AVIS BUDGET GROUP, INC. quarterly report, Q2 FY2019

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

Reporting period: Three and six months ended June 30, 2019. The company provides vehicle rental, car sharing and related mobility services through Avis, Budget, Zipcar and other brands in approximately 180 countries. Reportable segments are Americas and International.

Financial Performance and Position

Metric	Three months ended June 30	Six months ended June 30
Revenue	$2.337 billion, versus $2.328 billion	$4.257 billion, versus $4.296 billion
Adjusted EBITDA	$175 million, versus $161 million	$174 million, versus $163 million
Income before taxes	$81 million, versus $38 million	Loss of $55 million, versus loss of $91 million
Net income (loss)	$62 million, versus $26 million	Loss of $29 million, versus loss of $61 million
Basic diluted EPS	$0.81, versus $0.33	$(0.39), versus $(0.75)
Operating cash flow	Not separately presented	$965 million, versus $1.121 billion

Second-quarter revenue was essentially flat year over year. Volume increased 2%, but foreign-exchange movements reduced revenue by $46 million.
Six-month revenue declined 1%, primarily because of a $102 million foreign-exchange headwind and a 1% decrease in revenue per day excluding currency effects, partly offset by 2% higher volume.
Second-quarter operating margin was approximately 3.5% based on income before taxes; net margin was approximately 2.7%. Six-month results remained loss-making.
Vehicle depreciation and lease charges declined 8% in the quarter and 7% year to date, driven principally by lower Americas per-unit fleet costs. Vehicle interest expense increased 13% in the quarter and 13% year to date because of higher interest rates.
Americas second-quarter revenue increased 2% and Adjusted EBITDA increased 42% to $152 million. International revenue declined 4% and Adjusted EBITDA declined 45% to $39 million.
For the first six months, Americas Adjusted EBITDA increased 53% to $187 million, while International Adjusted EBITDA declined 76% to $18 million.

Cash Flow, Debt and Liquidity

Cash and cash equivalents were $534 million at June 30, 2019, compared with $615 million at December 31, 2018. Including program and restricted cash, total cash was $585 million, compared with $735 million at year-end.
Six-month investing cash use was $3.146 billion, including $8.715 billion invested in vehicles and $5.773 billion of vehicle disposition proceeds.
Six-month financing cash inflow was $2.027 billion, including $2.058 billion of net financing activity under vehicle programs.
Total indebtedness was approximately $16 billion, comprising approximately $3.5 billion of corporate debt and $12.5 billion of vehicle-program debt.
Corporate debt included $3.115 billion of long-term debt and $420 million of short-term debt or current maturities. Vehicle-program debt included $8.913 billion owed to Avis Budget Rental Car Funding and $3.543 billion of other debt.
Available capacity was approximately $575 million under the senior revolving credit facility and $1.294 billion under vehicle programs. The company reported compliance with its financial covenants.
The company had commitments to purchase approximately $3.1 billion of vehicles over the following 12 months, primarily financed through vehicle-backed debt and vehicle disposition proceeds.

Material Changes and Unusual Items

The company adopted the lease standard, Topic 842, on January 1, 2019. This added approximately $2.4 billion of operating lease right-of-use assets and $2.0 billion of long-term operating lease liabilities at June 30, with additional current lease liabilities. The adoption increased reported assets and liabilities without significantly changing expense recognition.
The sale of the company’s 50% investment in Anji Car Rental & Leasing Company generated $64 million of proceeds and a $44 million gain, recorded in operating expenses. The gain was excluded from Adjusted EBITDA.
Restructuring and other related charges were $23 million in the second quarter and $44 million for the first six months, versus $4 million and $10 million, respectively, in the comparable periods. The T19 restructuring plan had terminated approximately 225 employees by June 30, and approximately $25 million of additional restructuring expense was expected in 2019.
The company recorded approximately $3 million of separation-related charges for its former International president and approximately $8 million related to the announced departure of its chief executive officer. An additional $5 million of CEO-related accelerated stock compensation expense was expected in 2019.
In July 2019, the company issued $400 million of 5.75% Senior Notes due 2027 and used the proceeds to redeem $400 million of 5.5% Senior Notes due 2023.
In August 2019, the board increased the share repurchase authorization by $100 million. No common shares were repurchased under the program during the first six months of 2019.

Outlook, Commentary and Risks

Management stated that worldwide demand for mobility solutions had increased through the first half of 2019 and that U.S. used-vehicle values had stabilized.
Management expected the benefits of demand and stabilized used-vehicle values to be partly offset by rising interest rates, higher salaries, wages and benefits, and other cost pressures during 2019.
The third quarter is historically the strongest period because of increased leisure travel. Results are affected by seasonality, airline passenger volumes, economic conditions, fleet levels and used-vehicle prices.
No specific revenue, Adjusted EBITDA or earnings guidance was provided in the filing text.
Key risks include intense competition and technology-driven changes in mobility, travel-demand volatility, vehicle acquisition and residual-value risk, manufacturer repurchase obligations, used-vehicle pricing, fuel and labor costs, foreign exchange, interest rates, substantial leverage, access to asset-backed financing, covenant compliance, cybersecurity, litigation, regulation and geopolitical disruption.
Legal proceedings included an accrued liability of approximately $12 million for two appealed Georgia accident verdicts. Reasonably possible aggregate exposure from other legal proceedings was estimated at up to approximately $45 million above accrued amounts.
The company guaranteed up to $278 million of residual values for certain leased vehicles and had not recorded a liability because management expected sale proceeds to meet or exceed book values.

Investor Verification Points

Verify the sustainability of Americas fleet-cost improvements and whether International revenue-per-day and Adjusted EBITDA weakness persists.
Assess liquidity relative to approximately $16 billion of debt, upcoming vehicle-program maturities and the $3.1 billion vehicle purchase commitment.
Separate recurring operating performance from the $44 million Anji gain, restructuring charges and executive separation costs.
Evaluate the effect of higher interest rates on vehicle interest expense and corporate and vehicle-backed debt refinancing.
Review the impact of Topic 842 on reported leverage, lease obligations and comparability with prior periods.
Monitor used-vehicle prices, manufacturer repurchase and guaranteed-depreciation arrangements, fleet utilization and foreign-exchange movements.
Confirm the timing and cost of the CEO transition, expected additional restructuring and remaining share-repurchase authorization.