Avis Budget Group, Inc. — 2018 Form 10-K Summary
Business context and reporting period
Avis Budget Group provides global mobility services through Avis, Budget, Zipcar and other rental, truck-rental and car-sharing brands. The company operates or licenses its brands in approximately 180 countries, with an average rental fleet of nearly 650,000 vehicles and more than 40 million rental transactions in 2018. Reportable segments are Americas and International.
This filing covers the fiscal year ended December 31, 2018, with comparisons primarily to the year ended December 31, 2017. The filing was signed February 21, 2019. Results are seasonal, with the third quarter historically the strongest.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $9.124 billion | $8.848 billion | +3% |
| Net income | $165 million | $361 million | -54% |
| Diluted EPS | $2.06 | $4.25 | -51% |
| Adjusted EBITDA | $781 million | $735 million | +6% |
| Cash flow from operations | $2.609 billion | $2.648 billion | -$39 million |
| Cash used in investing activities | $3.426 billion | $2.204 billion | -$1.222 billion |
| Cash and cash equivalents | $615 million | $611 million | +$4 million |
| Total assets | $19.149 billion | $17.699 billion | +$1.450 billion |
| Stockholders’ equity | $414 million | $573 million | -$159 million |
Revenue growth reflected 4% higher rental volumes and a $41 million currency benefit, partly offset by a 1% decline in revenue per day excluding currency effects. Total expenses rose 3% to $8.857 billion. Operating expenses were 50.8% of revenue, vehicle depreciation and lease charges were 23.9%, selling, general and administrative expenses were 13.4%, and vehicle interest was 3.4%.
Adjusted EBITDA is a non-GAAP measure and excludes, among other items, non-vehicle depreciation and amortization, corporate interest, restructuring, transaction costs, early debt extinguishment costs, certain legal charges and shareholder-activist costs. It should not be viewed as a substitute for GAAP net income.
Segment performance
| Segment | 2018 revenue | 2017 revenue | 2018 Adjusted EBITDA | 2017 Adjusted EBITDA |
|---|---|---|---|---|
| Americas | $6.186 billion | $6.100 billion | $558 million | $486 million |
| International | $2.938 billion | $2.748 billion | $287 million | $305 million |
| Corporate and Other | — | — | $(64) million | $(56) million |
Americas Adjusted EBITDA increased 15%, driven by higher revenue and 7% lower per-unit fleet costs. International Adjusted EBITDA declined 6%, primarily because of lower revenue per day, higher maintenance and damage costs, and higher marketing costs, partly offset by volume growth and currency benefits.
Debt, liquidity and capital allocation
- Total debt was approximately $13.8 billion at December 31, 2018, consisting of approximately $3.6 billion of corporate debt and $10.2 billion of debt under vehicle programs.
- Unhedged interest-rate-sensitive debt was approximately $4.1 billion at year-end and reached approximately $5.5 billion during the seasonal borrowing peak.
- Cash and cash equivalents were $615 million; committed corporate credit facilities provided $633 million of available capacity; and vehicle programs provided approximately $2.8 billion of available capacity.
- The company reported compliance with its financial and other debt covenants.
- Contractual obligations totaled approximately $27.2 billion, including $10.3 billion of vehicle-program debt, $3.6 billion of corporate debt, $1.8 billion of debt interest, $2.7 billion of operating leases and $8.7 billion of vehicle purchase commitments.
- The company repurchased approximately 5.9 million shares for approximately $200 million during 2018. Approximately $150 million remained available under the repurchase authorization at year-end. No cash dividends were declared or paid.
Material changes versus the prior comparable period
- Revenue and rental volumes increased, but net income fell substantially because 2017 benefited from a $213 million provisional tax benefit under the Tax Cuts and Jobs Act. In 2018, the company recorded an additional $30 million tax expense related to completing the transition-tax accounting.
- Adjusted EBITDA improved despite higher salaries, wages, benefits and interest rates, primarily due to lower Americas fleet costs.
- Vehicle-program assets increased to $12.779 billion from $11.879 billion, primarily due to fleet growth. Vehicle-program debt increased to $10.232 billion from $9.221 billion.
- The company acquired Morini in Northern Italy, Turiscar in Portugal, various Avis and Budget licensees, and a 40% interest in its Greek licensee.
- The company issued €350 million of 4.75% senior notes due 2026 and redeemed its $400 million of 5.875% senior notes due 2022. It also extended the maturity of its floating-rate term loan to 2025 and its senior revolving credit facility to 2023.
- Restructuring and other related charges declined to $22 million from $63 million, while early extinguishment-of-debt costs increased to $19 million from $3 million. The company also recorded $9 million of non-operational shareholder-activist costs.
- Adoption of the new revenue-recognition standard produced a cumulative reduction of approximately $40 million, net of tax, to beginning retained earnings, primarily from deferral of customer loyalty-point revenue.
Guidance, outlook, risks and unusual items
Management expected worldwide demand for mobility solutions to increase in 2019, against a backdrop of modest and potentially uneven global economic growth. The company planned to pursue pricing, ancillary-revenue, fleet optimization, cost-reduction, connected-vehicle and technology initiatives. It anticipated approximately $235 million of non-vehicle property and equipment additions in 2019.
- Major risks include intense price competition, ride-hailing and emerging mobility platforms, changes in travel demand, economic weakness, fuel-price volatility and airline disruptions.
- Fleet economics are highly sensitive to used-vehicle residual values, manufacturer recalls, vehicle availability, manufacturer repurchase obligations and the ability to refinance vehicle-backed debt.
- Higher interest rates could materially increase costs because a portion of borrowings is variable-rate. Most vehicle-program and certain corporate debt maturities occur within five years.
- Liquidity could be pressured by disruption in asset-backed securities or credit markets, higher collateral requirements, reduced used-vehicle prices or covenant breaches.
- The company retains material insurance and liability exposure. It reported approximately $421 million of liabilities for retained public-liability and property-damage risks.
- The company was appealing personal-injury verdicts and had accrued approximately $12 million for expected losses, net of recoverable insurance proceeds. Other reasonably possible legal exposure was estimated at up to approximately $45 million above accrued amounts.
- Cybersecurity, privacy, GDPR compliance, regulatory changes, foreign exchange, tax changes, environmental obligations and actions of licensees, independent operators and vendors could adversely affect results.
- Most operating leases were recognized on the balance sheet beginning January 1, 2019 under the new lease standard, which was expected to increase assets and liabilities by approximately $3 billion.
- In February 2019, the vehicle-funding subsidiary issued approximately $600 million of asset-backed notes with an expected final payment date of March 2022 and an approximately 4% weighted-average interest rate.
Important facts for investors to verify
- Reconcile the decline in GAAP net income and EPS with the unusually large 2017 Tax Act benefit and the 2018 transition-tax adjustment.
- Assess whether Americas fleet-cost improvements and higher Adjusted EBITDA are sustainable as used-vehicle values, interest rates and rental pricing change.
- Review refinancing requirements, vehicle-program collateral capacity, variable-rate exposure and covenant headroom.
- Evaluate the company’s ability to fund approximately $8.7 billion of vehicle purchases and other contractual obligations while maintaining liquidity.
- Monitor International revenue-per-day trends, maintenance costs and the integration performance of Morini, Turiscar and other acquired licensees.
- Review residual-value assumptions for risk vehicles, manufacturer repurchase and guaranteed-depreciation arrangements, recalls and used-vehicle disposal channels.
- Consider the effect of the 2019 lease-accounting adoption on leverage, assets, liabilities and debt-related metrics.
- Review pending litigation, insurance reserves, tax uncertainties and the company’s approximately $4.9 billion of U.S. federal net operating loss carryforwards.