AVIS BUDGET GROUP, INC. annual report, FY2023

Avis Budget Group, Inc. — FY2023 Form 10-K Summary

Business context and reporting period

Avis Budget Group provides vehicle rental, car sharing, truck rental and related mobility services through Avis, Budget, Zipcar and other brands. The Company operates or licenses its brands in approximately 180 countries, with approximately 691,500 average rental vehicles, nearly 39 million rental transactions and approximately 10,250 locations in 2023. Reportable segments are Americas and International.

This Form 10-K covers the fiscal year ended December 31, 2023, with comparisons primarily to fiscal 2022. The filing was signed and audited on February 16, 2024.

Financial performance and key metrics

Metric	2023	2022	Change
Revenue	$12.008 billion	$11.994 billion	Flat
Income before taxes	$1.914 billion	$3.636 billion	Down 47%
Net income	$1.635 billion	$2.756 billion	Down 41%
Net income attributable to Avis Budget Group	$1.632 billion	$2.764 billion	Down 41%
Diluted EPS	$42.08	$57.16	Down 26%
Adjusted EBITDA	$2.490 billion	$4.133 billion	Down 40%
Cash flow from operating activities	$3.828 billion	$4.707 billion	Down $879 million

Calculated net margin was approximately 13.6% and Adjusted EBITDA margin approximately 20.7% in 2023. Revenue reflected a 5% increase in rental volume, offset by a 5% decrease in revenue per day excluding currency effects.

Americas revenue was $9.347 billion, down 1%, while Adjusted EBITDA declined 40% to $2.196 billion.
International revenue was $2.661 billion, up 6%, while Adjusted EBITDA declined 29% to $400 million.
Operating expenses increased 7% to $5.675 billion, or 47.3% of revenue versus 44.1% in 2022.
Vehicle depreciation and lease charges more than doubled to $1.739 billion, primarily due to higher fleet levels, increased depreciation rates and lower gains on vehicle sales.
Vehicle interest expense increased 83% to $736 million, or 6.1% of revenue, reflecting higher interest rates and additional vehicle funding.
The effective income tax rate declined to 14.6% from 24.2%, partly due to tax credits and other tax-related items.

Cash flow, debt and liquidity

Cash used in investing activities was $7.346 billion, including $15.185 billion of vehicle purchases and $8.403 billion of proceeds from vehicle dispositions.
Cash provided by financing activities was $3.506 billion, driven primarily by net borrowings under vehicle programs.
Cash and cash equivalents were $555 million at December 31, 2023; total cash, program cash and restricted cash was $644 million.
Total indebtedness was approximately $23.8 billion, consisting of approximately $4.8 billion of corporate debt and $18.9 billion of debt under vehicle programs.
The Company had approximately $261 million of available borrowing capacity under its $2.0 billion senior revolving credit facility. Management reported total available liquidity of approximately $816 million, including available cash.
The Company was in compliance with its financial debt covenants at year-end. Approximately $7.6 billion of debt was unhedged interest-rate-sensitive debt.
Corporate debt maturities include approximately $1.9 billion in 2027 and $2.0 billion thereafter. Vehicle-program debt maturities include approximately $4.1 billion in 2024 and $6.7 billion in 2025.

Material changes versus the prior comparable period

Rental volume recovered and increased, but lower revenue per day and significantly higher fleet, operating and financing costs sharply reduced profitability.
Vehicle-program assets increased to $22.979 billion from $17.428 billion, while related liabilities increased to $22.817 billion from $16.971 billion.
Vehicle depreciation expense increased to $2.228 billion from $1.709 billion, while the net gain on vehicle sales declined to $656 million from $1.019 billion.
The Company issued €400 million of 7.250% senior notes due 2030 and $500 million of 8.000% senior notes due 2031. Proceeds were used to refinance existing debt and repay part of the 2029 term loan.
The Company paid a $10.00 per share special dividend totaling approximately $355 million and repurchased approximately 4.3 million shares for approximately $889 million, excluding certain excise taxes.
Stockholders’ equity remained negative at $(343) million, improving from $(700) million, largely due to comprehensive income, but partly offset by repurchases and the special dividend.
During 2023, the Company acquired two North American licensees and McNicoll Vehicle Hire in Scotland for aggregate disclosed consideration of approximately $41 million, excluding acquired fleet costs.

Guidance, outlook, risks and unusual items

Management did not provide specific quantitative 2024 revenue or earnings guidance in the filing. For 2024, its stated strategy is to emphasize customer experience, technology and infrastructure investment, operational excellence and long-term cost reduction. Non-vehicle property and equipment additions are expected to be approximately $285 million in 2024.

Key operating risks include intense price competition, changes in travel demand, inflation, fuel and labor costs, and macroeconomic weakness.
Approximately 90% of the average rental fleet consisted of risk vehicles in 2023, exposing the Company to used-vehicle pricing and residual-value risk. The filing notes that used-vehicle prices could decline in 2024.
The Company has commitments to purchase approximately $6.8 billion of vehicles over the next 12 months, primarily financed through vehicle-backed debt and vehicle-sale proceeds.
Higher interest rates are a material risk given the Company’s substantial variable-rate and vehicle-backed borrowings. Refinancing needs are significant because much of the debt matures within five years.
Other material risks include manufacturer recalls or supply disruptions, manufacturer failure to honor repurchase guarantees, cybersecurity and privacy incidents, litigation, insurance claims, regulatory and tax changes, foreign currency movements, and military conflicts affecting travel and costs.
The Company is defending class actions and other litigation. Management estimates potential exposure from reasonably possible adverse outcomes of current legal proceedings could aggregate up to approximately $40 million above amounts accrued.
A California tax matter involving a 1999 transaction remains subject to rehearing, with former subsidiaries assuming stated portions of potential liability.
No goodwill or intangible-asset impairment was recorded in 2023. The EMEA reporting unit’s estimated fair value exceeded carrying value by approximately 14% at the October 1, 2023 testing date, making it sensitive to weaker results or higher discount rates.
The Company’s independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Critical audit matters involved U.S. risk-vehicle residual values and U.S. self-insurance reserves.

Investor verification checklist

Verify the sustainability of rental volume and revenue per day, particularly in the Americas.
Assess used-vehicle residual values, fleet depreciation rates, vehicle-sale gains and the proportion of risk versus program vehicles.
Review debt maturities, refinancing capacity, variable-rate exposure, asset-backed borrowing collateral requirements and covenant headroom.
Reconcile reported liquidity of approximately $816 million with restricted program cash and vehicle-program financing needs.
Evaluate whether the 2023 tax rate benefited from non-recurring credits or other items and whether those benefits are repeatable.
Monitor the $6.8 billion vehicle purchase commitment and the Company’s ability to fund fleet growth while maintaining liquidity.
Review pending litigation, self-insurance reserves, manufacturer obligations and the California tax matter for potential cash impacts.
Consider the implications of negative stockholders’ equity, share repurchases and the special dividend for capital allocation and financial flexibility.