AVIS BUDGET GROUP, INC. quarterly report, Q2 FY2010

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

Business context and reporting period

The filing covers the quarter and six months ended June 30, 2010, compared with the corresponding 2009 periods. Avis Budget provides car and truck rentals and ancillary services through Domestic Car Rental, International Car Rental and Truck Rental segments. Operations are seasonal, with the third quarter historically the strongest period.

Key financial metrics

Metric	Three months ended June 30, 2010	Three months ended June 30, 2009	Six months ended June 30, 2010	Six months ended June 30, 2009
Net revenues	$1,294 million	$1,312 million	$2,446 million	$2,506 million
Income (loss) before taxes	$29 million	$(2) million	$(37) million	$(72) million
Net income (loss)	$26 million	$(6) million	$(12) million	$(55) million
Diluted EPS	$0.22	$(0.06)	$(0.12)	$(0.54)
Adjusted EBITDA	$93 million	$59 million	$130 million	$51 million

Second-quarter revenue declined 1%, while total expenses declined 4%. The resulting improvement in pre-tax income was primarily driven by lower vehicle depreciation, fleet costs and operating expenses.
Six-month revenue declined 2%, but Adjusted EBITDA increased substantially because of cost savings and lower fleet depreciation. Adjusted EBITDA is a non-GAAP measure defined by the company and may not be comparable with similarly titled measures.
Six-month operating cash flow was $660 million, compared with $688 million in 2009. Investing activities used $2.227 billion, primarily for vehicle purchases, while financing activities provided $1.548 billion.
Cash and cash equivalents were $458 million at June 30, 2010, compared with $482 million at December 31, 2009.
Capital expenditures excluding vehicle programs were $23 million through June 30; management expected full-year capital expenditures of approximately $70 million to $80 million.
Total indebtedness was approximately $8.1 billion, consisting of approximately $2.1 billion of corporate debt and $6.0 billion of vehicle-program debt. Stockholders’ equity was $225 million.
Available corporate revolving capacity was $739 million, net of letters of credit, and available vehicle-program capacity was approximately $821 million, including $800 million under the AESOP-related vehicle funding program. Management reported compliance with applicable senior credit facility and vehicle-program covenants.
Vehicle-program assets increased to $8.095 billion from $6.522 billion at year-end 2009, mainly reflecting seasonal fleet expansion. Vehicle-program liabilities increased to $7.410 billion from $5.838 billion.

Material changes versus the prior comparable period

Domestic Car Rental revenue fell 5% in the second quarter and 7% for the six-month period, primarily because of lower rental days. Domestic Adjusted EBITDA increased 41% in the quarter and 162% year to date because of lower fleet and operating costs.
International Car Rental revenue increased 16% in the quarter and 19% year to date, while Adjusted EBITDA increased 78% and 68%, respectively. Foreign exchange translation provided a substantial revenue benefit and largely offsetting expense impact.
Truck Rental revenue increased 3% in the quarter and 2% year to date. Adjusted EBITDA improved to $16 million in the quarter and $11 million year to date, compared with $9 million and a $1 million loss, respectively, in 2009.
Rental days declined 5% for domestic and international car rental operations in the second quarter and 9% for the first six months. Higher revenue per rental day and ancillary revenue partly offset lower volumes.
Vehicle depreciation and lease charges declined $54 million in the quarter and $111 million year to date, reflecting smaller fleets and lower per-unit fleet costs.
Corporate debt was refinanced in March 2010: the company repaid $451 million of floating-rate term debt, issued approximately $450 million of 9.625% senior notes due 2018, and amended maturities of the remaining term loan. The six-month results include a $40 million early extinguishment-of-debt charge, including associated interest-rate swap costs.
The company incurred $3 million of restructuring charges during the first six months, terminated approximately 700 employees, and expected approximately $9 million of additional restructuring costs through December 31, 2010.

Guidance, outlook, risks and unusual items

Management expected 2010 domestic enplanements to approximate 2009 levels and noted that sustained pricing increases remained difficult to achieve. Results remain sensitive to travel demand, seasonality, fleet costs and used-vehicle pricing.
On July 28, 2010, the company offered to acquire Dollar Thrifty Automotive Group for approximately $1.4 billion, consisting of cash and Avis Budget shares. The cash component was expected to be funded with available cash and committed financing. Completion was not assured and would require approvals.
The potential Dollar Thrifty transaction could increase leverage and borrowing costs, dilute existing shareholders, affect credit ratings, require regulatory or shareholder approvals, and create integration, litigation and execution risks.
The company had approximately $1.6 billion of vehicle purchase commitments over the following twelve months, subject primarily to manufacturer repurchase and guaranteed-depreciation arrangements.
The IRS audit of 2003–2006 tax years involved an accrued liability of $383 million plus interest. The company reached a settlement in principle in July 2010 and expected indemnification for most pre-Separation tax matters from Realogy and Wyndham, supported in part by a Realogy letter of credit. Final outcomes remained uncertain.
The company had recorded $12 million related to a petition for attorneys’ fees in the Credentials Litigation, for which Realogy and Wyndham had assumed responsibility. It also faced an Alaska licensee judgment totaling $19 million including interest and attorneys’ fees and had appealed.
Financial-guaranty firms insured portions of approximately $1.884 billion of domestic term asset-backed vehicle financing. Insolvency or default by guarantors could accelerate repayment requirements.
Other principal risks included competition, economic weakness, terrorism or natural disasters, fuel and vehicle-cost increases, foreign-exchange movements, financing-market disruption, covenant compliance, manufacturer creditworthiness, third-party distribution dependence, litigation and information-system disruptions.
Management stated that disclosure controls and procedures were effective and that no material changes had occurred in internal control over financial reporting.

Important facts for investors to verify

Reconcile reported net income with Adjusted EBITDA and assess whether the improvement is sustainable after excluding fleet-cost reductions, foreign-exchange effects and unusual debt-extinguishment items.
Monitor rental days, revenue per rental day, pricing, ancillary revenue and third-quarter seasonal demand.
Evaluate the company’s approximately $8.1 billion debt burden, vehicle-backed refinancing capacity, floating-rate exposure and covenant headroom.
Confirm the final IRS settlement, indemnification recoveries and the adequacy of recorded tax liabilities.
Track the Dollar Thrifty offer, financing terms, required approvals, potential dilution and integration or antitrust consequences.
Assess exposure to used-vehicle prices, manufacturer repurchase guarantees, vehicle purchase commitments and financial-guaranty counterparties.
Review the status and potential financial impact of the Alaska appeal, employment litigation and other legal proceedings.