The Company has elected to perform the annual impairment test on goodwill during the second quarter of each year, unless circumstances arise that require more frequent testing. During the second quarter of 2007, the Company completed the annual impairment test of goodwill and concluded goodwill was not impaired.
The changes in the carrying amount of goodwill for the six months ended June 30, 2007 are as follows (in thousands):
Debt and other obligations as of June 30, 2007 and December 31, 2006 consist of the following
On March 26, 2007, the Company extended its Variable Funding Note Purchase Facility (the “Conduit Facility”) for a three-month period with a capacity of $425 million. The extension period ran through June 25, 2007. The Company renewed its Conduit Facility, effective June 25, 2007, for a 364-day period. The maximum size of the Conduit Facility was reduced from $425 million to $300 million.
On March 26, 2007, the Company extended its Commercial Paper Program for a three-month period at a maximum capacity of $649 million backed by a three-month extension of the Liquidity Facility in the amount of $560 million. The extension period ran through June 25, 2007. The Company renewed its Commercial Paper Program for a 364-day period effective June 25, 2007. The maximum size of the Commercial Paper Program decreased from $649 million to $545 million. The Commercial Paper Program is supported by a renewal of the Liquidity Facility, which was decreased from a maximum size of $560 million to $460 million.
On May 23, 2007, RCFC issued $500 million of asset backed notes (the “2007 Series notes”) primarily to replace maturing asset backed notes. The 2007 Series notes consist of five-year floating rate notes at LIBOR plus 0.14%. In conjunction with the issuance of the 2007 Series notes, the Company also entered into interest rate swap agreements to convert this floating rate debt to fixed rate debt at a 5.16% interest rate.
On June 15, 2007, the Company entered into $600 million in new senior secured credit facilities (the “Senior Secured Credit Facilities”) comprised of a $350 million revolving credit facility (the “Revolving Credit Facility”) and a $250 million term loan (the “Term Loan”). The Senior Secured Credit Facilities contain certain financial and other covenants, including a covenant that sets the maximum amount the Company can spend annually on the acquisition of non-vehicle capital assets, a maximum leverage ratio and a limitation on cash dividends and share repurchases, and are collateralized by a first priority lien on substantially all material non-vehicle assets of the Company. As of June 30, 2007, the Company is in compliance with all covenants. The Revolving Credit Facility, which replaced the Company’s existing $300 million revolving credit facility, expires on June 15, 2013, and will be used to provide working capital borrowings and letters of credit. Interest rates on loans under the Revolving Credit Facility are, at the option of the Company, based on either prime rates, which are payable quarterly, or Eurodollar rates, which are payable based on an elected interest period of one, two, three or six months. The Revolving Credit Facility permits the combination of letter of credit usage and working capital borrowing up to $350 million with no sublimits on either. The Company had no outstanding working capital borrowings at June 30, 2007. The Term Loan expires on June 15, 2014, and can be used to reduce vehicle debt, to pay related fees and expenses and for general corporate purposes. Initially, the proceeds of the Term Loan were used to repay asset backed vehicle debt, thereby providing additional credit enhancement to the vehicle financing facilities. The issuance of the Term Loan allows the Company greater flexibility to finance non-program vehicles and vehicle purchases from non-investment grade manufacturers. The Term Loan requires minimum quarterly principal payments beginning in September 2007, but depending on the occurrence of certain events and cash flows, the required principal payments may be increased.
In June 2007, the Company extended its vehicle financing line of credit with various banks at existing levels, while finalizing negotiations to conform existing covenant calculations to those in the Senior Secured Credit Facilities.
10. | DERIVATIVE FINANCIAL INSTRUMENTS |
The Company is exposed to market risks, such as changes in interest rates. Consequently, the Company manages the financial exposure as part of its risk management program, by striving to reduce the potentially adverse effects that the potential volatility of the financial markets may have on the Company’s operating results. The Company has used interest rate swap agreements, for each related new asset backed note issuance in 2004 through 2007, to effectively convert variable interest rates on a total of $1.9 billion in asset backed notes to fixed interest rates. These swaps have termination dates through July 2012. The Company reflects these swaps on its balance sheet at fair market value, which totaled approximately $22.1 million at June 30, 2007, comprised of assets, included in receivables. At December 31, 2006, these swaps totaled $11.5 million comprised of assets, included in receivables, of approximately $14.3 million, and liabilities, included in accrued liabilities, of approximately $2.8 million.
The interest rate swap agreements related to the asset backed note issuances in 2004, 2005 and 2006 do not qualify for hedge accounting treatment under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended (“SFAS No. 133”); therefore, the change in the interest rate swap agreements’ fair values must be recognized as an (increase) decrease in fair value of derivatives in the condensed consolidated statement of income. For the six months ended June 30, 2007 and 2006, the Company recorded the related change in the fair value of the swap agreements of ($3.5) million and ($18.3) million, respectively, as a net increase in fair value of derivatives in its condensed consolidated statements of income.
14
The interest rate swap agreement entered into in May 2007 related to the 2007 asset backed note issuance (“2007 Swap”) constitutes a cash flow hedge and satisfies the criteria for hedge accounting under the “long-haul” method. Related to the 2007 Swap, the Company recorded income of $4.2 million, which is net of income taxes, in total comprehensive income for the six month period ended June 30, 2007 (Note 11). Deferred gains and losses are recognized in earnings as an adjustment to interest expense over the same period in which the related interest payments being hedged are recognized in earnings. Based on projected market interest rates, the Company estimates that approximately $0.8 million of net deferred gain related to the 2007 Swap will be reclassified into earnings within the next twelve months.
Comprehensive income is comprised of the following (in thousands):
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| | | | | | | | Three Months | | | | Six Months | |
| | | | | | | | Ended June 30, | | | | Ended June 30, | |
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| | | Net income | $ | 15,321 | | | $ | 26,655 | | | | $ | 20,483 | | | $ | 48,461 | |
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| | | Interest rate swap adjustment on 2007 swap | | 4,194 | | | | - | | | | | 4,194 | | | | - | |
| | | Foreign currency translation adjustment | | 2,649 | | | | 1,680 | | | | | 2,756 | | | | 1,599 | |
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| | | Comprehensive income | $ | 22,164 | | | $ | 28,335 | | | | $ | 27,433 | | | $ | 50,060 | |
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The Company has provided for income taxes in the U.S. and in Canada based on taxable income or loss and other tax attributes separately for each jurisdiction. The Company has established tax provisions separately for U.S. taxable income and Canadian losses, for which no income tax benefit was recorded. 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.
For the three months and six months ended June 30, 2007, the overall effective tax rate of 43.1% and 46.1%, respectively, differed from the U.S. statutory rate due primarily to the state and local taxes and losses relating to DTG Canada for which no benefit was recorded due to full valuation allowance.
Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109”, as amended (“FIN No. 48”). Upon adoption of FIN No. 48 and as of June 30, 2007, the Company had no material liability for unrecognized tax benefits and no material adjustments to the Company’s opening financial position were required. There are no material tax positions for which it is reasonably possible that unrecognized tax benefits will significantly change in the twelve months subsequent to June 30, 2007.
15
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 2003 through 2006 are subject to examination by federal taxing authorities and the tax years 2002 through 2006 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 statement of income. No amounts were recognized for interest and penalties upon adoption of FIN No. 48 or during the six months ended June 30, 2007.
13. | SHARE REPURCHASE PROGRAM |
In February 2006, the Company’s Board of Directors authorized a $300 million share repurchase program to replace the $100 million share repurchase program of which $44.7 million had been used to repurchase shares. The Company did not repurchase shares during the six months ended June 30, 2007. Since inception of the share repurchase programs, the Company has repurchased 4,110,500 shares of common stock at an average price of $37.96 per share totaling approximately $156.0 million, all of which were made in open market transactions. At June 30, 2007, the $300 million share repurchase program had $188.7 million of remaining authorization through December 31, 2008.
14. | COMMITMENTS AND CONTINGENCIES |
Various claims and legal proceedings have been asserted or instituted against the Company, including some purporting to be class actions, and some which demand large monetary damages or other relief which could result in significant expenditures. Litigation is subject to many uncertainties, and the outcome of individual matters is not predictable with assurance. 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 likely. Although the final resolution of any such matters could have a material effect on the Company’s consolidated operating results for the particular reporting period in which an adjustment of the estimated liability is recorded, the Company believes that any resulting liability should not materially affect its consolidated financial position.
15. | NEW ACCOUNTING STANDARDS |
In June 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) in EITF Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (“EITF No. 06-3”). The EITF reached a consensus that the presentation of the types of taxes included in the scope of EITF No. 06-3 on either a gross or a net basis is an accounting policy decision that should be disclosed. The Company reports revenues net of these taxes in its condensed consolidated statements of income.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which is effective for fiscal years beginning after November 15, 2007. This statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. The Company plans to adopt the provisions of SFAS No. 157 as required on January 1, 2008 and is currently evaluating the impact SFAS No. 157 will have on its consolidated financial position and results of operations.
16
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115” (“SFAS No. 159”). This statement permits entities to make an irrevocable election to measure certain financial instruments and other assets and liabilities at fair value on an instrument-by-instrument basis. Unrealized gains and losses on items for which the fair value option has been elected should be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company plans to adopt the provisions of SFAS No. 159 as required on January 1, 2008 and is currently evaluating the impact SFAS No. 159 will have on its consolidated financial position and results of operations.
In May 2007, the FASB issued FASB Staff Position (“FSP”) No. FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48” (“FSP No. FIN 48-1”). This FSP amends FIN No. 48 to provide guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits under FIN No. 48. The Company applied the provisions of FSP No. FIN 48-1 upon the initial adoption of FIN No. 48 on January 1, 2007, as required. The application of this FSP did not have a material impact on the Company’s consolidated financial position or results of operations.
*******
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF |
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth the percentage of total revenues in the Company’s condensed consolidated statements of income:
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| | | | | | | | | | | Three Months | | | Six Months | |
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REVENUES: | | | | | | | | | | | | | | | | | |
| | Vehicle rentals | | | | | 95.5 | % | | 92.4 | % | | | 94.4 | % | | 92.1 | % |
| | Vehicle leasing | | | | | 2.2 | | | 3.7 | | | | 2.1 | | | 3.6 | |
| | Fees and services | | | | | 2.1 | | | 2.9 | | | | 2.4 | | | 3.2 | |
| | Other | | | | | 0.2 | | | 1.0 | | | | 1.1 | | | 1.1 | |
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| | | Total revenues | | | | | 100.0 | | | 100.0 | | | | 100.0 | | | 100.0 | |
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COSTS AND EXPENSES: | | | | | | | | | | | | | | | | |
| | Direct vehicle and operating | | | | | 49.9 | | | 49.5 | | | | 50.3 | | | 50.5 | |
| | Vehicle depreciation and lease charges, net | | | | | 26.9 | | | 20.9 | | | | 25.3 | | | 19.6 | |
| | Selling, general and administrative | | | | | 13.3 | | | 15.8 | | | | 14.7 | | | 16.5 | |
| | Interest expense, net of interest income | | | | | 6.4 | | | 5.6 | | | | 5.6 | | | 5.0 | |
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| | | Total costs and expenses | | | | | 96.5 | | | 91.8 | | | | 95.9 | | | 91.6 | |
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| | (Increase) decrease in fair value of derivatives | | | | | (2.5 | ) | | (2.4 | ) | | | (0.4 | ) | | (2.3 | ) |
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INCOME BEFORE INCOME TAXES | | | | | 6.0 | | | 10.6 | | | | 4.5 | | | 10.7 | |
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INCOME TAX EXPENSE | | | | | 2.6 | | | 4.3 | | | | 2.1 | | | 4.5 | |
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NET INCOME | | | | | 3.4 | % | | 6.3 | % | | | 2.4 | % | | 6.2 | % |
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The following table sets forth certain selected operating data of the Company:
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| | | | | | | | Three Months | | | | | | | Six Months | | | | |
| | | | | | | | Ended June 30, | | | | | | | Ended June 30, | | | | |
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| U.S. and Canada | | | | | 2007 | | | 2006 | | | Change | | | | 2007 | | | 2006 | | | Change | |
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Vehicle Rental Data:
(includes franchise acquisitions) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| Average number of vehicles operated | | | | | 135,003 | | | | 126,793 | | | | 6.5% | | | | | 122,130 | | | | 116,308 | | | | 5.0% | |
| Number of rental days | | | | | 10,088,287 | | | | 9,647,805 | | | | 4.6% | | | | | 18,261,107 | | | | 17,745,966 | | | | 2.9% | |
| Vehicle utilization | | | | | 82.1% | | | | 83.6% | | | | (1.5) p.p. | | | | | 82.6% | | | | 84.3% | | | | (1.7) p.p. | |
| Average revenue per day | | | | $ | 42.73 | | | $ | 40.47 | | | | 5.6% | | | | $ | 43.90 | | | $ | 40.64 | | | | 8.0% | |
| Monthly average revenue per vehicle | | | | $ | 1,064 | | | $ | 1,027 | | | | 3.6% | | | | $ | 1,094 | | | $ | 1,033 | | | | 5.9% | |
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Same Store Vehicle Rental Data:
(excludes franchise acquisitions) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| Average number of vehicles operated | | | | | 126,390 | | | | 126,793 | | | | (0.3% | ) | | | | 114,288 | | | | 116,308 | | | | (1.7% | ) |
| Number of rental days | | | | | 9,463,402 | | | | 9,647,805 | | | | (1.9% | ) | | | | 17,125,596 | | | | 17,745,966 | | | | (3.5% | ) |
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| Vehicle Leasing Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| Average number of vehicles leased | | | | | 5,981 | | | | 11,212 | | | | (46.7% | ) | | | | 5,702 | | | | 10,126 | | | | (43.7% | ) |
| Monthly average revenue per vehicle | | | | $ | 543 | | | $ | 462 | | | | 17.5% | | | | $ | 522 | | | $ | 461 | | | | 13.2% | |
Three Months Ended June 30, 2007 Compared with Three Months Ended June 30, 2006
During the second quarter of 2007, the Company achieved revenue growth primarily from higher revenue per day and volume related to franchise acquisitions. The Company also experienced higher vehicle depreciation and interest costs during the quarter. These costs exceeded the revenue growth and resulted in lower profits for the second quarter of 2007 as compared to last year’s second quarter.
Operating Results
The Company had income before income taxes of $26.9 million for the second quarter of 2007, as compared to $44.8 million in the second quarter of 2006.
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Revenues
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| | | | | | | | Three Months | | | | | | | |
| | | | | | | | Ended June 30, | | | $ Increase/ | | | % Increase/ | |
| | | | | | | | 2007 | | | 2006 | | | (decrease) | | | (decrease) | |
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| | Vehicle rentals | | $ | 431.1 | | | $ | 390.5 | | | $ | 40.6 | | | | 10.4% | |
| | Vehicle leasing | | | 9.7 | | | | 15.5 | | | | (5.8 | ) | | | (37.4% | ) |
| | Fees and services | | | 9.8 | | | | 12.2 | | | | (2.4 | ) | | | (20.1% | ) |
| | Other | | | 1.0 | | | | 4.4 | | | | (3.4 | ) | | | (76.2% | ) |
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| | Total revenues | | $ | 451.6 | | | $ | 422.6 | | | $ | 29.0 | | | | 6.9% | |
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| | Vehicle rental metrics: | | | | | | | | | | | | | | | | |
| | Number of rental days | | | 10,088,287 | | | | 9,647,805 | | | | 440,482 | | | | 4.6% | |
| | Average revenue per day | | $ | 42.73 | | | $ | 40.47 | | | $ | 2.26 | | | | 5.6% | |
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| | Vehicle leasing metrics: | | | | | | | | | | | | | | | | |
| | Average number of vehicles leased | | | 5,981 | | | | 11,212 | | | | (5,231 | ) | | | (46.7% | ) |
| | Average monthly lease revenue per unit | | $ | 543 | | | $ | 462 | | | $ | 81 | | | | 17.5% | |
Vehicle rental revenue for the second quarter of 2007 increased 10.4%, due to a 5.6% increase in revenue per day totaling $22.8 million, coupled with a 4.6% increase in rental days totaling $17.8 million. Vehicle rental days increased 6.5% due to 2006 franchisee acquisitions, 2007 franchisee acquisitions and greenfield locations that had not yet annualized but decreased 1.9% on a same store basis.
Vehicle leasing revenue for the second quarter of 2007 decreased 37.4%, due to a 46.7% decrease in the average lease fleet totaling $7.3 million, partially offset by a 17.5% increase in the average lease rate totaling $1.5 million. Lease rates increased as a result of higher vehicle depreciation and financing costs and the decline in volume was due to fewer vehicles leased to franchisees, which is primarily attributable to the shift of several locations from franchised operations to corporate operations.
Fees and services revenue decreased 20.1%, primarily due to lower revenues from franchisees due to the shift of several locations from franchised operations to corporate operations.
Other revenue decreased $3.4 million primarily due to a decrease in the market value of investments in the Company’s deferred compensation and retirement plans of $5.0 million. The revenue relating to these plans is attributable to the mark to market valuation of the corresponding investments and is offset in selling, general and administrative expenses and, therefore, has no impact on net income. This $5.0 million decrease is partially offset by a $1.6 million increase in parking revenues.
20
Expenses
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| | | | | | | | Three Months | | | | | | | |
| | | | | | | | Ended June 30, | | | $ Increase/ | | | % Increase/ | |
| | | | | | | | 2007 | | | 2006 | | | (decrease) | | | (decrease) | |
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| | Direct vehicle and operating | | $ | 225.6 | | | $ | 209.2 | | | $ | 16.4 | | | | 7.8% | |
| | Vehicle depreciation and lease charges, net | | | 121.3 | | | | 88.1 | | | | 33.2 | | | | 37.7% | |
| | Selling, general and administrative | | | 60.0 | | | | 66.9 | | | | (6.9 | ) | | | (10.3% | ) |
| | Interest expense, net of interest income | | | 29.0 | | | | 23.8 | | | | 5.2 | | | | 22.2% | |
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| | Total expenses | | $ | 435.9 | | | $ | 388.0 | | | $ | 47.9 | | | | 12.3% | |
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| | (Increase) decrease in fair value of derivatives | | $ | (11.2 | ) | | $ | (10.3 | ) | | $ | (0.9 | ) | | | 8.8% | |
Direct vehicle and operating expenses for the second quarter of 2007 increased $16.4 million, primarily due to a higher number of vehicles operated and higher transaction levels. As a percent of revenue, direct vehicle and operating expenses were 49.9% in the second quarter of 2007, compared to 49.5% in the second quarter of 2006.
The increase in direct vehicle and operating expense in the second quarter of 2007 resulted from the following:
| Ø | Facility and airport concession expenses increased $7.5 million. This increase resulted from increases in concession fees of $5.8 million, which are primarily based on a percentage of revenue generated from the airport facility, and increases in rent expense of $1.7 million. |
| Ø | Commission expenses increased $3.4 million, which are primarily based on revenue and related to fees charged by travel agents, third party Internet sites and credit card companies. |
| Ø | Personnel related expenses increased $2.5 million. Salary expenses increased approximately $3.2 million from increases in the number of employees and $1.1 million due to higher compensation costs per employee, partially offset by a reduction of $1.2 million related to lower incentive compensation expense. |
| Ø | Vehicle related costs increased $1.2 million. This increase resulted from a $2.9 million increase in net vehicle damage and maintenance expense, a $2.0 million increase in gasoline expense which is generally recovered in revenue from customers and a $0.7 million increase in various other fleet related categories. These increases were partially offset by a decrease in vehicle insurance expense of $4.4 million due to favorable adjustments to insurance reserves relating to favorable developments in claims history. |
Net vehicle depreciation and lease charges for the second quarter of 2007 increased $33.2 million. As a percent of revenue, net vehicle depreciation and lease charges were 26.9% in the second quarter of 2007, compared to 20.9% in the second quarter of 2006.
The increase in net vehicle depreciation and lease charges resulted from the following:
| Ø | Vehicle depreciation expense increased $39.8 million, resulting primarily from a 39.2% increase in the average depreciation rate, coupled with a 2.7% increase in the depreciable fleet. The increase in depreciation rate was primarily the result of an increase in depreciation rates on Program Vehicles and Non-Program Vehicles, partially offset by a higher mix of Non-Program Vehicles, which typically have lower depreciation rates. |
21
| Ø | Net vehicle gains on disposal of Non-Program Vehicles, which reduce vehicle depreciation and lease charges, increased $6.0 million. This increase resulted from a higher average gain per unit and an increase in the number of units sold. |
| Ø | Lease charges, for vehicles leased from third parties, decreased $0.6 million due to a decrease in the average number of units leased. |
Selling, general and administrative expenses for the second quarter of 2007 decreased $6.9 million, resulting from a $7.6 million decrease in general and administrative expenses offset by a $0.7 million increase in sales and marketing expense. As a percent of revenue, selling, general and administrative expenses were 13.3% of revenue in the second quarter of 2007, compared to 15.8% in the second quarter of 2006.
The decrease in selling, general and administrative expenses in the second quarter of 2007 resulted from the following:
| Ø | Personnel related expenses decreased $13.2 million due primarily to lower personnel costs of approximately $6.8 million principally related to information technology (“IT”) employees outsourced in October 2006, a $3.6 million decrease in performance share expense, a $2.5 million decrease in incentive compensation expense and a $0.3 million reduction in group health insurance. The decrease in incentive compensation expense is related to lower levels of earnings in the second quarter of 2007 compared to the second quarter of 2006. Additionally, the decrease in performance share expense in 2007 related to a non-recurring 2006 change in estimate for the final calculation of the vested 2003 performance share awards paid in 2006 as well as lower levels of earnings in the second quarter of 2007 compared to the second quarter of 2006. |
| Ø | The market value of investments in the Company’s deferred compensation and retirement plans decreased $5.0 million, which is offset in other revenue and, therefore, did not impact net income. |
| Ø | IT related expenses increased $8.9 million, primarily due to base contract fees paid to EDS for the outsourcing of information technology services. |
| Ø | Transition costs relating to the outsourcing of IT and call center operations were $1.5 million, including salary related expenses. |
| Ø | Sales and marketing expenses increased $0.7 million. |
Net interest expense for the second quarter of 2007 increased $5.2 million due to higher interest rates and higher average vehicle debt and interest expense related to the term debt in addition to a $1.4 million write off of unamortized deferred financing fees related to the retired revolving credit facility. Net interest expense was 6.4% of revenue in the second quarter of 2007, compared to 5.6% in the second quarter of 2006.
The income tax provision for the second quarter of 2007 was $11.6 million. The effective income tax rate for the second quarter of 2007 was 43.1% compared to 40.6% for the second quarter of 2006. 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, no income tax benefit was recorded for Canadian losses in 2007 or 2006, thus, increasing the consolidated effective tax rate compared to the U.S. effective tax rate.
22
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.
Six Months Ended June 30, 2007 Compared with Six Months Ended June 30, 2006
During the first half of 2007, the Company achieved revenue growth from higher revenue per day and volume related to franchise acquisitions. The Company also experienced higher vehicle depreciation and interest costs. These cost increases coupled with an unfavorable change in the (increase) decrease in fair value of derivatives exceeded the revenue growth and resulted in lower profits for the first half of 2007 as compared to the first half of 2006.
Operating Results
The Company had income of $38.0 million before income taxes for the first half of 2007, as compared to income before income taxes of $84.1 million in the first half of 2006.
Revenues
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Six Months | | | | | | | |
| | | | | | | | Ended June 30, | | | $ Increase/ | | | % Increase/ | |
| | | | | | | | 2007 | | | 2006 | | | (decrease) | | | (decrease) | |
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| | |
| | |
| | |
| |
| | | | | | | | (in millions) | |
| | | | | | | | | | | | | | | | | |
| | Vehicle rentals | | $ | 801.7 | | | $ | 721.2 | | | $ | 80.5 | | | | 11.2% | |
| | Vehicle leasing | | | 17.8 | | | | 28.0 | | | | (10.2 | ) | | | (36.3% | ) |
| | Fees and services | | | 20.6 | | | | 24.7 | | | | (4.1 | ) | | | (16.8% | ) |
| | Other | | | 9.5 | | | | 9.2 | | | | 0.3 | | | | 2.9% | |
| | | | | | | |
| | |
| | |
| | |
| |
| | Total revenues | | $ | 849.6 | | | $ | 783.1 | | | $ | 66.5 | | | | 8.5% | |
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| | |
| | |
| | |
| |
| | | | | | | | | | | | | | | | | |
| | Vehicle rental metrics: | | | | | | | | | | | | | | | | |
| | Number of rental days | | | 18,261,107 | | | | 17,745,966 | | | | 515,141 | | | | 2.9% | |
| | Average revenue per day | | $ | 43.90 | | | $ | 40.64 | | | $ | 3.26 | | | | 8.0% | |
| | | | | | | | | | | | | | | | | |
| | Vehicle leasing metrics: | | | | | | | | | | | | | | | | |
| | Average number of vehicles leased | | | 5,702 | | | | 10,126 | | | | (4,424 | ) | | | (43.7% | ) |
| | Average monthly lease revenue per unit | | $ | 522 | | | $ | 461 | | | $ | 61 | | | | 13.2% | |
Vehicle rental revenue for the first half of 2007 increased 11.2%, due to an 8.0% increase in revenue per day totaling $59.6 million, coupled with a 2.9% increase in rental days totaling $20.9 million. Vehicle rental days increased 6.4% due to 2006 franchise acquisitions, 2007 franchise acquisitions and greenfield locations that had not yet annualized but decreased 3.5% on a same store basis.
Vehicle leasing revenue for the first half of 2007 decreased 36.3%, due to a 43.7% decrease in the average lease fleet totaling $12.3 million, partially offset by a 13.2% increase in the average lease rate totaling $2.1 million. The decline in volume was due to fewer vehicles leased to franchisees, which is primarily attributable to the shift of several locations from franchised operations to corporate operations, and the increase in lease rates resulted from higher vehicle depreciation and financing costs.
Fees and services revenue decreased 16.8%, primarily due to lower revenues from franchisees due to the shift of several locations from franchised operations to corporate operations.
Other revenue remained basically flat primarily due to an increase of $3.3 million in parking revenues, offset by a decrease of $3.8 million in the market value of investments in the Company’s deferred compensation and retirement plans. The revenue relating to these plans is attributable to the mark to market valuation of the corresponding investments and is offset in selling, general and administrative expenses and, therefore, has no impact on net income.
23
Expenses
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Six Months | | | | | | | |
| | | | | | | | Ended June 30, | | | $ Increase/ | | | % Increase/ | |
| | | | | | | | 2007 | | | 2006 | | | (decrease) | | | (decrease) | |
| | | | | | | |
| | |
| | |
| | |
| |
| | | | | | | | (in millions) | |
| | | | | | | | | | | | | | | | | |
| | Direct vehicle and operating | | $ | 427.0 | | | $ | 395.3 | | | $ | 31.7 | | | | 8.0% | |
| | Vehicle depreciation and lease charges, net | | | 214.6 | | | | 153.2 | | | | 61.4 | | | | 40.1% | |
| | Selling, general and administrative | | | 125.3 | | | | 128.9 | | | | (3.6 | ) | | | (2.8% | ) |
| | Interest expense, net of interest income | | | 48.1 | | | | 39.9 | | | | 8.2 | | | | 20.6% | |
| | | | | | | |
| | |
| | |
| | |
| |
| | Total expenses | | $ | 815.0 | | | $ | 717.3 | | | $ | 97.7 | | | | 13.6% | |
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| | |
| | |
| | |
| |
| | (Increase) decrease in fair value of derivatives | | $ | (3.5 | ) | | $ | (18.3 | ) | | $ | 14.8 | | | | (81.1% | ) |
Direct vehicle and operating expenses for the first half of 2007 increased $31.7 million, primarily due to higher fleet and transaction levels coupled with higher costs per transaction. As a percent of revenue, direct vehicle and operating expenses were 50.3% in the first half of 2007, compared to 50.5% in the first half of 2006.
The increase in direct vehicle and operating expense in the first half of 2007 resulted from the following:
| Ø | Facility and airport concession expenses increased $12.3 million. This increase resulted from increases in concession fees of $9.2 million, which are primarily based on a percentage of revenue generated from the airport facility, and increases in rent expense of $3.1 million. |
| Ø | Commission expenses increased $7.8 million, which are primarily based on revenue and related to fees charged by travel agents, third party Internet sites and credit card companies. |
| Ø | Personnel related expenses increased $6.1 million. Salary expenses increased approximately $5.2 million from increases in the number of employees and $4.0 million due to higher compensation costs per employee, partially offset by $1.7 million due to decreased costs in group health insurance and $1.5 million due to lower incentive compensation expense. |
| Ø | Vehicle related costs increased $1.6 million. This increase resulted from a $3.3 million increase in gasoline expense which is generally recovered in revenue from customers and a $2.1 million increase in net vehicle damage and maintenance expense. These increases were partially offset by a decrease in vehicle insurance expense of $4.4 million due to favorable adjustments to insurance reserves relating to favorable developments in claims history. |
Net vehicle depreciation and lease charges for the first half of 2007 increased $61.4 million. As a percent of revenue, net vehicle depreciation and lease charges were 25.3% in the first half of 2007 compared to 19.6% in the first half of 2006.
The increase in net vehicle depreciation and lease charges resulted from the following:
| Ø | Vehicle depreciation expense increased $61.3 million, resulting primarily from a 35.4% increase in the average depreciation rate, coupled with a 1.0% increase in the depreciable fleet. The increase in depreciation rate was primarily the result of an increase in depreciation rates on Program and Non-Program Vehicles, partially offset by a higher mix of Non-Program Vehicles, which typically have lower depreciation rates. |
24
| Ø | Net vehicle gains on disposal of Non-Program Vehicles, which reduce vehicle depreciation and lease charges, decreased $1.3 million. This decrease resulted from a lower average gain per unit, partially offset by an increase in the number of units sold. |
| Ø | Lease charges, for vehicles leased from third parties, decreased $1.2 million due to a decrease in the average number of units leased. |
Selling, general and administrative expenses for the first half of 2007 decreased $3.6 million, resulting from a $4.9 million decrease in general and administrative expenses, partially offset by a $1.3 million increase in sales and marketing expense. As a percent of revenue, selling, general and administrative expenses were 14.7% of revenue in the first half of 2007, compared to 16.5% in the first half of 2006.
The decrease in selling, general and administrative expenses in the first half of 2007 resulted from the following:
| Ø | Personnel related expenses decreased $22.5 million due primarily to lower personnel costs of approximately $12.1 million principally related to IT employees outsourced in October 2006, a $5.1 million decrease in performance share expense, a $4.2 million decrease in incentive compensation expense and a $1.1 million reduction in group health insurance. The decrease in performance share expense in 2007 related to a non-recurring 2006 change in estimate for the final calculation of the vested 2003 performance share awards paid in 2006 as well as lower levels of earnings in the second quarter of 2007 compared to the second quarter of 2006. Additionally, the decrease in incentive compensation expense is related to lower levels of earnings in the second quarter of 2007 compared to the second quarter of 2006. |
| Ø | The market value of investments in the Company’s deferred compensation and retirement plans decreased $3.8 million, which is offset in other revenue and, therefore, did not impact net income. |
| Ø | IT related expenses increased $18.1 million, primarily due to base contract fees paid to EDS for the outsourcing of information technology services. |
| Ø | Transition costs relating to the outsourcing of IT and call center operations were $4.0 million, including salary related expenses. |
| Ø | Sales and marketing expenses increased $1.3 million. |
Net interest expense for the first half of 2007 increased $8.2 million due to higher interest rates and higher average vehicle debt, lower cash balances, interest expense related to the term debt in addition to a $1.4 million write off of unamortized deferred financing fees related to the retired revolving credit facility. These increases were partially offset by an increase in the rate received on interest reimbursements relating to vehicle programs. Net interest expense was 5.6% of revenue in the first half of 2007, compared to 5.0% in the first half of 2006.
The income tax provision for the first half of 2007 was $17.5 million. The effective income tax rate for the first half of 2007 was 46.1% compared to 42.4% for the first half of 2006. 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, no income tax benefit was recorded for Canadian losses in 2007 or 2006, thus, increasing the consolidated effective tax rate compared to the U.S. effective tax rate.
25
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.
Outlook
The Company expects the travel environment to remain stable in 2007. Rental rates, which are highly competitive within the rental car industry, increased significantly in the first half of 2007. The Company expects rental rates to continue to increase with more significant increases in peak demand periods and more moderate increases during off-peak periods. The Company expects continued growth in rental day volume resulting from franchise acquisitions, new local market stores, and expanding and diversifying its customer base.
Vehicle manufacturers are reducing total capacity and reducing vehicle supply to the rental car industry; however, the Company has adequate fleet to meet its forecasted growth in 2007. Vehicle manufacturers have also significantly increased industry vehicle costs by increasing Program Vehicle depreciation rates and lowering incentives for both Program and Non-Program Vehicles for the 2007 model year. Vehicle cost increases will progressively moderate in the last half of 2007 as higher 2007 vehicle costs annualize and 2008 model year vehicles begin to be purchased. The Company expects cost increases from the 2008 model year vehicles will moderate substantially from the 25 percent increase estimated in 2007. Continuing with the 2008 model year vehicles, the Company plans to operate a larger proportion of Non-Program Vehicles, which will increase its exposure to fluctuations in the used car market.
Interest costs will continue to rise due to the higher cost Term Loan and higher interest rates. The Company also expects higher costs relating to commissions to continue in 2007, due to volume increases on the third party Internet reservation channels. These higher costs, including vehicle depreciation, will negatively impact the Company’s profits unless the Company can increase rental rates substantially and achieve other cost reductions.
The Company has several initiatives related to both cost control and revenue growth. Relating to cost control, the Company has flattened the management structure and made staff reductions at its Tulsa-based headquarters to lower its cost structure, streamline processes and decision making and improve customer service. These personnel reductions are expected to result in cost savings on an annual basis; however, the Company expects to record approximately $2.5 million in severance costs during the third quarter of 2007. These one-time severance costs are expected to offset the majority of savings from the management reorganization in 2007; however, personnel cost savings are expected to be realized in 2008 and beyond. The Company has begun implementing productivity improvements in each of its field locations utilizing lean management techniques. Also, the Company will be installing fleet optimization software to enhance its management of fleet costs. These initiatives are in addition to the outsourcing of IT services and a significant portion of the Company’s call center operations which have already occurred, With respect to revenue growth, the Company has increased its focus on the domestic corporate segment and the international inbound segment of its business, and is offering more value-added products to its customers such as the new Style Series, which offers high-end vehicles in certain leisure markets, and increasing the number of GPS units offered. Additionally, the Company has begun a moderate expansion of its local market business and will continue to experience growth through its franchise acquisition program.
In August 2006, the Company entered into a master services agreement (“MSA”) with Electronic Data Systems Corporation and EDS Information Systems, L.L.C. (collectively, “EDS”) to outsource the majority of IT services. The MSA will provide significant cost reductions to the Company over its term at current levels of IT development and support. The Company continues to incur transition costs in 2007; however, it expects this arrangement to provide ongoing cost savings in 2008 and beyond.
26
In February 2007, the Company announced it had signed an agreement to outsource a portion of its reservation call center transactions to PRC, a global leader in the operation of outsourced call centers, during the second quarter of 2007. This outsourcing arrangement is expected to provide cost savings in the future, but is expected to reduce earnings slightly in 2007 due to transition and ramp up costs.
Seasonality
The Company’s business is subject to seasonal variations in customer demand, with the summer vacation period representing the peak season for vehicle rentals. 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, share repurchases and for working capital. The Company uses both cash and letters of credit to support asset backed vehicle financing programs. 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 Senior Secured Credit Facilities (hereinafter defined) and insurance bonds. Cash generated by operating activities of $306.2 million for the six months ended June 30, 2007 was primarily the result of net income, adjusted for depreciation and a reduction in outstanding vehicle manufacturers’ receivables. The liquidity necessary for purchasing vehicles is primarily obtained from secured vehicle financing, most of which is proceeds from sale of 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 are provided by a combination of cash, vehicles, letters of credit and proceeds from the Term Loan (hereinafter defined). These letters of credit are provided under the Company’s Revolving Credit Facility. Vehicle manufacturer downgrades often result in increases in required credit enhancement levels for asset backed vehicle financing. Along with the recently completed acquisition of the Company’s primary vehicle supplier, the Company will be required to increase credit enhancement levels on vehicle purchases.
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. A significant portion of the secured vehicle financing consists of asset backed notes. The Company generally issues additional notes each year primarily to replace maturing notes. The Company believes the asset backed note market continues to be a viable source of vehicle financing.
Cash used in investing activities was $504.6 million. The principal use of cash in investing activities during the six months ended June 30, 2007, was the purchase of revenue-earning vehicles, which totaled $2.6 billion. This use of cash was partially offset by $1.9 billion in proceeds from the sale of used revenue-earning vehicles. Restricted cash and investments at June 30, 2007, decreased $279.9 million from the previous year, including $285.9 million used for vehicle financing partially offset by interest income earned on restricted cash and investments of $6.0 million. The Company’s need for cash to finance vehicles is 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 non-vehicle capital expenditures of $20.2 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 used $23.0 million of cash, net of assets acquired and liabilities assumed, for franchisee acquisitions. These expenditures were financed with cash provided from operations.
27
Cash provided by financing activities was $200.7 million primarily due to the issuance of $500 million in asset backed notes in May 2007, the issuance of the $250 million Term Loan in June 2007 and an increase in other existing bank vehicle lines of credit of $64.5 million. Cash provided by financing activities was partially offset by the maturity of asset backed notes totaling $312.5 million, a $154.0 million net decrease in commercial paper, a $125 million decrease under the Conduit Facility (hereinafter defined) and a payoff of debt assumed in a recent franchise acquisition of $14.1 million.
The Company uses a like-kind exchange program for its vehicles where it disposes of vehicles and acquires replacement vehicles in a form which allows the tax basis gains on these dispositions to be deferred. The like-kind exchange program has resulted in a material deferral of federal and state income taxes for fiscal years beginning in 2002 and extending through the quarter ended June 30, 2007. The benefit of the deferral is dependent on timely reinvestment of vehicle disposition proceeds in replacement vehicles; therefore, a downsizing of the Company’s fleet or reduced vehicle purchases could result in reduced deferrals and increased payments of federal and state income taxes, after considering the effect of net operating losses.
The Company has significant requirements to maintain letters of credit and surety bonds to support its insurance programs and airport concession commitments. At June 30, 2007, the Company had $70.7 million in letters of credit, for such purposes, including $58.6 million in letters of credit already noted under the Revolving Credit Facility, and $38.5 million in surety bonds to secure these obligations.
Asset Backed Notes
The asset backed note program at June 30, 2007 was comprised of $2.0 billion in asset backed notes with maturities ranging from 2007 to 2012. Borrowings under the asset backed notes are secured by eligible vehicle collateral and bear interest at fixed rates ranging from 4.20% to 5.27%, including certain floating rate notes swapped to fixed rates. On May 23, 2007, RCFC issued an additional $500 million of five-year asset backed notes consisting of floating rate notes at LIBOR plus 0.14%. In conjunction with the asset backed notes issuance, the Company also entered into interest rate swap agreements to convert this floating rate debt to fixed rate debt at a 5.16% interest rate.
Conduit Facility
On March 26, 2007, the Company extended its Variable Funding Note Purchase Facility (the “Conduit Facility”) for a three-month period with a capacity of $425 million. The extension period ran through June 25, 2007. The Company renewed its Conduit Facility, effective June 25, 2007, for a 364-day period. The maximum size of the Conduit Facility was reduced from $425 million to $300 million.
Commercial Paper Program and Liquidity Facility
On March 26, 2007, the Company extended its Commercial Paper Program for a three-month period at a maximum capacity of $649 million backed by a three-month extension of the Liquidity Facility in the amount of $560 million. The extension period ran through June 25, 2007. The Company renewed its Commercial Paper Program for a 364-day period effective June 25, 2007. The maximum size of the Commercial Paper Program decreased from $649 million to $545 million. The Commercial Paper Program is supported by a renewal of the Liquidity Facility, which was decreased from a maximum size of $560 million to $460 million. At June 30, 2007, the Company had $25.0 million in commercial paper outstanding under the Commercial Paper Program.
28
Vehicle Debt and Obligations
Vehicle manufacturer and bank lines of credit provided $312 million in capacity at June 30, 2007. The Company had $235.8 million in borrowings outstanding under these lines at June 30, 2007. All lines of credit are collateralized by the related vehicles. In June 2007, the Company extended its line of credit with various banks at existing levels, while finalizing negotiations to conform existing covenant calculations to those in the Senior Secured Credit Facilities.
The Company finances its Canadian vehicle fleet through a fleet securitization program. Under this program, DTG Canada can obtain vehicle financing up to CND $300 million funded through a bank commercial paper conduit which expires May 31, 2010. At June 30, 2007, DTG Canada had approximately CND $166.8 million (US $156.5 million) funded under this program.
Senior Secured Credit Facilities
On June 15, 2007, the Company entered into $600 million in new senior secured credit facilities (the “Senior Secured Credit Facilities”) comprised of a $350 million revolving credit facility (the “Revolving Credit Facility”) and a $250 million term loan (the “Term Loan”). The Senior Secured Credit Facilities contain certain financial and other covenants, including a covenant that sets the maximum amount the Company can spend annually on the acquisition of non-vehicle capital assets, a maximum leverage ratio and a limitation on cash dividends and share repurchases, and are collateralized by a first priority lien on substantially all material non-vehicle assets of the Company. As of June 30, 2007, the Company is in compliance with all covenants.
The Revolving Credit Facility, which replaced the Company’s existing $300 million revolving credit facility, expires on June 15, 2013, and will be used to provide working capital borrowings and letters of credit. Interest rates on loans under the Revolving Credit Facility are, at the option of the Company, based on either prime rates, which are payable quarterly, or Eurodollar rates, which are payable based on an elected interest period of one, two, three or six months. The Revolving Credit Facility permits the combination of letter of credit usage and working capital borrowing up to $350 million with no sublimits on either. The Company had letters of credit outstanding under the Revolving Credit Facility of approximately $172.0 million and no working capital borrowings at June 30, 2007.
The Term Loan expires on June 15, 2014, and can be used to reduce vehicle debt, to pay related fees and expenses and for general corporate purposes. Initially, the proceeds of the Term Loan were used to repay asset backed vehicle debt, thereby providing additional credit enhancement to the vehicle financing facilities. The issuance of the Term Loan allows the Company greater flexibility to finance non-program vehicles and vehicle purchases from non-investment grade manufacturers. The Term Loan requires minimum quarterly principal payments beginning in September 2007, but depending on the occurrence of certain events and cash flows, the required principal payments may be increased.
New Accounting Standards
For a discussion on new accounting standards refer to Note 15 of the Notes to condensed consolidated financial statements in Item 1 – Financial Statements.
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 manages 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. However, this foreign currency risk is mitigated by the underlying collateral which is the Canadian fleet. The fair value of the interest rate swaps is calculated using projected market interest rates over the term of the related debt instruments as provided by the counter parties.
29
Based on the Company’s level of floating rate debt (excluding notes with floating interest rates swapped into fixed rates) at June 30, 2007, a 50 basis point fluctuation in interest rates would have an approximate $5 million impact on the Company’s expected pretax income on an annual basis. This impact on pretax income is reduced by earnings from cash and cash equivalents and restricted cash and investments, which are invested on a short-term basis and subject to fluctuations in interest rates. At June 30, 2007, cash and cash equivalents totaled $194.2 million and restricted cash and investments totaled $109.8 million. The Company estimates that, for 2007, approximately 35% of its average debt will bear interest at floating rates.
At June 30, 2007, there were no significant changes in the Company’s quantitative disclosures about market risk compared to December 31, 2006, which is included under Item 7A of the Company’s most recent Form 10-K, except for the net change of the derivative financial instruments noted in Notes 9 and 10 to the condensed consolidated financial statements.
a) | Disclosure Controls and Procedures |
The Company maintains 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 (“SEC”) rules and forms. The disclosure controls and procedures are also designed with the objective of ensuring such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing the disclosure controls and procedures, the Company’s management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.
As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the CEO and CFO, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the quarter covered by this report. Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective at the reasonable assurance level as of the end of the quarter covered by this report.
b) | Changes in Internal Control Over Financial Reporting |
There has been no change in the Company’s internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, identified in connection with the evaluation of the Company’s internal control performed during the fiscal quarter ended June 30, 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
30
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 final resolution of any such matters could have a material effect on the Company's consolidated operating results for a particular reporting period in which an adjustment of the estimated liability is recorded, the Company believes that any resulting liability should not materially affect its consolidated financial position.
There have been no changes to the risk factors disclosed in Item 1A of our most recent Form 10-K or the Form 10-Q for the period ended March 31, 2007.
a) | Recent Sales of Unregistered Securities |
31
c) | Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Total Number of | | | Maximum | |
| | | | | | | | | | Shares Purchased | | | Dollar Value of | |
| | | | Total Number | | | Average | | | as Part of Publicly | | | Shares that May Yet | |
| | | | of Shares | | | Price Paid | | | Announced Plans | | | Be Purchased under | |
| Period | | | Purchased | | | Per Share | | | or Programs | | | the Plans or Programs | |
| | | | | | | | | | | | | | | | | | |
April 1, 2007 -
April 30, 2007 | | | | - | | | $ | - | | | | - | | | $ | 188,692,000 | |
| | | | | | | | | | | | | | | | | | |
May 1, 2007 -
May 31, 2007 | | | | - | | | $ | - | | | | - | | | $ | 188,692,000 | |
| | | | | | | | | | | | | | | | | | |
June 1, 2007 -
June 30, 2007 | | | | - | | | $ | - | | | | - | | | $ | 188,692,000 | |
| | | |
| | | | | | | |
| | | | |
| Total | | | | - | | | | | | | | - | | | | | |
| | | |
| | | | | | | |
| | | | |
In February 2006, the Company’s Board of Directors authorized a $300 million share repurchase program to replace the $100 million share repurchase program of which $44.7 million had been used to repurchase shares. The Company did not repurchase shares during the six months ended June 30, 2007. Since inception of the share repurchase programs, the Company has repurchased 4,110,500 shares of common stock at an average price of $37.96 per share totaling $156.0 million, all of which were made in open market transactions. At June 30, 2007, the $300 million share repurchase program has $188.7 million of remaining authorization to be completed by December 31, 2008. The Company plans to begin repurchasing shares in the third quarter of 2007.
[a] | On May 17, 2007, the 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 following matters were voted on at the Annual Meeting of Stockholders of the Company: |
| Proposal 1 – Election of Directors. |
| | | | | | | | | | | | | |
| | | | | | | NUMBER OF VOTES | |
| | | | | | |
| |
| | | NOMINEE | | | FOR | | | WITHHELD | |
| |
| |
| | |
| |
| | Molly Shi Boren | | | 20,508,338 | | | | 72,407 | |
| | Thomas P. Capo | | | 20,506,639 | | | | 74,106 | |
| | Maryann N. Keller | | | 20,506,889 | | | | 73,856 | |
| | The Hon. Edward C. Lumley | | | 19,793,101 | | | | 787,644 | |
| | Richard W. Neu | | | 20,506,939 | | | | 73,806 | |
| | Gary L. Paxton | | | 20,509,589 | | | | 71,156 | |
| | John C. Pope | | | 19,437,213 | | | | 1,143,532 | |
| | Edward L. Wax | | | 20,509,588 | | | | 71,157 | |
Proposal 2 – Ratification of the appointment of Deloitte & Touche LLP as the independent registered public accounting firm of the Company for the 2007 year. A proposal to ratify the appointment of Deloitte & Touche LLP as the independent registered public accounting firm of the Company for 2007 was adopted, with 20,439,777 votes cast for, 132,693 votes cast against and 8,275 votes abstained.
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| |
4.175 | Note Purchase Agreement dated as of May 15, 2007 among Rental Car Finance Corp., Dollar Thrifty Automotive Group, Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., J.P. Morgan Securities Inc., ABN AMRO Incorporated, BNP Paribas Securities Corp., Dresdner Kleinwort Securities LLC, and Scotia Capital (USA) Inc., filed as the same numbered exhibit with DTG’s Form 8-K, filed May 18, 2007, Commission File No. 1-13647* |
4.176 | Series 2007-1 Supplement dated as of May 23, 2007 between Rental Car Finance Corp. and Deutsche Bank Trust Company Americas, filed as the same numbered exhibit with DTG’s Form 8-K, filed May 29, 2007, Commission File No. 1-13647* |
4.177 | Enhancement Letter of Credit Application and Agreement dated as of May 23, 2007 among DTG Operations, Inc., Rental Car Finance Corp., Dollar Thrifty Automotive Group, Inc. and Credit Suisse, filed as the same numbered exhibit with DTG’s Form 8-K, filed May 29, 2007, Commission File No. 1-13647* |
4.178 | Financial Guaranty Insurance Policy No. 07030024 issued by Financial Guaranty Insurance Company to Deutsche Bank Trust Company Americas for the benefit of the Series 2007-1 Noteholders, filed as the same numbered exhibit with DTG’s Form 8-K, filed May 29, 2007, Commission File No. 1-13647* |
4.179 | CP Enhancement Letter of Credit Application and Agreement dated as of June 15, 2007 among Dollar Thrifty Funding Corp., DTG Operations, Inc., Rental Car Finance Corp., Dollar Thrifty Automotive Group, Inc. and Deutsche Bank Trust Company Americas (Series 1998-1), filed as the same numbered exhibit with DTG’s Form 8-K, filed June 20, 2007, Commission File No. 1-13647* |
4.180 | Enhancement Letter of Credit Application and Agreement dated as of June 15, 2007 among DTG Operations, Inc., Rental Car Finance Corp., Dollar Thrifty Automotive Group, Inc. and Deutsche Bank Trust Company Americas (Series 2000-1), filed as the same numbered exhibit with DTG’s Form 8-K, filed June 20, 2007, Commission File No. 1-13647* |
4.181 | Enhancement Letter of Credit Application and Agreement dated as of June 15, 2007 among DTG Operations, Inc., Rental Car Finance Corp., Dollar Thrifty Automotive Group, Inc. and Deutsche Bank Trust Company Americas (Series 2004-1), filed as the same numbered exhibit with DTG’s Form 8-K, filed June 20, 2007, Commission File No. 1-13647* |
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4.182 | Enhancement Letter of Credit Application and Agreement dated as of June 15, 2007 among DTG Operations, Inc., Rental Car Finance Corp., Dollar Thrifty Automotive Group, Inc. and Deutsche Bank Trust Company Americas (Series 2005-1), filed as the same numbered exhibit with DTG’s Form 8-K, filed June 20, 2007, Commission File No. 1-13647* |
4.183 | Enhancement Letter of Credit Application and Agreement dated as of June 15, 2007 among DTG Operations, Inc., Rental Car Finance Corp., Dollar Thrifty Automotive Group, Inc. and Deutsche Bank Trust Company Americas (Series 2006-1), filed as the same numbered exhibit with DTG’s Form 8-K, filed June 20, 2007, Commission File No. 1-13647* |
4.184 | Enhancement Letter of Credit Application and Agreement dated as of June 15, 2007 among DTG Operations, Inc., Rental Car Finance Corp., Dollar Thrifty Automotive Group, Inc. and Deutsche Bank Trust Company Americas (Series 2007-1), filed as the same numbered exhibit with DTG’s Form 8-K, filed June 20, 2007, Commission File No. 1-13647* |
4.185 | Amendment No. 12 to Note Purchase Agreement dated as of June 19, 2007 among Rental Car Finance Corp., Dollar Thrifty Automotive Group, Inc., the Conduit Purchasers parties thereto, the Committed Purchasers parties thereto, the Managing Agents parties thereto, and JPMorgan Chase Bank, National Association, filed as the same numbered exhibit with DTG’s Form 8-K, filed June 27, 2007, Commission File No. 1-13647* |
4.186 | Amendment No. 1 to Amended and Restated Series 2000-1 Supplement dated as of June 19, 2007 among Rental Car Finance Corp., DTG Operations, Inc., Dollar Thrifty Automotive Group, Inc., Deutsche Bank Trust Company Americas, The Bank of Nova Scotia, ABN AMRO Bank N.V., JPMorgan Chase Bank, National Association, BNP Paribas, New York Branch, Mizuho Corporate Bank, Ltd. and Working Capital Management Co., LP, filed as the same numbered exhibit with DTG’s Form 8-K, filed June 27, 2007, Commission File No. 1-13647* |
4.187 | Extension Agreement dated as of June 19, 2007 among Dollar Thrifty Funding Corp., certain financial institutions, as the Liquidity Lenders, Credit Suisse and Deutsche Bank Trust Company Americas, filed as the same numbered exhibit with DTG’s Form 8-K, filed June 27, 2007, Commission File No. 1-13647* |
4.188 | Amendment No. 12 to Liquidity Agreement dated as of June 19, 2007 among Dollar Thrifty Funding Corp., certain financial institutions, as the Liquidity Lenders, Credit Suisse and Deutsche Bank Trust Company Americas, filed as the same numbered exhibit with DTG’s Form 8-K, filed June 27, 2007, Commission File No. 1-13647* |
4.189 | Amendment No. 1 to Second Amended and Restated Series 1998-1 Supplement dated as of June 19, 2007 among Rental Car Finance Corp., DTG Operations, Inc., Dollar Thrifty Automotive Group, Inc., Deutsche Bank Trust Company Americas, and Dollar Thrifty Funding Corp., filed as the same numbered exhibit with DTG’s Form 8-K, filed June 27, 2007, Commission File No. 1-13647* |
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4.190 | Amendment No. 1 dated as of June 19, 2007 to Amended and Restated Master Motor Vehicle Lease and Servicing Agreement (Group II) among Rental Car Finance Corp., DTG Operations, Inc. and Dollar Thrifty Automotive Group, Inc., filed as the same numbered exhibit with DTG’s Form 8-K, filed June 27, 2007, Commission File No. 1-13647* |
4.191 | Amendment No. 2 to Series 2006-1 Supplement dated as of May 23, 2007 between Rental Car Finance Corp. and Deutsche Bank Trust Company Americas** |
4.192 | Amendment No. 1 dated as of May 22, 2007 to Amended and Restated Master Motor Vehicle Lease and Servicing Agreement (Group IV) among Rental Car Finance Corp., DTG Operations, Inc. and Dollar Thrifty Automotive Group, Inc.** |
10.143 | Credit Agreement dated as of June 15, 2007 among Dollar Thrifty Automotive Group, as the borrower, various financial institutions as are or may become parties thereto, Deutsche Bank Trust Company Americas, as the administrative agent, The Bank of Nova Scotia, as the syndication agent, and Deutsche Bank Securities Inc. and The Bank of Nova Scotia as the joint lead arrangers and joint bookrunners, filed as the same numbered exhibit with DTG’s Form 8-K, filed June 20, 2007, Commission File No. 1-13647* |
10.144 | Deferral Agreement regarding 2007 annual incentive compensation plan dated June 29, 2007 between Gary L. Paxton and Dollar Thrifty Automotive Group, Inc.** |
10.145 | Deferral Agreement regarding 2007 annual incentive compensation plan dated June 29, 2007 between Steven B. Hildebrand and Dollar Thrifty Automotive Group, Inc.** |
10.146 | Deferral Agreement regarding 2007 annual incentive compensation plan dated June 29, 2007 between R. Scott Anderson and Dollar Thrifty Automotive Group, Inc.** |
10.147 | Deferral Agreement regarding 2007 annual incentive compensation plan dated June 29, 2007 between John J. Foley and Dollar Thrifty Automotive Group, Inc.** |
10.148 | Deferral Agreement regarding 2007 annual incentive compensation plan dated June 29, 2007 between Yves Boyer and Dollar Thrifty Automotive Group, Inc.** |
10.149 | Deferral Agreement regarding 2005 performance share plan award dated June 29, 2007 between Gary L. Paxton and Dollar Thrifty Automotive Group, Inc.** |
10.150 | Deferral Agreement regarding 2005 performance share plan award dated June 29, 2007 between Steven B. Hildebrand and Dollar Thrifty Automotive Group, Inc.** |
10.151 | Deferral Agreement regarding 2005 performance share plan award dated June 29, 2007 between R. Scott Anderson and Dollar Thrifty Automotive Group, Inc.** |
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10.152 | Deferral Agreement regarding 2005 performance share plan award dated June 29, 2007 between John J. Foley and Dollar Thrifty Automotive Group, Inc.** |
10.153 | Deferral Agreement regarding 2005 performance share plan award dated June 29, 2007 between Yves Boyer and Dollar Thrifty Automotive Group, Inc.** |
15.28 | Letter from Deloitte & Touche LLP regarding interim financial information** |
23.34 | Consent of Tullius Taylor Sartain & Sartain LLP regarding Registration Statement on Form S-8, Registration No. 333-89189, filed as the same numbered exhibit with Dollar Thrifty Automotive Group, Inc. Retirement Savings Plan’s Form 11-K for the fiscal year ended December 31, 2006, filed June 26, 2007, Commission File No. 1-13647* |
31.43 | Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002** |
31.44 | Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002** |
32.43 | Certification by the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002** |
32.44 | Certification by the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002** |
99.38 | News release announcing Dollar Thrifty Automotive Group, Inc. is seeking $600 million in a new Senior Secured Credit Facility issued by Dollar Thrifty Automotive Group, Inc. on May 21, 2007, filed as the same numbered exhibit with DTG’s Form 8-K, filed May 21, 2007, Commission File No. 1-13647* |
99.39 | News release announcing Dollar Thrifty Automotive Group, Inc. completes $600 million in new Senior Secured Credit Facilities issued by Dollar Thrifty Automotive Group, Inc. on June 18, 2007, filed as the same numbered exhibit with DTG’s Form 8-K, filed June 18, 2007, Commission File No. 1-13647* |
99.41 | News release reporting Second Quarter Financial Results for 2007, issued by Dollar Thrifty Automotive Group, Inc. on August 7, 2007, filed as the same numbered exhibit with DTG’s Form 8-K, filed August 7, 2007, Commission File No. 1-13647* |
____________________
* | Incorporated by reference |
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Table of Contents
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.
| DOLLAR THRIFTY AUTOMOTIVE GROUP, INC. |
August 7, 2007 | By: | /s/ GARY L. PAXTON |
| President, Chief Executive Officer and Principal |
August 7, 2007 | By: | /s/ STEVEN B. HILDEBRAND |
| Senior Executive Vice President, Chief Financial |
| Officer, Principal Financial Officer and Principal |
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Table of Contents
INDEX TO EXHIBITS
Exhibit Number | Description |
4.191 | Amendment No. 2 to Series 2006-1 Supplement dated as of May 23, 2007 between Rental Car Finance Corp. and Deutsche Bank Trust Company Americas |
4.192 | Amendment No. 1 dated as of May 22, 2007 to Amended and Restated Master Motor Vehicle Lease and Servicing Agreement (Group IV) among Rental Car Finance Corp., DTG Operations, Inc. and Dollar Thrifty Automotive Group, Inc. |
10.144 | Deferral Agreement regarding 2007 annual incentive compensation plan dated June 29, 2007 between Gary L. Paxton and Dollar Thrifty Automotive Group, Inc. |
10.145 | Deferral Agreement regarding 2007 annual incentive compensation plan dated June 29, 2007 between Steven B. Hildebrand and Dollar Thrifty Automotive Group, Inc. |
10.146 | Deferral Agreement regarding 2007 annual incentive compensation plan dated June 29, 2007 between R. Scott Anderson and Dollar Thrifty Automotive Group, Inc. |
10.147 | Deferral Agreement regarding 2007 annual incentive compensation plan dated June 29, 2007 between John J. Foley and Dollar Thrifty Automotive Group, Inc. |
10.148 | Deferral Agreement regarding 2007 annual incentive compensation plan dated June 29, 2007 between Yves Boyer and Dollar Thrifty Automotive Group, Inc. |
10.149 | Deferral Agreement regarding 2005 performance share plan award dated June 29, 2007 between Gary L. Paxton and Dollar Thrifty Automotive Group, Inc. |
10.150 | Deferral Agreement regarding 2005 performance share plan award dated June 29, 2007 between Steven B. Hildebrand and Dollar Thrifty Automotive Group, Inc. |
10.151 | Deferral Agreement regarding 2005 performance share plan award dated June 29, 2007 between R. Scott Anderson and Dollar Thrifty Automotive Group, Inc. |
10.152 | Deferral Agreement regarding 2005 performance share plan award dated June 29, 2007 between John J. Foley and Dollar Thrifty Automotive Group, Inc. |
10.153 | Deferral Agreement regarding 2005 performance share plan award dated June 29, 2007 between Yves Boyer and Dollar Thrifty Automotive Group, Inc. |
15.28 | Letter from Deloitte & Touche LLP regarding interim financial information |
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31.43 | Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.44 | Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.43 | Certification by the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.44 | Certification by the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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