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TMCNet:  AVIS BUDGET GROUP, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

[August 05, 2014]

AVIS BUDGET GROUP, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion should be read in conjunction with our Consolidated Condensed Financial Statements and accompanying Notes thereto included elsewhere herein and with our 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 20, 2014 (the "2013 Form 10-K") and our Current Report on Form 8-K filed May 12, 2014 to update the 2013 Form 10-K for a change to our reportable segments as well as a revision to our definition of Adjusted EBITDA. Our actual results of operations may differ materially from those discussed in the 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Risk Factors" and other portions of our 2013 Form 10-K and our Current Report on Form 8-K filed May 12, 2014. 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 recognized brands in the global vehicle rental and car sharing industry, Avis, Budget and Zipcar. We are a leading vehicle rental operator in North America, Europe, Australia, New Zealand and certain other regions we serve, with a fleet of approximately 500,000 vehicles. We also license the use of the Avis and Budget trademarks to licensees in the areas in which we do not operate directly. We and our licensees operate the Avis, Budget and/or Zipcar brands in approximately 175 countries throughout the world.

Our Segments We categorize our operations into three reportable business segments: North America, consisting primarily of our Avis and Budget car rental operations in the United States, our Avis and Budget vehicle rental operations in Canada, and our Zipcar car sharing operations in North America; International, consisting primarily of our Avis and Budget vehicle rental operations in Europe, the Middle East, Africa, Asia, South America, Central America, the Caribbean, Australia and New Zealand, and our car sharing operations in certain of these markets; and Truck Rental, consisting of our Budget truck rental operations in the United States. Our segments include the financial results of Zipcar since our acquisition of such business in March 2013. In conjunction with a change in our management structure in first quarter 2014, we re-aligned components of our Zipcar operations among our business segments. Segment financial information presented below has been recast to conform with our current business segment reporting alignment for all periods presented.

Business and Trends Our revenues are derived principally from car and truck rentals in our Company-owned operations and include: • time and mileage ("T&M") 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 other locations; • sales of loss damage waivers and insurance and rentals of navigation units and other items in conjunction with vehicle rentals; and • royalty revenue from our licensees in conjunction with their vehicle rental transactions.

Our operating results are subject to variability due to seasonality, macroeconomic conditions 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.

32-------------------------------------------------------------------------------- Table of Contents We believe that the following factors, among others, may affect and/or impact our financial condition and results of operations: • general travel demand, including worldwide enplanements; • fleet, pricing, marketing and strategic decisions made by us and by our competitors; • changes in fleet costs and in conditions in the used vehicle marketplace, as well as manufacturer recalls; • changes in borrowing costs and in market willingness to purchase corporate and vehicle-related debt; • our acquisitions, our integration of acquired operations and our realization of synergies, particularly with respect to Zipcar and Avis Europe; • demand for car sharing services; • changes in the price of gasoline; • changes in currency exchange rates; and • demand for truck rentals.

Thus far in 2014, we continue to operate in an uncertain and uneven economic environment. Nonetheless, we anticipate that worldwide demand for vehicle rental and car sharing services will increase in 2014, most likely against a backdrop of modest economic growth in most of the geographic markets in which we operate directly. We also expect that our access to new fleet vehicles will be adequate to meet our needs for both replacement of existing vehicles in the normal course and for growth to meet incremental demand. We will look to pursue opportunities for further pricing increases in 2014 in order to maintain our returns on invested capital and to enhance our profitability.

Our objective is to focus on strategically accelerating our growth, strengthening our global position as a leading provider of vehicle rental services, continuing to enhance our customers' rental experience, and controlling costs and driving efficiency throughout the organization. We operate in a highly competitive industry and we expect to continue to face challenges and risks. 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 and our operations, and adjustments in the size, nature and terms of our relationships with vehicle manufacturers.

Year-to-Date Highlights In the six months ended June 30, 2014: • Our net revenues increased 10% year-over-year to $4.1 billion in 2014.

• Pricing (our average T&M revenue per rental day) increased 3% in North America, excluding Zipcar and Payless Car Rental ("Payless", which was acquired in July 2013), driven by increases in both commercial and leisure pricing.

• Adjusted EBITDA increased 21% to $330 million in 2014, as a result of higher rental volumes and increased year-over-year pricing in North America.

• We redeemed all $687 million of our outstanding 8¼% Senior Notes due January 2019 using the proceeds from our issuance of $400 million of 5?% Senior Notes due 2022 and €200 million of additional euro-denominated 6% Senior Notes due 2021.

• We repurchased $150 million of our common stock, reducing our diluted shares outstanding by approximately 3.0 million shares.

33-------------------------------------------------------------------------------- Table of Contents • We acquired our Budget licensee in Edmonton, Alberta, Canada and also re-acquired the right to operate the Budget brand in Portugal.

RESULTS OF OPERATIONS We measure performance using the following key operating statistics: (i) rental days, which represents the total number of days (or portion thereof) a vehicle was rented, and (ii) T&M revenue per rental day, which represents the average daily revenue we earned from rental and mileage fees charged to our customers.

We also measure our ancillary revenues (rental-transaction revenue other than T&M revenue), such as from the sale of collision and loss damage waivers, insurance products and fuel service options and portable GPS navigation unit rentals. Our vehicle rental operating statistics (rental days and T&M revenue per rental day) are all calculated based on the actual rental of the vehicle during a 24-hour period. We believe that this methodology provides our management with the most relevant statistics in order to manage the business.

Our calculation may not be comparable to other companies' calculation of similarly-titled statistics.

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 revenue and "Adjusted EBITDA", which we define as income from continuing operations before non-vehicle related depreciation and amortization, any impairment charges, restructuring expense, early extinguishment of debt costs, non-vehicle related interest, transaction-related costs and income taxes.

Our presentation of Adjusted EBITDA may not be comparable to similarly-titled measures used by other companies. In the first quarter of 2014, we revised our definition of Adjusted EBITDA to exclude restructuring expense and have recast our 2013 Adjusted EBITDA amounts to conform with the revised definition. For additional information regarding the impact of the change in our definition of Adjusted EBITDA, refer to Note 15 - Segment Information.

34-------------------------------------------------------------------------------- Table of Contents Three Months Ended June 30, 2014 vs. Three Months Ended June 30, 2013 Our consolidated results of operations comprised the following: Three Months Ended June 30, 2014 2013 Change % Change Revenues Vehicle rental $ 1,553 $ 1,438 $ 115 8 % Other 641 564 77 14 % Net revenues 2,194 2,002 192 10 % Expenses Operating 1,105 1,007 98 10 % Vehicle depreciation and lease charges, net 517 476 41 9 % Selling, general and administrative 287 274 13 5 % Vehicle interest, net 72 66 6 9 % Non-vehicle related depreciation and amortization 45 37 8 22 % Interest expense related to corporate debt, net: Interest expense 55 55 - 0 % Early extinguishment of debt 56 91 (35 ) (38 %) Transaction-related costs 8 19 (11 ) (58 %) Restructuring expense 1 15 (14 ) (93 %) Total expenses 2,146 2,040 106 5 % Income (loss) before income taxes 48 (38 ) 86 * Provision for (benefit from) income taxes 22 (10 ) 32 * Net income (loss) $ 26 $ (28 ) $ 54 * __________ * Not meaningful.

During second quarter 2014, our net revenues increased principally as a result of a 4% increase in total rental days and a 3% increase in pricing (excluding Zipcar and Payless), $31 million of revenue from Payless and a 10% increase in ancillary revenues (excluding Zipcar and Payless). Movements in currency exchange rates did not have a significant impact on revenues during second quarter 2014 compared to 2013.

Total expenses increased as a result of higher operating expenses resulting from increased volumes and higher vehicle depreciation and lease charges as a result of a 5% increase in our car rental fleet and a 2% increase in our per-unit fleet costs (excluding Zipcar and Payless). These increases were partially offset by decreases in debt extinguishment costs, transaction-related costs and restructuring expense. As a result, despite a $7 million negative pretax impact from currency exchange rate movements, our net income increased by $54 million.

Our effective tax rates were a provision of 46% and a benefit of 26% for the three months ended June 30, 2014 and 2013, respectively, principally due to the non-deductibility of certain transaction-related costs in 2014 and of the expenses for the early extinguishment of corporate debt in 2013.

For the three months ended June 30, 2014, the Company reported diluted earnings of $0.24 per share, which includes after-tax debt extinguishment costs of ($0.31) per share.

In the three months ended June 30, 2014: • Operating expenses, at 50.3% of revenue, remained level compared to the prior-year period.

• Vehicle depreciation and lease charges decreased to 23.6% of revenue from 23.8% compared to second quarter 2013, primarily due to increased pricing and ancillary revenues, partially offset by increased per-unit fleet costs.

• Selling, general and administrative costs decreased to 13.1% of revenue from 13.7% in second quarter 2013 primarily due to reduced marketing expenses.

35-------------------------------------------------------------------------------- Table of Contents • Vehicle interest costs, at 3.3% of revenue, remained level compared to the prior-year period.

Following is a more detailed discussion of the results of each of our reportable segments: Revenues Adjusted EBITDA 2014 2013 % Change 2014 2013 % Change North America $ 1,427 $ 1,279 12 % $ 157 $ 115 37 % International 667 621 7 % 57 58 (2 %) Truck Rental 100 102 (2 %) 13 17 (24 %) Corporate and Other (a) - - * (14 ) (11 ) * Total Company $ 2,194 $ 2,002 10 % 213 179 19 % Less: Non-vehicle related depreciation and amortization 45 37 Interest expense related to corporate debt, net: Interest expense 55 55 Early extinguishment of debt 56 91 Transaction-related costs (b) 8 19 Restructuring expense 1 15 Income (loss) before income taxes $ 48 $ (38 ) __________ * Not meaningful.

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

(b) Primarily comprised of acquisition- and integration-related expenses.

North America 2014 2013 % Change Revenue $ 1,427 $ 1,279 12 % Adjusted EBITDA 157 115 37 % Revenues increased 12% in second quarter 2014 compared with second quarter 2013, primarily due to 5% growth in rental volumes and a 4% increase in pricing (excluding Zipcar and Payless).

Adjusted EBITDA increased 37% in second quarter 2014 compared with second quarter 2013, primarily due to increased pricing and rental volumes.

In the three months ended June 30, 2014: • Operating expenses were 48.4% of revenue, compared to 48.3% in the prior-year period.

• Vehicle depreciation and lease charges decreased to 25.6% of revenue from 26.1% in second quarter 2013, as pricing increases outpaced the 2% increase in per-unit fleet costs (excluding Zipcar and Payless).

• Selling, general and administrative costs decreased to 11.0% of revenue from 12.6% in the prior-year period, principally due to lower marketing expenses.

• Vehicle interest costs, at 3.9% of revenue, remained level compared to second quarter 2013.

36-------------------------------------------------------------------------------- Table of Contents International 2014 2013 % Change Revenue $ 667 $ 621 7 % Adjusted EBITDA 57 58 (2 %) Revenues increased 7% during second quarter 2014 compared to second quarter 2013, primarily due to a 2% increase in rental volumes and a 13% increase in ancillary revenues.

Adjusted EBITDA decreased 2% in second quarter 2014 compared to second quarter 2013, due to a $5 million negative impact from currency exchange rate changes, partially offset by the increase in rental volumes and ancillary revenues.

In the three months ended June 30, 2014: • Operating expenses were 53.0% of revenue, an increase from 52.3% in the prior-year period, due to currency hedge gains in 2013, partially offset by increased ancillary revenues in 2014.

• Vehicle depreciation and lease charges decreased to 20.3% of revenue from 21.2% compared to second quarter 2013, driven by increased ancillary revenues.

• Selling, general and administrative costs increased to 16.2% of revenue from 15.1% in the prior-year period, primarily due to increased advertising and brand investment.

• Vehicle interest costs decreased to 1.9% of revenue compared to 2.0% in second quarter 2013.

Truck Rental 2014 2013 % Change Revenue $ 100 $ 102 (2 %) Adjusted EBITDA 13 17 (24 %) Revenues decreased $2 million due to a 6% decrease in total rental days, as our rental fleet was 12% smaller in 2014, largely offset by a 4% increase in pricing.

Adjusted EBITDA decreased $4 million in second quarter 2014 compared with second quarter 2013, principally due to higher per-unit fleet costs associated with newly acquired rental fleet.

37-------------------------------------------------------------------------------- Table of Contents Six Months Ended June 30, 2014 vs. Six Months Ended June 30, 2013 Our consolidated results of operations comprised the following: Six Months Ended June 30, 2014 2013 Change % Change Revenues Vehicle rental $ 2,882 $ 2,654 $ 228 9 % Other 1,174 1,039 135 13 % Net revenues 4,056 3,693 363 10 % Expenses Operating 2,105 1,937 168 9 % Vehicle depreciation and lease charges, net 950 863 87 10 % Selling, general and administrative 535 498 37 7 % Vehicle interest, net 136 123 13 11 % Non-vehicle related depreciation and amortization 86 71 15 21 % Interest expense related to corporate debt, net: Interest expense 111 114 (3 ) (3 %) Early extinguishment of debt 56 131 (75 ) (57 %) Transaction-related costs 16 26 (10 ) (38 %) Restructuring expense 8 25 (17 ) (68 %) Total expenses 4,003 3,788 215 6 % Income (loss) before income taxes 53 (95 ) 148 * Provision for (benefit from) income taxes 23 (21 ) 44 * Net income (loss) $ 30 $ (74 ) $ 104 * __________ * Not meaningful.

During the six months ended June 30, 2014, our net revenues increased principally as a result of a 4% increase in total rental days and a 2% increase in pricing (excluding Zipcar and Payless), $60 million of incremental revenue from Zipcar, $60 million of revenue from Payless and an 8% increase in ancillary revenues (excluding Zipcar and Payless). Movements in currency exchange rates did not have a significant impact on revenues during the six months ended June 30, 2014 compared to 2013.

Total expenses increased as a result of higher operating expenses resulting from increased volumes; higher vehicle depreciation and lease charges as a result of a 4% increase in our car rental fleet and a 4% increase in our per-unit fleet costs (excluding Zipcar and Payless); and higher selling, general and administrative costs, driven by the acquisition of Zipcar. These increases were partially offset by decreases in debt extinguishment costs, transaction-related costs and restructuring expense. As a result, despite a $16 million negative pretax impact from currency exchange rate movements, our net income increased by $104 million. Our effective tax rates were a provision of 43% and a benefit of 22% for the six months ended June 30, 2014 and 2013, respectively, principally due to the non-deductibility of certain transaction-related costs in 2014 and of the expenses for the early extinguishment of corporate debt in 2013.

For the six months ended June 30, 2014, the Company reported diluted earnings of $0.28 per share, which includes after-tax debt extinguishment costs of ($0.30), after-tax transaction costs of ($0.12) per share and after-tax restructuring expense of ($0.04) per share.

In the six months ended June 30, 2014: • Operating expenses decreased to 51.9% of revenue from 52.5% in the first half of 2013, driven by higher rental pricing and increased rental volumes.

• Vehicle depreciation and lease charges, at 23.4% of revenue, remained level compared to the first half of 2013.

38-------------------------------------------------------------------------------- Table of Contents • Selling, general and administrative costs decreased to 13.2% of revenue from 13.5% in the first half of 2013.

• Vehicle interest costs were 3.4% of revenue compared to 3.3% in the prior-year period.

Following is a more detailed discussion of the results of each of our reportable segments: Revenues Adjusted EBITDA 2014 2013 % Change 2014 2013 % Change North America $ 2,663 $ 2,377 12 % $ 271 $ 208 30 % International 1,218 1,138 7 % 74 75 (1 %) Truck Rental 175 178 (2 %) 11 12 (8 %) Corporate and Other (a) - - * (26 ) (23 ) * Total Company $ 4,056 $ 3,693 10 % 330 272 21 % Less: Non-vehicle related depreciation and amortization 86 71 Interest expense related to corporate debt, net: Interest expense 111 114 Early extinguishment of debt 56 131 Transaction-related costs (b) 16 26 Restructuring expense 8 25 Income (loss) before income taxes $ 53 $ (95 ) __________ * Not meaningful.

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

(b) Primarily comprised of acquisition- and integration-related expenses.

North America 2014 2013 % Change Revenue $ 2,663 $ 2,377 12 % Adjusted EBITDA 271 208 30 % Revenues increased 12% in the six months ended June 30, 2014 compared with the same period in 2013, primarily due to 4% growth in rental volumes and a 3% increase in pricing (excluding Zipcar and Payless) as well as the acquisitions of Zipcar and Payless.

Adjusted EBITDA increased 30% in the six months ended June 30, 2014 compared with the same period in 2013, primarily due to increased rental volumes and pricing (excluding Zipcar and Payless) as well as the acquisitions of Zipcar and Payless, partially offset by 5% higher per-unit fleet costs (excluding Zipcar and Payless).

In the six months ended June 30, 2014: • Operating expenses were 49.7% of revenue, a decrease from 49.9% in the prior-year period, primarily due to higher pricing.

• Vehicle depreciation and lease charges decreased to 25.0% of revenue from 25.1% in first half 2014 compared to 2013.

• Selling, general and administrative costs decreased to 11.2% of revenue from 12.2% in the prior-year period principally due to lower marketing expenses.

• Vehicle interest costs, at 4.0% of revenue, remained level compared the prior-year period.

39-------------------------------------------------------------------------------- Table of Contents International 2014 2013 % Change Revenue $ 1,218 $ 1,138 7 % Adjusted EBITDA 74 75 (1 %) Revenues increased 7% during the six months ended June 30, 2014 compared to the same period in 2013, primarily due to a 3% increase in rental volumes and an 11% increase in ancillary revenues.

Adjusted EBITDA decreased in the six months ended June 30, 2014 compared to the same period in 2013, with the benefit of higher revenue offset by a $14 million negative impact from currency exchange rate changes.

In the six months ended June 30, 2014: • Operating expenses were 55.0% of revenue, a decrease from 55.3% in the prior-year period, primarily due to increased ancillary revenues, partially offset by currency hedge losses in 2014 compared to currency hedge gains in 2013.

• Vehicle depreciation and lease charges decreased to 20.7% of revenue from 21.3% compared to the prior year period, driven by increased ancillary revenues.

• Selling, general and administrative costs increased to 16.2% of revenue from 15.1% in the prior-year period, primarily due to increased advertising and brand investment as well as the acquisition of Zipcar.

• Vehicle interest costs increased to 2.0% of revenue compared to 1.8% in the six months ended June 30, 2013.

Truck Rental 2014 2013 % Change Revenue $ 175 $ 178 (2 %) Adjusted EBITDA 11 12 (8 %) Revenues decreased $3 million due to a 5% decrease in total rental days, as our rental fleet was 13% smaller in 2014, and lower ancillary sales, largely offset by a 4% increase in pricing.

Adjusted EBITDA decreased $1 million in the six months ended June 30, 2014 compared with the same period in 2013, principally due to increased per-unit fleet costs, partially offset by lower maintenance costs as we realize the benefits of our previous restructuring initiative.

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.

40-------------------------------------------------------------------------------- Table of Contents FINANCIAL CONDITION June 30, December 31, 2014 2013 Change Total assets exclusive of assets under vehicle programs $ 5,942 $ 5,832 $ 110 Total liabilities exclusive of liabilities under vehicle programs 5,876 5,720 156 Assets under vehicle programs 14,047 10,452 3,595 Liabilities under vehicle programs 13,446 9,793 3,653 Stockholders' equity 667 771 (104 ) Total assets exclusive of assets under vehicle programs increased primarily due to a seasonal increase in value-added tax receivables, which are recoverable from government agencies.

Total liabilities exclusive of liabilities under vehicle programs increased primarily due to seasonal increases in accounts payable and prepaid reservations.

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 and associated funding.

The decrease in stockholders' equity is primarily due to the repurchase of our common stock, partially offset by $30 million of net income for the six months ended June 30, 2014.

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 six months ended June 30, 2014, we issued €200 million (approximately $275 million) of additional 6% Euro-denominated Senior Notes due 2021 at 106.75% of their face value, for aggregate proceeds of approximately $295 million. In May 2014, we issued $400 million of 5?% Senior Notes due 2022 at par. The proceeds from these borrowings were used to repurchase the entire $687 million principal amount of our 8¼% Senior Notes due 2019 for $737 million plus accrued interest. In addition, we repurchased approximately 3.0 million shares of our outstanding common stock during the six months ended June 30, 2014, and increased our borrowings under vehicle programs to fund the seasonal increase in our rental fleet.

CASH FLOWS The following table summarizes our cash flows: Six Months Ended June 30, 2014 2013 Change Cash provided by (used in): Operating activities $ 1,011 $ 874 $ 137 Investing activities (4,068 ) (3,458 ) (610 ) Financing activities 2,899 2,498 401 Effect of exchange rate changes 2 (17 ) 19 Net decrease in cash and cash equivalents (156 ) (103 ) (53 ) Cash and cash equivalents, beginning of period 693 606 87 Cash and cash equivalents, end of period $ 537 $ 503 $ 34 During the six months ended June 30, 2014, we generated $137 million more cash from operating activities compared with the same period in 2013 principally reflecting the increase in our net earnings.

The increase in cash used in investing activities during the six months ended June 30, 2014 compared with the same period in 2013 is primarily due to an increase in vehicle purchases and the acquisition of our Budget licensee in Edmonton in 2014, partially offset by the acquisition of Zipcar in 2013.

41-------------------------------------------------------------------------------- Table of Contents The increase in cash provided by financing activities during the six months ended June 30, 2014 compared with the same period in 2013 is primarily due to increased borrowings under vehicle programs to fund vehicle purchases in 2014, partially offset by increased corporate borrowings to fund the purchase of Zipcar in 2013 and the repurchase of common stock in 2014.

DEBT AND FINANCING ARRANGEMENTS At June 30, 2014, we had approximately $14.2 billion of indebtedness, including corporate indebtedness of approximately $3.4 billion and debt under vehicle programs of approximately $10.8 billion.

Corporate indebtedness consisted of: As of As of Maturity June 30, December 31, Dates 2014 2013 3½% Convertible Notes (a) October 2014 $ 65 $ 66 4?% Senior Notes November 2017 300 300 Floating Rate Senior Notes (b) December 2017 247 247 8¼% Senior Notes January 2019 - 691 Floating Rate Term Loan (c) March 2019 985 989 9¾% Senior Notes March 2020 223 223 6% Euro-denominated Senior Notes March 2021 634 344 5?% Senior Notes June 2022 400 - 5½% Senior Notes April 2023 500 500 3,354 3,360 Other 34 34 Total $ 3,388 $ 3,394 __________(a) As of June 30, 2014, the 3½% convertible notes are convertible by the holders into approximately 4 million shares of the Company's common stock.

(b) The interest rate on these notes is equal to three-month LIBOR plus 275 basis points, for an aggregate rate of 2.98% at June 30, 2014; the Company has entered into an interest rate swap to hedge its interest rate exposure related to these notes at an aggregate rate of 3.58%.

(c) The floating rate term loan is part of the Company's senior credit facility, which is secured by pledges of capital stock of certain subsidiaries of the Company, and liens on substantially all of the Company's intellectual property and certain other real and personal property. As of June 30, 2014, the floating term rate loan due 2019 bears interest at the greater of three-month LIBOR or 0.75%, plus 225 basis points, for an aggregate rate of 3.00%. The Company has entered into a swap to hedge $600 million of its interest rate exposure related to the floating rate term loan at an aggregate rate of 3.96%.

The following table summarizes the components of our debt under vehicle programs, including related party debt due to Avis Budget Rental Car Funding (AESOP) LLC ("Avis Budget Rental Car Funding"): As of As of June 30, December 31, 2014 2013North America - Debt due to Avis Budget Rental Car Funding (a) $ 8,101 $ 5,656 North America - Canadian borrowings (a)( b) 744 400 International - Debt borrowings (a) 1,290 731 International - Capital leases (a) 444 289 Truck Rental - Debt borrowings (c) 264 226 Other 5 35 Total $ 10,848 $ 7,337 __________(a) The increases reflect additional borrowings principally to fund a seasonal increase in the Company's car rental fleet.

(b) The increase includes additional borrowings to fund an increase in the Company's fleet driven by the acquisition of its Budget licensee for Edmonton.

(c) The increase reflects additional borrowings to acquire rental fleet.

42-------------------------------------------------------------------------------- Table of Contents As of June 30, 2014, the committed corporate credit facilities available to us and/or our subsidiaries included: Total Outstanding Letters of Available Capacity Borrowings Credit Issued Capacity Senior revolving credit facility maturing 2018 (a) $ 1,650 $ - $ 900 $ 750 Other facilities (b) 13 1 - 12 __________(a) The senior revolving credit facility bears interest at one-month LIBOR, plus 225 basis points and is part of the Company's senior credit facility, which is secured by pledges of capital stock of certain subsidiaries of the Company, and liens on substantially all of the Company's intellectual property and certain other real and personal property.

(b) These facilities encompass bank overdraft lines of credit, bearing interest of 5.14% to 5.69% as of June 30, 2014.

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

The following table presents available funding under our debt arrangements related to our vehicle programs at June 30, 2014: Total Outstanding Available Capacity (a) Borrowings Capacity North America - Debt due to Avis Budget Rental Car Funding (b) $ 8,516 $ 8,101 $ 415 North America - Canadian borrowings (c) 961 744 217 International - Debt borrowings (d) 1,650 1,290 360 International - Capital leases (e) 554 444 110 Truck Rental - Debt borrowings (f) 283 264 19 Other 5 5 - Total $ 11,969 $ 10,848 $ 1,121 __________(a) Capacity is subject to maintaining sufficient assets to collateralize debt.

(b) The outstanding debt is collateralized by approximately $9.7 billion of underlying vehicles and related assets.

(c) The outstanding debt is collateralized by $919 million of underlying vehicles and related assets.

(d) The outstanding debt is collateralized by approximately $1.6 billion of underlying vehicles and related assets.

(e) The outstanding debt is collateralized by $450 million of underlying vehicles and related assets.

(f) The outstanding debt is collateralized by $406 million of underlying vehicles and related assets.

LIQUIDITY RISK Our primary liquidity needs include the payment of operating expenses, servicing of corporate and vehicle related debt and procurement of rental vehicles to be used in our operations. The present intention of management is to reinvest the undistributed earnings of our foreign subsidiaries indefinitely into our foreign operations. We do not anticipate the need to repatriate foreign earnings to the United States to service corporate debt or for other U.S. needs. Our primary sources of funding are operating revenue, 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 June 30, 2014, we have cash and cash equivalents of $537 million, available borrowing capacity under our committed credit facilities of $750 million and available capacity under our vehicle programs of approximately $1.1 billion. During the six months ended June 30, 2014, we repurchased the entire$687 million principal amount of our 8¼% Senior Notes for $737 million plus accrued interest and obtained Board approval to expand our $200 million share repurchase authorization by $235 million. We intend to fund share repurchases under the program with our cash flow from operations.

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, including Ford, General Motors, Chrysler, Peugeot, Volkswagen, Kia, Fiat, BMW, Subaru, Mercedes and Toyota being unable or unwilling to honor their obligations to repurchase or guarantee the 43-------------------------------------------------------------------------------- Table of Contents 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 June 30, 2014, 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 2013 Form 10-K.

CONTRACTUAL OBLIGATIONS Our future contractual obligations have not changed significantly from the amounts reported within our 2013 Form 10-K and our Current Report on Form 8-K filed May 12, 2014 with the exception of our commitment to purchase vehicles, which decreased by approximately $4.4 billion from December 31, 2013, to approximately $2.0 billion at June 30, 2014. 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 9 and 10 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 2013 Form 10-K and our Current Report on Form 8-K filed May 12, 2014 are the accounting policies (related to goodwill and other indefinite-lived intangible assets, business combinations, 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 2014 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.

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