Business Context and Reporting Period
Avis Budget Group, Inc. operates Avis, Budget and Zipcar vehicle rental and car-sharing brands, directly and through licensees in approximately 180 countries. Reportable segments are Americas and International. This unaudited Form 10-Q covers the three and nine months ended September 30, 2016, with comparisons to the corresponding 2015 periods.
The business is seasonal, with the third quarter typically the strongest due to leisure travel. The average rental fleet exceeded 580,000 vehicles.
Key Financial Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net revenue | $2.656 billion | $2.577 billion | $6.780 billion | $6.600 billion |
| Net income | $209 million | $184 million | $194 million | $318 million |
| Diluted EPS | $2.28 | $1.77 | $2.05 | $3.00 |
| Adjusted EBITDA | $469 million | $431 million | $717 million | $775 million |
| Operating cash flow | Not presented for the quarter | Not presented for the quarter | $2.101 billion | $2.038 billion |
Q3 net income margin was approximately 7.9%, compared with 7.1% in the prior-year quarter. Nine-month net income margin was approximately 2.9%, compared with 4.8% in 2015. Q3 Adjusted EBITDA margin was approximately 17.7%; nine-month Adjusted EBITDA margin was approximately 10.6%. Adjusted EBITDA is a company-defined non-GAAP measure and may not be comparable with similarly titled measures.
- Q3 rental days increased 2%, pricing increased 1%, and the rental fleet increased 2%. Nine-month rental days increased 4%, while pricing declined 2%.
- Q3 Americas revenue increased 3% and Adjusted EBITDA increased 10%. International revenue increased 4% and Adjusted EBITDA increased 7%.
- For the first nine months, Americas revenue increased 2% but Adjusted EBITDA declined 7%; International revenue increased 6% but Adjusted EBITDA declined 3%.
- Cash and cash equivalents were $985 million at September 30, 2016, versus $452 million at December 31, 2015.
- Total assets were $19.475 billion, including $11.724 billion of vehicles under vehicle programs. Stockholders’ equity was $474 million.
Debt, Liquidity and Cash Flow
- Total indebtedness was approximately $14 billion, consisting of approximately $4 billion of corporate debt and $10 billion of vehicle-program debt.
- Corporate debt totaled $3.866 billion before separating current maturities, compared with $3.461 billion at December 31, 2015. Vehicle-program debt totaled $10.100 billion, compared with $8.860 billion.
- The senior revolving credit facility had $893 million of available capacity after $907 million of letters of credit. Vehicle-program funding capacity was $3.246 billion.
- Nine-month cash flow included $2.101 billion provided by operations, $2.755 billion used in investing activities and $1.173 billion provided by financing activities, resulting in a $533 million increase in cash.
- Vehicle investing included $10.151 billion of vehicle purchases and $7.373 billion of vehicle-disposition proceeds.
- The company repurchased approximately 9.5 million shares for approximately $290 million during the first nine months. Approximately $150 million remained authorized for repurchases at September 30, 2016.
- The company reported compliance with its corporate and vehicle-program debt covenants at September 30, 2016.
Material Changes Versus the Prior Comparable Period
- Q3 revenue increased 3%, net income increased 14%, diluted EPS increased 29%, and Adjusted EBITDA increased 9%, reflecting higher rental volume, pricing in the Americas and efficiency initiatives.
- Nine-month revenue increased 3%, but net income declined 39% and Adjusted EBITDA declined 7%. Lower pricing, higher per-unit fleet costs, marketing and commission costs, and adverse currency effects offset volume growth.
- Nine-month vehicle depreciation and lease charges increased 6% and rose to 23.2% of revenue from 22.5%; selling, general and administrative expense increased 6%.
- The effective tax rate increased to 39.8% from 15.9%, primarily because 2015 included a $98 million benefit from resolution of a prior-year tax matter.
- Restructuring expense increased to $26 million from $10 million, while transaction-related costs declined to $13 million from $57 million.
- The company issued $350 million of 6.625% Senior Notes due 2024, redeemed $300 million of 2017 notes, and extended $825 million of term-loan borrowings to March 2022. It also issued €300 million of 4.125% Senior Notes due 2024; the proceeds were used in October 2016 primarily to redeem €275 million of 2021 notes.
Guidance, Outlook, Risks and Unusual Items
Management expected worldwide demand for vehicle rental and car-sharing services to increase during 2016 amid modest and uneven global economic growth. Management stated that fleet access was adequate and expected to remain so, and planned to pursue pricing increases in the remainder of 2016 and in 2017 to improve returns and profitability. The filing does not provide specific full-year revenue or earnings guidance.
- Management expanded efficiency and restructuring initiatives. Approximately 565 employees were notified of termination under the T15 program and approximately 125 under acquisition integration efforts; approximately $4 million of additional restructuring expense was expected in 2016.
- The company had agreements to purchase approximately $7.3 billion of vehicles over the following 12 months, largely subject to manufacturer repurchase and guaranteed-depreciation obligations.
- Key risks include intense competition and pricing pressure, travel demand, used-vehicle values, fleet costs and recalls, manufacturer creditworthiness, access to vehicle-backed and corporate financing, interest rates, currency and gasoline prices, economic and geopolitical disruption, cyber-security, information-system outages, litigation and regulatory matters.
- A French competition proceeding could result in a material loss, although the company could not predict the outcome or reasonably possible loss range. Other reasonably possible legal exposure was estimated at up to approximately $30 million above accrued amounts, excluding the French matter.
- The Canadian competition matter was settled in June 2016 for an immaterial amount and included adoption of a competition-law compliance program.
- Subsequent to quarter-end, the revolving credit facility maturity was extended to 2021 and €275 million of 2021 notes were redeemed.
Important Facts for Investors to Verify
- Whether pricing and per-unit fleet costs improve, particularly in the Americas and International segments.
- The sustainability of volume growth and the extent to which currency movements continue to affect revenue and Adjusted EBITDA.
- Used-vehicle resale values, manufacturer repurchase performance and the economics of the approximately $7.3 billion vehicle purchase commitments.
- Corporate and vehicle-program debt maturities, refinancing requirements, covenant compliance and available borrowing capacity.
- The effect of the higher effective tax rate relative to 2015, when a $98 million tax benefit materially increased earnings.
- The outcome and potential financial exposure of the French competition proceeding and other litigation.
- The impact of continued share repurchases on leverage, liquidity and per-share earnings.