AVIS BUDGET GROUP, INC. quarterly report, Q1 FY2019

Business Context and Reporting Period

Avis Budget Group, Inc. provides vehicle rental, car sharing and related mobility services under the Avis, Budget, Zipcar and other brands in approximately 180 countries. Reportable segments are Americas and International. This unaudited Form 10-Q covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018. The first quarter is seasonally weaker and lower-margin, and management noted that the shift of Easter from the first quarter of 2018 to the second quarter of 2019 negatively affected the comparison.

Financial Results and Key Metrics

Metric	Q1 2019	Q1 2018	Change
Revenue	$1,920 million	$1,968 million	Down 2%
Loss before income taxes	$(136) million	$(129) million	Lower by $7 million
Income tax benefit	$45 million	$42 million	Up $3 million
Net loss	$(91) million	$(87) million	Lower by $4 million
Basic and diluted loss per share	$(1.20)	$(1.08)	More loss per share
Adjusted EBITDA	$(1) million	$2 million	Down $3 million
Cash flow from operations	$440 million	$503 million	Down $63 million
Total cash, including program and restricted cash	$676 million	$701 million	Down $25 million

Net loss margin was approximately negative 4.7% in 2019 versus negative 4.4% in 2018. Adjusted EBITDA margin was approximately negative 0.1% versus positive 0.1%. Operating expenses were 55.8% of revenue versus 55.5%; vehicle depreciation and lease charges were 25.3% versus 26.2%; selling, general and administrative costs were 14.8% versus 15.1%; and vehicle interest was 4.2% versus 3.7%.

Americas revenue was $1,327 million, down 2%, while Adjusted EBITDA increased to $35 million from $15 million, primarily from lower per-unit fleet costs.
International revenue was $593 million, down 4%, and Adjusted EBITDA declined to a $21 million loss from $3 million of income. Lower revenue per day, unfavorable currency effects and higher per-unit fleet costs offset higher rental volumes.
Currency movements reduced revenue by approximately $56 million and reduced expenses by approximately $61 million.
Vehicle investment was $4.376 billion, partially offset by $3.083 billion of vehicle disposition proceeds. Total investing cash outflow was $1.434 billion.

Balance Sheet, Debt and Liquidity

Total assets were $22.902 billion at March 31, 2019, including $13.980 billion of assets under vehicle programs. Stockholders’ equity was $324 million, down from $414 million at December 31, 2018, primarily due to the quarterly net loss.
Corporate debt was approximately $3.524 billion, including $3.501 billion of long-term debt. Debt under vehicle programs was approximately $11.205 billion. Management described total indebtedness as approximately $15 billion.
Cash and cash equivalents were $540 million; total cash including program and restricted cash was $676 million.
Available capacity included $637 million under the senior revolving credit facility and approximately $2.102 billion under vehicle-program facilities. The company had approximately $6.0 billion of vehicle purchase commitments over the following 12 months.
The company issued approximately $600 million of asset-backed notes in February 2019 at a weighted average interest rate of 3.56%. It remained in compliance with applicable corporate and vehicle-program debt covenants.
Operating cash flow declined to $440 million from $503 million, principally due to working-capital changes. Financing activities provided $937 million, largely from vehicle-program borrowings.

Material Changes Versus the Prior Comparable Period

Revenue declined 2%, primarily due to currency translation, while net loss increased by $4 million.
Americas profitability improved substantially, but International profitability deteriorated.
Vehicle depreciation and lease charges declined $30 million, while vehicle interest expense increased $9 million due primarily to higher interest rates.
Restructuring and other related charges increased to $21 million from $6 million. The 2019 amount includes the new T19 restructuring initiative and approximately $3 million of costs related to the departure of the President, International.
Early extinguishment of debt costs decreased to zero from $5 million; prior-year non-operational shareholder-activist costs of $9 million were not repeated.
Effective January 1, 2019, the company adopted the new lease standard, recognizing approximately $2.811 billion of property operating lease assets and liabilities and $183 million related to vehicle operating leases. This materially increased reported assets and liabilities without significantly changing expense or cash-flow presentation.
The company invested $78 million in debt securities of Avis Budget Rental Car Funding, an increase in the related-party investment balance.

Guidance, Outlook, Commentary and Risks

Management stated that worldwide demand for mobility solutions had increased through the period and that U.S. used-vehicle values had stabilized. It expected rising interest rates and higher salaries, wages and benefits to continue affecting results during 2019. No quantitative full-year revenue, earnings or cash-flow guidance was provided in the filing.

The company expects approximately $40 million of additional restructuring expense related to T19 during 2019. T19 includes process and function consolidation and reductions in headcount, large vehicles and U.S. truck-rental locations. Approximately 160 employees had received termination notices and approximately 130 had been terminated by March 31, 2019.

Key risks include intense competition and pricing pressure, changes in travel demand, economic weakness, fuel and labor costs, vehicle acquisition and residual values, manufacturer repurchase obligations, and used-vehicle market conditions.
Liquidity is dependent on operating cash flow, vehicle sales, asset-backed financing, access to credit markets and continued compliance with debt covenants.
The company is exposed to interest-rate, foreign-currency and gasoline-price volatility and uses derivatives to manage portions of these exposures.
Legal and regulatory matters include an accrued liability of approximately $12 million related to two Georgia personal-injury verdicts under appeal. The company estimated reasonably possible aggregate exposure from other legal proceedings of up to approximately $45 million above accrued amounts.
The company guaranteed up to $292 million of residual values for certain leased vehicles and had not recorded a liability because it expected sale proceeds to meet or exceed carrying values.
In April 2019, the company issued approximately $650 million of additional asset-backed notes at a weighted average rate of 3.44% and completed the sale of its Anji investment for $64 million, net of withholding taxes.

Important Facts for Investors to Verify

Assess whether International segment weakness, including lower revenue per day and higher fleet costs, persists beyond the seasonally weak first quarter.
Reconcile total indebtedness, vehicle-program funding capacity and cash availability, distinguishing collateralized vehicle debt from corporate debt.
Monitor the effect of higher interest rates on vehicle interest expense, floating-rate debt and future refinancing costs.
Track execution of T19, including the expected additional $40 million of restructuring expense and its potential savings.
Evaluate vehicle residual values, manufacturer repurchase and guaranteed-depreciation obligations, and the approximately $6.0 billion of vehicle purchase commitments.
Review the impact of the lease-standard adoption when comparing 2019 balance-sheet metrics with 2018.
Verify developments in the appealed Georgia litigation, other legal exposures, and the company’s continued compliance with debt covenants.