Avis Budget Group, Inc. — Q1 2017 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2017. Avis Budget operates Avis, Budget and Zipcar vehicle rental and car-sharing businesses through Americas and International segments, with an average fleet exceeding 600,000 vehicles and operations or licenses in approximately 180 countries. The first quarter is seasonally slower and lower-margin; management noted that the timing of Easter also adversely affected Q1 2017.
Financial performance and key metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net revenues | $1,839 million | $1,881 million | Down 2% |
| Vehicle rental revenue | $1,286 million | $1,328 million | Down 3% |
| Loss before taxes | $165 million | $86 million | Loss increased $79 million |
| Net loss | $107 million | $51 million | Loss increased $56 million |
| Diluted loss per share | $1.25 | $0.53 | Loss increased $0.72 |
| Adjusted EBITDA | $(27) million | $44 million | Down $71 million |
| Net cash from operating activities | $447 million | $472 million | Down $25 million |
Net loss margin was approximately negative 5.8%, compared with negative 2.7% in the prior-year quarter. Adjusted EBITDA margin was approximately negative 1.5%, compared with positive 2.3%. Rental pricing declined 5% while rental volumes increased 3%. Per-unit fleet costs increased 4%.
- Americas revenue declined 4% to $1,314 million and Adjusted EBITDA declined to a $20 million loss from $63 million of income, primarily due to lower pricing and a 7% increase in per-unit fleet costs.
- International revenue increased 2% to $525 million and Adjusted EBITDA increased to $7 million from $1 million, supported by a 7% increase in rental volumes, including the France Cars acquisition, and favorable currency effects.
- Operating expenses increased 1% to $1,049 million; vehicle depreciation and lease charges increased 9% to $504 million. SG&A declined 3% to $262 million.
- Cash and cash equivalents increased to $923 million from $490 million at December 31, 2016. Net cash increased $433 million during the quarter, primarily from operating and financing activities.
Liquidity, debt and capital resources
- Total indebtedness was approximately $14 billion, consisting of approximately $4 billion of corporate debt and $10 billion of vehicle-program debt.
- Corporate debt totaled $3,980 million, including $474 million classified as short-term or current maturities. Debt under vehicle programs totaled $9,501 million.
- Available capacity was approximately $896 million under the senior revolving credit facility and $3.2 billion under vehicle programs. The company also had approximately $0.9 billion of cash.
- In March 2017, the company issued €250 million of 4.5% senior notes due 2025 and increased its 2022 floating-rate term loan by approximately $188 million. Proceeds were intended to refinance debt due in 2017 and 2021; management stated that no significant corporate debt maturities were expected until 2022.
- Vehicle-program investing used $932 million, including $3,944 million of vehicle purchases partly offset by $2,958 million of vehicle-disposition proceeds. The company had commitments to purchase approximately $5.2 billion of vehicles over the following 12 months.
- The company repurchased approximately 1.5 million shares for $50 million, with approximately $250 million remaining under the authorization.
Material changes, outlook and unusual items
- Management characterized the operating environment as uncertain and uneven, with heightened geopolitical risks and soft used-vehicle residual values. It nevertheless expected worldwide rental and car-sharing demand to increase in 2017 and anticipated stabilization in vehicle residual values.
- Management expected adequate access to fleet vehicles and intended to pursue pricing increases to improve returns and profitability. No quantitative earnings guidance was provided in the filing text.
- A new T17 restructuring initiative began in Q1, involving headcount reductions, process improvements and function consolidation. Approximately 335 employees were notified of termination and approximately 240 had been terminated by March 31. Q1 restructuring expense was $7 million, with approximately $40 million of additional expense expected during 2017.
- Q1 results included $13 million of charges for legal matters, $7 million of restructuring expense, $3 million of transaction-related costs and $3 million of early debt-extinguishment costs.
- The company recognized a $39 million liability related to Georgia personal-injury litigation and intends to appeal the verdicts. Potential additional exposure from reasonably possible adverse legal outcomes was estimated at up to approximately $50 million above accrued amounts.
- In April 2017, the company redeemed €175 million principal amount of 6% euro-denominated notes due 2021 for €180 million plus accrued interest. In May 2017, it accelerated expiration of its short-term shareholder rights plan and entered into a new shareholder agreement with SRS Investment Management.
- Key risks include competition and pricing pressure, travel demand, vehicle residual values and manufacturer repurchase obligations, fleet and fuel costs, access to financing, substantial leverage, covenant compliance, foreign exchange and interest rates, litigation, cyber-security and operational disruptions.
Important facts for investors to verify
- Whether pricing pressure and higher per-unit fleet costs improve during the remainder of 2017, particularly in the Americas.
- Progress and total cost of the T17 restructuring initiative versus the approximately $40 million remaining expected expense.
- Used-vehicle residual values, vehicle-disposition gains or losses, and the company’s ability to fund approximately $5.2 billion of committed vehicle purchases.
- Corporate and vehicle-program debt maturities, refinancing execution, interest-rate exposure and compliance with leverage and other covenants.
- Outcome and ultimate cost of the Georgia personal-injury litigation and other legal proceedings.
- Whether the company converts its available liquidity and increased rental volumes into sustained positive EBITDA and net income.