AVIS BUDGET GROUP, INC. quarterly report, Q1 FY2014

Avis Budget Group, Inc. — Q1 2014 Form 10-Q Summary

Reporting period: Three months ended March 31, 2014; unaudited interim results. Avis Budget provides car and truck rentals, ancillary services, licensing and car-sharing services through Avis, Budget and Zipcar in approximately 175 countries. Reportable segments are North America, International and Truck Rental.

Financial performance

Metric	Q1 2014	Q1 2013	Change
Net revenues	$1.862 billion	$1.691 billion	10%
Vehicle rental revenue	$1.329 billion	$1.217 billion	9%
Other revenue	$533 million	$474 million	12%
Adjusted EBITDA	$117 million	$93 million	26%
Income before taxes	$5 million	$(57) million	Improved $62 million
Net income	$4 million	$(46) million	Improved $50 million
Diluted EPS	$0.03	$(0.43)	Improved
Operating cash flow	$390 million	$300 million	+$90 million

Adjusted EBITDA margin was approximately 6.3%, compared with approximately 5.5% in the prior-year period. Net income margin was approximately 0.2%, versus a negative 2.7% in Q1 2013. Operating expenses declined to 53.7% of revenue from 55.1%; vehicle depreciation and lease charges increased to 23.2% from 22.8%.

Segment results and operating trends

North America: Revenue increased 13% to $1.236 billion and Adjusted EBITDA increased 23% to $114 million. Excluding Zipcar and Payless, rental volume increased 4% and pricing increased 2%.
International: Revenue increased 7% to $551 million, while Adjusted EBITDA was unchanged at $17 million. Higher revenue was offset by a $9 million negative currency impact.
Truck Rental: Revenue declined 1% to $75 million; Adjusted EBITDA improved to a $2 million loss from a $5 million loss, helped by pricing and lower maintenance costs.
Total rental days, excluding Zipcar and Payless, increased 4%. The fleet increased 2%, while per-unit fleet costs increased 6% excluding those acquisitions.

Cash flow, liquidity and debt

Cash and cash equivalents were $841 million at March 31, 2014, up from $693 million at December 31, 2013.
Operating cash flow was $390 million. Investing cash flow was $(957) million, including $3.275 billion invested in vehicles and $2.470 billion of vehicle-disposition proceeds. Financing cash flow was $716 million.
Total indebtedness was approximately $11.7 billion, consisting of $3.7 billion of corporate debt and $8.0 billion of vehicle-program debt.
Corporate debt increased to $3.696 billion from $3.394 billion, primarily because of the issuance of approximately $295 million of additional 6% Euro-denominated senior notes due 2021.
At quarter-end, available capacity was approximately $1.0 billion under the revolving corporate credit facility and $3.5 billion under vehicle programs.
The company was in compliance with the financial covenants of its senior credit facility and reported no known noncompliance under vehicle-backed funding agreements.

Material changes and unusual items

Q1 2014 included $54 million of revenue from Zipcar and $30 million from Payless. The 2013 comparison included the acquisition of Zipcar in March 2013.
The company acquired its Budget licensee in Edmonton, Alberta, for approximately $33 million plus $86 million for acquired fleet, and reacquired the right to operate the Budget brand in Portugal for approximately $15 million.
Restructuring expense was $7 million, primarily for employee terminations. Approximately 130 employees were notified of termination, and the company expects approximately $15 million of additional restructuring expense in 2014.
Transaction-related costs were $8 million, primarily consisting of a non-cash charge for reacquired license rights and acquisition integration expenses.
Q1 2013 included $40 million of early extinguishment-of-debt costs; no such cost was recorded in Q1 2014.
The company repurchased approximately 1.635 million shares for $75 million during the quarter. In April 2014, the board increased the share-repurchase authorization by $235 million.
In April 2014, the company used the Euro-note proceeds to repurchase $292 million principal amount of 8.25% senior notes for $316 million plus accrued interest and expects approximately $26 million of debt-extinguishment costs.

Outlook, risks and contingencies

Management expected worldwide vehicle-rental and car-sharing demand to increase in 2014 against modest economic growth, adequate access to new fleet vehicles and opportunities for additional pricing increases. The filing provides no formal quantitative revenue or earnings guidance.

Key risks include competition, travel demand, used-vehicle prices, vehicle supply and manufacturer repurchase or guaranteed-depreciation obligations, fuel and labor costs, currency and interest rates, financing-market access, and integration of Zipcar, Payless and other acquisitions.
The company had commitments to purchase approximately $5.6 billion of vehicles over the following 12 months, primarily subject to manufacturer repurchase or guaranteed-depreciation arrangements.
Litigation and governmental inquiries include vehicle-rental contract, licensee, wage-and-hour, employment, insurance, competition, intellectual-property, environmental, commercial and tax matters. Management believes accruals and defenses are adequate, but unfavorable outcomes could materially affect results.
Guarantees related primarily to former subsidiaries’ real-estate leases had an estimated maximum future payment exposure of approximately $47 million; recorded liability was approximately $1 million.
Foreign-exchange derivatives generated an $18 million loss in Q1 2014, largely expected to be offset by gains on underlying exposures. Management reported that a hypothetical 10% change in currency, interest rates or gasoline prices would not have a material earnings impact based on the filing’s sensitivity analyses.

Investor verification checklist

Verify the sustainability of North America’s volume, pricing and Adjusted EBITDA gains after separating acquisition effects from underlying performance.
Monitor fleet costs, used-vehicle disposal prices, manufacturer repurchase obligations and the approximately $5.6 billion vehicle-purchase commitment.
Assess leverage, upcoming maturities—including the $66 million convertible notes due October 2014—and continued access to corporate and vehicle-backed financing.
Confirm the timing and approximately $26 million expected debt-extinguishment cost associated with the April 2014 senior-note repurchase.
Evaluate whether Zipcar, Payless, Edmonton and Portugal acquisitions deliver expected synergies while restructuring costs continue.
Review currency, interest-rate and gasoline-price exposures, litigation contingencies, and the company’s ability to maintain debt covenants and liquidity.