Avis Budget Group, Inc. — Q3 2019 Form 10-Q Summary
Business Context and Reporting Period
Avis Budget Group provides vehicle rental and mobility services under the Avis, Budget, Zipcar and regional brands. Operations are reported in the Americas and International segments, with brands and licensees operating in approximately 180 countries. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $2,753 million | $2,778 million | $7,010 million | $7,074 million |
| Net income | $189 million | $213 million | $160 million | $152 million |
| Diluted EPS | $2.50 | $2.68 | $2.10 | $1.88 |
| Adjusted EBITDA | $471 million | $476 million | $645 million | $639 million |
| Cash flow from operations | Not separately provided | Not separately provided | $1,931 million | $2,095 million |
Q3 net margin was approximately 6.9%, versus 7.7% in Q3 2018. Nine-month net margin was approximately 2.3%, versus 2.1% in the prior-year period. Q3 adjusted EBITDA margin was approximately 17.1%, versus 17.1%; nine-month adjusted EBITDA margin was approximately 9.2%, versus 9.0%.
- Q3 revenue declined 1%, principally due to a $44 million adverse currency impact and a 1% decline in revenue per day, partly offset by 2% higher volume.
- Q3 net income declined 11%, reflecting higher corporate interest expense, vehicle interest, restructuring charges and debt extinguishment costs.
- Nine-month revenue declined 1%, primarily due to a $146 million adverse currency impact and a 1% decline in revenue per day, partly offset by 2% higher volume.
- Nine-month adjusted EBITDA increased 1%; Americas adjusted EBITDA rose 17% to $508 million, while International adjusted EBITDA fell 26% to $187 million.
- Vehicle depreciation and lease charges declined 7% for the nine-month period, primarily due to lower Americas per-unit fleet costs. Vehicle interest expense increased 10% due mainly to higher interest rates.
Cash Flow, Debt and Liquidity
| Balance or cash-flow item | September 30, 2019 | December 31, 2018 |
|---|---|---|
| Cash and cash equivalents | $615 million | $615 million |
| Cash, program and restricted cash | $708 million | $735 million |
| Corporate debt | Approximately $3.5 billion | Not separately stated in the filing summary |
| Debt under vehicle programs | Approximately $11.6 billion | $10.2 billion |
| Total indebtedness | Approximately $15.1 billion | Not separately stated in the filing summary |
| Available corporate revolving capacity | $853 million | Not provided |
| Available vehicle-program capacity | Approximately $2.4 billion | Not provided |
- Nine-month operating cash flow was $1,931 million, down from $2,095 million. Net cash used in investing was $3,038 million, including $10,621 million of vehicle purchases and $7,826 million of vehicle-disposition proceeds.
- Cash, program and restricted cash decreased by $27 million during the nine months, ending at $708 million.
- The Company issued $400 million of 5.75% senior notes due 2027 and used proceeds to redeem $400 million of 5.5% senior notes due 2023. It also called and subsequently redeemed an additional $75 million of those 2023 notes in October 2019.
- Vehicle-program funding included approximately $600 million, $650 million and $650 million of asset-backed notes issued during the first nine months, at weighted-average interest rates of 3.56%, 3.44% and 2.45%, respectively.
- Management reported compliance with applicable corporate and vehicle-program debt covenants at September 30, 2019.
Material Changes Versus the Prior Comparable Period
- Revenue was lower year over year, but volume increased and lower Americas fleet costs supported improved nine-month adjusted EBITDA.
- International performance weakened, with nine-month revenue down 5% and adjusted EBITDA down 26%, driven by currency effects and lower revenue per day.
- Restructuring and other related charges increased to $66 million for the nine months from $14 million. Q3 included $22 million versus $4 million in the prior-year quarter.
- The Company recorded a $44 million gain from the sale of its 50% equity-method investment in Anji Car Rental & Leasing Company in China.
- The Company adopted the new lease standard, which added approximately $2.8 billion of property operating lease assets and $2.8 billion of related liabilities, plus approximately $183 million of vehicle operating lease assets and liabilities.
- Share repurchases totaled approximately $59 million for the nine months, reducing shares outstanding by approximately 2.1 million. Approximately $192 million remained available under the repurchase authorization at September 30, 2019.
- Stockholders’ equity increased to $495 million from $414 million at year-end 2018, primarily due to comprehensive income.
Guidance, Outlook, Risks and Unusual Items
Management stated that worldwide demand for mobility solutions had increased through the filing date and that U.S. used-vehicle values had stabilized. The Company expected the offsetting effects of higher interest rates and higher salaries, wages and benefits to continue for the remainder of 2019. The filing does not provide a clear numerical full-year revenue or earnings guidance figure.
- The Company initiated a plan to exit Brazil, recorded $6 million of related restructuring expense in Q3 and expected approximately $10 million of additional expense.
- The T19 efficiency and U.S. truck-rental restructuring plan resulted in $45 million of expense through September 30, 2019, with approximately $15 million of additional 2019 expense expected.
- Former International President Mark Servodidio resigned effective June 14, 2019. CEO Larry D. De Shon announced his resignation and was expected to remain employed through December 31, 2019; related charges totaled approximately $15 million through September 30, 2019, with approximately $2 million of additional expense expected in 2019.
- The Company committed to purchase approximately $8.0 billion of vehicles over the following 12 months, primarily financed through vehicle-backed debt and vehicle-sale proceeds.
- Vehicle leases included guaranteed residual values of up to $283 million; management had not recorded a liability because it expected sale proceeds to meet or exceed carrying values.
- Potential legal exposure from proceedings where a loss was reasonably possible was estimated at up to approximately $30 million above accrued amounts. A separate Georgia personal-injury matter had an accrued liability of approximately $12 million, net of expected insurance recoveries.
- Key risks include competition and pricing pressure, travel demand, used-vehicle values, vehicle-manufacturer obligations, interest rates, foreign currency, fuel prices, access to asset-backed and other financing, covenant compliance, cybersecurity, litigation, regulatory changes and economic disruption.
- The Company identified pricing pressure and increased competition in its EMEA reporting unit but concluded that no interim goodwill impairment test was required as of September 30, 2019. Further deterioration could result in a future impairment charge.
Most Important Facts for Investors to Verify
- Whether Americas fleet-cost benefits can offset pricing pressure, higher labor costs and interest expense.
- Whether International revenue and adjusted EBITDA stabilize after currency effects and lower revenue per day.
- The pace and cost of the Brazil and T19 restructuring programs, including the expected remaining charges.
- Fleet financing availability, vehicle-backed debt maturities and compliance with corporate and vehicle-program covenants.
- Used-vehicle residual values, manufacturer repurchase or guaranteed-depreciation obligations and the $8.0 billion vehicle purchase commitment.
- The effect of the CEO transition and other executive departures on strategy and operating execution.
- Potential legal, regulatory, cybersecurity and goodwill-impairment exposures not fully reflected in current-period earnings.