Avis Budget Group, Inc. Form 10-Q Summary
Business context and reporting period
Avis Budget Group provides vehicle rental and mobility solutions through Avis, Budget, Zipcar, Payless, Maggiore, FranceCars and Apex brands. Operations are reported in the Americas and International segments and span approximately 180 countries. This unaudited Form 10-Q covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods.
Key financial metrics
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Revenue | $2.328 billion | $2.238 billion | $4.296 billion | $4.077 billion |
| Net income (loss) | $26 million | $3 million | $(61) million | $(104) million |
| Diluted EPS | $0.32 | $0.04 | $(0.75) | $(1.22) |
| Adjusted EBITDA | $161 million | $140 million | $163 million | $113 million |
| Operating cash flow | Not separately provided | Not separately provided | $1.121 billion | $1.139 billion |
Six-month revenue increased 5%, supported by a 4% increase in rental volumes and a 3% favorable currency impact. Six-month Adjusted EBITDA increased 44% to $163 million. Approximate six-month Adjusted EBITDA margin was 3.8%, compared with 2.8% in 2017. Second-quarter net margin was approximately 1.1%.
- Americas second-quarter revenue increased 2% to $1.590 billion and Adjusted EBITDA increased 11% to $107 million. Six-month Adjusted EBITDA increased 61% to $122 million.
- International second-quarter revenue increased 10% to $738 million and Adjusted EBITDA increased 20% to $71 million. Six-month revenue increased 13% to $1.358 billion and Adjusted EBITDA increased 12% to $74 million, aided materially by currency movements.
- Six-month vehicle depreciation and lease charges were $1.106 billion, or 25.8% of revenue, versus 27.0% in the prior-year period. Selling, general and administrative expense increased to 14.4% of revenue from 13.6%.
- Cash and cash equivalents were $489 million at June 30, 2018, compared with $611 million at December 31, 2017. Including program and restricted cash, total cash was $661 million.
- Net cash used in investing activities was $3.748 billion, including $8.359 billion invested in vehicles and $4.807 billion of vehicle disposition proceeds. Net cash provided by financing activities was $2.389 billion.
Debt, liquidity and capital resources
- Total indebtedness was approximately $15.4 billion at June 30, 2018, consisting of approximately $3.6 billion of corporate debt and $11.8 billion of debt under vehicle programs.
- Corporate long-term debt was $3.544 billion, compared with $3.573 billion at December 31, 2017. Vehicle-program liabilities were $14.402 billion, compared with $11.191 billion.
- Available liquidity included approximately $0.5 billion of cash, $0.5 billion of available committed corporate credit capacity and $1.5 billion of available vehicle-program capacity.
- The company extended the floating-rate term loan maturity to 2025 and the senior revolving credit facility maturity to 2023. It also issued approximately $400 million of asset-backed notes and increased European fleet securitization capacity by approximately $175 million.
- The company reported compliance with its corporate and vehicle-program debt covenants as of June 30, 2018.
Material changes versus the prior comparable period
- Revenue increased $219 million for the six-month period, while net loss improved by $43 million and Adjusted EBITDA increased by $50 million.
- Improvement reflected higher rental volumes, lower Americas per-unit fleet costs and higher utilization. Americas utilization increased 90 basis points for the six-month period.
- Restructuring and other related charges declined to $10 million from $45 million for the six-month period. The 2017 comparison included significant charges related to employee programs and officer separation costs.
- The company recorded $9 million of non-operational charges related to shareholder activist activity during the first six months of 2018.
- The company repurchased approximately 1.6 million shares for $67 million during the first six months, reducing shares outstanding by approximately 2%. Approximately $33 million remained under the authorization at June 30; the authorization was increased by $250 million in August 2018.
- Adoption of revenue standard Topic 606 resulted in an approximately $50 million increase in the customer loyalty program liability and an approximately $40 million net-of-tax reduction to accumulated deficit at January 1, 2018. The six-month reported net loss was approximately $4 million lower than it would have been without adoption.
Guidance, outlook, commentary and risks
Management did not provide formal numeric earnings guidance in the filing. Management stated that worldwide rental demand had increased, U.S. used-vehicle values were stable and these conditions were expected to continue through 2018, although rising interest rates and other headwinds were expected to offset some benefits. The third quarter is historically the strongest period because of seasonal leisure travel.
- The workforce-planning restructuring had resulted in 87 employee terminations by June 30, with approximately $11 million of additional 2018 expense expected. Approximately $1 million of additional expense was expected under the truck initiative.
- The company committed to purchase approximately $2.8 billion of vehicles over the following 12 months, primarily financed through vehicle-backed debt and vehicle disposition proceeds.
- Material risks include competition and pricing pressure, travel demand and airline traffic, used-vehicle values, manufacturer repurchase and guaranteed-depreciation obligations, fleet financing availability, interest rates, foreign exchange, fuel prices, economic conditions, cybersecurity, litigation, regulatory compliance and substantial indebtedness.
- Potential exposure from legal proceedings that was reasonably possible but not accrued could be up to approximately $50 million above accrued amounts. The company had accrued approximately $12 million, net of recoverable insurance proceeds, for two related personal-injury matters and intended to appeal.
- Adoption of lease standard Topic 842 on January 1, 2019 was expected to materially increase reported assets and liabilities because most operating leases would be recognized on the balance sheet.
- The accounting for certain Tax Act effects remained provisional, including the treatment of foreign earnings, tax attributes and potential repatriation-related taxes.
- Subsequent events included the July 2018 acquisition of Morini S.p.A. for approximately $41 million plus potential earn-outs of approximately $6 million.
Important facts for investors to verify
- Whether volume growth, utilization and Americas fleet-cost improvements continue after the seasonal third quarter.
- The sustainability of Adjusted EBITDA improvement after excluding restructuring, activist-related, transaction and other unusual items.
- Vehicle-program leverage, refinancing requirements and available capacity relative to the approximately $2.8 billion vehicle-purchase commitment.
- Exposure to rising interest rates, used-vehicle prices, manufacturer obligations and asset-backed financing markets.
- The ultimate tax effects of the Tax Act and the balance-sheet impact of Topic 842 adoption.
- Developments in the personal-injury litigation and other proceedings, including potential losses beyond accrued amounts.
- The effect of continued share repurchases on liquidity, leverage and per-share results.