AVIS BUDGET GROUP, INC. annual report, FY2015

Avis Budget Group, Inc. — 2015 Form 10-K Summary

Business context and reporting period

Avis Budget Group is a global provider of vehicle rental, truck rental and car-sharing services through Avis, Budget, Zipcar, Payless, Apex and Maggiore. The company operates directly and through licensees in approximately 180 countries, with reporting segments of Americas and International. This filing covers the fiscal year ended December 31, 2015; quarterly data identifies the fourth quarter as a separate period.

2015 average rental fleet exceeded 580,000 vehicles and the company completed more than 38 million rental transactions.
Average car-rental fleet, excluding Zipcar and U.S. truck operations, was approximately 547,000 vehicles; total rental days were 142 million.
2015 acquisitions included Maggiore in Italy, the remaining interest in Brazil, licensee operations in Scandinavia and the Avis licensee in Poland.

Financial performance and key metrics

Metric	2015	2014	Change
Net revenue	$8.502 billion	$8.485 billion	Flat reported; up 5% in constant currency
Vehicle-rental revenue	$6.026 billion	$6.026 billion	Flat
Other revenue	$2.476 billion	$2.459 billion	Up 1%
Net income	$313 million	$245 million	Up 28%
Diluted EPS	$2.98	$2.22	Up 34%
Adjusted EBITDA	$903 million	$876 million	Up 3%; up 9% in constant currency
Operating cash flow	$2.584 billion	$2.579 billion	Up $5 million
Capital expenditures excluding vehicles	$199 million	$182 million	Up $17 million

Income before taxes was $382 million versus $392 million in 2014. The 2015 effective tax rate was 18%, compared with 38% in 2014, principally reflecting a $98 million benefit from resolving a prior-year tax matter.
Vehicle depreciation and lease charges declined 3% to $1.933 billion, supported by approximately 10% lower per-unit fleet costs.
Operating expenses were 50.4% of revenue, compared with 50.1% in 2014; selling, general and administrative expense was 12.9% of revenue versus 12.7%.
Americas revenue increased 2% to $6.069 billion and Adjusted EBITDA increased 4% to $682 million. International revenue decreased 4% to $2.433 billion and Adjusted EBITDA decreased 1% to $277 million.
Fourth-quarter 2015 revenue was $1.902 billion and net loss was $5 million, compared with fourth-quarter 2014 revenue of $1.887 billion and net income of $23 million.

Liquidity, cash flow and debt

Cash and cash equivalents were $452 million at December 31, 2015, down from $624 million.
Total debt was approximately $12.3 billion, consisting of $3.5 billion of corporate debt and $8.9 billion of vehicle-program debt.
Available funding was approximately $4.4 billion, including $1.1 billion under committed corporate credit facilities and $3.3 billion under vehicle programs.
The senior revolving credit facility had $1.113 billion of available capacity after $687 million of letters of credit.
Vehicle-program debt was backed by approximately $11.716 billion of related assets and had a debt-to-vehicle-program-asset ratio of 76%, compared with 73% in 2014.
Contractual obligations totaled approximately $23.547 billion, including $8.913 billion of vehicle-program debt, $3.516 billion of corporate debt, $1.477 billion of debt interest, $2.263 billion of operating leases and $7.208 billion of vehicle-purchase commitments.
The company repurchased approximately $394 million of common stock, or 8.8 million shares, during 2015. No cash dividends were declared or paid.
Management stated that the company was in compliance with applicable debt covenants at year-end.

Material changes versus the prior comparable period

Rental days increased 7%, while the rental fleet increased 7%; excluding Maggiore, rental days increased 5% and the fleet increased 4%.
Currency movements reduced revenue by approximately $444 million and expenses by approximately $418 million. Constant-currency pricing declined 2% overall, with a 1% decline in the Americas and a 4% decline internationally.
Transaction-related costs increased to $68 million from $13 million, primarily from acquisitions and integration activities, including $25 million of non-cash charges related to reacquired license rights.
Restructuring expense declined to $18 million from $26 million, while early debt-extinguishment costs declined to $23 million from $56 million.
Corporate debt increased by $108 million to $3.461 billion after issuing $375 million of 5.25% senior notes due 2025 and redeeming the remaining $223 million of 9.75% senior notes due 2020.
Stockholders’ equity declined to $439 million from $665 million, primarily due to share repurchases and currency translation losses, partly offset by net income.

Outlook, management commentary, risks and unusual items

Management expected worldwide demand for vehicle rental and car-sharing services to increase in 2016 amid modest and uneven global economic growth. The company expected adequate access to replacement and growth fleet, intended to pursue pricing increases and planned approximately $210 million of 2016 non-vehicle capital expenditures. Management also expected to use most of its remaining repurchase authorization; the board increased that authorization by $300 million in January 2016.

Major operating risks include intense price competition, travel-demand volatility, seasonality, fleet acquisition and residual-value risk, manufacturer recalls, used-vehicle pricing and manufacturer performance under repurchase or guaranteed-depreciation programs.
Liquidity and refinancing risks are significant because of substantial corporate and vehicle-backed debt, variable-rate borrowings, collateral requirements and upcoming maturities. Approximately $1.5 billion of vehicle-program debt and $26 million of corporate debt mature in 2016; vehicle-program maturities total approximately $2.884 billion in 2017.
Foreign-exchange movements materially affected 2015 reported results, particularly in the International segment. The company uses currency, interest-rate and commodity derivatives for hedging and not for speculation.
Legal contingencies include French competition proceedings with potentially material losses that cannot currently be estimated and Canadian competition proceedings seeking approximately $25 million in penalties plus customer reimbursements. Other reasonably possible legal exposure was estimated at up to approximately $25 million above accrued amounts, excluding those two matters.
The company committed to purchase approximately $7.2 billion of vehicles over the following twelve months. Approximately 49% of the 2015 rental car fleet consisted of program or leased vehicles, and 64% of disposed vehicles were sold under repurchase or guaranteed-depreciation programs.
Restructuring and acquisition integration activities resulted in approximately 180 employees being targeted for termination in the acquisition-integration program and approximately 325 under the T15 initiative; approximately $10 million of additional acquisition-integration restructuring expense was expected in 2016.
Management and Deloitte & Touche reported effective disclosure controls and internal control over financial reporting, and Deloitte issued an unqualified opinion on the consolidated financial statements.

Important facts for investors to verify

Reconcile Adjusted EBITDA to GAAP income and assess the effect of the $98 million tax benefit, acquisition-related costs, restructuring expense and debt-extinguishment costs on reported earnings.
Review vehicle-program debt maturities, collateral requirements and available capacity, particularly in light of the $7.2 billion vehicle-purchase commitment.
Monitor used-vehicle residual values, manufacturer repurchase obligations, fleet depreciation and vehicle utilization.
Assess the sustainability of pricing and margin performance after the 2015 constant-currency pricing declines, especially internationally.
Track integration results and potential liabilities from the Maggiore, Brazil, Scandinavia and Poland acquisitions.
Follow the French and Canadian competition proceedings, employment litigation, insurance reserves and other contingencies.
Verify the effect of continued share repurchases on leverage, liquidity, shares outstanding and stockholders’ equity.