AVIS BUDGET GROUP, INC. annual report, FY2017

Avis Budget Group, Inc. — FY2017 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2017. The filing also provides unaudited fourth-quarter data. Avis Budget operates Avis, Budget, Zipcar, Payless, Apex, Maggiore, FranceCars and Budget Truck businesses across approximately 180 countries, with an average rental fleet exceeding 620,000 vehicles and more than 39 million rental transactions in 2017.

Financial performance and metrics

Metric	2017	2016	Change
Net revenue	$8.848 billion	$8.659 billion	Up 2%
Vehicle rental revenue	$6.219 billion	$6.081 billion	Up 2%
Net income	$361 million	$163 million	Up $198 million
Diluted EPS	$4.25	$1.75	Up $2.50
Adjusted EBITDA	$735 million	$838 million	Down 12%
Cash flow from operations	$2.648 billion	$2.640 billion	Essentially unchanged

Approximate net margin was 4.1%; Adjusted EBITDA margin was approximately 8.3%, compared with approximately 9.7% in 2016.
Rental volumes increased 5%, while time-and-mileage revenue per rental day declined 1%. Currency movements increased revenue by $58 million and Adjusted EBITDA by $25 million.
Vehicle depreciation and lease charges increased 9% to $2.221 billion, or 25.1% of revenue, primarily because of higher per-unit fleet costs and lower revenue per rental day.
Operating expenses were $4.472 billion, or 50.5% of revenue. Selling, general and administrative expense declined to 12.7% of revenue from 13.1%.
Americas revenue declined slightly to $6.100 billion and Adjusted EBITDA fell 23% to $486 million. International revenue increased 8% to $2.748 billion and Adjusted EBITDA increased 12% to $305 million.
Fourth-quarter revenue was $2.019 billion and net income was $220 million, compared with revenue of $1.879 billion and a net loss of $31 million in the fourth quarter of 2016. Fourth-quarter results included provisional Tax Act benefits.

Financial position, debt and liquidity

Total assets were $17.699 billion, including $11.879 billion of assets under vehicle programs. Stockholders’ equity increased to $573 million from $221 million.
Total indebtedness was approximately $12.8 billion, consisting of approximately $3.6 billion of corporate debt and $9.2 billion of debt under vehicle programs. Debt under vehicle programs was approximately 78% of related assets.
Year-end cash and cash equivalents were $611 million; cash, program cash and restricted cash totaled $901 million. The Company reported approximately $1.0 billion of available corporate revolving capacity and $4.1 billion of available vehicle-program capacity.
2017 investing cash outflow was $2.204 billion, including $1.999 billion of net investment in vehicle programs. Non-vehicle capital expenditures were $197 million; management anticipated approximately $225 million in 2018.
The Company committed to purchase approximately $8.1 billion of program vehicles over the following 12 months. Total disclosed contractual obligations were $25.591 billion, including vehicle-program debt, corporate debt, interest, leases and vehicle purchase commitments.
The Company was in compliance with its debt covenants at December 31, 2017. Approximately $2.8 billion of year-end debt was unhedged interest-rate-sensitive debt, rising to approximately $5.1 billion during the 2017 seasonal borrowing peak.

Material changes and unusual items

The Tax Act produced a provisional net income tax benefit of $213 million, comprising a $317 million benefit from remeasuring deferred tax liabilities and a $104 million transition-tax expense. The 2017 effective tax rate was a benefit rate of 71%. The accounting was not finalized at filing and could be adjusted during 2018.
Restructuring and related charges increased to $63 million from $29 million. Initiatives included workforce reductions, location closures, process consolidation and a U.S. truck-rental restructuring; approximately $3 million of additional truck-initiative expense was expected in 2018.
The Company recorded $23 million of transaction-related costs, a $2 million Zipcar trademark impairment and a net $14 million benefit related to a personal-injury legal matter, including $27 million of recoverable insurance proceeds and a $13 million charge.
The Company issued €250 million of 4.5% senior notes due 2025, repaid its 6% euro-denominated notes due 2021 and refinanced other floating-rate debt. The 2022 floating-rate term loan was increased to approximately $1.1 billion.
The Company repurchased approximately 6.1 million shares for $200 million during 2017, reducing shares outstanding by approximately 7%. Approximately $100 million remained available under the repurchase authorization at year-end, and management expected to use most of that capacity in 2018. No cash dividends were paid.
In January 2018, the Board adopted a short-term stockholder rights plan amid a pending proxy contest. In February 2018, the Company extended the maturity of its floating-rate term loan to 2025 and its revolving credit facility to 2023.

Outlook, management commentary and risks

Management expected worldwide demand for vehicle rental and mobility solutions to increase in 2018 despite modest and uneven economic growth, continued competitive pressure, relatively soft U.S. used-vehicle values and rising interest rates.
The Company planned to pursue pricing increases, optimize fleet size and disposition, expand ancillary products, improve yield management and reduce operating costs to support profitability and returns on invested capital.
Strategic initiatives included connected vehicles, mobility technology, Zipcar expansion, a partnership with Waymo for autonomous-vehicle fleet services, and voice-enabled reservation capabilities. The Company planned to exceed 100,000 connected vehicles in its U.S. Avis fleet by the end of 2018 and pursue a fully connected global fleet by 2020.
Key risks include intense price competition, travel-demand volatility, used-vehicle residual values, vehicle recalls, manufacturer performance under repurchase and guaranteed-depreciation programs, refinancing and collateral requirements, variable interest rates, currency movements, litigation and insurance claims, cyber-security and data privacy, regulatory changes, and integration of acquired businesses.
The Tax Act eliminates like-kind exchange treatment for personal property and provides temporary full expensing of qualifying assets. A prolonged fleet reduction could reduce tax deductions and increase cash tax payments after available tax attributes are used.

Investor verification checklist

Verify the recurring operating performance underlying the $361 million of net income, excluding the provisional $213 million Tax Act benefit and other unusual items.
Assess whether higher fleet costs and lower time-and-mileage revenue per day are temporary or indicate sustained margin pressure, particularly in the Americas.
Review the maturity schedule, refinancing assumptions, covenant headroom and collateral requirements for approximately $12.8 billion of debt.
Evaluate used-vehicle prices, risk-car exposure, manufacturer repurchase obligations and the ability to fund the approximately $8.1 billion of committed 2018 vehicle purchases.
Confirm the final accounting for the Tax Act, including the transition tax, deferred-tax remeasurement, GILTI treatment and any tax on undistributed foreign earnings.
Review the pending proxy contest, stockholder rights plan and the effect of planned share repurchases on leverage, liquidity and per-share results.
Examine legal contingencies, insurance recoveries and the Company’s estimate of up to approximately $50 million of reasonably possible litigation exposure above accrued amounts.