Avis Budget Group, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results for the three and nine months ended September 30, 2017, filed November 7, 2017. Avis Budget operates Avis, Budget, Zipcar, Payless, Maggiore, FranceCars and Apex brands in approximately 180 countries, with an average rental fleet exceeding 600,000 vehicles. Reportable segments are Americas and International. The third quarter is seasonally the company’s strongest period.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net revenue | $2,752 million | $2,656 million | $6,829 million | $6,780 million |
| Net income | $245 million | $209 million | $141 million | $194 million |
| Diluted EPS | $2.91 | $2.28 | $1.65 | $2.05 |
| Adjusted EBITDA | $482 million | $469 million | $595 million | $717 million |
| Operating cash flow | Not separately provided | Not separately provided | $2,041 million | $2,111 million |
Q3 net income margin was approximately 8.9% and adjusted EBITDA margin was approximately 17.5%. Nine-month net income margin was approximately 2.1% and adjusted EBITDA margin was approximately 8.7%.
- Q3 revenue increased 4%, supported by a 5% increase in rental volume. Vehicle rental revenue rose 4% and other revenue rose 2%.
- Q3 adjusted EBITDA increased 3%; Americas EBITDA declined 1% to $303 million, while International EBITDA increased 8% to $194 million.
- For the first nine months, revenue increased 1%, but adjusted EBITDA declined 17% and net income declined 27%.
- Nine-month rental volume increased 4%, while time and mileage revenue per rental day declined 3%. Per-unit fleet costs increased 5%.
- Vehicle depreciation and lease charges rose to 25.1% of nine-month revenue from 23.2% in the prior-year period; Q3 increased to 22.4% from 21.7%.
- Cash and cash equivalents were $814 million at September 30, 2017, compared with $490 million at December 31, 2016. Cash was below the $985 million balance at September 30, 2016.
- Total assets were $19.873 billion and stockholders’ equity was $401 million at September 30, 2017, compared with $17.643 billion and $221 million, respectively, at year-end 2016.
- Debt was approximately $14 billion, consisting of approximately $4 billion of corporate debt and $10 billion of vehicle-program debt. Corporate debt carrying value was $3.591 billion; vehicle-program debt was $10.566 billion.
- Available liquidity included approximately $0.8 billion of cash, $0.7 billion of available committed corporate capacity and $2.6 billion of available vehicle-program capacity.
Material changes versus the prior comparable periods
- Q3 profitability improved despite higher fleet costs, reflecting higher rental volume, improved utilization, cost mitigation and a lower effective tax rate of approximately 33% versus 39%.
- Nine-month profitability deteriorated primarily because of higher Americas fleet costs, lower pricing per rental day and increased restructuring-related charges. Americas adjusted EBITDA fell 29% to $379 million; International adjusted EBITDA rose 10% to $260 million.
- The company initiated the T17 restructuring program, including headcount reductions, process improvements, location closures and fleet reductions. It recorded $31 million of T17 restructuring expense through September 30, terminated approximately 595 employees and expects approximately $4 million of additional expense in the fourth quarter.
- Other nine-month restructuring-related charges included $7 million for the former President and CFO’s separation and $14 million related to a limited voluntary opportunity plan.
- The company issued €250 million of 4.5% senior notes due 2025 and increased its 2022 term loan by $188 million. Proceeds were used to redeem 2021 euro notes and 2017 floating-rate notes; management stated there were no significant corporate debt maturities until 2022.
- Vehicle-program debt increased principally to fund fleet growth. Vehicles, net, increased to $11.801 billion from $10.464 billion at year-end 2016.
- The company repurchased approximately 4.2 million shares for $127 million during the first nine months, leaving approximately $174 million authorized for future repurchases.
Guidance, outlook, commentary and risks
Management did not provide a specific quantified full-year revenue or earnings guidance figure in the filing. Management expects worldwide rental and car-sharing demand to continue growing during the remainder of 2017 amid modest and uneven global economic growth, expects adequate access to fleet vehicles, and intends to pursue pricing increases to improve profitability and returns on invested capital.
- Key operating pressures include intense competition, soft U.S. used-vehicle values, higher fleet costs, lower rental pricing per day, fuel and labor costs, and economic or travel-demand weakness.
- Liquidity depends on operating cash flow, vehicle dispositions, vehicle-backed financing and access to credit markets. Disruptions could increase financing costs, reduce capacity or require additional collateral.
- The company committed to purchase approximately $6.1 billion of vehicles over the following 12 months, primarily financed through vehicle-backed debt and vehicle-sale proceeds.
- Debt agreements include restrictive covenants and a maximum leverage ratio. The company reported compliance with applicable financial covenants at September 30, 2017.
- Legal matters include Georgia personal-injury verdicts for which the company accrued approximately $12 million net of insurance; reasonably possible aggregate exposure from other proceedings was estimated at up to approximately $50 million above accrued amounts.
- The company is exposed to foreign-exchange, interest-rate and gasoline-price risk. Management stated that a hypothetical 10% change in interest or currency rates, or gasoline prices, would not have a material impact based on its analysis.
- Upcoming accounting changes include revenue recognition under Topic 606 in 2018 and lease accounting under Topic 842 in 2019. Management expects Topic 842 to materially increase reported assets and liabilities.
Investor verification checklist
- Verify whether higher rental volumes and planned pricing actions offset fleet-cost inflation and used-vehicle depreciation pressure.
- Track Americas fleet costs, time and mileage revenue per day, utilization and segment EBITDA.
- Reconcile approximately $14 billion of total debt, vehicle-program maturities and available financing capacity.
- Assess execution and cash costs of the T17 restructuring and limited voluntary opportunity plan.
- Review the $6.1 billion vehicle-purchase commitment, manufacturer repurchase or guaranteed-depreciation obligations and used-vehicle resale values.
- Monitor legal contingencies, covenant compliance, foreign-exchange effects and implementation of Topics 606 and 842.