Avis Budget Group, Inc. — Q3 2014 Form 10-Q Summary
Business context and reporting period
Avis Budget provides car and truck rentals, ancillary services and car sharing through the Avis, Budget and Zipcar brands. Operations are reported in North America, International and Truck Rental segments. The filing covers the three and nine months ended September 30, 2014; results are unaudited and the third quarter is seasonally the company’s strongest period.
Financial performance and key metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net revenue | $2.542 billion | $2.395 billion | $6.598 billion | $6.087 billion |
| Net income | $192 million | $118 million | $222 million | $44 million |
| Diluted EPS | $1.74 | $1.02 | $2.00 | $0.39 |
| Adjusted EBITDA | $417 million | $383 million | $747 million | $654 million |
| Net margin | 7.6% | 4.9% | 3.4% | 0.7% |
| Adjusted EBITDA margin | 16.4% | 16.0% | 11.3% | 10.7% |
Q3 revenue increased 6%, driven by 3% higher rental days, 2% higher pricing and 10% higher ancillary revenue. The nine-month revenue increase of 8% reflected 5% higher rental days, 1% higher pricing, incremental Zipcar revenue and 11% higher ancillary revenue.
For the nine months, operating cash flow was $2.067 billion versus $1.743 billion in the prior year. Investing cash use was $3.553 billion, including $9.835 billion of vehicle purchases and $6.535 billion of vehicle-sale proceeds. Financing provided $1.520 billion. Cash and cash equivalents ended at $713 million versus $693 million at December 31, 2013.
At September 30, 2014, corporate debt was $3.335 billion and vehicle-program debt was $9.500 billion, for approximately $12.8 billion of total indebtedness. The company had $866 million of available corporate revolving capacity, approximately $2.705 billion of available vehicle-program capacity and was in compliance with applicable debt covenants.
Material changes versus the prior comparable period
- Q3 net income rose 63% and nine-month net income increased by $178 million, benefiting from higher revenue and the absence of the $33 million prior-year impairment charge.
- Nine-month Adjusted EBITDA increased 14% to $747 million, led by North America, whose revenue increased 11% and Adjusted EBITDA increased 21%.
- International revenue increased 6% for the nine months and Adjusted EBITDA increased 4%; Truck Rental revenue and Adjusted EBITDA declined 3% and 6%, respectively.
- Operating expense ratios improved, but vehicle depreciation and lease charges increased to 23.2% of revenue for the nine months from 22.8%, reflecting higher per-unit fleet costs.
- The company issued approximately $275 million of additional euro-denominated notes and $400 million of 5.125% senior notes, using proceeds to redeem all $687 million of 8.25% senior notes.
- The vehicle fleet expanded, with vehicles under vehicle programs increasing to $11.484 billion from $9.582 billion at December 31, 2013, primarily due to seasonal fleet growth.
- The company repurchased approximately 4.0 million shares for $210 million during the nine months. Stockholders’ equity declined to $732 million from $771 million, primarily because of repurchases and currency translation losses.
Guidance, outlook, risks and unusual items
Management expected worldwide vehicle-rental and car-sharing demand to increase during 2014 despite slow global economic growth. Vehicle availability was considered adequate, and management planned to pursue additional pricing increases in the remainder of 2014 and 2015. No formal numerical earnings guidance is provided in the filing.
- Restructuring expense was $16 million for the nine months; approximately $5 million of additional expense was expected in 2014. Approximately 200 employees were notified of termination and approximately 165 had been terminated by September 30.
- Acquisitions during 2014 included the Edmonton Budget licensee, the Budget brand operating rights in Portugal and ACE Rent A Car operations. The company also recorded $7 million of transaction-related expense for contingent consideration associated with Apex.
- The company committed to purchase approximately $4.6 billion of vehicles over the following 12 months, primarily supported by manufacturer repurchase or guaranteed-depreciation arrangements.
- Key risks include industry competition and pricing pressure, travel demand, vehicle costs and recalls, used-vehicle values, manufacturer credit and repurchase obligations, financing-market access, substantial leverage, covenant compliance, foreign exchange, fuel prices, litigation, cybersecurity and integration of acquisitions including Zipcar.
- In October 2014, the convertible notes were exchanged for approximately 4.0 million common shares; the revolving credit facility was increased to $1.8 billion; the share-repurchase authorization was increased by $200 million; and the company agreed to acquire its Southern California and Las Vegas Budget licensee for approximately $210 million plus acquired fleet.
Most important facts for investors to verify
- Whether rental pricing and volumes can offset higher per-unit fleet costs, recalls and used-vehicle depreciation risk.
- The sustainability of cash flow after vehicle purchases, share repurchases, acquisitions and debt service.
- Vehicle-program funding capacity, collateral requirements and the $1.476 billion of vehicle-program debt maturing within one year.
- Progress and costs associated with restructuring, Zipcar and other acquisition integration, and realization of expected synergies.
- Compliance with leverage and other debt covenants, including the effect of seasonal fleet borrowing and future acquisitions.
- Execution and financing of the announced Southern California and Las Vegas Budget acquisition and the expanded share-repurchase authorization.