Description
Filed with the SEC from Aug 30 to Sep 05:
Dollar Thrifty Automotive (DTG)
York Capital Management decreased its holdings to 3,139,225 shares (11.3%) by selling 670,212 shares from Sept. 5 to Sept. 7 for $87.21 to $87.24 each. On Aug. 27, Hertz (HTZ) announced the proposed acquisition of Dollar Thrifty, valuing the company at $87.50 a share, or an 8% premium to its prior closing price.
BUSINESS OVERVIEW
Company Overview
General
Dollar Thrifty Automotive Group, Inc., a Delaware corporation (“DTG”), owns DTG Operations, Inc. (“DTG Operations”), Dollar Rent A Car, Inc. and Thrifty, Inc. Thrifty, Inc. owns Thrifty Rent-A-Car System, Inc. and Thrifty Car Sales, Inc. (“Thrifty Car Sales”). Thrifty Rent-A-Car System, Inc. owns Dollar Thrifty Automotive Group Canada Inc. (“DTG Canada”). DTG operates under a corporate structure that combines the management of operations and administrative functions for both the Dollar and Thrifty brands. DTG Operations operates company-owned stores under the Dollar brand and the Thrifty brand, operates reservation centers for both brands and conducts sales and marketing activities for both brands. Thrifty Rent-A-Car System, Inc. and Dollar Rent A Car, Inc. conduct franchising activities for their respective brands. Thrifty Car Sales operates a franchised retail used car sales network. The Company also has a special purpose financing entity, Rental Car Finance Corp. (“RCFC”), which has been consolidated in the financial statements of the Company. Dollar Rent A Car, Inc., the Dollar brand and DTG Operations operating under the Dollar brand are individually and collectively referred to hereafter as “Dollar”. Thrifty, Inc., Thrifty Rent-A-Car System, Inc., Thrifty Car Sales, the Thrifty brand and DTG Operations operating under the Thrifty brand are individually and collectively referred to hereafter as “Thrifty”. DTG, Dollar and Thrifty and each of their subsidiaries are individually or collectively referred to herein as the “Company”, as the context may require.
The Company is the successor to Pentastar Transportation Group, Inc., which was formed in 1989 to acquire and operate the rental car subsidiaries of Chrysler Group, LLC, the new legal entity following the restructuring of Chrysler LLC (formerly known as DaimlerChrysler Corporation) (such successor or predecessor entity, as the context may require, and its subsidiaries and members of its affiliated group are hereinafter referred to as “Chrysler”). DTG Operations, formerly known as Dollar Rent A Car Systems, Inc., was incorporated in 1965. Thrifty Rent-A-Car System, Inc. was incorporated in 1950 and Dollar Rent A Car, Inc. was incorporated in December 2002. Thrifty, Inc. was incorporated in December 1998.
Operating Structure
Dollar and Thrifty and their respective independent franchisees operate the Dollar and Thrifty vehicle rental systems. The Dollar and Thrifty brands represent a value-priced rental vehicle generally appealing to leisure customers, including foreign tourists, and to small businesses, government business and independent business travelers. As of December 31, 2011, Dollar and Thrifty had 586 locations in the U.S. and Canada, of which 280 were company-owned stores and 306 were locations operated by franchisees.
In the U.S., Dollar's main focus is operating company-owned stores located in major airports, and it derives substantial revenues from leisure and tour package rentals. Thrifty focuses on serving both the airport and local markets operating through a network of company-owned stores and franchisees. Dollar and Thrifty currently derive the majority of their U.S. revenues from providing rental vehicles and services directly to rental customers. Consequently, Dollar and Thrifty incur the costs of operating company-owned stores, and their revenues are directly affected by changes in rental demand and pricing. Dollar and Thrifty also have franchisees in countries outside the U.S. and Canada and derive revenues from franchise fees and by providing services such as reservation and rate management services.
Company Strategy
The Company believes that the U.S. travel markets should continue to improve in 2012. The Company’s business strategy is designed to capitalize on these improving conditions and achieve sustained, profitable growth based on the following key initiatives:
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Focus on Profitability of Core Operations . The Company’s focus is on maximizing profitability of its core operations and return on assets. Key to this effort has been a focus on the optimal balance between transaction volume and pricing, including particularly enhancing rate per day, even where achieving this objective has resulted in reduced rental days. The Company’s primary focus is the top 75 airport markets in the U.S. and in key leisure destinations. The Company continues to focus on maximizing profitability of its company-owned stores and continually monitors its stores in light of return on asset and profitability targets. The Company expects to increase revenues and profitability through expansion of its commercial and tour business, particularly with small and mid-sized corporate customers, and continued improvements in the convenience, value and service it offers to customers.
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Enhanced Fleet Diversification and Fleet Management . The Company operates a diversified fleet, focused on maintaining inventory in line with travel demand, and product mix in line with customer demand. The Company’s expected fleet composition for the 2012 model year is comprised of vehicles from Chrysler (35%), Ford Motor Company (“Ford”) (26%), General Motors Company (“General Motors”) (14%) and other manufacturers (25%). A diversified fleet enables the Company to offer customers a wider range of vehicle options. The Company has also reduced its credit exposure to the major vehicle manufacturers by shifting its fleet mix to a greater proportion of vehicles purchased outside of manufacturer residual value programs, which has also reduced funding requirements and vehicle depreciation rates. The Company will also continue to explore alternative ways of disposing of its rental fleet to maximize proceeds, particularly through enhanced Internet sales opportunities and expanding retail sales.
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Expand Brand Representation in Select Markets Through Franchising . The Company has a growing franchisee network, which provides it with brand representation in international markets, smaller U.S. airport locations and local markets that are not part of the Company’s core strategic focus. In those markets, franchised operations can provide the Company with recurring and stable sources of profit. In optimizing its ownership mix, the Company may continue to acquire franchisees on a limited and opportunistic basis for purposes of brand consolidation or to improve its representation in larger markets that may be under-served. In international markets outside of North America, the Company exclusively utilizes its franchise network to promote its operations, and will continue to pursue international franchise expansion as a growth opportunity. During 2011, the Company granted 18 and 4 new franchises to domestic and international franchisees, respectively.
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Continued Focus on Cost Controls. The Company has undertaken significant cost control and productivity initiatives in recent years and considers its low cost structure to be a competitive strength. In addition to key areas such as personnel productivity initiatives utilized to optimize staffing levels, planned initiatives include further reliance on outsourcing arrangements and elimination of redundant systems, further expansion of consolidated purchasing programs and expanded use of best practices throughout the Company.
Available Information
The Company makes available free of charge on or through its Internet Web site its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such material has been electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). The Company’s Internet address is http://www.dtag.com.
The SEC also maintains a Web site that contains all of the Company’s filings at http://www.sec.gov. Information on the Company’s Web site is not incorporated into this Form 10-K.
The Company has a code of business conduct, which is available on the Company’s Web site under the heading, “About DTG”. The Company’s Board of Directors has adopted a corporate governance policy and Board committee charters, which are updated periodically and can be found on the Company’s Web site under the heading, “Corporate Governance”. A copy of the code of business conduct, the corporate governance policy and the charters are available without charge upon request to the Company’s headquarters as listed on the front of this Form 10-K, attention “Investor Relations” department.
Industry Overview
The Company competes primarily in the U.S. car rental industry. The U.S. daily car rental industry has two principal markets: the airport market and the local market. Vehicle rental companies that focus on the airport market rent primarily to leisure and business travelers. Companies focusing on the local market rent primarily to persons who need a vehicle periodically for personal or business use or who require a temporary replacement vehicle. Rental companies also sell used vehicles and ancillary products such as refueling services, navigation systems and loss damage waivers to vehicle renters. As a general matter, the car rental industry is significantly dependent on conditions in the overall leisure and business travel markets.
Vehicle rental companies typically incur substantial debt to finance their fleets which makes them dependent on access to the fleet financing and capital markets to fund operations, and also has a direct impact on profitability due to the interest costs associated with the debt and fluctuations in interest rates. Although the fleet financing market has improved significantly since 2009, new issuances in these markets, including those undertaken by the Company, have required higher collateral enhancement rates than the industry has faced historically. This increase in collateral enhancements will have a direct impact on the capital required to support operations in future periods.
Vehicle rental companies are also dependent on vehicle manufacturers and overall economic conditions in the new and used vehicle markets, as these factors directly impact the cost of acquiring vehicles, and the ultimate disposition value of vehicles, both of which impact operating cost. Historically, rental companies acquired a large portion of their fleets under residual value programs (“Residual Value Programs”), under which vehicle manufacturers repurchase or guarantee the resale value of the vehicle in future periods, thereby allowing the rental companies to fix their holding cost of the vehicle (“Program Vehicles”). Most vehicle rental companies have in recent periods increased their vehicle purchases made outside of Residual Value Programs to lower fleet costs and reduce the risk related to the creditworthiness of the vehicle manufacturers, which has increased their dependence on the used vehicle market in terms of both determining holding cost, and for ultimate disposition of the vehicles. Vehicle rental companies bear residual value risk for these vehicles, which are referred to as “Non-Program Vehicles” or “risk vehicles”.
The U.S. rental car industry has nine top brands which are owned by four companies. Three of the companies are publicly held: Dollar and Thrifty operated by the Company; Avis and Budget operated by Avis Budget Group, Inc. (“Avis Budget”) and Hertz and Advantage operated by Hertz Global Holdings, Inc. (“Hertz”). The remaining three brands of Alamo, National and Enterprise are operating subsidiaries of Enterprise Rent-A-Car Company, which is privately held. The Company also faces competition from local and regional car rental companies in the United States, some of which have the ability to impact pricing in numerous large airports in the United States. There is intense competition in the U.S. car rental industry on the basis of price, service levels, vehicle quality, vehicle availability and the convenience and condition of rental locations.
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. This general seasonal variation in demand, along with more localized changes in demand, causes the Company to vary its fleet size over the course of the year. To accommodate increased demand in the summer vacation period, the Company increases its available fleet and staff and as demand declines, the fleet and staff are decreased accordingly. Certain operating expenses, such as minimum concession fees, rent, insurance and administrative overhead represent fixed costs and cannot be adjusted for seasonal increases or decreases in demand. In 2011, the Company’s average monthly fleet size ranged from a low of approximately 94,000 vehicles in the first quarter to a high of approximately 118,000 vehicles in the second quarter.
The Company
The Company has two value rental car brands, Dollar and Thrifty, with a strategy to operate company-owned stores in the top 75 airport markets and in key leisure destinations in the United States. In the U.S., the Dollar and Thrifty brands are marketed separately, but operate under a single management structure and share vehicles, back-office employees and facilities, where possible. The Company also operates company-owned stores in five of the eight largest airport markets in Canada under DTG Canada. In Canada, the company-owned stores are primarily co-branded.
The Company is focused on maximizing profitability of its company-owned stores and continually monitors any stores that do not meet minimum return on asset and profitability targets for potential improvements or possible closure.
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. This general seasonal variation in demand, along with more localized changes in demand, causes the Company to vary its fleet size over the course of the year. To accommodate increased demand in the summer vacation period, the Company increases its available fleet and staff and as demand declines, the fleet and staff are decreased accordingly. Certain operating expenses, such as minimum concession fees, rent, insurance and administrative overhead represent fixed costs and cannot be adjusted for seasonal increases or decreases in demand. In 2011, the Company’s average monthly fleet size ranged from a low of approximately 94,000 vehicles in the first quarter to a high of approximately 118,000 vehicles in the second quarter.
The Company
The Company has two value rental car brands, Dollar and Thrifty, with a strategy to operate company-owned stores in the top 75 airport markets and in key leisure destinations in the United States. In the U.S., the Dollar and Thrifty brands are marketed separately, but operate under a single management structure and share vehicles, back-office employees and facilities, where possible. The Company also operates company-owned stores in five of the eight largest airport markets in Canada under DTG Canada. In Canada, the company-owned stores are primarily co-branded.
The Company is focused on maximizing profitability of its company-owned stores and continually monitors any stores that do not meet minimum return on asset and profitability targets for potential improvements or possible closure.
Thrifty Car Sales
Thrifty Car Sales provides an opportunity to franchised rental service providers to enhance or build their used car operations under a well-recognized national brand name. In addition to the use of the brand name, dealers have access to a variety of products and services offered by Thrifty Car Sales. These products and services include participation in a full service business development center, a nationally supported Internet strategy and Web site, operational and marketing support, vehicle supply services and customized retail and wholesale financing programs, as well as national accounts and supply programs. At December 31, 2011, Thrifty Car Sales had 32 franchise locations.
Other Services
Supplemental Equipment and Optional Products – Dollar and Thrifty make available loss damage waivers and insurance products related to the vehicle rental, subject to availability and applicable local law, rent global positioning system (GPS) equipment, ski racks, infant and child seats and other supplemental equipment, offer a Rent-a-Toll product for electronic toll payments, and sell pre-paid gasoline and roadside emergency benefit programs (Road Safe and TripSaver).
Parking Services – Airport parking operations are a natural complement to vehicle rental operations. The Company operates 10 corporate parking operations.
Supplies and National Account Programs – The Company makes bulk purchases of items used by its franchisees, which it sells to franchisees at prices that are often lower than they could obtain on their own. The Company also negotiates national account programs to allow its franchisees to take advantage of volume discounts for many products or services such as tires, glass and long distance telephone and overnight mail services.
Reservations
The Internet is the primary source of reservations for the Company. For the year ended December 31, 2011, approximately 76% of the Company’s total non-tour reservations came through the Internet, slightly increasing from approximately 75% in 2010. During 2011, the Company’s Internet Web sites (dollar.com and thrifty.com) provided approximately 42% of total non-tour reservations. Third-party Internet sites provided 34% of non-tour reservations, with no third-party site providing more than 10% of total non-tour reservations. The remaining non-tour reservations were primarily provided by reservation call centers and travel agents. Dollar and Thrifty reservation systems are linked to all major airline reservation systems and to travel agencies in the U.S., Canada and abroad.
Marketing
Dollar and Thrifty are positioned as value car rental companies in the travel industry, providing on-airport convenience with low rates on quality vehicles. Customers who rent from Dollar and Thrifty are cost-conscious leisure, government and business travelers who want to save money on car rentals without compromising the quality of car rental products and services.
Dollar and Thrifty acquire these value-oriented customers through a multi-faceted marketing approach that involves traditional and Internet advertising, Internet search marketing, sales teams, strategic marketing partners, and investments in traditional and emerging distribution channels. Each of these disciplines has a specific focus on selected customer segment opportunities.
Strategic Marketing Partners
Dollar and Thrifty have aligned themselves with certain strategic marketing partners to facilitate the growth of their business.
Dollar has strong relationships with many significant international tour operators and brokers who specialize in inbound travel to the U.S., as well as domestic tour operators, who generate inbound business to Hawaii, Florida and other leisure destinations.
Major travel agents and consortia operate under preferred supplier agreements with Dollar and Thrifty. Under these agreements, Dollar and Thrifty provide travel agency groups additional commissions or benefits in return for featuring Dollar and Thrifty in their advertising or giving Dollar and Thrifty a priority in their reservation systems. In general, these arrangements are not exclusive to Dollar and Thrifty.
Both Dollar and Thrifty have also developed strategic partnerships with certain hotels, credit card companies, and with most U.S. airlines through participation in airline frequent flyer programs. In addition, Dollar and Thrifty actively participate with our partner airlines in their respective branded Web sites.
Internet Marketing and Distribution Channels
Dollar and Thrifty focus on Internet advertising and marketing, which continue to be the most cost-efficient means of reaching travel customers. Dollar and Thrifty promote their respective brands via Internet banner advertising, keywords and rate guarantees to encourage travelers to book reservations on their own branded Internet Web sites, dollar.com and thrifty.com. In addition, Dollar and Thrifty both continue to make technology investments in their respective Web sites, dollar.com and thrifty.com, to provide enhancements to best meet their customers’ changing travel needs.
In 2011, Dollar and Thrifty re-launched their mobile Web sites, since mobile is rapidly becoming a significant booking channel for customers. New mobile applications are expected to be rolled out in 2012 to meet consumer demand. Additionally, in 2011, Dollar and Thrifty continued their efforts to integrate customer transactional data with an email marketing program to deliver relevant messages to subscribing customers at optimal times, with a view to increasing customer engagement and loyalty. The Company believes that this type of integration can increase the interaction between customers and the brands while expanding customer loyalty and increasing revenue.
Dollar and Thrifty are among the leading car rental companies in direct-connect technology, which bypasses global distribution systems and reduces reservation costs by allowing customers to book directly through the travel partners’ Websites. Dollar and Thrifty have entered into direct-connect relationships with certain airline and other travel partners.
In addition, Dollar and Thrifty are featured with numerous national online booking agents where customers frequently shop for travel services and are in regular discussions with owners of other emerging travel channels to secure inclusion of the Dollar and Thrifty brands in those channels.
Dollar and Thrifty have made filings under the intellectual property laws of jurisdictions in which they and their respective franchisees operate, including the U.S. Patent and Trademark Office, to protect the names, logos and designs identified with Dollar and Thrifty. These marks are important for customer brand awareness and selection of Dollar and Thrifty for vehicle rental and for dollar.com and thrifty.com for reservation services.
Customer Service
The Company’s commitment to delivering consistent customer service is a key element of our strategy. At its headquarters and in company-owned stores, the Company has programs involving customer satisfaction training and team-based problem solving focused on improving customer service. The Company’s customer service centers measure customer service through third-party customer satisfaction surveys, track service quality trends, respond to customer inquiries and provide recommendations to senior management and vehicle rental location management. The Company conducts initial and ongoing training for headquarters, company-owned store and franchisee employees, using professional trainers, performance coaches and computer-based training programs.
CEO BACKGROUND
Thomas P. Capo , 61, has served as a director of DTG since November 1997 and as Chairman of the Board from October 2003 to November 2010. Mr. Capo was a Senior Vice President and the Treasurer of DaimlerChrysler Corporation from November 1998 to August 2000. From November 1991 to October 1998 he was Treasurer of Chrysler Corporation. Prior to holding these positions, Mr. Capo served as Vice President and Controller of Chrysler Financial Corporation. Mr. Capo is also currently a director and member of the audit committee of Cooper Tire & Rubber Company, and has served in that capacity since 2007. Since November 9, 2009, he has also served as a director and member of the audit committee and is currently the chairman of the nominating and corporate governance committees of Lear Corporation. Mr. Capo previously served as a director of Sonic Automotive, Inc. from 2001 to 2006, of JLG Industries, Inc. from 2005 to 2006, and of Micro-Heat, Inc., a private company, from 2006 to 2007.
Maryann N. Keller , 68, has served as a director of DTG since May 2000. Ms. Keller was President of the Automotive Services unit of priceline.com from July 1999 to November 2000. Prior to joining priceline.com, she was a senior managing director and investment analyst at Furman Selz LLC from 1985 to 1998 and was a financial analyst with ING Barings (which acquired Furman Selz LLC in 1998) from January 1999 to June 1999. Since December 2000, Ms. Keller has been the President of Maryann Keller & Associates, a consulting firm. Ms. Keller was also a director of Lithia Motors, Inc. from 2006 to 2009. Since May 2010, Ms. Keller has been a director of DriveTime Automotive Group, Inc., and currently serves on its audit, compensation and governance committees.
Hon. Edward C. Lumley , 72, has served as a director of DTG since December 1997. Mr. Lumley has been Vice Chairman of the investment banking firm BMO Nesbitt Burns Inc. since January 1991. Prior to this, Mr. Lumley was Chairman of the Noranda Manufacturing Group and was an elected member of the Canadian Parliament, serving as a Minister of the Crown in several portfolios such as industry and international trade. He has served as a director of Canadian National Railway Company since 1996 and as a director of BCE Inc. and Bell Canada since 2003 and is currently the Chairman of the Pension Committees of these entities. Mr. Lumley has previously served as a director (and for several years, the lead director) of Magna International Inc. from 1989 to 2007. In 2006, Mr. Lumley was appointed Chancellor of the University of Windsor.
Richard W. Neu , 56, has served as a director of DTG since February 2006 and was its Chairman of the Board from November 2010 to December 2011, at which time Mr. Thompson was appointed as Chairman of the Board and Mr. Neu became the Lead Director. Mr. Neu served as the interim Chief Financial Officer of DTG from April 2008 until the appointment of Mr. Thompson to that position in May 2008. Mr. Neu was the Chief Financial Officer and Treasurer of Charter One Financial, Inc. from December 1985 to August 2004, was a director of Charter One Financial, Inc. from 1992 to August 2004, and previously worked for KPMG LLP as a Senior Audit Manager. Mr. Neu has been a director of MCG Capital Corporation, a publicly-traded business development company, since November 2007, and has been Chairman of the Board since April 2009. He was also appointed as its Chief Executive Officer on October 31, 2011. In January 2010, Mr. Neu was elected a director of Huntington Bancshares Incorporated.
John C. Pope , 63, has served as a director of DTG since December 1997. Mr. Pope has been Chairman of PFI Group, an investment firm, since July 1994. In addition, Mr. Pope has served as a director of Con-Way, Inc. since 2003, of Kraft Foods Inc. since 2001, of Waste Management, Inc., since 1997, and of RR Donnelley & Sons, Inc. (and a predecessor company) since 1997. Mr. Pope was the Chairman of the Board of MotivePower Industries, Inc. from January 1996 to November 1999 and a director from May 1995 to November 1999. Mr. Pope also previously served as a director of Federal-Mogul Corporation from 1987 to 2007. Further, Mr. Pope served as a director of Per-Se Technologies, Inc. from 1996 to 2005. Mr. Pope served as a director and in various executive positions with UAL Corporation and United Airlines, Inc. between January 1988 and July 1994, including as Chief Financial Officer, President and Chief Operating Officer. Mr. Pope also has served as Chief Financial Officer from 1985 to 1988 and Treasurer from 1979 to 1985 of AMR Corporation/American Airlines.
Scott L. Thompson , 53, has served as a director of DTG since October 2008 and is the Chief Executive Officer and President of DTG. Mr. Thompson is also the Chairman of the Board of DTG, having been appointed to that role in December 2011. Prior to serving as Chief Executive Officer and President, Mr. Thompson was a Senior Executive Vice President and the Chief Financial Officer of DTG from May 2008 to October 2008. Prior to joining DTG, Mr. Thompson was a consultant to private equity firms from 2005 until May 2008, and was a founder of Group 1 Automotive, Inc., a NYSE and Fortune 500 company, serving as its Senior Executive Vice President, Chief Financial Officer and Treasurer from February 1996 until his retirement in January 2005. Mr. Thompson is a director of Houston Wire & Cable Company, and was its non-executive Chairman of the Board from 2007 until December 2011. Since June 2004, he has served as a director of Conn’s, Inc. He is a former director of Adams Resources and Energy, Inc. and United Agriculture Products.
MANAGEMENT DISCUSSION FROM LATEST 10K
Overview
The Company operates two value rental car brands, Dollar and Thrifty. The majority of its customers pick up their vehicles at airport locations. Both brands are value priced and the Company seeks to be the industry’s low cost provider. Leisure customers typically rent vehicles for longer periods than business customers, resulting in lower costs per transaction due to less frequent operational interaction.
Both Dollar and Thrifty operate through a network of company-owned stores and franchisees. The majority of the Company’s revenue is generated from renting vehicles to customers through company-owned stores, with lesser amounts generated through parking income, vehicle leasing, royalty fees and services provided to franchisees.
The Company’s profitability is primarily a function of the volume and pricing of rental transactions, vehicle utilization rates and depreciation expense. Significant changes in the purchase or sales price of vehicles or interest rates can also have a significant effect on the Company’s profitability, depending on the ability of the Company to adjust its pricing for these changes. The Company’s business requires significant expenditures for vehicles and, consequently, requires substantial liquidity to finance such expenditures.
In 2011, the Company’s vehicle rental revenues increased when compared to 2010, primarily due to a 3.8% increase in the number of rental days, partially offset by a 2.9% decrease in average revenue per day.
During 2011, expenses declined 4.0% compared to 2010. The Company had lower net vehicle depreciation and lease charges primarily due to lower depreciation rates per vehicle resulting from continued favorable conditions in the used car market, mix optimization through a more diversified fleet and improved remarketing efforts. Selling, general and administrative expenses decreased primarily due to lower merger-related costs. Net interest expense decreased primarily due to lower average vehicle debt and lower interest rates. Additionally, the Company experienced increases in the fair value of derivatives in 2011 and 2010 of $3.2 million and $28.7 million, respectively.
The combination of these factors contributed to net income of $159.6 million for the year ended December 31, 2011, compared to net income of $131.2 million for the year ended December 31, 2010. Excluding the change in fair value of derivatives and non-cash charges related to the impairment of long-lived assets, net of tax, non-GAAP net income was $157.7 million for the year ended December 31, 2011 compared to non-GAAP net income of $115.0 million for the year ended December 31, 2010. Corporate Adjusted EBITDA for 2011 was $298.6 million compared to $235.7 million in 2010. Additionally, the Company incurred $4.6 million in merger-related expenses for the year ended December 31, 2011, compared to $22.6 million for the year ended December 31, 2010. Reconciliations of non-GAAP financial measures to the comparable measures calculated in accordance with generally accepted accounting principles in the United States (“GAAP”) are presented below.
Use of Non-GAAP Measures for Measuring Results
Non-GAAP pretax income, non-GAAP net income and non-GAAP EPS exclude the impact of the (increase) decrease in fair value of derivatives and the impact of long-lived asset impairments, net of related tax impact (as applicable), from the reported GAAP measures and are further adjusted to exclude merger-related expenses. Due to volatility resulting from the mark-to-market treatment of the derivatives and the non-operating nature of the non-cash impairments and merger-related expenses, the Company believes these non-GAAP measures provide an important assessment of year-over-year operating results.
Operating Results
The Company had income before income taxes of $221.4 million in 2010 compared to income before income taxes of $81.0 million in 2009.
Liquidity and Capital Resources
The Company’s primary uses of liquidity are for the purchase of vehicles for its rental fleet, including required collateral enhancement under its fleet financing structures, non-vehicle capital expenditures and working capital.
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 borrowings under secured vehicle financing programs, cash provided from operations and proceeds from the disposal of used vehicles. 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, sales proceeds from disposal of used vehicles and availability under the New Revolving Credit Facility.
The Company believes that its cash generated from operations, cash balances, availability under the New Revolving Credit Facility and secured vehicle financing programs are adequate to meet its liquidity requirements for the near future. The Company has asset-backed medium-term note maturities totaling $500 million that amortize in equal monthly installments from February 2012 through July 2012. The Company added $500 million of asset-backed medium-term notes in July 2011 through the issuance of its Series 2011-1 notes and $400 million of asset-backed medium-term notes in October 2011 through the issuance of the Series 2011-2 notes as well as extended and increased the Series 2010-3 variable funding notes (“VFN”) from $450 million to $600 million in September 2011. The Company further modified its fleet debt capacity by terminating the $200 million Series 2010-1 VFN and the $300 million Series 2010-2 VFN in October 2011.
The secured vehicle financing programs require varying levels of credit enhancement or overcollateralization, which are provided by a combination of cash, vehicles and letters of credit. Enhancement levels vary based on the source of debt used to finance the vehicles. The letters of credit are provided under the Company’s New Revolving Credit Facility. Additionally, enhancement levels are seasonal and increase significantly during the second quarter when the fleet is at peak levels. Enhancement requirements under asset-backed financing sources have changed significantly for the rental car industry as a whole over the past few years, and as a result, enhancement levels under the Series 2011-1 notes, the Series 2011-2 notes and the Series 2010-3 VFN are approximately 45%, compared to 30% on the Series 2007-1 notes. Based on expected future peak fleet levels and the scheduled amortization of the Series 2007-1 notes, which will begin in February 2012, the Company expects to provide up to $75 million of additional enhancement in 2012 compared to 2011 levels.
Operating Activities
Net cash generated by operating activities of $567.3 million, $461.9 million and $535.9 million for 2011, 2010 and 2009, respectively, are primarily the result of net income adjusted for depreciation expense and income taxes.
Investing Activities
Net cash used in investing activities was $402.5 million for 2011. The principal expenditure of cash from investing activities was for purchases of new revenue-earning vehicles, which totaled $1.2 billion, partially offset by the sale of revenue-earning vehicles, which totaled $0.8 billion. Cash and cash equivalents – required minimum balance was eliminated in February 2011 as the $100 million requirement under the Company’s financing arrangements was eliminated (see Item 8 – Note 1 of Notes to Consolidated Financial Statements). Additionally, restricted cash and investments decreased $75.9 million from December 31, 2010. The Company also used cash for non-vehicle capital expenditures of $16.6 million in 2011. These expenditures consist primarily of airport facility improvements for the Company’s rental locations and IT-related projects. The Company estimates non-vehicle capital expenditures to be approximately $25 million in 2012 related to airport facility projects and IT equipment and systems.
Net cash used in investing activities was $59.1 million for 2010. The principal component of cash used in investing activities was for purchases of new revenue-earning vehicles, which totaled $1.2 billion, partially offset by proceeds from the sale of revenue-earning vehicles, which totaled $0.9 billion. In addition, restricted cash and investments decreased $345.1 million from December 31, 2009, primarily due to the repayment of the Series 2005-1 notes.
The Company also used cash for non-vehicle capital expenditures of $23.0 million in 2010. These expenditures consist primarily of airport facility improvements for the Company’s rental locations and IT-related projects.
Net cash provided by investing activities was $279.0 million for 2009. The principal component of cash provided by investing activities was the sale of revenue-earning vehicles, which totaled $1.5 billion in proceeds. This source of cash was partially offset by the purchase of revenue-earning vehicles, which totaled $1.1 billion, and the $100 million of cash and cash equivalents required to be maintained at all times under the Senior Secured Credit Facilities and separately identified on the balance sheet as cash and cash equivalents – required minimum balance. Restricted cash at December 31, 2009 increased $26.0 million from the previous year, including $22.8 million available for vehicle purchases or debt service, coupled with $3.2 million of interest income earned on restricted cash and investments. Non-vehicle capital expenditures were $15.5 million in 2009. These expenditures consisted primarily of airport facility improvements for the Company’s rental locations and investments in IT-related equipment and systems.
Financing Activities
Net cash used in financing activities was $119.3 million in 2011 primarily due to a $100 million forward stock repurchase agreement entered into and pre-funded in November 2011 to buyback Company shares. The Company also paid $14.8 million in deferred financing costs associated with the issuance of the Series 2011-1 notes, Series 2011-2 notes and renewal of Series 2010-3 VFN. In 2011, the Company made payments of $1.5 billion primarily including $500 million of scheduled debt repayments on the Series 2006-1 notes, $830 million of reductions to the amounts drawn under the Series 2010 VFNs, and $148 million of principal payments on the Term Loan. These payments were offset by $1.5 billion in borrowings under the Series 2011-1 notes, the Series 2011-2 notes, the Series 2010-3 VFN and the Series 2010-2 VFN.
Net cash used in financing activities was $340.1 million in 2010, primarily due to $400 million of scheduled debt repayments on the Series 2005-1 notes and $100 million of scheduled debt repayments on the Series 2006-1 notes, as well as a net reduction in Canadian debt of $20 million and a $10 million scheduled repayment of the Term Loan. The Company also paid $11.8 million in deferred financing costs associated with the issuance of the Series 2010-1 VFN, Series 2010-2 VFN and Series 2010-3 VFN. These uses of cash were partially offset by the issuance of the Series 2010-1 VFN totaling $200 million.
Net cash used in financing activities was $644.1 million in 2009, primarily due to the repayment of amounts outstanding under the Company’s liquidity and conduit facilities in the amount of $274.9 million and $215.0 million, respectively. Additionally, due to the non-renewal of its vehicle manufacturer and bank lines of credit, the Company repaid $233.7 million of debt outstanding under these arrangements. The Company also prepaid $20 million of the Term Loan and paid $6.6 million in deferred financing cost associated with amendments to the Senior Secured Credit Facilities. The Company also paid $6.6 million in fees related to the issuance of an additional 6.6 million shares of common stock in November 2009. These uses of cash were partially offset by $129.6 million of proceeds from the issuance of common stock.
Contractual Obligations and Commitments
The Company has various contractual commitments primarily related to asset-backed medium-term notes, asset-backed VFNs, airport concession fee and operating lease commitments related to airport and other facilities (some consisting of minimum annual guarantees as defined in the lease agreements), technology contracts, and vehicle purchases. The Company expects to fund these commitments with existing cash resources, cash generated from operations, sales proceeds from disposal of used vehicles and future issuances of asset-backed notes as existing notes mature.
Variable Funding Notes
VFNs at December 31, 2011 were comprised of $600 million in U.S. fleet financing capacity that may be drawn and repaid from time to time in whole or in part during the revolving period, which ends in September 2013.
In October 2011, the Series 2010-1 and Series 2010-2 VFNs were terminated as a result of the renewal and increase of the Series 2010-3 VFN and the issuance of the Series 2011-2 notes.
The Series 2010-3 VFN of $600 million was undrawn at December 31, 2011. At the end of the revolving period, the then-outstanding principal amount of the Series 2010-3 VFN will be repaid monthly over a three-month period, beginning in October 2013, with the final expected payment date in December 2013. The Series 2010-3 VFN requires a maximum leverage ratio of 3.0 to 1.0, a minimum interest coverage ratio of 2.0 to 1.0 and a minimum corporate EBITDA requirement of $75 million, consistent with the covenants in the New Revolving Credit Facility.
Canadian Fleet Financing
On April 18, 2011, due to the Company’s excess cash position and the cost differential between the interest rate on its Canadian fleet financing and interest rates earned on investment of excess cash, the Company fully repaid the outstanding balance of CAD $54.0 million (US $56.0 million) and terminated the CAD Series 2010 Program. Direct investments in the Canadian fleet funded from cash and cash equivalents totaled CAD $64.9 million (US $63.5 million) as of December 31, 2011.
Senior Secured Credit Facilities
On August 31, 2011, the Company repaid the outstanding balance of $143.1 million under the term loan (the “Term Loan”) and terminated the Term Loan portion of its senior secured credit facilities (the “Senior Secured Credit Facilities”). Accordingly, at December 31, 2011, the Company’s Senior Secured Credit Facilities was comprised of only the $231.3 million revolving credit facility (the “Revolving Credit Facility”) which was refinanced and terminated on February 16, 2012. The Senior Secured Credit Facilities contained certain financial and other covenants and were collateralized by a first priority lien on substantially all material non-vehicle assets and certain vehicle assets not pledged as collateral under a vehicle financing facility. The Company had letters of credit outstanding under the Revolving Credit Facility of $144.3 million for U.S. enhancement and $54.7 million in general purpose letters of credit with remaining available capacity of $32.3 million at December 31, 2011.
On February 16, 2012, the Company terminated its existing Senior Secured Credit Facilities and replaced it with the $450 million New Revolving Credit Facility that expires in February 2017. Under the New Revolving Credit Facility, the Company is subject to a maximum corporate leverage ratio of 3.0 to 1.0, a minimum corporate interest coverage ratio of 2.0 to 1.0, and a minimum corporate EBITDA requirement of $75 million. In addition, the New Revolving Credit Facility contains covenants restricting our ability to undertake certain activities, including, among others, restrictions on the Company’s ability to incur additional indebtedness, make loans, acquisitions or other investments, grant liens on its property, dispose of assets, pay dividends or conduct stock repurchases, make capital expenditures or engage in certain transactions with affiliates.
Under the New Revolving Credit Facility, certain restrictions were relaxed or extended from the Senior Secured Credit Facilities, so that we have the ability (subject to specified conditions and limitations), among other things, to incur up to $400 million of unsecured notes of the Company, to enter into permitted acquisitions of up to $250 million in the aggregate during the term of the New Revolving Credit Facility and to incur financing and assume indebtedness in connection therewith, and to make investments in our U.S. special-purpose financing entities (including RCFC) and our Canadian special-purpose financing entities, in aggregate amounts at any time outstanding of up to $750 million and $150 million, respectively. In addition, we renewed and extended our ability, subject to certain limitations, to make dividend, stock repurchase and other restricted payments under the New Revolving Credit Facility, in an amount up to $300 million, plus 50% of cumulative adjusted net income (or minus 100% of cumulative adjusted net loss, as applicable) for the period beginning January 1, 2012 and ending on the last day of the fiscal quarter immediately preceding the restricted payment.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
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.
Outlook for 2012
The Company provided updated guidance for rental revenue, fleet cost expectations and earnings per share for the full year of 2012. The Company’s revenue guidance is based on the revenue per day environment experienced in the first half of 2012. The Company expects that continued rental day growth, offset by compression in revenue per day, will result in full year 2012 rental revenues increasing modestly compared to 2011.
The Company noted that the used vehicle market has been strong throughout the first half of 2012, and the Company has sold approximately 33,100 vehicles at a realized gain of $36.8 million during the first half of 2012. The Company noted that it expects the used vehicle market to remain strong through at least the back half of the year, subject to normal seasonality. The Company noted that gains on sales of Non-Program Vehicles will decline significantly in the back half of the year as the Company’s fleet refresh cycle winds down. The Company is improving its fleet cost outlook for the full year of 2012, which it now expects to range from $200 to $210 per vehicle per month.
The Company noted that the expected improvement in fleet costs will be mostly offset by the change in revenue mix between volume and price. Accordingly, the Company is reaffirming its prior guidance for Corporate Adjusted EBITDA for the full year of 2012 of $285 million to $310 million.
Finally, the Company noted that it is revising its earnings per share guidance based on share repurchase activity that has been completed through June 30, 2012. The Company is now targeting diluted earnings per share to range from $5.25 to $5.70 per share for 2012, up from its previously announced range of $5.00 to $5.60 per share.
Liquidity and Capital Resources
The Company’s primary uses of liquidity are for the purchase of vehicles for its rental fleet, including required collateral enhancement under its fleet financing structures, non-vehicle capital expenditures and working capital. 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 borrowings under secured vehicle financing programs, cash provided from operations and proceeds from the disposal of used vehicles. 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, sales proceeds from disposal of used vehicles and availability under the Revolving Credit Facility.
The Company believes that its cash generated from operations, cash balances, availability under the Revolving Credit Facility and secured vehicle financing programs are adequate to meet its liquidity requirements for the near future. The Company has asset-backed medium-term note maturities totaling $83 million that amortize in July 2012. In February 2012, the Company terminated the existing senior secured credit facility and replaced it with a $450 million Revolving Credit Facility, and in March 2012, the Company completed the $150 million CAD Series 2012-1 notes.
The secured vehicle financing programs require varying levels of credit enhancement or overcollateralization, which are provided by a combination of cash, vehicles and letters of credit under the Company’s Revolving Credit Facility. Enhancement levels vary based on the source of debt used to finance the vehicles. Additionally, enhancement levels are seasonal and increase significantly during the second and third quarters when the fleet is at peak levels. In April 2012, the Company reduced its outstanding enhancement letters of credit supporting its secured vehicle financing facilities by approximately $145 million, utilizing a portion of its excess cash to meet the collateral enhancement requirements under those facilities. As a result of the reduction in letters of credit and seasonal increases in the fleet, the Company increased its investment in its securitization trusts for collateral enhancement purposes to approximately $670 million as of June 30, 2012. The Company retains the flexibility to replace a portion of this cash collateral with funds borrowed under its Revolving Credit Facility or the issuance of letters of credit as it deems appropriate. Enhancement requirements under asset-backed financing sources have changed significantly for the rental car industry as a whole over the past few years, and as a result, enhancement levels under the Series 2011-1 notes, the Series 2011-2 notes and the Series 2010-3 VFN are approximately 45%, compared to 30% on the Series 2007-1 notes. Based on expected future peak fleet levels and the payoff of the Series 2007-1 notes in July 2012, the Company expects to provide up to $150 million of additional enhancement in 2012 compared to 2011 levels.
Net cash generated by operating activities of $235.0 million for the six months ended June 30, 2012 was primarily the result of net income adjusted for depreciation expense, net of gains on sales of vehicles and income taxes.
Net cash used in investing activities was $584.2 million. The principal expenditure of cash from investing activities during the six months ended June 30, 2012 was for purchases of new revenue-earning vehicles, which totaled $1.3 billion, partially offset by the sale of revenue-earning vehicles, which totaled $0.5 billion. In addition, at June 30, 2012, restricted cash and investments, which are restricted for the acquisition of revenue-earning vehicles and payments of the related debt, decreased $154.3 million from December 31, 2011. The Company also used cash for non-vehicle capital expenditures of $10.0 million. These expenditures consist primarily of airport facility improvements for the Company’s rental locations and information technology-related projects.
Net cash provided by financing activities was $126.0 million primarily due to $510.0 million in borrowings under the Series 2010-3 VFN and $68.8 million in proceeds from the issuance of the CAD Series 2012-1 notes. These borrowings were partially offset by $416.7 million of scheduled debt repayments on the Series 2007-1 notes, $27.3 million to buy back Company shares under the share repurchase program and $8.6 million in deferred financing costs primarily associated with the issuance of the Revolving Credit Facility.
The Company has significant requirements to maintain letters of credit and surety bonds to support its insurance programs, airport concession and other obligations. At June 30, 2012, the Company had $50.6 million in letters of credit, including $46.5 million in letters of credit under the Revolving Credit Facility, and $41.0 million in surety bonds to secure these obligations. At June 30, 2012, these surety bonds and letters of credit had not been drawn.
The Company does not conduct operations in foreign jurisdictions other than Canada, and accordingly, cash and cash equivalents would not be subject to repatriation taxes or otherwise stranded in foreign jurisdictions.
Contractual Obligations and Commitments
In June 2012, the Company executed a vehicle supply agreement with Chrysler Group for a three-year term beginning with program year 2013 (August 1, 2012) and ending at the end of program year 2015 (July 31, 2015), that will allow the Company to source a portion of its vehicle purchases, with certain minimum volumes, through Chrysler Group. Volume requirements may be modified by mutual agreement between the Company and Chrysler Group.
See debt discussion below for an update to the “Total Debt and Other Obligations” section of the table provided in Part II, Item 7 – Contractual Obligations and Commitments in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
Asset-Backed Medium-Term Notes
The asset-backed medium-term note program at June 30, 2012 was comprised of $983.3 million in asset-backed medium-term notes with maturities in 2012 through 2015. Borrowings under the asset-backed medium-term notes are secured by eligible vehicle collateral, among other things. The Series 2007-1 notes, of which $83.3 million remained outstanding at June 30, 2012, were paid-off in July 2012. The Series 2011-1 notes, with a fixed blended interest rate of 2.81%, are comprised of $420 million principal amount Class A notes with a fixed interest rate of 2.51% and $80 million principal amount of Class B notes with a fixed interest rate of 4.38%. The Series 2011-2 notes of $400 million have a fixed interest rate of 3.21%. Proceeds from the asset-backed medium-term notes that are not utilized for financing vehicles and certain related receivables are maintained in restricted cash and investment accounts and are available for the purchase of vehicles. These amounts totaled approximately $118.9 million at June 30, 2012. At June 30, 2012, the Series 2011-2 notes required compliance with a maximum corporate leverage ratio of 3.0 to 1.0, a minimum corporate interest coverage ratio of 2.0 to 1.0 and a minimum corporate EBITDA requirement of $75 million, consistent with the terms of the Company’s Revolving Credit Facility.
The Series 2007-1 notes began scheduled amortization in February of 2012. During the first half of 2012, $416.7 million of principal payments were made with the remaining $83.3 million paid in July 2012. The Series 2011-1 notes are expected to begin scheduled amortization in September 2014, and will amortize over a six-month period. The Series 2011-2 notes are expected to begin scheduled amortization in December 2014 and will amortize over a six-month period.
Variable Funding Notes
The variable funding notes at June 30, 2012 were comprised of $600 million in U.S. fleet financing capacity that may be drawn and repaid from time to time in whole or in part during the revolving period, which ends in September 2013.
The Series 2010-3 VFN of $600 million had borrowings of $510 million at June 30, 2012. At the end of the revolving period, the then-outstanding principal amount of the Series 2010-3 VFN will be repaid monthly over a three-month period, beginning in October 2013, with the final expected payment date in December 2013. The facility bears interest at a spread of 130 basis points above each funding institution’s cost of funds, which may be based on either the weighted-average commercial paper rate, a floating one-month LIBOR rate or a Eurodollar rate. The Series 2010-3 VFN had an interest rate of 1.58% at June 30, 2012. The Series 2010-3 VFN also has a facility fee commitment rate of up to 0.8% per annum on any unused portion of the facility. The Series 2010-3 VFN requires compliance with a maximum corporate leverage ratio of 3.0 to 1.0, a minimum corporate interest coverage ratio of 2.0 to 1.0 and a minimum corporate EBITDA requirement of $75 million, consistent with the terms of the Company’s Revolving Credit Facility.
Canadian Fleet Financing
On March 9, 2012, the Company completed the CAD Series 2012-1 notes totaling $150 million. These notes have a term of two years and require a program fee of 150 basis points above the one-month rate for Canadian dollar denominated bankers’ acceptances and a utilization fee of 65 basis points on the unused Series CAD 2012-1 amount. At June 30, 2012, CAD $70 million (US $68.8 million) of the CAD Series 2012-1 notes had been drawn. The CAD Series 2012-1 notes had an interest rate of 2.69% at June 30, 2012.
Revolving Credit Facility
On February 16, 2012, the Company terminated the existing senior secured credit facility and replaced it with a new $450 million Revolving Credit Facility that expires in February 2017. Pricing under the Revolving Credit Facility is grid-based with a spread above LIBOR that will range from 300 basis points to 350 basis points, based upon usage of the facility. Commitment fees under the Revolving Credit Facility will equal 50 basis points on unused capacity. Under the Revolving Credit Facility, the Company is subject to a maximum corporate leverage ratio of 3.0 to 1.0, a minimum corporate interest coverage ratio of 2.0 to 1.0 and a minimum corporate EBITDA requirement of $75 million. In addition, the Revolving Credit Facility contains covenants restricting its ability to undertake certain activities, including, among others, restrictions on the Company and its subsidiaries’ ability to incur additional indebtedness, make loans, acquisitions or other investments, grant liens on its property, dispose of assets, pay dividends or conduct stock repurchases, make capital expenditures or engage in certain transactions with affiliates.
Under the Revolving Credit Facility, the Company has the ability (subject to specified conditions and limitations), among other things, to incur up to $400 million of unsecured indebtedness; to enter into permitted acquisitions of up to $250 million in the aggregate during the term of the Revolving Credit Facility and to incur financing and assume indebtedness in connection therewith; to make investments in the Company’s U.S. special-purpose financing entities (including RCFC) and our Canadian special-purpose financing entities, in aggregate amounts at any time outstanding of up to $750 million and $150 million, respectively; and to make dividend, stock repurchase and other restricted payments in an amount up to $300 million, plus 50% of cumulative adjusted net income (or minus 100% of cumulative adjusted net loss, as applicable) for the period beginning January 1, 2012 and ending on the last day of the fiscal quarter immediately preceding the restricted payment. The Company had approximately $318 million available under the limitations of the Revolving Credit Facility for these restricted payments at June 30, 2012.
In April 2012, the Company reduced the enhancement letters of credit outstanding under its Revolving Credit Facility by $145 million and instead satisfied the related enhancement requirements under certain series of RCFC’s notes with cash. The Company had letters of credit outstanding under the Revolving Credit Facility of $19.0 million for U.S. enhancement and $46.5 million in general purpose letters of credit with a remaining available capacity of $384.5 million at June 30, 2012.
CONF CALL
Leslie Hunziker - Staff Vice President of Investor Relations
Good morning, everyone. By now, I'm sure you've all seen our press release announcing Hertz's offer to acquire Dollar Thrifty. This morning, management will provide a brief overview of the acquisition terms and strategic rationale, and we'll then open up the call to your questions. We've provided slides to accompany this conference call that can be accessed on our website at hertz.com and on Dollar Thrifty's website at dtag.com. On the call today for Hertz in Park Ridge, New Jersey, is Mark Frissora, Chairman and CEO; Elyse Douglas, CFO; and Jeff Zimmerman, General Counsel and Corporate Secretary. And in Tulsa, Oklahoma, we have Dollar -- from Dollar Thrifty, we have Scott Thompson, Chairman and CEO; Cliff Buster, CFO; and Vicki Vaniman, General Counsel.
Again, I'll turn it over to Mark.
Mark P. Frissora - Executive Chairman, Chief Executive Officer, Member of Executive Committee, Chairman of Hertz Corp and Chief Executive Officer of Hertz Corp
Good morning, everyone, and thank you, Leslie. At last, we're in the home stretch of closing on what will be important brand additions to our rental car business. It goes without saying that this is a transformational deal that will allow Hertz to benefit significantly from the growth prospects and operational efficiencies of a much larger business and a best-in-class operation.
Let's start with the transaction highlights on Slide 5. As you know by now, we are acquiring Dollar Thrifty for $87.50 per share, all cash, or a corporate enterprise value of $2.3 billion. This represents a multiple of 7.8x the midpoint of Dollar Thrifty's EBITDA guidance for 2012, which is $298 million. This multiple equates to a roughly 40% premium to the current Hertz and Avis average multiple. Our offer has no financing contingency but is predicated on our obtaining antitrust clearance. We expect the transaction to be accretive to our diluted net earnings per share in 1 -- in year 1 and EVA-positive after synergies by the end of year 2. This is in spite of the loss of about $30 million of 2012 corporate EBITDA from the Advantage asset divestiture. Based on best-guess estimates, we anticipate the deal closing sometime in the fourth quarter. I'll walk you through the timing of the process in just a minute.
But before I do, I want to say that we're very pleased with the outcome of our recent negotiations with Dollar Thrifty and its board and believe that the transaction terms and structure provide premium value for both companies' shareholders. We're also excited to welcome Dollar Thrifty's employees to our team. We know our collaborative efforts will make the Hertz-Dollar Thrifty combination the best among industry competitors. Would you agree, Scott?
Scott L. Thompson - Chairman, Chief Executive Officer and President
I echo your thoughts about the transaction and the opportunities it affords the combined company. I truly think the transaction is good for both companies' shareholders and the industry as a whole. Dollar Thrifty brings Hertz a highly profitable operation, with solid leisure-focused customer base and a motivated workforce with years of experience in servicing value-focused customers. I believe Hertz will be able to swell the company's products offerings and expand geographically in ways that would be difficult for Dollar Thrifty to do as a stand-alone company. The Dollar Thrifty Board of Directors fully supports this transaction, and the company will aid Hertz as they finalize the regulatory process. I'll let Mark update you on the status of the FTC review.
Mark P. Frissora - Executive Chairman, Chief Executive Officer, Member of Executive Committee, Chairman of Hertz Corp and Chief Executive Officer of Hertz Corp
Thanks, Scott. But before I do that, I want to acknowledge that it's been a long road getting to this point, and the wait hasn't been an easy one for management, employees or investors. So I want to thank everyone for their patience and understanding as we have continued to work through what has turned out to be a very complex, extended FTC process.
On Slide 7, we've outlined the status of the antitrust review. Basically, we've signed a purchase agreement for the divestiture of our Advantage assets, as well as certain DTG assets and associated airport concessions. We will continue to work with the FTC to reach a favorable conclusion, and we hope the final steps in the FTC review will be swift.
On Slide 8 is the estimated timeline to the transaction's closing. We'll file our merger agreement with the SEC later today and soon thereafter launch the tender offer. We hope to have an FTC consent decree in about 6 weeks or so. To be clear, we aren't basing this on any definitive guidance from the FTC, but our lawyers believe this is a realistic assumption. Finally, we expect to complete the tender offer by the end of October. Based on this schedule, we'll start integration actions before year-end.
So why is this an important deal for Hertz? There are multiple opportunities and competitive advantages that we expect to capitalize on to make the Hertz brand the most formidable in the industry. First and foremost, starting on Slide 9, the combination of the Hertz, Dollar and Thrifty businesses results in a $10.2 billion company, with 3 distinct brands that complement each other in their respective customer segments. As you know, Hertz has a strong portfolio of businesses that individually and collectively have excellent growth profiles. Our management team has a wealth of experience and expertise, our efficient and productive infrastructure is best in class, and we have a vibrant, winning culture. The addition of Dollar Thrifty, one of the market leaders in renting cars to the price-conscious leisure customer, strengthens each one of these value drivers and provides an exceptional platform for future growth. It gives us established value brands, longer average rental lengths, a broad location network and a higher share of the leisure market. An increase in leisure rentals as a percent of revenue will support our goal of reducing operating cyclicality due to the longer length of the transaction and the greater resiliency of the leisure traveler. Another benefit to profit will be the fleet sharing, which will significantly increase our combined utilization, especially on the weekends. Hertz's strong midweek peak driven by corporate rentals will be complemented by Dollar Thrifty's weekend leisure peak demand. We've long been of the belief that having a distinct brand to specifically address the needs of different rental car customer groups is imperative to winning in this industry. One brand can't be all things to all customers. It blurs the value proposition and confuses the pricing structure. Our goal of becoming a multi-brand rental car leader will be achieved by maintaining Hertz's premium service and vehicle standards for corporate and leisure customers at pricing reflective of those attributes. The Dollar brand will continue to address leisure customers in the mid-tier value segment domestically. And Thrifty will compete in the fastest-growing spartan leisure segment against the deep-value competitors. Thrifty will also help us build out our value proposition in Europe, already having noteworthy brand presence in Australia, South Africa and across Britain through its strong franchise network, which you can see on Slide 10.
We plan to combine our corporate-owned Advantage locations, of which there are just 36 across Europe today, under the Thrifty moniker to provide international customers a great value, which as you can imagine, is highly sought after in a tough economic environment.
Moving to Slide 11. If you look at the profiles of both companies, it is apparent that the added scale that comes with this transaction will allow us to capture meaningful cost synergies. We have proven that we have the discipline and experience to transform the business at every level. This transaction is expected to create significant efficiencies and cost savings for us on top of what is already a position of strength.
On Slide 12, we've identified at least $160 million of annual run rate cost synergies, and we're confident in our ability to achieve that number at a minimum over 24 months. The components of the synergies are pretty straightforward. Of course, there will be some redundant operations between the 2 companies. Those types of things make up other efficiencies in the pie chart. But the more significant synergies will come from fleet efficiencies as we combine and share the fleets for better utilization, purchasing power and lower depreciation and fleet interest expense. Integrating our industry-leading IT systems, including our latest virtual kiosk and smart car innovations, will be our second-greatest cost-saving opportunity. And non-fleet procurement expenses will represent another large piece of the efficiency potential.
In addition to the cost synergies, there are other opportunities that we haven't baked into the analysis yet. For example, sales growth opportunities like expanding the Thrifty brand in Europe that I mentioned and sharing our currently exclusive travel partnerships would represent real upside.
Moving to Slide 13. In terms of the capital structure, we are committed to maintaining a strong balance sheet. We are clearly becoming a larger and stronger company. And including run rate cost synergies, our pro forma corporate debt-to-EBITDA leverage ratio is only expected to increase by about 2/10 of a turn. This transaction does not deter us in any way from our ultimate goal of becoming investment grade. We'll use the combined Dollar Thrifty and Hertz cash on hand, along with new borrowings, to fund the acquisition. We secured a $1.95 billion bridge loan and expect permanent financing to come from a combination of long-term bonds and a term loan financing. We will assume Dollar Thrifty's existing fleet debt and, over time, bring their fleet financing under the Hertz ABS program. While we expect to be put on credit watch initially, we have no indication that the all-cash transaction will result in a credit rating downgrade.
Now that you've heard all the details, you can see why we are genuinely excited about the prospects for this combined business. And we are entering this transaction from the position of strength, creating financial value for our shareholders and delivering strategic value to our business. We've chosen an exceptional company to partner with, and timing by all accounts is ideal.
So with that, let's open up the call for questions, operator.
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Fund Letters
