AVIS BUDGET GROUP, INC. quarterly report, Q2 FY2011

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

Business context and reporting period

Avis Budget Group provides car and truck rentals and ancillary services through Domestic Car Rental, International Car Rental and Truck Rental segments. This unaudited Form 10-Q covers the three and six months ended June 30, 2011, with comparisons to the comparable 2010 periods. Results are seasonal, with the third quarter historically strongest.

Key financial metrics

Metric	Q2 2011	Q2 2010	Six months 2011	Six months 2010
Net revenue	$1,412 million	$1,294 million	$2,646 million	$2,446 million
Income before taxes	$89 million	$29 million	$100 million	$(37) million
Net income	$52 million	$26 million	$59 million	$(12) million
Diluted EPS	$0.42	$0.22	$0.49	$(0.12)
Adjusted EBITDA	$191 million	$95 million	$274 million	$132 million
Operating cash flow	Not separately provided for the quarter	Not separately provided for the quarter	$702 million	$660 million

Q2 net margin was approximately 3.7%, compared with approximately 2.0% in Q2 2010. Six-month net margin was approximately 2.2%, compared with a loss margin of approximately 0.5% in the prior-year period. Adjusted EBITDA margin increased to approximately 13.5% for the six months, from approximately 5.4% in 2010.

Q2 rental revenue increased 8%, reflecting an 8% increase in domestic and international car rental days and a 10% increase in truck rental days. Car rental revenue per rental day was broadly unchanged overall.
Q2 ancillary revenue increased 14%. Six-month T&M revenue increased 7%, ancillary revenue increased 12%, and international results benefited from $45 million of favorable foreign-currency translation.
Vehicle depreciation and lease charges declined $80 million in Q2 and $101 million for the six months, primarily because of lower per-unit depreciation costs and gains on vehicle sales.
At June 30, 2011, cash and cash equivalents were $645 million, down from $911 million at December 31, 2010. Restricted cash was $406 million, including $395 million designated for the Avis Europe acquisition.
Total assets were $12.441 billion and stockholders’ equity was $532 million at June 30, 2011, compared with $10.327 billion and $410 million, respectively, at December 31, 2010.

Debt, liquidity and cash flow

Total indebtedness was approximately $8.8 billion at June 30, 2011, consisting of approximately $2.5 billion of corporate debt and $6.3 billion of debt under vehicle programs.
Vehicle-program debt increased $1.8 billion from year-end, principally to fund the larger domestic and international rental fleets. Vehicle assets increased approximately $1.8 billion.
The revolving credit facility had $1.2 billion of capacity, $651 million of letters of credit and $549 million of available capacity. Vehicle programs had approximately $1.425 billion of available capacity, subject to collateral requirements.
Six-month investing cash outflow was $2.689 billion, including $5.242 billion invested in vehicles and $401 million placed into acquisition-related restricted cash. Financing activities provided $1.716 billion.
The company was in compliance with the financial covenants of its senior credit facilities and reported no known covenant violations under vehicle-backed funding arrangements.

Material changes versus the prior comparable period

Revenue increased 9% in Q2 and 8% for the six months, while net income increased $26 million in Q2 and $71 million for the six months.
Domestic Car Rental Q2 Adjusted EBITDA increased 177% to $144 million; International Car Rental Adjusted EBITDA was unchanged at $32 million; Truck Rental Adjusted EBITDA increased 13% to $18 million.
For the six months, Domestic Car Rental Adjusted EBITDA increased 196% to $201 million, International Car Rental remained at $62 million, and Truck Rental increased 64% to $18 million.
Operating expenses, selling and administrative expenses and marketing spending increased with higher rental volumes and strategic investment. Six-month selling, general and administrative expense increased 18%.
Transaction-related costs increased to $34 million in Q2 and $36 million for the six months, including $23 million of foreign-currency losses associated with the Avis Europe purchase price and costs related to the potential Dollar Thrifty acquisition.
The prior-year six-month period included a $40 million early extinguishment-of-debt charge; no comparable charge was recorded in 2011.

Guidance, outlook, commentary and risks

Management expects non-vehicle capital expenditures of approximately $60 million to $70 million in 2011.
The company agreed to acquire Avis Europe for approximately $1.0 billion in cash. Shareholders approved the transaction on August 1, 2011, and closing was expected in October 2011, subject to court approvals and regulatory clearances.
The company established interim financing commitments of up to €694 million and $400 million for Avis Europe and intended to replace them with lower-cost financing. The acquisition was expected to increase indebtedness, borrowing costs and restrictive covenant exposure.
The company was also pursuing regulatory approval for a potential Dollar Thrifty acquisition; timing, financing, terms and completion remained uncertain.
Management cited competition, pricing, travel demand, economic conditions, used-vehicle values, vehicle supply and manufacturer repurchase obligations as key operating risks.
Liquidity risks include reliance on vehicle-backed financing, asset-backed markets, used-vehicle proceeds and compliance with debt covenants. Financial guarantors supported approximately $1.15 billion of domestic term asset-backed financing scheduled to expire in 2012.
The company had approximately $2.9 billion of vehicle purchase commitments over the next twelve months and approximately $1.0 billion of additional obligations related to the Avis Europe agreement.
A hypothetical 10% foreign-exchange movement could have an approximately $63 million impact on earnings, primarily because of hedges related to the Avis Europe purchase price. Interest-rate and gasoline-price sensitivity was reported as not material under the company’s stated scenarios.
Litigation matters include an appealed Alaska judgment totaling approximately $19 million, plus other claims and governmental inquiries. The company believes its accruals are adequate but notes that unfavorable outcomes could materially affect a reporting period.

Important facts for investors to verify

Completion timing, regulatory and court approvals, financing terms and final debt incurred for the Avis Europe acquisition.
Whether the potential Dollar Thrifty transaction proceeds and its effect on leverage, liquidity and covenants.
Sustainability of gains on vehicle sales and lower per-unit depreciation costs in the used-vehicle market.
Availability and pricing of vehicle-backed financing, including the 2012 financial-guarantee expirations and near-term debt maturities.
Trends in rental days, revenue per rental day, fleet size, utilization and pricing during the seasonally important third quarter.
Potential effects of foreign-exchange movements, litigation, manufacturer obligations and the company’s substantial vehicle purchase commitments.