Avis Budget Group, Inc. — 2011 Q1 Form 10-Q Summary
Business context and reporting period
Avis Budget Group provides car and truck rentals and ancillary services through Avis and Budget brands in the United States and internationally. Reported segments are Domestic Car Rental, International Car Rental and Truck Rental. This unaudited filing covers the three months ended March 31, 2011, compared with the three months ended March 31, 2010.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net revenues | $1,235 million | $1,153 million | +$82 million, 7% |
| Income before taxes | $11 million | $(66) million | +$77 million |
| Net income (loss) | $7 million | $(38) million | +$45 million |
| Diluted EPS | $0.06 | $(0.37) | Improved |
| Net margin | Approximately 0.6% | Approximately (3.3)% | Improved |
| Adjusted EBITDA | $81 million | $38 million | +$43 million |
| Adjusted EBITDA margin | Approximately 6.6% | Approximately 3.3% | Improved |
| Net cash from operating activities | $277 million | $280 million | $(3) million |
| Cash and cash equivalents | $913 million | $911 million at Dec. 31, 2010 | +$2 million |
Revenue growth reflected a 7% increase in domestic and international car rental days, a 17% increase in truck rental days and a 10% increase in ancillary revenue. Car rental revenue per rental day declined 1% overall, while truck rental revenue per day declined 7%. Foreign currency translation contributed $17 million to revenue.
Total expenses increased only $5 million to $1,224 million. Operating expenses rose $47 million and selling, general and administrative expenses rose $25 million, including $2 million related to the potential Dollar Thrifty acquisition. These increases were offset by the absence of a $40 million prior-year early debt-extinguishment charge, a $21 million reduction in vehicle depreciation and lease charges, and an $11 million reduction in vehicle interest.
Segment performance
- Domestic Car Rental: Revenue increased 6% to $929 million; Adjusted EBITDA increased to $57 million from $16 million. Rental days rose 7%, while revenue per day fell 3%. Lower per-unit fleet costs were a major earnings benefit.
- International Car Rental: Revenue increased 15% to $231 million; Adjusted EBITDA increased 3% to $30 million. Results benefited from higher volumes and currency translation, largely offset by foreign-exchange-related expenses.
- Truck Rental: Revenue increased 6% to $75 million; Adjusted EBITDA improved to break-even from a $4 million loss. Rental days increased 17%, but revenue per day declined 7%.
Liquidity, debt and cash flow
- Cash flow from operations was $277 million. Investing activities used $860 million, primarily reflecting $2.526 billion invested in vehicles, partly offset by $1.674 billion of vehicle-disposition proceeds. Financing activities provided $586 million.
- Total indebtedness was approximately $7.6 billion at March 31, 2011, consisting of approximately $2.5 billion of corporate debt and $5.1 billion of vehicle-program debt.
- Vehicle-program debt increased $596 million from year-end, principally to fund a larger domestic and international rental fleet. Net vehicles under vehicle programs increased to $7.088 billion from $6.422 billion.
- Available funding was approximately $2.3 billion: $612 million under revolving credit facilities and approximately $1.7 billion under vehicle programs. The Company reported compliance with applicable financial and restrictive covenants.
- At March 31, 2011, the Company had approximately $2.8 billion of commitments to purchase vehicles over the following twelve months.
Material changes, outlook and risks
- The Company stated that the U.S. economic recovery supported rental demand, but demand remained below pre-recession levels. Operations are seasonal, with the third quarter historically strongest.
- Management continued cost-reduction and process-improvement initiatives and expected non-vehicle capital expenditures of approximately $85 million to $95 million in 2011.
- The Company was pursuing the proposed acquisition of Dollar Thrifty. Completion, timing, regulatory approvals, financing, integration and incremental indebtedness remained uncertain. The filing provides no clear completed-transaction guidance or specific earnings forecast.
- In May 2011, after the reporting date, the Company issued $700 million of asset-backed notes and consolidated its corporate revolving facilities into a $1.2 billion facility maturing in 2016 at one-month LIBOR plus 300 basis points.
- Key risks include competition and pricing pressure, travel demand, used-vehicle values, vehicle supply and manufacturer obligations, fuel and labor costs, interest and foreign-exchange rates, financing-market access, covenant compliance, substantial leverage, financial-guarantor performance and potential acquisition-related risks.
- The February 2011 Christchurch earthquake damaged certain facilities and vehicles; management expected insurance recoveries to largely offset the economic costs.
- Restructuring activities were substantially complete; the remaining restructuring liability was $5 million, expected to be paid through 2015.
- The Company was defending litigation, including an appealed $19 million Alaska judgment comprising damages, prejudgment interest and attorneys’ fees. Management stated that it had adequately accrued for applicable matters or did not expect them to have a material impact, while noting that unfavorable outcomes remain possible.
Important facts for investors to verify
- Whether Dollar Thrifty was ultimately acquired, including purchase price, financing, regulatory conditions and resulting leverage.
- The sustainability of revenue growth and Adjusted EBITDA improvement after adjusting for foreign currency effects, favorable vehicle depreciation trends and the absence of the prior-year debt-extinguishment charge.
- Vehicle residual values, manufacturer repurchase or guaranteed-depreciation obligations, fleet purchase commitments and the ability to refinance maturing vehicle debt.
- Available liquidity after considering restricted cash, acquisition funding needs, vehicle-program collateral requirements and the May 2011 refinancing transactions.
- Compliance with debt covenants and the effect of interest-rate, fuel-price and foreign-exchange movements on future results.
- Developments in the Alaska appeal, other litigation, Realogy and Wyndham indemnification obligations, and guarantees with approximately $161 million of maximum potential future payments.