Avis Budget Group, Inc. — Form 10-Q Summary
Business context and reporting period
Avis Budget Group operates Avis, Budget and Zipcar vehicle-rental and car-sharing businesses, plus Budget Truck Rental. Operations span approximately 175 countries, with a fleet of approximately 500,000 vehicles. Reported segments are North America, International and Truck Rental. This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods.
Financial performance and key metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net revenues | $2,395 million | $2,170 million | $6,087 million | $5,659 million |
| Income before taxes | $230 million | $260 million | $135 million | $363 million |
| Net income | $118 million | $280 million | $44 million | $336 million |
| Diluted EPS | $1.02 | $2.38 | $0.39 | $2.77 |
| Adjusted EBITDA | $369 million | $370 million | $615 million | $736 million |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $1,743 million | $1,524 million |
Q3 revenue increased 10%, while nine-month revenue increased 8%. Q3 net income fell 58%, and nine-month net income fell 87%. The effective tax rate was 49% in Q3 2013 versus an 8% benefit in Q3 2012, and 67.4% for the first nine months versus 7.4% in the prior-year period.
Q3 operating expenses were 47.7% of revenue, vehicle depreciation and lease charges were 21.9%, SG&A was 11.4%, and vehicle interest was 3.0%. For the first nine months, the corresponding ratios were 50.6%, 22.8%, 12.7% and 3.2%.
Segment results for Q3 were North America revenue of $1,513 million and Adjusted EBITDA of $223 million; International revenue of $773 million and Adjusted EBITDA of $144 million; and Truck Rental revenue of $109 million and Adjusted EBITDA of $13 million. For the first nine months, North America Adjusted EBITDA was $427 million, International was $211 million and Truck Rental was $12 million.
Cash flow, balance sheet, debt and liquidity
- Operating cash flow for the first nine months was $1,743 million, up $219 million from 2012.
- Net cash used in investing activities was $3,218 million, including $2,645 million of vehicle-program investing and $531 million for net assets acquired.
- Net cash provided by financing activities was $1,466 million. Cash and cash equivalents declined $17 million to $589 million at September 30, 2013.
- Total assets were $17.804 billion, including $10.805 billion of vehicles under vehicle programs. Stockholders’ equity was $804 million.
- Total indebtedness was approximately $12.0 billion, consisting of approximately $3.4 billion of corporate debt and $8.6 billion of vehicle-program debt.
- Corporate long-term debt was $3.203 billion, compared with $2.848 billion at December 31, 2012. Vehicle-program liabilities were $11.058 billion, including $8.636 billion of vehicle-program debt.
- The 2018 revolving credit facility had $1.65 billion of capacity, $820 million of letters of credit and $830 million of available capacity. Vehicle-program funding capacity was $10.903 billion, with $2.267 billion available.
- The Company reported compliance with the financial covenants of its senior credit facility and stated that it was not aware of noncompliance with vehicle-program debt covenants.
Material changes versus the prior comparable period
- Revenue growth reflected higher rental volumes, ancillary revenue, and contributions from acquisitions. Excluding acquisitions, rental days increased 4% in Q3 and 3% for the first nine months.
- North America revenue increased 11% in Q3 and 9% year to date, but Adjusted EBITDA declined 4% and 16%, respectively, primarily because of higher fleet costs.
- Per-unit fleet costs increased 12% in Q3 and 22% for the first nine months, reflecting normalization of used-vehicle residual values. The car-rental fleet increased 3% in Q3 and 2% year to date, excluding acquisitions.
- International revenue increased 10% in Q3 and 6% year to date. International Adjusted EBITDA increased 12% in Q3 and was essentially unchanged year to date.
- Truck Rental revenue was flat, while Adjusted EBITDA declined 7% in Q3 and 63% year to date, partly because of restructuring costs and a smaller fleet.
- Zipcar was acquired in March 2013 for $473 million net of cash and contributed $82 million of Q3 revenue, $172 million of nine-month revenue, and $14 million of nine-month Adjusted EBITDA. Payless was acquired in July 2013 for $50 million and contributed $23 million of Q3 and nine-month revenue.
- The Company acquired a 50% interest in its Brazilian licensee in August 2013. It recorded a $33 million impairment charge on the investment and reported the investment at approximately $20 million at September 30, 2013.
- Early extinguishment of debt expense increased to $131 million from $52 million for the first nine months, while corporate interest expense declined to $170 million from $208 million.
- The Company issued $500 million of 5.5% notes due 2023, approximately $338 million of 6% Euro-denominated notes due 2021, and added $300 million to its 2019 term loan. It used proceeds partly for acquisitions and debt refinancing.
Guidance, outlook, commentary, risks and unusual items
Management expected continued volume growth in North America and Europe through 2013, stable Australian rental volumes in the fourth quarter, and continued positive North American pricing. Management also expected North American per-unit fleet costs to remain significantly higher in 2013 as used-vehicle residual values normalized.
Key risks include intense competition and pricing pressure; travel and airline-demand fluctuations; used-vehicle residual values; vehicle supply and manufacturer repurchase or guaranteed-depreciation obligations; substantial leverage and refinancing needs; access to asset-backed and other financing; interest-rate, foreign-exchange and gasoline-price exposure; integration and synergy realization for Zipcar, Payless and Avis Europe; economic weakness, particularly in Australia; litigation and regulatory matters; information-system disruptions; uninsured claims; and compliance with debt covenants.
- Restructuring expense was $39 million for the first nine months. Management expected approximately $3 million more for the Truck Rental initiative and approximately $18 million more for employee-related restructuring during 2013.
- The Company committed to purchase approximately $4.4 billion of vehicles over the next 12 months and had approximately $168 million of other purchase commitments extending through 2018.
- More than 860,000 common shares were repurchased for approximately $25 million. The Board authorized a $200 million repurchase program, with approximately $175 million remaining at September 30, 2013.
- The Alaska Rent A Car judgment was paid in full in September 2013; the Company stated that its continuing appeal was not material to financial condition.
- The Company stated that its disclosure controls were effective and that no material change occurred in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether higher fleet costs and used-vehicle residual values continue to pressure North American margins and Adjusted EBITDA.
- Progress toward operating synergies and integration objectives for Zipcar, Payless and Avis Europe.
- Refinancing plans for corporate debt maturing in 2014 and the Company’s ability to maintain covenant compliance.
- Availability and cost of vehicle-backed financing, particularly under changing credit-market conditions.
- Manufacturer performance under repurchase and guaranteed-depreciation agreements and the potential effect on fleet liquidity.
- The valuation and future performance of the Brazilian licensee investment following the $33 million impairment.
- Execution of the Truck Rental restructuring plan and the remaining expected restructuring costs.
- Future vehicle-purchase commitments, fleet size, disposal proceeds and used-vehicle market conditions.