Business Context and Reporting Period
Avis Budget Group, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2023. The company provides vehicle rental, car-sharing and related mobility services through Avis, Budget, Zipcar and other brands in approximately 180 countries. Reportable segments are Americas and International. The average rental fleet was approximately 621,000 vehicles.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $2.557 billion | $2.432 billion | 5% |
| Income before taxes | $397 million | $695 million | (43%) |
| Net income attributable to Avis Budget Group | $312 million | $529 million | (41%) |
| Diluted EPS | $7.72 | $9.71 | (21%) |
| Adjusted EBITDA | $535 million | $810 million | (34%) |
| Net cash from operating activities | $819 million | $1.148 billion | (29%) |
Revenue increased primarily from a 6% increase in rental volume and a 1% increase in revenue per day, excluding currency effects. Currency movements reduced revenue by approximately $37 million.
Reported net income margin declined to approximately 12.2% from 21.7%. Adjusted EBITDA margin declined to approximately 20.9% from 33.3%. Operating expenses increased to 51.1% of revenue from 47.2%; vehicle depreciation and lease charges increased to 10.3% from 4.5%; and vehicle interest increased to 5.2% from 3.2%.
Cash and cash equivalents were $548 million at March 31, 2023, compared with $570 million at December 31, 2022. Total cash, program cash and restricted cash was $629 million. The company reported approximately $1.4 billion of available liquidity, consisting of $548 million of cash and approximately $877 million available under its corporate revolving credit facility.
Total indebtedness was approximately $19.5 billion, including $4.7 billion of corporate debt and $14.8 billion of debt under vehicle programs. Total assets under vehicle programs were $18.877 billion, including $17.434 billion of vehicles. Stockholders’ equity was negative $441 million.
Material Changes Versus the Prior Comparable Period
- Americas revenue increased 1%, but Adjusted EBITDA declined 36% to $516 million, primarily because of higher per-unit fleet costs, inflation and higher vehicle interest expense.
- International revenue increased 25% to $541 million and Adjusted EBITDA increased 117% to $50 million, reflecting higher volume and revenue per day as travel activity returned, partly offset by currency effects.
- Operating expenses increased 14% to $1.307 billion, selling, general and administrative expense increased 14% to $324 million, and vehicle interest expense increased 73% to $133 million.
- Vehicle depreciation and lease charges, net, increased to $265 million from $111 million, driven by increased fleet levels, higher depreciation rates and higher per-unit fleet costs.
- Operating cash flow declined by $329 million, while investing cash use increased by $513 million, principally because vehicle investment increased to $3.880 billion from $2.727 billion.
- Vehicle program financing provided $899 million of net cash, compared with $611 million in the prior-year quarter. Total cash, program cash and restricted cash decreased $13 million during the quarter.
- The company repurchased no shares under its stock repurchase program during the quarter. Approximately $1.7 billion of authorization remained available at March 31, 2023.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific full-year financial guidance. Management stated that its strategy remains focused on cost management, customer experience, resilience and stakeholder value. Management expects results to remain sensitive to interest rates, inflation, wages, commodity prices, used-vehicle values and travel demand.
- The company had approximately $9.3 billion of commitments to purchase vehicles over the next 12 months, an increase of approximately $2.6 billion from December 31, 2022. These purchases are expected to be financed principally through vehicle-backed debt and vehicle disposition proceeds.
- In January 2023, the vehicle-financing subsidiary issued $500 million and $350 million of asset-backed notes at weighted average interest rates of 5.36% and 5.31%. In April 2023, it issued an additional $450 million and $550 million at weighted average rates of 5.67% and 5.76%, and increased variable-funding capacity by $750 million.
- The company’s cost-optimization restructuring plan resulted in approximately 265 employee termination notices and approximately 225 terminations as of March 31, 2023. Approximately $2 million of additional restructuring expense is expected during 2023.
- The company recorded $8 million of related income from services provided to Avis Mobility Ventures and a $6 million loss on its equity investment in that former subsidiary during the quarter.
- Potential adverse legal outcomes were estimated at up to approximately $35 million in excess of accrued amounts, although management does not believe the matters should result in a material liability. The company is pursuing rehearing of a California tax matter involving historical assessments; former subsidiaries have assumed specified portions of the potential liability.
- Principal risks include competition, travel-demand volatility, inflation, interest rates, vehicle supply and pricing, used-vehicle values, manufacturer repurchase obligations, access to asset-backed financing, leverage and covenant compliance, foreign exchange, fuel prices, litigation, cybersecurity and regulatory changes.
- The company was in compliance with its corporate and vehicle-program debt covenants at March 31, 2023. Disclosure controls and procedures were deemed effective, and no material change in internal control over financial reporting was reported.
Important Facts for Investors to Verify
- Whether higher fleet costs, depreciation rates and interest expense continue to pressure Americas margins despite increased rental volume.
- The sustainability of International segment revenue and EBITDA improvement after adjusting for currency movements and seasonal travel patterns.
- Liquidity and refinancing capacity given approximately $19.5 billion of total debt, substantial vehicle purchase commitments and rising borrowing costs.
- Used-vehicle disposal values and the performance of manufacturer repurchase and guaranteed-depreciation programs.
- The effect of the April 2023 asset-backed financing transactions and the additional $750 million of vehicle-program funding capacity.
- Progress and remaining costs of the cost-optimization restructuring plan.
- Developments in the California tax proceeding, other litigation and the estimated unaccrued legal exposure.
- Whether the company resumes share repurchases while maintaining covenant compliance and sufficient liquidity.