Document
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 September 30, 2018

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____

Commission File No. 001-10308
 
Avis Budget Group, Inc.
(Exact name of registrant as specified in its charter) 
Delaware
 
06-0918165
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
6 Sylvan Way
Parsippany, NJ
 
07054
(Address of principal executive offices)
 
(Zip Code)
 
(973) 496-4700
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
Emerging growth company
o
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

The number of shares outstanding of the issuer’s common stock was 77,346,138 shares as of October 31, 2018.
 


Table of Contents

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


Table of Contents

FORWARD-LOOKING STATEMENTS

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

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

a change in travel demand, including changes or disruptions in airline passenger traffic;

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

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

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

our ability to continue to successfully implement our business strategies, achieve and maintain cost savings and adapt our business to changes in mobility;

our ability to obtain financing for our global operations, including the funding of our vehicle fleet through the issuance of asset-backed securities and use of the global lending markets;

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

our ability to conform to multiple and conflicting laws or regulations in the countries in which we operate;

our dependence on third-party distribution channels, third-party suppliers of other services and co-marketing arrangements with third parties;

our dependence on the performance and retention of our senior management and key employees;

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

our ability to accurately estimate our future results;

any major disruptions in our communication networks or information systems;

our exposure to uninsured or unpaid claims in excess of historical levels;


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risks associated with litigation, governmental or regulatory inquiries, or any failure or inability to comply with laws, regulations or contractual obligations or any changes in laws, regulations or contractual obligations, including with respect to personal identifiable information and consumer privacy, labor and employment, and tax;

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

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

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

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

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

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

risks related to protecting the integrity of, and preventing unauthorized access to, our information technology systems or those of our third party vendors, and protecting the confidential information of our employees and customers against security breaches, including physical or cyber-security breaches, attacks, or other disruptions; and

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

We operate in a continuously changing business environment and new risk factors emerge from time to time. New risk factors, factors beyond our control, or changes in the impact of identified risk factors may cause actual results to differ materially from those set forth in any forward-looking statements. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. Moreover, we do not assume responsibility for the accuracy and completeness of those statements. Other factors and assumptions not identified above, including those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and other portions of our 2017 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 22, 2018 (the “2017 Form 10-K”), could cause actual results to differ materially from those projected in any forward-looking statements.

Although we believe that our assumptions are reasonable, any or all of our forward-looking statements may prove to be inaccurate and we can make no guarantees about our future performance. Should unknown risks or uncertainties materialize or underlying assumptions prove inaccurate, actual results could differ materially from past results and/or those anticipated, estimated or projected. We undertake no obligation to release any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. For any forward-looking statements contained in any document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.


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PART I — FINANCIAL INFORMATION
Item 1.
Financial Statements
Avis Budget Group, Inc.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(In millions, except per share data)
(Unaudited)
 
 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
 
2018
 
2017
 
2018
 
2017
Revenues
$
2,778

 
$
2,752

 
$
7,074

 
$
6,829

 
 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
Operating
1,294

 
1,256

 
3,561

 
3,413

 
Vehicle depreciation and lease charges, net
587

 
616

 
1,693

 
1,717

 
Selling, general and administrative
336

 
320

 
953

 
875

 
Vehicle interest, net
85

 
78

 
237

 
215

 
Non-vehicle related depreciation and amortization
62

 
66

 
190

 
194

 
Interest expense related to corporate debt, net:
 
 
 
 
 
 
 
 
Interest expense
44

 
45

 
139

 
142

 
Early extinguishment of debt

 

 
5

 
3

 
Transaction-related costs, net
11

 

 
18

 
8

 
Restructuring and other related charges
4

 
7

 
14

 
52

Total expenses
2,423

 
2,388

 
6,810

 
6,619

 
 
 
 
 
 
 
 
 
 
Income before income taxes
355

 
364

 
264

 
210

Provision for income taxes
142

 
119

 
112

 
69

 
 
 
 
 
 
 
 
 
 
Net income
$
213


$
245

 
$
152

 
$
141

 
 
 
 
 
 
 
 
 
 
Comprehensive income
$
207

 
$
279

 
$
104

 
$
251

 
 
 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
 
Basic
$
2.71

 
$
2.96

 
$
1.90

 
$
1.68

 
Diluted
$
2.68

 
$
2.91

 
$
1.88

 
$
1.65

See Notes to Consolidated Condensed Financial Statements (Unaudited).

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Avis Budget Group, Inc.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions, except par value)
(Unaudited)
 
 
September 30, 
 2018
 
December 31,  
 2017
Assets
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
$
605

 
$
611

 
Receivables, net
918

 
922

 
Other current assets
657

 
533

Total current assets
2,180

 
2,066

 
 
 
 
 
Property and equipment, net
719

 
704

Deferred income taxes
1,065

 
931

Goodwill
1,064

 
1,073

Other intangibles, net
844

 
850

Other non-current assets
267

 
196

Total assets exclusive of assets under vehicle programs
6,139

 
5,820

 
 
 
 
 
Assets under vehicle programs:
 
 
 
 
Program cash
151

 
283

 
Vehicles, net
12,163

 
10,626

 
Receivables from vehicle manufacturers and other
772

 
547

 
Investment in Avis Budget Rental Car Funding (AESOP) LLC—related party
516

 
423

 
 
13,602

 
11,879

Total assets
$
19,741

 
$
17,699

 
 
 
 
 
Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
 
Accounts payable and other current liabilities
$
1,885

 
$
1,619

 
Short-term debt and current portion of long-term debt
23

 
26

Total current liabilities
1,908

 
1,645

 
 
 
 
 
Long-term debt
3,538

 
3,573

Other non-current liabilities
767

 
717

Total liabilities exclusive of liabilities under vehicle programs
6,213

 
5,935

 
 
 
 
 
Liabilities under vehicle programs:
 
 
 
 
Debt
3,800

 
2,741

 
Debt due to Avis Budget Rental Car Funding (AESOP) LLC—related party
7,122

 
6,480

 
Deferred income taxes
1,775

 
1,594

 
Other
310

 
376

 
 
13,007

 
11,191

Commitments and contingencies (Note 13)

 

 
 
 
 
 
Stockholders’ equity:
 
 
 
 
Preferred stock, $0.01 par value—authorized 10 shares; none issued and outstanding, at each date

 

 
Common stock, $0.01 par value—authorized 250 shares; issued 137 shares, at each date
1

 
1

 
Additional paid-in capital
6,766

 
6,820

 
Accumulated deficit
(1,103
)
 
(1,222
)
 
Accumulated other comprehensive income (loss)
(78
)
 
(24
)
 
Treasury stock, at cost—59 and 56 shares, respectively
(5,065
)
 
(5,002
)
Total stockholders’ equity
521

 
573

Total liabilities and stockholders’ equity
$
19,741

 
$
17,699


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) 
 
 
 
Nine Months Ended 
 September 30,
 
 
 
2018
 
2017
Operating activities
 
 
 
Net income
$
152

 
$
141

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Vehicle depreciation
1,536

 
1,500

 
(Gain) loss on sale of vehicles, net
(35
)
 
53

 
Non-vehicle related depreciation and amortization
190

 
194

 
Stock-based compensation
18

 
8

 
Amortization of debt financing fees
21

 
25

 
Early extinguishment of debt costs
5

 
3

 
Net changes in assets and liabilities:
 
 
 
 
 
Receivables
(140
)
 
(112
)
 
 
Income taxes and deferred income taxes
78

 
16

 
 
Accounts payable and other current liabilities
138

 
74

 
Other, net
132

 
139

Net cash provided by operating activities
2,095

 
2,041

 
 
 
 
 
 
Investing activities
 
 
 
Property and equipment additions
(157
)
 
(138
)
Proceeds received on asset sales
9

 
6

Net assets acquired (net of cash acquired)
(64
)
 
(17
)
Other, net
(44
)
 
6

Net cash used in investing activities exclusive of vehicle programs
(256
)
 
(143
)
 
 
 
 
 
 
Vehicle programs:
 
 
 
 
Investment in vehicles
(10,079
)
 
(9,672
)
 
Proceeds received on disposition of vehicles
6,752

 
6,872

 
Investment in debt securities of Avis Budget Rental Car Funding (AESOP) LLC—related party
(116
)
 
(33
)
 
Proceeds from debt securities of Avis Budget Rental Car Funding (AESOP) LLC—related party
22

 

 
 
(3,421
)
 
(2,833
)
Net cash used in investing activities
(3,677
)
 
(2,976
)


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Avis Budget Group, Inc.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued)
(In millions)
(Unaudited)
 
 
Nine Months Ended 
 September 30,
 
 
2018
 
2017
Financing activities
 
 
 
Proceeds from long-term borrowings
81

 
589

Payments on long-term borrowings
(99
)
 
(596
)
Net change in short-term borrowings
(4
)
 
(3
)
Repurchases of common stock
(143
)
 
(144
)
Debt financing fees
(9
)
 
(9
)
Other, net
3

 

Net cash used in financing activities exclusive of vehicle programs
(171
)
 
(163
)
 
 
 
 
 
Vehicle programs:
 
 
 
 
Proceeds from borrowings
13,371

 
14,276

 
Payments on borrowings
(11,727
)
 
(12,930
)
 
Debt financing fees
(19
)
 
(8
)
 
 
1,625

 
1,338

Net cash provided by financing activities
1,454

 
1,175

 
 
 
 
 
Effect of changes in exchange rates on cash and cash equivalents, program and restricted cash
(5
)
 
41

 
 
 
 
 
Net (decrease) increase in cash and cash equivalents, program and restricted cash
(133
)
 
281

Cash and cash equivalents, program and restricted cash, beginning of period
901

 
720

Cash and cash equivalents, program and restricted cash, end of period
$
768

 
$
1,001

See Notes to Consolidated Condensed Financial Statements (Unaudited).

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Avis Budget Group, Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
(Unless otherwise noted, all dollar amounts in tables are in millions, except per share amounts)

1.
Basis of Presentation

Avis Budget Group, Inc. provides vehicle rental and other mobility solutions to businesses and consumers worldwide. The accompanying unaudited Consolidated Condensed Financial Statements include the accounts and transactions of Avis Budget Group, Inc. and its subsidiaries, as well as entities in which Avis Budget Group, Inc. directly or indirectly has a controlling financial interest (collectively, the “Company”), and have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission for interim financial reporting.
The Company operates the following reportable business segments:

Americas—consisting primarily of (i) vehicle rental operations in North America, South America, Central America and the Caribbean, (ii) car sharing operations in certain of these markets, and (iii) licensees in the areas in which the Company does not operate directly.

International—consisting primarily of (i) vehicle rental operations in Europe, the Middle East, Africa, Asia and Australasia, (ii) car sharing operations in certain of these markets, and (iii) licensees in the areas in which the Company does not operate directly.

The operating results of acquired businesses are included in the accompanying Consolidated Condensed Financial Statements from the dates of acquisition. The Company has completed the business acquisitions discussed in Note 5 to these Consolidated Condensed Financial Statements. Differences between the preliminary allocation of purchase price and the final allocation for the Company’s fourth quarter 2017 acquisitions of ACL Hire Limited and various licensees in Europe and North America were not material.

In presenting the Consolidated Condensed Financial Statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”), management makes estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgment and available information. Accordingly, actual results could differ from those estimates. In management’s opinion, the Consolidated Condensed Financial Statements contain all adjustments necessary for a fair presentation of interim results reported. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year or any subsequent interim period. These financial statements should be read in conjunction with the Company’s 2017 Form 10-K.

Summary of Significant Accounting Policies

The Company’s significant accounting policies are fully described in Note 2, “Summary of Significant Accounting Policies,” in the Company’s Annual Report on Form 10-K for fiscal year 2017.

Reclassifications. Certain reclassifications have been made to prior years’ Consolidated Condensed Financial Statements to conform to the current year presentation. These reclassifications have no impact on reported net income (see “Adoption of New Accounting Pronouncements” below).

As of December 31, 2017, the Company elected to adopt the provisions of ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” early on a retrospective basis. ASU 2016-18 clarifies guidance on the classification and presentation of restricted cash in the statement of cash flows. The following table provides the impact of adoption on the Company’s Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2017.

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Nine Months Ended September 30, 2017
 
As Previously Reported
 
Effect of Change
 
As Adjusted
Decrease in program cash
$
53

 
$
(53
)
 
$

Other, net
5

 
1

 
6

Net cash used in investing activities
(2,924
)
 
(52
)
 
(2,976
)
 
 
 
 
 
 
Effect of changes in exchange rates on cash and cash equivalents, program and restricted cash
32

 
9

 
41

 
 
 
 
 
 
Net increase in cash and cash equivalents, program and restricted cash
324

 
(43
)
 
281

Cash and cash equivalents, program and restricted cash, beginning of period
490

 
230

 
720

Cash and cash equivalents, program and restricted cash, end of period
$
814

 
$
187

 
$
1,001


Restricted Cash. Program cash primarily represents amounts specifically designated to purchase assets under vehicle programs and/or to repay the related debt, as such the Company considers it a restricted cash equivalent. The following table provides a reconciliation of cash and cash equivalents, program and restricted cash reported within the Consolidated Condensed Balance Sheets to the amounts shown in the Consolidated Condensed Statements of Cash Flows.
 
As of September 30,
 
2018
 
2017
Cash and cash equivalents
$
605

 
$
814

Program cash
151

 
180

Restricted cash (a)
12

 
7

Total cash and cash equivalents, program and restricted cash
$
768

 
$
1,001

________
(a) 
Included within other current assets.

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

Transaction-related costs, net. Transaction-related costs, net are classified separately in the Consolidated Condensed Statements of Comprehensive Income. These costs are comprised of expenses related to acquisition-related activities such as due diligence and other advisory costs, expenses related to the integration of the acquiree’s operations with those of the Company, including the implementation of best practices and process improvements, non-cash gains and losses related to re-acquired rights, expenses related to pre-acquisition contingencies and contingent consideration related to acquisitions.

Currency Transactions. The Company records the gain or loss on foreign-currency transactions on certain intercompany loans and the gain or loss on intercompany loan hedges within interest expense related to corporate debt, net. During the three and nine months ended September 30, 2018 and 2017, the Company recorded an immaterial amount in each period.

Adoption of New Accounting Pronouncements

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

On January 1, 2018, as a result of a new accounting pronouncement, the Company early adopted ASU 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which allows a reclassification from accumulated other comprehensive income to retained earnings for the adjustment of deferred taxes due to the reduction of the corporate income tax rate as a result of U.S. tax reform. Accordingly, the Company has reclassified $4

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million of net tax benefits from accumulated other comprehensive loss to beginning accumulated deficit related to the following (see Note 14 - Stockholders’ Equity). Prior period amounts have not been retrospectively adjusted.
Currency Translation Adjustments
 
Net Unrealized Gains (Losses) on Cash Flow Hedges
 
Net Unrealized Gains (Losses) on Available-for Sale Securities
 
Minimum Pension Liability Adjustment
 
Accumulated Other Comprehensive Income (Loss)
$
7

 
$
1

 
$

 
$
(12
)
 
$
(4
)

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

On January 1, 2018, as a result of a new accounting pronouncement, the Company adopted ASU 2017-07, “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Costs and Net Periodic Postretirement Benefit Cost,” which requires an entity to disaggregate the components of net benefit cost recognized in its consolidated statements of operations. The adoption of this accounting pronouncement did not have a material impact on the Company’s Consolidated Condensed Financial Statements.

Recognition and Measurement of Financial Assets and Financial Liabilities

On January 1, 2018, as a result of a new accounting pronouncement, the Company adopted ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” along with a related clarifying update, which makes limited amendments to the classification and measurement of financial instruments. The amendments supersede the guidance to classify equity securities with readily determinable fair values into different categories (trading or available-for-sale) and require equity securities (including other ownership interests, such as partnerships, unincorporated joint ventures, and limited liability companies) to be measured at fair value with changes in the fair value recognized through net income. Accordingly, the Company has reclassified $2 million of net unrealized gains associated with available for sale equity securities from accumulated other comprehensive loss to beginning accumulated deficit (see Note 14 - Stockholders’ Equity). This ASU has no impact on the Company’s accounting for equity method investments.

Intra-Entity Transfers of Assets Other Than Inventory

On January 1, 2018, as a result of a new accounting pronouncement, the Company adopted ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,” which removes the prohibition in Topic 740 against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. The adoption of this accounting pronouncement did not have an impact on the Company’s Consolidated Condensed Financial Statements.

Revenue from Contracts with Customers

On January 1, 2018, as a result of a new accounting pronouncement, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which outlines a single model for entities to use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance. The new guidance applies to all contracts with customers except for leases, insurance contracts, financial instruments, certain nonmonetary exchanges and certain guarantees. Also, additional disclosures are required about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The Company has adopted the requirements of the new standard on a modified retrospective basis applied to all contracts. Prior periods have not been retrospectively adjusted. As discussed in Leases below, the Company’s rental related revenues will be accounted for under Topic 606 until the adoption of ASU 2016-02, “Leases (Topic 842)” on January 1, 2019. Under Topic 606, each transaction that generates customer loyalty points results in the deferral of revenue generally equivalent to the estimated retail value of points expected to be redeemed. The associated revenue will be recognized at the time the customer redeems the loyalty points. Previously, the Company did not defer revenue and recorded an expense associated with the incremental cost of providing the future rental at the time when the loyalty points were earned. In the Company’s Consolidated Condensed Balance Sheet at January 1, 2018, customer loyalty program liability increased approximately $50 million related to the estimated retail value of customer loyalty points earned, with a corresponding increase to

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accumulated deficit (approximately $40 million, net of tax) due to the cumulative impact of adopting Topic 606. Certain customers may receive cash-based rebates, which are accounted for as variable consideration under Topic 606. The Company estimates these rebates based on the expected amount to be provided to customers and reduces revenue recognized.

The impact of adoption of Topic 606 on the Company’s Consolidated Condensed Statement of Comprehensive Income for the three months ended September 30, 2018 was not material. The impact of adoption of Topic 606 on the Company’s Consolidated Condensed Statement of Comprehensive Income for the nine months ended September 30, 2018 and Consolidated Condensed September 30, 2018 Balance Sheet was as follows:
 
Nine Months Ended September 30, 2018
 
As Reported
 
Balances without Adoption of Topic 606
 
Effect of Change
Consolidated Condensed Statement of Comprehensive Income
 
 
 
 
 
Revenues
$
7,074

 
$
7,083

 
$
(9
)
 
 
 
 
 
 
Expenses
 
 
 
 
 
  Operating
3,561

 
3,564

 
(3
)
Total expenses
6,810

 
6,813

 
(3
)
 
 
 
 
 
 
Income before income taxes
264

 
270

 
(6
)
Provision for income taxes
112

 
114

 
(2
)
Net income
$
152

 
$
156

 
$
(4
)
 
 
 
 
 
 
Comprehensive income
$
104

 
$
108

 
$
(4
)
 
 
 
 
 
 
 
September 30, 2018
 
As Reported
 
Balances without Adoption of Topic 606
 
Effect of Change
Consolidated Condensed Balance Sheet
 
 
 
 
 
Deferred income taxes
$
1,065

 
$
1,053

 
$
12

Total assets exclusive of assets under vehicle programs
6,139

 
6,127

 
12

Total assets
19,741

 
19,729

 
12

 
 
 
 
 
 
Accounts payable and other current liabilities
1,885

 
1,879

 
6

Total current liabilities
1,908

 
1,902

 
6

 
 
 
 
 
 
Other non-current liabilities
767

 
717

 
50

Total liabilities exclusive of liabilities under vehicle programs
6,213

 
6,163

 
50

 
 
 
 
 
 
Accumulated deficit
(1,103
)
 
(1,059
)
 
(44
)
Total stockholders’ equity
$
521

 
$
565

 
$
(44
)

Recently Issued Accounting Pronouncements

Intangibles—Goodwill and Other—Internal-Use Software

In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-15 “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement That Is a Service Contract”, which provides guidance for determining when the arrangement includes a software license. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The amendments in this Update also require the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, to present the expense in the same line in its statement of income as the fees associated with the hosting element (service) of the arrangement and

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classify payments for capitalized implementation costs in its statement of cash flows in the same manner as payments made for fees associated with the hosting element. The entity is also required to present the capitalized implementation costs in its balance sheet in the same line that a prepayment for the fees of the associated hosting arrangement would be presented. ASU 2018-15 becomes effective for the Company on January 1, 2020. Early adoption is permitted. The Company is currently evaluating the impact of adopting this accounting pronouncement on its Consolidated Condensed Financial Statements.

Compensation—Retirement Benefits—Defined Benefit Plans

In August 2018, the FASB issued ASU 2018-14, “Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans,” which adds, removes, and clarifies disclosure requirements related to defined benefit pension and other postretirement plans. These changes are part of the FASB’s disclosure framework project, which the Board launched in 2014 to improve the effectiveness of disclosures in notes to financial statements. ASU 2018-14 becomes effective for the Company on January 1, 2021. Early adoption is permitted. The adoption of this accounting pronouncement is not expected to have a material impact on the Company's Consolidated Condensed Financial Statements.

Fair Value Measurement

In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement,” which adds, removes, and modifies disclosure requirements related to fair value measurements. ASU 2018-13 becomes effective for the Company on January 1, 2020. Early adoption is permitted. The adoption of this accounting pronouncement is not expected to have a material impact on the Company's Consolidated Condensed Financial Statements.

Nonemployee Share-Based Payment Accounting

In June 2018, the FASB issued ASU 2018-07, “Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” which simplifies the accounting for share-based payments granted to nonemployees for goods and services and aligns most of the guidance on such payments to nonemployees with the requirements for share-based payments granted to employees. ASU 2018-07 becomes effective for the Company on January 1, 2019. Early adoption is permitted. The adoption of this accounting pronouncement is not expected to have an impact on the Company's Consolidated Condensed Financial Statements.

Accounting for Hedging Activities

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” which amends the existing guidance to allow companies to more accurately present the economic results of an entity’s risk management activities in the financial statements. ASU 2017-12 becomes effective for the Company on January 1, 2019. Early adoption is permitted. The Company is currently evaluating the effect of this accounting pronouncement on its Consolidated Condensed Financial Statements.

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which sets forth a current expected credit loss impairment model for financial assets that replaces the current incurred loss model. This model requires a financial asset (or group of financial assets), including trade receivables, measured at amortized cost to be presented at the net amount expected to be collected with an allowance for credit losses deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. ASU 2016-13 becomes effective for the Company on January 1, 2020. Early adoption is permitted as of January 1, 2019. The adoption of this accounting pronouncement is not expected to have a material impact on the Company's Consolidated Condensed Financial Statements.

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Leases

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which requires a lessee to recognize all long-term leases on its balance sheet as a liability for its lease obligation, measured at the present value of lease payments not yet paid, and a corresponding asset representing its right to use the underlying asset over the lease term and expands disclosure of key information about leasing arrangements. The ASU does not significantly change a lessee’s recognition, measurement and presentation of expenses and cash flows. Additionally, ASU 2016-02 aligns key aspects of lessor accounting with the new revenue recognition guidance in Topic 606 (see Revenue from Contracts with Customers above). In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach which includes a number of optional practical expedients that entities may elect to apply. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” which provides an additional transition method allowing entities to only apply the new lease standard in the year of adoption. Additionally, ASU 2018-11 provides a practical expedient for lessors to combine nonlease components with related lease components if certain conditions are met. These ASUs become effective for the Company on January 1, 2019. Early adoption is permitted.

The Company is in the process of implementing these ASUs and expects most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon adoption, which will materially increase total assets and total liabilities relative to such amounts prior to adoption. The Company has determined portions of its vehicle rental contracts that convey the right to control the use of identified assets are within the scope of the accounting guidance contained in these ASUs. As discussed in Revenue from Contracts with Customers above, the Company’s rental related revenues are accounted for under the revenue accounting standard Topic 606, until the adoption of this lease accounting standard Topic 842 on January 1, 2019.

Income Taxes

In January 2018, the FASB issued FASB Staff Question and Answer Topic 740, No. 5: Accounting for Global Intangible Low-Taxed Income (“GILTI”), which provides guidance on accounting for the GILTI provisions of the U.S. enacted tax reform legislation (“the Tax Act”). The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance allows accounting for tax on GILTI to be treated as a deferred tax item or as a component of current period income tax expense in the year incurred, subject to an accounting policy election. The Company will complete its analysis during the fourth quarter of 2018 and will elect an accounting policy at such time.

2.
Revenues

The following table presents the Company’s revenues disaggregated by geography.
 
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
Americas
$
1,844

 
$
4,782

Europe, Middle East and Africa
784

 
1,830

Asia and Australasia
150

 
462

Total revenues
$
2,778

 
$
7,074



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The following table presents the Company’s revenues disaggregated by brand.
 
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
Avis
$
1,599

 
$
4,095

Budget
953

 
2,372

Other
226

 
607

Total revenues
$
2,778

 
$
7,074

________
Other includes Zipcar, Payless, Apex, Maggiore and FranceCars.

The Company derives revenues primarily by providing vehicle rentals and other related products and mobility services to commercial and leisure customers, as well as through licensing of its rental systems. Other related products and mobility services include sales of collision and loss damage waivers under which a customer is relieved from financial responsibility arising from vehicle damage incurred during the rental; products and services for driving convenience such as fuel service options, chauffeur drive services, roadside safety net, electronic toll collection, tablet rentals, access to satellite radio, portable navigation units and child safety seat rentals; and rentals of other supplemental items including automobile towing equipment and other moving accessories and supplies. The Company also receives payment from customers for certain operating expenses that it incurs, including airport concession fees that are paid by the Company in exchange for the right to operate at airports and other locations, as well as vehicle licensing fees. In addition, the Company collects membership fees in connection with its car sharing business.

Revenue is recognized when obligations under the terms of a contract with the customer are satisfied; generally this occurs evenly over the contract (over time); when control of the promised products or services is transferred to the customer. Revenue is measured as the amount of consideration the Company expects to be entitled to receive in exchange for transferring products or services. Certain customers may receive cash-based rebates, which are accounted for as variable consideration. The Company estimates these rebates based on the expected amount to be provided to customers and reduces revenue recognized. Vehicle rental and rental-related revenues are recognized evenly over the period of rental. Licensing revenues principally consist of royalties paid by the Company’s licensees and are recorded as the licensees’ revenues are earned (over the rental period). The Company renews license agreements in the normal course of business and occasionally terminates, purchases or sells license agreements. In connection with ongoing fees that the Company receives from its licensees pursuant to license agreements, the Company is required to provide certain services, such as training, marketing and the operation of reservation systems. Revenues and expenses associated with gasoline, airport concessions and vehicle licensing are recorded on a gross basis within revenues and operating expenses. Membership fees related to the Company’s car sharing business are generally nonrefundable, are deferred and recognized ratably over the period of membership.

Contract Liabilities

The Company records deferred revenues when cash payments are received in advance of satisfying its performance obligations, including amounts that are refundable. In addition, certain customers earn loyalty points on rentals, for which the Company defers a portion of its rental revenues generally equivalent to the estimated retail value of points expected to be redeemed. The Company estimates points that will never be redeemed based upon actual redemption and expiration patterns. Currently loyalty points expire at the earlier of 12 months of member inactivity or five years from when they were earned. Future changes to expiration assumptions or expiration policy, or to program rules, may result in changes to deferred revenue as well as recognized revenues from the program.


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The following table presents changes in the Company’s contract liabilities during the nine months ended September 30, 2018.
 
Balance at January 1, 2018
 
Revenue deferred
 
Revenue recognized
 
Balance at September 30, 2018
Prepaid rentals(a)
$
101

 
$
1,406

 
$
1,384

 
$
123

Other deferred revenue(b)
93

 
167

 
167

 
93

Total deferred revenue
$
194

 
$
1,573

 
$
1,551

 
$
216

________
(a) 
At September 30, 2018, included in accounts payable and other current liabilities.
(b) 
At September 30, 2018, $38 million included in accounts payable and other current liabilities and $55 million in other non-current liabilities. Non-current amounts are expected to be recognized as revenue within two to three years.

3.
Restructuring and Other Related Charges

Restructuring

During first quarter 2018, the Company initiated a strategic restructuring plan to improve processes and reduce headcount in response to its new workforce planning technology that allows more effective management of staff levels (“Workforce planning”). During the nine months ended September 30, 2018, as part of this process, the Company formally communicated the termination of employment to 119 employees, and as of September 30, 2018, the Company had terminated the employment of 115 of these employees. The costs associated with this initiative primarily represent severance, outplacement services and other costs associated with employee terminations, the majority of which have been or are expected to be settled in cash. The Company expects further restructuring expense of approximately $5 million related to this initiative to be incurred in 2018.

During fourth quarter 2017, the Company initiated a strategic restructuring initiative to better position its truck rental operations in the U.S., in which it closed certain rental locations and reduced the size of the older rental fleet, with the intent to increase fleet utilization and reduce vehicle and overhead costs (“Truck initiative”). The Company expects no further restructuring expense related to this initiative.

During first quarter 2017, the Company initiated a strategic restructuring initiative to drive operational efficiency throughout the organization by reducing headcount, improving processes and consolidating functions, closing certain rental locations and decreasing the size of its fleet (“T17”). As of September 30, 2018, the Company had terminated the employment of 673 employees related to this initiative. The costs associated with this initiative primarily represent severance, outplacement services and other costs associated with employee terminations, the majority of which have been or are expected to be settled in cash. This initiative is substantially complete.


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The following tables summarize the changes to our restructuring-related liabilities and identify the amounts recorded within the Company’s reporting segments for restructuring charges and corresponding payments and utilizations:
 
 
Americas
 
International
 
Total
Balance as of January 1, 2018
$
1

 
$
3

 
$
4

 
Restructuring charge:
 
 
 
 
 
 
Workforce planning
2

 
7

 
9

 
Truck initiative
2

 

 
2

 
T17
2

 

 
2

 
Restructuring payment/utilization:
 
 
 
 
 
 
Workforce planning
(2
)
 
(6
)
 
(8
)
 
Truck initiative
(2
)
 

 
(2
)
 
T17
(2
)
 
(2
)
 
(4
)
Balance as of September 30, 2018
$
1

 
$
2

 
$
3

 
 
 
 
 
 
 
 
 
Personnel
Related
 
Other (a)
 
Total
Balance as of January 1, 2018
$
4

 
$

 
$
4

 
Restructuring charge:
 
 
 
 
 
 
Workforce planning
8

 
1

 
9

 
Truck initiative

 
2

 
2

 
T17

 
2

 
2

 
Restructuring payment/utilization:
 
 
 
 
 
 
Workforce planning
(8
)
 

 
(8
)
 
Truck initiative

 
(2
)
 
(2
)
 
T17
(2
)
 
(2
)
 
(4
)
Balance as of September 30, 2018
$
2

 
$
1

 
$
3

__________
(a) 
Includes expenses primarily related to the disposition of vehicles.

Other Related Charges

Officer Separation Costs

On May 12, 2017, the Company announced the resignation of David B. Wyshner as the Company’s President and Chief Financial Officer. In connection with Mr. Wyshner’s departure, the Company recorded other related charges of $7 million during the nine months ended September 30, 2017, inclusive of accelerated stock-based compensation expense of $2 million.

Limited Voluntary Opportunity Plans (“LVOP”)

During 2017, the Company offered voluntary termination programs to certain employees in the Americas’ field operations, shared services, and general and administrative functions for a limited time. These employees, if qualified, elected resignation from employment in return for enhanced severance benefits to be settled in cash. During the nine months ended September 30, 2017, the Company recorded other related charges of $14 million. As of September 30, 2018, 358 qualified employees elected to participate in the plan and the employment of all participants had been terminated.


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4.
Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (“EPS”) (shares in millions): 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2018
 
2017
 
2018
 
2017
Net income for basic and diluted EPS
$
213

 
$
245

 
$
152

 
$
141

 
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
78.8

 
82.6

 
80.1

 
84.1

Options and non-vested stock (a)
0.7

 
1.4

 
0.9

 
1.4

Diluted weighted average shares outstanding
79.5

 
84.0

 
81.0

 
85.5

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
Basic
$
2.71

 
$
2.96

 
$
1.90

 
$
1.68

 
Diluted
$
2.68

 
$
2.91

 
$
1.88

 
$
1.65

__________
(a) 
For the three months ended September 30, 2018 and 2017, 0.5 million and 0.7 million non-vested stock awards, respectively, have an anti-dilutive effect and therefore are excluded from the computation of diluted weighted average shares outstanding. For the nine months ended September 30, 2018 and 2017, 0.2 million and 0.8 million non-vested stock awards, respectively, have an anti-dilutive effect and therefore are excluded from the computation of diluted weighted average shares outstanding.

5.
Acquisitions and Other Investments

Acquisitions

2018

Avis and Budget Licensees

In 2018, the Company completed the acquisitions of various licensees in Europe and North America, for
approximately $31 million, net of cash. These investments were in line with the Company’s strategy to re-acquire licensees when advantageous to expand its footprint of Company-operated locations. The acquired fleet was financed under the Company’s existing financing arrangements. In connection with these acquisitions, approximately $36 million was recorded in license agreements. The license agreements are being amortized over a weighted average useful life of approximately two years. The fair value of the assets acquired and liabilities assumed has not yet been finalized and is therefore subject to change.

Morini S.p.A.

In July 2018, the Company completed the acquisition of Morini S.p.A. (”Morini”) for €35 million (approximately $40 million), net of acquired cash, plus potential earn-out payments of €5 million (approximately $6 million) based on Morini’s performance over the next two years. During the three months ended September 30, 2018, the Company paid €28 million (approximately $32 million). The remainder of the purchase price will be paid during the three months ended March 31, 2020. The investment enabled the Company to expand its footprint of vehicle rental services in Northern Italy. The excess of the purchase price over preliminary fair value of net assets acquired was allocated to goodwill, which was assigned to the Company’s International reportable segment. In connection with this acquisition, approximately $21 million was recorded in goodwill, $19 million was recorded in license agreements, $3 million was recorded in customer relationships and $3 million related to trademarks was recorded in other intangibles. The license agreements, customer relationships and trademarks are being amortized over a weighted average useful life of approximately 14 years. The goodwill is not deductible for tax purposes. The fair value of assets acquired and liabilities assumed has not been finalized and is therefore subject to change.

Other Investments

In March 2018, the Company made an initial equity investment of €15 million ($19 million) in its licensee in Greece (“Greece”), for a 20% ownership stake. In connection with this investment, the Company entered into an agreement to purchase an additional 20% equity interest, 10% in March 2019 and 10% in March 2020, for

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€15 million. In June 2018, the Company completed its purchase of the additional 20% equity investment for €16 million ($18 million), including an acceleration premium, and as of June 30, 2018, had a 40% ownership stake in Greece. The Company’s equity investment is recorded within other non-current assets. The Company’s share of Greece’s results are reported within operating expenses and are $7 million for both the three and nine months ended September 30, 2018.

6.
Other Current Assets

Other current assets consisted of:
 
As of September 30, 2018
 
As of
December 31,
2017
Sales and use taxes
$
257

 
$
174

Prepaid expenses
230

 
196

Other
170

 
163

Other current assets
$
657

 
$
533


7.
Intangible Assets

Intangible assets consisted of:
 
As of September 30, 2018
 
As of December 31, 2017
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Amortized Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
License agreements (a)
$
319

 
$
160

 
$
159

 
$
281

 
$
140

 
$
141

Customer relationships
240

 
136

 
104

 
242

 
119

 
123

Other
51

 
20

 
31

 
51

 
18

 
33

Total
$
610

 
$
316

 
$
294

 
$
574

 
$
277

 
$
297

 
 
 
 
 
 
 
 
 
 
 
 
Unamortized Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
Goodwill (b)
$
1,064

 
 
 
 
 
$
1,073

 
 
 
 
Trademarks
$
550

 
 
 
 
 
$
553

 
 
 
 
_________
(a) 
The change in the carrying amount since December 31, 2017, primarily reflects the acquisitions of Avis and Budget Licensees and Morini (see Note 5 - Acquisitions and Other Investments).
(b) 
The change in the carrying amount since December 31, 2017, primarily reflects currency translation, partially offset by acquisitions (see Note 5 - Acquisitions and Other Investments).

For the three months ended September 30, 2018 and 2017, amortization expense related to amortizable intangible assets was approximately $15 million and $17 million, respectively. For the nine months ended September 30, 2018 and 2017, amortization expense related to amortizable intangible assets was approximately $48 million, in each period. Based on the Company’s amortizable intangible assets at September 30, 2018, the Company expects amortization expense of approximately $17 million for the remainder of 2018, $52 million for 2019, $45 million for 2020, $32 million for 2021, $26 million for 2022 and $23 million for 2023, excluding effects of currency exchange rates.

8.
Vehicle Rental Activities

The components of vehicles, net within assets under vehicle programs were as follows: 
 
As of
 
As of
 
September 30,
 
December 31,
 
2018
 
2017
Rental vehicles
$
13,418

 
$
11,652

Less: Accumulated depreciation
(1,701
)
 
(1,652
)
 
11,717

 
10,000

Vehicles held for sale
446

 
626

Vehicles, net
$
12,163

 
$
10,626


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The components of vehicle depreciation and lease charges, net are summarized below: 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Depreciation expense
$
540

 
$
547

 
$
1,536

 
$
1,500

Lease charges
72

 
67

 
192

 
164

(Gain) loss on sale of vehicles, net
(25
)
 
2

 
(35
)
 
53

Vehicle depreciation and lease charges, net
$
587

 
$
616

 
$
1,693

 
$
1,717


At September 30, 2018 and 2017, the Company had payables related to vehicle purchases included in liabilities under vehicle programs - other of $269 million and $231 million, respectively, and receivables related to vehicle sales included in assets under vehicle programs - receivables from vehicle manufacturers and other of $757 million and $707 million, respectively.

9.
Income Taxes

The Company’s effective tax rate for the nine months ended September 30, 2018 is a provision of 42.4%. Such rate differed from the Federal statutory rate of 21.0% primarily due to an adjustment of the one-time transition tax on the deemed repatriation of cumulative foreign subsidiary earnings initially recorded during the three months ended December 31, 2017 and taxes on the Company’s international operations.

The Company’s effective tax rate for the nine months ended September 30, 2017 was a provision of 32.9%. Such rate differed from the Federal statutory rate of 35.0% primarily due to foreign taxes as a result of the mix of the Company’s earnings between the U.S. and foreign jurisdictions.

In December 2017, the Tax Act made substantial changes to corporate income tax laws. The Company is recognizing the effects of the Tax Act in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of FASB Accounting Standards Codification Topic 740, Income Taxes, in the reporting period that the Tax Act was signed into law.

During the three months ended December 31, 2017 the Company had recorded a provisional income tax benefit of $317 million related to the remeasurement of its net deferred income tax liabilities as a result of the reduced corporate tax rate and a provisional tax expense of $104 million for the one-time transition tax on the deemed repatriation of cumulative foreign subsidiary earnings. During the three months ended September 30, 2018, the Company revised the provisional expense of $104 million and recorded an additional tax expense of $30 million resulting from revised estimated calculations of historical earnings of foreign subsidiaries.

During the fourth quarter of 2018, the Company will finalize the accounting for the effects of the Tax Act. Additional information needed to finalize the provisional tax benefit on the remeasurement of net deferred income tax liabilities include calculations and analysis of the repeal of the like-kind exchange provisions and calculations of effective corporate state income tax rates based on the filing of the Company’s 2017 U.S. corporate income tax returns during the fourth quarter of 2018. The provisional tax expense for the one-time transition tax on cumulative foreign earnings will be finalized based on the analysis of state tax laws and guidance on the transition tax.

In addition, the Company continues to evaluate whether or not to continue to assert indefinite reinvestment on a part or all of its undistributed foreign earnings. This requires the Company to analyze its global working capital and cash requirements in light of the Tax Act and the potential tax liabilities attributable to a repatriation to the U.S., such as foreign withholding taxes and U.S. tax on currency transaction gains or losses. The Company did not record any deferred taxes attributable to its investments in its foreign subsidiaries. The Company will record the tax effects of any change in its assertion during the fourth quarter of 2018.


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10.
Accounts Payable and Other Current Liabilities

Accounts payable and other current liabilities consisted of: 
 
As of

As of
 
September 30,

December 31,
 
2018

2017
Accounts payable
$
396

 
$
359

Accrued sales and use taxes
307

 
218

Accrued advertising and marketing
223

 
190

Accrued payroll and related
188

 
176

Deferred revenue – current
161

 
135

Public liability and property damage insurance liabilities – current
144

 
145

Accrued insurance
117

 
103

Other
349

 
293

Accounts payable and other current liabilities
$
1,885

 
$
1,619


11.
Long-term Corporate Debt and Borrowing Arrangements

Long-term corporate debt and borrowing arrangements consisted of:
 
 
 
As of
 
As of
 
Maturity
Dates
 
September 30,
 
December 31,
 
 
2018
 
2017
Floating Rate Term Loan
March 2022
 
$

 
$
1,136

5⅛% Senior Notes
June 2022
 
400

 
400

5½% Senior Notes
April 2023
 
675

 
675

6⅜% Senior Notes
April 2024
 
350

 
350

4⅛% euro-denominated Senior Notes
November 2024
 
348

 
360

Floating Rate Term Loan (a)
February 2025
 
1,126

 

5¼% Senior Notes
March 2025
 
375

 
375

4½% euro-denominated Senior Notes
May 2025
 
290

 
300

Other (b)
 
 
40

 
49

Deferred financing fees
 
 
(43
)
 
(46
)
Total
 
 
3,561

 
3,599

Less: Short-term debt and current portion of long-term debt
 
 
23

 
26

Long-term debt
 
 
$
3,538

 
$
3,573

__________
(a) 
The floating rate term loan is part of the Company’s senior credit facility, which is secured by pledges of capital stock of certain subsidiaries of the Company, and liens on substantially all of the Company’s intellectual property and certain other real and personal property. As of September 30, 2018, the floating rate term loan due 2025 bears interest at one-month LIBOR plus 200 basis points, for an aggregate rate of 4.25%. The Company has entered into a swap to hedge $700 million of its interest rate exposure related to the floating rate term loan at an aggregate rate of 3.67%.
(b) 
Primarily includes capital leases which are secured by liens on the related assets.

In February 2018, the Company amended the terms of its Floating Rate Term Loan due 2022 and extended its maturity term to 2025.

Committed Credit Facilities and Available Funding Arrangements

At September 30, 2018, the committed corporate credit facilities available to the Company and/or its subsidiaries were as follows: 
 
Total
Capacity
 
Outstanding
Borrowings
 
Letters of Credit Issued
 
Available
Capacity
Senior revolving credit facility maturing 2023 (a) 
$
1,800

 
$

 
$
1,084

 
$
716

Other facilities (b)
1

 
1

 

 

__________
(a) 
The senior revolving credit facility bears interest at one-month LIBOR plus 200 basis points and is part of the Company’s senior credit facility, which is secured by pledges of capital stock of certain subsidiaries of the Company, and liens on substantially all of the Company’s intellectual property and certain other real and personal property.

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(b) 
These facilities encompass bank overdraft lines of credit, bearing interest of 3.25% as of September 30, 2018.

In February 2018, the Company amended the terms of its Senior revolving credit facility maturing 2021 and extended its maturity to 2023.

At September 30, 2018, the Company had various uncommitted credit facilities available, under which it had drawn approximately $1 million, which bear interest at rates between 0.74% and 6.60%.
Debt Covenants

The agreements governing the Company’s corporate indebtedness contain restrictive covenants, including restrictions on dividends paid to the Company by certain of its subsidiaries, the incurrence of additional indebtedness by the Company and certain of its subsidiaries, acquisitions, mergers, liquidations, and sale and leaseback transactions. As of September 30, 2018, the Company was in compliance with the financial covenants governing its indebtedness.

12.
Debt Under Vehicle Programs and Borrowing Arrangements

Debt under vehicle programs, including related party debt due to Avis Budget Rental Car Funding (AESOP) LLC (“Avis Budget Rental Car Funding”), consisted of:
 
As of
 
As of
 
September 30,
 
December 31,
 
2018
 
2017
Americas - Debt due to Avis Budget Rental Car Funding (a)
$
7,154

 
$
6,516

Americas - Debt borrowings (a)
855

 
660

International - Debt borrowings (a)
2,753

 
1,942

International - Capital leases
201

 
146

Other
7

 
1

Deferred financing fees (b)
(48
)
 
(44
)
Total
$
10,922

 
$
9,221

__________
(a) 
The increase reflects additional borrowings principally to fund increases in the Company’s car rental fleet.
(b) 
Deferred financing fees related to Debt due to Avis Budget Rental Car Funding as of September 30, 2018 and December 31, 2017 were $33 million and $36 million, respectively.

In April 2018, the Company’s Avis Budget Rental Car Funding subsidiary issued approximately $400 million in asset-backed notes with an expected final payment date of September 2023. The weighted average interest rate was approximately 4%. The Company used the proceeds from these borrowings to fund the repayment of maturing vehicle-backed debt and the acquisition of rental cars in the United States.

In June 2018, the Company increased its capacity under the European rental fleet securitization program by €150 million (approximately $175 million) to €1.8 billion (approximately $2.1 billion) and extended its maturity to 2021. The Company used the proceeds to finance fleet purchases for certain of the Company’s European operations.


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Debt Maturities

The following table provides the contractual maturities of the Company’s debt under vehicle programs, including related party debt due to Avis Budget Rental Car Funding, at September 30, 2018.
 
Debt under Vehicle Programs
Within 1 year
$
1,590

Between 1 and 2 years
2,759

Between 2 and 3 years
4,487

Between 3 and 4 years
823

Between 4 and 5 years
1,067

Thereafter
244

Total
$
10,970


Committed Credit Facilities and Available Funding Arrangements

As of September 30, 2018, 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 (b)
 
Available
Capacity
Americas - Debt due to Avis Budget Rental Car Funding
$
8,629

 
$
7,154

 
$
1,475

Americas - Debt borrowings
978

 
855

 
123

International - Debt borrowings
3,072

 
2,753

 
319

International - Capital leases
223

 
201

 
22

Other
7

 
7

 

Total
$
12,909

 
$
10,970

 
$
1,939

__________
(a) 
Capacity is subject to maintaining sufficient assets to collateralize debt.
(b) 
The outstanding debt is collateralized by vehicles and related assets of $8.7 billion for Americas - Debt due to Avis Budget Rental Car Funding; $1.2 billion for Americas - Debt borrowings; $3.0 billion for International - Debt borrowings; and $0.2 billion for International - Capital leases.

Debt Covenants

The agreements under the Company’s vehicle-backed funding programs contain restrictive covenants, including restrictions on dividends paid to the Company by certain of its subsidiaries and restrictions on indebtedness, mergers, liens, liquidations, and sale and leaseback transactions and in some cases also require compliance with certain financial requirements. As of September 30, 2018, the Company is not aware of any instances of non-compliance with any of the financial covenants contained in the debt agreements under its vehicle-backed funding programs.

13.
Commitments and Contingencies

Contingencies

In 2006, the Company completed the spin-offs of its Realogy and Wyndham subsidiaries. The Company does not believe that the impact of any resolution of pre-existing contingent liabilities in connection with the spin-offs should result in a material liability to the Company in relation to its consolidated financial position or liquidity, as Realogy and Wyndham each have agreed to assume responsibility for these liabilities. The Company is also named in litigation that is primarily related to the businesses of its former subsidiaries, including Realogy and Wyndham. The Company is entitled to indemnification from such entities for any liability resulting from such litigation.

In February 2017, following a state court trial in Georgia, a jury found the Company liable for damages in a case brought by a plaintiff who was injured in a vehicle accident allegedly caused by an employee of an independent contractor of the Company who was acting outside of the scope of employment. In March

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2017, the Company was also found liable for damages in a companion case arising from the same incident. The Company considers the attribution of liability to the Company, and the amount of damages awarded, to be unsupported by the facts of these cases and intends to appeal the verdicts. The Company has recognized a liability for the expected loss related to these cases, net of recoverable insurance proceeds, of approximately $12 million.

The Company is involved in claims, legal proceedings and governmental inquiries that are incidental to its vehicle rental and car sharing operations, including, among others, contract and licensee disputes, competition matters, employment and wage-and-hour claims, insurance and liability claims, intellectual property claims, business practice disputes and other regulatory, environmental, commercial and tax matters. Litigation is inherently unpredictable and, although the Company believes that its accruals are adequate and/or that it has valid defenses in these matters, unfavorable resolutions could occur. The Company estimates that the potential exposure resulting from adverse outcomes of legal proceedings in which it is reasonably possible that a loss may be incurred could, in the aggregate, be up to approximately $50 million in excess of amounts accrued as of September 30, 2018. The Company does not believe that the impact should result in a material liability to the Company in relation to its consolidated financial condition or results of operations.

Commitments to Purchase Vehicles

The Company maintains agreements with vehicle manufacturers under which the Company has agreed to purchase approximately $5.0 billion of vehicles from manufacturers over the next 12 months financed primarily through the issuance of vehicle-backed debt and cash received upon the disposition of vehicles. Certain of these commitments are subject to the vehicle manufacturers’ satisfying their obligations under their respective repurchase and guaranteed depreciation agreements.

Concentrations

Concentrations of credit risk at September 30, 2018 include (i) risks related to the Company’s repurchase and guaranteed depreciation agreements with domestic and foreign car manufacturers, primarily with respect to receivables for program cars that have been disposed but for which the Company has not yet received payment from the manufacturers and (ii) risks related to Realogy and Wyndham, including receivables of $23 million and $14 million, respectively, related to certain contingent, income tax and other corporate liabilities assumed by Realogy and Wyndham in connection with their disposition.

14.
Stockholders’ Equity

Stockholder Rights Plan

In January 2018, the Company’s Board of Directors authorized the adoption of a short-term stockholder rights plan. Effective April 16, 2018 the Company terminated the rights plan. Pursuant to the rights plan, the Company declared a dividend of one preferred share purchase right for each outstanding share of common stock, payable to holders of record as of the close of business on January 26, 2018. Each right, which was exercisable only in the event any person or group were to acquire beneficial ownership of 15% or more of the Company’s outstanding common stock (with certain limited exceptions), would have entitled any holder other than the person or group whose ownership position had exceeded the ownership limit to purchase common stock having a value equal to twice the $100 exercise price of the right, or, at the election of the Board of Directors, to exchange each right for one share of common stock (subject to adjustment). On April 16, 2018, the Company also entered into a new cooperation agreement with SRS Investment Management LLC and certain of its affiliates.

Share Repurchases

The Company’s Board of Directors has authorized the repurchase of up to $1.7 billion of its common stock under a plan originally approved in 2013 and subsequently expanded, most recently in August 2018. During the nine months ended September 30, 2018, the Company repurchased approximately 3.5 million shares of common stock at a cost of approximately $129 million under the program. During the nine months ended September 30, 2017, the Company repurchased approximately 4.2 million shares of common stock at a cost

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of approximately $127 million under the program. As of September 30, 2018, approximately $222 million of authorization remains available to repurchase common stock under this plan.

Total Comprehensive Income (Loss)

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

The components of other comprehensive income (loss) were as follows: 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2018
 
2017
 
2018
 
2017
Net income
$
213

 
$
245

 
$
152

 
$
141

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Currency translation adjustments (net of tax of $(1), $9, $(6) and $29, respectively)
(8
)
 
32

 
(61
)
 
105

 
Net unrealized gain (loss) on available-for-sale securities (net of tax of $0, $(1), $0, $(1), respectively)

 

 

 
1

 
Net unrealized gain (loss) on cash flow hedges (net of tax of $0, $(1), $(3) and $0, respectively)

 
1

 
8

 

 
Minimum pension liability adjustment (net of tax of $0, $(1), $(1) and $(2), respectively)
2

 
1

 
5

 
4

 
 
(6
)
 
34

 
(48
)
 
110

Comprehensive income
$
207

 
$
279

 
$
104

 
$
251

__________
Currency translation adjustments exclude income taxes related to indefinite investments in foreign subsidiaries (See Note 9 - Income Taxes).

Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) were as follows: 
 
 
Currency
Translation
Adjustments
 
Net Unrealized
Gains (Losses)
on Cash Flow
Hedges(a)
 
Net Unrealized Gains (Losses) on Available-for Sale Securities
 
Minimum
Pension
Liability
Adjustment(b)
 
Accumulated
Other
Comprehensive
Income (Loss)
Balance, December 31, 2017
$
71

 
$
5

 
$
2

 
$
(102
)
 
$
(24
)
 
Cumulative effect of accounting change (c)
7

 
1

 
(2
)
 
(12
)
 
(6
)
Balance, January 1, 2018
$
78

 
$
6

 
$

 
$
(114
)
 
$
(30
)
 
Other comprehensive income (loss) before reclassifications
(61
)
 
9

 

 
1

 
(51
)
 
Amounts reclassified from accumulated other comprehensive income (loss)

 
(1
)
 

 
4

 
3

Net current-period other comprehensive income (loss)
(61
)
 
8

 

 
5

 
(48
)
Balance, September 30, 2018
$
17

 
$
14

 
$

 
$
(109
)
 
$
(78
)
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2017
$
(39
)
 
$
2

 
$
1

 
$
(118
)
 
$
(154
)
 
Other comprehensive income (loss) before reclassifications
105

 
(2
)
 
1

 

 
104

 
Amounts reclassified from accumulated other comprehensive income (loss)

 
2

 

 
4

 
6

Net current-period other comprehensive income (loss)
105

 

 
1

 
4

 
110

Balance, September 30, 2017
$
66

 
$
2

 
$
2

 
$
(114
)
 
$
(44
)
__________
All components of accumulated other comprehensive income (loss) are net of tax, except currency translation adjustments, which exclude income taxes related to indefinite investments in foreign subsidiaries and include a $56 million gain, net of tax, as of

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September 30, 2018 related to the Company’s hedge of its net investment in euro-denominated foreign operations (see Note 16 - Financial Instruments).
(a) 
For the three and nine months ended September 30, 2018, the amounts reclassified from accumulated other comprehensive income (loss) into corporate interest expense were $2 million ($1 million, net of tax), in each period. For the three and nine months ended September 30, 2017, the amounts reclassified from accumulated other comprehensive income (loss) into corporate interest expense were $1 million ($1 million, net of tax) and $3 million ($2 million, net of tax), respectively.
(b) 
For the three and nine months ended September 30, 2018, amounts reclassified from accumulated other comprehensive income
(loss) into selling, general and administrative expenses were $2 million ($2 million, net of tax) and $6 million ($4 million, net of tax), respectively. For the three and nine months ended September 30, 2017, amounts reclassified from accumulated other comprehensive income (loss) into selling, general and administrative expenses were $2 million ($1 million, net of tax) and $6 million ($4 million, net of tax), respectively.
(c) 
See Note 1 - Basis of Presentation for the impact of adoption of ASU 2016-01 and ASU 2018-02.

15.
Stock-Based Compensation

The Company recorded stock-based compensation expense of $7 million and $1 million ($5 million and $1 million, net of tax) during the three months ended September 30, 2018 and 2017, respectively, and $18 million and $6 million ($14 million and $4 million, net of tax) during the nine months ended September 30, 2018 and 2017, respectively.

The activity related to restricted stock units (“RSUs”) consisted of (in thousands of shares):
 
 
 
Number of Shares
 
Weighted
Average
Grant Date
Fair Value
 
Weighted Average Remaining Contractual Term (years)
 
Aggregate Intrinsic Value (in millions)
Time-based RSUs
 
 
 
 
 
 
 
 
Outstanding at January 1, 2018
1,160

 
$
34.54

 
 
 
 
 
 
Granted (a)
321

 
48.41

 
 
 
 
 
 
Vested (b)
(559
)
 
36.01

 
 
 
 
 
 
Forfeited
(75
)
 
35.97

 
 
 
 
 
Outstanding and expected to vest at September 30, 2018 (c)
847

 
$
38.70

 
1.0
 
$
27

Performance-based and market-based RSUs
 
 
 
 
 
 
 
 
Outstanding at January 1, 2018
994

 
$
33.06

 
 
 
 
 
 
Granted (a)
353

 
48.52

 
 
 
 
 
 
Vested

 

 
 
 
 
 
 
Forfeited
(176
)
 
50.06

 
 
 
 
 
Outstanding at September 30, 2018
1,171

 
$
35.17

 
1.3
 
$
38

 
Outstanding and expected to vest at September 30, 2018 (c)
267

 
$
44.25

 
2.1
 
$
9

__________
(a) 
Reflects the maximum number of stock units assuming achievement of all performance-, market- and time-vesting criteria and does not include those for non-employee directors. The weighted-average fair value of time-based RSUs and performance-based RSUs granted during the nine months ended September 30, 2017 was $35.32 and $35.21, respectively.
(b) 
The total fair value of RSUs vested during September 30, 2018 and 2017 was $20 million and $23 million, respectively.
(c) 
Aggregate unrecognized compensation expense related to time-based RSUs and performance-based RSUs amounted to $35 million and will be recognized over a weighted average vesting period of 1.3 years.

The stock option activity consisted of (in thousands of shares):
 
 
Number of Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining Contractual Term (years)
 
Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2018
273

 
$
7.08

 
1.7
 
$
10

 
Granted

 

 
 
 

 
Exercised
(194
)
 
9.64

 
 
 
8

 
Forfeited/expired

 

 
 
 

Outstanding and exercisable at September 30, 2018
79

 
$
0.79

 
0.3
 
$
2



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Table of Contents

16.
Financial Instruments

Derivative Instruments and Hedging Activities
Currency Risk. The Company uses currency exchange contracts to manage its exposure to changes in currency exchange rates associated with certain of its non-U.S.-dollar denominated receivables and forecasted royalties, forecasted earnings of non-U.S. subsidiaries and forecasted non-U.S.-dollar denominated acquisitions. The Company primarily hedges a portion of its current-year currency exposure to the Australian, Canadian and New Zealand dollars, the euro and the British pound sterling. The majority of forward contracts do not qualify for hedge accounting treatment. The fluctuations in the value of these forward contracts do, however, largely offset the impact of changes in the value of the underlying risk they economically hedge. Forward contracts used to hedge forecasted third-party receipts and disbursements up to 12 months are designated and do qualify as cash flow hedges. The Company has designated its euro-denominated notes as a hedge of its investment in euro-denominated foreign operations.
The amount of gains or losses reclassified from other comprehensive income (loss) to earnings resulting from ineffectiveness or from excluding a component of the hedges’ gain or loss from the effectiveness calculation for cash flow and net investment hedges during the three and nine months ended September 30, 2018 and 2017 was not material, nor is the amount of gains or losses the Company expects to reclassify from accumulated other comprehensive income (loss) to earnings over the next 12 months.

Interest Rate Risk. The Company uses various hedging strategies including interest rate swaps and interest rate caps to create what it deems an appropriate mix of fixed and floating rate assets and liabilities. The Company uses interest rate swaps and interest rate caps to manage the risk related to its floating rate corporate debt and its floating rate vehicle-backed debt. The Company records the effective portion of changes in the fair value of its cash flow hedges to other comprehensive income (loss), net of tax, and subsequently reclassifies these amounts into earnings in the period during which the hedged transaction is recognized. The Company records the gains or losses related to freestanding derivatives, which are not designated as a hedge for accounting purposes, in its Consolidated Condensed Statements of Comprehensive Income. The changes in fair values of hedges that are determined to be ineffective are immediately reclassified from accumulated other comprehensive income (loss) into earnings. The amount of gains or losses reclassified from other comprehensive income (loss) to earnings resulting from ineffectiveness related to the Company’s cash flow hedges was not material during the three and nine months ended September 30, 2018 and 2017. The Company estimates that $7 million of gains currently recorded in accumulated other comprehensive income (loss) will be recognized in earnings over the next 12 months.

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

The Company held derivative instruments with absolute notional values as follows:
 
As of September 30, 2018
Interest rate caps (a)
$
8,482

Interest rate swaps
1,500

Foreign exchange contracts
1,103

 
 
Commodity contracts (millions of gallons of unleaded gasoline)
4

__________
(a) 
Represents $5.7 billion of interest rate caps sold, partially offset by approximately $2.7 billion of interest rate caps purchased. These amounts exclude $3.0 billion of interest rate caps purchased by the Company’s Avis Budget Rental Car Funding subsidiary as it is not consolidated by the Company.


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Table of Contents

Estimated fair values (Level 2) of derivative instruments were as follows: 
 
 
As of September 30, 2018
 
As of December 31, 2017
 
 
Fair Value,
Asset
Derivatives
 
Fair Value,
Liability
Derivatives
 
Fair Value,
Asset
Derivatives
 
Fair Value,
Liability
Derivatives
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
Interest rate swaps (a)
$
20

 
$

 
$
8

 
$

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

 
7

 

 
1

 
Foreign exchange contracts (c)
5

 
7

 
3

 
7

 
Total
$
26

 
$
14

 
$
11

 
$
8

__________
Amounts in this table exclude derivatives issued by Avis Budget Rental Car Funding; however, certain amounts related to the derivatives held by Avis Budget Rental Car Funding are included within accumulated other comprehensive income (loss).
(a) 
Included in other non-current assets or other non-current liabilities.
(b) 
Included in assets under vehicle programs or liabilities under vehicle programs.
(c) 
Included in other current assets or other current liabilities.

The effects of derivatives recognized in the Company’s Consolidated Condensed Financial Statements were as follows:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2018

2017
 
2018
 
2017
Derivatives designated as hedging instruments (a)
 
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
1

 
$
8

 
$

 
Euro-denominated notes
3

 
(13
)
 
16

 
(44
)
Derivatives not designated as hedging instruments (b)
 
 
 
 
 
 
 
 
Interest rate caps (c)
(3
)
 
(1
)
 
(4
)
 
(1
)
 
Foreign exchange contracts (d)
6

 
(11
)
 
25

 
(44
)
 
Commodity contracts (e)

 
1

 
1

 
(1
)
 
Total
$
6

 
$
(23
)
 
$
46

 
$
(90
)
__________
(a) 
Recognized, net of tax, as a component of other comprehensive income (loss) within stockholders’ equity.
(b) 
Gains (losses) related to derivative instruments are expected to be largely offset by (losses) gains on the underlying exposures being hedged.
(c) 
Included primarily in vehicle interest, net.
(d) 
For the three months ended September 30, 2018, included a $5 million gain in interest expense and a $1 million gain in operating expense and for the nine months ended September 30, 2018, included a $12 million gain in interest expense and a $13 million gain in operating expense. For the three months ended September 30, 2017, included a $7 million loss in interest expense and a $4 million loss in operating expense and for the nine months ended September 30, 2017, included a $25 million loss in interest expense and a $19 million loss in operating expense.
(e) 
Included in operating expense.


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Debt Instruments

The carrying amounts and estimated fair values (Level 2) of debt instruments were as follows: 
 
 
As of September 30, 2018
 
As of December 31, 2017
 
 
Carrying
Amount
 
Estimated
Fair
Value
 
Carrying
Amount
 
Estimated
Fair
Value
Corporate debt
 
 
 
 
 
 
 
 
Short-term debt and current portion of long-term debt
$
23

 
$
23

 
$
26

 
$
26

 
Long-term debt
3,538

 
3,590

 
3,573

 
3,677

 
 
 
 
 
 
 
 
 
Debt under vehicle programs
 
 
 
 
 
 
 
 
Vehicle-backed debt due to Avis Budget Rental Car Funding
$
7,122

 
$
7,110

 
$
6,480

 
$
6,537

 
Vehicle-backed debt
3,793

 
3,804

 
2,740

 
2,745

 
Interest rate swaps and interest rate caps (a)
7

 
7

 
1

 
1

__________
(a) 
Derivatives in a liability position.

17.
Segment Information

The Company’s chief operating decision-maker assesses performance and allocates resources based upon the separate financial information from each of the Company’s operating segments. In identifying its reportable segments, the Company considered the nature of services provided, the geographical areas in which the segments operated and other relevant factors. The Company aggregates certain of its operating segments into its reportable segments.

Management evaluates the operating results of each of its reportable segments based upon revenues and “Adjusted EBITDA,” which the Company defines as income from continuing operations before non-vehicle related depreciation and amortization, any impairment charges, restructuring and other related charges, early extinguishment of debt costs, non-vehicle related interest, transaction-related costs, net charges for unprecedented personal-injury legal matters, non-operational charges related to shareholder activist activity and income taxes. Net charges for unprecedented personal-injury legal matters are recorded within operating expenses in the Company’s Consolidated Condensed Statement of Comprehensive Income. The Company has revised its definition of Adjusted EBITDA to exclude non-operational charges related to shareholder activist activity. Non-operational charges related to shareholder activist activity include third party advisory, legal and other professional service fees and are recorded within selling, general and administrative expenses in the Company’s Consolidated Condensed Statement of Comprehensive Income. The Company did not revise prior years’ Adjusted EBITDA amounts because there were no costs similar in nature to these costs. The Company’s presentation of Adjusted EBITDA may not be comparable to similarly-titled measures used by other companies.

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Three Months Ended September 30,
 
 
 
 
2018
 
2017
 
 
 
 
Revenues

Adjusted EBITDA

Revenues

Adjusted EBITDA
Americas
$
1,844

 
$
313

 
$
1,839

 
$
303

International
934

 
178

 
913

 
194

Corporate and Other (a)

 
(15
)
 

 
(15
)
 
Total Company
$
2,778

 
$
476

 
$
2,752

 
$
482

 
 
 
 
 
 
 
 
 
 
 
Reconciliation of Adjusted EBITDA to income before income taxes
 
 
 
 
 
 
 
2018
 
 
 
2017
Adjusted EBITDA
 
 
$
476

 
 
 
$
482

Less:
Non-vehicle related depreciation and amortization
 
62

 
 
 
66

 
 
Interest expense related to corporate debt, net
 
44

 
 
 
45

 
 
Transaction-related costs, net
 
 
11

 
 
 

 
 
Restructuring and other related charges
 
4

 
 
 
7

Income before income taxes
 
 
$
355

 
 
 
$
364

__________
(a) 
Includes unallocated corporate overhead which is not attributable to a particular segment.
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
2018
 
2017
 
 
 
 
Revenues
 
Adjusted EBITDA
 
Revenues
 
Adjusted EBITDA
Americas
$
4,782

 
$
435

 
$
4,718

 
$
379

International
2,292

 
252

 
2,111

 
260

Corporate and Other (a)

 
(48
)
 

 
(44
)
 
Total Company
$
7,074

 
$
639

 
$
6,829

 
$
595

 
 
 
 
 
 
 
 
 
 
 
Reconciliation of Adjusted EBITDA to income before income taxes
 
 
 
 
 
 
 
2018
 
 
 
2017
Adjusted EBITDA
 
 
$
639

 
 
 
$
595

Less:
Non-vehicle related depreciation and amortization
 
190

 
 
 
194

 
 
Interest expense related to corporate debt, net:
 
 
 
 
 
 
 
 
Interest expense
 
139

 
 
 
142

 
 
Early extinguishment of debt
 
5

 
 
 
3

 
 
Transaction-related costs, net
 
 
18

 
 
 
8

 
 
Restructuring and other related charges
 
14

 
 
 
52

 
 
Non-operational charges related to shareholder activist activity
 
9

 
 
 

 
 
Charges for legal matter, net
 
 

 
 
 
(14
)
Income before income taxes
 
 
$
264

 
 
 
$
210

__________
(a) 
Includes unallocated corporate overhead which is not attributable to a particular segment.

Since December 31, 2017, there have been no significant changes in segment assets exclusive of assets under vehicle programs. As of September 30, 2018 and December 31, 2017, Americas assets under vehicle programs were approximately $9.9 billion and $9.0 billion, respectively, due to seasonality. As of September 30, 2018 and December 31, 2017, International assets under vehicle programs were approximately $3.7 billion and $2.9 billion, respectively, due to seasonality.

18.
Guarantor and Non-Guarantor Consolidating Condensed Financial Statements

The following consolidating financial information presents Consolidating Condensed Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017, Consolidating Condensed Balance Sheets as of September 30, 2018 and December 31, 2017, and Consolidating Condensed Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 for: (i) Avis Budget Group, Inc. (the “Parent”); (ii) ABCR and Avis Budget Finance, Inc. (the “Subsidiary Issuers”); (iii) the guarantor subsidiaries; (iv) the non-guarantor subsidiaries; (v) elimination entries

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Table of Contents

necessary to consolidate the Parent with the Subsidiary Issuers, and the guarantor and non-guarantor subsidiaries; and (vi) the Company on a consolidated basis. The Subsidiary Issuers and the guarantor and non-guarantor subsidiaries are 100% owned by the Parent, either directly or indirectly. All guarantees are full and unconditional and joint and several. This financial information is being presented in relation to the Company’s guarantee of the payment of principal, premium (if any) and interest on the notes issued by the Subsidiary Issuers. See Note 11 - Long-term Corporate Debt and Borrowing Arrangements for additional description of these guaranteed notes. The Senior Notes are guaranteed by the Parent and certain subsidiaries.

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

The following tables provide the impact of adoption of ASU 2016-18 on the Company’s Consolidating Condensed Statements of Cash Flows for the nine months ended September 30, 2017.
 
Nine Months Ended September 30, 2017
 
As Previously Reported Non-Guarantor
 
Effect of Change
 
As Adjusted Non-Guarantor
 
As Previously Reported Total
 
Effect of Change
 
As Adjusted Total
Decrease in program cash
$
53

 
$
(53
)
 
$

 
$
53

 
$
(53
)
 
$

Other, net
5

 
1

 
6

 
5

 
1

 
6

Net cash used in investing activities
(3,130
)
 
(52
)
 
(3,182
)
 
(2,924
)
 
(52
)
 
(2,976
)
 
 
 
 
 
 
 
 
 
 
 
 
Effect of changes in exchange rates on cash and cash equivalents, program and restricted cash
32

 
9

 
41

 
32

 
9

 
41

 
 
 
 
 
 
 
 
 
 
 
 
Net increase in cash and cash equivalents, program and restricted cash
319

 
(43
)
 
276

 
324

 
(43
)
 
281

Cash and cash equivalents, program and restricted cash, beginning of period
475

 
230

 
705

 
490

 
230

 
720

Cash and cash equivalents, program and restricted cash, end of period
$
794

 
$
187

 
$
981

 
$
814

 
$
187

 
$
1,001


The following table provides a reconciliation of the cash and cash equivalents, program and restricted cash reported within the Consolidating Condensed Balance Sheets to the amounts shown in the Consolidating Condensed Statements of Cash Flows.
 
As of September 30,
 
2018
 
2017
 
Non-Guarantor
 
Total
 
Non-Guarantor
 
Total
Cash and cash equivalents
$
529

 
$
605

 
$
794

 
$
814

Program cash
151

 
151

 
180

 
180

Restricted cash (a)
12

 
12

 
7

 
7

Total cash and cash equivalents, program and restricted cash
$
692

 
$
768

 
$
981

 
$
1,001

_________
(a) 
Included within other current assets.

29

Table of Contents

Consolidating Condensed Statements of Comprehensive Income

Three Months Ended September 30, 2018
 
 
 
Parent
 
Subsidiary
Issuers
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Total
Revenues
$

 
$

 
$
1,592

 
$
1,746

 
$
(560
)
 
$
2,778

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
 
 
 
 
Operating

 
3

 
737

 
554

 

 
1,294

 
Vehicle depreciation and lease charges, net

 

 
540

 
551

 
(504
)
 
587

 
Selling, general and administrative
10

 
3

 
182

 
141

 

 
336

 
Vehicle interest, net

 

 
59

 
82

 
(56
)
 
85

 
Non-vehicle related depreciation and amortization

 

 
36

 
26

 

 
62

 
Interest expense related to corporate debt, net:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense

 
37

 

 
7

 

 
44

 
 
Intercompany interest expense (income)
(3
)
 
1

 
9

 
(7
)
 

 

 
Transaction-related costs, net

 

 
2

 
9

 

 
11

 
Restructuring and other related charges

 

 
2

 
2

 

 
4

Total expenses
7

 
44

 
1,567

 
1,365

 
(560
)
 
2,423

Income (loss) before income taxes and equity in earnings of subsidiaries
(7
)
 
(44
)
 
25

 
381

 

 
355

Provision for (benefit from) income taxes
(2
)
 
(12
)
 
119

 
37

 

 
142

Equity in earnings of subsidiaries
218

 
250

 
344

 

 
(812
)
 

Net income
$
213

 
$
218

 
$
250

 
$
344

 
$
(812
)
 
$
213

 
 
 


 


 


 


 


 


Comprehensive income
$
207

 
$
212

 
$
244

 
$
338

 
$
(794
)
 
$
207


30

Table of Contents

Nine Months Ended September 30, 2018
 
 
 
Parent
 
Subsidiary
Issuers
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Total
Revenues
$

 
$

 
$
4,171

 
$
4,695

 
$
(1,792
)
 
$
7,074

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
 
 
 
 
Operating
2

 
4

 
2,035

 
1,520

 

 
3,561

 
Vehicle depreciation and lease charges, net

 

 
1,681

 
1,637

 
(1,625
)
 
1,693

 
Selling, general and administrative
38

 
9

 
513

 
393

 

 
953

 
Vehicle interest, net

 

 
172

 
232

 
(167
)
 
237

 
Non-vehicle related depreciation and amortization

 
1

 
108

 
81

 

 
190

 
Interest expense related to corporate debt, net:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense

 
115

 
2

 
22

 

 
139

 
 
Intercompany interest expense (income)
(9
)
 
(8
)
 
20

 
(3
)
 

 

 
 
Early extinguishment of debt

 
5

 

 

 

 
5

 
Transaction-related costs, net

 
1

 
3

 
14

 

 
18

 
Restructuring and other related charges

 

 
6

 
8

 

 
14

Total expenses
31

 
127

 
4,540

 
3,904

 
(1,792
)
 
6,810

Income (loss) before income taxes and equity in earnings of subsidiaries
(31
)
 
(127
)
 
(369
)
 
791

 

 
264

Provision for (benefit from) income taxes
(13
)
 
(34
)
 
114

 
45

 

 
112

Equity in earnings of subsidiaries
170

 
263

 
746

 

 
(1,179
)
 

Net income
$
152

 
$
170

 
$
263

 
$
746

 
$
(1,179
)
 
$
152

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
$
104

 
$
122

 
$
207

 
$
687

 
$
(1,016
)
 
$
104


31

Table of Contents

Three Months Ended September 30, 2017 
 
 
 
Parent
 
Subsidiary
Issuers
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Total
Revenues
$

 
$

 
$
1,569

 
$
1,794

 
$
(611
)
 
$
2,752

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
 
 
 
 
Operating

 
5

 
710

 
541

 

 
1,256

 
Vehicle depreciation and lease charges, net

 

 
568

 
605

 
(557
)
 
616

 
Selling, general and administrative
9

 
2

 
174

 
135

 

 
320

 
Vehicle interest, net

 

 
53

 
79

 
(54
)
 
78

 
Non-vehicle related depreciation and amortization

 

 
41

 
25

 

 
66

 
Interest expense related to corporate debt, net:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense

 
38

 
2

 
5

 

 
45

 
 
Intercompany interest expense (income)
(3
)
 
25

 
6

 
(28
)
 

 

 
Restructuring and other related charges

 
5

 
(2
)
 
4

 

 
7

Total expenses
6

 
75

 
1,552

 
1,366

 
(611
)
 
2,388

Income (loss) before income taxes and equity in earnings of subsidiaries
(6
)
 
(75
)
 
17

 
428

 

 
364

Provision for (benefit from) income taxes
(6
)
 
(30
)
 
87

 
68

 

 
119

Equity in earnings of subsidiaries
245

 
290

 
360

 

 
(895
)
 

Net income
$
245

 
$
245

 
$
290

 
$
360

 
$
(895
)
 
$
245

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
$
279

 
$
278

 
$
323

 
$
392

 
$
(993
)
 
$
279


32

Table of Contents

Nine Months Ended September 30, 2017
 
 
 
Parent
 
Subsidiary
Issuers
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Total
Revenues
$

 
$

 
$
4,093

 
$
4,595

 
$
(1,859
)
 
$
6,829

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
 
 
 
 
Operating
2

 
18

 
1,994

 
1,399

 

 
3,413

 
Vehicle depreciation and lease charges, net

 

 
1,728

 
1,690

 
(1,701
)
 
1,717

 
Selling, general and administrative
29

 
6

 
485

 
355

 

 
875

 
Vehicle interest, net

 

 
150

 
223

 
(158
)
 
215

 
Non-vehicle related depreciation and amortization

 
1

 
121

 
72

 

 
194

 
Interest expense related to corporate debt, net:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense

 
118

 
3

 
21

 

 
142

 
 
Intercompany interest expense (income)
(9
)
 
80

 
17

 
(88
)
 

 

 
 
Early extinguishment of debt

 
4

 

 
(1
)
 

 
3

 
Restructuring and other related charges

 
7

 
37

 
8

 

 
52

 
Transaction-related costs, net

 

 

 
8

 

 
8

Total expenses
22

 
234

 
4,535

 
3,687

 
(1,859
)
 
6,619

Income (loss) before income taxes and equity in earnings of subsidiaries
(22
)
 
(234
)
 
(442
)
 
908

 

 
210

Provision for (benefit from) income taxes
(10
)
 
(92
)
 
59

 
112

 

 
69

Equity in earnings of subsidiaries
153

 
295

 
796

 

 
(1,244
)
 

Net income
$
141

 
$
153

 
$
295

 
$
796

 
$
(1,244
)
 
$
141

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
$
251

 
$
262

 
$
405

 
$
904

 
$
(1,571
)
 
$
251


33

Table of Contents

Consolidating Condensed Balance Sheets

As of September 30, 2018
 
 
 
Parent
 
Subsidiary
Issuers
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
3

 
$
73

 
$

 
$
529

 
$

 
$
605

 
Receivables, net

 

 
247

 
671

 

 
918

 
Other current assets
1

 
100

 
109

 
447

 

 
657

Total current assets
4

 
173

 
356

 
1,647

 

 
2,180

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property and equipment, net

 
191

 
312

 
216

 

 
719

Deferred income taxes
13

 
842

 
169

 
41

 

 
1,065

Goodwill

 

 
471

 
593

 

 
1,064

Other intangibles, net

 
26

 
474

 
344

 

 
844

Other non-current assets
46

 
48

 
16

 
157

 

 
267

Intercompany receivables
156

 
399

 
1,880

 
906

 
(3,341
)
 

Investment in subsidiaries
355

 
4,841

 
4,043

 

 
(9,239
)
 

Total assets exclusive of assets under vehicle programs
574

 
6,520

 
7,721

 
3,904

 
(12,580
)
 
6,139

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets under vehicle programs:
 
 
 
 
 
 
 
 
 
 
 
 
Program cash

 

 

 
151

 

 
151

 
Vehicles, net

 
38

 
58

 
12,067

 

 
12,163

 
Receivables from vehicle manufacturers and other

 
2

 

 
770

 

 
772

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

 

 

 
516

 

 
516

 
 
 

 
40

 
58

 
13,504

 

 
13,602

Total assets
$
574

 
$
6,560

 
$
7,779

 
$
17,408

 
$
(12,580
)
 
$
19,741

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and stockholders’ equity
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and other current liabilities
$
13

 
$
248

 
$
633

 
$
991

 
$

 
$
1,885

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

 
17

 
2

 
4

 

 
23

Total current liabilities
13

 
265

 
635

 
995

 

 
1,908

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt

 
2,900

 
2

 
636

 

 
3,538

Other non-current liabilities
40

 
80

 
261

 
386

 

 
767

Intercompany payables

 
2,941

 
399

 
1

 
(3,341
)
 

Total liabilities exclusive of liabilities under vehicle programs
53

 
6,186

 
1,297

 
2,018

 
(3,341
)
 
6,213

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities under vehicle programs:
 
 
 
 
 
 
 
 
 
 
 
 
Debt

 
19

 
50

 
3,731

 

 
3,800

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

 

 

 
7,122

 

 
7,122

Deferred income taxes

 

 
1,591

 
184

 

 
1,775

Other

 

 

 
310

 

 
310

 
 
 

 
19

 
1,641

 
11,347

 

 
13,007

Total stockholders’ equity
521

 
355

 
4,841

 
4,043

 
(9,239
)
 
521

Total liabilities and stockholders’ equity
$
574

 
$
6,560

 
$
7,779

 
$
17,408

 
$
(12,580
)
 
$
19,741


34

Table of Contents

As of December 31, 2017
 
 
 
Parent
 
Subsidiary
Issuers
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
4

 
$
14

 
$

 
$
593

 
$

 
$
611

 
Receivables, net

 

 
255

 
667

 

 
922

 
Other current assets
4

 
89

 
101

 
339

 

 
533

Total current assets
8

 
103

 
356

 
1,599

 

 
2,066

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property and equipment, net

 
167

 
321

 
216

 

 
704

Deferred income taxes
14

 
704

 
154

 
59

 

 
931

Goodwill

 

 
471

 
602

 

 
1,073

Other intangibles, net

 
27

 
480

 
343

 

 
850

Other non-current assets
46

 
29

 
16

 
105

 

 
196

Intercompany receivables
187

 
382

 
1,506

 
824

 
(2,899
)
 

Investment in subsidiaries
381

 
4,681

 
3,938

 

 
(9,000
)
 

Total assets exclusive of assets under vehicle programs
636

 
6,093

 
7,242

 
3,748

 
(11,899
)
 
5,820

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets under vehicle programs:
 
 
 
 
 
 
 
 
 
 
 
 
Program cash

 

 

 
283

 

 
283

 
Vehicles, net

 
34

 
61

 
10,531

 

 
10,626

 
Receivables from vehicle manufacturers and other

 
1

 

 
546

 

 
547

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

 

 

 
423

 

 
423

 
 
 

 
35

 
61

 
11,783

 

 
11,879

Total assets
$
636

 
$
6,128

 
$
7,303

 
$
15,531

 
$
(11,899
)
 
$
17,699

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and stockholders’ equity
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and other current liabilities
$
23

 
$
207

 
$
552

 
$
837

 
$

 
$
1,619

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

 
17

 
3

 
6

 

 
26

Total current liabilities
23

 
224

 
555

 
843

 

 
1,645

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt

 
2,910

 
3

 
660

 

 
3,573

Other non-current liabilities
40

 
83

 
216

 
378

 

 
717

Intercompany payables

 
2,515

 
382

 
2

 
(2,899
)
 

Total liabilities exclusive of liabilities under vehicle programs
63

 
5,732

 
1,156

 
1,883

 
(2,899
)
 
5,935

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities under vehicle programs:
 
 
 
 
 
 
 
 
 
 
 
 
Debt

 
15

 
57

 
2,669

 

 
2,741

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

 

 

 
6,480

 

 
6,480

 
Deferred income taxes

 

 
1,407

 
187

 

 
1,594

 
Other

 

 
2

 
374

 

 
376

 
 
 

 
15

 
1,466

 
9,710

 

 
11,191

Total stockholders’ equity
573

 
381

 
4,681

 
3,938

 
(9,000
)
 
573

Total liabilities and stockholders’ equity
$
636

 
$
6,128

 
$
7,303

 
$
15,531

 
$
(11,899
)
 
$
17,699


35

Table of Contents

Consolidating Condensed Statements of Cash Flows

Nine Months Ended September 30, 2018 
 
Parent
 
Subsidiary
Issuers
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
Net cash provided by (used in) operating activities
$
139

 
$
202

 
$
88

 
$
1,785

 
$
(119
)
 
$
2,095

 
 
 
 
 
 
 
 
 
 
 
 
Investing activities
 
 
 
 
 
 
 
 
 
 
 
Property and equipment additions

 
(45
)
 
(60
)
 
(52
)
 

 
(157
)
Proceeds received on asset sales

 
2

 
2

 
5

 

 
9

Net assets acquired (net of cash acquired)

 
(3
)
 
(5
)
 
(56
)
 

 
(64
)
Other, net

 
(8
)
 

 
(36
)
 

 
(44
)
Net cash provided by (used in) investing activities exclusive of vehicle programs

 
(54
)
 
(63
)
 
(139
)
 

 
(256
)
 
 
 
 
 
 
 
 
 
 
 
 
Vehicle programs:
 
 
 
 
 
 
 
 
 
 
 
Investment in vehicles

 

 
(4
)
 
(10,075
)
 

 
(10,079
)
Proceeds received on disposition of vehicles

 
33

 

 
6,719

 

 
6,752

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

 

 

 
(116
)
 

 
(116
)
Proceeds from debt securities of Avis Budget Rental Car Funding (AESOP) LLCrelated party

 

 

 
22

 

 
22

 

 
33

 
(4
)
 
(3,450
)
 

 
(3,421
)
Net cash provided by (used in) investing activities

 
(21
)
 
(67
)
 
(3,589
)
 

 
(3,677
)
 
 
 
 
 
 
 
 
 
 
 
 
Financing activities
 
 
 
 
 
 
 
 
 
 
 
Proceeds from long-term borrowings

 
81

 

 

 

 
81

Payments on long-term borrowings

 
(97
)
 
(2
)
 

 

 
(99
)
Net change in short-term borrowings

 

 

 
(4
)
 

 
(4
)
Debt financing fees

 
(9
)
 

 

 

 
(9
)
Repurchases of common stock
(143
)
 

 

 

 

 
(143
)
Other, net
3

 
(95
)
 
(12
)
 
(12
)
 
119

 
3

Net cash provided by (used in) financing activities exclusive of vehicle programs
(140
)
 
(120
)
 
(14
)
 
(16
)
 
119

 
(171
)
 
 
 
 
 
 
 
 
 
 
 
 
Vehicle programs:
 
 
 
 
 
 
 
 
 
 
 
Proceeds from borrowings

 

 

 
13,371

 

 
13,371

Payments on borrowings

 
(2
)
 
(7
)
 
(11,718
)
 

 
(11,727
)
Debt financing fees

 

 

 
(19
)
 

 
(19
)
 

 
(2
)
 
(7
)
 
1,634

 

 
1,625

Net cash provided by (used in) financing activities
(140
)
 
(122
)
 
(21
)
 
1,618

 
119

 
1,454

 
 
 
 
 
 
 
 
 
 
 
 
Effect of changes in exchange rates on cash and cash equivalents, program and restricted cash

 

 

 
(5
)
 

 
(5
)
 
 
 
 
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents, program and restricted cash
(1
)
 
59

 

 
(191
)
 

 
(133
)
Cash and cash equivalents, program and restricted cash, beginning of period
4

 
14

 

 
883

 

 
901

Cash and cash equivalents, program and restricted cash, end of period
$
3

 
$
73

 
$

 
$
692

 
$

 
$
768


36

Table of Contents

Nine Months Ended September 30, 2017 
 
Parent
 
Subsidiary
Issuers
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
Net cash provided by (used in) operating activities
$
44

 
$
(45
)
 
$
70

 
$
2,007

 
$
(35
)
 
$
2,041

 
 
 
 
 
 
 
 
 
 
 
 
Investing activities
 
 
 
 
 
 
 
 
 
 
 
Property and equipment additions

 
(36
)
 
(56
)
 
(46
)
 

 
(138
)
Proceeds received on asset sales

 
1

 

 
5

 

 
6

Net assets acquired (net of cash acquired)

 
(1
)
 
(5
)
 
(11
)
 

 
(17
)
Intercompany loan receipts (advances)

 

 

 
(264
)
 
264

 

Other, net
100

 

 

 
6

 
(100
)
 
6

Net cash provided by (used in) investing activities exclusive of vehicle programs
100

 
(36
)
 
(61
)
 
(310
)
 
164

 
(143
)
 
 
 
 
 
 
 
 
 
 
 
 
Vehicle programs:
 
 
 
 
 
 
 
 
 
 
 
Investment in vehicles

 

 

 
(9,672
)
 

 
(9,672
)
Proceeds received on disposition of vehicles

 
39

 

 
6,833

 

 
6,872

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

 

 

 
(33
)
 

 
(33
)
 

 
39

 

 
(2,872
)
 

 
(2,833
)
Net cash provided by (used in) investing activities
100

 
3

 
(61
)
 
(3,182
)
 
164

 
(2,976
)
 
 
 
 
 
 
 
 
 
 
 
 
Financing activities
 
 
 
 
 
 
 
 
 
 
 
Proceeds from long-term borrowings

 
325

 

 
264

 

 
589

Payments on long-term borrowings

 
(401
)
 
(2
)
 
(193
)
 

 
(596
)
Net change in short-term borrowings

 

 

 
(3
)
 

 
(3
)
Intercompany loan borrowings (payments)

 
264

 

 

 
(264
)
 

Repurchases of common stock
(144
)
 

 

 

 

 
(144
)
Debt financing fees

 
(5
)
 

 
(4
)
 

 
(9
)
Other, net

 
(135
)
 

 

 
135

 

Net cash provided by (used in) financing activities exclusive of vehicle programs
(144
)
 
48

 
(2
)
 
64

 
(129
)
 
(163
)
 
 
 
 
 
 
 
 
 
 
 
 
Vehicle programs:
 
 
 
 
 
 
 
 
 
 
 
Proceeds from borrowings

 

 

 
14,276

 

 
14,276

Payments on borrowings

 
(1
)
 
(7
)
 
(12,922
)
 

 
(12,930
)
Debt financing fees

 

 

 
(8
)
 

 
(8
)
 

 
(1
)
 
(7
)
 
1,346

 

 
1,338

Net cash provided by (used in) financing activities
(144
)
 
47

 
(9
)
 
1,410

 
(129
)
 
1,175

 
 
 
 
 
 
 
 
 
 
 
 
Effect of changes in exchange rates on cash and cash equivalents, program and restricted cash

 

 

 
41

 

 
41

 
 
 
 
 
 
 
 
 
 
 
 
Net increase in cash and cash equivalents, program and restricted cash

 
5

 

 
276

 

 
281

Cash and cash equivalents, program and restricted cash, beginning of period
3

 
12

 

 
705

 

 
720

Cash and cash equivalents, program and restricted cash, end of period
$
3

 
$
17

 
$

 
$
981

 
$

 
$
1,001





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19.
Subsequent Events

In October 2018, the Company completed the acquisition of Turiscar Group, a provider of vehicle rental services in Portugal, for €27 million (approximately $31 million), of which €23 million (approximately $26 million) was paid. The remainder of the purchase price will be paid during the three months ended December 31, 2020.

In October 2018, the Company issued €350 million (approximately $404 million) of 4¾% euro-denominated Senior Notes due January 2026, at par, with interest payable semi-annually. The proceeds were used to redeem $400 million principal amount of 5⅛% Senior Notes due June 2022 for $410 million plus accrued interest.

In October 2018, the Company’s Avis Budget Rental Car Funding subsidiary issued approximately $550 million in asset-backed notes with an expected final payment date of March 2024 incurring interest at a weighted average rate of approximately 4%.


* * * *

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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 2017 Form 10-K. Our actual results of operations may differ materially from those discussed in forward-looking statements as a result of various factors, including but not limited to those included elsewhere in this Quarterly Report on Form 10-Q and those included in the “Managements Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and other portions of our 2017 Form 10-K. Unless otherwise noted, all dollar amounts in tables are in millions and those relating to our results of operations are presented before taxes.
OVERVIEW

Our Company

We operate three of the most globally recognized brands in the vehicle rental and other mobility solutions industry, Avis, Budget and Zipcar together with several brands well recognized in their respective markets, including Payless in the U.S. and certain other regions, Maggiore in Italy, FranceCars in France and Apex in both Australia and New Zealand. We are a leading vehicle rental operator in North America, Europe, Australasia and certain other regions we serve, with an average rental fleet of more than 620,000 vehicles. We also license the use of our trademarks to licensees in the areas in which we do not operate directly. We and our licensees operate our brands in approximately 180 countries throughout the world.

Our Segments

We categorize our operations into two reportable business segments: Americas, consisting primarily of our vehicle rental operations in North America, South America, Central America and the Caribbean, car sharing operations in certain of these markets, and licensees in the areas in which the Company does not operate directly; and International, consisting primarily of our vehicle rental operations in Europe, the Middle East, Africa, Asia and Australasia, car sharing operations in certain of these markets, and licensees in the areas in which the Company does not operate directly.

Business and Trends

Our revenues are derived principally from vehicle rentals in our Company-owned operations and include:
time & mileage fees charged to our customers for vehicle rentals;
payments from our customers with respect to certain operating expenses we incur, including gasoline and vehicle licensing fees, as well as concession fees, which we pay in exchange for the right to operate at airports and certain other locations; and
sales of loss damage waivers and insurance and other supplemental items in conjunction with vehicle rentals.
In addition, we receive royalty revenue from our licensees in conjunction with their vehicle rental transactions.

Our operating results are subject to variability due to macroeconomic conditions, seasonality and other factors. Car rental volumes tend to be associated with the travel industry, particularly airline passenger volumes, or enplanements, which in turn tend to reflect general economic conditions. Our vehicle rental operations are also seasonal, with the third quarter of the year historically having been our strongest due to the increased level of leisure travel during such quarter. We have a partially variable cost structure and routinely adjust the size, and therefore the cost, of our rental fleet in response to fluctuations in demand.

To date in 2018, worldwide demand for vehicle rental and other mobility solutions has increased and used-vehicle values in the U.S. have strengthened. We expect such economic conditions to continue in the remainder of 2018, counterbalanced by the incremental impact of rising interest rates, primarily in the Americas, higher salaries, wages and related benefits and other headwinds. We will continue to pursue opportunities to enhance our profitability and return on invested capital.


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Our objective is to drive sustainable, profitable growth by delivering strategic initiatives aimed at winning customers through differentiated brands and products, increasing our margins via revenue growth and operational efficiency and enhancing our leadership in the mobility landscape. Our strategies are intended to support and strengthen our brands, to grow our earnings and Adjusted EBITDA over time and to achieve growth and efficiency opportunities as mobility solutions continue to evolve. We operate in a highly competitive industry and we expect to continue to face challenges and risks in managing our business. We seek to mitigate our exposure to risks in numerous ways, including delivering upon our core strategic initiatives, and through continued optimization of fleet levels to match changes in demand for vehicle rentals; maintenance of liquidity to fund our fleet investment and operations; appropriate investments in technology; and adjustments in the size and the nature and terms of our relationships with vehicle manufacturers.

During the nine months ended September 30, 2018:

Our revenues totaled $7.1 billion, increasing 4% compared to the nine months ended September 30, 2017 due to higher rental volumes and a 1% benefit from currency exchange rate movements.

Our net income was $152 million, representing a $11 million year-over-year improvement in earnings, and our Adjusted EBITDA was $639 million, representing a $44 million year-over-year increase, driven by higher revenues and Americas’ lower per-unit fleet costs.

We repurchased approximately $129 million of our common stock, reducing our shares outstanding by approximately 3.5 million shares, or 4%.

We amended the terms of our Floating Rate Term Loan due 2022 and our Senior revolving credit facility maturing 2021 and extended the maturity to 2025 and 2023, respectively.

We acquired Morini S.p.A in Northern Italy and various licensees in Europe and North America.

In 2017, the U.S. enacted Public Law 115-97, commonly referred to as the U.S. Tax Reform Act (the “Tax Act”). The Tax Act makes broad and complex changes to U.S. corporate tax laws. We expect our 2018 provision for income taxes to be impacted by the reduced U.S. corporate tax rate, the inclusion in the U.S. tax base of certain foreign subsidiary earnings and the limitations on the deductibility of certain business expenses. During the three months ended September 30, 2018, we revised our provisional expense of $104 million for the one-time transition tax on the deemed repatriation of cumulative foreign subsidiary earnings initially recorded during the three months ended December 31, 2017 and recorded additional tax expense of $30 million. During the three months ended December 31, 2018, we intend to finalize our accounting for all previous estimates recorded in 2017.

RESULTS OF OPERATIONS

We measure performance principally using the following key operating statistics: (i) rental days, which represent the total number of days (or portion thereof) a vehicle was rented, (ii) revenue per day, which represents revenues divided by rental days, (iii) vehicle utilization, which represents rental days divided by available rental days, available rental days is defined as the average number of vehicles in our rental fleet times the number of days in the period, and (iv) per-unit fleet costs, which represent vehicle depreciation, lease charges and gain or loss on vehicle sales, divided by the average number of vehicles in our rental fleet. Our rental days, revenue per day and vehicle utilization operating statistics are all calculated based on the actual rental of the vehicle during a 24-hour period. We believe that this methodology provides us 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. We present currency exchange rate effects to provide a method of assessing how our business performed excluding the effects of foreign currency rate fluctuations. Currency exchange rate effects are calculated by translating the current-year results at the prior-period average exchange rate plus any related gains and losses on currency hedges.

We assess performance and allocate resources based upon the separate financial information of our operating segments. In identifying our reportable segments, we also consider the nature of services provided by our operating segments, the geographical areas in which our segments operate and other relevant factors. Management evaluates the operating results of each of our reportable segments based upon revenues and “Adjusted EBITDA,” which we define as income from continuing operations before non-vehicle related

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depreciation and amortization, any impairment charges, restructuring and other related charges, early extinguishment of debt costs, non-vehicle related interest, transaction-related costs, net charges for unprecedented personal-injury legal matters, non-operational charges related to shareholder activist activity and income taxes. Net charges for unprecedented personal-injury legal matters are recorded within operating expenses in our consolidated condensed statement of operations. We have revised our definition of Adjusted EBITDA to exclude non-operational charges related to shareholder activist activity. Non-operational charges related to shareholder activist activity include third party advisory, legal and other professional service fees and are recorded within selling, general and administrative expenses in our consolidated condensed statement of operations. We did not revise prior years’ Adjusted EBITDA amounts because there were no costs similar in nature to these costs.  We believe Adjusted EBITDA is useful as a supplemental measure in evaluating the performance of our operating businesses and in comparing our results from period to period. We also believe that Adjusted EBITDA is useful to investors because it allows investors to assess our results of operations and financial condition on the same basis that management uses internally. Adjusted EBITDA is a non-GAAP measure and should not be considered in isolation or as a substitute for net income or other income statement data prepared in accordance with U.S. GAAP. Our presentation of Adjusted EBITDA may not be comparable to similarly-titled measures used by other companies.

Three Months Ended September 30, 2018 vs. Three Months Ended September 30, 2017

Our consolidated results of operations comprised the following:
 
 
 
 
Three Months Ended 
 September 30,
 
 
 
 
 
 
 
 
2018
 
2017
 
$ Change 
 
% Change
Revenues
$
2,778

 
$
2,752

 
$
26

 
1
%
 
 
 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
Operating
1,294

 
1,256

 
(38
)
 
(3
%)
 
Vehicle depreciation and lease charges, net
587

 
616

 
29

 
5
%
 
Selling, general and administrative
336

 
320

 
(16
)
 
(5
%)
 
Vehicle interest, net
85

 
78

 
(7
)
 
(9
%)
 
Non-vehicle related depreciation and amortization
62

 
66

 
4

 
6
%
 
Interest expense related to corporate debt, net
44

 
45

 
1

 
2
%
 
Transaction-related costs, net
11

 

 
(11
)
 
n/m

 
Restructuring and other related charges
4

 
7

 
3

 
43
%
Total expenses
2,423

 
2,388

 
(35
)
 
(1
%)
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
355

 
364

 
(9
)
 
(2
%)
Provision for income taxes
142

 
119

 
(23
)
 
(19
%)
 
 
 
 
 
 
 
 
Net income
$
213

 
$
245

 
$
(32
)
 
(13
%)
__________
n/m
Not meaningful.

During the three months ended September 30, 2018, our revenues increased as a result of a 3% increase in rental volumes, partially offset by 1% lower revenue per day excluding currency exchange rate movements and a $31 million negative effect from currency exchange rate movements. Total expenses increased due to increased rental volumes, higher marketing costs and salaries, wages and related benefits, partially offset by lower per-unit fleet costs in the Americas and a $27 million benefit from currency exchange rate movements. Our effective tax rates were provisions of 40% and 33% during the three months ended September 30, 2018 and 2017, respectively, which in 2018 included additional tax expense of $30 million related to the adjustment of the one-time transition tax on the deemed repatriation of cumulative foreign subsidiary earnings initially recorded during the three months ended December 31, 2017. As a result of these items, our net income decreased by $32 million.

During the three months ended September 30, 2018, the Company reported earnings of $2.68 per diluted share, which includes after-tax transaction-related costs of ($0.10) per share, after-tax restructuring and other related charges of ($0.03) per share and a net tax provision related to the adjustment of the one-time transition tax on the deemed repatriation of cumulative foreign subsidiary earnings of ($0.38) per share. During the three months ended September 30, 2017, the Company reported earnings of $2.91 per diluted share, which includes after-tax

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restructuring and other related charges of ($0.06) per share.

During the three months ended September 30, 2018:

Operating expenses increased to 46.6% of revenue compared to 45.7% during the similar period in 2017, primarily due to higher salaries, wages and related benefits as a result of performance plan incentive accruals and legislative increases in minimum wages.

Vehicle depreciation and lease charges were reduced to 21.2% of revenue compared to 22.4% during the similar period in 2017, primarily due to Americas’ lower per-unit fleet costs.

Selling, general and administrative costs increased to 12.1% of revenue compared to 11.6% during the similar period in 2017, due to higher marketing costs and salary related benefits as a result of performance plan incentive accruals.

Vehicle interest costs increased to 3.1% of revenue compared to 2.8% during the similar period in 2017.

Following is a more detailed discussion of the results of each of our reportable segments and reconciliation of net income to Adjusted EBITDA: 
 
 
 
 
Three Months Ended September 30,
 
 
 
 
2018
 
2017
 
 
 
 
Revenues
 
Adjusted EBITDA
 
Revenues
 
Adjusted EBITDA
Americas
$
1,844

 
$
313

 
$
1,839

 
$
303

International
934

 
178

 
913

 
194

Corporate and Other (a)

 
(15
)
 

 
(15
)
 
Total Company
$
2,778

 
$
476

 
$
2,752

 
$
482

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reconciliation to Adjusted EBITDA
 
 
 
 
 
 
 
 
 
2018
 
2017
Net income
 
$
213

 
$
245

Provision for income taxes
 
142

 
119

Income before income taxes
 
355

 
364

 
 
 
 
 
 
Add:
Non-vehicle related depreciation and amortization
 
62

 
66

 
 
Interest expense related to corporate debt, net
 
44

 
45

 
 
Transaction-related costs, net (b)
 
11

 

 
 
Restructuring and other related charges
 
4

 
7

Adjusted EBITDA
 
$
476

 
$
482

__________
(a) 
Includes unallocated corporate overhead which is not attributable to a particular segment.
(b) 
Primarily comprised of acquisition and integration related expenses.

Americas
 
 
Three Months Ended September 30,
 
 
 
 
2018
 
2017
 
% Change
Revenues
 
$
1,844

 
$
1,839

 
0
%
Adjusted EBITDA
 
313

 
303

 
3
%

Revenues were relatively unchanged during the three months ended September 30, 2018, compared to the similar period in 2017, primarily due to 1% higher rental volumes, offset by a $9 million negative effect from currency exchange rate movements.

Adjusted EBITDA was 3% higher during the three months ended September 30, 2018, compared to the similar period in 2017, due to 10% lower per-unit fleet costs, partially offset by increased gasoline expense, higher salaries, wages and related benefits and higher vehicle interest rates.

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During the three months ended September 30, 2018:

Operating expenses increased to 46.5% of revenue compared to 45.6% during the similar period in 2017, primarily due to increased gasoline expense and higher salaries, wages and related benefits as a result of performance plan incentive accruals and legislative increases in minimum wages.

Vehicle depreciation and lease charges were reduced to 21.9% of revenue compared to 24.2% during the similar period in 2017, primarily due to lower per-unit fleet costs.

Selling, general and administrative costs increased to 11.0% of revenue compared to 10.6% during the similar period in 2017, primarily due to higher salary related benefits as a result of performance plan incentive accruals.

Vehicle interest costs increased to 3.6% of revenue compared to 3.2% during the similar period in 2017, primarily due to higher interest rates.

International
 
 
Three Months Ended September 30,
 
 
 
 
2018
 
2017
 
% Change
Revenues
 
$
934

 
$
913

 
2
%
Adjusted EBITDA
 
178

 
194

 
(8
%)

Revenues were 2% higher during the three months ended September 30, 2018, compared to the similar period in 2017, due to 7% higher rental volumes, partially offset by a 2% decrease in revenue per day excluding currency exchange rate movements and a $22 million negative effect from currency exchange rate movements.

Adjusted EBITDA decreased 8% during the three months ended September 30, 2018, compared to the similar period in 2017, primarily due to 3% higher per-unit fleet costs excluding currency exchange rate movements and lower revenue per day excluding currency exchange rate movements, partially offset by increased rental volumes. Currency movements decreased Adjusted EBITDA by $5 million.

During the three months ended September 30, 2018:

Operating expenses increased to 46.5% of revenue compared to 45.5% during the similar period in 2017, primarily due to lower revenue per day excluding currency exchange rate movements, partially offset by cost mitigating actions.

Vehicle depreciation and lease charges increased to 19.7% of revenue compared to 18.7% during the similar period in 2017, due to lower revenue per day excluding exchange rate movements and higher per-unit fleet costs.

Selling, general and administrative costs increased to 12.8% of revenue compared to 12.5% during the similar period in 2017.

Vehicle interest costs were 2.0% of revenue, were in-line with the similar period in 2017.


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Nine Months Ended September 30, 2018 vs. Nine Months Ended September 30, 2017

Our consolidated results of operations comprised the following:
 
 
 
 
Nine Months Ended 
 September 30,
 
 
 
 
 
 
 
 
2018
 
2017
 
$ Change 
 
% Change
Revenues
$
7,074

 
$
6,829

 
$
245

 
4
%
 
 
 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
Operating
3,561

 
3,413

 
(148
)
 
(4
%)
 
Vehicle depreciation and lease charges, net
1,693

 
1,717

 
24

 
1
%
 
Selling, general and administrative
953

 
875

 
(78
)
 
(9
%)
 
Vehicle interest, net
237

 
215

 
(22
)
 
(10
%)
 
Non-vehicle related depreciation and amortization
190

 
194

 
4

 
2
%
 
Interest expense related to corporate debt, net:
 
 
 
 
 
 
 
 
Interest expense
139

 
142

 
3

 
2
%
 
Early extinguishment of debt
5

 
3

 
(2
)
 
(67
%)
 
Transaction-related costs, net
18

 
8

 
(10
)
 
n/m

 
Restructuring and other related charges
14

 
52

 
38

 
73
%
Total expenses
6,810

 
6,619

 
(191
)
 
(3
%)
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
264

 
210

 
54

 
26
%
Provision for income taxes
112

 
69

 
(43
)
 
(62
%)
 
 
 
 
 
 
 
 
Net income
$
152

 
$
141

 
$
11

 
8
%
__________
n/m
Not meaningful.

During the nine months ended September 30, 2018, our revenues increased as a result of a 4% increase in rental volumes and a $73 million benefit from currency exchange rate movements, partially offset by a 1% reduction in revenue per day excluding exchange rate movements. Total expenses increased as a result of increased volumes, increased marketing costs and commissions, higher salaries, wages and related benefits and higher vehicle interest rates, partially offset by lower per-unit fleet costs in the Americas. These increases include a $56 million negative effect from currency exchange rate movements. Our effective tax rates were provisions of 42% and 33% during the nine months ended September 30, 2018 and 2017, respectively, which in 2018 included additional tax expense of $30 million related to the adjustment of the one-time transition tax on the deemed repatriation of cumulative foreign subsidiary earnings initially recorded during the three months ended December 31, 2017. As a result of these items, our net income increased by $11 million.

During the nine months ended September 30, 2018, the Company reported earnings of $1.88 per diluted share, which includes after-tax transaction-related costs of ($0.17) per share, after-tax restructuring and other related charges of ($0.13) per share, after-tax non-operational charges related to shareholder activist activity of ($0.09) per share, and after-tax debt extinguishment costs of ($0.05) per share and a net tax provision related to the adjustment of the one-time transition tax on the deemed repatriation of cumulative foreign subsidiary earnings of ($0.38) per share. During the nine months ended September 30, 2017, the Company reported earnings of $1.65 per diluted share, which includes after-tax restructuring and other related charges of ($0.39) per share, after-tax transaction-related costs of ($0.07) per share, after-tax debt extinguishment costs of ($0.02) per share and after-tax reversal of charges for legal matter of $0.10 per share. 

During the nine months ended September 30, 2018:

Operating expenses increased to 50.3% of revenue compared to 50.0% during the similar period in 2017.

Vehicle depreciation and lease charges were reduced to 23.9% of revenue compared to 25.1% during the similar period in 2017, primarily due to Americas’ lower per-unit fleet costs.

Selling, general and administrative costs increased to 13.5% of revenue compared to 12.8% during the similar period in 2017, due to increased marketing costs and commissions, and higher salary related

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benefits as a result of performance plan incentive accruals.

Vehicle interest costs increased to 3.4% of revenue compared to 3.1% during the similar period in 2017.

Following is a more detailed discussion of the results of each of our reportable segments and reconciliation of net income to Adjusted EBITDA: 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
2018
 
2017
 
 
 
 
Revenues
 
Adjusted EBITDA
 
Revenues
 
Adjusted EBITDA
Americas
$
4,782

 
$
435

 
$
4,718

 
$
379

International
2,292

 
252

 
2,111

 
260

Corporate and Other (a)

 
(48
)
 

 
(44
)
 
Total Company
$
7,074

 
$
639

 
$
6,829

 
$
595

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reconciliation to Adjusted EBITDA
 
 
 
 
 
 
 
 
 
2018
 
2017
Net income
 
$
152

 
$
141

Provision for income taxes
 
112

 
69

Income before income taxes
 
264

 
210

 
 
 
 
 
 
Add:
Non-vehicle related depreciation and amortization
 
190

 
194

 
 
Interest expense related to corporate debt, net
 
 
 
 
 
 
Interest expense
 
139

 
142

 
 
Early extinguishment of debt
 
5

 
3

 
 
Transaction-related costs, net (b)
 
18

 
8

 
 
Restructuring and other related charges
 
14

 
52

 
 
Non-operational charges related to shareholder activist activity (c)
 
9

 

 
 
Charges for legal matter, net (d)
 

 
(14
)
Adjusted EBITDA
 
$
639

 
$
595

_________
(a) 
Includes unallocated corporate overhead which is not attributable to a particular segment.
(b) 
Primarily comprised of acquisition- and integration-related expenses.
(c) 
Reported within selling, general and administrative expenses in our consolidated condensed results of operations.
(d) 
Reported within operating expenses in our consolidated condensed results of operations.

Americas
 
 
Nine Months Ended September 30,
 
 
 
 
2018
 
2017
 
% Change
Revenues
 
$
4,782

 
$
4,718

 
1
%
Adjusted EBITDA
 
435

 
379

 
15
%

Revenues increased 1% during the nine months ended September 30, 2018, compared to the similar period in 2017, primarily due to a 2% increase in rental volumes, partially offset by a $6 million negative effect from currency exchange rate movements.

Adjusted EBITDA increased 15% in the nine months ended September 30, 2018, compared to the similar period in 2017, due to higher revenues and 7% lower per-unit fleet costs, partially offset by increased marketing commissions, higher salaries, wages and related benefits, and higher interest rates. Currency movements increased Adjusted EBITDA by $3 million.

During the nine months ended September 30, 2018:

Operating expenses increased to 49.3% of revenue compared to 49.0% during the similar period in 2017.

Vehicle depreciation and lease charges decreased to 25.7% of revenue compared to 27.6% during the

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similar period in 2017, primarily due to lower per-unit fleet costs.

Selling, general and administrative costs increased to 11.9% of revenue compared to 11.4% during the similar period in 2017, primarily due to increased marketing commissions, and higher salary related benefits as a result of performance plan incentive accruals.

Vehicle interest costs increased to 4.0% of revenue compared to 3.6% during the similar period in 2017, primarily due to higher interest rates.

International
 
 
Nine Months Ended September 30,
 
 
 
 
2018
 
2017
 
% Change
Revenues
 
$
2,292

 
$
2,111

 
9
%
Adjusted EBITDA
 
252

 
260

 
(3
%)

Revenues increased 9% during the nine months ended September 30, 2018, compared to the similar period in 2017, primarily due to a 7% increase in rental volumes and a $79 million benefit from currency movements, partially offset by a 2% reduction in revenue per day excluding exchange rate movements.

Adjusted EBITDA decreased 3% during the nine months ended September 30, 2018, compared to the similar period in 2017, due to lower revenue per day excluding exchange rate movements, increased maintenance and damage costs, increased marketing costs and 1% higher per-unit fleet costs excluding exchange rate movements, partially offset by increased rental volumes. Currency movements increased Adjusted EBITDA by $18 million.

During the nine months ended September 30, 2018:

Operating expenses increased to 52.0% of revenue compared to 51.7% during the similar period in 2017.

Vehicle depreciation and lease charges increased to 20.4% of revenue compared to 19.6% during the similar period in 2017, due to lower revenue per day excluding exchange rate movements and higher per-unit fleet costs.

Selling, general and administrative costs increased to 14.6% of revenue compared to 14.3% during the similar period in 2017.

Vehicle interest costs were 2.0% of revenue compared to 2.1% during the similar period in 2017.

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


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FINANCIAL CONDITION
 
 
September 30, 
 2018
 
December 31,  
 2017
 
Change
Total assets exclusive of assets under vehicle programs
 
$
6,139

 
$
5,820

 
$
319

Total liabilities exclusive of liabilities under vehicle programs
 
6,213

 
5,935

 
278

Assets under vehicle programs
 
13,602

 
11,879

 
1,723

Liabilities under vehicle programs
 
13,007

 
11,191

 
1,816

Stockholders’ equity
 
521

 
573

 
(52
)

Total assets exclusive of assets under vehicle programs increased primarily due to an increase in deferred income taxes as projected under the Tax Act, and a seasonal increase in value-added tax receivables, which are recoverable from government agencies. Total liabilities exclusive of liabilities under vehicle programs increased due to a seasonal increase in accounts payable and other current liabilities.

The increases in assets under vehicle programs and liabilities under vehicle programs are principally related to the seasonal increase in the size of our vehicle rental fleet. The decrease in stockholders’ equity is due to our repurchases of common stock and the adoption of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” (See Note 1 to our Consolidated Condensed Financial Statements), partially offset by our net income.

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.

During the nine months ended September 30, 2018, we amended the terms of our Floating Rate Term Loan due 2022 and our Senior revolving credit facility maturing 2021 and extended the maturity to 2025 and 2023, respectively. In addition, our Avis Budget Rental Car Funding subsidiary issued approximately $400 million in asset-backed notes with an expected final payment date of September 2023 and a weighted average interest rate of 4%. The proceeds from these borrowings were used to fund the repayment of maturing vehicle-back debt and the acquisition of rental cars in the United States. We also increased our capacity under our European rental fleet securitization program by €150 million (approximately $175 million), the proceeds of which were used to finance fleet purchases for certain of our European operations, and extended its maturity to 2021.

CASH FLOWS

The following table summarizes our cash flows:
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
Change
Cash provided by (used in):
 
 
 
 
 

Operating activities
$
2,095

 
$
2,041

 
$
54


Investing activities
(3,677
)
 
(2,976
)
 
(701
)

Financing activities
1,454

 
1,175

 
279

Effect of changes in exchange rates on cash and cash equivalents, program and restricted cash
(5
)
 
41

 
(46
)
Net (decrease) increase in cash and cash equivalents, program and restricted cash
(133
)
 
281

 
(414
)
Cash and cash equivalents, program and restricted cash, beginning of period
901

 
720

 
181

Cash and cash equivalents, program and restricted cash, end of period
$
768

 
$
1,001

 
$
(233
)

The increase in cash provided by operating activities during the nine months ended September 30, 2018 compared with the same period in 2017 is principally due to changes in the components of working capital.

The increase in cash used in investing activities during the nine months ended September 30, 2018 compared

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with the same period in 2017 is primarily due to an increase in investment in vehicles, a decrease in proceeds received on the disposition of vehicles and increased business acquisition activity.

The increase in cash provided by financing activities during the nine months ended September 30, 2018 compared with the same period in 2017 is primarily due to an increase in net borrowings under vehicle programs.

DEBT AND FINANCING ARRANGEMENTS

At September 30, 2018, we had approximately $14.5 billion of indebtedness, including corporate indebtedness of approximately $3.6 billion and debt under vehicle programs of approximately $10.9 billion. For detailed information regarding our debt and borrowing arrangements, see Notes 11 and 12 to our Consolidated Condensed Financial Statements.
 
LIQUIDITY RISK

Our primary liquidity needs include the procurement of rental vehicles to be used in our operations, servicing of corporate and vehicle-related debt and the payment of operating expenses. Our primary sources of funding are operating revenues, cash received upon the sale of vehicles, borrowings under our vehicle-backed borrowing arrangements and our senior revolving credit facility, and other financing activities.

As discussed above, as of September 30, 2018, we have cash and cash equivalents of approximately $0.6 billion, available borrowing capacity under our committed credit facilities of approximately $0.7 billion and available capacity under our vehicle programs of approximately $1.9 billion.

Our liquidity position could be negatively affected by financial market disruptions or a downturn in the U.S. and worldwide economies, which may result in unfavorable conditions in the vehicle rental industry, in the asset-backed financing market, and in the credit markets generally. We believe these factors have in the past affected and could in the future affect the debt ratings assigned to us by credit rating agencies and the cost of our borrowings. Additionally, a downturn in the worldwide economy or a disruption in the credit markets could impact our liquidity due to (i) decreased demand and pricing for vehicles in the used-vehicle market, (ii) increased costs associated with, and/or reduced capacity or increased collateral needs under, our financings, (iii) the adverse impact of vehicle manufacturers being unable or unwilling to honor their obligations to repurchase or guarantee the depreciation on the related program vehicles and (iv) disruption in our ability to obtain financing due to negative credit events specific to us or affecting the overall debt market.

Our liquidity position could also be negatively impacted if we are unable to remain in compliance with the financial and other covenants associated with our senior credit facility and other borrowings, including a maximum leverage ratio. As of September 30, 2018, we were in compliance with the financial covenants governing our indebtedness. For additional information regarding our liquidity risks, see Part I, Item 1A, “Risk Factors” of our 2017 Form 10-K.

As a result of the Tax Act, we are subject to a one-time transition tax on the deemed repatriation of cumulative foreign subsidiary earnings. We recorded a provisional charge for the one-time transition tax of $104 million in the fourth quarter of 2017 and recorded additional tax expense of $30 million in the third quarter of 2018. The Tax Act provides companies the ability to offset the one-time transition tax with available tax attributes or elect to pay the tax over an eight year period. Although the Tax Act generally eliminates U.S. federal income taxes on dividends from foreign subsidiaries effective for years beginning January 1, 2018, we continue to evaluate the expected manner of recovery to determine whether or not to continue to assert indefinite reinvestment on a part or all of our undistributed foreign earnings. This requires us to analyze our global working capital and cash requirements in light of the Tax Act and the potential tax liabilities attributable to a repatriation to the U.S., such as foreign withholding taxes and U.S. tax on currency transaction gains or losses. We did not record any deferred taxes attributable to our investments in our foreign subsidiaries. We will record the tax effects of any change in our assertion upon completion of our analysis during the fourth quarter of 2018.

CONTRACTUAL OBLIGATIONS

Our future contractual obligations have not changed significantly from the amounts reported within our 2017 Form 10-K with the exception of our commitment to purchase vehicles, which decreased from $8.1 billion at

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December 31, 2017 to approximately $5.0 billion at September 30, 2018 due to seasonality. Changes to our obligations related to corporate indebtedness and debt under vehicle programs are presented above within the section titled “Liquidity and Capital Resources—Debt and Financing Arrangements” and also within Notes 11 and 12 to our Consolidated Condensed Financial Statements.

ACCOUNTING POLICIES

The results of the majority of our recurring operations are recorded in our financial statements using accounting policies that are not particularly subjective, nor complex. However, in presenting our financial statements in conformity with generally accepted accounting principles, we are required to make estimates and assumptions that affect the amounts reported therein. Several of the estimates and assumptions that we are required to make pertain to matters that are inherently uncertain as they relate to future events. Presented within the section titled “Critical Accounting Policies” of our 2017 Form 10-K are the accounting policies (related to goodwill and other indefinite-lived intangible assets, vehicles, income taxes and public liability, property damage and other insurance liabilities) that we believe require subjective and/or complex judgments that could potentially affect 2018 reported results. There have been no significant changes to those accounting policies or our assessment of which accounting policies we would consider to be critical accounting policies.

New Accounting Standards

For detailed information regarding new accounting standards and their impact on our business, see Note 1 to our Consolidated Condensed Financial Statements.

Item 3.
Quantitative and Qualitative Disclosures about Market Risk

We are exposed to a variety of market risks, including changes in currency exchange rates, interest rates and gasoline prices. We assess our market risks based on changes in interest and currency exchange rates utilizing a sensitivity analysis that measures the potential impact on earnings, fair values and cash flows based on a hypothetical 10% change (increase and decrease) in interest and foreign currency exchange rates. We used September 30, 2018 market rates to perform a sensitivity analysis separately for each of these market risk exposures. We have determined, through such analyses, that the impact of a 10% change in interest or currency exchange rates on our results of operations, balance sheet and cash flows would not be material. Additionally, we have commodity price exposure related to fluctuations in the price of unleaded gasoline. We anticipate that such commodity risk will remain a market risk exposure for the foreseeable future. We determined that a 10% change in the price of unleaded gasoline would not have a material impact on our earnings for the period ended September 30, 2018. For additional information regarding our long-term borrowings and financial instruments, see Notes 11, 12 and 16 to our Consolidated Condensed Financial Statements.

Item 4.
Controls and Procedures

(a)
Disclosure Controls and Procedures. Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2018.

(b)
Changes in Internal Control Over Financial Reporting. During the fiscal quarter to which this report relates, there has been no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1.
Legal Proceedings

During the quarter ended September 30, 2018, the Company had no material developments to report with respect to its legal proceedings. For additional information regarding the Company’s legal proceedings, see Note 13 to our Consolidated Condensed Financial Statements and refer to the Company’s 2017 Form 10-K.

Item 1A.
Risk Factors

During the quarter ended September 30, 2018, the Company had no material developments to report with respect to its risk factors. For additional information regarding the Company’s risk factors, please refer to the Company’s 2017 Form 10-K.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

The following is a summary of the Company’s common stock repurchases by month for the quarter ended September 30, 2018:
 
Total Number of Shares Purchased(a)
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
July 2018
759,563

 
$
33.37

 
759,563

 
$
7,752,273

August 2018
547,619

 
33.99

 
547,619

 
239,140,654

September 2018
531,949

 
32.42

 
531,949

 
221,893,106

Total
1,839,131

 
$
33.28

 
1,839,131

 
$
221,893,106

__________
(a) 
Excludes, for the three months ended September 30, 2018, 61,516 shares which were withheld by the Company to satisfy employees’ income tax liabilities attributable to the vesting of restricted stock unit awards.

As of September 30, 2018, the Companys Board of Directors has authorized the repurchase of up to $1.7 billion of its common stock under a plan originally approved in 2013 and subsequently expanded, most recently in August 2018. The Companys stock repurchases may occur through open market purchases or trading plans pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934. The amount and timing of specific repurchases are subject to market conditions, applicable legal requirements and other factors. The repurchase program may be suspended, modified or discontinued at any time without prior notice. The repurchase program has no set expiration or termination date.

Item 6.
Exhibits

See Exhibit Index.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 
 
 
 
 
AVIS BUDGET GROUP, INC.
 
 
 
Date:
November 6, 2018
 
 
 
 
 
 
 
/s/ Martyn Smith
 
 
 
 
Martyn Smith
 
 
 
 
Interim Chief Financial Officer
 
 
 
Date:
November 6, 2018
 
 
 
 
 
 
 
/s/ David T. Calabria
 
 
 
 
David T. Calabria
 
 
 
 
Senior Vice President and
 
 
 
 
Chief Accounting Officer

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Exhibit Index 
Exhibit No.
Description
4.1
4.2
31.1
31.2
32
101.INS
XBRL Instance Document.
101.SCH
XBRL Taxonomy Extension Schema.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase.
101.DEF
XBRL Taxonomy Extension Definition Linkbase.
101.LAB
XBRL Taxonomy Extension Label Linkbase.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase.

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