AVIS BUDGET GROUP, INC. annual report, FY2014

Avis Budget Group, Inc. — FY2014 Form 10-K Summary

Business context and reporting period

Annual report for the fiscal year ended December 31, 2014, filed February 23, 2015. Avis Budget Group provides vehicle rental, truck rental and car-sharing services through Avis, Budget, Zipcar, Payless, Apex and Budget Truck. The company and its licensees serve approximately 175 countries, with an average rental fleet exceeding 545,000 vehicles and more than 35 million rental transactions in 2014.

Reportable segments are North America, International and Truck Rental. Approximately 67% of vehicle-rental revenue came from airport locations and 33% from off-airport locations.

Financial performance and key metrics

Metric	2014	2013	Change
Net revenue	$8.485 billion	$7.937 billion	+7%
Vehicle-rental revenue	$6.026 billion	$5.707 billion	+6%
Other revenue	$2.459 billion	$2.230 billion	+10%
Adjusted EBITDA	$876 million	$769 million	+14%
Income before taxes	$392 million	$97 million	+ $295 million
Net income	$245 million	$16 million	+ $229 million
Diluted EPS	$2.22	$0.15	+ $2.07
Cash flow from operations	$2.579 billion	$2.253 billion	+ $326 million

Approximate 2014 margins were 10.3% on Adjusted EBITDA, 4.6% pretax and 2.9% net income. The filing cautions that Adjusted EBITDA is a non-GAAP measure and may not be comparable with similarly titled measures used by other companies.

Fourth-quarter 2014 net revenue was $1.887 billion and net income was $23 million, compared with $1.849 billion of revenue and a $28 million net loss in fourth-quarter 2013. Fourth-quarter diluted EPS was $0.21, versus a $0.26 loss per share in the prior-year quarter.

North America revenue increased 10% to $5.533 billion and Adjusted EBITDA increased 19% to $607 million.
International revenue increased 3% to $2.588 billion and Adjusted EBITDA increased 7% to $290 million.
Truck Rental revenue declined 2% to $364 million, while Adjusted EBITDA increased 8% to $39 million.
Total rental days increased 5%; North American pricing increased 2%, while consolidated pricing increased approximately 1%.
Vehicle depreciation and lease charges increased 10% to $1.996 billion, or 23.5% of revenue, primarily because of higher per-unit fleet costs.

Liquidity, debt and capital resources

Cash and cash equivalents were $624 million at December 31, 2014, down from $693 million.
Total debt was approximately $11.5 billion, consisting of $3.4 billion of corporate debt and $8.1 billion of debt under vehicle programs.
Available capacity was approximately $1.0 billion under committed corporate credit facilities and $4.4 billion under vehicle programs.
The senior revolving credit facility was expanded to $1.8 billion, with $1.017 billion available after letters of credit.
Vehicle-program assets were $11.058 billion and vehicle-program liabilities were $10.627 billion.
Debt under vehicle programs increased $779 million during 2014, primarily to fund fleet growth and acquisitions.
Operating cash flow was $2.579 billion; investing cash use was $2.807 billion, including $2.219 billion of net vehicle-program investing outflows; financing activities provided $182 million.
Non-vehicle capital expenditures were $182 million in 2014. Management expected approximately $200 million in 2015 and planned to refinance the remaining $223 million of 9.75% Senior Notes due 2020.
The company was in compliance with its debt covenants at year-end.

Material changes versus the prior comparable period

Revenue, rental volumes and Adjusted EBITDA reached company records, with profitability benefiting from higher volumes, pricing and lower debt-extinguishment, restructuring and transaction-related costs.
The effective tax rate fell to 37.5% from 83.5% in 2013. The prior year was affected by nondeductible impairment and debt-extinguishment costs.
The company redeemed all $687 million of its 8.25% Senior Notes due 2019 and issued new debt, including $400 million of 5.125% Senior Notes due 2022, approximately $275 million of additional euro-denominated notes and $175 million of additional 5.5% Senior Notes due 2023.
The remaining $66 million of convertible notes converted into approximately 4.0 million common shares.
The company repurchased approximately 5.7 million shares for $300 million. Approximately $284 million remained available under the repurchase authorization at year-end.
Acquisitions included Budget licensees in Edmonton, Southern California and Las Vegas and reacquisition of the Budget operating right in Portugal, for approximately $263 million plus $132 million of acquired fleet.
Manufacturer recalls increased significantly and reduced fleet utilization. Currency movements reduced 2014 revenue by approximately $43 million and pretax income by approximately $16 million.

Guidance, outlook, commentary and risks

Management expected worldwide demand for vehicle rental and car-sharing services to increase in 2015 amid modest and uneven global economic growth. Management expected continued adequate access to new fleet vehicles and planned to pursue additional pricing increases to improve returns and profitability. The company also intended to continue cost reductions, technology investments, yield-management initiatives, fleet optimization and integration of acquired businesses.

Key risks include intense price competition, changes in travel and airline demand, economic weakness, seasonality and potential disruption during the typically strongest third quarter.
Fleet costs and residual values are material risks. Approximately 42% of the average rental-car fleet was subject to repurchase, guaranteed-depreciation or operating-lease arrangements, and the company committed to purchase approximately $6.7 billion of vehicles over the following 12 months.
Manufacturer recalls, vehicle supply disruptions and manufacturer failures to honor repurchase or depreciation guarantees could reduce utilization, increase costs and impair liquidity.
Funding depends heavily on asset-backed securities and vehicle financing. Approximately $1.345 billion of vehicle-program debt and $28 million of corporate debt were contractually due in 2015.
Variable-rate debt, foreign exchange exposure and gasoline prices are managed with derivatives, but adverse market movements could affect earnings and cash flows.
Legal proceedings include wage-and-hour, employment, contract, insurance, regulatory, environmental and tax matters. Potential exposure from matters where loss was reasonably possible could reach approximately $20 million above accrued amounts.
The company recorded $26 million of restructuring expense in 2014 and expected approximately $10 million of additional T15 restructuring expense, principally personnel-related.
Management reported effective disclosure controls and internal control over financial reporting. Deloitte & Touche issued unqualified audit opinions.

Most important facts for investors to verify

Reconcile Adjusted EBITDA to GAAP income and assess the sustainability of the 2014 earnings improvement after excluding debt-extinguishment, restructuring and transaction-related items.
Evaluate leverage, debt maturities, refinancing requirements and the availability and collateral requirements of vehicle-backed funding.
Monitor used-vehicle residual values, manufacturer repurchase obligations, fleet utilization and the effect of recalls on depreciation expense and vehicle supply.
Assess whether pricing gains and volume growth can offset fleet-cost inflation and intense industry competition.
Review the integration and performance of Zipcar, Payless, Apex and the acquired Budget licensees.
Review cash available to the parent company separately from restricted vehicle-program cash, particularly in light of share repurchases and the absence of a dividend.
Track the $6.7 billion vehicle-purchase commitment, approximately $22.1 billion of disclosed contractual obligations and the company’s compliance with debt covenants.