Avis Budget Group, Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
Avis Budget Group 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. This filing covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods.
Results were heavily affected by COVID-19, travel restrictions, reduced airline traffic, lower rental demand and disruption in the used-vehicle market.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $760 million | $2.337 billion | $2.513 billion | $4.257 billion |
| Revenue change | (67%) | — | (41%) | — |
| Net income (loss) | $(481) million | $62 million | $(639) million | $(29) million |
| Diluted EPS | $(6.91) | $0.81 | $(8.96) | $(0.39) |
| Adjusted EBITDA | $(382) million | $175 million | $(469) million | $174 million |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $350 million | $965 million |
Reported net margin was approximately (63%) in Q2 2020 versus approximately 3% in Q2 2019, and approximately (25%) for the first six months versus approximately (1%) in the prior-year period. Adjusted EBITDA margin was approximately (50%) in Q2 2020 versus 7.5% in Q2 2019.
- Q2 revenue declined primarily from a 59% decrease in rental volume and a 20% decrease in revenue per day, excluding currency effects.
- Six-month revenue declined from a 35% decrease in volume and an 8% decrease in revenue per day, excluding currency effects.
- Q2 Americas revenue declined 65% and International revenue declined 73%. Six-month declines were 38% and 47%, respectively.
- Q2 COVID-19 charges were $73 million; six-month COVID-19 charges were $80 million. These included overflow parking, vehicle damage, excess minimum airport rent and sanitization costs.
- Restructuring and other related charges were $28 million in Q2 and $72 million for the six months, compared with $23 million and $44 million, respectively, in 2019.
Balance sheet, debt and liquidity
| Metric | June 30, 2020 | December 31, 2019 |
|---|---|---|
| Cash and cash equivalents | $1.258 billion | $686 million |
| Total cash, program cash and restricted cash | $1.339 billion | $900 million |
| Total assets | $21.690 billion | $23.126 billion |
| Corporate debt | Approximately $3.9 billion | Approximately $3.4 billion |
| Vehicle-program debt | Approximately $10.5 billion | Approximately $11.1 billion |
| Total indebtedness | Approximately $14.4 billion | Not clearly stated on the same basis |
| Stockholders’ equity | $(153) million | $656 million |
Six-month cash flow included $350 million from operations, $317 million from investing activities and $(224) million from financing activities, producing a $439 million increase in cash and cash equivalents, program cash and restricted cash. Vehicle purchases were $4.196 billion and vehicle-sale proceeds were $4.709 billion.
At June 30, 2020, the company reported approximately $1.3 billion of available cash and approximately $0.2 billion of available borrowing capacity under its revolving credit facility, or approximately $1.5 billion of total liquidity. The $1.8 billion revolving facility had $1.581 billion available after letters of credit.
The company entered into a credit agreement amendment providing relief from its quarterly-tested leverage covenant through June 30, 2021, subject to a liquidity covenant, additional reporting requirements, increased pricing and restrictions on revolving-facility borrowings. The company stated it was in compliance with its debt covenants at June 30, 2020.
Material changes versus the prior comparable period
- COVID-19 caused an unprecedented reduction in travel demand, rental volume and pricing. Management reported that Q2 revenue began approximately 80% below prior year and ended approximately 60% below prior year; rental volume ended approximately 50% below prior year.
- The fleet was reduced by more than 20% year over year by June 2020. Vehicles, net, declined to $10.810 billion from $12.177 billion at year-end 2019.
- Operating costs declined in absolute dollars but rose substantially as a percentage of revenue. Q2 operating expense was 81.9% of revenue versus 50.2% in 2019; vehicle depreciation and lease charges were 49.3% versus 23.2%.
- Corporate debt increased primarily through a $500 million 10.5% senior secured notes offering in May 2020 and an increase in the floating-rate term loan. The company also used additional term-loan proceeds to redeem $100 million of 2023 senior notes.
- Shareholders’ equity became negative, primarily because of the six-month comprehensive loss and share repurchases.
- The company repurchased approximately 5.0 million shares for $113 million during the first quarter; no plan repurchases were made during Q2. Approximately $76 million remained authorized at June 30, 2020.
- Vehicle purchase commitments declined by approximately $6.4 billion from year-end 2019 to approximately $1.4 billion over the following 12 months.
Guidance, outlook, commentary and risks
The filing does not provide formal quantitative revenue, earnings or EBITDA guidance. Management stated that reservations for the remainder of 2020 were significantly behind the prior year, that the third quarter is historically the most profitable quarter, and that the company could not forecast the pandemic’s duration or its financial and operating effects with reasonable certainty.
Management cited sequential improvement late in Q2 and expected to carry positive momentum into the remainder of 2020, but warned that a second wave of COVID-19 could reverse the recovery. Cost actions included eliminating non-essential capital and operating expenditures, workforce reductions and furloughs, compensation reductions, hiring and merit freezes, fleet reductions, vehicle-cancellation negotiations and alternative vehicle-distribution methods.
- Used-vehicle residual values could decline, producing losses on vehicle disposals, accelerated depreciation or additional collateral requirements under asset-backed financing.
- Further travel restrictions, weak airline traffic, economic deterioration or reduced consumer spending could prolong revenue and liquidity pressure.
- Further credit-rating downgrades could increase borrowing costs or restrict access to financing.
- The company depends on vehicle manufacturers to supply vehicles and honor repurchase or guaranteed-depreciation obligations.
- The company reported a fire at an overflow parking lot that resulted in approximately $50 million of vehicle carrying-value losses and an estimated loss of up to $10 million, treated as a COVID-19 charge.
- The company expects approximately $20 million of additional 2020 expense under its COVID-19-related optimization plan and approximately $7 million of additional Brazil restructuring expense.
- No goodwill or other intangible-asset impairment was recorded during the first six months, but further deterioration could result in a material future impairment charge.
- Potential exposure from reasonably possible adverse legal outcomes was estimated at up to approximately $35 million above accrued amounts; the company also recognized approximately $12 million related to certain Georgia litigation.
Most important facts for investors to verify
- Whether rental volumes, revenue per day and reservations recover sufficiently to support positive EBITDA during the historically important third quarter.
- Whether the company can maintain approximately $1.5 billion of stated liquidity while servicing approximately $14.4 billion of debt.
- Compliance with the new liquidity covenant and the leverage covenant when covenant relief expires on June 30, 2021.
- Used-vehicle prices, residual values, fleet-disposal volumes and collateral requirements under vehicle-backed financing.
- Future credit-rating actions, refinancing availability and the cost of corporate and vehicle-program debt.
- Progress and cash costs of fleet reductions, workforce actions, restructuring plans and other cost-saving initiatives.
- Potential goodwill, trademark, vehicle and other asset impairments if travel demand or economic conditions deteriorate.
- The filing’s non-GAAP Adjusted EBITDA definition, which excludes COVID-19 charges and may not be comparable with similarly titled measures used by other companies.