Avis Budget Group, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the period ended September 30, 2015. Avis Budget operates Avis, Budget and Zipcar vehicle-rental and car-sharing businesses, directly and through licensees, in approximately 175 countries. Reportable segments are Americas and International. The third quarter is historically the company’s strongest season because of increased leisure travel.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net revenues | $2.577 billion | $2.542 billion | $6.600 billion | $6.598 billion |
| Income before taxes | $312 million | $306 million | $378 million | $359 million |
| Net income | $184 million | $192 million | $318 million | $222 million |
| Diluted EPS | $1.77 | $1.74 | $3.00 | $2.00 |
| Adjusted EBITDA | $431 million | $417 million | $775 million | $747 million |
| Net income margin | 7.1% | 7.6% | 4.8% | 3.4% |
| Adjusted EBITDA margin | 16.7% | 16.4% | 11.7% | 11.3% |
Q3 revenue increased 1%, while net income decreased 4%. Year-to-date revenue was essentially flat, but net income increased 43%, primarily reflecting a $98 million income-tax benefit from resolving a prior-year tax matter. Adjusted EBITDA increased 3% in Q3 and 4% year to date; management reported 6% constant-currency revenue growth and 9% constant-currency Adjusted EBITDA growth year to date.
- Q3 rental days increased 10% overall, or 6% excluding Maggiore; the fleet increased 7%, or 4% excluding Maggiore.
- Year-to-date rental days increased 7%, or 5% excluding Maggiore.
- Q3 vehicle depreciation and lease charges declined 5% to $555 million, helped by a 6% constant-currency reduction in per-unit fleet costs.
- Year-to-date cash flow from operating activities was $2.038 billion, compared with $2.067 billion in 2014.
- Year-to-date investing cash flow was $(3.417) billion, including $(3.077) billion for vehicle programs and $(225) million for acquisitions.
- Year-to-date financing cash flow was $1.369 billion. Cash and cash equivalents declined to $585 million from $624 million at December 31, 2014.
Segments and material changes
| Segment | Q3 2015 revenue | Q3 2015 Adjusted EBITDA | 9M 2015 revenue | 9M 2015 Adjusted EBITDA |
|---|---|---|---|---|
| Americas | $1.776 billion | $279 million | $4.707 billion | $572 million |
| International | $801 million | $168 million | $1.893 billion | $245 million |
- Americas Q3 revenue and Adjusted EBITDA increased 2% and 1%, respectively. Year-to-date revenue and Adjusted EBITDA increased 2% each.
- International Q3 revenue was flat while Adjusted EBITDA increased 6%. Year-to-date revenue decreased 5% because of currency translation and lower pricing, while Adjusted EBITDA increased 8% from higher volumes, acquisitions and lower fleet costs.
- Currency movements reduced Q3 revenue by approximately $161 million and year-to-date revenue by approximately $368 million; corresponding expense benefits partly offset the impact.
- The company acquired the Scandinavian licensees, the remaining 50% of its Brazilian licensee and Maggiore Group in 2015. Acquisition-related transaction costs were $57 million year to date versus $23 million in 2014.
- In March 2015, the company issued $375 million of 5⅛% Senior Notes due 2025. It used proceeds partly to redeem $223 million of 9¾% Senior Notes due 2020 and to fund the Maggiore acquisition.
- The company repurchased approximately 5.9 million shares for $277 million during the first nine months. Approximately $258 million remained under the repurchase authorization at September 30, 2015.
Debt, liquidity and financial condition
- Total indebtedness was approximately $14 billion, consisting of approximately $4 billion of corporate debt and approximately $10 billion of vehicle-program debt.
- Corporate debt totaled $3.532 billion, including $3.505 billion of long-term debt. Vehicle-program debt totaled $9.996 billion, up from $8.116 billion at December 31, 2014, primarily to fund fleet growth and acquisitions.
- Cash and cash equivalents were $585 million. Available capacity was approximately $1.075 billion under the senior revolving credit facility, approximately $3.008 billion under vehicle programs and approximately $6 million under other committed facilities.
- Vehicle-program assets totaled $12.786 billion, including $11.604 billion of vehicles. Vehicle-purchase commitments were approximately $7.4 billion over the following 12 months.
- The company stated that it was in compliance with corporate debt covenants and was not aware of noncompliance under vehicle-backed funding agreements.
Outlook, commentary, risks and unusual items
- Management expected worldwide demand for rental and car-sharing services to increase in 2015, despite modest and uneven global economic growth, and expected vehicle availability to remain adequate.
- Management planned to pursue pricing increases in the remainder of 2015 and in 2016 to improve returns on invested capital and profitability.
- Management expects approximately $15 million of additional acquisition-integration restructuring expense through 2016. No further expense was anticipated for the T15 restructuring phase.
- Year-to-date results benefited from the $98 million prior-year tax-matter resolution. They also included $23 million of early debt-extinguishment costs, $57 million of transaction-related costs and $10 million of restructuring expense.
- Material risks include competition and pricing pressure, travel demand, used-vehicle values, manufacturer repurchase and guaranteed-depreciation obligations, access to vehicle-backed and corporate financing, leverage and covenant compliance, foreign-exchange and interest-rate exposure, fuel costs, cybersecurity, litigation and regulatory matters.
- The French Competition Authority and Canadian Competition Bureau proceedings could result in material losses, although the company stated that outcomes and loss ranges could not currently be predicted. The Canadian proceeding seeks approximately $25 million of penalties plus customer reimbursements.
- The company announced a subsequent agreement to acquire its Avis licensee in Poland for approximately $25 million plus acquired-fleet costs, with closing expected in November 2015.
Investor verification checklist
- Verify the sustainability of earnings excluding the $98 million tax benefit and other acquisition, restructuring and debt-extinguishment items.
- Assess whether rental-volume growth and anticipated pricing increases can offset currency pressure, operating-cost inflation and competitive pricing.
- Review the company’s approximately $14 billion debt load, vehicle-program maturities, collateral requirements and covenant headroom.
- Evaluate the $7.4 billion vehicle-purchase commitment and the company’s exposure to used-vehicle prices and manufacturer repurchase obligations.
- Monitor the French and Canadian competition proceedings and any related penalties, reimbursements or settlements.
- Confirm post-quarter acquisitions, restructuring charges, share repurchases and changes in available liquidity.