AVIS BUDGET GROUP, INC. quarterly report, Q2 FY2014

Avis Budget Group, Inc. — Form 10-Q Summary

Reporting period: Three and six months ended June 30, 2014. The unaudited filing covers Avis, Budget and Zipcar vehicle rental and car-sharing operations, plus Budget Truck Rental, across North America and international markets. The company operated a fleet of approximately 500,000 vehicles in approximately 175 countries.

Financial performance and metrics

Metric	Q2 2014	Q2 2013	Six months 2014	Six months 2013
Net revenues	$2.194 billion	$2.002 billion	$4.056 billion	$3.693 billion
Net income (loss)	$26 million	($28 million)	$30 million	($74 million)
Diluted EPS	$0.24	($0.26)	$0.28	($0.69)
Adjusted EBITDA	$213 million	$179 million	$330 million	$272 million
Operating cash flow	Not separately provided	Not separately provided	$1.011 billion	$874 million

Revenue growth: Net revenue increased 10% year over year in both Q2 and the first six months. Q2 vehicle rental revenue rose 8% and other revenue rose 14%; first-half increases were 9% and 13%, respectively.
Profitability: Q2 net margin was approximately 1.2%, compared with a loss margin of approximately 1.4% in the prior year. First-half net margin was approximately 0.7%, compared with a loss margin of approximately 2.0%. Adjusted EBITDA margins were approximately 9.7% in Q2 and 8.1% for the first half.
Operating costs: Q2 operating expense was 50.3% of revenue, vehicle depreciation and lease charges were 23.6%, SG&A was 13.1%, and vehicle interest was 3.3%. For the first half, the corresponding ratios were 51.9%, 23.4%, 13.2%, and 3.4%.
Cash flow: First-half operating cash flow increased $137 million to $1.011 billion. Investing cash flow was negative $4.068 billion, including $8.214 billion of vehicle purchases, partly offset by $4.382 billion of vehicle disposal proceeds. Financing activities provided $2.899 billion.
Liquidity: Cash and cash equivalents were $537 million at June 30, 2014, compared with $693 million at December 31, 2013. Available corporate revolving capacity was $750 million, and available vehicle-program capacity was approximately $1.121 billion.
Debt: Total indebtedness was approximately $14.2 billion, consisting of approximately $3.4 billion of corporate debt and $10.8 billion of vehicle-program debt. Corporate long-term debt was $3.299 billion, and vehicle-program liabilities totaled $13.446 billion, including debt and deferred taxes.
Balance sheet: Total assets increased to $19.989 billion from $16.284 billion, principally due to seasonal fleet expansion. Vehicles, net, increased to $13.366 billion from $9.582 billion. Stockholders’ equity declined to $667 million from $771 million, primarily because of share repurchases.

Material changes versus the prior comparable period

Rental days increased 4% in the first half and 4% in Q2; pricing increased 2% and 3%, respectively, excluding Zipcar and Payless.
North America was the primary earnings driver. Q2 revenue increased 12% to $1.427 billion and Adjusted EBITDA increased 37% to $157 million. First-half revenue increased 12% to $2.663 billion and Adjusted EBITDA increased 30% to $271 million.
International revenue increased 7% in both periods, but Adjusted EBITDA declined 2% in Q2 and 1% for the first half, reflecting adverse currency effects and higher brand investment.
Truck Rental revenue declined 2% in Q2 and the first half. Q2 Adjusted EBITDA declined 24% to $13 million, primarily due to higher per-unit fleet costs.
Lower early debt-extinguishment, transaction-related and restructuring costs significantly improved pretax results. Q2 early-extinguishment costs declined to $56 million from $91 million; first-half costs declined to $56 million from $131 million.
The company completed the refinancing of its 8.25% Senior Notes: it issued $400 million of 5.95% Senior Notes due 2022 and approximately $295 million of additional 6% euro-denominated notes, then repurchased the $687 million principal amount of the 8.25% notes.
The company repurchased approximately 2.977 million shares for approximately $150 million during the first half. The Board increased the authorized repurchase program by $235 million in April 2014.
The company acquired its Budget licensee in Edmonton for approximately $33 million plus $86 million of fleet and reacquired the right to operate the Budget brand in Portugal for approximately $15 million. It also paid $6 million of remaining consideration for its Brazilian investment.

Guidance, outlook, risks and unusual items

Management anticipated increased worldwide demand for vehicle rental and car-sharing services in 2014, supported by modest economic growth, and expected adequate access to vehicles for replacement and growth.
Management planned to pursue further pricing increases, optimize fleet levels, control costs and realize synergies from Zipcar, Avis Europe and other acquisitions. The filing does not provide a specific full-year revenue or earnings forecast.
Restructuring expense of $8 million was recorded in the first half. Approximately 210 employees had been notified of termination, approximately 150 had been terminated by June 30, and approximately $13 million of additional restructuring expense was expected in 2014.
Currency movements reduced Q2 pretax results by approximately $7 million and first-half pretax results by approximately $16 million. The filing also reported significant foreign-exchange derivative losses, which management expects to be substantially offset by the hedged exposures.
The company committed to purchase approximately $2.0 billion of vehicles over the following 12 months. These commitments are primarily supported by manufacturer repurchase or guaranteed-depreciation arrangements and vehicle-backed financing.
Key risks include intense competition and pricing pressure, travel-demand volatility, used-vehicle values, manufacturer recalls or financing support, substantial leverage, refinancing and covenant compliance, interest and currency rates, fuel costs, acquisition integration, litigation, cybersecurity or systems disruptions, uninsured claims and access to vehicle-backed financing.
The company was in compliance with its corporate and vehicle-program debt covenants at June 30, 2014. A July 2014 subsequent event involved the issuance of $500 million of asset-backed notes at a weighted average interest rate of 2.62% to repay maturing vehicle debt and fund rental vehicles.
Management stated that disclosure controls were effective and that no material change occurred in internal control over financial reporting during the quarter.

Investor verification checklist

Verify the sustainability of North America’s pricing, rental-volume growth and Adjusted EBITDA improvement.
Assess the effect of currency movements, brand investment and fleet costs on International profitability.
Reconcile total debt, vehicle-program collateral, maturities and available funding capacity, particularly the $1.251 billion of vehicle-program debt due within one year.
Evaluate liquidity after seasonal fleet purchases, vehicle disposals, share repurchases and the $2.0 billion vehicle purchase commitment.
Monitor used-vehicle resale prices and manufacturer repurchase or guaranteed-depreciation obligations.
Assess the remaining restructuring costs, acquisition-related contingent consideration, litigation exposure and other contractual commitments.
Review the effect of the 43.4% first-half effective tax rate and the company’s substantial deferred tax assets and liabilities.