Avis Budget Group, Inc. — 2015 Second-Quarter Form 10-Q Summary
Business context and reporting period
Avis Budget Group operates Avis, Budget and Zipcar vehicle-rental and car-sharing businesses, directly and through licensees, in approximately 175 countries. Reportable segments are Americas and International. This unaudited Form 10-Q covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net revenue | $2.173 billion | $2.194 billion | $4.023 billion | $4.056 billion |
| Adjusted EBITDA | $227 million | $213 million | $344 million | $330 million |
| Income before taxes | $82 million | $48 million | $66 million | $53 million |
| Net income | $143 million | $26 million | $134 million | $30 million |
| Diluted EPS | $1.34 | $0.24 | $1.25 | $0.28 |
| Operating cash flow | Not separately provided | Not separately provided | $1.027 billion | $1.011 billion |
- Q2 net margin was approximately 6.6%, compared with 1.2% in the prior-year quarter; six-month net margin was approximately 3.3%, compared with 0.7%.
- Adjusted EBITDA margin was approximately 10.4% in Q2 and 8.6% for the first six months, versus 9.7% and 8.1%, respectively, in the comparable periods.
- Cash and cash equivalents were $529 million at June 30, 2015, down from $624 million at December 31, 2014.
- Total debt was approximately $14.6 billion, consisting of $3.6 billion of corporate debt and $11.1 billion of vehicle-program debt. Available committed corporate capacity was approximately $754 million, and vehicle-program capacity was approximately $2.2 billion.
- Total assets were $20.399 billion and stockholders’ equity was $596 million at June 30, 2015.
Material changes versus the prior comparable period
- Reported revenue declined 1% in both Q2 and the first six months, primarily because foreign-currency movements reduced Q2 revenue by approximately $122 million and first-half revenue by approximately $206 million. On a constant-currency basis, first-half net revenue increased 4% to approximately $4.2 billion.
- Rental days increased 7% in Q2 and 6% year to date. The fleet increased approximately 6%, while reported vehicle depreciation and lease charges declined 4% in Q2 and 2% year to date.
- Adjusted EBITDA increased 7% in Q2 and 4% year to date. Americas revenue and Adjusted EBITDA rose 1% and 3%, respectively, in Q2; International revenue fell 5%, but Adjusted EBITDA rose 11%.
- Net income benefited from a $98 million income-tax benefit related to resolution of a prior-year tax matter. The six-month effective tax rate was a 103.0% benefit rate, compared with a 43.4% tax provision in 2014.
- Transaction-related costs increased to $18 million in Q2 and $49 million year to date, compared with $8 million and $16 million, respectively, in 2014. Restructuring expense was $3 million in Q2 and $4 million year to date.
- The Company issued $375 million of 5⅛% senior notes due 2025 and redeemed $223 million of 9¾% senior notes due 2020 for $243 million plus accrued interest. It also repurchased approximately 2.2 million shares for approximately $116 million during the first six months.
- Acquisitions included the Scandinavian licensees, the remaining 50% of the Brazilian licensee and Italy’s Maggiore Group. Cash consideration for Maggiore was approximately $160 million, net of acquired cash and short-term investments.
Cash flow, outlook, risks and unusual items
- First-half operating cash flow was $1.027 billion. Investing cash use was $3.717 billion, including $3.420 billion related to vehicle programs; financing provided $2.615 billion. Ending cash declined $95 million from the beginning of the year.
- Vehicle purchases totaled $7.939 billion and vehicle-disposition proceeds totaled $4.549 billion in the first half. The Company had commitments to purchase approximately $3.6 billion of vehicles over the following 12 months.
- Management expected worldwide vehicle-rental and car-sharing demand to increase in 2015 amid modest and uneven global growth. It expected adequate vehicle supply, intended to pursue pricing increases and emphasized fleet optimization, cost control, efficiency and liquidity.
- Third-quarter seasonality is historically favorable because of increased leisure travel, but results remain sensitive to travel demand, airline enplanements, pricing, fleet costs and used-vehicle values.
- Key risks include competition, economic and travel volatility, foreign-exchange movements, interest rates, gasoline prices, manufacturer recalls or supply disruptions, manufacturer repurchase obligations, access to asset-backed and corporate financing, debt covenants, information-system disruptions, litigation, regulatory matters and acquisitions.
- The French Competition Authority alleged competition-law violations involving the Company and European subsidiaries; potential losses could be material, but the outcome could not be predicted. Canadian authorities sought approximately $25 million in penalties plus customer reimbursements in a deceptive-marketing matter; potential losses also could be material.
- The Company recorded no significant covenant non-compliance and stated that it was in compliance with its debt covenants at June 30, 2015. In August 2015, the Board increased share-repurchase authorization by $250 million.
Important facts for investors to verify
- Separate the underlying operating improvement in Adjusted EBITDA from the unusually large $98 million tax benefit and other acquisition, debt-extinguishment and restructuring items.
- Assess the effect of currency translation, lower International pricing and higher rental volumes on sustainable revenue and margins.
- Monitor approximately $15 billion of debt, vehicle-backed funding capacity, refinancing requirements and compliance with leverage and other covenants.
- Evaluate used-vehicle prices, manufacturer repurchase and guaranteed-depreciation obligations, fleet utilization and the approximately $3.6 billion vehicle-purchase commitment.
- Review the integration, goodwill and preliminary purchase-price allocations associated with Maggiore, Brazil and the Scandinavian acquisitions.
- Follow the French and Canadian competition proceedings, other litigation and the timing of additional restructuring costs, including approximately $25 million expected for 2015 initiatives.