AVIS BUDGET GROUP, INC. annual report, FY2011

Avis Budget Group, Inc. — FY2011 Form 10-K Summary

Business context and reporting period

Annual report for the fiscal year ended December 31, 2011, with selected quarterly data for 2011 and 2010. Avis Budget operates Avis and Budget car-rental brands globally, Budget Truck Rental in the United States, and related ancillary and licensing businesses. The company operated or licensed its brands in approximately 175 countries, with an average fleet exceeding 393,000 vehicles and more than 24 million rental transactions during 2011.

The October 3, 2011 acquisition of Avis Europe for approximately $976 million reunited the Avis and Budget brands globally and materially expanded the International segment. Avis Europe contributed $359 million of revenue from the acquisition date through year-end.

Financial performance and key metrics

Metric	2011	2010	Change
Net revenue	$5.900 billion	$5.185 billion	Up 14%
Vehicle-rental revenue	$4.338 billion	$3.882 billion	Up 12%
Income before income taxes	$36 million	$72 million	Down $36 million
Net income (loss)	$(29) million	$54 million	Down $83 million
Adjusted EBITDA	$605 million	$398 million	Up 52%
Cash flow from operations	$1.578 billion	$1.640 billion	Down $62 million
Cash and cash equivalents	$534 million	$911 million	Down $377 million
Total debt	Approximately $8.8 billion	Approximately $7.0 billion	Up approximately $1.8 billion

Reported pretax margin was approximately 0.6%, net margin was approximately negative 0.5%, and Adjusted EBITDA margin was approximately 10.3%. The filing states that Adjusted EBITDA is a non-GAAP measure and may not be comparable with similarly titled measures used by other companies.

North America revenue was $4.495 billion and Adjusted EBITDA was $442 million, up 6% and 66%, respectively. Rental days increased 6%, while time-and-mileage revenue per day declined 2%.
International revenue was $1.028 billion and Adjusted EBITDA was $127 million. Revenue increased 85%, primarily because of the Avis Europe acquisition; the acquisition had no effect on 2011 International Adjusted EBITDA.
Truck Rental revenue was $376 million and Adjusted EBITDA was $49 million, up 2% and 44%, respectively. Rental days increased 7%, while revenue per day declined 3%.
Ancillary revenue increased 20%. Vehicle depreciation and lease charges declined to $1.223 billion from $1.287 billion, benefiting from lower per-unit fleet costs and gains on vehicle sales.
Operating cash flow remained strong but declined year over year. Investing cash flow was $(2.373) billion, including $(841) million for acquired net assets and $(1.474) billion related to vehicle programs.
Non-vehicle capital expenditures were $65 million in 2011; management expected approximately $125 million in 2012.

Material changes versus the prior comparable period

Revenue growth reflected higher rental volumes, a 20% increase in ancillary revenue, favorable foreign-currency translation of $78 million, and approximately half of the total revenue increase from Avis Europe in the fourth quarter.
Total expenses rose 15% to $5.864 billion. Selling, general and administrative expense increased 33% to $756 million, partly because of Avis Europe, increased advertising and marketing, higher commissions, and greater rental volumes.
Transaction-related costs increased to $255 million from $14 million. These included a $117 million non-cash charge for reacquired unfavorable license rights, $49 million of foreign-currency losses related to the acquisition purchase price, and $89 million of advisory, due-diligence and other costs.
The effective tax rate was approximately 181% because many Avis Europe transaction costs were nondeductible, compared with 25% in 2010.
Average fleet size increased approximately 15%, while average fleet utilization was 69%, slightly below 2010. Approximately 47% of the rental car fleet was subject to manufacturer repurchase or guaranteed-depreciation programs.
Fourth-quarter 2011 revenue was $1.630 billion, compared with $1.226 billion in the fourth quarter of 2010, while fourth-quarter net loss was $(170) million versus $(24) million. Fourth-quarter 2011 included approximately $160 million of acquisition-related charges and $5 million of restructuring charges.

Debt, liquidity and financial condition

Corporate debt was approximately $3.205 billion and debt under vehicle programs was approximately $5.564 billion at December 31, 2011.
Available funding was approximately $4.6 billion, including $766 million under committed non-vehicle-backed facilities and approximately $3.8 billion under vehicle programs. The revolving credit facility had $757 million of available capacity, net of letters of credit.
Vehicle-program debt maturities were concentrated in 2012, with $2.184 billion due; corporate debt maturities included $1.064 billion due in 2014.
The company was in compliance with the financial covenants of its senior credit facilities and was not aware of non-compliance under vehicle-backed funding agreements at year-end.
Financial guarantors Ambac and Assured Guaranty supported approximately $900 million and $208 million, respectively, of U.S. term asset-backed financing. Certain guarantor insolvency events could accelerate repayment.
Total contractual obligations were approximately $18.423 billion, including $5.245 billion of vehicle purchase commitments, $5.564 billion of vehicle-program debt, $3.205 billion of corporate debt, and $1.777 billion of debt interest.

Guidance, outlook, commentary and risks

Management’s 2012 objective was profitable growth, stronger global positioning, continued process improvements, cost reduction, and integration of Avis Europe and its European and Asian operations. Planned initiatives included optimizing the two-brand strategy, increasing ancillary revenue, improving yield management and pricing, expanding Budget in Europe, and controlling costs through Performance Excellence programs.

Management cautioned that the strong 2011 used-car market and resulting vehicle-disposition gains were not expected to continue at the same level in 2012. The filing does not provide a formal numerical revenue, earnings or Adjusted EBITDA outlook.

Principal risks include intense price competition, reduced travel or airline demand, economic weakness, fuel-price increases, seasonal disruption, and changes in the used-vehicle market.
Fleet costs depend on vehicle purchase prices, residual values, manufacturer repurchase and guaranteed-depreciation programs, manufacturer credit quality, supply disruptions, and vehicle recalls.
Liquidity depends heavily on asset-backed financing, vehicle sale proceeds and continued access to credit markets. Refinancing, collateral, interest-rate and covenant risks are material.
Integration of Avis Europe could generate less savings than expected or require greater costs, management attention and workforce or systems changes.
Other risks include foreign-currency exposure, derivatives, insurance and uninsured claims, litigation, environmental obligations, privacy and cybersecurity, reliance on third-party distribution channels and licensees, and legacy indemnification obligations involving Realogy, Wyndham and Travelport.
Notable legal matters include the Alaska Rent-A-Car judgment of approximately $19 million including damages, interest and attorneys’ fees, an unresolved California airport-fee antitrust action, and wage-and-hour and employee-classification litigation.

Most important facts for investors to verify

Whether Avis Europe integration delivers the expected cost savings and synergies without further material charges.
The sustainability of 2011’s lower fleet costs and unusually strong used-vehicle sale gains.
Near-term refinancing requirements, especially $2.184 billion of vehicle-program debt due in 2012 and $1.064 billion of corporate debt due in 2014.
Available asset-backed capacity, collateral requirements, covenant compliance and exposure to Ambac and Assured Guaranty.
Whether travel demand, rental pricing, fleet utilization and ancillary revenue growth offset competitive and economic pressure.
The status and potential financial impact of disclosed litigation, tax contingencies, insurance reserves and legacy indemnification obligations.
The dilution implications of approximately $345 million of convertible notes, warrants and other equity awards.