XNYS:DTG Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
____________________

FORM 10-Q

[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2012

OR

[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______________to______________

Commission file number 1-13647
____________________


DOLLAR THRIFTY AUTOMOTIVE GROUP, INC.
(Exact name of registrant as specified in its charter)

Delaware
73-1356520
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)

5330 East 31st Street, Tulsa, Oklahoma  74135
(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code:  (918) 660-7700


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   X        No____
 
Indicate by check mark whether the registrant 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   X        No____
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer    X          Accelerated filer                Non-accelerated filer              Smaller reporting company          
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes              No   X     

The number of shares outstanding of the registrant’s Common Stock as of July 27, 2012 was 27,866,943.
 
 



 
 
 
 
DOLLAR THRIFTY AUTOMOTIVE GROUP, INC.
FORM 10-Q
CONTENTS
 
Page
 
PART I - FINANCIAL INFORMATION
 

 
 
           
25
 
 
           
35
 

PART II - OTHER INFORMATION
 
 
 
 
39


 
 
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements” about our expectations, plans and performance, including those under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Outlook for 2012” and “Liquidity and Capital Resources.”  These statements use such words as “may,” “will,” “expect,” “believe,” “intend,” “should,” “could,” “anticipate,” “estimate,” “forecast,” “project,” “plan” and similar expressions.  These statements do not guarantee future performance and Dollar Thrifty Automotive Group, Inc. assumes no obligation to update them.  Risks and uncertainties relating to our business that could materially affect our future results include:

  
constraints on our growth and profitability given the challenges we face in increasing our market share in the key airport and local markets we serve, high barriers to entry in the insurance replacement market, capital and other constraints on expanding company-owned stores internationally and the challenges we would face in further reducing our expenses;
  
the impact of the continuing challenging global economic environment, the ongoing Eurozone sovereign debt issues and governmental actions to address budget deficits through austerity and other measures, which are fueling concerns about global economic prospects and could materially adversely affect unemployment rates and consumer discretionary spending, including for international inbound travel to the United States and for leisure travel more generally, on which we are substantially dependent;
  
the continuing significant political unrest and other concerns involving certain oil-producing countries, which has contributed to price volatility for petroleum products, and in recent periods higher average gasoline prices, which could affect both broader economic conditions and consumer spending levels;
 
 
2

 
 
  
the impact of pricing and other actions by competitors;
  
our ability to manage our fleet mix to match demand and meet our target for vehicle depreciation costs, particularly in light of the significant level of risk vehicles (i.e., those vehicles not acquired through a guaranteed residual value program) in our fleet and our exposure to wholesale used vehicle prices;
  
the cost and other terms of acquiring and disposing of automobiles and the impact of conditions in the used vehicle market on our vehicle cost, including the impact on vehicle depreciation costs in 2012 based on pricing volatility in the used vehicle market;
  
our ability to reduce our fleet capacity as and when projected by our plans;
  
the continuing strength of the U.S. automotive industry on which we depend for vehicle supply;
  
airline travel patterns, including disruptions or reductions in air travel resulting from capacity reductions, pricing actions, severe weather conditions, industry consolidation or other events, particularly given our dependence on leisure travel;
  
access to reservation distribution channels, particularly as the role of the Internet and mobile applications increases in the marketing and sale of travel-related services;
  
the effectiveness of actions we take to maintain a low cost structure and to manage liquidity;
  
the impact of repurchases of our common stock pursuant to our share repurchase program;
  
our ability to obtain cost-effective financing as needed without unduly restricting our operational flexibility;
  
our ability to comply with financial covenants, and the impact of those covenants on our operating and financial flexibility;
  
whether our preliminary expectations about our federal income tax position are affected by changes in our expected fleet size or operations or further legislative initiatives relating to taxes in the United States or elsewhere;
  
our ability to continue to defer the reversal of prior period tax deferrals and the availability of accelerated depreciation payments in future periods, the lack of either of which could result in material cash federal income tax payments in future periods;
  
the cost of regulatory compliance, costs and other effects of potential future initiatives, including those directed at climate change and its effects, and the costs and outcome of pending litigation;
  
disruptions in the operation or development of information and communication systems that we rely on, including those relating to methods of payment;
  
local market conditions where we and our franchisees do business, including whether franchisees will continue to have access to capital as needed; and
  
the impact of other events that can disrupt consumer travel, such as natural and man-made catastrophes, pandemics, social unrest and actual and perceived threats or acts of terrorism.

 
3

 

PART I – FINANCIAL INFORMATION



ITEM 1.                   FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
Dollar Thrifty Automotive Group, Inc.

We have reviewed the accompanying condensed consolidated balance sheets of Dollar Thrifty Automotive Group, Inc. and subsidiaries (the “Company”) as of June 30, 2012, and the related condensed consolidated statements of comprehensive income for the three-month and six-month periods ended June 30, 2012 and 2011, and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2012 and 2011. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Dollar Thrifty Automotive Group, Inc. and subsidiaries as of December 31, 2011, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated February 28, 2012,  we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2011, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.



/s/ ERNST & YOUNG LLP

Tulsa, Oklahoma
August 2, 2012
 
 
4

 
 
DOLLAR THRIFTY AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
 
                         
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011
   
(In Thousands Except Per Share Data)
 
                         
   
Three Months
   
Six Months
 
   
Ended June 30,
   
Ended June 30,
 
   
(Unaudited)
 
                         
   
2012
   
2011
   
2012
   
2011
 
REVENUES:
                       
  Vehicle rentals
  $ 378,897     $ 378,191     $ 717,986     $ 710,463  
  Other
    16,489       16,938       33,674       33,013  
         Total revenues
    395,386       395,129       751,660       743,476  
                                 
COSTS AND EXPENSES:
                               
  Direct vehicle and operating
    196,461       190,958       380,673       369,263  
  Vehicle depreciation and lease charges, net
    57,506       66,510       99,237       140,684  
  Selling, general and administrative
    47,477       48,843       93,025       97,790  
  Interest expense, net of interest income of
                               
     $471, $282, $964 and $747, respectively
     15,327        18,295        32,395        39,272  
         Total costs and expenses
    316,771       324,606       605,330       647,009  
                                 
  (Increase) decrease in fair value of derivatives
    209       (416 )     485       (3,890 )
                                 
INCOME BEFORE INCOME TAXES
    78,406       70,939       145,845       100,357  
                                 
INCOME TAX EXPENSE
    28,979       28,434       56,047       41,329  
                                 
NET INCOME
  $ 49,427     $ 42,505     $ 89,798     $ 59,028  
                                 
                                 
BASIC EARNINGS PER SHARE
  $ 1.77     $ 1.47     $ 3.16     $ 2.05  
                                 
DILUTED EARNINGS PER SHARE
  $ 1.69     $ 1.36     $ 3.03     $ 1.89  
                                 
COMPREHENSIVE INCOME    49,288      45,826     98,610      66,888  
                                 
See notes to condensed consolidated financial statements.
                         
 
 
5

 
 
DOLLAR THRIFTY AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
 
             
CONDENSED CONSOLIDATED BALANCE SHEETS
 
JUNE 30, 2012 AND DECEMBER 31, 2011
 
(In Thousands Except Share and Per Share Data)
 
             
   
June 30,
   
December 31,
 
   
2012
   
2011
 
ASSETS
  (Unaudited)        
             
Cash and cash equivalents
  $ 285,477     $ 508,648  
Restricted cash and investments
    199,002       353,265  
Receivables, net
    107,298       95,360  
Prepaid expenses and other assets
    77,020       65,959  
Revenue-earning vehicles, net
    2,107,982       1,467,835  
Property and equipment, net
    79,571       84,278  
Income taxes receivable
    3,998       18,786  
Software, net
    19,888       21,535  
                 
Total assets
  $ 2,880,236     $ 2,615,666  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
LIABILITIES:
               
Accounts payable
  $ 61,260     $ 54,377  
Accrued liabilities
    123,920       124,185  
Deferred income tax liability
    369,582       342,962  
Vehicle insurance reserves
    80,317       86,515  
Debt and other obligations
    1,562,142       1,399,955  
Total liabilities
    2,197,221       2,007,994  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
STOCKHOLDERS' EQUITY:
               
Preferred stock, $.01 par value:                
Authorized 10,000,000 shares; none outstanding
     -        -  
Common stock, $.01 par value:
               
 Authorized 200,000,000 and 50,000,000 shares, respectively;
               
36,194,393 and 36,048,606 issued, respectively, and
               
27,889,437 and 29,556,887 outstanding, respectively
    362       361  
Additional capital
    954,082       848,843  
Retained earnings (deficit)
    87,379       (2,419 )
Accumulated other comprehensive income (loss)
    1,195       (7,617 )
Treasury stock, at cost (8,304,956 and 6,491,719 shares, respectively)
    (360,003 )     (231,496 )
Total stockholders' equity
    683,015       607,672  
                 
Total liabilities and stockholders' equity
  $ 2,880,236     $ 2,615,666  
                 
See notes to condensed consolidated financial statements.
 
 
6

 
 
DOLLAR THRIFTY AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
 
             
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
SIX MONTHS ENDED JUNE 30, 2012 AND 2011
 
(In Thousands)
 
             
   
Six Months
 
   
Ended June 30,
 
   
(Unaudited)
 
             
   
2012
   
2011
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 89,798     $ 59,028  
Adjustments to reconcile net income to
               
   net cash provided by operating activities:
               
     Depreciation:
               
       Vehicle depreciation
    136,068       166,427  
       Non-vehicle depreciation
    8,857       9,773  
     Net gains from disposition of revenue-earning vehicles
    (36,831 )     (25,761 )
     Amortization
    3,601       3,807  
     Performance share incentive, stock option and restricted stock plans
    3,416       2,137  
     Interest income earned on restricted cash and investments
    (398 )     (160 )
     Deferred income taxes
    26,725       15,083  
     Swap termination reclassification       8,131        -  
     Change in fair value of derivatives
    485       (3,890 )
     Change in assets and liabilities:
               
       Income taxes payable/receivable
    14,788       70,810  
       Receivables
    (11,259 )     (2,636
       Prepaid expenses and other assets
    (3,027 )     (3,984
       Accounts payable
    1,053       6,203  
       Accrued liabilities
    710       (8,540
       Vehicle insurance reserves
    (6,198     (1,859
       Other
    (876     997  
                 
           Net cash provided by operating activities
    235,043       287,435  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Revenue-earning vehicles - Purchases
    (1,254,875 )     (861,596 )
Revenue-earning vehicles - Proceeds from sales
    522,557       250,430  
Change in cash and cash equivalents - required minimum balance
    -       100,000  
Net change in restricted cash and investments
    154,661       151,207  
Property, equipment and software - Purchases
    (10,013 )     (7,891 )
Property, equipment and software - Proceeds from sales
    3,486       21  
                 
           Net cash used in investing activities
    (584,184 )     (367,829
                 
           
(Continued)
 
                 
 
 
7

 
 
DOLLAR THRIFTY AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
           
             
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
           
SIX MONTHS ENDED JUNE 30, 2012 AND 2011
 
(In Thousands)
           
             
   
Six Months
 
   
Ended June 30,
 
   
(Unaudited)
 
             
   
2012
   
2011
 
             
CASH FLOWS FROM FINANCING ACTIVITIES:
           
Debt and other obligations:
           
  Proceeds from vehicle debt and other obligations
    578,845       637,955  
  Payments of vehicle debt and other obligations
    (416,665 )     (557,073 )
  Payments of non-vehicle debt
    -       (5,000 )
Issuance of common shares
    849       2,880  
Net settlement of employee withholding taxes on share-based awards
    (1,164 )     (3,205 )
Purchase of common stock for the treasury       (27,343      -  
Financing issue costs
    (8,552 )     (2,243 )
                 
           Net cash provided by financing activities
    125,970       73,314  
                 
CHANGE IN CASH AND CASH EQUIVALENTS
    (223,171     (7,080 )
                 
CASH AND CASH EQUIVALENTS:
               
Beginning of period
    508,648       463,153  
                 
End of period
  $ 285,477     $ 456,073  
                 
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                 
 
 Cash paid for (refund of): 
               
     Income taxes   $ 14,478     $ (44,625
     Interest   $ 27,573     $ 34,123  
                 
                 
 SUPPLEMENTAL DISCLOSURES OF INVESTING AND FINANCING                
    NONCASH ACTIVITIES:                 
 
Sales and incentives related to revenue-earning vehicles
  included in receivables
  $ 24,271     $ 25,689  
 
Purchases of revenue-earning vehicles included
  in accounts payable
   13,512      9,519  
 
Purchases of property, equipement and software included
  in accounts payable
  $  413     $ 177  
                 
Certain reclassifications have been made to the 2011 financial information to conform to the classification used in 2012.   
See notes to condensed consolidated financial statements.
 

 
8

 
 
DOLLAR THRIFTY AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
                   
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2012 AND 2011
(Unaudited)
                 

1.  
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 
The accompanying condensed consolidated financial statements include the accounts of Dollar Thrifty Automotive Group, Inc. (“DTG”) and its subsidiaries.  DTG’s significant wholly owned subsidiaries include DTG Operations, Inc., Thrifty, Inc., Dollar Rent A Car, Inc. and Rental Car Finance Corp. (“RCFC”).  Thrifty, Inc. is the parent company of Thrifty Rent-A-Car System, Inc., which is the parent company of Dollar Thrifty Automotive Group Canada Inc. (“DTG Canada”).  The term the “Company” is used to refer to DTG individually or collectively with its consolidated subsidiaries, as the context may require.

 
The accounting policies set forth in Item 8 - Note 1 of notes to the consolidated financial statements contained in DTG’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission (“SEC”) on February 28, 2012, have been followed in preparing the accompanying condensed consolidated financial statements.

 
The condensed consolidated financial statements and notes thereto for interim periods included herein have not been audited by an independent registered public accounting firm.  The condensed consolidated financial statements and notes thereto have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  In the Company’s opinion, it made all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the results of operations for the interim periods presented.  Results for interim periods are not necessarily indicative of results for a full year.

2.  
CASH AND INVESTMENTS

Cash and Cash Equivalents – Cash and cash equivalents include cash on hand and on deposit, including highly liquid investments with initial maturities of three months or less.  Book overdrafts represent outstanding checks not yet presented to the bank and are included in accounts payable to reflect the Company’s outstanding obligations.  At June 30, 2012 and December 31, 2011, there was $15.0 million and $19.0 million, respectively, in book overdrafts included in accounts payable.  These amounts do not represent bank overdrafts, which would constitute checks presented in excess of cash on hand, and would be effectively a loan to the Company.

Restricted Cash and Investments – Restricted cash and investments are restricted for the acquisition of vehicles and other specified uses under the rental car asset-backed note indenture and other agreements.  A portion of these funds is restricted due to the like-kind exchange tax program for deferred tax gains on eligible vehicle remarketing.  As permitted by the indenture, these funds are primarily held in highly rated money market funds with investments primarily in government and corporate obligations.  Restricted cash and investments are excluded from cash and cash equivalents.

3.  
SHARE-BASED PAYMENT PLANS

Long-Term Incentive Plan

At June 30, 2012, the Company’s common stock authorized for issuance under the long-term incentive plan (“LTIP”) for employees and non-employee directors was 2,918,067 shares.  
 
 
9

 
 
The Company has 1,168,546 shares available for future LTIP awards at June 30, 2012 after reserving for the maximum potential shares that could be awarded under existing LTIP grants.  The Company issues new shares from remaining authorized common stock to satisfy LTIP awards.

Compensation cost for non-qualified option rights, performance shares and restricted stock awards is recognized based on the fair value of the awards granted at the grant-date and is amortized to compensation expense on a straight-line basis over the requisite service periods of the stock awards, which are generally the vesting periods. The Company recognized compensation costs of $2.1 million and $4.0 million during the three and six months ended June 30, 2012, respectively, and $0.9 million and $2.1 million during the three and six months ended June 30, 2011, respectively, for such awards.  The total income tax benefit recognized in the statements of comprehensive income for share-based compensation payments was $0.8 million and $1.6 million for the three and six months ended June 30, 2012, respectively, and $0.4 million and $0.9 million for the three and six months ended June 30, 2011, respectively.

Option Rights Plan – Under the LTIP, the Human Resources and Compensation Committee may grant non-qualified option rights to key employees and non-employee directors.  The maximum number of shares for which option rights may be granted under the LTIP to any participant during any calendar year is 285,000.  No awards were granted in 2012 or 2011.  The grant-date fair value of options vested during both the three and six months ended June 30, 2012 was $1.6 million.  The grant-date fair value of options vested during the three and six months ended June 30, 2011 was $0.5 million and $1.6 million, respectively.  Expense is recognized over the service period which is the vesting period.  No unrecognized expense for the options is remaining at June 30, 2012.

The following table sets forth the non-qualified option rights activity under the LTIP for the six months ended June 30, 2012:
 
               
Weighted-
       
         
Weighted-
   
Average
   
Aggregate
 
   
Number of
   
Average
   
Remaining
   
Intrinsic
 
   
Shares
   
Exercise
   
Contractual
   
Value
 
   
(In Thousands)
   
Price
   
Term
   
(In Thousands)
 
                         
Outstanding at January 1, 2012
    1,575     $ 5.11       6.89     $ 102,579  
                                 
Granted
    -       -                  
Exercised
    (107 )     7.93                  
Canceled (Forfeited/Expired)
    -       -                  
                                 
Outstanding at June 30, 2012
    1,468     $ 4.91       5.92     $ 111,608  
                                 
Fully vested and exercisable options at:
                               
June 30, 2012
    1,468     $ 4.91       5.92     $ 111,608  
 
The total intrinsic value of options exercised during the three and six months ended June 30, 2012 was $1.7 million and $7.3 million, respectively.   The total intrinsic value of options exercised during the three and six months ended June 30, 2011 was $3.5 million and $6.2 million, respectively.  Total cash received by the Company for non-qualified option rights exercised during the three and six months ended June 30, 2012 totaled $0.2 million and $0.8 million, respectively.  Total cash received by the Company for non-qualified option rights exercised during the three and six months ended June 30, 2011 totaled $1.5 million and $2.9 million, respectively.

Performance Shares – Performance share awards, which may take the form of performance shares or performance units, are granted to Company officers and certain key employees.  The maximum amount of performance share awards that may be granted under the LTIP during any year to any participant is 160,000 common shares.  Compensation expense related to the performance shares is recognized over the vesting period.

In February 2012, the Company granted 29,135 performance units related to the 2011 incentive compensation plan with a grant-date fair value of $76.17 per share.  
 
 
10

 
 
These performance units, which will settle in Company shares, will vest over the requisite service period with 25% vesting on December 31, 2012 and the remaining 75% vesting on December 31, 2013.  The grant-date fair value for this award was based on the closing market price of the Company’s common shares on the date of grant.

In March 2011, the 2008 grant of performance shares earned from January 1, 2008 through December 31, 2010 totaling 73,000 shares, net of forfeitures, vested at 200% of the target award (total of approximately 146,000 shares) with a total intrinsic value to the recipients of approximately $3.5 million.  The Company withheld approximately 52,000 of these shares for the payment of taxes owed by the recipients and designated the shares withheld as treasury shares.

The following table presents the status of the Company’s nonvested performance shares as of June 30, 2012 and any changes during the six months ended June 30, 2012:
  
         
Weighted-Average
 
   
Shares
   
Grant-Date
 
Nonvested Shares
 
(In Thousands)
   
Fair Value
 
             
Nonvested at January 1, 2012
    262     $ 59.11  
Granted
    29       76.17  
Vested
    (2 )     52.11  
Forfeited
    (7 )     59.79  
Nonvested at June 30, 2012
    282     $ 60.89  
                 
 
At June 30, 2012, the total compensation cost related to nonvested performance share awards not yet recognized is estimated at approximately $9.6 million, based on the Company’s expectation that it will meet or exceed the targets specified in the performance share agreement.  This estimated compensation cost is expected to be recognized over the weighted-average period of 1.7 years.  The total intrinsic value of vested and issued performance shares during the six months ended June 30, 2012 and 2011 was $0.1 million and $7.6 million, respectively.  As of June 30, 2012, the intrinsic value of the nonvested performance share awards was $22.8 million.

Restricted Stock Units – Under the LTIP, the Company may grant restricted stock units to key employees and non-employee directors.  The grant-date fair value of the award is based on the closing market price of the Company’s common shares on the date of grant.

In January 2012, non-employee directors were granted 6,815 shares with a grant-date fair value of $73.42 per share that fully vest on December 31, 2012.  The total intrinsic value of vested and issued restricted stock units during the six months ended June 30, 2012 and 2011 was $2.7 million and $1.1 million, respectively.  At June 30, 2012, the total compensation cost related to nonvested restricted stock unit awards not yet recognized is approximately $0.3 million, which is expected to be recognized on a straight-line basis over the vesting period of the restricted stock units.

 
11

 

The following table presents the status of the Company’s nonvested restricted stock units as of June 30, 2012 and changes during the six months ended June 30, 2012:
 
         
Weighted-Average
 
   
Shares
   
Grant-Date
 
Nonvested Shares
 
(In Thousands)
   
Fair Value
 
             
Nonvested at January 1, 2012
    34     $ 5.41  
Granted
    7       73.42  
Vested
    (34 )     5.41  
Forfeited
    -       -  
Nonvested at June 30, 2012
    7     $ 73.42  
                 
 
4.  
VEHICLE DEPRECIATION AND LEASE CHARGES, NET

Vehicle depreciation and lease charges include the following (in thousands):
 
   
Three Months
   
Six Months
 
   
Ended June 30,
   
Ended June 30,
 
                         
   
2012
   
2011
   
2012
   
2011
 
                         
Depreciation of revenue-earning vehicles and other
  $ 80,077     $ 84,343     $ 136,068     $ 166,445  
Net gains from disposal of revenue-earning vehicles
    (22,571 )     (17,833 )     (36,831 )     (25,761 )
                                 
    $ 57,506     $ 66,510     $ 99,237     $ 140,684  
 
Average gain on Non-Program Vehicles:
 
   
Three Months
   
Six Months
 
   
Ended June 30,
   
Ended June 30,
 
                         
   
2012
   
2011
   
2012
   
2011
 
                         
Number of Non-Program Vehicles sold
    18,711       8,428       33,067       15,346  
                                 
Average gain on vehicles sold (per vehicle) 
  1,206     2,116     1,114     1,679  
 
Components of vehicle depreciation per vehicle per month:
 
   
Three Months
   
Six Months
 
   
Ended June 30,
   
Ended June 30,
 
                         
   
2012
   
2011
   
2012
   
2011
 
                         
Average depreciable fleet (units)      118,485        117,876        110,536        108,299  
                                 
Average depreciation rate       225      238      205      256  
Average gain on vehicles sold        (63      (50      (55      (39
                                 
Vehicle depreciation and lease charges, net      $ 162     $ 188     $ 150     $ 217  
 
 
12

 
 
Vehicles purchased by vehicle rental companies under programs where either the rate of depreciation or the residual value is guaranteed by the manufacturer are referred to as “Program Vehicles.”  Vehicles not purchased under these programs and for which rental companies therefore bear residual value risk are referred to as “Non-Program Vehicles.”

Depreciation expense for Non-Program Vehicles, which constitute substantially all of the Company’s fleet, is recorded on a straight-line basis over the life of the vehicle, based on the original acquisition cost, the projected residual value at the time of sale, and the estimated length of time the vehicle will be in service.  The Company’s vehicle depreciation rates are periodically adjusted on a prospective basis when residual value assumptions change due to changes in used vehicle market conditions.

The estimation of residual values requires the Company to make assumptions regarding the expected age and mileage of the vehicle at the time of disposal.  Additionally, residual value estimates must also take into consideration overall used vehicle market conditions at the time of sale, including the impact of seasonality on vehicle residuals.  The difference in residual values assumed and the proceeds realized upon sale of the vehicle is recorded as a gain or loss on the sale of the vehicle, and is recorded as a component of net vehicle depreciation and lease charges in the condensed consolidated statements of comprehensive income.

5.  
EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted-average number of common shares outstanding during the period.  Diluted EPS is based on the combined weighted-average number of common shares and dilutive potential common shares outstanding which include, where appropriate, the assumed exercise of options.  In computing diluted EPS, the Company utilizes the treasury stock method.

The computation of weighted-average common and common equivalent shares used in the calculation of basic and diluted EPS is shown in the following table (in thousands, except share and per share data):
 
   
Three Months
   
Six Months
 
   
Ended June 30,
   
Ended June 30,
 
                         
   
2012
   
2011
   
2012
   
2011
 
                         
Net income
  $ 49,427     $ 42,505     $ 89,798     $ 59,028  
                                 
Basic EPS:
                               
   Weighted-average common shares
    28,001,134       28,896,750       28,374,782       28,829,062  
                                 
Basic EPS
  $ 1.77     $ 1.47     $ 3.16     $ 2.05  
                                 
Diluted EPS:
                               
   Weighted-average common shares
    28,001,134       28,896,750       28,374,782       28,829,062  
                                 
Shares contingently issuable:
                               
  Stock options
    866,060       2,003,320       879,418       1,994,468  
  Performance awards and non-vested shares
    125,825       119,675       103,438       79,005  
  Employee compensation shares deferred
    24,577       49,406       32,419       49,359  
  Director compensation shares deferred
    224,535       221,452       223,661       220,105  
                                 
Shares applicable to diluted
    29,242,131       31,290,603       29,613,718       31,171,999  
                                 
Diluted EPS
  $ 1.69     $ 1.36     $ 3.03     $ 1.89  
 
 
13

 
 
For the three and six months ended June 30, 2012 and 2011, all options to purchase shares of common stock were included in the computation of diluted EPS because no exercise price was greater than the average per share market price of the common shares.

Shares included in the diluted EPS calculation related to shares contingently issuable for stock options decreased on a year-over-year basis for both the three and six months ended June 30, 2012, from the three and six months ended June 30, 2011. The Company uses the treasury stock method to determine the denominator used in the diluted EPS calculation. To derive the denominator, the number of outstanding options is reduced by the number of shares that would be repurchased from assumed proceeds of certain defined items including the exercise price of the option and the excess tax benefit that would result from the assumed exercise of the option. However, the excess tax benefit component is included only if the assumed tax benefit would decrease the Company’s current taxes payable. In 2012, the Company has projected that it will be a taxpayer and the tax benefit of the repurchases of shares from the assumed proceeds is incorporated into the diluted share calculation.  The impact of the assumed tax benefit in 2012 is a reduction in diluted shares outstanding of approximately 600,000 shares.  In 2011, the Company was not a taxpayer for federal income tax purposes and did not benefit from the tax deduction related to the assumed option exercises for purposes of the diluted share calculation, thus increasing the number of shares included in the diluted EPS calculation by approximately 800,000 shares.  Other factors, such as the Company’s stock price and stock options exercised, also impact the diluted EPS calculation.

During the three and six months ended June 30, 2012, the Company repurchased 283,250 and 1,798,643 shares of its common stock, respectively, which reduced the weighted-average common shares outstanding. See Note 10 for further discussion of the share repurchase program.

6.  
RECEIVABLES

Receivables consist of the following (in thousands):
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
             
Trade accounts receivable and other
  $ 83,531     $ 74,403  
Vehicle manufacturer receivables
    19,864       21,510  
Car sales receivable
    5,836       2,287  
      109,231       98,200  
Less:  Allowance for doubtful accounts
    (1,933 )     (2,840 )
    $ 107,298     $ 95,360  
 
Trade accounts receivable and other include primarily amounts due from rental customers, franchisees and tour operators arising from billings under standard credit terms for services provided in the normal course of business.

Vehicle manufacturer receivables include primarily amounts due under guaranteed residual, buyback and Non-Program Vehicle incentive programs, which are paid according to contract terms and are generally received within 60 days.

Car sales receivable include primarily amounts due from car sale auctions for the sale of both Program Vehicles and Non-Program Vehicles.

Allowance for doubtful accounts represents potentially uncollectible amounts owed to the Company from franchisees, tour operators, corporate account customers and others.
 
 
14

 
 
7.  
DEBT AND OTHER OBLIGATIONS

Debt and other obligations as of June 30, 2012 and December 31, 2011 consist of the following (in thousands):
 
     
June 30,
     
December 31,
 
     
2012
     
2011
 
                 
Vehicle debt and other obligations
               
Asset-backed medium-term notes:
               
  Series 2011-2 notes (matures May 2015)     400,000      400,000  
  Series 2011-1 notes (matures February 2015)       500,000        500,000  
  Series 2007-1 notes (matures July 2012)
   
83,333
     
         500,000
 
          
    983,333
     
        1,400,000
 
Discounts on asset-backed medium-term notes        (36       (45
     Asset-backed medium-term notes, net of discount       983,297        1,399,955  
                 
Series 2010-3 variable funding notes (matures December 2013)   510,000        -  
CAD Series 2012-1 notes (Canadian fleet financing)
   
           68,845
     
                   -
 
  (matures August 2014)                 
                 
  Total debt and other obligations
   $
        1,562,142
   
        1,399,955
 
                 
 
Asset-Backed Medium-Term Notes

Asset-backed medium-term notes were issued by RCFC in October 2011 (the “Series 2011-2 notes”), July 2011 (the “Series 2011-1 notes”), and May 2007 (the “Series 2007-1 notes”).

The $400 million of Series 2011-2 notes were issued at a fixed interest rate of 3.21% and will be repaid monthly over a six-month period, beginning in December 2014, with an expected final maturity date of May 2015.  At June 30, 2012, the Series 2011-2 notes required compliance with a maximum corporate leverage ratio of 3.0 to 1.0, a minimum corporate interest coverage ratio of 2.0 to 1.0 and a minimum corporate EBITDA requirement of $75 million, consistent with the terms of the Company’s Revolving Credit Facility (hereinafter defined).

The Series 2011-1 notes are comprised of $420 million principal amount of Series 2011-1 Class A Notes with a fixed interest rate of 2.51% and $80 million principal amount of Series 2011-1 Class B Notes with a fixed interest rate of 4.38%.  On a blended basis, the average annual coupon on the combined $500 million principal amount of the Series 2011-1 notes is approximately 2.81%.  The Series 2011-1 notes will be repaid monthly over a six-month period, beginning in September 2014, with an expected final maturity date in February 2015.

The Series 2007-1 notes began scheduled amortization in February 2012.  During the three and six months ended June 30, 2012, $250.0 million and $416.7 million of principal payments were made, respectively, with the remaining $83.3 million paid in July 2012.   At June 30, 2012, the Series 2007-1 notes had an interest rate of 0.59%.

Variable Funding Notes

The Company had drawn $510 million of the $600 million Series 2010-3 variable funding note (“VFN”) at June 30, 2012.  At the end of the revolving period, the then-outstanding principal amount of the Series 2010-3 VFN will be repaid monthly over a three-month period, beginning in October 2013, with the final payment due in December 2013.  The facility bears interest at a spread of 130 basis points above each funding institution’s cost of funds, which may be based on either the weighted-average commercial paper rate, a floating one-month LIBOR rate or a Eurodollar rate.  The Series 2010-3 VFN had an interest rate of 1.58% at June 30, 2012.  The Series 2010-3 VFN also has a facility fee commitment rate of up to 0.8% per annum on any unused portion of the facility. The Series 2010-3 VFN requires compliance with a maximum corporate leverage ratio of 3.0 to 1.0, a minimum corporate interest coverage ratio of 2.0 to 1.0 and a minimum corporate EBITDA requirement of $75 million, consistent with the terms of the Company’s Revolving Credit Facility.
 
 
15

 
 
Canadian Fleet Financing

On March 9, 2012, the Company completed a CAD Series 2012-1 $150 million Canadian fleet securitization program (the “CAD Series 2012-1 notes”).  This program has a term of two years and requires a program fee of 150 basis points above the one-month rate for Canadian dollar denominated bankers’ acceptances and a utilization fee of 65 basis points on the unused CAD Series 2012-1 amount.  At June 30, 2012, CAD $70 million (US $68.8 million) of the CAD Series 2012-1 notes had been drawn.  The CAD Series 2012-1 notes had an interest rate of 2.69% at June 30, 2012.

Revolving Credit Facility

On February 16, 2012, the Company terminated the existing senior secured credit facility and replaced it with a new $450 million revolving credit facility (the “Revolving Credit Facility”) that expires in February 2017.  Pricing under the Revolving Credit Facility is grid-based with a spread above LIBOR that will range from 300 basis points to 350 basis points, based upon usage of the facility.  Commitment fees under the Revolving Credit Facility will equal 50 basis points on unused capacity.  Under the Revolving Credit Facility, the Company is subject to a maximum corporate leverage ratio of 3.0 to 1.0, a minimum corporate interest coverage ratio of 2.0 to 1.0 and a minimum corporate EBITDA requirement of $75 million.  In addition, the Revolving Credit Facility contains various restrictive covenants including, among others, limitations on the Company’s and its subsidiaries’ ability to incur additional indebtedness, make loans, acquisitions or other investments, grant liens on their respective property, dispose of assets, pay dividends or conduct stock repurchases, make capital expenditures or engage in certain transactions with affiliates.

Under the Revolving Credit Facility, the Company has the ability (subject to specified conditions and limitations), among other things, to incur up to $400 million of unsecured indebtedness; to enter into permitted acquisitions of up to $250 million in the aggregate during the term of the Revolving Credit Facility and to incur financing and assume indebtedness in connection therewith; to make investments in the Company’s U.S. special-purpose financing entities (including RCFC) and its Canadian special-purpose financing entities, in aggregate amounts at any time outstanding of up to $750 million and $150 million, respectively; and to make dividend, stock repurchase and other restricted payments in an amount up to $300 million, plus 50% of cumulative adjusted net income (or minus 100% of cumulative adjusted net loss, as applicable) for the period beginning January 1, 2012 and ending on the last day of the fiscal quarter immediately preceding the restricted payment.

The Company had letters of credit outstanding under the Revolving Credit Facility of $19.0 million for U.S. enhancement and $46.5 million in general purpose letters of credit with a remaining available capacity of $384.5 million at June 30, 2012.

Covenant Compliance

As of June 30, 2012, the Company is in compliance with all covenants under its various financing arrangements.

8.  
DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to market risks, such as changes in interest rates, and has historically entered into interest rate swap and cap agreements to manage that risk.  Additionally, some of the Company’s debt facilities require interest rate cap agreements in order to limit the Company’s exposure to increases in interest rates.  The Company used interest rate swap agreements for asset-backed medium-term note issuances in 2007 to effectively convert variable interest rates to fixed interest rates; however, in late 2011, the Company terminated its 2007 swap agreements and paid a termination fee of $8.8 million to settle the outstanding liability.  
 
 
16

 
 
The remaining unamortized value of the hedge deferred in accumulated other comprehensive income (loss) on the balance sheet is being reclassified into earnings as interest expense over the remaining term of the related debt through July 2012.  During the three and six months ended June 30, 2012, $3.2 million and $8.1 million was reclassified into earnings as interest expense, respectively. The Company has also used interest rate cap agreements for its Series 2010-3 VFN, to effectively limit the variable interest rate on a total of $600 million in asset-backed VFNs.  These cap agreements have a termination date of July 2014.  There were no derivatives designated as hedging instruments at June 30, 2012 or December 31, 2011.

The fair value of derivatives outstanding at June 30, 2012 and December 31, 2011 are as follows (in thousands):
 
 
Fair Value of Derivative Instruments
                                 
 
Asset Derivatives
 
Liability Derivatives
 
June 30,
 
December 31,
 
June 30,
 
December 31,
 
2012
 
2011
 
2012
 
2011
 
Balance
Sheet
Location
 
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
 
Derivatives not
designated as hedging
instruments
                                       
Interest rate contracts
Prepaid
expenses and 
other assets 
  $ 63  
Prepaid
expenses and
other assets
  $ 548  
Accrued
liabilities
  $ -  
Accrued
liabilities
  $ -  
                                         
 
The (gain) loss recognized on interest rate swap and cap agreements that do not qualify for hedge accounting treatment and thus are not designated as hedging instruments for the three and six months ended June 30, 2012 and 2011 are as follows (in thousands):
 
 
 
Amount of (Gain) or Loss Recognized in Income on Derivative
 
Location of (Gain) or Loss
Recognized in Income on
Derivative
Derivatives Not
Designated as
Hedging Instruments
 
Three Months Ended
   
Six Months Ended
   
 
June 30,
   
June 30,
   
 
2012
   
2011
   
2012
   
2011
   
                         
Net (increase) decrease in 
Interest rate contracts
  $ 209     $ (416 )   $ 485     $ (3,890 ) fair value of derivatives 
                                   
 
 
17

 
 
The amount of gain (loss), net of tax and reclassification, recognized on the terminated hedging instruments in other comprehensive income (loss) (“OCI”) and the amount of the gain (loss) reclassified from Accumulated OCI (“AOCI”) into income for the three and six months ended June 30, 2012 and 2011 are as follows (in thousands):
 
Derivatives in Cash
Flow Hedging
Relationships
 
Amount of Gain or (Loss)
Recognized in OCI on
Derivative (Effective
Portion)
   
Amount of Gain or (Loss)
Reclassified from AOCI
into Income (Effective
Portion)
 
Location of (Gain) or
Loss Reclassified from
AOCI in Income
(Effective Portion)
 
2012
   
2011
   
2012
   
2011
   
                           
Three Months Ended
                         
June 30,
                       
Interest expense, net of
Interest rate contracts
  $ -     $ 3,075     $ (1,893 )   $ (3,673 ) interest income 
                                   
                                   
Six Months Ended
                                 
June 30,
                               
Interest expense, net of
Interest rate contracts
  $ -     $ 6,697     $ (4,732 )   $ (7,082 ) interest income 
                                   
 
Additionally, $0.4 million, net of tax, was reclassified from AOCI related to the discontinuance of a cash flow hedge during the six months ended June 30, 2011.
 
9.  
FAIR VALUE MEASUREMENTS

Financial instruments are presented at fair value in the Company’s balance sheets.  Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Assets and liabilities recorded at fair value in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values.  These categories include (in descending order of priority):  Level 1, defined as observable inputs for identical instruments such as quoted prices in active markets; Level 2, defined as inputs, other than quoted prices in active markets, that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
 
 
18

 
 
The following tables show assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011 on the Company’s balance sheet, and the input categories associated with those assets and liabilities:
 
         
Fair Value Measurements at Reporting Date Using
 
   
Total Fair
   
Quoted Prices in
   
Significant Other
   
Significant
 
(in thousands)
 
Value Assets
   
Active Markets for
   
Observable
   
Unobservable
 
   
(Liabilities)
   
Identical Assets
   
Inputs
   
Inputs
 
Description
 
at 6/30/12
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
                         
Derivative Assets
  63     -     63     -  
Deferred Compensation
     Plan Assets (a)
    6,701       6,701        -       -  
                                 
Total
  $ 6,764     $ 6,701     $ 63     $ -  
                                 
 
         
Fair Value Measurements at Reporting Date Using
 
   
Total Fair
   
Quoted Prices in
   
Significant Other
   
Significant
 
(in thousands)
 
Value Assets
   
Active Markets for
   
Observable
   
Unobservable
 
   
(Liabilities)
   
Identical Assets
   
Inputs
   
Inputs
 
Description
 
at 12/31/11
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
                         
Derivative Assets
  $ 548     $ -     $ 548     $ -  
Deferred Compensation
     Plan Assets (a)
    5,752       5,752        -       -  
                                 
Total
  $ 6,300     $ 5,752     $ 548     $ -  
                                 
(a)
Deferred Compensation Plan Assets consist primarily of equity securites.  The Company also has an offsetting liability related to the Deferred Compensation Plan, which is not disclosed in the table as it is not independently measured at fair value, but rather is set to equal fair value of the assets held in the related rabbi trust.
 
The fair value of derivative assets, consisting of interest rate caps as discussed above, is calculated using proprietary models utilizing observable inputs, as well as future assumptions related to interest rates, credit risk and other variables.  These calculations are performed by the financial institutions that are counterparties to the applicable cap agreements and reported to the Company on a monthly basis.   The Company uses these reported fair values to adjust the asset as appropriate.  The Company evaluates the reasonableness of the calculations by comparing similar calculations from other counterparties for the applicable period and performs back-testing through use of the look back approach to evaluate the fair value provided by the financial institutions.  Deferred compensation plan assets consist of publicly traded securities and are valued in accordance with market quotations.  There were no transfers into or out of Level 1 or Level 2 measurements for the six months ended June 30, 2012 or the 12 months ended December 31, 2011.  The Company’s policy is to recognize transfers between levels as of the beginning of the period in which the event or change in circumstances triggering the transfer occurs.  The Company had no Level 3 financial instruments at any time during the six months ended June 30, 2012 or the 12 months ended December 31, 2011.

The following estimated fair values of financial instruments have been determined by the Company using available market information and valuation methodologies described below.

Cash and Cash Equivalents and Restricted Cash and Investments – Cash and cash equivalents and restricted cash and investments consist of short-term, highly liquid investments with original maturities of three months or less when purchased and are comprised primarily of bank deposits, commercial paper and money market funds. The carrying amounts of these items are a reasonable estimate of their fair value due to the short-term nature of these instruments. The Company maintains its cash and cash equivalents in accounts that may not be federally insured.
 
 
19

 
 
Receivables and Accounts Payable – The carrying amounts of these items are a reasonable estimate of their fair value. The Company has not experienced any material losses in such accounts and believes it is not exposed to significant credit risk.

Debt and Other Obligations – The fair values of the debt traded on the secondary markets were developed utilizing a market approach based on observable inputs from similar debt arrangements and from information regarding the trading of the Company’s debt in non-active secondary markets and, thus, the debt is classified as Level 2 in the fair value hierarchy.  The Company’s other debt is not traded, including floating rate debt for which the carrying amounts are a reasonable estimate of the fair value, as well as fixed rate debt for which the fair values were estimated utilizing an income approach based on discount rates derived from other comparable issuances that include certain unobservable inputs.  The non-traded debt is classified as Level 3 in the fair value hierarchy.  A portion of the Company’s debt is denominated in Canadian dollars, and its carrying value is impacted by exchange rate fluctuations.  However, this foreign currency risk is mitigated by the underlying collateral, which is the Company’s Canadian fleet.

The following tables provide information about the Company’s market sensitive financial instruments valued at June 30, 2012 and December 31, 2011:
 
             
Fair Value Measurements at Reporting Date Using
 
    Carrying Value   
Fair Value
   
Quoted Prices in
   
Significant Other
   
Significant
 
 
  Assets   
Assets
   
Active Markets for
   
Observable
   
Unobservable
 
    (Liabilities)   
(Liabilities)
   
Identical Assets
   
Inputs
   
Inputs
 
Description
  at 6/30/12   
at 6/30/12
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
(in thousands)
                               
                                 
Vehicle debt and obligations-                                         
   floating rates (1)     (593,333    (593,257    -      (83,257   (510,000
Vehicle debt and obligations-                                         
   fixed rates       (900,000      (923,426      -        (511,954      (411,472
Canadian dollar denominated                                         
   vehicle debt and obligations-                                        
   floating rates       (68,845      (68,845      -        -        (68,845
                                         
Total
   (1,562,178   $ (1,585,528 )   $ -     $ (595,211 )   $ (990,317
                                         
(1)
Includes $83.3 million of Series 2007-1 notes and the $510 million Series 2010-3 VFN.  The fair value excludes the impact of the related interest rate cap.
 
 
             
Fair Value Measurements at Reporting Date Using
 
    Carrying Value   
Fair Value
   
Quoted Prices in
   
Significant Other
   
Significant
 
 
  Assets   
Assets
   
Active Markets for
   
Observable
   
Unobservable
 
    (Liabilities)   
(Liabilities)
   
Identical Assets
   
Inputs
   
Inputs
 
Description
  at 12/31/11   
at 12/31/11
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
(in thousands)
                               
                                 
Vehicle debt and obligations-                                         
   floating rates    (500,000    (495,820    -      (495,820    -  
Vehicle debt and obligations-                                         
   fixed rates       (900,000      (899,292      -        (499,292     (400,000
                                         
Total
   (1,400,000   $ (1,395,112 )   $ -     $ (995,112 )   $ (400,000
                                         
 
 
10.  
STOCKHOLDERS’ EQUITY

Share Repurchase Program

In September 2011, the Company announced that its Board of Directors had increased authorization under the share repurchase program to $400 million.  The share repurchase program is discretionary and has no expiration date.  Subject to applicable law, the Company may repurchase shares through forward stock repurchase agreements, accelerated stock buyback programs, directly in the open market, in privately negotiated transactions, or pursuant to derivative instruments or plans complying with SEC Rule 10b5-1, among other types of transactions and arrangements. The share repurchase program may be increased, suspended or discontinued at any time.
 
 
20

 
 
During the three and six months ended June 30, 2012, the Company repurchased 283,250 shares or approximately $22.3 million and 1,798,643 shares or approximately $127.3 million ($100 million of which was pre-funded in November 2011 under a forward stock repurchase agreement), respectively, of its common stock under this share repurchase program at an average price of $78.81 per share and $70.80 per share, respectively. As of June 30, 2012, approximately $273 million remained available for further purchases of the Company’s common stock under this share repurchase program.  Share repurchases are subject to applicable limitations under the Revolving Credit Facility, which as of June 30, 2012, permitted additional share repurchases totaling approximately $318 million.
 
Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) are as follows:
 
   
Interest Rate
Swap
   
Foreign
Currency
Translation
   
Accumulated
Other
Comprehensive
Income (Loss)
 
      (In Thousands)
                   
Balance, January 1, 2012
  $ (8,488   $ 871     $ (7,617
                         
Interest rate swap and cap adjustment, net of tax
     8,281        -        8,281  
                         
Foreign currency translation adjustment       -       531        531  
                         
Balance, June 30, 2012
  $ (207   $ 1,402     $ 1,195  
 
The cash flow hedge amount deferred into AOCI is related to the derivatives used to manage the interest rate risk, associated with the Company’s vehicle-related debt, which was terminated and is being recognized into earnings along with the interest payments the derivatives were designated to hedge. See Note 8 for further discussion.

11.  
INCOME TAXES

The Company has provided for income taxes on consolidated taxable income using a consolidated effective tax rate which reflects the utilization of Canadian tax net operating loss (“NOL”) carryforwards to the extent of Canadian taxable income.  A full valuation allowance had previously been recorded against the Canadian NOLs due to losses in the Canadian operations.  Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. A valuation allowance is recorded for deferred income tax assets when management determines it is more likely than not that such assets will not be realized.
 
The Company utilizes a like-kind exchange program for its vehicles whereby tax basis gains on disposal of eligible revenue-earning vehicles are deferred for purposes of U.S. federal and state income tax (the “Like-Kind Exchange Program”). To qualify for Like-Kind Exchange Program treatment, the Company exchanges (through a qualified intermediary) vehicles being disposed of with vehicles being purchased allowing the Company to carry-over the tax basis of vehicles sold to replacement vehicles, thereby deferring taxable gains from vehicle dispositions.  In addition, the Company has historically elected to utilize accelerated or “bonus” depreciation methods on its vehicle inventories in order to defer its cash liability for U.S. federal and state income tax purposes.  The Company’s ability to continue to defer the reversal of prior period tax deferrals will depend on a number of factors, including the size of the Company’s fleet, as well as the availability of accelerated depreciation methods in future years.  Accordingly, the Company may make material cash federal income tax payments in future periods.  
 
 
21

 
 
Based on existing tax law, the Company expects to be a cash taxpayer in 2012.  During the six months ended June 30, 2012, the Company received a tax refund of $8.8 million due to overpayments of the excess estimated tax payments made in 2011, and paid $20 million in estimated federal taxes for 2012.

For the three and six months ended June 30, 2012, the overall effective tax rate of 37.0% and 38.4%, respectively, and for the three and six months ended June 30, 2011, the overall effective tax rate of 40.1% and 41.2%, respectively, differed from the U.S. statutory federal income tax rate primarily due to state and local taxes and the operating results of DTG Canada for which no benefit was recognized due to full valuation allowance.

As of June 30, 2012 and December 31, 2011, the Company had no material liability for unrecognized tax benefits.  There are no material tax positions for which it is reasonably possible that unrecognized tax benefits will significantly change in the 12 months subsequent to June 30, 2012.

The Company files income tax returns in the U.S. federal and various state, local and foreign jurisdictions.  In the Company’s significant tax jurisdictions, the tax years 2008 and later are subject to examination by U.S. federal taxing authorities and the tax years 2007 and later are subject to examination by state and foreign taxing authorities.

The Company accrues interest and penalties on underpayment of income taxes related to unrecognized tax benefits as a component of income tax expense in the condensed consolidated statements of comprehensive income.  No material amounts were recognized for interest and penalties during the three and six months ended June 30, 2012 and 2011.

12.  
COMMITMENTS AND CONTINGENCIES

There have been no material changes to the Commitments and Contingencies Note 14 in Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, with the exception of the following:

Vehicle Insurance Reserves

The Company records reserves for its public liability and property damage exposure using actuarially-based loss estimates, which are updated semi-annually in June and December of each year.  In June 2011, the Company began semi-annual updates for supplemental liability insurance, as such reserves had been previously updated on an annual basis in December. As a result of favorable overall claims loss development, the Company recorded favorable insurance reserve adjustments, which effectively represents revision to previous estimates of vehicle insurance charges, of $2.5 million for the three and six months ended June 30, 2012 and $10.6 million for the three and six months ended June 30, 2011.

Contingencies

The following recent development pertaining to a legal proceeding described in the Company’s Form 10-K is furnished on a supplemental basis:

On March 2, 2012, the appellate court in Susan and Jeffrey Dillon v. DTG Operations, Inc. d/b/a Thrifty Car Rental (Case No. 09CH34874, Cook County Circuit Court, Chancery Division, Illinois) upheld the lower court’s ruling in favor of the Company.  The Plaintiffs did not seek a rehearing or further appeals, and this action has been dismissed.

Aside from the above, none of the other legal proceedings described in the Company’s Form 10-K have experienced material changes.

Various legal actions, claims and governmental inquiries and proceedings have been in the past, or may be in the future, asserted or instituted against the Company, including other purported class actions or proceedings relating to the Hertz transaction terminated in October 2010 and some that may demand large monetary damages or other relief which could result in significant expenditures.  
 
 
22

 
 
The Company is also subject to potential liability related to environmental matters.  The Company establishes reserves for litigation and environmental matters when the loss is probable and reasonably estimable.  It is reasonably possible that the final resolution of some of these matters may require the Company to make expenditures, in excess of established reserves, over an extended period of time and in a range of amounts that cannot be reasonably estimated.  The term “reasonably possible” is used herein to mean that the chance of a future transaction or event occurring is more than remote but less than probable.  The Company evaluates developments in its legal matters that could affect the amount of previously accrued reserves and makes adjustments as appropriate.  Significant judgment is required to determine both likelihood of a further loss and the estimated amount of the loss. With respect to outstanding litigation and environmental matters, based on current knowledge, the Company believes that the amount or range of reasonably possible loss will not, either individually or in the aggregate, have a material adverse effect on its business or consolidated financial statements.  However, the outcome of such legal matters is inherently unpredictable and subject to significant uncertainties.

Other

In June 2012, the Company executed a vehicle supply agreement with Chrysler Group LLC (“Chrysler Group”) for a three-year term beginning with program year 2013 (August 1, 2012) and ending at the end of program year 2015 (July 31, 2015), that will allow the Company to source a portion of its vehicle purchases, with certain minimum volumes, through Chrysler Group.  Volume requirements may be modified by mutual agreement between the Company and Chrysler Group.

13.  
NEW ACCOUNTING STANDARDS

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS” (“ASU 2011-04”), which amends U.S. GAAP to converge U.S. GAAP and International Financial Reporting Standards by changing the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements.  ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011.  The Company adopted ASU 2011-04 on January 1, 2012, as required (see Note 9 for required disclosures).

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income - Presentation of Comprehensive Income” (“ASU 2011-05”).  ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of stockholders’ equity.  It requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income - Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05” (“ASU 2011-12”) to defer the effective date of the specific requirement to present items that are reclassified out of accumulated other comprehensive income to net income alongside their respective components of net income and other comprehensive income. All other provisions of this update, which are to be applied retrospectively, are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The Company adopted ASU 2011-05 and ASU 2011-12 on January 1, 2012, as required (see condensed consolidated statements of comprehensive income and Note 10 for required disclosures).

In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”) to amend the requirement for an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position.  An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented.  
 
 
23

 
 
ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods.  The Company plans to adopt ASU 2011-11 on January 1, 2013, as required, but does not believe this guidance will have a significant impact on the Company’s consolidated financial statements.

14.  
SUBSEQUENT EVENTS

In preparing the accompanying condensed consolidated financial statements, the Company has reviewed events that have occurred after June 30, 2012 through the issuance of the financial statements.  The Company noted no reportable subsequent events other than the subsequent event noted below.

During July 2012, the Company repurchased 22,494 shares or approximately $1.8 million of its common stock under the share repurchase program at an average price of $79.74, leaving approximately $271 million available for further purchases of the Company’s common stock under the share repurchase program.



 
 
*******
 
 
 
24

 
 
ITEM 2.                   MANAGEMENT’S DISCUSSION AND ANALYSIS OF
 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations

The following table sets forth certain selected operating data of the Company:
 
   
Three Months
         
Six Months
       
   
Ended June 30,
         
Ended June 30,
       
               
%
               
%
 
U.S. and Canada
 
2012
   
2011
   
Change
   
2012
   
2011
   
Change
 
                                     
                                     
Vehicle Rental Data:
                                   
                                     
Average number of vehicles operated
    117,222       116,738       0.4%       109,319       107,391       1.8%  
Number of rental days
    8,563,364       8,217,167       4.2%       16,040,134       15,239,261       5.3%  
Vehicle utilization
    80.3%       77.4%    
2.9 p.p.
      80.6%       78.4%    
2.2 p.p.
 
Average revenue per day
  $ 44.25     $ 46.02       (3.8%   $ 44.76     $ 46.62       (4.0%
Monthly average revenue per vehicle
  $ 1,077     $ 1,080       (0.3%   $ 1,095     $ 1,103       (0.7%
Average depreciable fleet
    118,485       117,876       0.5%       110,536       108,299       2.1%  
Monthly avg. depreciation (net) per vehicle
  $ 162     $ 188       (13.8% )   $ 150     $ 217       (30.9%
                                                 
Use of Non-GAAP Measures for Measuring Results

Corporate Adjusted EBITDA means earnings, excluding the impact of the (increase) decrease in fair value of derivatives, before non-vehicle interest expense, income taxes, non-vehicle depreciation, amortization, and certain other items as shown below. The Company believes Corporate Adjusted EBITDA is important as it provides a supplemental measure of the Company's liquidity by adjusting earnings to exclude certain non-cash items, taxes and corporate-level capital structure decisions (i.e., non-vehicle interest), thus allowing the Company’s management, including the chief operating decision maker, as well as investors and analysts, to evaluate the Company’s operating cash flows based on the core operations of the Company.  Additionally, the Company believes Corporate Adjusted EBITDA is a relevant measure of operating performance in providing a measure of profitability that focuses on the core operations of the Company while excluding certain items that do not directly reflect ongoing operating performance.  The Company’s management, including the chief operating decision maker, uses Corporate Adjusted EBITDA to evaluate the Company’s performance and in preparing monthly operating performance reviews and annual operating budgets.  The items excluded from Corporate Adjusted EBITDA, but included in the calculation of the Company’s reported net income, are significant components of its condensed consolidated statements of comprehensive income, and must be considered in performing a comprehensive assessment of overall financial performance.  Corporate Adjusted EBITDA is not defined under GAAP and should not be considered as an alternative measure of the Company's net income, cash flow or liquidity.  Corporate Adjusted EBITDA amounts presented may not be comparable to similar measures disclosed by other companies.
 
 
25

 
 
See the table below for a reconciliation of non-GAAP to GAAP results.
 
                         
   
Three Months
   
Six Months
 
   
Ended June 30,
   
Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(in thousands)
   
(in thousands)
 
Reconciliation of Net Income to
                       
Corporate Adjusted EBITDA
                       
                         
Net income - as reported