Avis Budget Group, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2012, compared with the same periods in 2011. Avis Budget provides car and truck rentals and ancillary services through North America, International and Truck Rental segments. The International segment includes Avis Europe following its October 3, 2011 acquisition, which materially affects year-over-year comparisons.
Financial performance and key metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net revenues | $2.170 billion | $1.623 billion | $5.659 billion | $4.269 billion |
| Income before taxes | $260 million | $136 million | $363 million | $236 million |
| Net income | $280 million | $82 million | $336 million | $141 million |
| Diluted EPS | $2.38 | $0.65 | $2.77 | $1.14 |
| Adjusted EBITDA | $370 million | $272 million | $736 million | $546 million |
| Operating cash flow | Not separately provided | Not separately provided | $1.524 billion | $1.272 billion |
- Revenue increased 34% in the third quarter and 33% for the first nine months. Approximately 90% of nine-month revenue growth was attributable to the Avis Europe acquisition.
- Net income margin was approximately 12.9% in Q3 2012 versus 5.1% in Q3 2011, and 5.9% for the first nine months versus 3.3% in the prior-year period.
- Adjusted EBITDA margin was approximately 17.1% in Q3 2012 versus 16.8% in Q3 2011, and 13.0% for the first nine months versus 12.8% in the prior-year period.
- North America Q3 revenue rose 2% and Adjusted EBITDA rose 7%; nine-month revenue rose 3% and Adjusted EBITDA rose 19%.
- International Q3 revenue rose 302% and Adjusted EBITDA rose 249%; nine-month revenue rose 262% and Adjusted EBITDA rose 133%, primarily from Avis Europe. Excluding the acquisition, International Q3 Adjusted EBITDA declined 8%, while nine-month Adjusted EBITDA increased 3%.
- Truck Rental Q3 revenue declined 3% and Adjusted EBITDA declined 36%; nine-month revenue declined 1% and Adjusted EBITDA declined 20%.
- Operating expenses represented 47.7% of Q3 revenue versus 48.2% in the prior-year quarter. Vehicle depreciation and lease charges increased to 20.1% of revenue from 18.7%. For nine months, operating expenses were 50.9% of revenue versus 50.7%, while vehicle depreciation and lease charges improved to 19.2% from 19.7%.
Cash flow, debt and liquidity
- Operating cash flow for the first nine months was $1.524 billion, up $252 million year over year.
- Investing cash flow was negative $3.012 billion, including $8.962 billion invested in vehicles and $6.136 billion of vehicle disposition proceeds.
- Financing cash flow was positive $1.503 billion, primarily reflecting vehicle-program borrowings and repayments.
- Cash and cash equivalents were $554 million at September 30, 2012, compared with $534 million at December 31, 2011.
- Total indebtedness was approximately $10.8 billion, consisting of approximately $3.0 billion of corporate debt and $7.8 billion of debt under vehicle programs. Corporate debt declined $238 million from year-end, while vehicle-program debt increased $2.311 billion to fund fleet growth.
- Available liquidity included $280 million under the revolving credit facility, approximately $1.812 billion of vehicle-program capacity and $554 million of cash, subject to applicable borrowing and collateral conditions.
- Management stated that the Company was in compliance with the financial and restrictive covenants under its senior credit facility and vehicle-backed funding programs at September 30, 2012.
Material changes, outlook and unusual items
- The Avis Europe acquisition increased scale, fleet size, revenue and expenses and created integration and synergy opportunities. The Company recorded $21 million of Avis Europe-related transaction costs during the first nine months and $26 million of restructuring expense.
- Approximately 350 employees were notified of termination under the restructuring initiative. Management expected approximately $40 million of additional restructuring expense through 2013.
- The effective tax rate for the first nine months was 7.4% versus 40.3% in 2011, primarily because of an effective settlement of a $128 million unrecognized tax benefit. The Q3 tax provision was a $20 million benefit versus a $54 million provision in the prior-year quarter.
- The Company incurred $52 million of early debt-extinguishment expense during the first nine months, including debt repurchases and repayments that reduced corporate debt.
- Management reported an uneven macroeconomic environment: North American rental volumes benefited from a modest recovery, while European demand was constrained by recessionary and sociopolitical conditions. Rental pricing declined, while fleet costs and used-vehicle residual values remained important profitability drivers.
- No specific earnings or revenue guidance is provided in the filing text.
- Subsequent events included the October acquisition of Apex Car Rentals for approximately $29 million in cash plus fleet book value and potential earn-outs; October refinancing and repayment activity; renewal of a principal U.S. asset-backed conduit facility at reduced capacity; and a November offering of $300 million of 4.875% senior notes due 2017.
Principal risks and contingencies
- High leverage and dependence on vehicle-backed and corporate financing expose the Company to refinancing, interest-rate, covenant and asset-backed market risks.
- Liquidity could be adversely affected by weaker travel demand, lower used-vehicle values, higher fleet costs, reduced financing capacity or manufacturer failures to honor repurchase and guaranteed-depreciation arrangements.
- Competition may pressure rental pricing and volume. Other exposures include foreign exchange, gasoline prices, labor and operating costs, information-system disruptions, uninsured claims, litigation, regulatory matters and integration risks.
- The Company had approximately $3.4 billion of vehicle purchase commitments for the following 12 months, primarily subject to manufacturer repurchase or guaranteed-depreciation obligations.
- Litigation and governmental inquiries remain ongoing; management believes accruals are adequate or that unresolved matters will not be material, but unfavorable outcomes could affect a particular reporting period.
Investor verification checklist
- Verify the extent to which reported growth and profitability depend on the Avis Europe acquisition versus organic performance.
- Monitor rental pricing, rental days, fleet size, vehicle depreciation, used-car residual values and International segment margins.
- Assess the sustainability of the unusually low 2012 effective tax rate and the impact of the $128 million tax-benefit settlement.
- Review upcoming corporate and vehicle-program debt maturities, covenant compliance, refinancing needs and available borrowing capacity.
- Evaluate whether operating cash flow can support vehicle purchases, debt service and the approximately $3.4 billion of vehicle purchase commitments.
- Track the remaining Avis Europe restructuring costs, Apex integration, subsequent refinancing transactions and litigation or guarantee exposures.