Business Context and Reporting Period
Company: Avis Budget Group, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 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 cost of vehicle fleets. The reporting period reflects the ongoing impact of the 2008-2009 economic recession, which significantly reduced rental volumes.
Key Financial Metrics
| Metric (in millions) | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Net Revenues | $1,465 | $3,971 |
| Net Income (Loss) | $57 | $2 |
| EBITDA | $146 | $197 |
| Cash and Cash Equivalents | $470 (as of Sep 30, 2009) | N/A |
| Total Debt (Corporate + Vehicle Programs) | N/A | ~$6.4 billion (as of Sep 30, 2009) |
| Stockholders' Equity | $229 (as of Sep 30, 2009) | N/A |
Note: EBITDA is defined by the Company as income from continuing operations before non-vehicle related depreciation and amortization, impairment, non-vehicle related interest, and income taxes.
Material Changes vs. Prior Comparable Period
- Revenue Decline: Net revenues decreased 14% ($236 million) for the quarter and 16% ($752 million) for the nine months compared to 2008. This was driven primarily by a 21% decrease in car rental days and a 10% decrease in truck rental revenue, partially offset by higher revenue per rental day.
- Profitability Improvement: Net income improved significantly from a loss of $1,006 million in Q3 2008 to a profit of $57 million in Q3 2009. This turnaround is largely attributable to the absence of a $1,262 million impairment charge recorded in Q3 2008 (related to goodwill, tradename, and an equity investment).
- Expense Reduction: Total expenses decreased 52% for the quarter and 33% for the nine months. Key drivers included lower operating expenses due to reduced staffing and fleet size, and lower vehicle depreciation charges resulting from a 21% decline in the average car rental fleet.
- Foreign Exchange Impact: The Company reported a negative impact of $14 million (quarter) and $98 million (nine months) on revenues due to foreign currency exchange rate fluctuations.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management continues to implement a five-point cost-reduction plan, including headcount reductions (approx. 1,200 employees terminated in the first nine months of 2009) and facility consolidations. The Company expects to incur approximately $3 million in additional restructuring costs through year-end 2009. While the Company was in compliance with financial covenants as of September 30, 2009, management notes that there can be no assurance of satisfying minimum EBITDA requirements if economic conditions worsen.
Unusual Items
- Impairment Charge (2008): A $1,262 million charge in Q3 2008 significantly distorted year-over-year comparisons.
- Litigation Judgment (2009): An $18 million charge was recorded in Q3 2009 related to an adverse jury verdict in a breach-of-contract claim filed by a licensee in 2003. The Company plans to appeal.
Risks and Contingencies
- Debt Covenants: The Company relies heavily on asset-backed financing. Failure to meet EBITDA covenants could trigger defaults, requiring immediate repayment of debt from vehicle disposition proceeds.
- Manufacturer Dependence: Significant exposure to vehicle manufacturers (GM, Chrysler, Ford) regarding repurchase and guaranteed depreciation programs. Insolvency of these manufacturers poses a risk to fleet valuation and cash flow.
- Separation Liabilities: The Company has recorded a $476 million liability for tax matters related to the 2006 separation from Cendant Corporation, though it expects indemnification from Realogy and Wyndham.
- Convertible Notes: In October 2009 (subsequent event), the Company issued $345 million in convertible senior notes, which may dilute existing shareholders and impact stock price.
Investor Verification Checklist
- Covenant Compliance: Verify the Company's ability to meet the minimum trailing twelve-month EBITDA requirements under senior credit facilities, particularly given the recessionary environment.
- Manufacturer Solvency: Monitor the financial health of General Motors and Chrysler, as their ability to honor repurchase agreements is critical to the Company's fleet asset values.
- Litigation Status: Track the outcome of the appeal regarding the $18 million breach-of-contract judgment and the $33 million attorney fee petition in the Credentials Litigation.
- Refinancing Risk: Assess the Company's ability to refinance approximately $1.1 billion of term asset-backed financings maturing in 2010 amidst tight credit markets.
- Volume Recovery: Evaluate trends in domestic airline enplanements as a leading indicator for future rental volume recovery.