Avis Budget Group, Inc. — 2012 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2012. Avis Budget operates Avis and Budget vehicle-rental brands globally, plus Budget Truck Rental in the United States. The company and its licensees served approximately 175 countries, with an average fleet exceeding 496,000 vehicles and more than 29 million rental transactions during 2012.
Reportable segments were North America, International, and Truck Rental. The 2012 results include a full year of Avis Europe operations, acquired in October 2011, and the October 2012 acquisition of Apex Car Rentals, which was not material to consolidated results.
Key financial metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net revenues | $7,357 million | $5,900 million | +25% |
| Income before taxes | $300 million | $36 million | +$264 million |
| Net income | $290 million | $(29) million | +$319 million |
| Diluted EPS | $2.42 | $(0.28) | Improved |
| Adjusted EBITDA | $802 million | $605 million | +33% |
| Operating cash flow | $1,889 million | $1,578 million | +$311 million |
| Cash and cash equivalents | $606 million | $534 million | +$72 million |
| Corporate debt | $2,905 million | $3,205 million | $(300) million |
| Debt under vehicle programs | $6,806 million | $5,564 million | +$1,242 million |
| Stockholders’ equity | $757 million | $412 million | +$345 million |
Vehicle rental revenue was $5,297 million and other revenue was $2,060 million. Total expenses were $7,057 million, or approximately 96% of revenue. Operating expenses were 52.0% of revenue, vehicle depreciation and lease charges were 20.0%, selling, general and administrative costs were 12.6%, and vehicle interest costs were 4.0%.
Segment revenue and Adjusted EBITDA were $4,640 million and $556 million for North America, $2,342 million and $234 million for International, and $374 million and $33 million for Truck Rental. International revenue and EBITDA benefited substantially from the full-year inclusion of Avis Europe.
Material changes versus the prior comparable period
- Revenue increased $1.46 billion, with approximately 90% of the increase attributable to the Avis Europe acquisition and its inclusion for a full year.
- Total rental days increased 28%; North America rental days increased 5% and International rental days increased 161%. Excluding Avis Europe, consolidated revenue increased 3% and rental days increased 6%.
- Ancillary revenue increased 32%, including revenue from loss damage waivers, insurance, GPS rentals, gasoline, licensing, and other customer services.
- North America Adjusted EBITDA increased 26%, supported by higher volume, cost reductions, lower per-unit fleet costs, and lower borrowing costs. T&M revenue per rental day declined 2%.
- International Adjusted EBITDA increased 84%; excluding Avis Europe, International revenue increased 6% and Adjusted EBITDA increased 5%.
- Truck Rental revenue declined 1% and Adjusted EBITDA declined 33%, primarily because of lower rental days and higher vehicle maintenance costs.
- Transaction-related costs declined to $34 million from $255 million, while restructuring charges increased to $38 million from $5 million. The company also recorded $75 million of expense for early extinguishment of corporate debt.
- The income tax provision declined to $10 million from $65 million, principally due to the settlement of a $128 million unrecognized tax benefit related to pre-Separation taxes.
Cash flow, debt, liquidity, and capital structure
- Operating activities provided $1.89 billion; investing activities used $2.07 billion, including $1.88 billion of net vehicle-program investment; financing activities provided $250 million.
- Vehicle assets totaled $10.10 billion, including $9.27 billion of vehicles, and were largely financed through vehicle-backed debt and related funding programs.
- Total debt was approximately $9.7 billion, consisting of $2.9 billion of corporate debt and $6.8 billion of vehicle-program debt.
- Available liquidity included $606 million of cash, $875 million of committed non-vehicle borrowing capacity, and approximately $2.5 billion of available vehicle-program capacity. The company reported compliance with its senior credit facility covenants.
- Major contractual debt maturities included $395 million of corporate debt and $2.20 billion of vehicle-program debt due in 2014. Total contractual obligations were approximately $18.69 billion, including debt, interest, leases, vehicle purchase commitments, taxes, pensions, and other commitments.
- The company expects approximately $160 million of non-vehicle capital expenditures in 2013 and had commitments to purchase approximately $5.1 billion of vehicles over the following 12 months.
- No cash dividends were declared or paid in 2012 or 2011, and management did not anticipate paying dividends for the foreseeable future.
Guidance, outlook, risks, contingencies, and unusual items
Management’s 2013 priorities were profitable growth, global expansion, improved customer experience, and continued cost and process efficiencies. Planned initiatives included pricing and yield-management improvements, ancillary revenue growth, greater direct and prepaid bookings, small-business and international growth, fleet optimization, and further integration savings.
Management expected moderate North American economic growth and rental-volume growth, but anticipated higher fleet costs than in 2010 and 2011. Europe remained exposed to recession, high unemployment, weak travel demand, and political and economic volatility. The filing does not provide quantitative 2013 revenue or earnings guidance.
- In January 2013, the company announced an agreement to acquire Zipcar for approximately $500 million, expected to be funded through incremental corporate debt and available cash. Closing was subject to shareholder and customary approvals.
- The company expected approximately $12 million of additional Truck Rental restructuring expense and approximately $20 million of additional Avis Europe integration restructuring expense through 2013.
- In February 2013, the vehicle-funding subsidiary issued $750 million of asset-backed notes to refinance maturing vehicle debt and fund U.S. rental-car purchases.
- Key risks include intense pricing competition, changes in travel demand, fleet acquisition and residual-value risk, dependence on vehicle manufacturers’ repurchase programs, used-car market weakness, substantial leverage, refinancing and covenant risk, interest-rate and foreign-exchange volatility, fuel costs, seasonality, litigation, insurance claims, regulatory changes, cybersecurity, and reliance on third-party distribution channels and licensees.
- Legal matters included an approved settlement in the Shames airport-fee litigation subject to appeals, a $19 million Alaska licensee judgment under appeal, wage-and-hour and employee-classification litigation, and litigation related to the proposed Zipcar acquisition.
- Self-insurance liabilities for public liability and property damage totaled approximately $407 million at year-end. Defined benefit pension plans were underfunded by approximately $205 million.
Deloitte & Touche issued an unqualified audit opinion on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2012.
Most important facts for investors to verify
- Whether revenue and EBITDA growth excluding Avis Europe continued, particularly in North America and International operations.
- The sustainability of strong used-vehicle residual values and the effect of higher expected fleet costs on margins.
- Liquidity and refinancing capacity for the substantial 2014 vehicle-program maturities and other debt obligations.
- Compliance with leverage, coverage, collateral, and other debt covenants during seasonal borrowing peaks.
- The funding, closing, integration costs, synergies, and incremental leverage associated with the Zipcar acquisition.
- Whether Truck Rental restructuring improves utilization and reverses the segment’s 2012 EBITDA decline.
- The realization of deferred tax assets and the potential cash-tax effects if fleet downsizing reduces like-kind exchange benefits.
- Potential financial exposure from litigation, insurance claims, manufacturer obligations, former-subsidiary indemnifications, and other contingencies.