Avis Budget Group, Inc. — 2010 Third-Quarter Form 10-Q
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2010, compared with the corresponding 2009 periods. Avis Budget operates Avis and Budget car-rental brands, Budget Truck Rental, and ancillary services across Domestic Car Rental, International Car Rental, and Truck Rental segments. Results are seasonal, with the third quarter typically the strongest due to leisure travel and household moving activity.
Financial performance and key metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Net revenues | $1,512 million | $1,465 million | $3,959 million | $3,971 million |
| Income before taxes | $144 million | $83 million | $106 million | $11 million |
| Net income | $90 million | $57 million | $78 million | $2 million |
| Diluted EPS | $0.73 | $0.54 | $0.66 | $0.02 |
| Adjusted EBITDA | $208 million | $146 million | $338 million | $197 million |
| Net margin | 6.0% | 3.9% | 2.0% | Less than 0.1% |
| Adjusted EBITDA margin | 13.8% | 10.0% | 8.5% | 5.0% |
Q3 revenue increased 3%, reflecting a 4% increase in domestic and international car-rental days, higher ancillary revenue, and a $16 million favorable foreign-exchange effect. T&M revenue per rental day declined 2%. Adjusted EBITDA increased 42%, supported by revenue growth, lower operating and fleet costs, and the absence of a $18 million 2009 litigation charge.
For the first nine months, revenue was essentially flat as a 4% decline in car-rental days and a 3% decrease in T&M revenue were offset by higher ancillary revenue and favorable currency translation. Cost reductions, including an 8% decline in car per-unit fleet costs and lower operating expenses, drove the substantial improvement in profitability.
- Segment performance, Q3: Domestic Car Rental revenue rose 2% and Adjusted EBITDA rose 34% to $137 million; International Car Rental revenue rose 10% and Adjusted EBITDA rose 11% to $62 million; Truck Rental revenue rose 5% and Adjusted EBITDA rose 46% to $19 million.
- Segment performance, 9M: Domestic revenue declined 4% while Adjusted EBITDA increased 60% to $205 million; International revenue increased 15% and Adjusted EBITDA increased 33% to $124 million; Truck Rental revenue increased 3% and Adjusted EBITDA increased 150% to $30 million.
- Cash flow: Nine-month operating cash flow was $1.338 billion versus $1.250 billion in 2009. Investing activities used $2.016 billion, primarily because vehicle purchases exceeded vehicle disposition proceeds. Financing activities provided $813 million, largely through vehicle-program borrowings. Cash increased to $623 million from $482 million at year-end 2009.
- Liquidity: At September 30, the Company reported $728 million of available revolving-credit capacity and approximately $1.4 billion of available vehicle-program borrowing capacity.
- Debt: Total indebtedness was approximately $7.4 billion, consisting of approximately $2.1 billion of corporate debt and $5.3 billion of vehicle-program debt. Corporate long-term debt was $2.119 billion, unchanged from December 31, 2009, while vehicle-program debt increased to $5.277 billion from $4.374 billion because of seasonal fleet expansion.
- Balance sheet: Total assets were $10.701 billion and stockholders’ equity was $373 million, compared with $10.093 billion and $222 million, respectively, at year-end 2009.
Material changes versus the prior comparable period
- Profitability improved materially despite flat nine-month revenue, primarily through fleet-cost reductions, staffing and location rationalization, and other cost-saving initiatives.
- Vehicle depreciation and lease charges declined to $988 million for the nine months from $1.104 billion, while vehicle interest increased to $230 million from $215 million.
- The Company recorded a $40 million early-extinguishment charge in the first quarter related to repayment of corporate debt and termination of interest-rate swaps.
- In March 2010, the Company repaid $451 million of floating-rate term debt and issued $450 million of 9⅝% senior notes due 2018, primarily to refinance that debt.
- The IRS examination of 2003–2006 tax years was settled during the third quarter. Realogy and Wyndham funded $116 million of IRS payments and Wyndham reimbursed $86 million for tax attributes. Related tax liabilities and indemnification receivables were substantially reduced, and stockholders’ equity decreased by $16 million from a deferred-tax reallocation.
- The Company incurred $9 million of restructuring charges during the first nine months, terminated approximately 1,100 of approximately 1,200 targeted domestic employees, and had a remaining restructuring liability of $6 million at September 30. Approximately $2 million of additional charges were expected through December 31, 2010.
Guidance, outlook, commentary, risks, and unusual items
- Management indicated that domestic airline enplanements were below 2009 levels during the first nine months but were projected to improve in the fourth quarter. The filing does not provide formal revenue or earnings guidance.
- Capital expenditures were expected to approximate $60 million to $70 million for 2010.
- The Company had commitments to purchase approximately $4.7 billion of vehicles over the following twelve months, principally subject to manufacturer repurchase or guaranteed-depreciation arrangements.
- The proposed acquisition of Dollar Thrifty remained subject to antitrust clearance, financing, and other conditions. The Company expected the approximately $1.5 billion transaction to be funded with cash and debt, with potential stockholder dilution and increased leverage.
- In October 2010, after the reporting period, the Company issued $400 million of 8.25% senior notes due 2019, intended to fund the proposed Dollar Thrifty acquisition and/or repay corporate debt. It then repaid the $52 million term loan due 2012 and related swaps.
- Also after quarter-end, the vehicle-funding subsidiary expanded its asset-backed conduit capacity by $100 million to $2.05 billion and issued $700 million of asset-backed bonds to refinance maturing debt.
- Key risks include competition and pricing pressure, travel demand, used-vehicle values, manufacturer and financial-guarantor performance, access to vehicle-backed financing, substantial indebtedness and covenant compliance, foreign-exchange movements, litigation, economic weakness, and potential Dollar Thrifty acquisition and integration risks.
- At September 30, 2010, management reported compliance with the financial covenants of the senior credit facilities and no known noncompliance with vehicle-program covenants. Disclosure controls and procedures were deemed effective.
Important facts for investors to verify
- Reconcile the reported $1.338 billion operating cash flow with the substantial vehicle-fleet investment and related borrowing activity.
- Assess refinancing and liquidity requirements for approximately $2.4 billion of vehicle-backed debt due within one year.
- Evaluate sensitivity to used-vehicle prices, manufacturer repurchase obligations, fleet costs, interest rates, and financial-guarantor credit quality.
- Confirm the final status, financing, regulatory approvals, dilution, leverage impact, and integration risks of the proposed Dollar Thrifty acquisition.
- Review the October 2010 senior-note issuance, term-loan repayment, and asset-backed financing transactions as subsequent events affecting current liquidity and leverage.
- Consider the extent to which nine-month earnings improvement reflects recurring cost savings versus favorable tax settlements, foreign-exchange effects, and the absence of prior-year litigation charges.