Avis 2012 Annual Report Download - page 96

F-40
recorded net unrealized gains on cash flow hedges of $13 million, $33 million and $36 million, net of tax, respectively,
to other comprehensive income. The after-tax amount of gains or losses reclassified from accumulated other
comprehensive income (loss) to earnings resulting from ineffectiveness for 2012, 2011 and 2010 was not material to the
Company’s results of operations.
In 2010, the Company reclassified a loss of $24 million, net of tax from accumulated other comprehensive income to
earnings in connection with the early termination of certain interest rate swaps related to the repayment of a portion of
the Company’s outstanding debt. The Company estimates that approximately $2 million of losses deferred in
accumulated other comprehensive income will be recognized in earnings in 2013, which is expected to be offset in
earnings by the impact of the underlying hedged items.
The Company uses interest rate swaps, including freestanding derivatives and derivatives designated as cash flow
hedges, to manage the risk related to its floating rate corporate debt. In connection with such cash flow hedges, the
Company recorded net unrealized gains (losses) of $1 million, $1 million and $(3) million, net of tax, during 2012, 2011
and 2010, respectively, to other comprehensive income.
The Company uses derivatives to manage the risk associated with its floating rate vehicle-backed debt. These derivatives
include freestanding derivatives and derivatives designated as cash flow hedges, which have maturities ranging from
October 2013 to November 2015. In connection with such cash flow hedges, the Company recorded net unrealized gains
of $12 million, $32 million and $39 million, net of tax, during 2012, 2011 and 2010, respectively, to other
comprehensive income. The Company recorded losses of $3 million, $2 million and $4 million related to freestanding
derivatives during 2012, 2011 and 2010, respectively.
Commodity Risk. The Company periodically enters into derivative commodity contracts to manage its exposure to
changes in the price of unleaded gasoline. These instruments were designated as freestanding derivatives and the changes
in fair value are recorded in the Company’s consolidated results of operations. These derivatives resulted in a gain of $3
million in 2012, a loss of less than $1 million in 2011 and a gain of $1 million in 2010.
Credit Risk and Exposure. The Company is exposed to counterparty credit risks in the event of nonperformance by
counterparties to various agreements and sales transactions. The Company manages such risk by evaluating the financial
position and creditworthiness of such counterparties and by requiring collateral in certain instances in which financing is
provided. The Company mitigates counterparty credit risk associated with its derivative contracts by monitoring the
amount for which it is at risk with each counterparty, periodically evaluating counterparty creditworthiness and financial
position, and where possible, dispersing its risk among multiple counterparties.
There were no significant concentrations of credit risk with any individual counterparties or groups of counterparties at
December 31, 2012 or 2011 other than (i) risks related to the Company’s repurchase and guaranteed depreciation
agreements with domestic and foreign car manufacturers, including General Motors Company, Ford Motor Company,
Chrysler Group LLC, PSA Peugeot Citroën, Volkswagen Group, Toyota Motor Corporation, Kia Motors America, Fiat
Group Automobiles S.p.A. and Renault S.A., and primarily with respect to receivables for program cars that were
disposed but for which the Company has not yet received payment from the manufacturers (see Note 2—Summary of
Significant Accounting Policies), (ii) receivables from Realogy and Wyndham related to certain contingent, income tax
and other corporate liabilities assumed by Realogy and Wyndham in connection with the Separation and (iii) risks
related to leases which have been assumed by Realogy, Wyndham or Travelport but of which the Company is a
guarantor. Concentrations of credit risk associated with trade receivables are considered minimal due to the Company’s
diverse customer base. The Company does not normally require collateral or other security to support credit sales.
Fair Value
Derivative instruments and hedging activities
As described above, derivative assets and liabilities consist principally of currency exchange contracts, interest rate
swaps, interest rate contracts and commodity contracts.
The Company used significant observable inputs (Level 2 inputs), other than quoted unadjusted prices from active
markets (Level 1 inputs), to determine the fair value of its derivative assets and liabilities. Their carrying value represents
their fair value.
Certain of the Company’s derivative instruments contain collateral support provisions that require the Company to post
cash collateral to the extent that these derivatives are in a liability position. The aggregate fair value of such derivatives