CAR

Business Context and Reporting Period

Company: Avis Budget Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: The Company operates in three segments: Domestic Car Rental, International Car Rental, and Truck Rental. It provides vehicle rentals and ancillary services globally. The reporting period coincides with a significant downturn in the U.S. economy and financial market disruptions, impacting travel demand and financing costs.

Key Financial Metrics

Note: EBITDA is defined by the Company as income from continuing operations before non-vehicle related depreciation and amortization, impairment charges, non-vehicle related interest, and income taxes.

Material Changes vs. Prior Period

• Net Loss: The Company reported a net loss of $1,006 million for the quarter and $1,003 million for the nine months ended September 30, 2008, compared to net income of $103 million and $140 million, respectively, in the prior year periods.
• Impairment Charges: A non-cash impairment charge of $1,262 million was recorded in the third quarter of 2008. This included $923 million for goodwill, $321 million for tradenames, and $18 million for an equity investment in Carey Holdings, Inc. This charge was the primary driver of the net loss.
• Revenue: Net revenues decreased slightly by 1% ($18 million) in the quarter compared to the prior year, driven by a 3% decrease in rental days, partially offset by a 9% increase in ancillary revenues. For the nine months, revenues increased 3% ($123 million) due to higher ancillary sales and foreign currency effects.
• Expenses: Total expenses increased significantly due to the impairment charge, higher vehicle depreciation and lease charges (due to rising per-unit fleet costs), and increased operating expenses (primarily gasoline costs).
• Segment Performance:
  • Domestic Car Rental: EBITDA decreased 36% in the quarter and 40% for the nine months due to lower volumes and higher fleet costs.
  • International Car Rental: EBITDA increased 18% in the quarter and 21% for the nine months, aided by foreign currency exchange rates and ancillary revenue growth.
  • Truck Rental: EBITDA declined 60% in the quarter and 71% for the nine months due to weaker rental volumes.

Guidance, Outlook, and Risks

• Outlook: Management expects full-year 2008 results for the Domestic Car Rental segment to be significantly lower than 2007. The Company anticipates continued pressure from the economic downturn, rising borrowing costs, and reduced travel demand.
• Liquidity and Covenants: Due to reduced earnings, the Company may be unable to satisfy financial covenants in its senior credit facilities. Management intends to seek waivers or amendments, which may increase borrowing costs. A covenant default could trigger repayment requirements under asset-backed conduit facilities.
• Financing Costs: Recent amendments to asset-backed conduit facilities are expected to increase borrowing costs by approximately 3% per annum. The Company is working on longer-term extensions for facilities maturing in October 2008 and February 2009.
• Key Risks:
  • Further impairment of goodwill or intangible assets if market capitalization declines further.
  • Disruption in access to capital markets or increased cost of financing.
  • Manufacturer defaults on repurchase or guaranteed depreciation agreements.
  • Continued decline in airline passenger traffic and general economic conditions.

Investor Verification Checklist

• Impairment Validity: Verify the assumptions used in the discounted cash flow models for the $1.262 billion impairment charge, particularly regarding future profit forecasts and market valuations.
• Covenant Compliance: Monitor the Company's ability to obtain waivers for financial covenants in its senior credit facilities and the terms of any amendments.
• Financing Extensions: Confirm the status of extensions for the asset-backed conduit facilities maturing in late 2008 and early 2009.
• Fleet Costs: Assess the impact of rising per-unit fleet costs and the ability to pass these costs to consumers through pricing.
• Manufacturer Exposure: Review the financial health of key vehicle manufacturers (GM, Ford, Chrysler) regarding their ability to honor repurchase and depreciation guarantees.