Avis Budget Group, Inc. — 2012 First-Quarter Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. Avis Budget provides car and truck rentals and ancillary services worldwide through North America, International and Truck Rental segments. The October 2011 acquisition of Avis Europe materially affects year-over-year comparability.
Financial performance and key metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net revenues | $1,623 million | $1,235 million | +$388 million, 31% |
| Adjusted EBITDA | $112 million | $83 million | +$29 million, 35% |
| Income before taxes | $(26) million | $11 million | $(37) million |
| Net income (loss) | $(23) million | $7 million | $(30) million |
| Diluted EPS | $(0.22) | $0.06 | Declined |
| Operating cash flow | $253 million | $277 million | $(24) million |
Net revenue growth was driven primarily by the Avis Europe acquisition, which contributed approximately $327 million of revenue. Rental days increased 33% overall, including 7% growth in North America and 263% growth internationally. Ancillary revenue increased 44%. Consolidated expenses rose 35%, exceeding revenue growth, reflecting acquisition-related operating costs, higher SG&A, fleet costs, interest expense and unusual charges.
Adjusted EBITDA margin was approximately 6.9% of revenue, compared with approximately 6.7% in the prior-year quarter. Net loss margin was approximately 1.4%, compared with net income margin of approximately 0.6% in Q1 2011. The filing cautions that Adjusted EBITDA is a non-GAAP measure and may not be comparable with similarly titled measures used by other companies.
Liquidity, cash flow and debt
- Cash and cash equivalents were $606 million at March 31, 2012, up from $534 million at December 31, 2011.
- Net cash used in investing activities was $967 million, including $3.1 billion of vehicle purchases and $2.1 billion of vehicle-disposition proceeds.
- Net cash provided by financing activities was $783 million, including $3.1 billion of vehicle-program borrowings and $2.4 billion of vehicle-program principal repayments.
- Total indebtedness was approximately $9.8 billion: approximately $3.3 billion of corporate debt and $6.5 billion of debt under vehicle programs.
- Available capacity included $849 million under the revolving credit facility and approximately $3.8 billion under vehicle-program arrangements.
- Vehicle-program assets increased to $10.1 billion, principally from seasonal fleet expansion; related liabilities increased to $8.0 billion.
Material changes versus the prior comparable period
- North America revenue increased 4% to $1.038 billion and Adjusted EBITDA increased 72% to $93 million. Higher rental volume and lower per-unit fleet costs more than offset lower pricing.
- International revenue increased 215% to $510 million, principally from Avis Europe, while Adjusted EBITDA decreased 33% to $22 million. Avis Europe contributed a $13 million Adjusted EBITDA loss, including $7 million of restructuring costs.
- Truck Rental revenue was unchanged at $75 million, while Adjusted EBITDA improved from approximately zero to $1 million.
- Corporate interest expense increased to $73 million from $47 million, primarily because of higher indebtedness. Vehicle interest expense increased to $74 million from $63 million.
- The Company recorded $27 million of early extinguishment costs, $7 million of restructuring charges and $6 million of Avis Europe integration costs. It also recorded a $6 million foreign-currency-related loss within corporate interest expense.
- During the quarter, the Company issued a $500 million 2019 floating-rate term loan and $125 million of additional 8.25% senior notes, repaid $267 million of 2014 term debt and $150 million of 2018 term debt, and repurchased approximately $101 million principal amount of convertible notes.
Outlook, commentary and risks
Management expects Avis Europe’s contribution to Adjusted EBITDA to be concentrated in the second and third quarters because of seasonality. The Company expects approximately $40 million of additional restructuring costs through 2013. No formal full-year revenue or earnings guidance is provided in the filing text.
Vehicle rental demand is closely linked to airline passenger volumes and travel conditions, with the third quarter historically the strongest period. Key risks include competition and pricing pressure, economic weakness, used-vehicle residual values, vehicle supply and manufacturer repurchase obligations, fuel and labor costs, foreign exchange, interest rates, access to asset-backed financing, covenant compliance, integration of Avis Europe, litigation and disruptions to information systems.
The Company had approximately $4.6 billion of commitments to purchase vehicles over the following 12 months. Approximately $2.3 billion of vehicle-backed debt matured within one year. Financial guarantors provided guarantees on approximately $800 million of U.S. term asset-backed financing that were scheduled to expire in 2012. The Company stated that it was in compliance with applicable senior credit facility and vehicle-program covenants as of March 31, 2012.
In April 2012, the Company gave notice that it would redeem the $200 million outstanding principal amount of its 7.625% senior notes due 2014 on May 15, 2012, at par plus accrued interest.
Important facts for investors to verify
- Whether Avis Europe integration produces the expected cost synergies and improves International Adjusted EBITDA after the reported first-quarter loss.
- The Company’s ability to refinance or repay substantial 2012-2014 corporate and vehicle-program maturities.
- Compliance with maximum leverage, minimum interest coverage and vehicle-program covenants as fleet borrowing increases.
- Used-vehicle pricing, residual values and manufacturer performance under repurchase and guaranteed-depreciation arrangements.
- The cash-flow impact of approximately $4.6 billion of vehicle purchase commitments and the availability and cost of asset-backed financing.
- The amount and timing of the approximately $40 million of expected restructuring costs and other integration expenses.
- Potential exposure from litigation, former Cendant-related guarantees and the appealed Alaska judgment, as well as the adequacy of related accruals and indemnifications.