CAR-2014.06.30-10Q
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 June 30, 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 104,034,977 shares as of July 31, 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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•
risks associated with litigation, governmental or regulatory inquiries, or any 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;

•
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 2013 Annual Report on Form 10-K and our Current Report on Form 8-K filed May 12, 2014, could cause actual results to differ materially from those projected in any forward-looking statements.

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 
 June 30,
 
Six Months Ended 
 June 30,
 
 
 
2014
 
2013
 
2014
 
2013
Revenues
 
 
 
 
 
 
 
 
Vehicle rental
$
1,553

 
$
1,438

 
$
2,882

 
$
2,654

 
Other
641

 
564

 
1,174

 
1,039

Net revenues
2,194

 
2,002

 
4,056

 
3,693

 
 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
Operating
1,105

 
1,007

 
2,105

 
1,937

 
Vehicle depreciation and lease charges, net
517

 
476

 
950

 
863

 
Selling, general and administrative
287

 
274

 
535

 
498

 
Vehicle interest, net
72

 
66

 
136

 
123

 
Non-vehicle related depreciation and amortization
45

 
37

 
86

 
71

 
Interest expense related to corporate debt, net:
 
 
 
 
 
 
 
 
 
Interest expense
55

 
55

 
111

 
114

 
 
Early extinguishment of debt
56

 
91

 
56

 
131

 
Transaction-related costs
8

 
19

 
16

 
26

 
Restructuring expense
1

 
15

 
8

 
25

Total expenses
2,146

 
2,040

 
4,003

 
3,788

 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
48

 
(38
)
 
53

 
(95
)
Provision for (benefit from) income taxes
22

 
(10
)
 
23

 
(21
)
 
 
 
 
 
 
 
 
 
 
Net income (loss)
$
26


$
(28
)
 
$
30

 
$
(74
)
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
31

 
$
(65
)
 
$
38

 
$
(134
)
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per share
 
 
 
 
 
 
 
 
Basic
$
0.25

 
$
(0.26
)
 
$
0.29

 
$
(0.69
)
 
Diluted
$
0.24

 
$
(0.26
)
 
$
0.28

 
$
(0.69
)









See Notes to Consolidated Condensed Financial Statements (Unaudited).

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Avis Budget Group, Inc.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions, except share data)
(Unaudited)
 
 
June 30, 
 2014
 
December 31,  
 2013
Assets
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
$
537

 
$
693

 
Receivables, net
753

 
619

 
Deferred income taxes
176

 
177

 
Other current assets
666

 
455

Total current assets
2,132

 
1,944

 
 
 
 
 
Property and equipment, net
628

 
614

Deferred income taxes
1,190

 
1,299

Goodwill
707

 
691

Other intangibles, net
932

 
923

Other non-current assets
353

 
361

Total assets exclusive of assets under vehicle programs
5,942

 
5,832

 
 
 
 
 
Assets under vehicle programs:
 
 
 
 
Program cash
145

 
116

 
Vehicles, net
13,366

 
9,582

 
Receivables from vehicle manufacturers and other
174

 
391

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

 
363

 
 
14,047

 
10,452

Total assets
$
19,989

 
$
16,284

 
 
 
 
 
Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
 
Accounts payable and other current liabilities
$
1,636

 
$
1,479

 
Short-term debt and current portion of long-term debt
89

 
89

Total current liabilities
1,725

 
1,568

 
 
 
 
 
Long-term debt
3,299

 
3,305

Other non-current liabilities
852

 
847

Total liabilities exclusive of liabilities under vehicle programs
5,876

 
5,720

 
 
 
 
 
Liabilities under vehicle programs:
 
 
 
 
Debt
2,747

 
1,681

 
Debt due to Avis Budget Rental Car Funding (AESOP) LLC—related party
8,101

 
5,656

 
Deferred income taxes
2,070

 
2,177

 
Other
528

 
279

 
 
13,446

 
9,793

Commitments and contingencies (Note 11)

 

 
 
 
 
 
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 137,093,424 and 137,081,056 shares
1

 
1

 
Additional paid-in capital
7,733

 
7,893

 
Accumulated deficit
(2,330
)
 
(2,360
)
 
Accumulated other comprehensive income
125

 
117

 
Treasury stock, at cost—32,776,840 and 30,515,721 shares
(4,862
)
 
(4,880
)
Total stockholders’ equity
667

 
771

Total liabilities and stockholders’ equity
$
19,989

 
$
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) 
 
 
 
Six Months Ended 
 June 30,
 
 
 
2014
 
2013
Operating activities
 
 
 
Net income (loss)
$
30

 
$
(74
)
 
 
 
 
 
 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Vehicle depreciation
898

 
808

 
Gain on sale of vehicles, net
(24
)
 
(2
)
 
Non-vehicle related depreciation and amortization
86

 
71

 
Amortization of debt financing fees
20

 
22

 
Net change in assets and liabilities, excluding the impact of acquisitions and dispositions:
 
 
 
 
 
Receivables
(131
)
 
(113
)
 
 
Income taxes and deferred income taxes
5

 
(44
)
 
 
Accounts payable and other current liabilities
20

 
31

 
Other, net
107

 
175

Net cash provided by operating activities
1,011

 
874

 
 
 
 
 
 
Investing activities
 
 
 
Property and equipment additions
(80
)
 
(56
)
Proceeds received on asset sales
6

 
7

Net assets acquired (net of cash acquired)
(125
)
 
(476
)
Other, net
(8
)
 
50

Net cash used in investing activities exclusive of vehicle programs
(207
)
 
(475
)
 
 
 
 
 
 
Vehicle programs:
 
 
 
 
Increase in program cash
(29
)
 
(111
)
 
Investment in vehicles
(8,214
)
 
(7,306
)
 
Proceeds received on disposition of vehicles
4,382

 
4,434

 
 
(3,861
)
 
(2,983
)
Net cash used in investing activities
(4,068
)
 
(3,458
)


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Avis Budget Group, Inc.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued)
(In millions)
(Unaudited)
 
 
Six Months Ended 
 June 30,
 
 
2014
 
2013
Financing activities
 
 
 
Proceeds from long-term borrowings
695

 
2,725

Payments on long-term borrowings
(747
)
 
(2,338
)
Net change in short-term borrowings
—

 
10

Purchases of warrants
—

 
(29
)
Proceeds from sale of call options
—

 
40

Repurchases of common stock
(146
)
 
—

Debt financing fees
(11
)
 
(28
)
Other, net
(1
)
 
2

Net cash provided by (used in) financing activities exclusive of vehicle programs
(210
)
 
382

 
 
 
 
 
Vehicle programs:
 
 
 
 
Proceeds from borrowings
9,536

 
8,191

 
Payments on borrowings
(6,417
)
 
(6,055
)
 
Debt financing fees
(10
)
 
(20
)
 
 
3,109

 
2,116

Net cash provided by financing activities
2,899

 
2,498

 
 
 
 
 
Effect of changes in exchange rates on cash and cash equivalents
2

 
(17
)
 
 
 
 
 
Net decrease in cash and cash equivalents
(156
)
 
(103
)
Cash and cash equivalents, beginning of period
693

 
606

Cash and cash equivalents, end of period
$
537

 
$
503













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 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 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 (“2013 Form 10-K”) and the Company’s Current Report on Form 8-K filed May 12, 2014, which updated the 2013 Form 10-K for a change to the Company’s reportable segments as well as a revision to the Company’s definition of Adjusted EBITDA.

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 and six months ended June 30, 2014, the Company recorded losses of $2 million and $4 million, respectively, on such items. In the three and six months ended June 30, 2013, the Company recorded losses of $3 million and $7 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 (“ASU”) 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 these obligations as the sum of the amount the Company agreed to pay plus any additional amount the Company expects to pay on behalf of co-obligors. The adoption of this pronouncement did not have a material impact on the Company’s financial statements.

Recently Issued Accounting Standards

In April 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” which changes the criteria for determining which disposals can be presented as discontinued operations and also modifies related disclosure requirements. ASU 2014-08 becomes effective for the Company on January 1, 2015. The adoption of this accounting pronouncement is not expected to have an impact on the Company's financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which outlines a single model for entities to use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance. ASU 2014-09 becomes effective for the Company on January 1, 2017. The Company is currently evaluating the effect of this accounting pronouncement; however, it is not expected to have a material impact on the financial statements.

In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Allow a Performance Target to Be Achieved After the Requisite Service Period,” which requires that a performance target that could be achieved after the requisite service period be treated as a performance condition that affects the vesting of the award. ASU 2014-12 becomes effective for the Company on January 1, 2016. The adoption of this accounting pronouncement is not expected to have an impact on the Company's financial statements.

2.
Restructuring Activities

Subsequent to the acquisition of Avis Europe plc (“Avis Europe”), the Company began a restructuring initiative, identifying synergies across the Company, enhancing organizational efficiencies and consolidating and rationalizing processes. During the six months ended June 30, 2014, as part of this process, the Company formally communicated the termination of employment to approximately 210 employees and recorded $8 million of expense in connection with these initiatives. These expenses primarily represent severance, outplacement services and other costs associated with employee terminations. As of June 30, 2014, the Company has terminated approximately 150 of these employees. The Company expects further restructuring expense of approximately $13 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
 
2

 
6

 
8

 
Cash payment/utilization
 
(2
)
 
(16
)
 
(18
)
Balance as of June 30, 2014
 
$
1

 
$
11

 
$
12

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

 
$
5

 
$
22

 
Restructuring expense
 
8

 
—

 
8

 
Cash payment/utilization
 
(18
)
 
—

 
(18
)
Balance as of June 30, 2014
 
$
7

 
$
5

 
$
12


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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 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2014
 
2013
 
2014
 
2013
Net income (loss) for basic EPS
$
26

 
$
(28
)
 
$
30

 
$
(74
)
Convertible note interest, net of tax
1

 
—

 
1

 
—

Net income (loss) for diluted EPS
$
27

 
$
(28
)
 
$
31

 
$
(74
)
 
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
105.1

 
108.4

 
105.8

 
108.0

Options, warrants and non-vested stock (a) (b)
1.9

 
—

 
2.0

 
—

Convertible debt (c)
4.0

 
—

 
4.0

 
—

Diluted weighted average shares outstanding
111.0

 
108.4

 
111.8

 
108.0

 
 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 
 
 
 
 
 
 
Basic
$
0.25

 
$
(0.26
)
 
$
0.29

 
$
(0.69
)
 
Diluted
$
0.24

 
$
(0.26
)
 
$
0.28

 
$
(0.69
)
__________
(a) 
For the three months ended June 30, 2014, there are no anti-dilutive securities which were excluded from the computation of diluted earnings per share. For the six months ended June 30, 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 and six months ended June 30, 2013, 1.2 million outstanding options, 4.6 million warrants and 3.5 million non-vested stock awards have an anti-dilutive effect and therefore were excluded from the computation of diluted weighted average shares outstanding.
(c) 
For the three and six months ended June 30, 2013, 4.6 million issuable shares underlying the 3½% convertible notes due 2014 have an anti-dilutive effect and therefore were 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 $10 million of the total consideration was paid during the six months ended June 30, 2014 and the majority of the remainder is expected to be paid by the end of 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% non-controlling ownership stake in its Brazilian licensee for $53 million, of which the remaining consideration of $6 million was paid during the six months ended June 30, 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.

Apex Car Rentals

During the six months ended June 30, 2014, the Company recorded approximately $7 million in transaction-related costs to increase the fair value of contingent consideration associated with the October 2012 acquisition of Apex Car Rentals (“Apex”). The contingent consideration consists of a maximum of $26 million in payments that are contingent on the future financial performance of Apex. The amount recognized for contingent consideration at June 30, 2014 was $19 million.

5.
Other Current Assets

Other current assets consisted of:
 
As of June 30, 2014
 
As of December 31, 2013
Sales and use taxes
$
321

 
$
132

Prepaid expenses
221

 
187

Other
124

 
136

Other current assets
$
666

 
$
455


6.
Intangible Assets

Intangible assets consisted of:
 
As of June 30, 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)(d)
$
279

 
$
58

 
$
221

 
$
272

 
$
52

 
$
220

Customer relationships (a)(d)
177

 
44

 
133

 
166

 
35

 
131

Other (c)
8

 
2

 
6

 
2

 
1

 
1

Total
$
464

 
$
104

 
$
360

 
$
440

 
$
88

 
$
352

 
 
 
 
 
 
 
 
 
 
 
 
Unamortized Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
Goodwill (a)(b)(d)
$
707

 
 
 
 
 
$
691

 
 
 
 
Trademarks (d)
$
572

 
 
 
 
 
$
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.
(c) 
The increases in carrying amounts reflect the acquisition of airport concession agreements, amortized over a weighted average useful life of approximately three years.
(d) 
The changes in carrying amounts reflect fluctuations in currency exchange rates.

For the three months ended June 30, 2014 and 2013, amortization expense was approximately $9 million and $7 million, respectively. For the six months ended June 30, 2014 and 2013, amortization expense was

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approximately $16 million and $12 million, respectively. Based on the Company’s amortizable assets at June 30, 2014, the Company expects amortization expense of approximately $18 million for the remainder of 2014 and approximately $32 million for each of the five fiscal years thereafter.

7.
Vehicle Rental Activities

The components of the Company’s vehicles, net within assets under vehicle programs were as follows: 
 
As of
 
As of
 
June 30,
 
December 31,
 
2014
 
2013
Rental vehicles
$
14,409

 
$
10,234

Less: Accumulated depreciation
(1,461
)
 
(1,411
)
 
12,948

 
8,823

Vehicles held for sale
418

 
759

Vehicles, net
$
13,366

 
$
9,582


The components of vehicle depreciation and lease charges, net are summarized below: 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
Depreciation expense
$
491

 
$
455

 
$
898

 
$
808

Lease charges
39

 
23

 
76

 
57

Gain on sales of vehicles, net
(13
)
 
(2
)
 
(24
)
 
(2
)
Vehicle depreciation and lease charges, net
$
517

 
$
476

 
$
950

 
$
863


At June 30, 2014 and 2013, the Company had purchases of vehicles included in payables of $498 million and $525 million, respectively, and sales of vehicles included in receivables of $170 million and $154 million, respectively.

8.
Income Taxes

The Company’s effective tax rate for the six months ended June 30, 2014 is a provision of 43.4%. Such rate differed from the Federal statutory rate of 35.0% primarily due to the non-deductibility of certain transaction-related costs.

The Company’s effective tax rate for the six months ended June 30, 2013 was a benefit of 22.1%. Such rate differed from the Federal statutory rate of 35.0% primarily due to the treatment of the expenses for the early extinguishment of corporate debt and certain transaction-related costs.

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9.
Long-term Debt and Borrowing Arrangements

Long-term and other borrowing arrangements consisted of:
 
 
 
As of
 
As of
 
Maturity
Dates
 
June 30,
 
December 31,
 
 
2014
 
2013
3½% Convertible Notes (a)
October 2014
 
$
65

 
$
66

4⅞% Senior Notes
November 2017
 
300

 
300

Floating Rate Senior Notes (b)
December 2017
 
247

 
247

8¼% Senior Notes
January 2019
 
—

 
691

Floating Rate Term Loan (c)
March 2019
 
985

 
989

9¾% Senior Notes
March 2020
 
223

 
223

6% Euro-denominated Senior Notes
March 2021
 
634

 
344

5⅛% Senior Notes
June 2022
 
400

 
—

5½% Senior Notes
April 2023
 
500

 
500

 

 
3,354

 
3,360

Other
 
 
34

 
34

Total
 
 
3,388

 
3,394

Less: Short-term debt and current portion of long-term debt
 
 
89

 
89

Long-term debt
 
 
$
3,299

 
$
3,305

__________
(a) 
As of June 30, 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 2.98% at June 30, 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) 
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 June 30, 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.

In May 2014, the Company issued $400 million of 5⅛% Senior Notes due 2022 at par. In June 2014, the Company used the proceeds to repurchase the remaining $395 million principal amount of its 8¼% Senior Notes for $421 million plus accrued interest.

COMMITTED CREDIT FACILITIES AND AVAILABLE FUNDING ARRANGEMENTS

At June 30, 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
Senior revolving credit facility maturing 2018 (a) 
$
1,650

 
$
—

 
$
900

 
$
750

Other facilities (b)
13

 
1

 
—

 
12

__________
(a) 
The senior revolving credit facility bears interest at one-month LIBOR, plus 225 basis points and 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 June 30, 2014.

At June 30, 2014, the Company had various uncommitted credit facilities available, under which it had drawn approximately $5 million, which bear interest at rates between 0.41% and 2.50%.

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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 also contains a maximum leverage ratio requirement. As of June 30, 2014, the Company was in compliance with the financial covenants governing its indebtedness.

10.
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
 
June 30,
 
December 31,
 
2014
 
2013
North America - Debt due to Avis Budget Rental Car Funding (a)
$
8,101

 
$
5,656

North America - Canadian borrowings (a)(b)
744

 
400

International - Debt borrowings (a)
1,290

 
731

International - Capital leases (a)
444

 
289

Truck Rental - Debt borrowings (c)
264

 
226

Other
5

 
35

Total
$
10,848

 
$
7,337

__________
(a) 
The increase reflects additional borrowings principally to fund a seasonal increase in the Company’s car rental fleet.
(b) 
The increase includes additional borrowings to fund an increase in the Company’s fleet driven by the acquisition of its Budget licensee for Edmonton.
(c) 
The increase reflects additional borrowings to acquire rental fleet.


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 June 30, 2014.
 
Debt Under Vehicle Programs
Within 1 year (a)
$
1,251

Between 1 and 2 years
4,871

Between 2 and 3 years
1,485

Between 3 and 4 years
1,156

Between 4 and 5 years
1,714

Thereafter
371

Total
$
10,848

 __________
(a) 
Vehicle-backed debt maturing within one year primarily represents term asset-backed securities.


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COMMITTED CREDIT FACILITIES AND AVAILABLE FUNDING ARRANGEMENTS

As of June 30, 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)
$
8,516

 
$
8,101

 
$
415

North America - Canadian borrowings (c)
961

 
744

 
217

International - Debt borrowings (d)
1,650

 
1,290

 
360

International - Capital leases (e)
554

 
444

 
110

Truck Rental - Debt borrowings (f)
283

 
264

 
19

Other
5

 
5

 
—

Total
$
11,969

 
$
10,848

 
$
1,121

__________
(a) 
Capacity is subject to maintaining sufficient assets to collateralize debt.
(b) 
The outstanding debt is collateralized by approximately $9.7 billion of underlying vehicles and related assets.
(c) 
The outstanding debt is collateralized by $919 million of underlying vehicles and related assets.
(d) 
The outstanding debt is collateralized by approximately $1.6 billion of underlying vehicles and related assets.
(e) 
The outstanding debt is collateralized by $450 million of underlying vehicles and related assets.
(f) 
The outstanding debt is collateralized by $406 million of underlying vehicles and related assets.

DEBT COVENANTS

The 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 June 30, 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.

11.
Commitments and Contingencies

Contingencies
The Company is 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.

Additionally, 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 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. 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.


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Table of Contents

Commitments to Purchase Vehicles

The Company maintains agreements with vehicle manufacturers under which the Company has agreed to purchase approximately $2.0 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 June 30, 2014, the Company had approximately $137 million of purchase obligations, which extend through 2018.

Concentrations

Concentrations of credit risk at June 30, 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, BMW, Subaru, Mercedes 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 $62 million and $38 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 $42 million, the majority of which expire by the end of 2015. At June 30, 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.

12.
Stockholders’ Equity

Share Repurchases

In August 2013, the Company obtained Board approval to repurchase up to $200 million of its common stock. In April 2014, the Company’s Board authorized a $235 million increase to the share repurchase program. During the six months ended June 30, 2014, the Company repurchased approximately 2,977,000 shares of common stock at a cost of approximately $150 million under the program. The Company did not repurchase any of its common stock during the six months ended June 30, 2013.


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Accumulated Other Comprehensive Income

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

 
$
1

 
$
2

 
$
(52
)
 
$
117

Net current-period other comprehensive income (loss)
8

 
(2
)
 
1

 
1

 
8

Balance, June 30, 2014
$
174

 
$
(1
)
 
$
3

 
$
(51
)
 
$
125

 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2013
$
193

 
$
—

 
$
2

 
$
(85
)
 
$
110

Net current-period other comprehensive income (loss)
(60
)
 
1

 
(1
)
 
—

 
(60
)
Balance, June 30, 2013
$
133

 
$
1

 
$
1

 
$
(85
)
 
$
50

__________
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 a $9 million loss, net of tax, related to the Company's hedge of its net investment in Euro-denominated foreign operations (See Note 14 - Financial Instruments).
(a) 
For the three and six months ended June 30, 2014 and 2013, amounts reclassified from accumulated other comprehensive income were not material.
(b) 
For the three and six months ended June 30, 2014, amounts reclassified from accumulated other comprehensive income were $2 million ($1 million, net of tax) and $4 million ($2 million, net of tax), respectively. For the three and six months ended June 30, 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 (loss) were as follows: 
 

Three Months Ended 
 June 30,

Six Months Ended 
 June 30,
 

2014

2013

2014

2013
Net income (loss)
$
26

 
$
(28
)
 
$
30

 
$
(74
)
Other comprehensive income (loss):
 
 
 
 
 
 
 

Currency translation adjustments
5

 
(37
)
 
8

 
(60
)

Net unrealized gain (loss) on available-for-sale securities
2

 
(1
)
 
1

 
(1
)

Net unrealized gain (loss) on cash flow hedges
(3
)
 
1

 
(2
)
 
1


Minimum pension liability adjustment
1

 
—

 
1

 
—

 
 
5

 
(37
)
 
8

 
(60
)
Total comprehensive income (loss)
$
31

 
$
(65
)
 
$
38

 
$
(134
)
__________
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. The related taxes on all other components are not material for any period presented.



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13.
Stock-Based Compensation

The Company recorded stock-based compensation expense of $8 million and $5 million ($5 million and $3 million, net of tax) during the three months ended June 30, 2014 and 2013, respectively, and $16 million and $9 million ($10 million and $6 million, net of tax) during the six months ended June 30, 2014 and 2013, respectively, related to stock-based awards that were granted by the Company. In jurisdictions with net operating loss carryforwards, exercises and/or vestings of stock-based awards have generated $52 million of total tax deductions at June 30, 2014. Approximately $21 million of tax benefits will be recorded in additional paid-in capital when these tax deductions are realized in these jurisdictions.

The weighted average assumptions used in the Monte Carlo simulation model to calculate the fair value of the Company’s stock unit awards containing a market condition are as follows:
 
Six Months Ended 
 June 30,
 
2014
 
2013
Expected volatility of stock price
40%
 
43%
Risk-free interest rate
0.83%
 
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
379

 
41.94

 
325

 
41.97

 
—

 
—

 
Vested (b)
(600
)
 
16.71

 
(432
)
 
10.91

 
—

 
—

 
Forfeited/expired
(57
)
 
23.62

 
(32
)
 
21.48

 
—

 
—

Outstanding at June 30, 2014 (c)
1,030

 
$
27.12

 
1,904

 
$
19.13

 
267

 
$
14.90

__________
(a) 
Reflects the maximum number of stock units assuming achievement of all time-, performance- and market-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 $21.73, $20.64 and $17.14, respectively.
(b) 
The total grant date fair value of RSUs vested during the six months ended June 30, 2014 and 2013 was $15 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 $61 million, $114 million and $16 million, respectively. Aggregate unrecognized compensation expense related to time-based RSUs and performance-based and market-based RSUs amounted to $41 million and will be recognized over a weighted average vesting period of 1.1 years. The Company assumes that substantially all outstanding awards will vest over time.


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Table of Contents


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
(100
)
 
2.59

 
5

 

 
Forfeited/expired
—

 
—

 
—

 

Outstanding at June 30, 2014 (a)
879

 
2.85

 
50

 
4.7
Exercisable at June 30, 2014
847

 
$
2.52

 
$
48

 
4.7
__________ 
(a) 
The Company assumes that substantially all outstanding stock options will vest over time.

14.
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 six months ended June 30, 2014, the Company recorded a $2 million gain in accumulated other comprehensive income as part of currency translation adjustments. There was no ineffectiveness related to the Company’s net investment hedges during the three and six months ended June 30, 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. There was no ineffectiveness related to the Company’s cash flow hedges during the three and six months ended June 30, 2014. The Company estimates that $7 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 was not material as of June 30, 2014.


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The Company held derivative instruments with absolute notional values as follows:
 
As of
 
June 30, 2014
Interest rate caps (a)
$
12,275

Interest rate swaps
1,501

Foreign exchange swaps
642

Foreign exchange forward contracts
315

 
 
Commodity contracts (millions of gallons of unleaded gasoline)
10

__________
(a) 
Represents $9.9 billion of interest rate caps sold, partially offset by approximately $2.4 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 as it is not consolidated by the Company.

Fair values (Level 2) of derivative instruments were as follows: 
 
 
As of June 30, 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)
$
1

 
$
2

 
$
2

 
$
1

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

 
4

 
2

 
13

 
Interest rate swaps
—

 
—

 
—

 
—

 
Foreign exchange swaps and forward contracts (c)
2

 
11

 
3

 
5

 
Commodity contracts (c)
1

 
—

 
—

 
—

 
Total
$
4

 
$
17

 
$
7

 
$
19

__________
Amounts in this table exclude derivatives issued by Avis Budget Rental Car Funding, however, certain amounts related to the derivatives held by Avis Budget Rental Car Funding are included within accumulated other comprehensive income.
(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.



19
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The effects of derivatives recognized in the Company’s Consolidated Condensed Financial Statements were as follows:     
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2014
 
2013
 
2014
 
2013
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
Interest rate swaps (a)
$
(3
)
 
$
1

 
$
(2
)
 
$
1

Derivatives not designated as hedging instruments (b)
 
 
 
 

 

 
Interest rate caps (c)
—

 
4

 
—

 
7

 
Foreign exchange swaps and forward contracts (d)
(11
)
 
34

 
(29
)
 
35

 
Commodity contracts (e)
1

 
(2
)
 
1

 
—

 
Total
$
(13
)
 
$
37

 
$
(30
)
 
$
43

__________
(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 June 30, 2014, included a $11 million loss in interest expense and for the six months ended June 30, 2014, included a $26 million loss in interest expense and a $3 million loss in operating expense. For the three months ended June 30, 2013 included a $30 million gain in interest expense and a $4 million gain in operating expense and for the six months ended June 30, 2013, included a $29 million gain in interest expense and a $6 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 June 30, 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
$
24

 
$
24

 
$
23

 
$
23

 
Convertible debt
65

 
240

 
66

 
159

 
Long-term debt
3,299

 
3,381

 
3,305

 
3,416

 
 
 
 
 
 
 
 
 
Debt under vehicle programs
 
 
 
 
 
 
 
 
Vehicle-backed debt due to Avis Budget Rental Car Funding
$
8,101

 
$
8,241

 
$
5,656

 
$
5,732

 
Vehicle-backed debt
2,743

 
2,749

 
1,668

 
1,675

 
Interest rate swaps and interest rate contracts (a)
4

 
4

 
13

 
13

 __________
(a) 
Derivatives in a liability position.

15.
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 has aggregated certain of its operating segments into its 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

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presentation of Adjusted EBITDA may not be comparable to similarly-titled measures used by other companies.
 
 
 
 
Three Months Ended June 30,
 
 
 
 
2014
 
2013
 
 
 
 
Revenues
 
Adjusted EBITDA
 
Revenues (a)
 
Adjusted EBITDA (b)
North America
$
1,427

 
$
157

 
$
1,279

 
$
115

International
667

 
57

 
621

 
58

Truck Rental
100

 
13

 
102

 
17

Corporate and Other (c)
—

 
(14
)
 
—

 
(11
)
 
Total Company
$
2,194

 
213

 
$
2,002

 
179

 
 
 
 
 
 


 
 
 


Less:
Non-vehicle related depreciation and amortization
 
45

 
 
 
37

 
 
Interest expense related to corporate debt, net:
 

 
 
 

 
 
 
Interest expense
 
 
55

 
 
 
55

 
 
 
Early extinguishment of debt
 
 
56

 
 
 
91

 
 
Transaction-related costs
 
 
8

 
 
 
19

 
 
Restructuring expense
 
 
1

 
 
 
15

Income (loss) before income taxes
 
 
$
48

 
 
 
$
(38
)
__________
(a)
Previously reported amounts were recast for a change in the Company’s reportable segments, decreasing North America revenues and increasing International revenues by $13 million in the three months ended June 30, 2013.
(b) 
Amounts reflect a revision to the definition of Adjusted EBITDA to exclude restructuring expense, which resulted in an increase in Adjusted EBITDA in International and Truck Rental of $6 million and $9 million, respectively, and a change in the Company’s reportable segments, which resulted in an increase in North America Adjusted EBITDA and a decrease in International Adjusted EBITDA of $1 million in the three months ended June 30, 2013.
(c) 
Includes unallocated corporate overhead which is not attributable to a particular segment.
 
 
 
 
Six Months Ended June 30,
 
 
 
 
2014
 
2013
 
 
 
 
Revenues
 
Adjusted EBITDA
 
Revenues (a)
 
Adjusted EBITDA (b)
North America
$
2,663

 
$
271

 
$
2,377

 
$
208

International
1,218

 
74

 
1,138

 
75

Truck Rental
175

 
11

 
178

 
12

Corporate and Other (c)
—

 
(26
)
 
—

 
(23
)
 
Total Company
$
4,056

 
330

 
$
3,693

 
272

 
 
 
 
 
 
 
 
 
 
 
Less:
Non-vehicle related depreciation and amortization
 
86

 
 
 
71

 
 
Interest expense related to corporate debt, net:
 
 
 
 
 
 
 
 
 
Interest expense
 
 
111

 
 
 
114

 
 
 
Early extinguishment of debt
 
 
56

 
 
 
131

 
 
Transaction-related costs
 
 
16

 
 
 
26

 
 
Restructuring expense
 
 
8

 
 
 
25

Income (loss) before income taxes
 
 
$
53

 
 
 
$
(95
)
__________
(a) 
Previously reported amounts were recast for a change in the Company’s reportable segments, decreasing North America revenues and increasing International revenues by $15 million in the six months ended June 30, 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, $9 million and $13 million, respectively, and a change in the Company’s reportable segments, which resulted in an increase in North America Adjusted EBITDA and a decrease in International Adjusted EBITDA by $1 million in the six months ended June 30, 2013.
(c) 
Includes unallocated corporate overhead which is not attributable to a particular segment.

Since December 31, 2013, there have been no significant changes in segment assets other than in the Company’s North America and International segment assets under vehicle programs. As of June 30, 2014 and December 31, 2013, North America assets under vehicle programs were approximately $10.8 billion and $7.9 billion, respectively, and International assets under vehicle programs were approximately $2.9 billion and $2.2 billion, respectively.

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16.
Guarantor and Non-Guarantor Consolidating Condensed Financial Statements

The following consolidating financial information presents Consolidating Condensed Statements of Comprehensive Income for the three and six months ended June 30, 2014 and 2013, Consolidating Condensed Balance Sheets as of June 30, 2014 and December 31, 2013, and Consolidating Condensed Statements of Cash Flows for the six months ended June 30, 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, 5⅛% notes due June 2022 and 5½% notes due April 2023 (collectively, the “Notes”). See Note 9 - 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 June 30, 2014 
 
 
 
Parent
 
Subsidiary
Issuers
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Total
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Vehicle rental
$
—

 
$
—

 
$
1,049

 
$
504

 
$
—

 
$
1,553

 
Other
—

 
—

 
309

 
891

 
(559
)
 
641

Net revenues
—

 
—

 
1,358

 
1,395

 
(559
)
 
2,194

 
 
 

 

 

 

 

 

Expenses

 

 

 

 

 


 
Operating
2

 
4

 
660

 
439

 
—

 
1,105

 
Vehicle depreciation and lease charges, net
—

 
—

 
505

 
516

 
(504
)
 
517

 
Selling, general and administrative
6

 
7

 
157

 
117

 
—

 
287

 
Vehicle interest, net
—

 
—

 
51

 
76

 
(55
)
 
72

 
Non-vehicle related depreciation and amortization
—

 
1

 
28

 
16

 
—

 
45

 
Interest expense related to corporate debt, net:

 

 

 

 

 


 
 
Interest expense
—

 
41

 
2

 
12

 
—

 
55

 
 
Intercompany interest expense (income)
(3
)
 
(2
)
 
—

 
5

 
—

 
—

 
 
Early extinguishment of debt
—

 
56

 
—

 
—

 
—

 
56

 
Transaction-related costs
—

 
2

 
(4
)
 
10

 
—

 
8

 
Restructuring expense
—

 
—

 
—

 
1

 
—

 
1

Total expenses
5

 
109

 
1,399

 
1,192

 
(559
)
 
2,146

Income (loss) before income taxes and equity in earnings of subsidiaries
(5
)
 
(109
)
 
(41
)
 
203

 
—

 
48

Provision for (benefit from) income taxes
(1
)
 
(43
)
 
52

 
14

 
—

 
22

Equity in earnings of subsidiaries
30

 
96

 
189

 
—

 
(315
)
 
—

Net income
$
26

 
$
30

 
$
96

 
$
189

 
$
(315
)
 
$
26

 
 
 


 


 


 


 


 


Comprehensive income
$
31

 
$
33

 
$
101

 
$
194

 
$
(328
)
 
$
31


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Six Months Ended June 30, 2014
 
 
 
Parent
 
Subsidiary
Issuers
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Total
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Vehicle rental
$
—

 
$
—

 
$
1,965

 
$
917

 
$
—

 
$
2,882

 
Other
—</