AVIS BUDGET GROUP, INC. quarterly report, Q2 FY2016

Avis Budget Group, Inc. — 2016 Second-Quarter Form 10-Q Summary

Business context and reporting period

Avis Budget Group operates Avis, Budget and Zipcar vehicle-rental and car-sharing businesses, directly and through licensees, across approximately 180 countries. Reportable segments are Americas and International. The filing covers the three and six months ended June 30, 2016; results are unaudited and presented in millions unless otherwise noted.

Key financial metrics

Metric	Three months ended June 30, 2016	Three months ended June 30, 2015	Six months ended June 30, 2016	Six months ended June 30, 2015
Net revenues	$2,243	$2,173	$4,124	$4,023
Net income (loss)	$36	$143	$(15)	$134
Diluted EPS	$0.38	$1.34	$(0.16)	$1.25
Adjusted EBITDA	$204	$227	$248	$344
Cash flow from operations	Not provided for the quarter	Not provided for the quarter	$1,070	$1,027

Second-quarter revenue increased 3%; net income declined 75%. Net margin was approximately 1.6%, compared with 6.6% in the prior-year quarter.
First-half revenue increased 3%, while the Company reported a net loss. First-half net margin was approximately negative 0.4%, compared with 3.3% in 2015.
First-half Adjusted EBITDA margin was approximately 6.0%, down from 8.5% in 2015. Adjusted EBITDA is a non-GAAP measure.
At June 30, 2016, cash and cash equivalents were $527 million. Total current assets were $2.14 billion and current liabilities were $1.77 billion.
Total indebtedness was approximately $14.7 billion, consisting of $3.53 billion of corporate debt and $11.17 billion of vehicle-program debt. Vehicle-program debt is principally collateralized by rental vehicles and related assets.
Available capacity was approximately $623 million under the senior revolving credit facility and $2.38 billion under vehicle-program funding arrangements. The Company reported compliance with applicable debt covenants.
Stockholders’ equity was $339 million, down from $439 million at December 31, 2015, primarily reflecting share repurchases, partly offset by currency translation gains.

Material changes versus the prior comparable period

Rental days increased 3% in the second quarter and 5% in the first half. The average rental fleet increased 2% in the quarter and 4% in the first half.
First-half pricing declined 3%, while per-unit fleet costs increased 3%; in the Americas, pricing declined 2% and per-unit fleet costs increased 6%. International pricing declined 6%.
First-half Adjusted EBITDA declined 28% to $248 million, with Americas down 23% and International down 25%. Management attributed the decline to lower pricing, higher fleet costs, increased marketing and commissions, and a $29 million negative currency impact.
First-half vehicle depreciation and lease charges increased 7% to $995 million, and selling, general and administrative expense increased 10% to $581 million.
The prior-year first-half results included a $98 million income-tax benefit from resolution of a prior-year tax matter; the 2016 first-half effective tax benefit was 34.8%, compared with 103.0% in 2015.
Operating cash flow increased to $1.07 billion from $1.03 billion. Net cash used in investing activities improved to $3.08 billion from $3.72 billion, primarily because of higher vehicle-disposition proceeds and lower acquisition activity. Ending cash increased by $75 million during the first half.
The Company issued $350 million of 6.625% senior notes due 2024 and redeemed $300 million of 4.75% senior notes due 2017. It also extended $825 million of term-loan borrowings to March 2022.
The Company repurchased approximately 6.5 million shares for approximately $180 million during the first half, leaving approximately $260 million of authorization.

Guidance, outlook, commentary and risks

Management expected worldwide demand for vehicle rental and car-sharing services to increase in 2016 amid modest and uneven global growth. Vehicle availability was described as adequate for normal replacement and incremental demand, and management intended to pursue pricing increases.
The third quarter is historically the strongest period because of seasonal leisure travel. Results remain sensitive to travel demand, airline passenger volumes, pricing, fleet utilization, used-vehicle values and manufacturer repurchase or guaranteed-depreciation programs.
The T15 restructuring and acquisition-integration programs generated $20 million of first-half restructuring expense. Management expected approximately $7 million of additional T15 expense and $3 million of additional acquisition-integration expense during 2016.
The Company committed to purchase approximately $3.3 billion of vehicles over the following 12 months, primarily financed through vehicle-backed debt and vehicle-disposition proceeds.
A French Competition Authority matter remains unresolved; the Company stated that potential losses may be material but could not estimate an outcome or range. A Canadian competition matter was settled for an immaterial amount.
Principal risks include substantial leverage, refinancing and covenant compliance, access to vehicle-backed and corporate financing, competition and pricing pressure, economic and travel volatility, used-vehicle prices, manufacturer credit and supply, currency and interest-rate movements, fuel costs, cyber-security, litigation and regulatory matters, and geopolitical instability.

Most important facts for an investor to verify

Whether pricing and fleet-cost trends improve sufficiently to restore Adjusted EBITDA margins.
The sustainability of liquidity given approximately $14.7 billion of debt, seasonal fleet growth and vehicle-purchase commitments.
Upcoming corporate and vehicle-program debt maturities, refinancing access and continued covenant compliance.
Used-vehicle disposal values and performance of manufacturer repurchase and guaranteed-depreciation arrangements.
The eventual resolution and potential financial exposure from the French competition proceedings.
The cash and earnings impact of further restructuring, share repurchases and acquisition-integration activity.