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Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2006, for Avis Budget Group, Inc. (formerly Cendant Corporation). The reporting period is defined by a major corporate restructuring: the "Cendant Separation," which occurred in the third quarter of 2006. The company spun off its Real Estate (Realogy) and Hospitality (Wyndham) businesses and sold its Travel Distribution (Travelport) business. Consequently, the company now operates exclusively as a vehicle rental provider through its Avis and Budget brands, organized into three segments: Domestic Car Rental, International Car Rental, and Truck Rental.

Key Financial Metrics

Note: Net Income for 2006 includes a significant loss on the disposal of discontinued operations (Travelport, Realogy, Wyndham) totaling approximately $1.96 billion.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 5% to $5.689 billion, driven by a 7% increase in Domestic Car Rental revenue and a 15% increase in International Car Rental revenue. This was partially offset by a 14% decline in Truck Rental revenue.
• Profitability Decline: The company reported a loss from continuing operations of $451 million, compared to a loss of $11 million in 2005. This deterioration was primarily due to $574 million in separation-related charges (including $313 million for early debt extinguishment) and increased fleet costs.
• Segment Performance:
  • Domestic Car Rental: EBITDA decreased 5% to $214 million due to higher fleet depreciation and lease charges ($122 million increase) and inflationary cost increases, despite higher rental volumes and pricing.
  • Truck Rental: EBITDA plummeted 56% to $45 million due to a 14% reduction in rental days and higher per-unit fleet costs.
• Balance Sheet: Total assets decreased significantly from $34.5 billion to $13.3 billion, reflecting the removal of discontinued operations. Total debt was reduced by approximately $4.3 billion through the repayment of corporate debt and the sale of Travelport.

Guidance, Outlook, and Risks

Management Commentary & Strategy:

• Two-Brand Strategy: Management continues to optimize the distinct positioning of Avis (premium) and Budget (value) to capture diverse market segments.
• Revenue Expansion: Focus on expanding off-airport (local) revenue sources, including insurance replacement rentals and ancillary products like GPS navigation.
• Cost Management: Efforts to diversify fleet suppliers (reducing reliance on General Motors from 53% in 2005 to 38% in 2007) and increase the portion of "risk vehicles" (non-program cars) to mitigate rising fleet costs.

Key Risks:

• Fleet Costs: Rising per-unit costs for new vehicles and potential changes to manufacturer repurchase/guaranteed depreciation programs.
• Competition: Intense price competition in the vehicle rental industry.
• Travel Dependency: Revenue is heavily dependent on airline passenger traffic; disruptions (terrorism, pandemics, economic downturns) could materially harm operations.
• Indebtedness: Substantial debt levels ($7.1 billion) limit financial flexibility and expose the company to interest rate fluctuations.
• Separation Risks: Limited operating history as a stand-alone entity and reliance on transition services from spun-off entities.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the extent to which the reported Net Loss is driven by the one-time loss on the sale of Travelport and the spin-offs of Realogy and Wyndham, rather than core operating performance.
• Fleet Cost Trends: Monitor the company's ability to pass on rising vehicle acquisition costs to customers through pricing without losing market share.
• Debt Structure: Review the maturity schedule of the $7.1 billion debt load, specifically the $1.8 billion in corporate debt and $5.3 billion in vehicle-backed debt.
• Truck Rental Turnaround: Assess the effectiveness of restructuring initiatives in the Truck Rental segment, which saw a 56% drop in EBITDA.
• Off-Airport Growth: Track the growth rate of the local/off-airport segment, which management cites as a key strategic initiative for future revenue diversification.