Business Context and Reporting Period
Avis Budget Group, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2013. The company operates Avis and Budget vehicle-rental brands, Zipcar car-sharing operations, and Budget Truck Rental across approximately 175 countries, with a fleet of approximately 500,000 vehicles. Reportable segments are North America, International, and Truck Rental.
Zipcar was acquired on March 14, 2013, for $473 million net of acquired cash. Its results were included in North America from the acquisition date.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net revenues | $1.691 billion | $1.623 billion | 4% |
| Vehicle-rental revenue | $1.217 billion | $1.168 billion | 4% |
| Other revenue | $474 million | $455 million | 4% |
| Adjusted EBITDA | $83 million | $112 million | (26%) |
| Loss before income taxes | $(57) million | $(26) million | $(31) million |
| Net loss | $(46) million | $(23) million | $(23) million |
| Diluted loss per share | $(0.43) | $(0.22) | $(0.21) |
| Cash flow from operations | $300 million | $253 million | $47 million |
| Cash and cash equivalents | $569 million | $606 million at Dec. 31, 2012 | $(37) million |
Net loss margin was approximately negative 2.7%, compared with negative 1.4% in the prior-year quarter. Adjusted EBITDA margin was approximately 4.9%, compared with 6.9% in Q1 2012. The income-tax benefit was $11 million, producing an effective tax benefit rate of 19.3%.
- Operating expenses were $931 million, or 55.1% of revenue, versus 55.0% in Q1 2012.
- Vehicle depreciation and lease charges increased to $386 million from $318 million and represented 22.8% of revenue versus 19.6%.
- Vehicle interest expense declined to $57 million from $74 million.
- Corporate interest expense declined to $58 million from $73 million, while early extinguishment-of-debt expense increased to $40 million from $27 million.
- Rental days increased 2%, and total time-and-mileage revenue increased 4%. North America time-and-mileage revenue per rental day, excluding Zipcar, increased 4%.
Segment Performance
| Segment | Revenue | Revenue Change | Adjusted EBITDA | EBITDA Change |
|---|---|---|---|---|
| North America | $1.100 billion | 6% | $90 million | (3%) |
| International | $515 million | 1% | $14 million | (36%) |
| Truck Rental | $76 million | 1% | $(9) million | Down from $1 million |
| Corporate and Other | — | Not applicable | $(12) million | Down from $(4) million |
North America benefited from increased pricing, modest volume growth, and Zipcar, which contributed $14 million of revenue and $1 million of Adjusted EBITDA. Results were pressured by a 28% increase in per-unit fleet costs and a 3% increase in fleet size.
International revenue was supported by ancillary revenue and the Apex acquisition but was offset by lower pricing in existing operations. European demand remained constrained by recessionary and socio-political conditions. Apex contributed $13 million of revenue and $5 million of Adjusted EBITDA.
Truck Rental EBITDA declined primarily because of restructuring costs, higher vehicle-maintenance expense, and higher per-unit fleet costs.
Cash Flow, Debt and Liquidity
- Operating cash flow was $300 million. Investing cash flow was $(1.208) billion, including $(476) million for acquisitions and $(741) million of net cash used in vehicle programs.
- Financing cash flow was $873 million, including $407 million from non-vehicle financing and $466 million from vehicle-program financing.
- Corporate debt was $3.347 billion at March 31, 2013, up $442 million from December 31, 2012. Debt under vehicle programs was $7.462 billion, up $656 million.
- Total indebtedness was approximately $10.8 billion, including corporate and vehicle-program debt.
- Available capacity included $750 million under the revolving credit facility and approximately $2.782 billion under vehicle-program arrangements.
- Vehicle assets were $10.162 billion, compared with $9.274 billion at year-end 2012. Total assets increased to $16.557 billion from $15.218 billion, while stockholders’ equity declined to $694 million from $757 million.
- The company issued €250 million of 6% senior notes due 2021 and added a $200 million term loan due 2019, primarily to fund the Zipcar acquisition. It also repurchased approximately $51 million principal amount of convertible notes for $89 million.
- In April 2013, the company issued $500 million of 5.5% senior notes due 2023 and used proceeds to purchase approximately $326 million of 9.625% notes due 2018 and approximately $26 million of 9.75% notes due 2020.
Material Changes Versus the Prior Comparable Period
- Revenue increased 4%, but Adjusted EBITDA decreased 26% and net loss doubled to $46 million.
- Higher fleet costs drove a $68 million increase in vehicle depreciation and lease charges. Management attributed this to a 3% increase in the car-rental fleet, an 18% increase in per-unit fleet costs, and normalization of used-vehicle residual values.
- Operating expenses increased $38 million, partially offset by lower vehicle and corporate interest expense.
- The company acquired Zipcar and increased goodwill by $271 million and other intangible assets by $179 million, primarily as a result of the acquisition.
- Net cash used in investing activities increased by $241 million, primarily because of the Zipcar acquisition.
- Comprehensive loss was $69 million versus comprehensive income of $21 million, primarily reflecting a $23 million unfavorable currency-translation adjustment.
Outlook, Commentary, Risks and Unusual Items
Management described the 2013 macroeconomic environment as uneven. North American rental volumes increased slightly amid a modest recovery, while European demand remained weak. The company emphasized seasonality, with the third quarter historically the strongest period because of leisure travel.
- The company expects approximately $8 million of additional 2013 restructuring expense related to Truck Rental and approximately $20 million related to Avis Europe integration and organizational efficiencies.
- Management expects to pursue cost savings and integration synergies, particularly from Zipcar and Avis Europe, but provided no formal revenue, earnings, or cash-flow guidance in the filing.
- The company committed to purchase approximately $4.4 billion of vehicles over the following 12 months, primarily subject to manufacturers’ repurchase or guaranteed-depreciation obligations.
- Key risks include competition and pricing pressure, travel demand, used-vehicle residual values, vehicle supply and manufacturer credit, fleet financing access, interest rates, foreign exchange, gasoline prices, information systems, litigation, regulatory compliance, and the integration and realization of synergies from acquisitions.
- The company was in compliance with its senior-credit-facility and vehicle-program covenants as of March 31, 2013.
- An Alaska contract judgment totaling approximately $19 million, including damages, interest, and attorneys’ fees, was affirmed by the Ninth Circuit in March 2013; the company stated that it was continuing its appeal.
- Putative shareholder litigation related to the Zipcar acquisition was subject to a memorandum of understanding contemplating additional disclosures and court approval of a settlement.
Investor Verification Points
- Verify whether Zipcar integration produces the expected revenue growth, cost savings, and operational synergies.
- Monitor fleet costs, used-vehicle resale values, depreciation rates, and manufacturer repurchase or guaranteed-depreciation performance.
- Assess whether the significant corporate and vehicle-program debt remains serviceable under weaker rental demand or tighter financing markets.
- Review compliance with leverage, interest-coverage, and vehicle-program covenants, including available borrowing capacity.
- Track the planned restructuring costs and whether Truck Rental returns to profitability.
- Evaluate European pricing, rental volumes, currency effects, and the sustainability of Apex’s contribution.
- Follow the Alaska litigation appeal, Zipcar-related shareholder litigation, and other legal contingencies.
- Reconcile the April 2013 debt tender and refinancing transactions with subsequent interest expense, maturities, and liquidity.