Avis Budget Group, Inc. — Q2 2012 Form 10-Q Summary
Business context and reporting period
Avis Budget provides car and truck rentals and ancillary services worldwide through North America, International and Truck Rental segments. The filing covers the three and six months ended June 30, 2012; financial statements are unaudited. The International segment includes Avis Europe following its October 3, 2011 acquisition. The company operated a fleet of more than 500,000 vehicles and served approximately 175 countries through company-owned operations and licensees.
Key financial metrics
| Metric | Three months ended June 30, 2012 | Three months ended June 30, 2011 | Six months ended June 30, 2012 | Six months ended June 30, 2011 |
|---|---|---|---|---|
| Net revenues | $1,866 million | $1,412 million | $3,489 million | $2,646 million |
| Income before taxes | $129 million | $89 million | $102 million | $100 million |
| Net income | $79 million | $52 million | $56 million | $59 million |
| Diluted EPS | $0.66 | $0.42 | $0.47 | $0.49 |
| Adjusted EBITDA | $254 million | $191 million | $366 million | $274 million |
| Operating cash flow | Not separately provided | Not separately provided | $722 million | $702 million |
- Second-quarter operating expenses were 51.1% of revenue versus 51.3% in the prior-year quarter. Vehicle depreciation and lease costs were 17.9% of revenue versus 18.3%; vehicle interest costs were 4.3% versus 4.8%.
- For the six months, operating expenses were 52.9% of revenue versus 52.3%; vehicle depreciation and lease costs were 18.7% versus 20.8%; selling, general and administrative expenses were 13.0% versus 12.2%.
- Cash and cash equivalents were $454 million at June 30, 2012, down from $534 million at December 31, 2011.
- Total assets were $15.983 billion, including $11.272 billion of vehicles under vehicle programs. Stockholders’ equity was $478 million.
- Total indebtedness was approximately $11.3 billion, consisting of approximately $3.0 billion of corporate debt and $8.3 billion of vehicle-program debt.
- Available capacity included $409 million under the revolving credit facility and approximately $1.252 billion under vehicle-program arrangements. The company reported compliance with applicable financial and restrictive covenants.
Material changes versus the prior comparable period
- Second-quarter revenue increased 32%, primarily because Avis Europe was included for the first time in the comparable period. Excluding Avis Europe, revenue increased 3%.
- Second-quarter rental days increased 35% overall, including 6% growth in North America and 377% growth in International. North American T&M revenue per rental day declined 3%.
- North America second-quarter revenue rose 3% to $1.184 billion and Adjusted EBITDA rose 18% to $184 million, aided by higher rental volume and lower fleet costs.
- International second-quarter revenue increased 264% to $579 million and Adjusted EBITDA increased 195% to $59 million, primarily from Avis Europe. Avis Europe contributed $417 million of revenue and $34 million of Adjusted EBITDA, including restructuring costs.
- Six-month revenue increased 32%, with approximately 85% of the increase attributable to Avis Europe. Six-month net income declined $3 million because higher operating, interest, restructuring and debt-extinguishment costs substantially offset revenue and Adjusted EBITDA growth.
- Six-month Adjusted EBITDA increased 34% to $366 million. North America Adjusted EBITDA increased 32% to $277 million; International increased 53% to $81 million; Truck Rental Adjusted EBITDA remained $18 million.
- Corporate debt declined $194 million from year-end. The company issued a $500 million 2019 term loan and $125 million of additional 8.25% notes, while repaying or repurchasing approximately $848 million of existing corporate debt. Early extinguishment costs were $50 million for the six months.
- Vehicle-program debt increased $2.731 billion to $8.295 billion, primarily funding the seasonal fleet increase and the larger International fleet.
Cash flow, outlook, risks and unusual items
- Six-month operating cash flow was $722 million. Investing cash flow was negative $2.965 billion, principally reflecting $6.938 billion invested in vehicles, partly offset by $4.077 billion of vehicle-disposition proceeds. Financing cash flow was $2.162 billion, largely from vehicle-program borrowings.
- Management described the 2012 macroeconomic environment as uneven: North American volumes benefited from a modest recovery, while European rental revenue was constrained by recession and sociopolitical conditions. The third quarter is historically the strongest season, and Avis Europe’s Adjusted EBITDA is expected to be concentrated in the second and third quarters.
- The company expects approximately $30 million of additional restructuring costs through 2013 following the termination of approximately 200 employees and $19 million of restructuring charges in the first six months of 2012.
- Management reported no quantified earnings or revenue guidance in the filing text.
- Key risks include competition and pricing pressure, travel-demand volatility, used-vehicle residual values, vehicle supply and manufacturer obligations, financing-market access, substantial indebtedness, covenant compliance, interest rates, foreign exchange, gasoline prices, integration of Avis Europe, litigation, regulatory matters, information-system disruption and economic or geopolitical events.
- The company had commitments to purchase approximately $3.2 billion of vehicles over the next 12 months, primarily subject to manufacturer repurchase or guaranteed-depreciation arrangements, plus approximately $145 million of other purchase commitments through 2015.
- Litigation and governmental inquiries remain ongoing. The company believes accruals are adequate or matters are not currently material, but acknowledges that unfavorable outcomes could materially affect a reporting period.
- In July 2012, Avis Budget Rental Car Funding issued $690 million of asset-backed notes to refinance maturing vehicle debt and fund U.S. rental-car purchases.
Important facts for investors to verify
- Whether Avis Europe integration produces the expected synergies and whether the additional restructuring costs remain near the estimated $30 million.
- The sustainability of North American volume growth, pricing trends and used-vehicle residual values.
- Access to vehicle-backed financing and the refinancing of approximately $1.503 billion of vehicle-program debt due within one year.
- Compliance with corporate and vehicle-program debt covenants during seasonal fleet expansion and changing credit-market conditions.
- The effect of European economic weakness, currency movements, fuel prices and manufacturer repurchase or guaranteed-depreciation obligations.
- Potential cash exposure from litigation, legacy guarantees and indemnification arrangements involving former businesses.