AVIS BUDGET GROUP, INC. annual report, FY2013

Avis Budget Group, Inc. — 2013 Form 10-K Summary

Business context and reporting period

Avis Budget Group provides vehicle rental, car-sharing and ancillary services through Avis, Budget, Zipcar, Payless, Apex and Budget Truck. The filing covers the fiscal year ended December 31, 2013; fourth-quarter data are included in the unaudited quarterly financial information. The Company operated directly or through licensees in approximately 175 countries, with an average rental fleet exceeding 520,000 vehicles and more than 30 million rental transactions during 2013.

Zipcar was acquired in March 2013 and Payless in July 2013. The Company also acquired a 50% interest in its Brazilian licensee in August 2013.

Financial performance and key metrics

Metric	2013	2012	Change
Net revenue	$7,937 million	$7,357 million	8%
Vehicle rental revenue	$5,707 million	$5,297 million	8%
Adjusted EBITDA	$708 million	$802 million	(12%)
Net income	$16 million	$290 million	(94%)
Diluted EPS	$0.15	$2.42	Decrease
Cash flow from operations	$2,253 million	$1,889 million	+$364 million

Net margin was approximately 0.2%, compared with approximately 3.9% in 2012. Adjusted EBITDA margin was approximately 8.9%, compared with 10.9% in 2012. Fourth-quarter revenue was $1,849 million and fourth-quarter net loss was $28 million, or $0.26 diluted loss per share.

North America revenue increased 10% to $5,083 million, while Adjusted EBITDA declined 10% to $500 million, primarily because of higher fleet costs.
International revenue increased 6% to $2,481 million and Adjusted EBITDA increased 3% to $240 million.
Truck Rental revenue was essentially unchanged at $373 million, while Adjusted EBITDA declined 55% to $15 million, primarily reflecting restructuring expenses.
Rental days increased 3% excluding acquisitions. North American pricing increased 1% excluding Zipcar and Payless, driven by a 3% increase in leisure pricing.
Vehicle depreciation and lease charges increased 23% to $1,811 million, or 22.8% of revenue, from 20.0% in 2012. Fleet costs were affected by higher per-unit costs and anticipated normalization of used-vehicle residual values.

Cash flow, debt and liquidity

Cash and cash equivalents increased to $693 million at December 31, 2013, from $606 million at year-end 2012.
Cash used in investing activities was $2,234 million, including $537 million for net assets acquired and $1,569 million of net investment in vehicle programs.
Total indebtedness was approximately $10.7 billion, consisting of $3.4 billion of corporate debt and $7.3 billion of debt under vehicle programs.
Available liquidity included approximately $1.1 billion under committed non-vehicle-backed credit facilities and $3.5 billion of available vehicle-program capacity. The senior revolving credit facility had $1.65 billion of capacity and $1.052 billion available after letters of credit.
Corporate debt maturities totaled $89 million in 2014 and $561 million in 2017; vehicle-program debt maturities totaled $1.264 billion in 2014, $1.534 billion in 2015 and $1.618 billion in 2016.
The Company was in compliance with the financial covenants under its senior credit facility and reported no known covenant non-compliance under vehicle-program agreements.
The Company committed to purchase approximately $6.4 billion of vehicles over the following 12 months. It expected approximately $190 million of non-vehicle capital expenditures in 2014.

Material changes versus the prior comparable period

Revenue growth reflected higher rental volumes, a modest improvement in North American pricing, and contributions of $246 million from Zipcar and $44 million from Payless.
Profitability deteriorated despite revenue growth because of substantially higher fleet depreciation and lease charges, acquisition and integration costs, restructuring costs, debt-extinguishment costs and a higher tax provision.
Early extinguishment of debt costs increased to $147 million from $75 million. Transaction-related costs increased to $51 million from $34 million, and restructuring expense increased to $61 million from $38 million.
The Company recorded a $33 million impairment charge related to its Brazilian licensee investment.
Corporate debt increased by $489 million to $3.394 billion, while vehicle-program debt increased by $531 million to $7.337 billion, primarily supporting acquisitions and fleet growth.
The Company issued $500 million of 5.5% senior notes due 2023, approximately $325 million of 6% Euro-denominated notes due 2021, and $250 million of floating-rate notes due 2017, while repaying or repurchasing several existing debt instruments.
The Company repurchased approximately 1.6 million common shares for approximately $50 million and $62 million principal amount of convertible notes. No common-stock dividends were declared or paid.

Guidance, outlook, commentary and risks

Management expected worldwide demand for vehicle rental and car-sharing services to increase in 2014 against a backdrop of modest economic growth. Management expected fleet availability to be adequate for normal replacement and incremental demand, intended to pursue additional pricing increases, and planned to focus on profitable growth, customer service, cost efficiencies and fleet optimization. The Company anticipated no further Truck Rental restructuring expenses in 2014, but expected approximately $20 million of additional restructuring expense related to other initiatives.

Key risks include intense price competition, changes in travel demand and airline passenger volumes, used-vehicle residual values, vehicle supply and manufacturer repurchase or guaranteed-depreciation obligations.
High leverage and refinancing requirements expose the Company to interest-rate, credit-market, collateral and asset-backed financing risks. Approximately $1.9 billion of debt was unhedged interest-rate sensitive debt at year-end, rising to approximately $4.3 billion during the 2013 seasonal borrowing peak.
Integration of Zipcar and Payless may not deliver expected synergies or cost savings. Zipcar also faces competition and dependence on convenient, economically viable parking locations.
The Company remains exposed to litigation, wage-and-hour claims, insurance and self-insurance losses, regulatory changes, tax matters, cyber-security incidents, system disruptions, fuel costs, foreign exchange and political or economic instability.
The filing reports $416 million of retained public-liability and property-damage insurance liabilities at year-end, an unfunded defined-benefit pension status of $153 million, and $21.3 billion of disclosed contractual obligations, including debt, interest, leases and vehicle commitments.
Deloitte & Touche issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.

Important facts for investors to verify

Whether pricing gains and rental-volume growth can offset fleet-cost inflation and restore North American and consolidated Adjusted EBITDA margins.
The pace and realized value of Zipcar and Payless integration synergies, including Zipcar utilization and profitability.
Liquidity and refinancing capacity for near-term vehicle-program maturities and the approximately $6.4 billion vehicle-purchase commitment.
Exposure to used-car residual values, manufacturer obligations and collateral requirements supporting vehicle-backed debt.
The sustainability of cash flow after fleet purchases, acquisitions, debt service and planned share repurchases.
Potential effects of the Brazilian investment impairment, pending litigation, tax uncertainties and additional restructuring costs.