AVIS BUDGET GROUP, INC. quarterly report, Q3 FY2020

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

Reporting period: Three and nine months ended September 30, 2020. Avis, Budget and Zipcar provide vehicle rental, car-sharing and related mobility services across the Americas and International markets. Results were materially affected by the COVID-19 pandemic and reduced travel demand.

Financial performance and position

Metric	Q3 2020	Q3 2019	Nine months 2020	Nine months 2019
Revenue	$1,534 million	$2,753 million	$4,047 million	$7,010 million
Net income (loss)	$45 million	$189 million	$(594) million	$160 million
Diluted EPS	$0.63	$2.50	$(8.40)	$2.10
Adjusted EBITDA	$220 million	$471 million	$(249) million	$645 million
Operating cash flow	Not separately provided for the quarter	Not separately provided for the quarter	$632 million	$1,931 million

Revenue and volume: Q3 revenue declined 44%, reflecting a 42% decrease in rental volume and a 5% decrease in revenue per day, excluding foreign exchange effects. Nine-month revenue declined 42%, with volume down 38% and revenue per day down 7%, excluding foreign exchange effects.
Profitability: Q3 net margin was approximately 2.9%, compared with 6.9% in the prior-year quarter. Nine-month net margin was approximately negative 14.7%, compared with 2.3% in 2019. Q3 Adjusted EBITDA margin was approximately 14.3%, versus 17.1%; the nine-month margin was approximately negative 6.2%, versus 9.2%.
Segment results: Q3 Americas revenue was $1,114 million and Adjusted EBITDA was $222 million; International revenue was $420 million and Adjusted EBITDA was $6 million. For the nine months, Americas Adjusted EBITDA was $(41) million and International Adjusted EBITDA was $(174) million.
Cash and liquidity: Cash and cash equivalents were $1.564 billion at September 30, 2020. Including program and restricted cash, total cash was $1.660 billion. Management reported approximately $0.8 billion of available capacity under the senior revolving credit facility and approximately $2.4 billion of total liquidity including available cash and revolver capacity.
Debt: Total indebtedness was approximately $12.5 billion, consisting of approximately $4.2 billion of corporate debt and $8.3 billion of vehicle-program debt. Long-term corporate debt was $4.145 billion, compared with $3.416 billion at December 31, 2019. Vehicle-program debt declined from approximately $11.1 billion to $8.3 billion as the fleet was reduced.
Balance sheet: Total assets were $19.596 billion. Stockholders’ equity was negative $76 million, compared with positive $656 million at year-end 2019. Vehicles under vehicle programs declined to $8.780 billion from $12.177 billion.
Cash flows: Nine-month operating cash flow was $632 million. Investing activities provided $2.483 billion, primarily because vehicle dispositions exceeded vehicle purchases. Financing activities used $2.383 billion, principally reflecting repayment of vehicle-program borrowings.

Material changes versus the prior comparable period

COVID-19 caused a substantial decline in travel, rental reservations, rental volume and revenue. Q3 revenue fell $1.219 billion, and nine-month revenue fell $2.963 billion, versus the comparable periods in 2019.
Q3 net income declined $144 million, while the nine-month period moved from $160 million of net income to a $594 million net loss.
The company reduced its fleet by approximately 30% year over year by September 2020. Q3 utilization improved to 60.6%, up 25.5 percentage points from the prior quarter, and was 63.1% at September month-end.
Q3 per-unit fleet costs declined 35% to $163 per month, excluding exchange-rate effects. Nine-month per-unit fleet costs declined 18%.
Operating and administrative cost reductions included workforce reductions and furloughs, compensation actions, reduced capital expenditures and fleet reductions. Approximately 3,500 employees had been terminated under the 2020 Optimization Plan by September 30.
The company issued $500 million of 10.5% senior secured notes in May and $350 million of additional 5.875% senior notes in August. It also issued approximately $700 million and $650 million of asset-backed notes in January and August, respectively.
The company repurchased approximately 5.0 million shares for $113 million during the first quarter; no program repurchases were made during the third quarter. Approximately $76 million remained available under the authorization at September 30.

Outlook, commentary, risks and unusual items

Management stated that it cannot reliably predict the pandemic’s duration, travel recovery, seasonality or future operating and financial results. No quantitative revenue or earnings guidance was provided.
Management believes liquidity is adequate beyond the next twelve months based on current operating assumptions, reduced capital and operating expenses, fleet sales, program cash and available financing. The company has no meaningful corporate debt maturities until 2023.
The senior credit agreement provides relief from the quarterly-tested leverage covenant through June 30, 2021, but requires compliance with a liquidity covenant, additional reporting and other conditions. The company was in compliance with its debt covenants at September 30, 2020.
COVID-19 charges totaled $90 million for the first nine months and $10 million in Q3. These primarily included minimum guaranteed airport rent, vehicle sanitization, overflow parking and related costs, and vehicle losses from overflow parking incidents.
Restructuring and other related charges were $89 million for the first nine months, including the global optimization plan, Brazil exit activities, the limited voluntary termination program and executive separation costs. The company expected approximately $7 million of additional 2020 expense for the optimization plan and approximately $5 million for Brazil.
Used-vehicle market disruption and declining residual values could increase vehicle losses, collateral requirements and liquidity needs. The company reported a $10 million loss from a vehicle fire at an overflow parking facility.
Approximately $3.4 billion of vehicle purchases were committed over the following 12 months, subject in part to manufacturers’ repurchase and guaranteed-depreciation obligations.
Potential exposure from reasonably possible adverse legal outcomes was estimated at up to approximately $40 million above accrued amounts. A separate Georgia matter had an accrued liability of approximately $12 million, net of insurance recoveries.
Further deterioration in travel or economic conditions could result in goodwill and indefinite-lived intangible asset impairment charges. The company performed an interim review and recorded no impairment charge in Q3.
Adjusted EBITDA is a non-GAAP measure and was revised in 2020 to exclude COVID-19 charges; it may not be comparable with similarly titled measures used by other companies.

Important facts for investors to verify

Whether travel demand, rental volume, revenue per day and fleet utilization recover sufficiently to support positive operating cash flow and Adjusted EBITDA.
Compliance with the liquidity covenant and the reinstated leverage covenant after June 30, 2021, including refinancing needs and borrowing costs.
Used-vehicle residual values, fleet disposition proceeds, manufacturer repurchase obligations and collateral requirements under vehicle-backed financing.
The sustainability of cost reductions without impairing service levels, future demand capture or operating capacity.
Potential goodwill, intangible-asset and vehicle impairment charges if pandemic or economic conditions deteriorate.
The company’s negative stockholders’ equity, substantial leverage and approximately $2.6 billion of vehicle-program debt maturities within two years, based on the maturity disclosures.
Additional COVID-19, restructuring, litigation, insurance and executive separation costs not yet incurred.