Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Form 10-Q

 

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

For the quarterly period ended June 30, 2008

OR

 

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

For the transition period from              to             

Commission File No. 1-10308

 

 

Avis Budget Group, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   06-0918165

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

6 Sylvan Way

Parsippany, NJ

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

(973) 496-4700

(Registrant’s telephone number, including area code)

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

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

 

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

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

The number of shares outstanding of the issuer’s common stock was 101,340,920 shares as of July 31, 2008.

 

 

 


Table of Contents

Table of Contents

 

          Page
PART I    Financial Information (Unaudited)   
Item 1.    Financial Statements   
   Consolidated Condensed Statements of Income for the Three and Six Months Ended June 30, 2008 and 2007 (Unaudited)    3
   Consolidated Condensed Balance Sheets as of June 30, 2008 and December 31, 2007 (Unaudited)    4
   Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007 (Unaudited)    5
   Notes to Consolidated Condensed Financial Statements (Unaudited)    7
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    28
Item 3.    Quantitative and Qualitative Disclosures about Market Risk    37
Item 4.    Controls and Procedures    37
PART II    Other Information   
Item 1.    Legal Proceedings    37
Item 1A.    Risk Factors    38
Item 4.    Submission of Matters to a Vote of Security Holders    39
Item 6.    Exhibits    39
   Signatures    40


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FORWARD-LOOKING STATEMENTS

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

 

   

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

 

   

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

 

   

a decline in the results of operations or financial condition of the manufacturers of our cars and/or their willingness or ability to make cars available to us or the rental car industry as a whole on commercially reasonable terms or at all;

 

   

a downturn in airline passenger traffic in the United States or in the other international locations in which we operate;

 

   

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

 

   

a decline in general economic conditions, or a decline in the housing market;

 

   

our dependence on third-party distribution channels;

 

   

a disruption or decline in rental activity, particularly during our peak season or in key market segments;

 

   

a significant increase in interest rates or in borrowing costs or a fluctuation in interest rates, which can impact the valuation of our derivatives;

 

   

our ability to successfully implement our business strategy for growth;

 

   

our ability to accurately estimate our future results;

 

   

our ability to successfully integrate operations upon the acquisition of other businesses, potentially including exercise of our option to purchase a majority interest in Carey Holdings, Inc., the parent company of Carey International, Inc.;

 

   

a major disruption in our communication or centralized information networks;

 

   

our exposure to uninsured claims in excess of historic levels;

 

   

our failure or inability to comply with regulations or any changes in regulations;

 

   

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

 

   

substantial increases in fuel costs or decreases in fuel supply;

 

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a disruption in our ability to obtain financing for our operations, including the funding of our vehicle fleet via the asset-backed securities and lending market;

 

   

risks related to our indebtedness, including our substantial amount of debt, our ability to incur substantially more debt, the restrictive and financial covenants in agreements and instruments governing our debt and the amount of cash required to service all of our indebtedness;

 

   

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

 

   

the continuation of a low trading price of our stock, which could limit our access to capital, be an indicator that our goodwill is impaired and/or result in a future charge to earnings for an impairment of our goodwill; and

 

   

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

Other factors and assumptions not identified above, including those described under “Risk Factors” set forth in Item 1A of our 2007 Annual Report on Form 10-K and Part II, Item 1A of this Quarterly Report on Form 10-Q, were also involved in the derivation of these forward-looking statements, and the failure of such other assumptions to be realized, as well as other factors, may also cause actual results to differ materially from those projected. Most of these factors are difficult to predict accurately and are generally beyond our control.

You should consider the areas of risk described above, as well as those described under “Risk Factors” set forth in Item 1A of our 2007 Annual Report on Form 10-K and Part II, Item 1A of this Quarterly Report on Form 10-Q, in connection with any forward-looking statements that may be made by us and our businesses generally. Except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to release any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless required by law. For any forward-looking statements contained in any document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 

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PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

Avis Budget Group, Inc.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(In millions, except per share data)

(Unaudited)

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
 
     2008    2007    2008    2007  

Revenues

           

Vehicle rental

   $ 1,194    $ 1,175    $ 2,313    $ 2,252  

Other

     383      341      709      629  
                             

Net revenues

     1,577      1,516      3,022      2,881  
                             

Expenses

           

Operating

     811      785      1,588      1,496  

Vehicle depreciation and lease charges, net

     441      402      823      764  

Selling, general and administrative

     173      168      344      327  

Vehicle interest, net

     74      71      159      142  

Non-vehicle related depreciation and amortization

     20      20      39      43  

Interest expense related to corporate debt, net

     32      32      61      65  

Separation costs, net

     1      3      1      (3 )
                             

Total expenses

     1,552      1,481      3,015      2,834  
                             

Income before income taxes

     25      35      7      47  

Provision for income taxes

     10      12      3      12  
                             

Income from continuing operations

     15      23      4      35  

Gain on disposal of discontinued operations, net of tax

     —        1      —        1  
                             

Net income

   $ 15    $ 24    $ 4    $ 36  
                             

Earnings per share

           

Basic

           

Income from continuing operations

   $ 0.15    $ 0.22    $ 0.04    $ 0.34  

Net income

     0.15      0.23      0.04      0.35  

Diluted

           

Income from continuing operations

   $ 0.15    $ 0.22    $ 0.04    $ 0.34  

Net income

     0.15      0.23      0.04      0.35  

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,      
2008
    December 31,
2007
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 262     $ 214  

Receivables, net

     434       392  

Deferred income taxes

     44       42  

Other current assets

     492       570  
                

Total current assets

     1,232       1,218  

Property and equipment, net

     505       500  

Deferred income taxes

     255       234  

Goodwill

     1,000       1,000  

Other intangibles, net

     802       760  

Other non-current assets

     773       781  
                

Total assets exclusive of assets under vehicle programs

     4,567       4,493  
                

Assets under vehicle programs:

    

Program cash

     —         1  

Vehicles, net

     9,139       7,474  

Receivables from vehicle manufacturers and other

     119       276  

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

     567       230  
                
     9,825       7,981  
                

Total assets

   $ 14,392     $ 12,474  
                

Liabilities and stockholders’ equity

    

Current liabilities:

    

Accounts payable and other current liabilities

   $ 1,046     $ 1,094  

Current portion of long-term debt

     9       10  
                

Total current liabilities

     1,055       1,104  

Long-term debt

     1,784       1,787  

Other non-current liabilities

     953       998  
                

Total liabilities exclusive of liabilities under vehicle programs

     3,792       3,889  
                

Liabilities under vehicle programs:

    

Debt

     1,186       950  

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

     6,314       4,646  

Deferred income taxes

     1,254       1,246  

Other

     389       278  
                
     9,143       7,120  
                

Commitments and contingencies (Note 15)

    

Stockholders’ equity:

    

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

     —         —    

Common stock, $.01 par value—authorized 250 million shares;
issued 136,734,089 and 136,706,236 shares

     1       1  

Additional paid-in capital

     9,224       9,320  

Accumulated deficit

     (1,516 )     (1,520 )

Accumulated other comprehensive income

     55       32  

Treasury stock, at cost— 35,221,142 and 32,719,985 shares

     (6,307 )     (6,368 )
                

Total stockholders’ equity

     1,457       1,465  
                

Total liabilities and stockholders’ equity

   $ 14,392     $ 12,474  
                

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,
 
     2008     2007  

Operating Activities

    

Net income

   $ 4     $ 36  

Adjustments to arrive at income from continuing operations

     —         (1 )
                

Income from continuing operations

     4       35  

Adjustments to reconcile income from continuing operations to net cash provided by operating activities exclusive of vehicle programs:

    

Non-vehicle related depreciation and amortization

     39       43  

Net change in assets and liabilities:

    

Receivables

     (24 )     (14 )

Income taxes and deferred income taxes

     (3 )     12  

Accounts payable and other current liabilities

     23       (53 )

Other, net

     (19 )     (11 )
                

Net cash provided by continuing operating activities exclusive of vehicle programs

     20       12  
                

Vehicle programs:

    

Vehicle depreciation

     820       759  
                
     820       759  
                

Net cash provided by continuing operating activities

     840       771  
                

Investing Activities

    

Property and equipment additions

     (47 )     (51 )

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

     (71 )     (1 )

Proceeds received on asset sales

     9       8  

Proceeds from sale of investment

     —         106  

Payments made to Realogy and Wyndham, net

     1       (88 )

Proceeds from dispositions of businesses, net of transaction-related payments

     (1 )     (1 )

Other, net

     (8 )     (8 )
                

Net cash used in investing activities exclusive of vehicle programs

     (117 )     (35 )
                

Vehicle programs:

    

Decrease (increase) in program cash

     1       (4 )

Investment in vehicles

     (6,202 )     (6,480 )

Proceeds received on disposition of vehicles

     4,027       3,752  

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

     (343 )     —    
                
     (2,517 )     (2,732 )
                

Net cash used in investing activities

     (2,634 )     (2,767 )
                

 

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Avis Budget Group, Inc.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued)

(In millions)

 

     Six Months Ended
June 30,
 
     2008     2007  

Financing Activities

    

Principal payments on borrowings

     (5 )     (39 )

Issuances of common stock

     —         39  

Repurchases of common stock

     (33 )     —    
                

Net cash used in financing activities exclusive of vehicle programs

     (38 )     —    
                

Vehicle programs:

    

Proceeds from borrowings

     5,799       6,287  

Principal payments on borrowings

     (4,136 )     (4,362 )

Net change in short-term borrowings

     226       129  

Other, net

     (8 )     (6 )
                
     1,881       2,048  
                

Net cash provided by financing activities

     1,843       2,048  
                

Effect of changes in exchange rates on cash and cash equivalents

     (1 )     3  
                

Net increase in cash and cash equivalents

     48       55  

Cash and cash equivalents, beginning of period

     214       172  
                

Cash and cash equivalents, end of period

   $ 262     $ 227  
                

See Notes to Consolidated Condensed Financial Statements (Unaudited).

 

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Avis Budget Group, Inc.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)

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

 

1. Basis of Presentation and Recently Issued Accounting Pronouncements

Basis of Presentation

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

The Company operates in the following business segments:

 

   

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

 

   

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

 

   

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

In presenting the Consolidated Condensed Financial Statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), management makes estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgments and available information. Accordingly, actual results could differ from those estimates. In management’s opinion, the Consolidated Condensed Financial Statements contain all normal recurring adjustments necessary for a fair presentation of interim results reported. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year or any subsequent interim period. These financial statements should be read in conjunction with the Company’s 2007 Annual Report on Form 10-K filed on February 29, 2008.

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

Separation. In connection with the separation of Cendant Corporation (as the Company was formerly known) into four independent companies (the “Separation”), the Company completed the spin-offs of Realogy Corporation (“Realogy”) and Wyndham Worldwide Corporation (“Wyndham”) on July 31, 2006 and completed the sale of Travelport, Inc. (“Travelport”) on August 23, 2006. During the three and six months ended June 30, 2007, the Company recorded costs (credits) of $3 million and $(3) million, respectively, in connection with the Separation, which included costs consisting primarily of professional and consulting fees, as well as a $14 million credit related to tax-related receivables from Realogy and Wyndham recognized in connection with the adoption of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”) (see Note 8—Income Taxes).

Adoption of New Accounting Standards during 2008

Fair Value Measurements. In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. In addition, SFAS No. 157 requires the Company to consider its own credit spreads when measuring the fair value of liabilities, including derivatives, and the credit spreads of the Company’s counterparties when measuring the fair value of assets, including derivatives. The Company adopted SFAS No. 157 on January 1, 2008, as required, and it had no impact to the Company’s financial statements at the time of adoption (see Note 6—Fair Value Measurements).

 

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In February 2008, the FASB issued FASB Staff Position SFAS 157-1, “Application of SFAS No. 157 to SFAS No. 13 and Its Related Interpretative Accounting Pronouncements that Address Leasing Transactions” (“FSP SFAS 157-1”) and FASB Staff Position SFAS 157-2, “Effective Date of SFAS No. 157” (“FSP SFAS 157-2”). FSP SFAS 157-1 excludes SFAS No. 13 and its related interpretive accounting pronouncements that address leasing transactions, with the exception of fair value measurements of assets and liabilities recorded as a result of a lease transaction but measured pursuant to other pronouncements within the scope of SFAS No. 157. FSP SFAS 157-2 delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). FSP SFAS 157-1 and FSP SFAS 157-2 became effective for the Company upon adoption of SFAS No. 157 on January 1, 2008. The Company is currently evaluating the impact of the additional disclosures required relating to the fair value measurement of nonfinancial assets and nonfinancial liabilities when it fully implements SFAS No. 157 on January 1, 2009.

Fair Value Option. In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115,” (“SFAS No. 159”). SFAS No. 159 permits a company to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities on a contract-by-contract basis, with changes in fair value recognized in earnings. The election to use the fair value option is available when an entity first recognizes a financial asset or a financial liability or upon entering into a firm commitment. Additionally, SFAS No. 159 allows for a one-time election for existing positions upon adoption, with the transition adjustment recorded to beginning retained earnings. The Company adopted SFAS No. 159 on January 1, 2008 and has elected not to apply the option to measure any of its financial assets or liabilities.

Recently Issued Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) seeks to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. SFAS No. 141(R) requires an acquiror to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. SFAS No. 141(R) also requires the acquiror in a business combination achieved in stages to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values. SFAS No. 141(R) requires an acquiror to recognize adjustments made during the measurement period to the acquired assets and liabilities as if they had occurred on the acquisition date and to revise prior period financial statements in subsequent filings for changes. In addition, SFAS No. 141(R) requires that all acquisition related costs be expensed as incurred, rather than capitalized as part of the purchase price and those restructuring costs that an acquiror expected but was not obligated to incur to be recognized separately from the business combination. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company will adopt SFAS No. 141(R) on January 1, 2009, as required, and is currently evaluating the impact of such adoption on its financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 amends Accounting Research Bulletin (“ARB”) No. 51 to establish accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the Consolidated Financial Statements. SFAS No. 160 also requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest on the face of the consolidated statement of income. Under SFAS No. 160, the accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation must be accounted for as equity transactions for the difference between the parent’s carrying value and the cash exchanged in the transaction. In addition, SFAS No. 160 also requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated (except in the case of a spin-off), and requires expanded disclosures in the Consolidated Financial Statements that clearly identify and distinguish between the interests of the parent’s ownership interest and the interests of the noncontrolling owners of a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company will adopt SFAS No. 160 on January 1, 2009, as required, and is currently evaluating the impact of such adoption on its financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 requires entities to provide qualitative disclosures about the objectives and strategies for using derivatives, quantitative data about the fair value of and gains and losses on derivative contracts, and details of credit-risk-related contingent features in their hedged positions. SFAS No. 161 also asks entities to disclose more information about the location and amounts of derivative instruments in financial statements; how derivatives and related hedges are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”; and how the hedges affect the entity’s financial position, financial

 

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performance, and cash flows. SFAS No. 161 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after November 15, 2008. The Company will adopt SFAS No. 161 on January 1, 2009, as required, and is currently evaluating the impact of such adoption on its financial statements.

 

2. Discontinued Operations

The $1 million gain on disposal of discontinued operations, net of tax in the three and six months ended June 30, 2007 represents purchase price adjustments related to the sale of Travelport.

 

3. Earnings Per Share

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

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2008    2007    2008    2007

Income from continuing operations

   $ 15    $ 23    $ 4    $ 35

Gain on disposal of discontinued operations, net of tax

     —        1      —        1
                           

Net income

   $ 15    $ 24    $ 4    $ 36
                           

Basic weighted average shares outstanding

     101.4      103.4      102.1      102.5

Stock options, warrants and restricted stock units (a)

     —        1.4      —        1.2
                           

Diluted weighted average shares outstanding

     101.4      104.8      102.1      103.7
                           

Earnings per share:

           

Basic

           

Income from continuing operations

   $ 0.15    $ 0.22    $ 0.04    $ 0.34

Gain on disposal of discontinued operations

     —        0.01      —        0.01
                           

Net income

   $ 0.15    $ 0.23    $ 0.04    $ 0.35
                           

Diluted

           

Income from continuing operations

   $ 0.15    $ 0.22    $ 0.04    $ 0.34

Gain on disposal of discontinued operations

     —        0.01      —        0.01
                           

Net income

   $ 0.15    $ 0.23    $ 0.04    $ 0.35
                           

_______

(a)     Excludes restricted stock units for which performance-based vesting criteria have not been achieved.

 

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

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2008    2007    2008    2007

Options (a)

     5.3      3.0      5.3      4.6

Warrants

     —        0.2      —        0.2

_______

(a)     The weighted average exercise price for anti-dilutive options for the three and six months ended June 30, 2008 was $24.97 and $24.96, respectively. The

weighted average exercise price for anti-dilutive options for the three and six months ended June 30, 2007 was $39.32 and $35.25, respectively.

 

4. Acquisitions

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

 

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

 

5. Intangible Assets

Intangible assets consisted of:

 

     As of June 30, 2008    As of December 31, 2007
     Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Carrying
Amount
   Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Carrying
Amount

Amortized Intangible Assets

                 

Franchise agreements

   $ 74    $ 19    $ 55    $ 75    $ 18    $ 57

Customer lists

     19      7      12      19      7      12

Other

     2      1      1      2      1      1
                                         
   $ 95    $ 27    $ 68    $ 96    $ 26    $ 70
                                         

Unamortized Intangible Assets

                 

Goodwill

   $ 1,000          $ 1,000      
                         

Trademarks

   $ 734          $ 690      
                         

Amortization expense relating to all intangible assets was approximately $1 million during the second quarter of 2008 and 2007. For the six month periods ended June 30, 2008 and 2007, amortization expense was less than $2 million.

Based on the Company’s amortizable intangible assets at June 30, 2008, the Company expects amortization expense of approximately $2 million for the remainder of 2008 and approximately $3 million for each of the five fiscal years thereafter.

 

6. Fair Value Measurements

SFAS No. 157 requires disclosures about the Company’s assets and liabilities that are measured at fair value. The Company used significant observable inputs (Level 2 inputs), other than quoted unadjusted prices from active markets (Level 1 inputs), to determine the fair value of its derivative assets and liabilities.

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

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis:

 

Based on Significant Other Observable Inputs (Level 2):    As of
June 30, 2008

Assets:

  

Interest rate swaps and other derivatives

   $ —  

Interest rate caps under vehicle programs

     3
      

Total

   $ 3
      

Liabilities:

  

Interest rate swaps and other derivatives

   $ 34

Interest rate swaps and other derivatives under vehicle programs

     21
      

Total

   $ 55
      

 

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7. Vehicle Rental Activities

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

 

            As of       
June 30,

2008
    As of
December 31,
2007
 

Rental vehicles

   $ 10,072     $ 7,947  

Less: Accumulated depreciation

     (1,165 )     (1,022 )
                
     8,907       6,925  

Vehicles held for sale, net

     232       549  
                

Vehicles, net

   $ 9,139     $ 7,474  
                

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2008     2007     2008     2007  

Depreciation expense

   $ 441     $ 407     $ 820     $ 759  

Lease charges

     8       12       16       26  

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

     (8 )     (17 )     (13 )     (21 )
                                

Vehicle depreciation and lease charges, net

   $ 441     $ 402     $ 823     $ 764  
                                

During the three months ended June 30, 2008 and 2007, vehicle interest, net on the accompanying Consolidated Condensed Statements of Income excludes $33 million and $35 million, respectively, and for the six months ended June 30, 2008 and 2007, excludes $66 million and $71 million, respectively, of interest expense related to the fixed and floating rate borrowings of the Company’s Avis Budget Car Rental, LLC (“Avis Budget Car Rental”) subsidiary. Such interest is recorded within interest expense related to corporate debt, net on the accompanying Consolidated Condensed Statements of Income.

 

8. Income Taxes

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

The Company’s effective tax rate from continuing operations for the six months ended June 30, 2007 is a provision of 25.5%. Such rate differs from the Federal statutory rate of 35.0% primarily due to an increase in the receivables due from Realogy and Wyndham in connection with the adoption of FIN 48 and a corresponding credit to the Separation costs which is not subject to income taxes, as well as a decrease for changes in New York State and Canadian tax law.

 

9. Other Current Assets

Other current assets consisted of:

 

            As of       
June 30,
2008
   As of
December 31,
2007

Receivables from Realogy (a)

   $ 142    $ 169

Receivables from Wyndham (a)

     95      122

Prepaid expenses

     162      148

Other

     93      131
             
   $ 492    $ 570
             
 
 

      (a)

Represents amounts due for certain contingent and other corporate liabilities assumed by Realogy and Wyndham in connection with the Separation and services performed under the Transition Services Agreement entered into in connection with the Separation. These amounts are due from Realogy and Wyndham on demand upon the Company’s settlement of the related liability. At June 30, 2008 and December 31, 2007, there are corresponding liabilities recorded within accounts payable and other current liabilities. In connection with the Company’s adoption of FIN 48, receivables from Realogy and Wyndham related to income taxes were classified as non-current assets. At June 30, 2008, non-current assets related to income taxes receivable were $612 million.

 

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10. Equity Investment

At June 30, 2008, the Company’s equity-method investee and the Company’s approximate ownership interest, based on outstanding shares, are as follows:

 

Company

   Percentage
Ownership
 

Carey Holdings, Inc.

   47.9 %

The Company’s investment in Carey Holdings, Inc. (“Carey”) is recorded within other non-current assets on the Consolidated Condensed Balance Sheets and the Company’s share of Carey’s operating results is reported within operating expenses on the Consolidated Condensed Statements of Income. At June 30, 2008, the Company’s investment totaled $61 million and included $2 million of deferred acquisition costs. The Company has the option until October 2008 to increase its ownership stake in Carey to approximately 80%, subject to certain conditions that would most likely include the assumption or repayment of Carey’s existing indebtedness.

 

11. Accounts Payable and Other Current Liabilities

Accounts payable and other current liabilities consisted of:

 

            As of       
June 30,
2008
   As of
December 31,
2007

Accounts payable

   $ 231    $ 210

Accrued payroll and related

     160      171

Disposition related liabilities

     120      125

Accrued legal settlements

     110      121

Public liability and property damage insurance liabilities

     108      109

Other

     317      358
             
   $ 1,046    $ 1,094
             

 

12. Other Non-Current Liabilities

Other non-current liabilities consisted of:

 

             As of       
June 30,
2008
   As of
December 31,
2007

Long-term income taxes payable

   $ 422    $ 440

Public liability and property damage insurance liabilities

     237      252

Other

     294      306
             
   $ 953    $ 998
             

 

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13. Long-term Debt and Borrowing Arrangements

Long-term debt consisted of:

 

     Maturity
Date
   As of
      June 30,      
2008
   As of
December 31,
2007

Floating rate term loan (a)

   April 2012    $ 791    $ 796

Floating rate notes

   May 2014      250      250

7 5/8% notes

   May 2014      375      375

7 3/4% notes

   May 2016      375      375
                
        1,791      1,796

Other

        2      1
                

Total long-term debt

        1,793      1,797

Less: Current portion

        9      10
                

Long-term debt

   $ 1,784    $ 1,787
                
 
 

      (a)

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

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

Committed Credit Facilities and Available Funding Arrangements

At June 30, 2008, the committed credit facilities available to the Company and/or its subsidiaries at the corporate or Avis Budget Car Rental level were as follows:

 

      Total
Capacity
   Outstanding
Borrowings
   Letters of
Credit
Issued
   Available
Capacity

$1.5 billion revolving credit facility (a)

   $ 1,500    $ —      $ 572    $ 928

Letter of credit facility (b)

     303      —        303      —  
 
 

      (a)

This secured revolving credit facility was entered into by Avis Budget Car Rental in April 2006, has a five year term and currently bears interest at one month LIBOR plus 125 basis points. The floating rate term loan and the revolving credit facility are secured by pledges of all of the capital stock of all of the Company’s direct or indirect domestic subsidiaries and up to 66% of the capital stock of each direct foreign subsidiary, subject to certain exceptions, and liens on substantially all of the Company’s intellectual property.

 

      (b)

Final maturity date is July 2010.

The Company’s debt agreements contain restrictive covenants, including restrictions on dividends paid to the Company by certain of its subsidiaries, the incurrence of indebtedness by the Company and certain of its subsidiaries, mergers, liquidations, and sale and leaseback transactions. The credit facility also requires the maintenance of certain financial ratios. As of June 30, 2008, the Company is not aware of any instances of non-compliance with such financial or restrictive covenants.

 

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Table of Contents
14. Debt Under Vehicle Programs and Borrowing Arrangements

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

 

      As of
      June 30,      
2008
   As of
December 31,
2007

Debt due to Avis Budget Rental Car Funding (a)

   $ 6,314    $ 4,646

Budget Truck financing:

     

Budget Truck Funding program (b)

     336      246

Capital leases

     179      204

Other (c)

     671      500
             
   $ 7,500    $ 5,596
             
 
 

      (a)

The increase principally reflects (i) $1.3 billion of incremental borrowings under the Company’s conduit facilities to support the acquisition of rental vehicles within the Company’s Domestic Car Rental operations during the six months ended June 30, 2008 and (ii) a $343 million increase in the Company’s investment in Avis Budget Rental Car Funding reflecting the Company’s decision to invest funds from vehicle sales into Avis Budget Rental Car Funding as equity rather than as a repayment of debt due to Avis Budget Rental Car Funding.

 

      (b)

The increase primarily reflects incremental borrowings under the Company’s conduit facility to support the acquisition of rental vehicles within the Company’s Budget Truck rental fleet.

 

      (c)

The increase primarily reflects incremental borrowings under the Company’s conduit facilities to support the acquisition of vehicles in the Company’s International Car Rental operations and additional fleet loans to support the acquisition of certain vehicles for the Company’s Domestic Car Rental operations.

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, 2008:

 

      Vehicle-
Backed Debt
   Capital
Leases
   Total

Within 1 year

   $ 3,240    $ 155    $ 3,395

Between 1 and 2 years

     432      24      456

Between 2 and 3 years

     1,974      —        1,974

Between 3 and 4 years

     253      —        253

Between 4 and 5 years

     900      —        900

Thereafter

     522      —        522
                    

Total

   $ 7,321    $ 179    $ 7,500
                    

As of June 30, 2008, available funding under the Company’s vehicle programs (including related party debt due to Avis Budget Rental Car Funding) consisted of:

 

      Total
Capacity (a)
   Outstanding
Borrowings
   Available
Capacity

Debt due to Avis Budget Rental Car Funding (b)

   $ 6,889    $ 6,314    $ 575

Budget Truck financing:

        

Budget Truck Funding program (c)

     375      336      39

Capital leases (d)

     179      179      —  

Other (e)

     1,128      671      457
                    
   $ 8,571    $ 7,500    $ 1,071
                    
 
 

      (a)

Capacity is subject to maintaining sufficient assets to collateralize debt.

 

      (b)

The outstanding debt is collateralized by approximately $8.2 billion of underlying vehicles and related assets.

 

      (c)

The outstanding debt is collateralized by approximately $345 million of underlying vehicles and related assets.

 

      (d)

In connection with these capital leases, there are corresponding assets of approximately $190 million within vehicles, net on the Company’s Consolidated Condensed Balance Sheet as of June 30, 2008.

 

      (e)

The outstanding debt is collateralized by approximately $1.2 billion of underlying vehicles and related assets.

Debt agreements under the Company’s vehicle-backed funding programs contain restrictive covenants, including restrictions on dividends paid to the Company by certain of its subsidiaries and indebtedness of material subsidiaries, mergers, limitations on liens, liquidations, and sale and leaseback transactions. As of June 30, 2008, the Company is not aware of any instances of non-compliance with such covenants.

 

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Table of Contents
15. Commitments and Contingencies

Contingencies

The Internal Revenue Service (“IRS”) is examining the Company’s taxable years 2003 through 2006. Although the Company believes there is appropriate support for the positions taken on its tax returns, the Company has recorded liabilities for uncertain tax positions for all years for which the statute of limitations has not expired. The Company has $422 million accrued for tax liabilities and believes these accruals to be adequate for all open years based on assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. Although the Company believes the recorded assets and liabilities are reasonable, tax regulations are subject to interpretation and tax litigation is inherently uncertain; therefore, the Company’s assessments can involve both a series of complex judgments about future events and rely heavily on estimates and assumptions. While the Company believes that the estimates and assumptions supporting the assessments are reasonable, the final determination of tax audits and any other related litigation could be materially different than that which is reflected in historical income tax provisions and recorded assets and liabilities. The potential results of an audit or litigation related to these matters include a range of outcomes, which may involve material amounts. However, the Company is entitled to indemnification by Realogy and Wyndham for most pre-Separation tax matters and therefore does not expect such resolution to have a significant impact on its earnings, financial position or cash flows.

The Company is involved in litigation asserting claims associated with accounting irregularities discovered in 1998 at former CUC business units outside of the principal common stockholder class action litigation. The Company has accrued liabilities of approximately $103 million regarding such litigation matters. The Company does not believe that it is feasible to predict or determine the final outcome or resolution of such unresolved proceedings. Pursuant to the Separation Agreement (described below), Realogy and Wyndham have assumed all liabilities related to this litigation, as described below, and therefore a corresponding receivable has been established for such amount. Changes in liabilities related to such legal matters for which the Company is entitled to indemnification, and corresponding changes in the Company’s indemnification assets, are shown net within the separation costs, net line on the Consolidated Condensed Statements of Income.

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

The Company does not believe that the impact of any unresolved proceedings constituting an Assumed Liability related to the CUC accounting irregularities 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 as well as other liabilities related to the Company’s litigation that are not related to its vehicle rental operations. Such litigation assumed by Realogy and Wyndham includes litigation which was retained by the Company in connection with the sale of its former Marketing Services division.

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

 

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In addition to the matters discussed above, the Company is also involved in claims, legal proceedings and governmental inquiries related to its vehicle rental operations, including contract disputes, business practices, insurance claims, intellectual property, environmental issues and other commercial, employment and tax matters, including patent claims, wage and hour claims and breach of contract claims by licensees. The Company believes that it has adequately accrued for such matters as appropriate or, for matters not requiring accrual, believes that they will not have a material adverse impact on its results of operations, financial position or cash flows based on information currently available. However, litigation is inherently unpredictable and, although the Company believes that its accruals are adequate and/or that it has valid defenses in these matters, unfavorable resolutions could occur, which could adversely impact the Company’s results of operations or cash flows in a particular reporting period.

Commitments to Purchase Vehicles

The Company maintains agreements with vehicle manufacturers which require the Company to purchase approximately $1 billion of vehicles from manufacturers over the next twelve months. The majority of these commitments are subject to the vehicle manufacturers’ satisfying their obligations under the repurchase and guaranteed depreciation agreements. The Company is in the process of finalizing its purchase commitments with manufacturers for 2009 model-year vehicles, which will significantly increase the Company’s outstanding commitments. The Company’s featured suppliers for the Avis and Budget brands are General Motors Corporation and Ford Motor Company, respectively, although the Company purchases vehicles produced by numerous other manufacturers. The purchase of such vehicles is financed primarily through the issuance of vehicle-backed debt in addition to cash received upon the sale of vehicles in the used car market and under repurchase and guaranteed depreciation programs.

Concentrations

Concentrations of credit risk at June 30, 2008 include (i) risks related to the Company’s repurchase and guaranteed depreciation agreements with General Motors Corporation and Ford Motor Company primarily with respect to receivables for program cars that have been returned to the car manufacturers and (ii) receivables from Realogy and Wyndham of $529 million and $327 million, respectively, related to certain contingent, income tax and other corporate liabilities assumed by Realogy and Wyndham in connection with the Separation.

Other Guarantees

The Company has provided certain guarantees to subsidiaries of Realogy, Wyndham and Travelport which, as previously discussed, were disposed during third quarter 2006. These guarantees relate primarily to various real estate leases. The maximum potential amount of future payments that the Company may be required to make under these guarantees is estimated to be approximately $332 million. At June 30, 2008, the liability recorded by the Company in connection with these guarantees was approximately $6 million. To the extent that the Company would be required to perform under any of these guarantees, the Company is entitled to indemnification from Realogy, Wyndham and/or Travelport.

 

16. Stockholders’ Equity

Dividends

For the six months ended June 30, 2008 and 2007, the Company did not pay cash dividends.

Share Repurchases

During the six months ended June 30, 2008, the Company used approximately $33 million of available cash to repurchase approximately 2.9 million shares of Avis Budget Group common stock under its common stock repurchase program. The Company did not repurchase any of its common stock during the six months ended June 30, 2007.

 

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Table of Contents

Accumulated Other Comprehensive Income (Loss)

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

 

     Currency
Translation
Adjustments
   Unrealized
Losses on
Cash Flow
Hedges
    Minimum
Pension
Liability
Adjustment
    Accumulated
Other

Comprehensive
Income

Balance, January 1, 2008

   $ 117    $ (63 )   $ (22 )   $ 32

Current period change

     25      (2 )     —         23
                             

Balance, June 30, 2008

   $ 142    $ (65 )   $ (22 )   $ 55
                             
 

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

Total Comprehensive Income

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

The components of other comprehensive income were as follows:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2008    2007    2008     2007

Net income

   $ 15    $ 24    $ 4     $ 36

Other comprehensive income:

          

Currency translation adjustments

     14      26      25       34

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

     68      26      (2 )     15
                            
     82      52      23       49
                            

Total comprehensive income

   $ 97    $ 76    $ 27     $ 85
                            

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

 

17. Stock-Based Compensation

The Company records compensation expense for all outstanding employee stock awards. The Company recorded pretax stock-based compensation expense of $2 million and $5 million ($1 million and $3 million, after tax) during second quarter 2008 and 2007, respectively, and $6 million and $9 million ($4 million and $5 million, after tax) during the six months ended June 30, 2008 and 2007, respectively, related to employee stock awards that were granted by the Company.

The Company applies the direct method and tax law ordering approach to calculate the tax effects of stock-based compensation. In jurisdictions with net operating loss carryforwards, tax deductions for 2008 and 2007 exercises of stock-based awards did not generate a cash benefit. Approximately $31 million of tax benefits will be recorded in additional paid-in capital when realized in these jurisdictions.

 

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

 

     Six Months Ended June 30, 2008
     RSUs    Options
     Number
of RSUs
    Weighted
Average
Grant Price
   Number
of Options (b)
    Weighted
Average
Exercise
Price

Balance at January 1, 2008

   2,330     $ 25.03    5,963     $ 26.16

Granted at fair market value

   1,128       12.73    —         —  

Vested/exercised

   (503 )     24.89    (5 )     10.68

Cancelled

   (112 )     21.67    (615 )     36.79
                 

Balance at June 30, 2008 (a)

   2,843       20.30    5,343       24.96
                 
 
 

      (a)

As of June 30, 2008, the Company’s outstanding RSUs had aggregate intrinsic value of $24 million. Aggregate unrecognized compensation expense related to RSUs amounted to $50 million as of June 30, 2008. The balance of RSUs at June 30, 2008 consists of 1,796 related to time-based awards and 1,047 related to performance-based awards.

 

      (b)

All stock options outstanding as of June 30, 2008 are exercisable and have a weighted average remaining contractual life of 1.6 years.

The table below summarizes information regarding the Company’s outstanding and exercisable stock options as of June 30, 2008 (in thousands of shares):

 

Range of

Exercise Prices

   Weighted Average
Contractual Life
   Number of
Options

Less than $15.00

   1.1    874

$15.01 to $20.00

   2.9    388

$20.01 to $25.00

   1.9    214

$25.01 to $30.00

   1.8    2,686

$30.01 to $35.00

   1.2    1,160

$35.01 and above

   0.3    21
       
   1.6    5,343
       

As of June 30, 2008, the Company also had approximately 0.5 million outstanding stock appreciation rights with a weighted average exercise price of $24.40, a weighted average remaining contractual life of 5.1 years and unrecognized compensation expense of $2 million.

 

18. Segment Information

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

 

     Three Months Ended June 30,  
     2008     2007  
     Revenues    EBITDA     Revenues    EBITDA(a)  

Domestic Car Rental

   $ 1,241    $ 46     $ 1,195    $ 59  

International Car Rental

     230      25       202      21  

Truck Rental

     105      8       114      10  

Corporate and Other (b)

     1      (2 )     5      (3 )
                              

Total Company

   $ 1,577      77     $ 1,516      87  
                  

Less: Non-vehicle related depreciation and amortization

        20          20  

Interest expense related to corporate debt, net

        32          32  
                      

Income before income taxes

      $ 25        $ 35  
                      

 

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Table of Contents
     Six Months Ended June 30,  
     2008     2007  
     Revenues    EBITDA     Revenues    EBITDA(a)  

Domestic Car Rental

   $ 2,377    $ 61     $ 2,279    $ 110  

International Car Rental

     460      55       393      45  

Truck Rental

     183      (2 )     197      (1 )

Corporate and Other (b)

     2      (7 )     12      1  
                              

Total Company

   $ 3,022      107     $ 2,881      155  
                  

Less:    Non-vehicle related depreciation and amortization

        39          43  

Interest expense related to corporate debt, net

        61          65  
                      

Income before income taxes

      $ 7        $ 47  
                      
 
 

      (a)

In the three months ended June 30, 2007, EBITDA reflects Separation-related costs of $2 million in Domestic Car Rental, and $1 million within Corporate and Other, respectively. In the six months ended June 30, 2007, EBITDA reflects Separation-related costs (credits) of $3 million in Domestic Car Rental, and $(6) million within Corporate and Other, respectively.

 

      (b)

Includes unallocated corporate overhead, the elimination of transactions between segments and the results of operations of certain non-strategic businesses.

Since December 31, 2007, there have been no significant changes in segment assets with the exception of the Company’s Domestic Car Rental segment, for which assets under vehicle programs were approximately $8.1 billion and approximately $6.4 billion at June 30, 2008 and December 31, 2007, respectively.

 

19. Guarantor and Non-Guarantor Consolidating Condensed Financial Statements

The following consolidating financial information presents Consolidating Condensed Balance Sheets as of June 30, 2008 and December 31, 2007, Consolidating Condensed Statements of Income for the three months and six months ended June 30, 2008 and 2007 and Consolidating Condensed Statements of Cash Flows for the six months ended June 30, 2008 and 2007 for: (i) Avis Budget Group, Inc. (the “Parent”); (ii) Avis Budget Car Rental and Avis Budget Finance, Inc. (the “Subsidiary Issuers”); (iii) the guarantor subsidiaries; (iv) the non-guarantor subsidiaries; (v) elimination entries necessary to consolidate the Parent with the Subsidiary Issuers, the guarantor and non-guarantor subsidiaries; and (vi) the Company on a consolidated basis. The Subsidiary Issuers and the guarantor and non-guarantor subsidiaries are 100% owned by the Parent, either directly or indirectly. All guarantees are full and unconditional and joint and several. This financial information is being presented in relation to the Company’s Guarantee of the Notes issued by Avis Budget Car Rental. See Note 13—Long-term Debt and Borrowing Arrangements for additional description of these Notes. The Notes have separate investors than the equity investors of the Company and the Notes are guaranteed by certain subsidiaries.

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

 

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Consolidating Condensed Statements of Income

Three Months Ended June 30, 2008

 

     Parent     Subsidiary
Issuers
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations         Total    

Revenues

            

Vehicle rental

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

Other

     1       —         284       537       (439 )     383
                                              

Net revenues

     1       —         1,322       693       (439 )     1,577
                                              

Expenses

            

Operating

     1       7       678       125       —         811

Vehicle depreciation and lease charges, net

     —         —         385       219       (163 )     441

Selling, general and administrative

     3       —         149       21       —         173

Vehicle interest, net

     —         —         67       52       (45 )     74

Non-vehicle related depreciation and amortization

     —         —         18       2       —         20

Interest expense related to corporate debt, net:

            

Interest expense

     —         33       —         (1 )     —         32

Intercompany interest expense (income)

     —         (33 )     33       —         —         —  

Separation costs, net

     —         1       —         —         —         1
                                              

Total expenses

     4       8       1,330       418       (208 )     1,552
                                              

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

     (3 )     (8 )     (8 )     275       (231 )     25

Provision (benefit) for income taxes

     (1 )     3       (7 )     15       —         10

Equity in earnings of subsidiaries

     17       28       29       —         (74 )     —  
                                              

Net income

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

 

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Six Months Ended June 30, 2008

 

     Parent     Subsidiary
Issuers
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations         Total    

Revenues

            

Vehicle rental

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

Other

     1       —         519       1,032       (843 )     709
                                              

Net revenues

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

Expenses

            

Operating

     2       7       1,319       260       —         1,588

Vehicle depreciation and lease charges, net

     —         —         714       624       (515 )     823

Selling, general and administrative

     6       —         296       42       —         344

Vehicle interest, net

     —         —         146       111       (98 )     159

Non-vehicle related depreciation and amortization

     —         —         35       4       —         39

Interest expense related to corporate debt, net:

            

Interest expense, net

     (1 )     64       —         (2 )     —         61

Intercompany interest expense (income)

     —         (64 )     64       —         —         —  

Separation costs, net

     —         1       —         —         —         1
                                              

Total expenses

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

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

     (6 )     (8 )     (63 )     314       (230 )     7

Provision (benefit) for income taxes

     (3 )     3       (26 )     29       —         3

Equity in earnings of subsidiaries

     7       18       55       —         (80 )     —  
                                              

Net income

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

 

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Three Months Ended June 30, 2007

 

     Parent     Subsidiary
Issuers
    Guarantor
Subsidiaries
   Non-Guarantor
Subsidiaries
   Eliminations         Total    

Revenues

              

Vehicle rental

   $ —       $ —       $ 1,033    $ 142    $ —       $ 1,175

Other

     3       —         257      566      (485 )     341
                                            

Net revenues

     3       —         1,290      708      (485 )     1,516
                                            

Expenses

              

Operating

     3       —         665      117      —         785

Vehicle depreciation and lease charges, net

     —         —         352      404      (354 )     402

Selling, general and administrative

     1       —         145      22      —         168

Vehicle interest, net

     —         —         67      85      (81 )     71

Non-vehicle related depreciation and amortization

     —         —         18      2      —         20

Interest expense related to corporate debt, net:

              

Interest expense

     (1 )     33       —        —        —         32

Intercompany interest expense (income)

     —         (33 )     33      —        —         —  

Separation costs, net

     1       2       —        —        —         3
                                            

Total expenses

     4       2       1,280      630      (435 )     1,481
                                            

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

     (1 )     (2 )     10      78      (50 )     35

Provision (benefit) for income taxes

     (1 )     (1 )     4      10      —         12

Equity in earnings of subsidiaries

     23       75       69      —        (167 )     —  
                                            

Income from continuing operations

     23       74       75      68      (217 )     23

Income from discontinued operations, net of tax

     1       —         —        —        —         1
                                            

Net income

   $ 24     $ 74     $ 75    $ 68    $ (217 )   $ 24
                                            

 

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Six Months Ended June 30, 2007

 

     Parent     Subsidiary
Issuers
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
   Eliminations         Total      

Revenues

             

Vehicle rental

   $ —       $ —       $ 1,970     $ 282    $ —       $ 2,252  

Other

     5       —         462       1,062      (900 )     629  
                                               

Net revenues

     5       —         2,432       1,344      (900 )     2,881  
                                               

Expenses

             

Operating

     2       —         1,263       231      —         1,496  

Vehicle depreciation and lease charges, net

     —         —         671       750      (657 )     764  

Selling, general and administrative

     7       —         277       43      —         327  

Vehicle interest, net

     —         —         134       154      (146 )     142  

Non-vehicle related depreciation and amortization

     1       —         39       3      —         43  

Interest expense related to corporate debt, net:

             

Interest expense

     (2 )     67       —         —        —         65  

Intercompany interest

expense (income)

     —         (67 )     67       —        —         —    

Separation costs, net

     (6 )     3       —         —        —         (3 )
                                               

Total expenses

     2       3       2,451       1,181      (803 )     2,834  
                                               

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

     3       (3 )     (19 )     163      (97 )     47  

Provision (benefit) for income taxes

     (4 )     (2 )     (4 )     22      —         12  

Equity in earnings of subsidiaries

     28       127       142       —        (297 )     —    
                                               

Income from continuing operations

     35       126       127       141      (394 )     35  

Income from discontinued operations, net of tax

     1       —         —         —        —         1  
                                               

Net income

   $ 36     $ 126     $ 127     $ 141    $ (394 )   $ 36  
                                               

 

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Table of Contents

Consolidating Condensed Balance Sheets

As of June 30, 2008

 

     Parent    Subsidiary
Issuers
   Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total

Assets

              

Current assets:

              

Cash and cash equivalents

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

Receivables, net

     —        87      241       106       —         434

Deferred income taxes

     —        —        73       2       (31 )     44

Other current assets

     252      98      86       59       (3 )     492
                                            

Total current assets

     269      295      410       292       (34 )     1,232

Property and equipment, net

     —        186      268       51       —         505

Deferred income taxes

     4      241      —         53       (43 )     255

Goodwill

     —        3      985       12       —         1,000

Other intangibles, net

     —        17      691       94       —         802

Other non-current assets

     674      68      24       7       —         773

Intercompany receivables (payables)

     457      584      (1,032 )     (9 )     —         —  

Investment in subsidiaries

     853      2,101      2,522       —         (5,476 )     —  
                                            

Total assets exclusive of assets under vehicle programs

     2,257      3,495      3,868       500       (5,553 )     4,567
                                            

Assets under vehicle programs:

              

Vehicles, net

     —        —        192       8,947       —         9,139

Receivables from vehicle manufacturers and other

     —        —        —         119       —         119

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

     —        —        —         567       —         567
                                            
     —        —        192       9,633       —         9,825
                                            

Total assets

   $ 2,257    $ 3,495    $ 4,060     $ 10,133     $ (5,553 )   $ 14,392
                                            

Liabilities and stockholders’ equity

              

Current liabilities:

              

Accounts payable and other current liabilities

   $ 280    $ 204    $ 479     $ 117     $ (34 )   $ 1,046

Current portion of long-term debt

     —        9      —         —         —         9
                                            

Total current liabilities

     280      213      479       117       (34 )     1,055

Long-term debt

     —        1,784      —         —         —         1,784

Other non-current liabilities

     520      102      204       170       (43 )     953
                                            

Total liabilities exclusive of liabilities under vehicle programs

     800      2,099      683       287       (77 )     3,792
                                            

Liabilities under vehicle programs:

              

Debt

     —        84      179       923       —         1,186

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

     —        —        —         6,314       —         6,314

Deferred income taxes

     —        —        1,097       157       —         1,254

Other

     —        4      —         385       —         389
                                            
     —        88      1,276       7,779       —         9,143
                                            

Total stockholders’ equity

     1,457      1,308      2,101       2,067       (5,476 )     1,457
                                            

Total liabilities and stockholders’ equity

   $ 2,257    $ 3,495    $ 4,060     $ 10,133     $ (5,553 )   $ 14,392
                                            

 

24


Table of Contents

As of December 31, 2007

 

     Parent    Subsidiary
Issuers
   Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total

Assets

              

Current assets:

              

Cash and cash equivalents

   $ 37    $ 99    $ 12     $ 66     $ —       $ 214

Receivables, net

     2      67      220       103       —         392

Deferred income taxes

     —        —        73       2       (33 )     42

Other current assets

     329      104      82       55       —         570
                                            

Total current assets

     368      270      387       226       (33 )     1,218

Property and equipment, net

     —        175      275       50       —         500

Deferred income taxes

     4      223      —         49       (42 )     234

Goodwill

     —        3      985       12       —         1,000

Other intangibles, net

     —        17      648       95       —         760

Other non-current assets

     681      72      22       6       —         781

Intercompany receivables (payables)

     460      672      (1,007 )     (125 )     —         —  

Investment in subsidiaries

     841      2,063      2,496       —         (5,400 )     —  
                                            

Total assets exclusive of assets under vehicle programs

     2,354      3,495      3,806       313       (5,475 )     4,493
                                            

Assets under vehicle programs:

              

Program cash

     —        —        —         1       —         1

Vehicles, net

     —        —        207       7,267       —         7,474

Receivables from vehicle manufacturers and other

     —        —        —         276       —         276

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

     —        —        —         230       —         230
                                            
     —        —        207       7,774       —         7,981
                                            

Total assets

   $ 2,354    $ 3,495    $ 4,013     $ 8,087     $ (5,475 )   $ 12,474
                                            

Liabilities and stockholders’ equity

              

Current liabilities:

              

Accounts payable and other current liabilities

   $ 356    $ 233    $ 433     $ 105     $ (33 )   $ 1,094

Current portion of long-term debt

     1      9      —         —         —         10
                                            

Total current liabilities

     357      242      433       105       (33 )     1,104

Long-term debt

     —        1,787      —         —         —         1,787

Other non-current liabilities

     532      110      218       180       (42 )     998
                                            

Total liabilities exclusive of liabilities under vehicle programs

     889      2,139      651       285       (75 )     3,889
                                            

Liabilities under vehicle programs:

              

Debt

     —        58      204       688       —         950

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

     —        —        —         4,646       —         4,646

Deferred income taxes

     —        —        1,088       158       —         1,246

Other

     —        2      7       269       —         278
                                            
     —        60      1,299       5,761       —         7,120
                                            

Total stockholders’ equity

     1,465      1,296      2,063       2,041       (5,400 )     1,465
                                            

Total liabilities and stockholders’ equity

   $ 2,354    $ 3,495    $ 4,013     $ 8,087     $ (5,475 )   $ 12,474
                                            

 

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Consolidating Condensed Statements of Cash Flows

Six Months Ended June 30, 2008

 

     Parent     Subsidiary
Issuers
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Net cash provided by operating activities

   $ (2 )   $ 72     $ 3     $ 876     $ (109 )   $ 840  
                                                

Investing activities

            

Property and equipment additions

     —         (28 )     (13 )     (6 )     —         (47 )

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

     —         —         (71 )     —         —         (71 )

Proceeds received on asset sales

     —         6       1       2       —         9  

Payments made to Realogy and Wyndham, net

     1       —         —         —         —         1  

Proceeds from dispositions of businesses, net of transaction-related payments

     (1 )     —         —         —         —         (1 )

Other, net

       (3 )     (6 )     1       —         (8 )
                                                

Net cash used in investing activities exclusive of vehicle programs

     —         (25 )     (89 )     (3 )     —         (117 )
                                                

Vehicle programs:

            

Increase in program cash

     —         —         —         1       —         1  

Investment in vehicles

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

Proceeds received on disposition of vehicles

     —         67       1       3,959       —         4,027  

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

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

Net cash used in investing activities

     —         (89 )     (97 )     (2,448 )     —         (2,634 )
                                                

Financing activities

            

Principal payments on borrowings

     (1 )     (4 )     —         —         —         (5 )

Repurchases of common stock

     (33 )     —         —         —         —         (33 )

Net intercompany transactions

     16       17       119       (261 )     109       —    
                                                

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

     (18 )     13       119       (261 )     109       (38 )
                                                

Vehicle programs:

            

Proceeds from borrowings

     —         30       —         5,769       —         5,799  

Principal payments on borrowings

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

Net change in short-term borrowings

     —         —         —         226       —         226  

Other, net

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

Net cash provided by (used in) financing activities

     (18 )     28       92       1,632       109       1,843  
                                                

Effect of changes in exchange rates on cash and cash equivalents

     —         —         —         (1 )     —         (1 )
                                                

Net increase (decrease) in cash and cash equivalents

     (20 )     11       (2 )     59       —         48  

Cash and cash equivalents, beginning of period

     37       99       12       66       —         214  
                                                

Cash and cash equivalents, end of period

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

 

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Table of Contents

Six Months Ended June 30, 2007

 

     Parent     Subsidiary
Issuers
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Net cash provided by operating activities

   $ 1     $ 14     $ 47     $ 799     $ (90 )   $ 771  
                                                

Investing activities

            

Property and equipment additions

     —         (25 )     (20 )     (6 )     —         (51 )

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

     —         —         (1 )     —         —         (1 )

Proceeds received on asset sales

     —         6       —         2       —         8  

Proceeds from sale of investment

     106       —         —         —         —         106  

Payments made to Realogy and Wyndham, net

     (88 )     —         —         —         —         (88 )

Proceeds from dispositions of businesses, net of transaction-related payments

     (1 )     —         —         —         —         (1 )

Other, net

     —         (4 )     (4 )     —         —         (8 )
                                                

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

     17       (23 )     (25 )     (4 )     —         (35 )
                                                

Vehicle programs:

            

Increase in program cash

     —         —         —         (4 )     —         (4 )

Investment in vehicles

     —         (57 )     (58 )     (6,365 )     —         (6,480 )

Proceeds received on disposition of vehicles

     —         128       46       3,578       —         3,752  
                                                
     —         71       (12 )     (2,791 )     —         (2,732 )
                                                

Net cash provided by (used in) investing activities

     17       48       (37 )     (2,795 )     —         (2,767 )
                                                

Financing activities

            

Principal payments on borrowings

     (1 )     (38 )     —         —         —         (39 )

Issuances of common stock

     39       —         —         —         —         39  

Net intercompany transactions

     (2 )     (36 )     6       (58 )     90       —    
                                                

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

     36       (74 )     6       (58 )     90       —    
                                                

Vehicle programs:

            

Proceeds from borrowings

     —         —         —         6,287       —         6,287  

Principal payments on borrowings

     —         —         (26 )     (4,336 )     —         (4,362 )

Net change in short-term borrowings

     —         —         —         129       —         129  

Other, net

     (1 )     (4 )     (1 )     —         —         (6 )
                                                
     (1 )     (4 )     (27 )     2,080       —         2,048  
                                                

Net cash provided by (used in) financing activities

     35       (78 )     (21 )     2,022       90       2,048  
                                                

Effect of changes in exchange rates on cash and cash equivalents

     —         —         —         3       —         3  
                                                

Net increase (decrease) in cash and cash equivalents

     53       (16 )     (11 )     29       —         55  

Cash and cash equivalents, beginning of period

     35       75       29       33       —         172  
                                                

Cash and cash equivalents, end of period

   $ 88     $ 59     $ 18     $ 62     $ —       $ 227  
                                                

 

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Table of Contents

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

The following discussion should be read in conjunction with our Consolidated Condensed Financial Statements and accompanying Notes thereto included elsewhere herein and with our 2007 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 29, 2008 (the “2007 Form 10-K”). Unless otherwise noted, all dollar amounts are in millions and those relating to our results of operations are presented before taxes.

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

We operate in the following business segments:

 

   

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

 

   

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

 

   

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

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

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

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

 

   

Domestic enplanements, which are now expected to decline in 2008 compared to 2007;

 

   

Rising per-unit car fleet costs, which we began to experience in 2005 and have continued with model-year 2008 vehicles;

 

   

Difficulty in achieving sustained pricing increases;

 

   

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

 

   

Increases in borrowing spreads for vehicle-related debt; and

 

   

Decreased demand for truck rentals, which has been impacted by household moving activity.

 

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Table of Contents

RESULTS OF OPERATIONS

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

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

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

THREE MONTHS ENDED JUNE 30, 2008 VS. THREE MONTHS ENDED JUNE 30, 2007

Our consolidated results of operations comprised the following:

 

     Three Months Ended June 30,  
     2008    2007    Change  

Net revenues

   $ 1,577    $ 1,516    $ 61  

Total expenses

     1,552      1,481      71  
                      

Income before income taxes

     25      35      (10 )

Provision for income taxes

     10      12      (2 )
                      

Income from continuing operations

     15      23      (8 )

Gain on disposal of discontinued operations, net of tax

     —        1      (1 )
                      

Net income

   $ 15    $ 24    $ (9 )
                      

During second quarter 2008, our net revenues increased $61 million (4%) compared to second quarter 2007, driven by our car rental operations which experienced a 3% increase in T&M revenue, due primarily to a 3% increase in rental days, and a 15% increase in ancillary revenues. The growth in our car rental operations was partially offset by an 8% decrease in truck rental revenue. Ancillary revenue growth was primarily driven by increases in airport concession and vehicle licensing revenues, rentals of GPS navigation units, and sales of insurance products and other items. In addition, the total revenue increase includes $20 million related to the effect of foreign currency exchange rate fluctuations on the translation of our international operations results into U.S. dollars.

The total expense increase of $71 million (5%) was principally due to increases of (i) $39 million (10%) in vehicle depreciation and lease charges resulting from a 2% growth in our average car rental fleet and higher per unit vehicle costs, (ii) $26 million (3%) in operating expenses largely due to the 3% increase in car rental days, (iii) $5 million in selling, general and administrative expenses related to increases in marketing and commission expenditures, most of which are volume-related, and other items, and (iv) $3 million in vehicle interest expense. The increase in total expenses includes an adverse impact from foreign exchange currency rates of $18 million. As a result of these items, offset by a $2 million reduction in our provision for income taxes, our income from continuing operations decreased $8 million.

Our effective tax rate for continuing operations was a provision of 40.0% and 34.3% for the second quarter 2008 and 2007, respectively.

 

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Table of Contents

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

 

     Revenues     EBITDA  
     2008    2007    %
Change
    2008     2007     %
Change
 

Domestic Car Rental

   $ 1,241    $ 1,195    4 %   $       46     $       59     (22 %)

International Car Rental

     230      202    14       25       21     19  

Truck Rental

     105      114    (8 )     8       10     (20 )

Corporate and Other (a)

     1      5    *       (2 )     (3 )   *  
                                  

Total Company

   $ 1,577    $ 1,516        77       87    
                      

Less: Non-vehicle related depreciation and amortization

             20       20    

Interest expense related to corporate debt, net

             32       32    
                          

Income before income taxes

           $ 25     $ 35    
                          

 

(*)

Not meaningful.

(a)

Includes unallocated corporate overhead, the elimination of transactions between segments and the results of operations of certain non-strategic businesses. EBITDA for 2007 also includes Separation-related costs of $3 million.

Domestic Car Rental

Revenues increased $46 million (4%) while EBITDA decreased $13 million (22%) in second quarter 2008 compared with second quarter 2007, primarily due to a modest increase in car rental volume and increased ancillary revenues offset by increased fleet costs.

The revenue increase of $46 million was comprised of a $13 million (1%) increase in T&M revenue and a $33 million (13%) increase in ancillary revenues. The increase in T&M revenue was principally driven by a 3% increase in rental days while T&M revenue per day declined 1% from second quarter 2007. The $33 million increase in ancillary revenues was due primarily to (i) a $14 million increase in gasoline sales, which was more than offset in EBITDA by $17 million of higher gasoline expense, (ii) a $13 million increase in rentals of GPS navigation units, sales of insurance products and other items, and (iii) a $6 million increase in airport concession and vehicle licensing revenues, $4 million of which was offset in EBITDA by higher airport concession and vehicle licensing expenses remitted to airport and other regulatory authorities.

The favorable effect of incremental T&M revenues was offset in EBITDA by $35 million (11%) of increased fleet depreciation and lease charges resulting from a 2% increase in the average size of our domestic rental fleet and an 8% increase in per-unit fleet costs. EBITDA also reflected a $4 million (1%) increase in operating and selling, general and administrative expenses including (i) $6 million of incremental operating expenses primarily representing inflationary increase in salaries and wages, off-airport rental expense and other costs, (ii) a $5 million increase in selling, general and administrative expense related primarily to increased travel agency commissions and (iii) a $7 million increase in expenses associated with increased car rental volume and fleet size, primarily related to agency operator commissions, credit card fees and other items, offset by a $14 million reduction in insurance costs due to favorable experience. EBITDA also reflected the absence of a $4 million gain on the mark-to-market of gasoline hedges recorded in the second quarter 2007.

International Car Rental

Revenues and EBITDA increased $28 million (14%) and $4 million (19%), respectively, in second quarter 2008 compared with second quarter 2007, primarily due to the impact of foreign currency exchange rate movements and growth in ancillary revenues.

The revenue increase of $28 million was comprised of a $15 million (11%) increase in car rental T&M revenue and a $13 million (22%) increase in ancillary revenues. The total growth in revenue includes a $20 million increase related to foreign currency exchange rates, impacting T&M revenue by $14 million and ancillary revenues by $6 million, and was largely offset in EBITDA by the opposite impact of foreign exchange on expenses. The increase in T&M revenue was principally driven by an 8% increase in T&M revenue per day and a 3% increase in the number of days a car was rented. The $13 million increase in ancillary revenues was due primarily to (i) a $6 million increase in counter sales of insurance, GPS rentals and other items, (ii) a $5 million increase in airport concession and vehicle licensing revenues, which was offset in EBITDA by $4 million of higher airport concession and vehicle licensing expense remitted to airport and other regulatory authorities, and (iii) a $2 million increase in gasoline sales, which was largely offset in EBITDA by higher gasoline costs.

The favorable effect of incremental T&M revenues was partially offset in EBITDA by $6 million (13%) of increased fleet depreciation and lease charges, reflecting a 2% increase in the average size of our international rental fleet and an 11% increase in per unit-fleet costs. EBITDA also reflects $12 million of incremental operating expenses including (i) an $8 million increase in salaries and wages, rents and other costs and (ii) $4 million in additional agency operator commissions and other vehicle costs, offset by a $4 million reduction in lower insurance costs due to favorable experience. The cost increases primarily reflect year-over-year exchange rate movements.

 

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Table of Contents

Truck Rental

Revenues and EBITDA declined $9 million (8%) and $2 million (20%), respectively, in second quarter 2008 compared with second quarter 2007.

The revenue decrease was primarily due to a decline in T&M revenue, which reflected a 10% decrease in T&M revenue per day, while rental days were essentially unchanged year over year. The decrease in T&M revenue per day was primarily the result of a decrease in commercial and one-way volumes. EBITDA benefited from $2 million (7%) less fleet depreciation, interest and lease charges reflecting lower per-unit fleet costs and also reflected a decrease of $5 million in operating expenses primarily relating to commission expense as a result of the decrease in T&M revenue.

SIX MONTHS ENDED JUNE 30, 2008 VS. SIX MONTHS ENDED JUNE 30, 2007

Our consolidated results of operations comprised the following:

 

     Six Months Ended June 30,  
     2008    2007    Change  

Net revenues

   $ 3,022    $ 2,881    $ 141  

Total expenses

     3,015      2,834      181  
                      

Income before income taxes

     7      47      (40 )

Provision for income taxes

     3      12      (9 )
                      

Income from continuing operations

     4      35      (31 )

Gain on disposal of discontinued operations, net of tax

     —        1      (1 )
                      

Net income

   $ 4    $ 36    $ (32 )
                      

During the six months ended June 30, 2008, our total revenues increased $141 million (5%) principally due to a $61 million (3%) increase in T&M revenue reflecting a 3% increase in domestic and international car rental days, and an $80 million (13%) increase in ancillary revenues due to counter sales of insurance products, GPS navigation unit rentals, fees charged to customers and other items. These increases were partially offset by a decrease in T&M revenue within our Truck Rental segment due primarily to a 10% decrease in T&M revenue per day. In addition, the total revenue increase includes $48 million related to the effect of foreign currency exchange rate fluctuations on the translation of our international operations results into U.S. dollars.

The total expense increase of $181 million (6%) was principally due to increases of (i) $92 million (6%) in operating expenses largely resulting from the 3% increase in car rental days and higher gasoline costs, (ii) $59 million (8%) in vehicle depreciation and lease charges resulting from 3% growth in our average car rental fleet and higher per-unit vehicle costs, (iii) $17 million in vehicle interest expense principally related to mark-to-market losses on interest-rate hedges in 2008, and (iv) $17 million in selling, general and administrative expenses related to increases in marketing and commission expenditures, most of which are volume-related, and other items. The increase in total expenses includes an adverse impact from foreign exchange currency rates of $42 million. These year-over-year increases were partially offset by a $4 million decrease in non-vehicle depreciation and amortization and interest expense related to corporate debt. As a result of these items, offset by a $9 million decrease in our provision for income taxes, our income from continuing operations decreased $31 million.

Our effective tax rate for continuing operations was a provision of 42.9% and 25.5% for the six months ended June 30, 2008 and 2007, respectively. The increase in our effective tax rate for 2008 was primarily due to differences in the amount of stock-based compensation recorded for book and tax purposes. Our effective tax rate for 2007 was less than the federal statutory rate of 35% primarily due to a Separation-related credit recorded in connection with the adoption of FIN 48 that was not subject to income tax as well as a decrease for changes in New York State and Canadian tax law.

 

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

 

     Revenues     EBITDA  
     2008    2007    %
Change
    2008     2007     %
Change
 

Domestic Car Rental

   $ 2,377    $ 2,279    4 %   $       61     $       110     (45 %)

International Car Rental

     460      393    17       55       45     22  

Truck Rental

     183      197    (7 )     (2 )     (1 )   *  

Corporate and Other (a)

     2      12    *       (7 )     1     *  
                                  

Total Company

   $ 3,022    $ 2,881        107       155    
                      

Less: Non-vehicle related depreciation and amortization

             39       43    

Interest expense related to corporate debt, net

             61       65    
                          

Income before income taxes

           $ 7     $ 47    
                          

 

(*)

Not meaningful.

(a)

Includes unallocated corporate overhead, the elimination of transactions between segments and the results of operations of certain non-strategic businesses. EBITDA for 2007 also includes Separation-related credits of $3 million.

Domestic Car Rental

Revenues increased $98 million (4%) while EBITDA decreased $49 million (45%) in the six months ended June 30, 2008 compared with the same period in 2007. Revenue increased primarily due to an increase in ancillary revenues and increased car rental volume. EBITDA margins were negatively impacted in the first half by lower car rental pricing and increased fleet costs.

The revenue increase of $98 million was comprised of a $37 million (2%) increase in T&M revenue and a $61 million (13%) increase in ancillary revenues. The increase in T&M revenue was principally driven by a 3% increase in rental days while T&M revenue per day decreased by 1% year over year. The $61 million increase in ancillary revenues was due primarily to (i) a $26 million increase in rentals of GPS navigation units, sales of insurance products and other items, (ii) a $13 million increase in airport concession and vehicle licensing revenues, $7 million of which was offset in EBITDA by higher airport concession and vehicle licensing expenses remitted to airport and other regulatory authorities, and (iii) a $23 million increase in gasoline sales, which was more than offset in EBITDA by $32 million of higher gasoline expense.

The favorable effect of incremental T&M revenues was offset in EBITDA by $53 million (9%) of increased fleet depreciation and lease charges resulting from a 3% increase in the average size of our domestic rental fleet and a 6% increase in per-unit fleet costs. EBITDA also reflects $55 million of incremental operating expenses including (i) $26 million of additional expenses associated with increased car rental volume and fleet size, primarily related to agency operator commissions, vehicle maintenance costs, credit card fees, and other items, offset by a $13 million reduction in insurance expense due to favorable experience, (ii) $20 million of increased selling, general and administration expense primarily related to higher travel agency commissions, travel incentive programs and other marketing costs, most of which are volume-related, (iii) $12 million of incremental expenses largely representing inflationary increases in salaries and wages, off-airport rental expense and other costs, and (iv) $13 million of increased vehicle interest expense year-over-year due in part to mark-to-market losses on interest rates hedges recorded through the six months ended June 30, 2008.

International Car Rental

Revenues and EBITDA increased $67 million (17%) and $10 million (22%), respectively, in the six months ended June 30, 2008 compared with the same period in 2007, primarily due to the impact of foreign currency exchange rate movements, increased ancillary revenues and higher demand for car rentals.

The revenue increase of $67 million was comprised of a $39 million (14%) increase in car rental T&M revenue and a $28 million (25%) increase in ancillary revenues. The total growth in revenue includes a $48 million increase related to foreign currency exchange rates, impacting T&M revenue by $34 million and ancillary revenues by $14 million, and was largely offset in EBITDA by the opposite impact of foreign exchange on expenses in the amount of $42 million. The increase in T&M revenue was principally driven by a 10% increase in T&M revenue per day, primarily due to movements in foreign currency exchange rates, and a 3% increase in the number of days a car was rented. The $28 million increase in ancillary revenues was due primarily to (i) a $15 million increase in counter sales of insurance, GPS rentals and other items, (ii) a $10 million increase in airport concession and vehicle licensing revenues, which was offset in EBITDA by $10 million of higher airport concession and vehicle licensing expenses remitted to airport and other regulatory authorities, and (iii) a $3 million increase in gasoline sales, which was fully offset in EBITDA by higher gasoline costs.

 

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The favorable effect of incremental T&M revenues was partially offset in EBITDA by $12 million (13%) of increased fleet depreciation and lease charges, reflecting a 3% increase in the average size of our international rental fleet and a 9% increase in per-unit fleet costs. EBITDA also reflects $31 million of incremental operating expenses including (i) a $15 million increase in salaries and wages, rents and other costs and (ii) a $10 million increase in agency operator commissions, and other vehicle costs, offset by a $3 million reduction in lower insurance costs due to favorable experience. The cost increases primarily reflect year-over-year exchange rate movements.

Truck Rental

Revenues declined $14 million (7%) while EBITDA declined by $1 million in the six months ended June 30, 2008 compared with the same period in 2007.

The revenue decrease was primarily due to a decline in T&M revenue, which reflected a 10% decrease in T&M revenue per day, offset by a 1% increase in rental days. EBITDA benefited from $5 million (8%) less fleet depreciation, interest and lease charges reflecting lower per-unit fleet costs, and also reflected a decrease of $3 million in operating commission expense primarily as a result of the decrease in T&M revenue.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

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

FINANCIAL CONDITION

 

     June 30,
2008
   December 31,
2007
   Change  

Total assets exclusive of assets under vehicle programs

   $ 4,567    $ 4,493    $ 74  

Total liabilities exclusive of liabilities under vehicle programs

     3,792      3,889      (97 )

Assets under vehicle programs

     9,825      7,981      1,844  

Liabilities under vehicle programs

     9,143      7,120      2,023  

Stockholders’ equity

     1,457      1,465      (8 )

Total assets exclusive of assets under vehicle programs increased $74 million principally due to (i) a $48 million increase in cash and cash equivalents (see “Liquidity and Capital Resources – Cash Flows” for a detailed discussion), (ii) a $42 million increase in other intangible assets, net related primarily to our acquisition of nineteen vehicle rental franchises during the first six months of 2008, (iii) a $42 million increase in accounts receivable, and (iv) a $23 million increase in deferred taxes. These increases were offset by a $62 million decrease in receivables due from Realogy and Wyndham, $54 million within other current assets and $8 million within other non-current assets, and a $28 million decrease in income tax receivables.

Total liabilities exclusive of liabilities under vehicle programs decreased $97 million primarily due to (i) a $24 million decrease in advertising and marketing related liabilities, (ii) a $23 million decrease in tax liabilities for which we are entitled to indemnification from Realogy and Wyndham, (iii) an $18 million decrease in income taxes payable, (iv) a $15 million decrease in non-current insurance liabilities, (v) an $11 million decrease in accrued payroll related liabilities, which related primarily to the payment of the 2007 annual incentives in first quarter 2008, and (vi) an $11 million decrease in accrued legal settlements. These decreases were partially offset by an increase of $21 million in accounts payable.

Assets under vehicle programs increased approximately $1.8 billion primarily due to (i) approximately $1.7 billion of net additions, principally to our Domestic vehicle rental fleets to meet seasonal needs and (ii) a $337 million increase in our Investment in Avis Budget Rental Car Funding (AESOP) LLC due to capital contribution reflecting our decision to invest funds from vehicle sales as equity rather than as a repayment of debt. These increases were partially offset by a $160 million decrease in receivables from vehicle manufacturers.

Liabilities under vehicle programs increased approximately $2.0 billion, reflecting $1.9 billion additional borrowings to support the growth in our vehicle rental fleet described above, and a $109 million increase in invoices from manufacturers for vehicles received. See “Liquidity and Capital Resources-Debt and Financing Arrangements” for a detailed account of the change in our debt related to vehicle programs.

 

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Stockholders’ equity decreased $8 million, primarily due to the repurchase of approximately $33 million of our common stock and a $7 million decrease in additional paid-in capital for Separation-related adjustments offset by (i) a $23 million increase in accumulated other comprehensive income primarily as a result of currency translation adjustments, (ii) a $4 million increase related to the amortization expense of restricted stock units and (iii) net income of $4 million.

LIQUIDITY AND CAPITAL RESOURCES

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

CASH FLOWS

At June 30, 2008, we had $262 million of cash on hand, an increase of $48 million from $214 million at December 31, 2007. The following table summarizes such increase:

 

     Six Months Ended June 30,  
     2008     2007     Change  

Cash provided by (used in):

      

Operating activities

   $ 840     $ 771     $ 69  

Investing activities

     (2,634 )     (2,767 )     133  

Financing activities

     1,843       2,048       (205 )

Effect of exchange rate changes

     (1 )     3       (4 )
                        

Net change in cash and cash equivalents

   $ 48     $ 55     $ (7 )
                        

During the six months ended June 30, 2008, we generated $69 million more cash from operating activities in comparison to the same period in 2007. This change principally reflects a $58 million reduction in our working capital requirements and a $15 million decrease related to income taxes and deferred income taxes.

We used $133 million less cash in investing activities during the six months ended June 30, 2008 compared with the same period in 2007. This change primarily reflects the activities of our vehicle programs, which used $553 million less cash due to our fleet management decisions, including increasing the average hold period of our vehicle fleet, offset by (i) a $343 million capital contribution to Avis Budget Rental Car Funding (AESOP) LLC in the first quarter 2008, reflecting our decision to invest funds from vehicle sales as equity rather than as a repayment of debt, (ii) $70 million of incremental spending for acquisitions of vehicle rental franchises and (iii) a net year-over-year decrease of $17 million in transactions with our former operating businesses. Our capital expenditures in second quarter 2008 were relatively consistent with the same period in 2007, and we anticipate aggregate capital expenditures will approximate $90-95 million in 2008.

We generated $205 million less cash from financing activities during the six months ended June 30, 2008 in comparison with the same period in 2007. This change primarily reflects (i) a $167 million net decrease in cash provided under our vehicle programs’ financing activities mainly due to a decrease in proceeds from borrowings and (ii) a $72 million increase in cash utilized for the net repurchases and issuances of common stock, partially offset by a $33 million decrease in debt principal payments related to our corporate borrowings.

DEBT AND FINANCING ARRANGEMENTS

At June 30, 2008, we had approximately $9.3 billion of indebtedness (including corporate indebtedness of approximately $1.8 billion and debt under vehicle programs of approximately $7.5 billion).

 

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Corporate indebtedness consisted of:

 

     Maturity
Date
   As of
June 30,
2008
   As of
December 31,
2007
   Change  

Floating rate term loan (a) (b)

   April 2012    $ 791    $ 796    $ (5 )

Floating rate notes (a)

   May 2014      250      250      —    

7 5/8% notes (a)

   May 2014      375      375      —    

7 3/4% notes (a)

   May 2016      375      375      —    
                         
        1,791      1,796      (5 )

Other

        2      1      1  
                         
   $ 1,793    $ 1,797    $ (4 )
                         

 

(a)

In connection with the Separation, Avis Budget Car Rental borrowed $1,875 million in April 2006, which consisted of (i) $1 billion of unsecured fixed and floating rate notes and (ii) an $875 million secured floating rate term loan under a credit facility. The floating rate term loan and floating rate notes bear interest at three month LIBOR plus 125 basis points and three month LIBOR plus 250 basis points, respectively. We use various hedging strategies, including derivative instruments, to manage a portion of the risks associated with our floating rate debt.

(b)

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

The following table summarizes the components of our debt under vehicle programs (including related party debt due to Avis Budget Rental Car Funding (AESOP), LLC):

 

     As of
June 30,
2008
   As of
December 31,
2007
   Change  

Debt due to Avis Budget Rental Car Funding (a)

   $ 6,314    $ 4,646    $ 1,668  

Budget Truck financing:

        

Budget Truck Funding program (b)

     336      246      90  

Capital leases

     179      204      (25 )

Other (c)

     671      500      171  
                      
   $ 7,500    $ 5,596    $ 1,904  
                      

 

(a)

As of June 30, 2008, the principal sources of the $6.3 billion of debt are $5.8 billion of third party debt issued by Avis Budget Rental Car Funding, $444 million of our equity investment in Avis Budget Rental Car Funding and $79 million of interest rate derivative hedges. The increase principally reflects (i) $1.3 billion of incremental borrowings under our conduit facilities to support the acquisition of rental vehicles within our Domestic Car Rental operations and (ii) a $343 million increase in the our Investment in Avis Budget Rental Car Funding reflecting our decision to invest funds from vehicle sales into Avis Budget Rental Car Funding as equity rather than as a repayment of debt due to Avis Budget Rental Car Funding.

(b)

The increase primarily reflects incremental borrowings under our conduit facility to support the acquisition of rental vehicles within our Budget Truck rental fleet.

(c)

The increase primarily reflects incremental borrowings under our conduit facilities to support the acquisition of vehicles within our International Car Rental operations and additional fleet loans to support the acquisition of certain vehicles for our Domestic Car Rental operations.

As of June 30, 2008, the committed credit facilities available to us and/or our subsidiaries at the corporate or Avis Budget Car Rental, LLC level were as follows:

 

     Total
Capacity
   Outstanding
Borrowings
   Letters of
Credit Issued
   Available
Capacity