AVIS BUDGET GROUP, INC. annual report, FY2019

Avis Budget Group, Inc. — Fiscal 2019 Form 10-K Summary

Business context and reporting period

Avis Budget Group provides vehicle rental, truck rental, car-sharing and related mobility services through Avis, Budget, Zipcar and other brands. The Company and its licensees operate in approximately 180 countries, with an average global rental fleet of approximately 660,000 vehicles and more than 41 million rental transactions in 2019. Reportable segments are Americas and International.

This filing covers the fiscal year ended December 31, 2019. The filing was signed and audited on February 20, 2020. Results are seasonal, with the third quarter historically the strongest period because of higher summer leisure travel.

Financial performance and key metrics

Metric	2019	2018	Change
Revenue	$9.172 billion	$9.124 billion	+1%
Net income	$302 million	$165 million	+83%
Adjusted EBITDA	$788 million	$781 million	+1%
Diluted EPS	$3.98	$2.06	+93%
Cash flow from operating activities	$2.586 billion	$2.609 billion	-$23 million
Cash used in investing activities	$2.752 billion	$3.426 billion	Improved by $674 million

Revenue growth was driven primarily by a 3% increase in rental volume, partly offset by a $165 million negative foreign-exchange effect. Operating expenses were $4.698 billion, vehicle depreciation and lease charges were $2.063 billion, selling, general and administrative expense was $1.237 billion, and vehicle interest was $344 million.

As a percentage of revenue, operating expenses increased to 51.2% from 50.8%, vehicle depreciation and lease charges declined to 22.5% from 23.9%, selling, general and administrative expense was broadly stable at 13.5% versus 13.4%, and vehicle interest increased to 3.8% from 3.4%. The filing does not present a consolidated GAAP operating margin, but income before taxes was $287 million and net income margin was approximately 3.3%.

Segment results

Segment	2019 Revenue	2019 Adjusted EBITDA	Year-over-year change
Americas	$6.352 billion	$652 million	Revenue +3%; EBITDA +17%
International	$2.820 billion	$203 million	Revenue -4%; EBITDA -29%
Corporate and Other	Not applicable	$(67) million	EBITDA declined by $3 million

Americas performance benefited from higher volume, lower per-unit fleet costs and higher utilization. International results were pressured by currency effects, lower revenue per day, higher public liability and property damage expense and higher per-unit fleet costs.

Balance sheet, debt and liquidity

Total assets were $23.126 billion, including $13.815 billion of assets under vehicle programs.
Corporate debt was approximately $3.435 billion; debt under vehicle programs was approximately $11.068 billion. Total indebtedness was approximately $14.5 billion.
Cash and cash equivalents were $686 million. Including program and restricted cash, total cash was $900 million at year-end.
Available capacity was approximately $719 million under committed corporate credit facilities and $2.893 billion under vehicle programs.
Stockholders’ equity increased to $656 million from $414 million.
Approximately $4.0 billion of debt was unhedged interest-rate-sensitive debt at year-end; seasonal peak unhedged interest-rate-sensitive debt was approximately $5.7 billion.
The Company was in compliance with the financial covenants governing its indebtedness as of December 31, 2019.

Contractual obligations totaled approximately $27.589 billion, including $11.117 billion of vehicle-program debt, $3.474 billion of corporate debt, $1.697 billion of debt interest, $3.403 billion of operating leases and $7.751 billion of vehicle purchase commitments. Approximately $10.783 billion of these obligations were scheduled for 2020.

Material changes versus the prior comparable period

Revenue increased 1%, while rental volume increased 3%; foreign exchange reduced reported revenue by $165 million.
Net income benefited from a $113 million one-time release of valuation allowances on certain foreign deferred tax assets. The 2019 effective tax rate was a 5% benefit versus a 38% provision in 2018.
Diluted EPS included an estimated $1.50 per-share benefit from the tax valuation allowance release and a $0.04 benefit from 2019 share repurchases.
Americas Adjusted EBITDA improved substantially, while International Adjusted EBITDA declined 29%.
Vehicle depreciation and lease charges declined $116 million, primarily due to lower Americas per-unit fleet costs and higher utilization.
Restructuring and related charges increased to $80 million from $22 million, including $55 million for the T19 efficiency and truck-rental initiative and $7 million for the exit from Brazil.
The Company adopted ASC 842, increasing reported assets and liabilities through recognition of operating lease right-of-use assets and liabilities. Operating lease right-of-use assets were $2.596 billion at year-end.
The Company issued $400 million of 5.75% senior notes due 2027 and used the proceeds to redeem $400 million of 5.5% notes due 2023. It also redeemed an additional $75 million of the 2023 notes.
The Company repurchased approximately 2.2 million shares for approximately $62 million. Approximately $189 million remained available under the repurchase authorization at year-end.

Guidance, outlook, management commentary and unusual items

The filing does not provide formal 2020 revenue or earnings guidance. Management’s strategy emphasizes ancillary revenue growth, technology and connected-fleet investments, mileage optimization, direct-to-consumer vehicle sales, cost controls, mobility partnerships and selective acquisitions or licensee reacquisitions.

The Company expected approximately $230 million of 2020 additions to non-vehicle property and equipment.
At year-end, management anticipated approximately $8 million of additional restructuring expense related to the Brazil exit.
The Company announced the departure of its prior CEO effective December 31, 2019; Joseph A. Ferraro became interim President and CEO while a permanent successor search continued.
The filing identifies the coronavirus outbreak in China at the beginning of 2020 as a potential risk to travel demand and results.
In January 2020, the Company adopted a short-term stockholder rights plan expiring in January 2021. Subsequent to year-end, the Company issued approximately $700 million of vehicle-backed notes and amended its floating-rate term loan to extend maturity to 2027 and increase borrowings to approximately $1.2 billion.
The Company completed the sale of its China equity-method investment for $64 million and recorded a $44 million gain.
Critical accounting judgments include residual values for risk vehicles, self-insurance reserves, goodwill and intangible-asset impairment, and deferred tax-asset realizability.

Principal risks and contingencies

Intense price and service competition from traditional rental companies, ride-hailing providers, car-sharing businesses, technology companies and other mobility providers.
Exposure to used-vehicle residual values, fleet costs, manufacturer repurchase or guaranteed-depreciation obligations, vehicle recalls and vehicle supply disruptions.
Dependence on travel demand, airline traffic, economic conditions, fuel prices and the seasonal third quarter.
Substantial leverage, refinancing requirements, variable interest rates, asset-backed financing availability, collateral requirements and restrictive debt covenants.
Foreign-exchange, political, regulatory, tax and economic risks across international operations.
Cybersecurity, data privacy, information-system availability and dependence on third-party distribution channels and vendors.
Self-insured liability, property damage, litigation, employment claims and regulatory investigations.
Potential loss of airport concessions, leases or other strategically important operating locations.
Legal proceedings were described as incidental to operations; reasonably possible aggregate exposure in excess of accrued amounts was estimated at up to approximately $30 million. A separate Georgia matter had an accrued liability of approximately $12 million net of recoverable insurance proceeds.

Investor verification checklist

Verify the sustainability of earnings excluding the $113 million tax valuation allowance benefit and the $44 million China-investment gain.
Reconcile Adjusted EBITDA to GAAP income and assess the effect of $80 million of restructuring charges and other excluded items.
Review the maturity and refinancing profile of approximately $14.5 billion of total debt, including vehicle-program obligations and variable-rate exposure.
Assess liquidity after funding approximately $7.7 billion of vehicle purchase commitments and meeting collateral requirements.
Monitor used-vehicle prices, fleet utilization, per-unit fleet costs and manufacturer repurchase or guaranteed-depreciation performance.
Evaluate the deterioration in International results and the effect of currency movements, pricing and liability costs.
Review the impact of ASC 842 and the Company’s approximately $2.6 billion of property operating lease right-of-use assets.
Follow the CEO succession process, activist-stockholder discussions and the January 2020 rights plan.
Assess the effect of coronavirus-related travel restrictions and other disruptions on rental volume, airport demand and fleet utilization.