Avis Budget Group, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2013; filed August 7, 2013. Avis Budget operates Avis, Budget and Zipcar vehicle-rental and car-sharing businesses, plus Budget Truck Rental, across approximately 175 countries. The interim financial statements are unaudited and presented under U.S. GAAP.
Key Financial Metrics
| Metric | Q2 2013 | Q2 2012 | Six Months 2013 | Six Months 2012 |
|---|---|---|---|---|
| Net revenue | $2,002 million | $1,866 million | $3,693 million | $3,489 million |
| Adjusted EBITDA | $164 million | $254 million | $247 million | $366 million |
| Adjusted EBITDA margin | 8.2% | 13.6% | 6.7% | 10.5% |
| Net income (loss) | $(28) million | $79 million | $(74) million | $56 million |
| Diluted EPS | $(0.26) | $0.66 | $(0.69) | $0.47 |
| Cash flow from operations | Not separately provided | Not separately provided | $874 million | $722 million |
Q2 net revenue increased 7%, while six-month revenue increased 6%. Revenue growth reflected higher rental days, pricing and ancillary revenue, as well as $76 million of Q2 and $90 million of year-to-date revenue from Zipcar. Profitability deteriorated because vehicle depreciation and lease charges increased 43% in Q2 and 32% year to date, primarily from higher per-unit fleet costs and normalized used-vehicle residual values.
Q2 operating expenses were 50.3% of revenue versus 51.1% in the prior-year quarter. Vehicle depreciation and lease charges increased to 23.8% of revenue from 17.9%, while SG&A increased to 13.7% from 12.5%. Six-month vehicle depreciation and lease charges increased to 23.4% of revenue from 18.7%.
Segment Performance
- North America: Q2 revenue increased 9% to $1,292 million, but Adjusted EBITDA declined 38% to $114 million. Zipcar contributed $76 million of revenue and $6 million of Adjusted EBITDA. Six-month revenue rose 8% to $2,392 million, while Adjusted EBITDA fell 26% to $205 million.
- International: Q2 revenue increased 5% to $608 million, while Adjusted EBITDA declined 10% to $53 million, primarily due to lower pricing. Six-month revenue increased 3% to $1,123 million and Adjusted EBITDA declined 17% to $67 million.
- Truck Rental: Q2 revenue declined 1% to $102 million and Adjusted EBITDA declined 53% to $8 million. Six-month Adjusted EBITDA was a loss of $2 million versus $18 million of earnings, reflecting restructuring, maintenance and fleet-cost pressures.
Cash Flow, Debt and Liquidity
- Six-month operating cash flow was $874 million, up from $722 million. Investing cash usage was $3.458 billion, including $2.983 billion of vehicle-program investment and $476 million of net assets acquired, principally Zipcar. Financing activities provided $2.498 billion.
- Cash and cash equivalents declined to $503 million at June 30, 2013, from $606 million at December 31, 2012.
- Total indebtedness was approximately $12.8 billion, comprising approximately $3.4 billion of corporate debt and $9.4 billion of vehicle-program debt. Corporate debt increased from $2.9 billion at year-end 2012; vehicle-program debt increased from $6.8 billion.
- Corporate financing included $500 million of 5.5% notes due 2023, €250 million of 6% notes due 2021, and an additional $300 million term loan due 2019. Proceeds funded Zipcar and refinanced or repurchased higher-cost debt.
- The company had $431 million available under its $1.5 billion revolving credit facility, approximately $903 million of available vehicle-program funding capacity, and $50 million drawn under uncommitted credit facilities.
- The company was in compliance with its senior credit facility and vehicle-program covenants at June 30, 2013.
Material Changes and Unusual Items
- Zipcar was acquired on March 14, 2013, for $473 million net of acquired cash. The preliminary allocation included $275 million of goodwill and $190 million of identifiable intangible assets.
- Early extinguishment of debt expense increased to $91 million in Q2 and $131 million for the first six months, versus $23 million and $50 million, respectively, in the comparable periods. Management did not expect debt-extinguishment costs of similar magnitude going forward.
- Transaction-related costs were $19 million in Q2 and $26 million year to date, primarily related to Zipcar and Avis Europe integration.
- Restructuring expense was $15 million in Q2 and $25 million year to date. The company expected approximately $9 million of additional Truck Rental restructuring expense and $22 million of additional corporate restructuring expense during 2013.
- The company committed to purchase approximately $2.5 billion of vehicles during the next 12 months, primarily supported by manufacturer repurchase or guaranteed-depreciation arrangements.
- Subsequent to quarter-end, the company acquired Payless Car Rental for approximately $50 million, authorized up to $200 million of common-stock repurchases, and amended its revolving credit facility to extend maturity to 2018, increase capacity to $1.65 billion and reduce the interest rate by 75 basis points.
Outlook and Principal Risks
Management expected modestly higher North American rental volumes and continued pricing gains, but softness in European demand. It expected North American per-unit fleet costs to be significantly higher in 2013 as used-vehicle residual values normalized. Management highlighted opportunities from Zipcar, Avis Europe integration, pricing, cost reduction, technology and productivity initiatives, but provided no specific full-year revenue or earnings guidance in the filing.
Principal risks include intense competition and pricing pressure; travel-demand and economic weakness; higher fleet acquisition costs or weaker used-vehicle values; vehicle-manufacturer repurchase and guaranteed-depreciation exposure; substantial corporate and vehicle-backed debt; refinancing and covenant requirements; interest-rate, currency and fuel-price volatility; integration and synergy risks related to Zipcar, Avis Europe and other acquisitions; dependence on financing markets and third parties; litigation and regulatory matters; information-system disruptions; uninsured claims; and terrorism, pandemics or natural disasters.
The company disclosed a $16 million Alaska contract judgment plus $3 million of interest and attorneys’ fees, with continuing appellate efforts, as well as other litigation and governmental inquiries. Management stated that existing accruals and defenses were adequate, but unfavorable outcomes could materially affect results or liquidity.
Investor Verification Checklist
- Verify whether fleet-cost normalization and used-vehicle residual values continue to pressure vehicle depreciation and margins.
- Assess Zipcar integration, revenue growth, profitability and realization of expected synergies.
- Review the maturity profile, refinancing needs and covenant headroom for approximately $12.8 billion of total debt.
- Monitor available vehicle-program funding capacity and the company’s ability to finance seasonal fleet increases.
- Evaluate European pricing and demand trends and the performance of the Apex and Payless acquisitions.
- Confirm the magnitude and timing of remaining restructuring costs, share repurchases and other post-quarter-end cash uses.
- Review vehicle purchase commitments, manufacturer guarantees, used-vehicle disposal values and related counterparty exposures.