Avis Budget Group, Inc. — 2011 Q3 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 nine months ended September 30, 2011, compared with the corresponding 2010 periods. The company completed its approximately $1.0 billion acquisition of Avis Europe on October 3, 2011; therefore, Avis Europe results were not included in third-quarter 2011 operations.
Financial performance and key metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net revenues | $1,623 million | $1,512 million | $4,269 million | $3,959 million |
| Income before taxes | $136 million | $144 million | $236 million | $106 million |
| Net income | $82 million | $90 million | $141 million | $78 million |
| Diluted EPS | $0.65 | $0.73 | $1.14 | $0.66 |
| Adjusted EBITDA | $272 million | $213 million | $546 million | $346 million |
| Net margin | 5.1% | 6.0% | 3.3% | 2.0% |
| Adjusted EBITDA margin | 16.8% | 14.1% | 12.8% | 8.7% |
Q3 revenue increased 7%, driven by a 5% increase in car rental days, a 4% increase in truck rental days and a 12% increase in ancillary revenue. Nine-month revenue increased 8%, with car rental days up 7%, truck rental days up 9% and ancillary revenue up 12%. International revenue benefited from foreign-exchange translation.
Q3 net income declined 9% despite higher revenue because expenses grew 9%, including transaction-related costs, operating expenses, selling and marketing costs, gasoline expense and foreign-exchange effects. Lower vehicle depreciation and lease charges, vehicle interest and restructuring costs partially offset these increases.
Nine-month net income increased 81%. The improvement reflected higher revenue, lower vehicle depreciation and lease charges, the absence of the prior-year $40 million early-extinguishment charge and lower vehicle interest expense. The effective tax rate increased to 40.3% from 26.4%, primarily because of state taxes and nondeductible transaction costs.
Segment performance
- Domestic Car Rental: Q3 revenue increased 6% to $1,193 million and Adjusted EBITDA increased 31% to $179 million. Nine-month revenue increased 6% to $3,177 million and Adjusted EBITDA increased 85% to $380 million. Results benefited from higher volume and lower fleet costs, including gains on vehicle sales.
- International Car Rental: Q3 revenue increased 16% to $318 million and Adjusted EBITDA increased 19% to $74 million. Nine-month revenue increased 17% to $802 million and Adjusted EBITDA increased 10% to $136 million. Foreign-exchange translation was a major contributor.
- Truck Rental: Q3 revenue increased 1% to $112 million and Adjusted EBITDA increased 16% to $22 million. Nine-month revenue increased 3% to $290 million and Adjusted EBITDA increased 33% to $40 million. Higher commercial rental volume and utilization offset lower daily pricing.
Cash flow, liquidity and debt
- Cash and cash equivalents were $1,002 million at September 30, 2011, compared with $911 million at December 31, 2010. Restricted cash was $395 million, including approximately $384 million related to the Avis Europe acquisition.
- Nine-month operating cash flow was $1,272 million, versus $1,338 million in 2010. The decrease primarily reflected the absence of $185 million of prior-year tax reimbursements, partly offset by improved operating results and income-tax-related changes.
- Nine-month investing cash flow was negative $2,774 million, including $6,701 million of vehicle purchases, $4,379 million of vehicle-sale proceeds and $401 million placed into acquisition-related restricted cash.
- Nine-month financing cash flow was positive $1,609 million, principally from $8,235 million of vehicle-program borrowings, partly offset by $6,568 million of principal payments.
- Total indebtedness was approximately $8.6 billion at September 30, 2011, consisting of approximately $2.5 billion of corporate debt and $6.1 billion of vehicle-program debt. Corporate debt was $2,498 million, broadly unchanged from year-end 2010; vehicle-program debt increased from $4,515 million to $6,133 million.
- Available capacity included $416 million under the revolving credit facility and approximately $2.3 billion under vehicle programs, subject to collateral requirements. The company reported compliance with applicable senior credit and vehicle-program covenants.
- The company had commitments to purchase approximately $4.4 billion of vehicles over the following twelve months. Non-vehicle capital expenditures were expected to be approximately $50 million to $60 million in 2011.
Material changes, outlook and risks
- The Avis Europe acquisition closed October 3, 2011 and was funded with cash, restricted cash and incremental debt. The company repaid approximately $620 million of Avis Europe debt, issued $250 million of 9.75% senior notes due 2020 and obtained incremental term-loan and vehicle-backed financing.
- Acquisition accounting was incomplete when the filing was issued; the filing did not provide final acquisition-date fair values, goodwill, acquired intangibles or pro forma segment disclosures.
- Transaction-related costs were $66 million in Q3 and $102 million for the nine months, compared with $5 million and $8 million, respectively, in the prior-year periods. These costs included Avis Europe and Dollar Thrifty-related expenses, including $26 million and $49 million of foreign-currency losses related to the Avis Europe purchase.
- Management stated that the unusually strong used-car market had materially reduced vehicle depreciation costs in 2011 and did not expect that strength to continue into Q4 2011 or thereafter.
- Key risks include competition and pricing pressure, reduced travel demand, economic weakness, used-vehicle values, vehicle supply and manufacturer obligations, financing-market access, substantial leverage, covenant compliance, foreign-exchange and interest-rate exposure, fuel costs, litigation, information-system disruptions and integration of Avis Europe.
- Financial guarantors provided guarantees on approximately $1.15 billion of domestic term asset-backed financing expiring in 2012; certain insolvency events could accelerate repayment requirements.
- The company disclosed an approximately $19 million Alaska litigation judgment and attorneys’ fees under appeal, as well as other litigation and guarantees relating to former businesses. It estimated maximum potential payments under certain real-estate lease guarantees at approximately $130 million, with approximately $3 million recorded as a liability.
- A hypothetical 10% change in relevant foreign-exchange rates could have affected earnings by approximately $74 million, primarily because of hedges related to the Avis Europe acquisition. The filing stated that comparable 10% interest-rate and gasoline-price changes would not have had a material earnings impact.
Investor verification checklist
- Verify the final purchase-price allocation, goodwill, acquired intangibles, debt assumed and pro forma contribution of Avis Europe in subsequent filings.
- Assess post-acquisition leverage, interest expense, covenant headroom and the availability and terms of vehicle-backed financing.
- Monitor used-vehicle prices and disposal gains, since 2011 fleet-cost improvements were materially supported by unusually strong used-car conditions.
- Reconcile reported cash with restricted cash and confirm liquidity available after acquisition funding and repayment of Avis Europe debt.
- Evaluate whether rental-volume growth and ancillary-revenue gains offset pricing pressure, higher operating costs, gasoline expense and marketing investment.
- Track the impact of the higher effective tax rate and the unusually large transaction-related cost burden.
- Review litigation, former-business indemnification and guarantee exposures, including the Alaska judgment and financial-guarantor expirations.