s common stock.
(b) 
The interest rate on these notes is equal to three-month LIBOR plus 275 basis points, for an aggregate rate of 3.00% at March 31, 2014; the Company has entered into an interest rate swap to hedge its interest rate exposure related to these notes at an aggregate rate of 3.58%.
(c) 
As of March 31, 2014, the Company called $292 million of the 8¼% Senior Notes due 2019 for redemption; accordingly, these are included in current portion of long-term debt.
(d) 
The floating rate term loan is part of the Company’s senior credit facility, which is secured by pledges of capital stock of certain subsidiaries of the Company, and liens on substantially all of the Company’s intellectual property and certain other real and personal property. As of March 31, 2014, the floating term rate loan due 2019 bears interest at the greater of three-month LIBOR or 0.75%, plus 225 basis points, for an aggregate rate of 3.00%. The Company has entered into a swap to hedge $600 million of its interest rate exposure related to the floating rate term loan at an aggregate rate of 3.96%.

In March 2014, the Company issued €200 million (approximately $275 million) of additional 6% Euro-denominated Senior Notes due 2021. These additional notes were sold at 106.75% of their face value, for aggregate proceeds of approximately $295 million, with a yield to maturity of 4.85%. In April 2014, the Company used the proceeds to repurchase $292 million principal amount of its 8¼% Senior Notes for $316 million plus accrued interest.


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COMMITTED CREDIT FACILITIES AND AVAILABLE FUNDING ARRANGEMENTS

At March 31, 2014, the committed corporate credit facilities available to the Company and/or its subsidiaries were as follows: 
 
Total
Capacity
 
Outstanding
Borrowings
 
Letters of Credit Issued
 
Available
Capacity
Revolving credit facility maturing 2018 (a) 
$
1,650

 
$
—

 
$
638

 
$
1,012

Other facilities (b)
13

 
1

 
—

 
12

__________
(a) 
The senior revolving credit facility bears interest at one-month LIBOR, plus 225 basis points. The senior revolving credit facility is part of the Company’s senior credit facility, which is secured by pledges of capital stock of certain subsidiaries of the Company, 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 5.14% to 5.69% as of March 31, 2014.

At March 31, 2014, the Company had various uncommitted credit facilities available, under which it had drawn approximately $16 million, which bear interest at rates between 0.52% and 2.50%.
DEBT COVENANTS

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 March 31, 2014, the Company was in compliance with the financial covenants of its senior credit facility.

9.
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
 
As of
 
March 31,
 
December 31,
 
2014
 
2013
North America - Debt due to Avis Budget Rental Car Funding (a)
$
6,359

 
$
5,656

North America - Canadian borrowings (a)(b)
482

 
400

International - Debt borrowings (c)
584

 
731

International - Capital leases (a)
353

 
289

Truck Rental - Debt borrowings
211

 
226

Other
10

 
35

Total
$
7,999

 
$
7,337

__________
(a) 
The increase reflects additional borrowings principally to fund an increase in the Company’s fleet driven by increased rental volume.
(b) 
The increase reflects additional borrowings principally to fund an increase in the Company’s fleet driven by the acquisition of its Budget licensee for Edmonton.
(c) 
The decrease is principally related to the timing of borrowings related to recently acquired fleet.


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DEBT MATURITIES

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 March 31, 2014.
 
Debt Under Vehicle Programs
Within 1 year (a)
$
1,131

Between 1 and 2 years
2,218

Between 2 and 3 years
1,571

Between 3 and 4 years
902

Between 4 and 5 years
1,601

Thereafter
576

Total
$
7,999

 __________
(a) 
Vehicle-backed debt maturing within one year includes term asset-backed securities of approximately $952 million and bank and bank-sponsored borrowings of $179 million.

COMMITTED CREDIT FACILITIES AND AVAILABLE FUNDING ARRANGEMENTS

As of March 31, 2014, 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
North America - Debt due to Avis Budget Rental Car Funding (b)
$
8,544

 
$
6,359

 
$
2,185

North America - Canadian borrowings (c)
724

 
482

 
242

International - Debt borrowings (d)
1,511

 
584

 
927

International - Capital leases (e)
468

 
353

 
115

Truck Rental - Debt borrowings (f)
230

 
211

 
19

Other
10

 
10

 
—

Total
$
11,487

 
$
7,999

 
$
3,488

__________
(a) 
Capacity is subject to maintaining sufficient assets to collateralize debt.
(b) 
The outstanding debt is collateralized by approximately $8.1 billion of underlying vehicles and related assets.
(c) 
The outstanding debt is collateralized by $604 million of underlying vehicles and related assets.
(d) 
The outstanding debt is collateralized by approximately $1.0 billion of underlying vehicles and related assets.
(e) 
The outstanding debt is collateralized by $387 million of underlying vehicles and related assets.
(f) 
The outstanding debt is collateralized by $351 million of underlying vehicles and related assets.

DEBT COVENANTS

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 March 31, 2014, 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.

10.
Commitments and Contingencies

Contingencies
In 2006, the Company completed the spin-offs of its Realogy and Wyndham subsidiaries. In connection with the spin-offs, Realogy assumed 62.5% and Wyndham assumed 37.5% of certain contingent and other corporate liabilities of the Company that 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 each subsidiary’s disposition (“Assumed Liabilities”). If Realogy or Wyndham were to default on its payment of costs or expenses to the Company

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related to any Assumed Liabilities, the Company would be responsible for 50% of the defaulting party’s obligation. 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. In accordance with the terms of relevant documents, 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.
The Company is also named in various litigation that is primarily related to the businesses of its former subsidiaries, including Realogy, and Wyndham and their current or former subsidiaries. The Company is entitled to indemnification from such entities for any liability resulting from such litigation.
Additionally, the Company is also involved in claims, legal proceedings and governmental inquiries related, among other things, to its vehicle rental operations, including, among others, contract and licensee disputes, wage-and-hour claims, competition matters, employment matters, insurance claims, intellectual property claims and other regulatory, environmental, commercial and tax matters. 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 financial position, results of operations or cash flows.

Commitments to Purchase Vehicles

The Company maintains agreements with vehicle manufacturers under which the Company has agreed to purchase approximately $5.6 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 and cash received upon the disposition of vehicles.

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 marketing, advertising and capital expenditures. As of March 31, 2014, the Company had approximately $154 million of purchase obligations, which extend through 2018.

Concentrations

Concentrations of credit risk at March 31, 2014 include (i) risks related to the Company’s repurchase and guaranteed depreciation agreements with domestic and foreign car manufacturers, including Ford, General Motors, Chrysler, Peugeot, Volkswagen, Kia, Fiat, Subaru, BMW and Toyota, and primarily with respect to receivables for program cars that have been disposed but for which the Company has not yet received payment from the manufacturers and (ii) risks related to Realogy and Wyndham, including receivables of $61 million and $37 million, respectively, related to certain contingent, income tax and other corporate liabilities assumed by Realogy and Wyndham in connection with their disposition.

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 sold or spun-off 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 $47 million, the majority of which expire by the end of 2015. At March 31, 2014, the liability recorded by the Company in connection with these guarantees was approximately $1 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 and Wyndham, as applicable. The Company monitors the credit ratings and other relevant information for Realogy and Wyndham in order to assess the status of the payment/performance risk of these guarantees.


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11.
Stockholders’ Equity

Share Repurchases

In August 2013, the Company obtained Board approval to repurchase of up to $200 million of its common stock. During the three months ended March 31, 2014, the Company repurchased approximately 1,635,000 shares of common stock at a cost of approximately $75 million under the repurchase program. The Company did not repurchase any of its common stock during the three months ended March 31, 2013.

Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income were as follows: 
 
 
Currency
Translation
Adjustments
 
Net Unrealized
Gains
on Cash Flow
Hedges
 
Net Unrealized
Gains (Losses) on
Available-for
Sale Securities
 
Minimum
Pension
Liability
Adjustment
 
Accumulated
Other
Comprehensive
Income
Balance, January 1, 2014
$
166

 
$
1

 
$
2

 
$
(52
)
 
$
117

Net current-period other comprehensive income (a)
3

 
1

 
(1
)
 
—

 
3

Balance, March 31, 2014
$
169

 
$
2

 
$
1

 
$
(52
)
 
$
120

 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2013
$
193

 
$
—

 
$
2

 
$
(85
)
 
$
110

Net current-period other comprehensive loss (a)
(23
)
 
—

 
—

 
—

 
(23
)
Balance, March 31, 2013
$
170

 
$
—

 
$
2

 
$
(85
)
 
$
87

__________
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 and include $11 million loss, net of tax, related to the Company's hedge of its net investment in Euro-denominated foreign operations (See Note 13 - Financial Instruments).
(a) 
For the periods ended March 31, 2014 and 2013, amounts reclassified from accumulated other comprehensive income were not material.

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 
 March 31,
 

2014

2013
Net income (loss)
$
4

 
$
(46
)
Other comprehensive income (loss):
 
 
 

Currency translation adjustments
3

 
(23
)

Net unrealized loss on available-for-sale securities
(1
)
 
—


Net unrealized gain on cash flow hedges (a)
1

 
—

 
 
3

 
(23
)
Total comprehensive income (loss)
$
7

 
$
(69
)
__________
All components of other comprehensive income are net of tax, except currency translation adjustments, which exclude income taxes related to indefinite investments in foreign subsidiaries.
(a)
The Company’s net unrealized gain on cash flow hedges was $1 million before tax during the three months ended March 31, 2014 and was not material for the three months ended March 31, 2013.


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12.
Stock-Based Compensation

The Company records compensation expense for all stock-based awards based on the estimated fair value of the award at the grant date, which is recognized over the vesting period. The Company recorded stock-based compensation expense of $8 million and $4 million ($5 million and $3 million, net of tax) during the three months ended March 31, 2014 and 2013, respectively, related to stock-based awards that were granted by the Company. In jurisdictions with net operating loss carryforwards, tax deductions for exercises and/or vestings of stock-based awards have generated a $57 million tax benefit at March 31, 2014, with a corresponding increase to additional paid-in capital. Approximately $22 million of incremental tax benefits will be recorded in additional paid-in capital when realized in these jurisdictions.

Stock Unit Awards
The Company’s performance-based restricted stock units granted in 2014 and 2013 incorporate a total shareholder return metric. The grant date fair value of these awards is estimated using a Monte Carlo simulation model to estimate the Company’s shareholder-return ranking relative to an applicable stock index. The weighted average assumptions used in the Monte Carlo simulation model to calculate the fair value of the Company’s stock unit awards are as follows:
 
Three Months Ended 
 March 31,
 
2014
 
2013
Expected volatility of stock price
40%
 
43%
Risk-free interest rate
0.85%
 
0.39%
Expected term of awards
3 years
 
3 years
Dividend yield
0.0%
 
0.0%

The activity related to the Company’s restricted stock units (“RSUs”) and cash units, consisted of (in thousands of shares): 
 
 
 
Time-Based RSUs
 
Performance-Based and Market-Based RSUs
 
Cash Unit Awards
 
 
Number of Shares
 
Weighted
Average Grant Date
Fair Value
 
Number of Shares
 
Weighted
Average Grant Date
Fair Value
 
Number of Units
 
Weighted
Average Grant Date
Fair Value
Outstanding at January 1, 2014 (a)
1,308

 
$
17.92

 
2,043

 
$
13.79

 
267

 
$
14.90

 
Granted
352

 
41.15

 
235

 
39.37

 
—

 
—

 
Vested (b)
(588
)
 
16.62

 
(432
)
 
10.91

 
—

 
—

 
Forfeited/expired
(56
)
 
23.49

 
(32
)
 
21.48

 
—

 
—

Outstanding at March 31, 2014 (c)
1,016

 
$
26.40

 
1,814

 
$
17.66

 
267

 
$
14.90

__________
(a) 
Reflects the maximum number of stock units assuming achievement of all performance-, market- and time-vesting criteria and does not include those for non-employee directors. The weighted-average fair value of time-based RSUs, performance-based and market-based RSUs, and cash units granted in 2013 was $21.20, $20.30 and $17.14, respectively.
(b) 
The total grant date fair value of RSUs vested during the three months ended March 31, 2014 and 2013 was $14 million and $14 million, respectively.
(c) 
The Company’s outstanding time-based RSUs, performance-based and market-based RSUs, and cash units had aggregate intrinsic value of $49 million, $88 million and $13 million, respectively. Aggregate unrecognized compensation expense related to time-based RSUs and performance-based and market-based RSUs amounted to $43 million and will be recognized over a weighted average vesting period of 1.3 years. The Company assumes that substantially all outstanding awards will vest over time.


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Stock Options

The stock option activity consisted of (in thousands of shares): 
 
 
Number of Options
 
Weighted Average Exercise Price
 
Aggregate Intrinsic Value (in millions)
 
Weighted Average Remaining Contractual Term (years)
Outstanding at January 1, 2014
979

 
$
2.82

 
$
37

 
5.2
 
Granted
—

 
—

 
—

 

 
Exercised
(87
)
 
2.22

 
4

 

 
Forfeited/expired
—

 
—

 
—

 

Outstanding at March 31, 2014 (a)
892

 
2.88

 
41

 
5.0
Exercisable at March 31, 2014
860

 
$
2.56

 
$
40

 
5.0
__________ 
(a) 
The Company assumes that substantially all outstanding stock options will vest over time.

13.
Financial Instruments

Derivative Instruments and Hedging Activities
The Company uses currency exchange contracts to manage its exposure to changes in currency exchange rates associated with its non-U.S.-dollar denominated receivables and forecasted royalties, forecasted earnings of non-U.S. subsidiaries and forecasted non-U.S.-dollar denominated acquisitions. The Company primarily hedges a portion of its current-year 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. Forward contracts used to hedge forecasted third-party receipts and disbursements up to 12 months are designated and do qualify as cash flow hedges.

The Company has designated its 6% Euro-denominated notes as a hedge of its net investment in Euro-denominated foreign operations. For the three months ended March 31, 2014, the Company recorded no gain or loss in accumulated other comprehensive income as part of currency translation adjustments. There was no ineffectiveness related to the Company's cash flow or net investment hedges during the three months ended March 31, 2014 and the Company does not expect to reclassify any amounts from accumulated other comprehensive income into 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 and interest rate caps 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 are determined to be ineffective are immediately reclassified from accumulated other comprehensive income into earnings. The Company estimates that $6 million of losses currently recorded in accumulated other comprehensive income will be recognized in earnings over the next 12 months.

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 and the aggregate fair value of assets needed to settle these derivatives as of March 31, 2014 was approximately $1 million, for which the Company has posted cash collateral in the normal course of business.

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The Company held derivative instruments with absolute notional values as follows:
 
As of
 
March 31, 2014
Interest rate caps (a)
$
11,981

Interest rate swaps
1,503

Foreign exchange swaps
548

Foreign exchange forward contracts
400

 
 
Commodity contracts (millions of gallons of unleaded gasoline)
7

__________
(a) 
Represents $9.7 billion of interest rate caps sold, partially offset by approximately $2.3 billion of interest rate caps purchased. These amounts exclude $7.5 billion of interest rate caps purchased by the Company’s Avis Budget Rental Car Funding subsidiary.

Fair values (Level 2) of derivative instruments were as follows: 
 
 
As of March 31, 2014
 
As of December 31, 2013
 
 
Fair Value,
Asset
Derivatives
 
Fair Value,
Liability
Derivatives
 
Fair Value,
Asset
Derivatives
 
Fair Value,
Liability
Derivatives
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
Interest rate swaps (a)
$
3

 
$
—

 
$
2

 
$
1

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
Interest rate caps (b)
1

 
9

 
2

 
13

 
Interest rate swaps
—

 
—

 
—

 
—

 
Foreign exchange swaps and forward contracts (c)
3

 
13

 
3

 
5

 
Commodity contracts
—

 
—

 
—

 
—

 
Total
$
7

 
$
22

 
$
7

 
$
19

__________
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 11—Stockholders’ Equity.
(a) 
Included in other non-current assets or other non-current liabilities.
(b) 
Included in assets under vehicle programs or liabilities under vehicle programs.
(c) 
Included in other current assets or other current liabilities.


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The effects of derivatives recognized in the Company’s Consolidated Condensed Financial Statements were as follows:     
 
 
Three Months Ended 
 March 31,
 
 
 
2014
 
2013
 
Derivatives designated as hedging instruments
 
 
 
 
 
Interest rate swaps (a)
$
1

 
$
—

 
Derivatives not designated as hedging instruments (b)
 
 
 
 
 
Interest rate caps (c)
—

 
3

 
 
Foreign exchange swaps and forward contracts (d)
(18
)
 
1

 
 
Commodity contracts (e)
—

 
2

 
 
Total
$
(17
)
 
$
6

 
__________
(a) 
Recognized, net of tax, as a component of other comprehensive income within stockholders’ equity.
(b) 
Gains (losses) related to derivative instruments are expected to be largely offset by (losses) gains on the underlying exposures being hedged.
(c) 
Included in interest expense.
(d) 
For the three months ended March 31, 2014, included a $14 million loss in interest expense and a $4 million loss in operating expenses. For the three months ended March 31, 2013, included a $1 million loss in interest expense and a $2 million gain in operating expenses.
(e) 
Included in operating expenses.

Debt Instruments

The carrying amounts and estimated fair values (Level 2) of debt instruments were as follows: 
 
 
As of March 31, 2014
 
As of December 31, 2013
 
 
Carrying
Amount
 
Estimated
Fair
Value
 
Carrying
Amount
 
Estimated
Fair
Value
Corporate debt
 
 
 
 
 
 
 
 
Short-term debt and current portion of long-term debt, excluding convertible debt
$
327

 
$
348

 
$
23

 
$
23

 
Convertible debt
66

 
197

 
66

 
159

 
Long-term debt
3,303

 
3,397

 
3,305

 
3,416

 
 
 
 
 
 
 
 
 
Debt under vehicle programs
 
 
 
 
 
 
 
 
Vehicle-backed debt due to Avis Budget Rental Car Funding
$
6,359

 
$
6,493

 
$
5,656

 
$
5,732

 
Vehicle-backed debt
1,631

 
1,640

 
1,668

 
1,675

 
Interest rate swaps and interest rate contracts (a)
9

 
9

 
13

 
13

 __________
(a) 
Derivatives in a liability position.

14.
Segment Information

The Company’s chief operating decision maker assesses performance and allocates resources based upon the separate financial information from the Company’s operating segments. In identifying its reportable segments, the Company considered the nature of services provided, the geographical areas in which the segments operated and other relevant factors. The Company aggregates two of its operating segments into each of its North America and International reportable segments.
Management evaluates the operating results of each of its reportable segments based upon revenue and “Adjusted EBITDA,” which the Company defines as income from continuing operations before non-vehicle related depreciation and amortization, any impairment charge, restructuring expense, early extinguishment of debt costs, non-vehicle related interest, transaction-related costs and income taxes. The Company’s presentation of Adjusted EBITDA may not be comparable to similarly-titled measures used by other companies. In the first quarter of 2014, the Company revised its definition of Adjusted EBITDA to exclude

19
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restructuring expense and has recast its 2013 Adjusted EBITDA to conform with the revised definition, consistent with the manner in which management assesses performance and allocates resources. The Company’s presentation of Adjusted EBITDA may not be comparable to similarly-titled measures used by other companies.
 
 
 
 
Three Months Ended March 31,
 
 
 
 
2014
 
2013
 
 
 
 
Revenues
 
Adjusted EBITDA
 
Revenues (a)
 
Adjusted EBITDA (b)
North America
$
1,236

 
$
114

 
$
1,098

 
$
93

International
551

 
17

 
517

 
17

Truck Rental
75

 
(2
)
 
76

 
(5
)
Corporate and Other (c)
—

 
(12
)
 
—

 
(12
)
 
Total Company
$
1,862

 
117

 
$
1,691

 
93

 
 
 
 
 
 


 
 
 


Less:
Non-vehicle related depreciation and amortization
 
41

 
 
 
34

 
 
Interest expense related to corporate debt, net:
 

 
 
 

 
 
 
Interest expense
 
 
56

 
 
 
58

 
 
 
Early extinguishment of debt
 
 
—

 
 
 
40

 
 
Transaction-related costs (d)
 
 
8

 
 
 
8

 
 
Restructuring expense
 
 
7

 
 
 
10

Income (loss) before income taxes
 
 
$
5

 
 
 
$
(57
)
__________
(a)
Amounts reflect the Company’s realignment of its operating segments (see Note 1 - Basis of Presentation for details). As a result, previously reported amounts were recast decreasing North America revenues and increasing International revenues by $2 million in the three months ended March 31, 2013.
(b) 
Amounts reflect the revised definition of Adjusted EBITDA to exclude restructuring expense, which resulted in an increase in Adjusted EBITDA in North America, International and Truck Rental of $3 million, $3 million and $4 million, respectively, in the three months ended March 31, 2013. The realignment of the Company's operating segments had no effect on Adjusted EBITDA for the three months ended March 31, 2013.
(c) 
Includes unallocated corporate overhead which is not attributable to a particular segment.
(d) 
During the three months ended March 31, 2014, transaction-related costs primarily comprised of a non-cash charge for re-acquired license rights and acquisition integration expenses. During the three months ended March 31, 2013, transaction-related costs primarily related to the integration of Avis Europe and the acquisition of Zipcar.

Since December 31, 2013, there have been no significant changes in segment assets other than in the Company’s North America segment. As of March 31, 2014 and December 31, 2013, North America assets under vehicle programs were approximately $8.8 billion and $7.9 billion, respectively.


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15.
Guarantor and Non-Guarantor Consolidating Condensed Financial Statements

The following consolidating financial information presents Consolidating Condensed Statements of Comprehensive Income for the three months ended March 31, 2014 and 2013, Consolidating Condensed Balance Sheets as of March 31, 2014 and December 31, 2013, and Consolidating Condensed Statements of Cash Flows for the three months ended March 31, 2014 and 2013 for: (i) Avis Budget Group, Inc. (the “Parent”); (ii) ABCR 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 the Subsidiary Issuers. These senior notes consist of Floating rate notes due 2017, 4⅞% notes due 2017, 8¼% notes due 2019, 9¾% notes due 2020 and 5½% notes due April 2023 (collectively, the “Notes”). See Note 8—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. Certain reclassifications have been made to the 2013 consolidating condensed financial statements to report intercompany transactions on a gross basis and to conform to the current-year presentation. The reclassified amounts had no impact on reported net income, stockholders’ equity, or the net change in cash for the periods presented for the Parent, Subsidiary Issuer, Guarantor Subsidiaries, Non-Guarantor Subsidiaries, Eliminations or the Company on a consolidated basis.

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Consolidating Condensed Statements of Comprehensive Income

Three Months Ended March 31, 2014 
 
 
 
Parent
 
Subsidiary
Issuers
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Total
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Vehicle rental
$
—

 
$
—

 
$
916

 
$
413

 
$
—

 
$
1,329

 
Other
—

 
—

 
267

 
755

 
(489
)
 
533

Net revenues
—

 
—

 
1,183

 
1,168

 
(489
)
 
1,862

 
 
 

 

 

 

 

 

Expenses

 

 

 

 

 


 
Operating
—

 
4

 
604

 
392

 
—

 
1,000

 
Vehicle depreciation and lease charges, net
—

 
—

 
441

 
432

 
(440
)
 
433

 
Selling, general and administrative
7

 
4

 
140

 
97

 
—

 
248

 
Vehicle interest, net
—

 
—

 
45

 
68

 
(49
)
 
64

 
Non-vehicle related depreciation and amortization
—

 
—

 
27

 
14

 
—

 
41

 
Interest expense related to corporate debt, net:

 

 

 

 

 


 
 
Interest expense
1

 
47

 
—

 
8

 
—

 
56

 
 
Intercompany interest expense (income)
(3
)
 
(3
)
 
1

 
5

 
—

 
—

 
Transaction-related costs
—

 
2

 
3

 
3

 
—

 
8

 
Restructuring expense
—

 
—

 
2

 
5

 
—

 
7

Total expenses
5

 
54

 
1,263

 
1,024

 
(489
)
 
1,857

Income (loss) before income taxes and equity in earnings of subsidiaries
(5
)
 
(54
)
 
(80
)
 
144

 
—

 
5

Provision for (benefit from) income taxes
(2
)
 
(21
)
 
18

 
6

 
—

 
1

Equity in earnings of subsidiaries
7

 
40

 
138

 
—

 
(185
)
 
—

Net income
$
4

 
$
7

 
$
40

 
$
138

 
$
(185
)
 
$
4

 
 
 


 


 


 


 


 


Comprehensive income
$
7

 
$
11

 
$
43

 
$
141

 
$
(195
)
 
$
7



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Table of Contents

Three Months Ended March 31, 2013 
 
 
 
Parent
 
Subsidiary
Issuers
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Total
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Vehicle rental
$
—

 
$
—

 
$
837

 
$
380

 
$
—

 
$
1,217

 
Other
—

 
—

 
246

 
526

 
(298
)
 
474

Net revenues
—

 
—

 
1,083

 
906

 
(298
)
 
1,691

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
 
 
 
 
Operating
2

 
1

 
558

 
370

 
—

 
931

 
Vehicle depreciation and lease charges, net
—

 
—

 
260

 
243

 
(117
)
 
386

 
Selling, general and administrative
9

 
1

 
131

 
83

 
—

 
224

 
Vehicle interest, net
—

 
—

 
42

 
58

 
(43
)
 
57

 
Non-vehicle related depreciation and amortization
—

 
—

 
22

 
12

 
—

 
34

 
Interest expense related to corporate debt, net:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
1

 
54

 
—

 
3

 
—

 
58

 
 
Intercompany interest expense (income)
(3
)
 
(11
)
 
3

 
11

 
—

 
—

 
 
Early extinguishment of debt
39

 
1

 
—

 
—

 
—

 
40

 
Restructuring expense
—

 
—

 
6

 
4

 
—

 
10

 
Transaction-related costs
—

 
4

 
1

 
3

 
—

 
8

Total expenses
48

 
50

 
1,023

 
787

 
(160
)
 
1,748

Income (loss) before income taxes and equity in earnings of subsidiaries
(48
)
 
(50
)
 
60

 
119

 
(138
)
 
(57
)
Provision for (benefit from) income taxes
(4
)
 
(20
)
 
14

 
(1
)
 
—

 
(11
)
Equity in earnings of subsidiaries
(2
)
 
28

 
(18
)
 
—

 
(8
)
 
—

Net income (loss)
$
(46
)
 
$
(2
)
 
$
28

 
$
120

 
$
(146
)
 
$
(46
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
(69
)
 
$
(25
)
 
$
2

 
$
95

 
$
(72
)
 
$
(69
)
 


23
Table of Contents

Consolidating Condensed Balance Sheets

As of March 31, 2014
 
 
 
Parent
 
Subsidiary
Issuers
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
5

 
$
459

 
$
—

 
$
377

 
$
—

 
$
841

 
Receivables, net
—

 
—

 
183

 
463

 
—

 
646

 
Deferred income taxes
1

 
—

 
155

 
23

 
(5
)
 
174

 
Other current assets
3

 
75

 
93

 
330

 
—

 
501

Total current assets
9

 
534

 
431

 
1,193

 
(5
)
 
2,162

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property and equipment, net
—

 
104

 
312

 
197

 
—

 
613

Deferred income taxes
20

 
1,107

 
141

 
—

 
(4
)
 
1,264

Goodwill
—

 
—

 
339

 
374

 
—

 
713

Other intangibles, net
—

 
41

 
516

 
375

 
—

 
932

Other non-current assets
104

 
91

 
18

 
149

 
—

 
362

Intercompany receivables
146

 
—

 
865

 
626

 
(1,637
)
 
—

Investment in subsidiaries
617

 
2,944

 
3,340

 
—

 
(6,901
)
 
—

Total assets exclusive of assets under vehicle programs
896

 
4,821

 
5,962

 
2,914

 
(8,547