Avis Budget Group, Inc. — 2018 Q3 Form 10-Q Summary
Business Context and Reporting Period
Unaudited results for the three and nine months ended September 30, 2018. Avis Budget provides vehicle rental and mobility services through Avis, Budget, Zipcar, Payless, Maggiore, FranceCars, Apex and other brands in approximately 180 countries. Reportable segments are Americas and International. The third quarter is seasonally the company’s strongest quarter due to increased leisure travel.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $2,778 million | $2,752 million | $7,074 million | $6,829 million |
| Income before taxes | $355 million | $364 million | $264 million | $210 million |
| Net income | $213 million | $245 million | $152 million | $141 million |
| Diluted EPS | $2.68 | $2.91 | $1.88 | $1.65 |
| Adjusted EBITDA | $476 million | $482 million | $639 million | $595 million |
| Net margin | 7.7% | 8.9% | 2.1% | 2.1% |
| Adjusted EBITDA margin | 17.1% | 17.5% | 9.0% | 8.7% |
Q3 revenue increased 1%, while rental volume rose 3%; revenue per day, excluding currency effects, declined 1%. Nine-month revenue increased 4%, driven by a 4% increase in rental volume and a $73 million currency benefit, partly offset by a 1% decline in revenue per day excluding currency effects.
- Q3 operating expense was $1,294 million, or 46.6% of revenue, versus 45.7% in the prior-year quarter.
- Q3 vehicle depreciation and lease charges declined to 21.2% of revenue from 22.4%, primarily because of lower Americas per-unit fleet costs.
- Q3 vehicle interest increased to 3.1% of revenue from 2.8%, reflecting higher interest rates.
- Americas nine-month Adjusted EBITDA rose 15% to $435 million; International nine-month Adjusted EBITDA declined 3% to $252 million.
- Cash provided by operating activities was $2,095 million for the nine months, compared with $2,041 million in 2017.
- Net cash used in investing activities was $3,677 million, including $10,079 million of vehicle purchases and $6,752 million of vehicle disposition proceeds.
- Cash and cash equivalents were $605 million at September 30, 2018; total cash, program cash and restricted cash was $768 million.
Debt, Liquidity and Balance Sheet
- Total debt was approximately $14.5 billion, comprising approximately $3.6 billion of corporate debt and $10.9 billion of vehicle-program debt.
- Corporate long-term debt was $3,538 million, compared with $3,573 million at December 31, 2017.
- Vehicle-program liabilities were $13,007 million, including $10,922 million of vehicle-program debt, compared with $11,191 million at year-end.
- Available capacity was approximately $716 million under the senior revolving credit facility and $1.9 billion under vehicle programs.
- The company reported compliance with applicable corporate and vehicle-program debt covenants.
- Vehicle assets increased to $12,163 million from $10,626 million at December 31, 2017, primarily reflecting seasonal fleet expansion.
- Stockholders’ equity declined to $521 million from $573 million, largely due to share repurchases and the cumulative effect of adopting the new revenue standard, partly offset by net income.
Material Changes Versus the Prior Comparable Period
- Nine-month net income increased 8% to $152 million and Adjusted EBITDA increased 7% to $639 million.
- Q3 net income declined 13% to $213 million despite higher revenue, primarily because of a $30 million additional tax expense related to the Tax Act transition tax, higher operating and SG&A costs, and currency effects.
- Americas profitability improved due to lower per-unit fleet costs. International profitability weakened because of lower revenue per day, higher per-unit fleet costs and increased maintenance, damage and marketing costs.
- Restructuring and other related charges declined to $14 million for the nine months from $52 million in 2017, while transaction-related costs increased to $18 million from $8 million.
- The company repurchased approximately 3.5 million shares for $129 million during the nine months. Approximately $222 million remained under the repurchase authorization at September 30, 2018.
- The company acquired Morini S.p.A. in Northern Italy and various European and North American licensees for aggregate disclosed consideration of approximately $71 million, excluding potential earn-outs where applicable.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal numerical full-year guidance in the filing. Management stated that worldwide rental demand had increased and U.S. used-vehicle values had strengthened, and expected those conditions to continue through the remainder of 2018. Countervailing pressures included rising interest rates, higher wages and benefits, competition, and other operating headwinds.
- The effective tax rate was 42.4% for the nine months, compared with 32.9% in 2017. The higher rate primarily reflected the revised Tax Act transition-tax estimate and international taxes. The company expected to finalize its Tax Act accounting in the fourth quarter of 2018.
- Adoption of Topic 606 reduced reported nine-month revenue by $9 million and net income by $4 million versus amounts that would have been reported without adoption. The adoption also reduced stockholders’ equity by approximately $44 million at September 30, 2018.
- The company was implementing lease accounting under Topic 842, effective January 1, 2019, and expected a material increase in reported assets and liabilities from recognizing operating lease right-of-use assets and liabilities.
- The company had approximately $5.0 billion of vehicle purchase commitments over the following 12 months, generally financed through vehicle-backed debt and vehicle disposition proceeds.
- The company accrued approximately $12 million for two Georgia personal-injury matters and estimated potential exposure from reasonably possible adverse legal outcomes of up to approximately $50 million above accrued amounts.
- Principal risks include competition and pricing, travel demand, used-vehicle values, manufacturer repurchase obligations, access to asset-backed and other financing, interest rates, foreign exchange, fuel costs, cyber and information-system disruptions, litigation, regulatory compliance and substantial indebtedness.
- In October 2018, after the reporting period, the company acquired Turiscar Group, issued €350 million of 4.75% senior notes due 2026 and redeemed $400 million of 5⅛% senior notes due 2022. Its vehicle-funding subsidiary also issued approximately $550 million of asset-backed notes.
Facts Investors Should Verify
- Whether rental volume growth and U.S. used-vehicle values offset lower revenue per day, higher labor costs and rising interest expense.
- The final fourth-quarter accounting for the Tax Act transition tax and any effect on the effective tax rate, deferred taxes and cash taxes.
- The impact of Topic 842 adoption on total assets, liabilities, leverage metrics and covenant calculations.
- The sustainability of Americas fleet-cost improvements and the causes of continued International Adjusted EBITDA pressure.
- Vehicle-program refinancing needs, available collateral capacity and the maturity profile of approximately $11.0 billion of vehicle-program debt.
- Execution of the $5.0 billion vehicle purchase commitments and the company’s ability to dispose of vehicles at expected values.
- Potential legal, manufacturer, financing and liquidity exposures beyond recorded amounts.