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EX-32 - EXHIBIT 32 - AVIS BUDGET GROUP, INC.exhibit32car-20170930.htm
EX-31.2 - EXHIBIT 31.2 - AVIS BUDGET GROUP, INC.exhibit312car-20170930.htm
EX-31.1 - EXHIBIT 31.1 - AVIS BUDGET GROUP, INC.exhibit311car-20170930.htm
EX-12 - EXHIBIT 12 - AVIS BUDGET GROUP, INC.exhibit12car-20170930.htm

 
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, 2017

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

Commission File No. 001-10308
 
Avis Budget Group, Inc.
(Exact name of registrant as specified in its charter) 
Delaware
 
06-0918165
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
6 Sylvan Way
Parsippany, NJ
 
07054
(Address of principal executive offices)
 
(Zip Code)
 
(973) 496-4700
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, “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 81,421,558 shares as of October 31, 2017.
 



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



FORWARD-LOOKING STATEMENTS

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

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

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

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

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

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

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

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

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

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

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

our ability to accurately estimate our future results;

any major disruptions in our communication networks or information systems;

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

risks associated with litigation, governmental or regulatory inquiries, or any failure or inability to comply with laws, regulations or contractual obligations or any changes in laws, regulations or contractual obligations, including with respect to personally identifiable information and taxes;

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

1



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

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

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

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

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

risks related to protecting the integrity of our information technology systems and the confidential information of our employees and customers against security breaches, including cyber-security breaches; and

other business, economic, competitive, governmental, regulatory, political or technological factors affecting our operations, pricing or services, including uncertainty and instability related to the potential withdrawal of countries from the European Union.

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 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 21, 2017 (the “2016 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. Except to the extent of our obligations under the federal securities laws, we undertake no obligation to release any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. For any forward-looking statements contained in any document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.


2


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,
 
 
 
2017
 
2016
 
2017
 
2016
Revenues
 
 
 
 
 
 
 
 
Vehicle rental
$
1,949

 
$
1,871

 
$
4,798

 
$
4,772

 
Other
803

 
785

 
2,031

 
2,008

Net revenues
2,752

 
2,656

 
6,829

 
6,780

 
 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
Operating
1,256

 
1,219

 
3,413

 
3,381

 
Vehicle depreciation and lease charges, net
616

 
576

 
1,717

 
1,571

 
Selling, general and administrative
320

 
315

 
875

 
896

 
Vehicle interest, net
78

 
77

 
215

 
215

 
Non-vehicle related depreciation and amortization
66

 
63

 
194

 
189

 
Interest expense related to corporate debt, net:
 
 
 
 


 


 
Interest expense
45

 
51

 
142

 
157

 
Early extinguishment of debt

 

 
3

 
10

 
Restructuring and other related charges
7

 
6

 
52

 
26

 
Transaction-related costs, net

 
4

 
8

 
13

Total expenses
2,388

 
2,311

 
6,619

 
6,458

 
 
 
 
 
 
 
 
 
 
Income before income taxes
364

 
345

 
210

 
322

Provision for income taxes
119

 
136

 
69

 
128

 
 
 
 
 
 
 
 
 
 
Net income
$
245


$
209

 
$
141

 
$
194

 
 
 
 
 
 
 
 
 
 
Comprehensive income
$
279

 
$
235

 
$
251

 
$
294

 
 
 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
 
Basic
$
2.96

 
$
2.32

 
$
1.68

 
$
2.07

 
Diluted
$
2.91

 
$
2.28

 
$
1.65

 
$
2.05

See Notes to Consolidated Condensed Financial Statements (Unaudited).

3


Avis Budget Group, Inc.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions, except par value)
(Unaudited)
 
 
September 30, 
 2017
 
December 31,  
 2016
Assets
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
$
814

 
$
490

 
Receivables, net
855

 
808

 
Other current assets
750

 
519

Total current assets
2,419

 
1,817

 
 
 
 
 
Property and equipment, net
693

 
685

Deferred income taxes
1,566

 
1,493

Goodwill
1,065

 
1,007

Other intangibles, net
863

 
870

Other non-current assets
182

 
193

Total assets exclusive of assets under vehicle programs
6,788

 
6,065

 
 
 
 
 
Assets under vehicle programs:
 
 
 
 
Program cash
180

 
225

 
Vehicles, net
11,801

 
10,464

 
Receivables from vehicle manufacturers and other
709

 
527

 
Investment in Avis Budget Rental Car Funding (AESOP) LLC—related party
395

 
362

 
 
13,085

 
11,578

Total assets
$
19,873

 
$
17,643

 
 
 
 
 
Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
 
Accounts payable and other current liabilities
$
1,866

 
$
1,488

 
Short-term debt and current portion of long-term debt
26

 
279

Total current liabilities
1,892

 
1,767

 
 
 
 
 
Long-term debt
3,565

 
3,244

Other non-current liabilities
760

 
764

Total liabilities exclusive of liabilities under vehicle programs
6,217

 
5,775

 
 
 
 
 
Liabilities under vehicle programs:
 
 
 
 
Debt
3,781

 
2,183

 
Debt due to Avis Budget Rental Car Funding (AESOP) LLC—related party
6,785

 
6,695

 
Deferred income taxes
2,424

 
2,429

 
Other
265

 
340

 
 
13,255

 
11,647

Commitments and contingencies (Note 11)

 

 
 
 
 
 
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
6,862

 
6,918

 
Accumulated deficit
(1,442
)
 
(1,639
)
 
Accumulated other comprehensive loss
(44
)
 
(154
)
 
Treasury stock, at cost—55 and 51 shares, respectively
(4,976
)
 
(4,905
)
Total stockholders’ equity
401

 
221

Total liabilities and stockholders’ equity
$
19,873

 
$
17,643

See Notes to Consolidated Condensed Financial Statements (Unaudited).

4


Avis Budget Group, Inc.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited) 
 
 
 
Nine Months Ended 
 September 30,
 
 
 
2017
 
2016
Operating activities
 
 
 
Net income
$
141

 
$
194

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Vehicle depreciation
1,500

 
1,453

 
(Gain) loss on sale of vehicles, net
53

 
(15
)
 
Non-vehicle related depreciation and amortization
194

 
189

 
Stock-based compensation
8

 
21

 
Amortization of debt financing fees
25

 
29

 
Early extinguishment of debt costs
3

 
10

 
Net change in assets and liabilities:
 
 
 
 
 
Receivables
(112
)
 
(149
)
 
 
Income taxes and deferred income taxes
16

 
80

 
 
Accounts payable and other current liabilities
74

 
43

 
Other, net
139

 
256

Net cash provided by operating activities
2,041

 
2,111

 
 
 
 
 
 
Investing activities
 
 
 
Property and equipment additions
(138
)
 
(125
)
Proceeds received on asset sales
6

 
10

Net assets acquired (net of cash acquired)
(17
)
 
(4
)
Other, net
5

 
4

Net cash used in investing activities exclusive of vehicle programs
(144
)
 
(115
)
 
 
 
 
 
 
Vehicle programs:
 
 
 
 
Decrease in program cash
53

 
138

 
Investment in vehicles
(9,672
)
 
(10,151
)
 
Proceeds received on disposition of vehicles
6,872

 
7,373

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

 
 
(2,780
)
 
(2,640
)
Net cash used in investing activities
(2,924
)
 
(2,755
)


5


Avis Budget Group, Inc.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued)
(In millions)
(Unaudited)
 
 
Nine Months Ended 
 September 30,
 
 
2017
 
2016
Financing activities
 
 
 
Proceeds from long-term borrowings
589

 
896

Payments on long-term borrowings
(596
)
 
(527
)
Net change in short-term borrowings
(3
)
 
1

Repurchases of common stock
(144
)
 
(299
)
Debt financing fees
(9
)
 
(15
)
Net cash (used in) provided by financing activities exclusive of vehicle programs
(163
)
 
56

 
 
 
 
 
Vehicle programs:
 
 
 
 
Proceeds from borrowings
14,276

 
11,879

 
Payments on borrowings
(12,930
)
 
(10,752
)
 
Debt financing fees
(8
)
 
(20
)
 
 
1,338

 
1,107

Net cash provided by financing activities
1,175

 
1,163

 
 
 
 
 
Effect of changes in exchange rates on cash and cash equivalents
32

 
14

 
 
 
 
 
Net increase in cash and cash equivalents
324

 
533

Cash and cash equivalents, beginning of period
490

 
452

Cash and cash equivalents, end of period
$
814

 
$
985

See Notes to Consolidated Condensed Financial Statements (Unaudited).

6


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

1.
Basis of Presentation

Avis Budget Group, Inc. provides car and truck rentals, car sharing services and ancillary services to businesses and consumers worldwide. The accompanying unaudited Consolidated Condensed Financial Statements include the accounts and transactions of Avis Budget Group, Inc. and its subsidiaries, 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, 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 fair value of the assets acquired and liabilities assumed in connection with the Company’s fourth quarter 2016 acquisition of FranceCars has not yet been finalized; however, there have been no significant changes to the preliminary allocation of the purchase price during the nine months ended September 30, 2017.

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 2016 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 2016.

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).

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.


7


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 months ended September 30, 2017 and 2016, the Company recorded a $2 million gain and a $1 million loss, respectively and during the nine months ended September 30, 2017 and 2016, the Company recorded a $2 million gain and a $8 million loss, respectively, on such items.

Adoption of New Accounting Pronouncements

On January 1, 2017, as a result of a new accounting pronouncement, the Company adopted Accounting Standards Update (”ASU”) 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, minimum statutory withholding requirements and classification in the statement of cash flows. Accordingly, in the Company’s Consolidated Condensed Balance Sheet at January 1, 2017, deferred income tax assets, net of the valuation allowance were increased by $56 million related to previously unrecognized excess tax benefits associated with equity awards, with a corresponding decrease to accumulated deficit, using the modified retrospective method. In addition, in the Company’s Consolidated Condensed Statement of Cash Flows for the nine months ended September 30, 2016, cash taxes paid related to shares directly withheld from employees for tax purposes of $10 million were reclassified from accounts payable and other current liabilities within net cash provided by operating activities to repurchases of common stock within net cash provided by financing activities exclusive of vehicle programs. The Company elected to account for forfeitures on an actual basis, which did not have a material impact on its Consolidated Condensed Financial Statements.

Recently Issued Accounting Pronouncements

Accounting for Hedging Activities

In August 2017, the Financial Accounting Standards Board (“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 Financial Statements.

Scope of Modification Accounting for Share-Based Payment Awards

In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting,” which provides guidance on the types of changes to the terms or conditions of a share-based payment award to which an entity would be required to apply modification accounting. ASU 2017-09 becomes effective for the Company on January 1, 2018. Early adoption is permitted. The adoption of this pronouncement is not expected to have a material impact on the Company’s Consolidated Financial Statements.

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

In March 2017, the FASB issued 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 the consolidated statements of operations. ASU 2017-07 becomes effective for the Company on January 1, 2018. Early adoption is permitted. The adoption of this accounting pronouncement is not expected to have a material impact on the Company’s Consolidated Financial Statements.

8



Accounting for Goodwill Impairment

In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which requires an entity to perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and to recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 becomes effective for the Company on January 1, 2020. Early adoption is permitted. The adoption of this accounting pronouncement is not expected to have an impact on the Company’s Consolidated Financial Statements.

Clarifying the Definition of a Business

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” which assists entities in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. ASU 2017-01 becomes effective for the Company on January 1, 2018. Early adoption is permitted. The adoption of this accounting pronouncement is not expected to have a material impact on the Company’s Consolidated Financial Statements.

Restricted Cash

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which clarifies guidance on the classification and presentation of restricted cash in the statement of cash flows. ASU 2016-18 becomes effective for the Company on January 1, 2018. Early adoption is permitted. The adoption of this accounting pronouncement will impact the presentation of program cash in the Company’s Consolidated Statements of Cash Flows.

Classification of Certain Cash Receipts and Cash Payments

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which clarifies guidance on the classification of certain cash receipts and cash payments in the statement of cash flows. ASU 2016-15 becomes effective for the Company on January 1, 2018. Early adoption is permitted. The adoption of this accounting pronouncement is not expected to have a material impact on the Company’s Consolidated 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 Financial Statements.


9


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 ASU 2014-09, “Revenue from Contracts with Customers” (see below). ASU 2016-02 becomes effective for the Company on January 1, 2019. Early adoption is permitted. 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. The Company is currently evaluating and planning for the implementation of this ASU, including assessing its overall impact, 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 ASU 2016-02. As discussed in Revenue from Contracts with Customers below, the Company’s vehicle rental revenues will be accounted for under the revenue accounting standard (“Topic 606”) effective January 1, 2018, until the adoption of this accounting pronouncement on January 1, 2019.

Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which makes limited amendments to the classification and measurement of financial instruments. The new standard amends certain disclosure requirements associated with the fair value of financial instruments. ASU 2016-01 becomes effective for the Company on January 1, 2018. Early adoption is permitted. The adoption of this accounting pronouncement is not expected to have a material impact on the Company’s Consolidated Financial Statements.

Revenue from Contracts with Customers

In May 2014, the FASB issued 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. ASU 2014-09 becomes effective for the Company on January 1, 2018 and may be adopted on either a full or modified retrospective basis. The Company is currently evaluating and planning for the implementation of this ASU and has determined it will adopt the requirements of the new standard on a modified retrospective basis using the practical expedient not to restate contracts that begin and end within the same prior fiscal year. The Company derives revenue primarily by providing vehicle rentals and ancillary products to customers and has determined this ASU will affect its presentation of vehicle rental and other revenue as the total transaction price for each vehicle rental contract will need to be allocated among performance obligations based on standalone selling price. ASU 2014-09 defines standalone selling price as the observable price of a good or service when sold separately in similar circumstances and to similar customers. The Company has also determined this ASU will impact its accounting for its customer loyalty program and rebates. As discussed in Leases above, the Company’s vehicle rental revenues will be accounted for under Topic 606 effective January 1, 2018, until the adoption of Topic 842 on January 1, 2019.


10


2.
Restructuring and Other Related Charges

Restructuring

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 (the “T17”). During the nine months ended September 30, 2017, as part of this initiative, the Company formally communicated the termination of employment to approximately 620 employees, and as of September 30, 2017, the Company had terminated the employment of approximately 595 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 $4 million related to this initiative to be incurred in fourth quarter 2017.

In conjunction with previous acquisitions, the Company identified opportunities to integrate and streamline its operations, primarily in Europe (the “Acquisition integration”). This initiative is substantially complete, and the Company does not anticipate any further restructuring expense related to this initiative.

In 2014, the Company committed to various strategic initiatives to identify best practices and drive efficiency throughout its organization, by reducing headcount, improving processes and consolidating functions (the “T15”). The Company does not anticipate any further restructuring expense related to this initiative.

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, 2017
 
 
$
1

 
$
5

 
$
6

 
Restructuring expense:
 
 
 
 
 
 
 
 
T17
 
 
24

 
7

 
31

 
Restructuring payment/utilization:
 
 
 
 
 
 
 
 
T17
 
 
(23
)
 
(7
)
 
(30
)
 
T15
 
 
(1
)
 
(2
)
 
(3
)
 
Acquisition integration
 
 

 
(1
)
 
(1
)
Balance as of September 30, 2017
 
 
$
1

 
$
2

 
$
3

 
 
 
 
 
 
 
 
 
 
 
Personnel
Related
 
Facility
Related
 
Other (a)
 
Total
Balance as of January 1, 2017
$
5

 
$
1

 
$

 
$
6

 
Restructuring expense:
 
 
 
 
 
 
 
 
T17
17

 

 
14

 
31

 
Restructuring payment/utilization:
 
 
 
 
 
 
 
 
T17
(15
)
 
(1
)
 
(14
)
 
(30
)
 
T15
(3
)
 

 

 
(3
)
 
Acquisition integration
(1
)
 

 

 
(1
)
Balance as of September 30, 2017
$
3

 
$

 
$

 
$
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.

11



Limited Voluntary Opportunity Plan (“LVOP”)

During second quarter 2017, the Company decided to offer a voluntary termination program to certain employees in the Americas’ field operations, shared services, and general and administrative functions for a limited time. These employees, if qualified, can elect 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 in connection with the LVOP. Approximately 325 qualified employees elected to participate in the plan, and as of September 30, 2017, the Company had terminated the employment of approximately 255 of these participants.

3.
Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (“EPS”) (shares in millions): 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Net income for basic and diluted EPS
$
245

 
$
209

 
$
141

 
$
194

 
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
82.6

 
90.4

 
84.1

 
93.5

Options and non-vested stock (a)
1.4

 
1.4

 
1.4

 
1.3

Diluted weighted average shares outstanding
84.0

 
91.8

 
85.5

 
94.8

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
Basic
$
2.96

 
$
2.32

 
$
1.68

 
$
2.07

 
Diluted
$
2.91

 
$
2.28

 
$
1.65

 
$
2.05

__________
(a) 
For the three months ended September 30, 2017 and 2016, 0.7 million and 0.2 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, 2017 and 2016, 0.8 million and 0.2 million non-vested stock awards, respectively, have an anti-dilutive effect and therefore are excluded from the computation of diluted weighted average shares outstanding.

4.
Other Current Assets

Other current assets consisted of:
 
As of
September 30,
2017
 
As of December 31, 2016
Sales and use taxes
$
348

 
$
153

Prepaid expenses
231

 
212

Other
171

 
154

Other current assets
$
750

 
$
519



12


5.
Intangible Assets

Intangible assets consisted of:
 
As of September 30, 2017
 
As of December 31, 2016
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Amortized Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
License agreements
$
279

 
$
133

 
$
146

 
$
261

 
$
109

 
$
152

Customer relationships
240

 
113

 
127

 
224

 
90

 
134

Other
50

 
15

 
35

 
46

 
12

 
34

Total
$
569

 
$
261

 
$
308

 
$
531

 
$
211

 
$
320

 
 
 
 
 
 
 
 
 
 
 
 
Unamortized Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
Goodwill (a)
$
1,065

 
 
 
 
 
$
1,007

 
 
 
 
Trademarks
$
555

 
 
 
 
 
$
550

 
 
 
 
_________
(a) 
The increase in the carrying amount since December 31, 2016 primarily reflects currency translation.

For the three months ended September 30, 2017 and 2016, amortization expense related to amortizable intangible assets was approximately $17 million and $15 million, respectively. For the nine months ended September 30, 2017 and 2016, 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, 2017, the Company expects amortization expense of approximately $14 million for the remainder of 2017, $47 million for 2018, $41 million for 2019, $40 million for 2020, $30 million for 2021 and $24 million for 2022, excluding effects of currency exchange rates.

6.
Vehicle Rental Activities

The components of vehicles, net within assets under vehicle programs were as follows: 
 
As of
 
As of
 
September 30,
 
December 31,
 
2017
 
2016
Rental vehicles
$
12,993

 
$
10,937

Less: Accumulated depreciation
(1,627
)
 
(1,454
)
 
11,366

 
9,483

Vehicles held for sale
435

 
981

Vehicles, net
$
11,801

 
$
10,464


The components of vehicle depreciation and lease charges, net are summarized below: 
 
Three Months Ended 
 September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Depreciation expense
$
547

 
$
523

 
$
1,500

 
$
1,453

Lease charges
67

 
57

 
164

 
133

(Gain) loss on sale of vehicles, net
2

 
(4
)
 
53

 
(15
)
Vehicle depreciation and lease charges, net
$
616

 
$
576

 
$
1,717

 
$
1,571


At September 30, 2017 and 2016, the Company had payables related to vehicle purchases included in liabilities under vehicle programs - other of $231 million and $164 million, respectively, and receivables related to vehicle sales included in assets under vehicle programs - receivables from vehicle manufacturers and other of $707 million and $586 million, respectively.


13


7.
Income Taxes

The Company’s effective tax rate for the nine months ended September 30, 2017 is 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.

The Company’s effective tax rate for the nine months ended September 30, 2016 was a provision of 39.8%. Such rate differed from the Federal statutory rate of 35.0% primarily due to state and foreign income taxes.

8.
Accounts Payable and Other Current Liabilities

Accounts payable and other current liabilities consisted of: 
 
As of

As of
 
September 30,

December 31,
 
2017

2016
Accounts payable
$
426

 
$
343

Accrued sales and use taxes
329

 
206

Accrued payroll and related
172

 
173

Deferred revenue – current
154

 
114

Public liability and property damage insurance liabilities – current
141

 
141

Accrued commissions
126

 
86

Other
518

 
425

Accounts payable and other current liabilities
$
1,866

 
$
1,488


9.
Long-term Corporate Debt and Borrowing Arrangements

Long-term and other borrowing arrangements consisted of:
 
 
 
As of
 
As of
 
Maturity
Dates
 
September 30,
 
December 31,
 
 
2017
 
2016
Floating Rate Senior Notes
December 2017
 
$

 
$
249

Floating Rate Term Loan
March 2019
 

 
144

6% euro-denominated Senior Notes
March 2021
 

 
194

Floating Rate Term Loan (a)
March 2022
 
1,139

 
816

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
 
354

 
316

5¼% Senior Notes
March 2025
 
375

 
375

4½% euro-denominated Senior Notes
May 2025
 
295

 

Other (b)
 
 
51

 
57

Deferred financing fees
 
 
(48
)
 
(53
)
Total
 
 
3,591

 
3,523

Less: Short-term debt and current portion of long-term debt
 
 
26

 
279

Long-term debt
 
 
$
3,565

 
$
3,244

__________
(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, 2017, the floating rate term loan due 2022 bears interest at three-month LIBOR plus 200 basis points, for an aggregate rate of 3.34%. 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 3.75%.
(b) 
Primarily includes capital leases which are secured by liens on the related assets.

In March 2017, the Company issued €250 million of 4½% euro-denominated Senior Notes due 2025, at par. In April 2017, the Company used the net proceeds from the offering to redeem its outstanding €175 million principal amount of 6% euro-denominated Senior Notes due 2021 for €180 million plus accrued interest. In June 2017, the Company used the remaining proceeds to redeem a portion of its Floating Rate Senior Notes due 2017.

14



In March 2017, the Company increased its Floating Rate Term Loan due 2022 to $1.1 billion and reduced the loan interest rate to three-month LIBOR plus 2.00%. The Company used the incremental term loan proceeds to repay all of its outstanding Floating Rate Term Loan due 2019. In June 2017, the Company used the remaining proceeds to redeem the remainder of its outstanding Floating Rate Senior Notes due 2017.

Committed Credit Facilities and Available Funding Arrangements

At September 30, 2017, 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 2021 (a) 
$
1,800

 
$

 
$
1,058

 
$
742

Other facilities (b)
3

 
3

 

 

__________
(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.
(b) 
These facilities encompass bank overdraft lines of credit, bearing interest of 3.10% to 3.18% as of September 30, 2017.

At September 30, 2017, the Company had various uncommitted credit facilities available, under which it had drawn approximately $2 million, which bear interest at rates between 0.74% and 4.50%.
Debt Covenants

The agreements governing the Company’s indebtedness contain restrictive covenants, including restrictions on dividends paid to the Company by certain of its subsidiaries, the incurrence of additional indebtedness by the Company and certain of its subsidiaries, acquisitions, mergers, liquidations, and sale and leaseback transactions. The Company’s senior credit facility also contains a maximum leverage ratio requirement. As of September 30, 2017, the Company was in compliance with the financial covenants governing its indebtedness.

10.
Debt Under Vehicle Programs and Borrowing Arrangements

Debt under vehicle programs, including related party debt due to Avis Budget Rental Car Funding (AESOP) LLC (“Avis Budget Rental Car Funding”), consisted of:
 
As of
 
As of
 
September 30,
 
December 31,
 
2017
 
2016
Americas - Debt due to Avis Budget Rental Car Funding (a)
$
6,816

 
$
6,733

Americas - Debt borrowings (a)
947

 
577

International - Debt borrowings (a)
2,684

 
1,449

International - Capital leases
159

 
162

Other
1

 
7

Deferred financing fees (b)
(41
)
 
(50
)
Total
$
10,566

 
$
8,878

__________
(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, 2017 and December 31, 2016 were $31 million and $38 million, respectively.

In March 2017, the Company’s Avis Budget Rental Car Funding subsidiary issued approximately $600 million in asset-backed notes with an expected final payment date of September 2022. The weighted average interest rate was 3%. 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.


15


In May 2017, the Company increased its capacity under the European rental fleet securitization program by €250 million. The Company used the proceeds to finance fleet purchases for certain of the Company’s European operations.

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, 2017.
 
Debt under Vehicle Programs
Within 1 year (a)
$
1,868

Between 1 and 2 years
4,751

Between 2 and 3 years
1,908

Between 3 and 4 years
1,143

Between 4 and 5 years
800

Thereafter
137

Total
$
10,607

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

Committed Credit Facilities and Available Funding Arrangements

As of September 30, 2017, available funding under the Company’s vehicle programs, including related party debt due to Avis Budget Rental Car Funding, consisted of:
 
Total
Capacity (a)
 
Outstanding
Borrowings
 
Available
Capacity
Americas - Debt due to Avis Budget Rental Car Funding (b)
$
9,106

 
$
6,816

 
$
2,290

Americas - Debt borrowings (c)
974

 
947

 
27

International - Debt borrowings (d)
2,897

 
2,684

 
213

International - Capital leases (e)
189

 
159

 
30

Other
1

 
1

 

Total
$
13,167

 
$
10,607

 
$
2,560

__________
(a) 
Capacity is subject to maintaining sufficient assets to collateralize debt.
(b) 
The outstanding debt is collateralized by approximately $8.4 billion of underlying vehicles and related assets.  
(c) 
The outstanding debt is collateralized by approximately $1.3 billion of underlying vehicles and related assets.
(d) 
The outstanding debt is collateralized by approximately $3.1 billion of underlying vehicles and related assets.  
(e) 
The outstanding debt is collateralized by approximately $0.2 billion of underlying vehicles and related assets.

Debt Covenants

The agreements under the Company’s vehicle-backed funding programs contain restrictive covenants, including restrictions on dividends paid to the Company by certain of its subsidiaries and restrictions on indebtedness, mergers, liens, liquidations, and sale and leaseback transactions and in some cases also require compliance with certain financial requirements. As of September 30, 2017, 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.

11.
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,

16


including Realogy and Wyndham. The Company is entitled to indemnification from such entities for any liability resulting from such litigation.

In February 2015, the French Competition Authority issued a statement of objections alleging that several car rental companies, including the Company and two of its European subsidiaries, engaged with (i) twelve French airports, the majority of which are controlled by public administrative bodies or the French state, and violated competition law through the distribution by airports of company-specific statistics to car rental companies operating at those airports and (ii) two other international car rental companies in a concerted practice relating to train station surcharges. In February 2017, the Company was notified that the French Competition Authority dismissed the charges and cleared the Company and its subsidiaries of any wrongdoing.

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 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 related, among other things, to its vehicle rental operations, including contract and licensee disputes, competition matters, employment matters, 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, 2017; however, 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 $6.1 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, 2017 include (i) risks related to the Company’s repurchase and guaranteed depreciation agreements with domestic and foreign car manufacturers, including Ford, General Motors and Chrysler, and primarily with respect to receivables for program cars that have been disposed but for which the Company has not yet received payment from the manufacturers and (ii) risks related to Realogy and Wyndham, including receivables of $30 million and $19 million, respectively, related to certain contingent, income tax and other corporate liabilities assumed by Realogy and Wyndham in connection with their disposition.


17


12.
Stockholders’ Equity

Stockholder Rights Plan

In January 2017, the Company’s Board of Directors authorized the adoption of a short-term stockholder rights plan, with an expiration date in January 2018. Effective May 3, 2017, 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 February 2, 2017. Each right, which was exercisable only in the event any person or group were to acquire a voting or economic position of 10% 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 $90 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 May 3, 2017, 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 $1.5 billion of its common stock under a plan originally approved in 2013 and subsequently expanded, most recently in 2016. During the nine months ended September 30, 2017, the Company repurchased approximately 4.2 million shares of common stock at a cost of approximately $127 million under the program. During the nine months ended September 30, 2016, the Company repurchased approximately 9.5 million shares of common stock at a cost of approximately $290 million under the program. As of September 30, 2017, approximately $174 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,
 
 
2017
 
2016
 
2017
 
2016
Net income
$
245

 
$
209

 
$
141

 
$
194

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Currency translation adjustments (net of tax of $9, $3, $29 and $7, respectively)
32

 
20

 
105

 
100

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

 
1

 
1

 
1

 
Net unrealized gain (loss) on cash flow hedges (net of tax of $(1), $(3), $0 and $2, respectively)
1

 
4

 

 
(4
)
 
Minimum pension liability adjustment (net of tax of $(1), $0, $(2) and $(1), respectively)
1

 
1

 
4

 
3

 
 
34

 
26

 
110

 
100

Comprehensive income
$
279

 
$
235

 
$
251

 
$
294

__________
Currency translation adjustments exclude income taxes related to indefinite investments in foreign subsidiaries.


18


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(b)
 
Minimum
Pension
Liability
Adjustment(c)
 
Accumulated
Other
Comprehensive
Income (Loss)
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
)
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2016
$
(80
)
 
$
(2
)
 
$

 
$
(65
)
 
$
(147
)
 
Other comprehensive income (loss) before reclassifications
100

 
(7
)
 

 

 
93

 
Amounts reclassified from accumulated other comprehensive income (loss)

 
3

 
1

 
3

 
7

Net current-period other comprehensive income (loss)
100

 
(4
)
 
1

 
3

 
100

Balance, September 30, 2016
$
20

 
$
(6
)
 
$
1

 
$
(62
)
 
$
(47
)
__________
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 $39 million gain, net of tax, as of September 30, 2017 related to the Company’s hedge of its net investment in euro-denominated foreign operations (see Note 14 - Financial Instruments).
(a) 
For the three and nine months ended September 30, 2017, 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. For the three and nine months ended September 30, 2016, amounts reclassified from accumulated other comprehensive income (loss) into corporate interest expense were $2 million ($1 million, net of tax) and $6 million ($3 million, net of tax), respectively.
(b) 
For the three and nine months ended September 30, 2016, amounts reclassified from accumulated other comprehensive income (loss) into operating expenses were $1 million ($1 million, net of tax) in each period.
(c) 
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. For the three and nine months ended September 30, 2016, amounts reclassified from accumulated other comprehensive income (loss) into selling, general and administrative expenses were $1 million ($1 million, net of tax) and $4 million ($3 million, net of tax), respectively.


13.
Stock-Based Compensation

The Company recorded stock-based compensation expense of $1 million and $7 million ($1 million and $5 million, net of tax) during the three months ended September 30, 2017 and 2016, respectively, and $6 million and $21 million ($4 million and $14 million, net of tax) during the nine months ended September 30, 2017 and 2016, respectively.

The Company uses a Monte Carlo simulation model to calculate the fair value of stock unit awards containing a market condition. For the nine months ended September 30, 2017, the Company did not issue any stock unit awards containing a market condition. For the nine months ended September 30, 2016, the Company’s weighted average assumptions for expected stock price volatility, risk-free interest rate, valuation period and dividend yield were 46%, 0.98%, 3 years, and 0.0%, respectively.


19


The activity related to the Company’s restricted stock units (“RSUs”) consisted of (in thousands of shares):
 
 
Time-Based RSUs
 
Performance-Based and Market-Based RSUs
 
 
Number of Shares
 
Weighted
Average Grant Date
Fair Value
 
Number of Shares
 
Weighted
Average Grant Date
Fair Value
Outstanding at January 1, 2017 (a)
878

 
$
34.83

 
923

 
$
34.11

 
Granted
915

 
35.32

 
572

 
35.21

 
Vested (b)
(470
)
 
37.11

 
(146
)
 
36.55

 
Forfeited/expired
(92
)
 
32.53

 
(304
)
 
38.73

Outstanding at September 30, 2017 (c)
1,231

 
$
34.50

 
1,045

 
$
33.03

__________
(a) 
Reflects the maximum number of stock units assuming achievement of all time-, performance- and market-vesting criteria and does not include those for non-employee directors. The weighted-average fair value of time-based RSUs, and performance-based and market-based RSUs granted during the nine months ended September 30, 2016 was $25.92 and $23.33, respectively.
(b) 
The total grant date fair value of RSUs vested during the nine months ended September 30, 2017 and 2016 was $23 million and $27 million, respectively.
(c) 
The Company assumes 0.1 million of performance-based and market-based RSUs outstanding awards will vest over time with weighted average grate date fair value of $36.64. The Company’s outstanding time-based RSUs, and performance-based and market-based RSUs expected to vest had aggregate intrinsic values of $47 million and $4 million, respectively. Aggregate unrecognized compensation expense related to time-based RSUs, and performance-based and market-based RSUs amounted to $40 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
 
Aggregate Intrinsic Value (in millions)
 
Weighted Average Remaining Contractual Term (years)
Outstanding at January 1, 2017
810

 
$
2.91

 
$
27

 
2.3
 
Granted

 

 

 
 
 
Exercised
(14
)
 
0.79

 

 
 
 
Forfeited/expired

 

 

 
 
Outstanding and exercisable at September 30, 2017
796

 
$
2.95

 
$
28

 
1.5

14.
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, 2017 and 2016 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

20


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 results of operations. 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, 2017 and 2016. The Company estimates that $2 million of losses 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, 2017
Interest rate caps (a)
$
11,035

Interest rate swaps
1,100

Foreign exchange contracts
887

 
 
Commodity contracts (millions of gallons of unleaded gasoline)
4

__________
(a) 
Represents $8.0 billion of interest rate caps sold, partially offset by approximately $3.0 billion of interest rate caps purchased. These amounts exclude $5.0 billion of interest rate caps purchased by the Company’s Avis Budget Rental Car Funding subsidiary as it is not consolidated by the Company.

Estimated fair values (Level 2) of derivative instruments were as follows: 
 
 
As of September 30, 2017
 
As of December 31, 2016
 
 
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)
$
4

 
$
2

 
$
7

 
$
4

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

 
1

 
1

 
7

 
Foreign exchange contracts (c)
7

 
10

 
7

 
2

 
Total
$
11

 
$
13

 
$
15

 
$
13

__________
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.


21


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,
 
 
2017

2016

2017

2016
Derivatives designated as hedging instruments (a)
 
 
 
 
 
 
 
 
Interest rate swaps
$
1

 
$
4

 
$

 
$
(4
)
 
Euro-denominated notes
(13
)
 
(3
)
 
(44
)
 
(11
)
Derivatives not designated as hedging instruments (b)
 
 
 
 
 
 
 
 
Interest rate caps (c)
(1
)
 

 
(1
)
 
(1
)
 
Foreign exchange contracts (d)
(11
)
 
5

 
(44
)
 
17

 
Commodity contracts (e)
1

 

 
(1
)
 

 
Total
$
(23
)
 
$
6

 
$
(90
)
 
$
1

__________
(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) 
For the three and nine months ended September 30, 2016 and 2017, included in vehicle interest, net.
(d) 
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. For the three months ended September 30, 2016, included a $8 million gain in interest expense and a $3 million loss in operating expense and for the nine months ended September 30, 2016, included a $43 million gain in interest expense and a $26 million loss in operating expense.
(e) 
Included in operating expense.

Debt Instruments

The carrying amounts and estimated fair values (Level 2) of debt instruments were as follows: 
 
 
As of September 30, 2017
 
As of December 31, 2016
 
 
Carrying
Amount
 
Estimated
Fair
Value
 
Carrying
Amount
 
Estimated
Fair
Value
Corporate debt
 
 
 
 
 
 
 
 
Short-term debt and current portion of long-term debt
$
26

 
$
26

 
$
279

 
$
280

 
Long-term debt
3,565

 
3,667

 
3,244

 
3,265

 
 
 
 
 
 
 
 
 
Debt under vehicle programs
 
 
 
 
 
 
 
 
Vehicle-backed debt due to Avis Budget Rental Car Funding
$
6,785

 
$
6,834

 
$
6,695

 
$
6,722

 
Vehicle-backed debt
3,780

 
3,786

 
2,176

 
2,187

 
Interest rate swaps and interest rate caps (a)
1

 
1

 
7

 
7

__________
(a) 
Derivatives in a liability position.

15.
Segment Information

The Company’s chief operating decision-maker assesses performance and allocates resources based upon the separate financial information from 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 revenue 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

22


unprecedented personal-injury legal matters 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 costs associated with the separation of certain officers of the Company and its limited voluntary opportunity plan, which offers certain employees the limited opportunity to elect resignation from employment for enhanced severance benefits. Costs associated with the separation of certain officers and the limited voluntary opportunity plan are recorded as part of restructuring and other related charges in the Company’s Consolidated Condensed Statement of Comprehensive Income. The Company did not revise prior year’s 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.
 
 
 
 
Three Months Ended September 30,
 
 
 
 
2017
 
2016
 
 
 
 
Revenues

Adjusted EBITDA

Revenues

Adjusted EBITDA
Americas
$
1,839

 
$
303

 
$
1,821

 
$
306

International
913

 
194

 
835

 
179

Corporate and Other (a)

 
(15
)
 

 
(16
)
 
Total Company
$
2,752

 
$
482

 
$
2,656

 
$
469

 
 
 
 
 
 
 
 
 
 
 
Reconciliation of Adjusted EBITDA to income before income taxes
 
 
 
 
 
 
 
2017
 
 
 
2016
Adjusted EBITDA
 
 
$
482

 
 
 
$
469

Less:
Non-vehicle related depreciation and amortization
 
66

 
 
 
63

 
 
Interest expense related to corporate debt, net
 
45

 
 
 
51

 
 
Restructuring and other related charges
 
7

 
 
 
6

 
 
Transaction-related costs, net
 
 

 
 
 
4

Income before income taxes
 
 
$
364

 
 
 
$
345

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

 
 
 
 
Nine Months Ended September 30,
 
 
 
 
2017
 
2016
 
 
 
 
Revenues
 
Adjusted EBITDA
 
Revenues
 
Adjusted EBITDA
Americas
$
4,718

 
$
379

 
$
4,778

 
$
532

International
2,111

 
260

 
2,002

 
237

Corporate and Other (a)

 
(44
)
 

 
(52
)
 
Total Company
$
6,829

 
$
595

 
$
6,780

 
$
717

 
 
 
 
 
 
 
 
 
 
 
Reconciliation of Adjusted EBITDA to income before income taxes
 
 
 
 
 
 
 
2017
 
 
 
2016
Adjusted EBITDA
 
 
$
595

 
 
 
$
717

Less:
Non-vehicle related depreciation and amortization
 
194

 
 
 
189

 
 
Interest expense related to corporate debt, net
 
142

 
 
 
157

 
 
Early extinguishment of corporate debt
 
3

 
 
 
10

 
 
Restructuring and other related charges
 
52

 
 
 
26

 
 
Transaction-related costs, net
 
 
8

 
 
 
13

 
 
Charges for legal matter, net (b)
 
 
(14
)
 
 
 

Income before income taxes
 
 
$
210

 
 
 
$
322

__________
(a) 
Includes unallocated corporate overhead which is not attributable to a particular segment.
(b) 
Reported within operating expenses in our Consolidated Condensed Statements of Comprehensive Income.

Since December 31, 2016, there have been no significant changes in segment assets other than the Company’s International segment assets. As of September 30, 2017 and December 31, 2016, International segment assets exclusive of assets under vehicle programs were approximately $2.6 billion and $2.0 billion,

23


respectively, and International segment assets under vehicle programs were approximately $3.5 billion and $2.4 billion, respectively, due to seasonality.

16.
Guarantor and Non-Guarantor Consolidating Condensed Financial Statements

The following consolidating financial information presents Consolidating Condensed Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016, Consolidating Condensed Balance Sheets as of September 30, 2017 and December 31, 2016, and Consolidating Condensed Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 for: (i) Avis Budget Group, Inc. (the “Parent”); (ii) ABCR and Avis Budget Finance, Inc. (the “Subsidiary Issuers”); (iii) the guarantor subsidiaries; (iv) the non-guarantor subsidiaries; (v) elimination entries necessary to consolidate the Parent with the Subsidiary Issuers, and the guarantor and non-guarantor subsidiaries; and (vi) the Company on a consolidated basis. The Subsidiary Issuers and the guarantor and non-guarantor subsidiaries are 100% owned by the Parent, either directly or indirectly. All guarantees are full and unconditional and joint and several. This financial information is being presented in relation to the Company’s guarantee of the payment of principal, premium (if any) and interest on the notes issued by the Subsidiary Issuers. See Note 9 - Long-term 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.

24


Consolidating Condensed Statements of Comprehensive Income

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

 
$

 
$
1,228

 
$
721

 
$

 
$
1,949

 
Other

 

 
341

 
1,073

 
(611
)
 
803

Net 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