Thrifty Car Rental 2006 Annual Report Download - page 39

Net interest expense decreased $2.7 million in 2005 primarily due to an increase in earnings on restricted
and unrestricted cash balances, which reduce interest expense, partially offset by an increase in average
vehicle debt. As a percent of revenue, net interest expense was 5.8% in 2005, compared to 6.4% in
2004.
The change in fair value of the Company’s interest rate swap agreements was an increase of ($29.7)
million in 2005 compared to an increase of ($24.3) million in 2004 resulting in a year over year increase of
($5.4) million.
The income tax provision for 2005 was $54.2 million. The effective income tax rate for 2005 was 41.5%
compared to 40.3% in 2004. 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 2005 or 2004, thus,
increasing the consolidated effective tax rate compared to the U.S. effective tax rate.
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 Revolving Credit Facility and insurance bonds. Cash generated by operating activities of
$461.9 million for 2006 is primarily the result of net income, adjusted for depreciation. 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 and letters of credit.
These letters of credit are provided under the Company’s Revolving Credit Facility.
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 portion of the secured vehicle financing is supported
by 364-day term bank facilities, which are renewable annually. These 364-day term bank facilities are
expected to be extended for a 90-day period in March 2007. A significant portion of the secured vehicle
financing consists of asset backed notes, which have varying maturities through 2011. The Company
generally issues additional notes each year to replace maturing notes and provide for growth in its fleet.
The Company believes the asset backed note market continues to be a viable source of vehicle financing
and expects to issue additional notes during 2007, partially to replace maturing notes of $313 million.
The Company has experienced some increases during the last few years in the level of credit
enhancement or additional collateral required for new asset backed notes and the Commercial Paper
Program. These increased requirements have reduced liquidity available for other corporate purposes.
The Company believes it has sufficient resources to meet these requirements.
Cash used in investing activities was $452.3 million. The principal use of cash in investing activities was
the purchase of revenue-earning vehicles, which totaled $4.2 billion, and was primarily offset by $3.4
billion in proceeds from the sale of used revenue-earning vehicles. 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. Fleet levels are the lowest in the first and fourth quarters
when rental demand is at a seasonal low. Restricted cash at December 31, 2006 decreased $395.5
million from the previous year, including $412.4 million used for vehicle financing partially offset by
interest income earned on restricted cash and investments of $16.9 million. 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 $35.8 million.
These expenditures consist primarily of airport facility improvements for the Company’s rental locations
and investments in information technology equipment and systems. The Company estimates non-vehicle
capital expenditures to be approximately $45 million in 2007 as a result of increased airport facility
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