CAR

Business Context and Reporting Period

Company: Avis Budget Group, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2009
Business Overview: The Company operates in three segments: Domestic Car Rental, International Car Rental, and Truck Rental. Operations are heavily influenced by travel demand, airline passenger volumes, and the financial health of vehicle manufacturers. The reporting period reflects the ongoing impact of the U.S. recession, credit market disruptions, and reduced travel demand.

Key Financial Metrics

Note: Total Debt includes $1.887 billion in corporate long-term debt and $5.352 billion in debt under vehicle programs.

Material Changes vs. Prior Period

• Revenue Decline: Net revenues decreased 17% year-over-year for the three months ended June 30, 2009, and 17% for the six-month period. This was driven primarily by a 21% decrease in car rental days and a 19% decrease in rental days for the six-month period.
• Profitability: The Company reported a net loss of $6 million for the quarter and $55 million for the six months, compared to net income of $15 million and $4 million, respectively, in the prior year periods.
• Expense Reduction: Total expenses decreased 15% for the quarter and 14% for the six months, reflecting cost-cutting initiatives, reduced staffing, and lower fleet costs due to a smaller average fleet size.
• Foreign Exchange Impact: Foreign currency fluctuations negatively impacted revenue by $34 million for the quarter and $84 million for the six months, though this was largely offset by corresponding reductions in foreign currency-denominated expenses.
• Restructuring: The Company incurred $8 million in restructuring charges for the quarter and $13 million for the six months, primarily related to severance costs from eliminating approximately 1,400 positions.

Guidance, Outlook, and Risks

• Outlook: Management anticipates the third quarter to be the strongest due to seasonal leisure travel and household moving activity. However, the Company warns that economic conditions may persist, and there is no assurance of satisfying minimum EBITDA requirements under senior credit facilities.
• Liquidity: As of June 30, 2009, the Company held $434 million in cash. Available capacity under the revolving credit facility was $315 million, and available capacity under vehicle programs was $1.43 billion.
• Key Risks:
  • Refinancing Risk: Significant disruption in the asset-backed financing market poses a risk to refinancing maturing debt, particularly $42 million and $1.1 billion of term asset-backed financings maturing in 2009 and 2010.
  • Manufacturer Dependence: Risks associated with the Chapter 11 bankruptcy filings of General Motors and Chrysler, which could impact repurchase obligations and vehicle availability.
  • Covenant Compliance: Failure to meet financial covenants (specifically minimum trailing twelve-month EBITDA) could trigger defaults, though the covenant structure changes to a leverage ratio test starting in the quarter ending June 30, 2010.
• Subsequent Event: On July 23, 2009, the Company issued $450 million in asset-backed notes to repay maturing debt and acquire rental cars.

Investor Verification Checklist

• Verify the Company's ability to refinance approximately $1.1 billion of vehicle-backed debt maturing in 2010 amidst credit market disruptions.
• Monitor the financial stability of key vehicle manufacturers (GM, Chrysler, Ford) and their ability to honor repurchase and guaranteed depreciation agreements.
• Assess the impact of the $476 million recorded tax liability related to the IRS audit of 2003-2006 taxable years, noting the indemnification by Realogy and Wyndham.
• Review the Company's compliance with senior credit facility covenants, specifically the minimum EBITDA requirement, prior to the transition to a leverage ratio test in Q3 2010.
• Track the effectiveness of cost-reduction initiatives in offsetting the decline in rental volume and rising per-unit fleet costs.