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CAR > SEC Filings for CAR > Form 10-K on 21-Feb-2014All Recent SEC Filings

Show all filings for AVIS BUDGET GROUP, INC.

Form 10-K for AVIS BUDGET GROUP, INC.


21-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our Consolidated Financial Statements and accompanying Notes thereto included elsewhere herein. Unless otherwise noted, all dollar amounts in tables are in millions and those relating to our results of operations are presented before taxes.
OVERVIEW

OUR COMPANY
We operate three of the most recognized brands in the global vehicle rental and car sharing industry, Avis, Budget and Zipcar. We are a leading vehicle rental operator in North America, Europe, Australia, New Zealand and certain other regions we serve, with a fleet of more than 500,000 vehicles. We also license the use of the Avis and Budget trademarks to licensees in the areas in which we do not operate directly. We and our licensees operate the Avis, Budget and/or Zipcar brands in approximately 175 countries throughout the world.
OUR SEGMENTS
We categorize our operations into three reportable business segments: North America, International, and Truck Rental, as discussed in Part I of this Form 10-K.
BUSINESS AND TRENDS
Our revenues are derived principally from car and truck rentals in our Company-owned operations and include:
time and mileage ("T&M") fees charged to our customers for vehicle rentals;

payments from our customers with respect to certain operating expenses we incur, including gasoline and vehicle licensing fees, as well as concession fees, which we pay in exchange for the right to operate at airports and other locations;

sales of loss damage waivers and insurance and rentals of navigation units and other items in conjunction with vehicle rentals; and

royalty revenue from our licensees in conjunction with their vehicle rental transactions.

Our operating results are subject to variability due to seasonality, macroeconomic conditions and other factors. Car rental volumes tend to be associated with the travel industry, particularly airline passenger volumes, or enplanements, which in turn tend to reflect general economic conditions. Our vehicle rental operations are also seasonal, with the third quarter of the year historically having been our strongest due to the increased level of leisure travel during such quarter. We have a partially variable cost structure and routinely adjust the size, and therefore the cost, of our rental fleet in response to fluctuations in demand.

We believe that the following factors, among others, may affect and/or impact our financial condition and results of operations:
worldwide enplanements;

fleet, pricing, marketing and strategic decisions made by us and by our competitors;

changes in fleet costs and in conditions in the used vehicle marketplace;

changes in borrowing costs and in market willingness to purchase corporate and vehicle-related debt;

our acquisitions, our integration of acquired operations and our realization of synergies, particularly with respect to Zipcar and Avis Europe;

demand for car sharing services;

changes in the price of gasoline;

changes in currency exchange rates; and


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demand for truck rentals.

We continue to operate in an uncertain economic environment, which impacted our business in 2013 and will continue to do so. Nonetheless, we anticipate that worldwide demand for vehicle rental and car sharing services will increase in 2014, most likely against a backdrop of modest economic growth in most of the geographic markets in which we operate directly. We also expect that our access to new fleet vehicles will be adequate to meet our needs for both replacement of existing vehicles in the normal course and for growth to meet incremental demand. We experienced declines in realized pricing from 2009 to 2012, and we took actions in 2013 that helped achieve a modest increase in realized pricing. We will look to pursue opportunities for further pricing increases in 2014 in order to maintain our returns on invested capital and to enhance our profitability.

Our objective in 2014 is to focus on growing our business profitably, strengthening our position as a leading
global provider of vehicle rental services, continuing to enhance the quality of vehicle rental services that we
provide to customers, and maintaining and enhancing efficiencies achieved through process improvement and
other actions. We operate in a highly competitive industry and we expect to continue to face challenges and risks. We seek to mitigate our exposure to risks in numerous ways, including delivering upon the core strategic initiatives described above and through continued optimization of fleet levels to match changes in demand for vehicle rentals, maintenance of liquidity to fund our fleet and our operations, and adjustments in the size, nature and terms of our relationships with vehicle manufacturers.
2013 HIGHLIGHTS
In 2013, we achieved record transaction volumes and revenues and had the second-highest Adjusted EBITDA in our history:
Our net revenues increased 8% year-over-year to $7.9 billion in 2013, primarily due to a 3% increase in Avis and Budget rental days, as well as the acquisitions of Zipcar and Payless Car Rental ("Payless").

Pricing (our average T&M revenue per rental day) increased 1% in North America, excluding Zipcar and Payless, driven by a 3% increase in leisure pricing.

Adjusted EBITDA totaled $708 million in 2013, which represents a 12% decline from $802 million in 2012 primarily due to higher fleet costs in North America.

We completed the acquisition of Zipcar, the world's leading car sharing network, in March 2013.

We repurchased $62 million principal amount of our outstanding 3% Convertible Senior Notes due 2014 and $50 million of our common stock, reducing our diluted shares outstanding by approximately 5.4 million shares.

We completed the acquisition of Payless, the sixth largest car rental company in North America, in July 2013.

We acquired a 50% ownership stake in our Brazilian licensee for Avis and Budget in August 2013.

Our share price increased 104% to $40.42.

RESULTS OF OPERATIONS

We measure performance using the following key operating statistics: (i) rental days, which represents the total number of days (or portion thereof) a vehicle was rented, and (ii) T&M revenue per rental day, which represents the average daily revenue we earned from rental and mileage fees charged to our customers. We also measure our ancillary revenues (rental-transaction revenue other than T&M revenue), such as from the sale of collision and loss damage waivers, insurance products, fuel service options and portable GPS navigation unit rentals. Our vehicle rental operating statistics (rental days and T&M revenue per rental day) are all calculated based on the actual rental of the vehicle during a 24-hour period. We believe that this methodology, while conservative, provides our management with the most relevant statistics in order to manage the business. Our calculation may not be comparable to other companies' calculation of similarly-titled statistics.

We assess performance and allocate resources based upon the separate financial information of our operating segments. In identifying our reportable segments, we also consider the nature of services provided by our operating segments, the geographical areas in which our segments operate and other relevant factors. Management evaluates the operating results of each of our reportable segments based upon revenue and


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"Adjusted EBITDA", which we define as income from continuing operations before non-vehicle related depreciation and amortization, any impairment charge, early extinguishment of debt, non-vehicle related interest, transaction-related costs and income taxes. Our presentation of Adjusted EBITDA may not be comparable to similarly-titled measures used by other companies. Year Ended December 31, 2013 vs. Year Ended December 31, 2012

Our consolidated results of operations comprised the following:

                                                                      Year Ended
                                                                      December 31,
                                                                   2013         2012        Change       % Change
Revenues
   Vehicle rental                                               $  5,707     $  5,297     $    410            8 %
   Other                                                           2,230        2,060          170            8 %
Net revenues                                                       7,937        7,357          580            8 %

Expenses
   Operating                                                       4,074        3,824          250            7 %
   Vehicle depreciation and lease charges, net                     1,811        1,471          340           23 %
   Selling, general and administrative                             1,019          925           94           10 %
   Vehicle interest, net                                             264          297          (33 )        (11 %)
   Non-vehicle related depreciation and amortization                 152          125           27           22 %
   Interest expense related to corporate debt, net:
           Interest expense                                          228          268          (40 )        (15 %)
           Early extinguishment of debt                              147           75           72           96 %
   Restructuring expense                                              61           38           23           61 %
   Transaction-related costs                                          51           34           17           50 %
   Impairment                                                         33            -           33            *
Total expenses                                                     7,840        7,057          783           11 %

Income before income taxes                                            97          300         (203 )        (68 %)
Provision for income taxes                                            81           10           71            *

Net income                                                      $     16     $    290     $   (274 )        (94 %)


__________


* Not meaningful.

During 2013, our net revenues increased principally as a result of a 3% increase in total rental days (excluding acquisitions), $246 million of revenue from Zipcar and $44 million of revenue from Payless. Movements in currency exchange rates had virtually no effect on revenues in 2013 compared to 2012.

Total expenses increased as a result of higher vehicle depreciation and lease charges resulting from a 2% increase in our car rental fleet and a 17% increase in our per-unit fleet costs (excluding acquisitions); an increase in operating expenses as a result of the acquisition of Zipcar, increased volumes and inflationary pressures on costs; an increase in selling, general and administrative costs, driven by the acquisition of Zipcar and increased marketing commissions; and an increase in debt extinguishment costs in connection with the retirement of a portion of our outstanding corporate debt. Our expenses were not materially impacted by currency exchange rates. As a result of these items, and a $71 million increase in our provision for income taxes, our net income decreased $274 million. Our effective tax rates were a provision of 84% and 3% in 2013 and 2012, respectively, principally due to the non-deductibility of a portion of our debt extinguishment costs and the treatment of impairment costs in 2013 and the effective settlement of a $128 million unrecognized tax benefit in 2012.

In the year ended December 31, 2013:

Operating expenses decreased to 51.3% of revenue from 52.0% in the prior year, driven by cost-reduction efforts.


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Vehicle depreciation and lease charges increased to 22.8% of revenue from 20.0% in 2012, principally due to higher per-unit fleet costs amid an anticipated normalization of used-car residual values.

Selling, general and administrative costs increased to 12.8% of revenue from 12.6% in 2012.

Vehicle interest costs declined to 3.3% of revenue compared to 4.0% in the prior year, principally due to lower borrowing rates.

Following is a more detailed discussion of the results of each of our reportable segments:

                                                            Revenues                                Adjusted EBITDA
                                                2013           2012        % Change        2013         2012        % Change
North America                               $     5,083     $  4,640           10 %     $    500     $    556          (10 %)
International                                     2,481        2,342            6 %          240          234            3 %
Truck Rental                                        373          374            0 %           15           33          (55 %)
Corporate and Other (a)                               -            1            *            (47 )        (21 )          *
         Total Company                      $     7,937     $  7,357            8 %          708          802          (12 %)

Less:             Non-vehicle related depreciation and amortization                          152          125
                  Interest expense related to corporate debt, net:
                       Interest expense                                                      228          268
                       Early extinguishment of debt                                          147           75
                  Transaction-related costs (b)                                               51           34
                  Impairment (c)                                                              33            -

Income before income taxes $ 97 $ 300



* Not meaningful.

(a) Includes unallocated corporate overhead and the elimination of transactions between reportable segments.

(b) For 2013, primarily represents costs related to the integration of acquired businesses and our acquisition of Zipcar and, for 2012, primarily represents costs related to the integration of the operations of Avis Europe.

(c) We recorded a charge of $33 million for the impairment of our equity-method investment in our Brazilian licensee.

North America
                    2013       2012      % Change
Revenue           $ 5,083    $ 4,640       10 %
Adjusted EBITDA       500        556      (10 %)

Revenues increased 10% in 2013 compared with 2012, primarily due to the acquisitions of Zipcar and Payless and 3% growth in rental volumes and a 1% increase in pricing (excluding acquisitions).

Adjusted EBITDA decreased 10% in 2013 compared with 2012 due to higher fleet costs, partially offset by lower vehicle interest expense, as our borrowing rates declined year-over-year.

Zipcar and Payless contributed $246 million and $44 million to revenues and $25 million and an insignificant amount to Adjusted EBITDA, respectively, in 2013.

In the year ended December 31, 2013:

Operating expenses were 49.4% of revenue, a decrease from 50.4% in the prior year, primarily due to higher pricing and our continued cost-reduction efforts.

Vehicle depreciation and lease charges increased to 24.8% of revenue from 20.3% in 2012, due to 25% higher per-unit fleet costs, excluding acquisitions.

Selling, general and administrative costs decreased to 11.8% of revenue from 12.0% in the prior year.


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Vehicle interest costs declined to 4.0% of revenue compared to 5.3% in the prior year, principally due to lower borrowing rates.

International
                    2013       2012     % Change
Revenue           $ 2,481    $ 2,342       6 %
Adjusted EBITDA       240        234       3 %

Revenues increased 6% during 2013 compared with 2012, primarily due to a 4% increase in rental days and a 10% increase in ancillary revenues (excluding Apex Car Rentals ("Apex")), the October 2012 acquisition of Apex, and a $14 million increase related to currency exchange rates, partially offset by a 2% decrease in pricing (excluding Apex).

Adjusted EBITDA increased 3% in 2013 compared with 2012. Apex contributed $42 million to revenue and $9 million to Adjusted EBITDA in 2013, compared to $8 million of revenue and $2 million of Adjusted EBITDA in fourth quarter 2012.

In the year ended December 31, 2013:

Operating expenses, at 52.9% of revenue, remained level compared to the prior year.

Vehicle depreciation and lease costs decreased to 20.2% of revenue from 20.6% in the prior year, principally due to an increase in fleet utilization.

Selling, general and administrative costs increased to 13.9% of revenue from 13.3% in the prior-year, primarily due to increased marketing commissions.

Vehicle interest costs increased to 1.9% of revenue compared to 1.6% in the prior year, due to lower cash balances in 2013.

Truck Rental
                   2013     2012     % Change
Revenue           $ 373    $ 374        0 %
Adjusted EBITDA      15       33      (55 %)

Revenues decreased $1 million as the effects on volume of having an 8% smaller fleet were largely offset by a 7% increase in pricing.

Adjusted EBITDA decreased principally as a result of approximately $21 million of restructuring expenses we incurred in 2013 as we reposition this business.

Corporate and Other
                   2013     2012    % Change
Revenue           $  -     $  1            *
Adjusted EBITDA    (47 )    (21 )          *


__________


* Not meaningful

Revenue and Adjusted EBITDA decreased $1 million and $26 million, respectively, in 2013 compared with 2012. Adjusted EBITDA decreased in 2013 primarily due to greater selling, general and administrative expenses which are not attributable to a particular segment.


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Year Ended December 31, 2012 vs. Year Ended December 31, 2011

Our consolidated results of operations comprised the following:
                                                                      Year Ended
                                                                      December 31,
                                                                   2012         2011        Change        % Change
Revenues
   Vehicle rental                                               $  5,297     $  4,338     $     959           22 %
   Other                                                           2,060        1,562           498           32 %
Net revenues                                                       7,357        5,900         1,457           25 %

Expenses
   Operating                                                       3,824        3,025           799           26 %
   Vehicle depreciation and lease charges, net                     1,471        1,223           248           20 %
   Selling, general and administrative                               925          756           169           22 %
   Vehicle interest, net                                             297          286            11            4 %
   Non-vehicle related depreciation and amortization                 125           95            30           32 %
   Interest expense related to corporate debt, net:
           Interest expense                                          268          219            49           22 %
           Early extinguishment of debt                               75            -            75            *
   Restructuring expense                                              38            5            33            *
   Transaction-related costs                                          34          255          (221 )        (87 %)
Total expenses                                                     7,057        5,864         1,193           20 %

Income before income taxes                                           300           36           264            *
Provision for income taxes                                            10           65           (55 )        (85 %)

Net income (loss)                                               $    290     $    (29 )   $     319            *


__________


* Not meaningful.

During 2012, our net revenues increased principally due to the acquisition of Avis Europe in fourth quarter 2011 and 6% increases in total rental days and ancillary revenues (excluding Avis Europe). Movements in currency exchange rates had virtually no effect on revenues.

Total expenses increased as a result of including the results of Avis Europe for the full year; an increase in debt extinguishment costs in connection with the retirement of a portion of our outstanding corporate debt; and an increase in restructuring expenses. These increases were partially offset by a decrease in transaction-related costs, which for 2012 related primarily to the integration of the operations of Avis Europe and which for 2011 related to costs associated with the acquisition of Avis Europe and our previous efforts to acquire Dollar Thrifty. Our expenses were not materially impacted by currency exchange rates. As a result of these items, and a $55 million decrease in our provision for income taxes, our net income increased $319 million. Our effective tax rates were a provision of 3% and 181% for 2012 and 2011, respectively, which reflected the settlement of a $128 million unrecognized tax benefit in 2012 and the non-deductibility of many of the transaction-related costs related to the acquisition of Avis Europe in 2011.

In the year ended December 31, 2012:

Operating expenses were 52.0% of revenue, versus 51.3% in the prior year, primarily due to the acquisition of Avis Europe.

Vehicle depreciation and lease costs declined to 20.0% of revenue in 2012, from 20.7% in 2011, primarily due to lower per-unit fleet costs in North America amid robust used-car residual values in the first half of the year, partially offset by the acquisition of Avis Europe.

Selling, general and administrative costs decreased to 12.6% of revenue, versus 12.8% in 2011, as a result of our cost-reduction initiatives.


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Vehicle interest costs declined to 4.0% of revenue, compared to 4.8% in the prior-year period, principally due to lower borrowing rates.

Following is a more detailed discussion of the results of each of our reportable segments:

                                                             Revenues                                Adjusted EBITDA
                                                2012           2011        % Change         2012         2011        % Change
North America                               $     4,640     $  4,495            3 %      $    556     $    442           26 %
International                                     2,342        1,028          128 %           234          127           84 %
Truck Rental                                        374          376           (1 %)           33           49          (33 %)
Corporate and Other (a)                               1            1            *             (21 )        (13 )          *
         Total Company                      $     7,357     $  5,900           25 %           802          605           33 %

Less:             Non-vehicle related depreciation and amortization                           125           95
                  Interest expense related to corporate debt, net:
                       Interest expense                                                       268          219
                       Early extinguishment of debt                                            75            -
                  Transaction-related costs (b)                                                34          255

Income before income taxes $ 300 $ 36



* Not meaningful

(a) Includes unallocated corporate overhead and the elimination of transactions between segments.

(b) For 2012, primarily represents costs related to the integration of the operations of Avis Europe and, for 2011, primarily represents costs related to our acquisition of Avis Europe and our previous efforts to acquire Dollar Thrifty.

North America
                    2012       2011      % Change
Revenue           $ 4,640    $ 4,495         3 %
Adjusted EBITDA       556        442        26 %

Revenues increased 3% during 2012 compared with 2011, primarily due to a 5% increase in rental days, partially offset by a 2% decrease in pricing.

Adjusted EBITDA increased 26% during 2012 compared with 2011, primarily due to the increase in revenue and an 8% decline in per-unit fleet costs.

In the year ended December 31, 2012:

Operating expenses decreased to 50.4% of revenue versus 50.6% in the prior year, highlighting our cost-reduction efforts in an environment where our T&M revenue per day declined.

Vehicle depreciation and lease costs declined to 20.3% of revenue in 2012 from 21.5% in the prior year, primarily due to lower per-unit fleet costs amid strong used-car residual values during the first half of 2012.

Selling, general and administrative costs decreased to 12.0% of revenue, compared to 12.1% of revenue for 2011.

Vehicle interest expense decreased to 5.3% of revenue versus 5.9% in the prior year, principally due to lower borrowing rates.


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International
                    2012       2011     % Change
Revenue           $ 2,342    $ 1,028       128 %
Adjusted EBITDA       234        127        84 %

Revenues increased in 2012 compared with 2011, primarily due to the acquisition of Avis Europe during fourth quarter 2011 and a 7% increase in rental days (excluding Avis Europe).

Adjusted EBITDA increased 84% in 2012 compared with 2011, principally due to the acquisition of Avis Europe.

Avis Europe contributed approximately $1.6 billion to revenue and $103 million to Adjusted EBITDA during 2012, compared with $359 million of revenue and no effect on Adjusted EBITDA in fourth quarter 2011.

In the year ended December 31, 2012:

Operating expenses were 52.9% of revenue, an increase from 50.1% in the . . .

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