During the second quarter, the car rental industry continued to be impacted by lower rental rates and reduced industry rental demand related to the war in Iraq, SARS outbreak in Canada and a weak economy. The above factors combined with a weak used car market, primarily resulting from increased incentives on new car purchases offered by manufacturers, caused the second quarter of 2003 results to fall below last year’s second quarter.
Total revenues for the quarter ended June 30, 2003 increased $1.6 million, or 0.5%, to $304.1 million compared to the second quarter of 2002. The increase in total revenue was primarily due to a 1.6% increase in vehicle rental revenue, partially offset by a decrease in vehicle leasing revenue of 4.7%.
The Company’s vehicle rental revenue for the second quarter of 2003 was $243.7 million, a $3.8 million increase from the second quarter of 2002. The increase in vehicle rental revenue was the result of an 8.0% increase in rental days, partially offset by a 5.9% decrease in revenue per day. The growth in rental days resulted from operating locations that were previously franchised and establishing new stores in locations not previously operated, which accounted for a 6.2% increase. Additionally, rental days on a same store basis increased 1.8%.
Vehicle leasing revenue for the second quarter of 2003 was $41.4 million, a $2.1 million decrease from the second quarter of 2002. This decline was due to a 3.4% decline in the average lease fleet primarily related to the shift of several locations from franchised operations to corporate operations coupled with a 1.3% decline in the average lease rate.
Fees and services revenue decreased 7.0% to $14.3 million as compared to the second quarter of 2002. This decline was primarily related to the shift of several locations from franchised operations to corporate operations.
Expenses
Total expenses increased 6.7% from $273.7 million in the second quarter of 2002 to $291.9 million in the second quarter of 2003. Total expenses as a percentage of revenue increased to 96.0% in 2003 from 90.5% in 2002.
Direct vehicle and operating expenses for the second quarter of 2003 increased $3.1 million, or 2.9%, over the second quarter of 2002. The increase in costs related primarily to higher fleet and transaction levels and the operation of additional corporate stores under both the Dollar and Thrifty brands.
Net vehicle depreciation expense and lease charges increased $16.9 million, or 18.3%, in the second quarter of 2003 as compared to the second quarter of 2002. Net vehicle losses on the disposal of non-program vehicles were $2.2 million for the second quarter of 2003, compared to gains of $7.3 million for the second quarter of 2002. Vehicle depreciation expense increased $7.7 million, or 7.9%, due to a 5.1% increase in depreciable fleet coupled with a 2.6% increase in the average depreciation rate primarily related to non-program vehicles. Lease charges, for vehicles leased from third parties, decreased $0.3 million to $1.2 million for the second quarter of 2003, due to a decrease in the number of vehicles leased.
Selling, general and administrative expenses of $47.7 million for the second quarter of 2003 decreased 1.9% from $48.6 million in the second quarter of 2002. This decrease was due primarily to lower accruals for incentive compensation plans and other general and administrative expenses, partially offset by increased sales and marketing costs.
Net interest expense decreased $0.9 million, or 3.9%, to $22.5 million primarily due to lower interest rates in the second quarter of 2003 as compared to the second quarter of 2002, partially offset by an increase in average vehicle debt.
The effective tax rate for the second quarter of 2003 was 48.0% compared to 39.0% for the second quarter of 2002. This increase in the effective tax rate was due primarily to lower U.S. pretax earnings in relationship to Canadian pretax losses. The Company reports taxable income for the U.S. and Canada in separate tax jurisdictions and establishes provisions separately for each jurisdiction. On a separate, domestic basis, the U.S. effective tax rate approximates the statutory tax rate including the effect of state income taxes. However, on a consolidated basis, no income tax benefit is recorded for Canadian losses, thus, increasing the consolidated effective tax rate.
Interim reporting requirements for applying separate, annual effective income tax rates to U.S. and Canadian operations, combined with the seasonal impact of Canadian operations, will cause significant variations in the Company’s quarterly consolidated effective income tax rates.
Operating Results
Income before income taxes decreased $16.6 million, or 57.7%, to $12.2 million for the second quarter of 2003.
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Six Months Ended June 30, 2003 Compared with Six Months Ended June 30, 2002
Revenues
Total revenues for the six months ended June 30, 2003 increased $9.4 million, or 1.7%, to $554.6 million compared to the six months ended June 30, 2002. The growth in total revenue was due to an increase in vehicle rental revenue of 1.5% and an increase in vehicle leasing revenue of 4.5%, partially offset by a decrease in fees and services revenue of 2.2%.
The Company’s vehicle rental revenue for the first half of 2003 was $442.1 million, a $6.6 million increase from the first half of 2002. The increase in vehicle rental revenue was the result of an 8.0% increase in rental days, partially offset by a 6.0% decrease in revenue per day. The growth in rental days resulted from operating locations that were previously franchised and establishing new stores in locations not previously operated. Additionally, rental days on a same store basis increased 1.0%.
Vehicle leasing revenue for the first half of 2003 was $78.7 million, a $3.4 million increase from the first half of 2002. This increase in vehicle leasing revenue was primarily due to increased vehicle orders by franchisees increasing their participation in the Company’s leasing program, partially offset by the impact of locations shifted from franchised operations to corporate operations.
Fees and services revenue decreased 2.2% to $27.9 million as compared to the first half of 2002.
Expenses
Total expenses increased 9.1% from $495.4 million in the first half of 2002 to $540.7 million in the first half of 2003. Total expenses as a percentage of revenue increased to 97.5% in 2003 from 90.9% in 2002.
Direct vehicle and operating expenses for the first half of 2003 increased $14.1 million, or 7.2%, compared to the first half of 2002. The increase in costs related primarily to higher fleet and transaction levels and to the operation of additional corporate stores under both the Dollar and Thrifty brands.
Net vehicle depreciation expense and lease charges increased $33.6 million, or 20.4%, in the first half of 2003 as compared to the first half of 2002. Vehicle depreciation expense increased $21.9 million, or 12.7%, due to a 9.3% increase in depreciable fleet coupled with a 3.1% increase in the average depreciation rate primarily related to non-program vehicles. Net vehicle losses on the disposal of non-program vehicles were $1.0 million for the first half of 2003, compared to net vehicle gains of $11.4 million for the first half of 2002. Lease charges, for vehicles leased from third parties, decreased $0.7 million due to a decrease in the number of vehicles leased in the first half of 2003.
Selling, general and administrative expenses of $89.8 million for 2003 decreased 0.9% from $90.6 million in 2002. This decrease was due primarily to lower accruals for incentive compensation plans and other general and administrative expenses, partially offset by increased sales and marketing costs.
Net interest expense decreased $1.5 million, or 3.5%, to $41.8 million in the first half of 2003 primarily due to lower interest rates, partially offset by an increase in average vehicle debt.
The effective tax rate for the first half of 2003 was 50.1% compared to 40.4% for the first half of 2002. This increase in the effective tax rate was due primarily to lower U.S. pretax earnings in relationship to Canadian pretax losses. The Company reports taxable income for the U.S. and Canada in separate tax jurisdictions and establishes provisions separately for each jurisdiction. On a separate, domestic basis, the U.S. effective tax rate approximates the statutory tax rate including the effect of state income taxes. However, on a consolidated basis, no income tax benefit is recorded for Canadian losses, thus, increasing the consolidated effective tax rate.
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Operating Results
Income before income taxes decreased $35.9 million, or 72.1%, to $13.9 million for the first half of 2003.
Outlook
The outlook for the balance of 2003 remains uncertain, but is showing signs of improvement. Airline passenger enplanements, a key driver of vehicle rental demand, are still below prior year levels and industry pricing remains weak. Renewed consumer confidence and increased travel may result from a more stable geopolitical landscape. Early indications show signs of improvement in the third quarter relating to an increase in summer travel volumes, improving rental rates and stabilizing used car sale prices.
Seasonality
The Company’s business is subject to seasonal variations in customer demand, with the summer vacation period representing the peak season for vehicle rental. During the peak season, the Company increases its rental fleet and workforce to accommodate increased rental activity. As a result, any occurrence that disrupts travel patterns during the summer period could have a material adverse effect on the annual performance of the Company. The first and fourth quarters for the Company’s rental operations are generally the weakest, when there is limited leisure travel and a greater potential for adverse weather conditions. Many of the operating expenses such as rent, general insurance and administrative personnel are fixed and cannot be reduced during periods of decreased rental demand.
Liquidity and Capital Resources
The Company’s primary uses of liquidity are for the purchase of vehicles for its rental and leasing fleets, non-vehicle capital expenditures, franchisee acquisitions and for working capital. The Company also uses letters of credit or insurance bonds to secure certain commitments related to airport concession agreements, insurance programs, and for other purposes.
The Company’s primary sources of liquidity are cash generated from operations, secured vehicle financing, the Revolving Credit Facility and insurance bonds. Cash generated by operating activities of $281.3 million for the six months ended June 30, 2003, is primarily the result of net income, adjusted for depreciation, and reduced receivable balances. The liquidity necessary for purchasing vehicles is primarily obtained from secured vehicle financing, most of which is asset backed notes, sales proceeds from disposal of used vehicles and cash generated by operating activities. The asset backed notes require varying levels of credit enhancement or overcollateralization, which is provided by a combination of cash, vehicles and letters of credit. These letters of credit are provided under the Company’s Revolving Credit Facility.
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The Company believes that its cash generated from operations, availability under its Revolving Credit Facility, insurance bonding programs and secured vehicle financing programs are adequate to meet its liquidity requirements for the foreseeable future, including the acceleration of franchisee acquisitions relating to the Company’s new corporate strategy and the recently announced stock repurchase program of up to $30 million over the next two years. A significant portion of the secured vehicle financing consists of asset backed notes. The Company generally issues additional notes each year to replace maturing notes and provide for growth in its fleet. The Company believes the asset backed note market continues to be a viable source of vehicle financing. The Company, like the rental car industry, has experienced increases during the last year in the level of credit enhancement or additional collateral required for new asset backed notes, the Conduit Facility and the Commercial Paper Program. These increased requirements have reduced liquidity available for other corporate purposes. The Company believes it has sufficient resources to meet these requirements.
Cash used in investing activities was $719.8 million. The principal use of cash in investing activities was the purchase of revenue-earning vehicles, which totaled $2.3 billion, partially offset by $1.4 billion in proceeds from the sale of used revenue-earning vehicles. The Company’s need for cash to finance vehicles is highly seasonal and typically peaks in the second and third quarters of the year when fleet levels build to meet seasonal rental demand. The Company expects to continue to fund its revenue-earning vehicles with cash provided from operations and increased secured vehicle financing. The Company also used cash for the purchase of non-vehicle capital expenditures of $8.8 million. These expenditures consist primarily of airport facility improvements for the Company’s rental locations and investments in information technology equipment and systems. The Company also acquired the franchised operations of its Hawaii and Manchester, New Hampshire franchisees of the Thrifty brand and the master franchise rights of the Dollar brand in Canada during the first half of 2003, which used $7.9 million of cash. These expenditures were financed with cash provided from operations. At June 30, 2003, restricted cash and investments totaled $114.2 million, decreasing $220.7 million which was used to acquire revenue-earning vehicles during the six months ended June 30, 2003. Restricted cash and investments are restricted for the acquisition of revenue-earning vehicles and other specified uses as defined under the asset backed note program, the Canadian fleet securitization partnership program, the Like-Kind Exchange Program and provide collateral for interest rate swap agreements relating to asset backed notes.
Cash received in financing activities was $357.4 million primarily due to the issuance of $375 million in asset backed notes in March 2003, an $82 million increase in commercial paper issued, the increase of $25 million under the Conduit Facility and a net increase of $43 million in borrowings under the Canadian fleet securitization program, partially offset by the maturity of asset backed notes totaling $184 million.
The Company has significant requirements for bonds and letters of credit to support its insurance programs and airport concession commitments. At June 30, 2003, the insurance companies had issued approximately $44.9 million in bonds to secure these obligations.
Asset Backed Notes
The asset backed note program at June 30, 2003 was comprised of $1.57 billion in asset backed notes with maturities ranging from 2003 to 2007. Borrowings under the asset backed notes are secured by eligible vehicle collateral. Asset backed notes totaling $1.36 billion bear interest at fixed rates ranging from 3.64% to 7.10%, including certain floating rate notes swapped to fixed rates. Asset backed notes totaling $208.4 million bear interest at floating rates ranging from LIBOR plus 0.64% to LIBOR plus 1.05%.
Conduit Facility
In March 2003, an existing bank increased its commitment in the Conduit Facility, raising the capacity to $275 million, which was fully utilized, at June 30, 2003.
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Commercial Paper Program and Liquidity Facility
Effective February 24, 2003, the Commercial Paper Program was renewed for another 364-day period at a maximum size of $554 million, backed by a renewal of the Liquidity Facility in the amount of $485 million. The Commercial Paper Program and the Liquidity Facility are renewable annually. Borrowings under the Commercial Paper Program are secured by eligible vehicle collateral and bear interest based on market-dictated commercial paper rates. At June 30, 2003, the Company had $389.9 million in commercial paper outstanding.
Vehicle Debt and Obligations
Vehicle manufacturer and bank lines of credit provided $401.4 million in capacity at June 30, 2003. The Company had $247.9 million in borrowings outstanding under these lines at June 30, 2003. All lines of credit are collateralized by the related vehicles.
The Company has financed its Canadian vehicle fleet through a five-year fleet securitization partnership program, which began in February 1999. This program was amended in May 2003, increasing the vehicle financing up to CND$200 million funded through a bank commercial paper conduit and extending the expiration date of the program through December 31, 2004. At June 30, 2003, the Company had approximately CND$137.4 million (US$102.0 million) funded under this program.
Revolving Credit Facility
The Company has a $215 million five-year, senior secured, revolving credit facility (the “Revolving Credit Facility”) that expires in August 2005. The Revolving Credit Facility is used to provide working capital borrowings and letters of credit. Working capital borrowings under the Revolving Credit Facility are limited to $70 million. In March 2003, the Company completed an amendment affecting a financial covenant, which also included limiting expenditures for non-vehicle capital assets and franchisee acquisitions if certain covenant levels are not maintained. On July 31, 2003, the Company completed another amendment of the Revolving Credit Facility, which among other provisions, allows the Company to retain a higher limitation for franchisee acquisitions in 2003 even though the Company would be unable to meet the original covenant level required to maintain the higher limit. The Company had letters of credit outstanding under the Revolving Credit Facility of approximately $188.1 million and no working capital borrowings at June 30, 2003.
New Accounting Standards
In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations” which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company adopted the provisions of SFAS No. 143 as required on January 1, 2003. Adoption of SFAS No. 143 had no material effect on the consolidated financial statements of the Company.
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement supersedes Emerging Issues Task Force (“EITF”) No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” Under this statement, a liability or a cost associated with a disposal or exit activity is recognized at fair value when the liability is incurred rather than at the date of an entity’s commitment to an exit plan as required under EITF No. 94-3. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption permitted. The Company adopted the provisions of SFAS No. 146 as required on January 1, 2003. Adoption of SFAS No. 146 had no material effect on the consolidated financial statements of the Company.
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In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. ” This interpretation elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation it has undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of the interpretation are applicable on a prospective basis to guarantees issued or modified beginning in 2003. The disclosure requirements were effective for interim or annual financial statements beginning on December 31, 2002.
SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” was issued and effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003 and requires prospective accounting treatment.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The following information about the Company’s market sensitive financial instruments constitutes a “forward-looking” statement. The Company’s primary market risk exposure is changing interest rates, primarily in the United States. The Company’s policy is to manage interest rates through use of a combination of fixed and floating rate debt and interest rate swap agreements. All items described are non-trading and are stated in U.S. Dollars. Because a portion of the Company’s debt is denominated in Canadian dollars, its carrying value is impacted by exchange rate fluctuations.
At June 30, 2003, there were no significant changes in the Company’s quantitative disclosures about market risk compared to December 31, 2002, which is included under Item 7A of the Company’s most recent Form 10-K, except for the addition of the derivative financial instrument noted in Note 8 to the condensed consolidated financial statements.
| ITEM 4. | CONTROLS AND PROCEDURES |
| | | |
| a) | Evaluation of disclosure controls and procedures |
| | We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report. |
| | | |
| b) | Changes in internal controls |
| | Effective with the corporate reorganization on January 1, 2003, the Company implemented changes to certain internal controls over financial reporting and processes. The Company does not believe there are any significant deficiencies or material weaknesses in internal controls over financial reporting due to these changes. The Company will continue to monitor internal controls over financial reporting to ensure their effectiveness. |
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PART II - OTHER INFORMATION
Various legal actions, claims and governmental inquiries and proceedings are pending or may be instituted or asserted in the future against the Company and its subsidiaries. Litigation is subject to many uncertainties, and the outcome of the individual litigated matters is not predictable with assurance. It is possible that certain of the actions, claims, inquiries or proceedings could be decided unfavorably to the Company or the subsidiaries involved. Although the amount of liability with respect to these matters cannot be ascertained, potential liability is not expected to materially affect the consolidated financial position or results of operations of the Company.
| ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
| | | |
| [a] | On May 29, 2003, the 2003 Annual Meeting of Stockholders of the Company was held. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was no solicitation in opposition to management's director nominees. |
| | | |
| [b] | The Company's stockholders elected Molly Shi Boren, Thomas P. Capo, Joseph E. Cappy, Maryann N. Keller, The Hon. Edward C. Lumley, John C. Pope, John P. Tierney and Edward L. Wax to serve as directors of the Company until the next Annual Meeting of Stockholders or until their successors have been duly elected. |
| | | |
| [c] | The votes cast by the Company's stockholders for the election of directors listed in paragraph (b), as determined by the final report of the inspectors, are set forth below: |
| | | | | | | | | | | | | |
| | | | | | | NUMBER OF VOTES | |
| | | | | | |
| |
| | | NOMINEE | | | FOR | | | WITHHELD | |
| |
| |
| | |
| |
| | Molly Shi Boren | | | 22,782,258 | | | | 99,417 | |
| | Thomas P. Capo | | | 22,377,115 | | | | 504,560 | |
| | Joseph E. Cappy | | | 22,738,804 | | | | 142,871 | |
| | Maryann N. Keller | | | 22,385,192 | | | | 496,483 | |
| | The Hon. Edward C. Lumley | | | 22,698,722 | | | | 182,953 | |
| | John C. Pope | | | 22,770,419 | | | | 111,256 | |
| | John P. Tierney | | | 22,377,163 | | | | 504,512 | |
| | Edward L. Wax | | | 22,773,512 | | | | 108,163 | |
The Company’s stockholders voted on the following proposals:
Proposal 1 - Election of Directors. See paragraphs (b) and (c) above.
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| ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K |
| | | | | | | | | |
| | Exhibit | 15.10 | | Letter from Deloitte & Touche LLP regarding interim financial information |
| |
| | Exhibit | 31.1 | | Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
| | Exhibit | 31.2 | | Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
| | Exhibit | 32.1 | | Certification by the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
| | Exhibit | 32.2 | | Certification by the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
| | During the quarterly period ended June 30, 2003, and between such date and the filing of this Form 10-Q, the Company filed or furnished the following reports on Form 8-K: |
| | Current report on Form 8-K dated April 24, 2003, included press release reporting the financial results of the Company for the quarter ended March 31, 2003. |
| | Current report on Form 8-K dated July 30, 2003, included press release reporting the financial results of the Company for the quarter ended June 30, 2003. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned; thereunto duly authorized, in the City of Tulsa, Oklahoma, on August 12, 2003.
| | | | DOLLAR THRIFTY AUTOMOTIVE GROUP, INC. |
| | | By: | /s/ JOSEPH E. CAPPY |
| | | |
|
| | | Name: | Joseph E. Cappy |
| | | Title: | Chairman of the Board, Chief Executive Officer and Principal Executive Officer |
| | | | |
| | | | |
| | | By: | /s/ STEVEN B. HILDEBRAND |
| | | |
|
| | | Name: | Steven B. Hildebrand |
| | | Title: | Executive Vice President, Chief Financial Officer, Principal Financial Officer and Principal Accounting Officer |
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