Avis Budget Group, Inc. — Q1 2016 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2016. Avis Budget operates Avis, Budget and Zipcar vehicle-rental and car-sharing brands, directly and through licensees, in approximately 180 countries. Reportable segments are Americas and International. The average rental fleet exceeded 580,000 vehicles.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net revenue | $1,881 million | $1,850 million | 2% |
| Vehicle-rental revenue | $1,328 million | $1,319 million | 1% |
| Adjusted EBITDA | $44 million | $117 million | (62%) |
| Adjusted EBITDA margin | 2.3% | 6.3% | Down 4.0 percentage points |
| Loss before income taxes | $(86) million | $(16) million | $(70) million |
| Net loss | $(51) million | $(9) million | $(42) million |
| Diluted loss per share | $(0.53) | $(0.09) | $(0.44) |
| Cash flow from operations | $463 million | $503 million | $(40) million |
Net loss margin was approximately (2.7%), compared with (0.5%) in the prior-year quarter. Operating expenses were 55.3% of revenue versus 53.2%; vehicle depreciation and lease charges were 24.6% versus 23.4%; selling, general and administrative costs were 14.3% versus 13.4%.
- Americas revenue declined 1% to $1,364 million and Adjusted EBITDA declined 45% to $63 million.
- International revenue increased 9% to $517 million, while Adjusted EBITDA declined 94% to $1 million.
- Rental days increased 8% overall, or 5% excluding Maggiore; pricing declined 5% in constant currency.
- Currency movements reduced revenue by approximately $32 million and Adjusted EBITDA by approximately $33 million.
- Cash and cash equivalents were $876 million at March 31, 2016, compared with $452 million at December 31, 2015.
- Total debt was approximately $13.7 billion on the balance sheet, comprising $3.8 billion of corporate debt and $9.9 billion of vehicle-program debt; management described total indebtedness as approximately $14 billion.
- Available corporate committed capacity was approximately $918 million, and available vehicle-program capacity was approximately $3.1 billion.
Material changes versus the prior comparable period
- Revenue grew modestly, but profitability deteriorated substantially because of lower pricing, higher per-unit fleet costs in the Americas, currency headwinds and higher operating, fleet and SG&A expenses.
- Operating expenses increased $55 million, vehicle depreciation and lease charges increased $31 million, and SG&A increased $21 million.
- Restructuring expense increased to $15 million from $1 million, while transaction-related costs fell to $4 million from $31 million.
- Vehicle purchases increased to $4.1 billion from $3.2 billion, producing $1.2 billion of cash used in investing activities versus $774 million in the prior-year quarter.
- Financing cash inflows increased to $1.1 billion from $527 million, primarily from corporate and vehicle-program borrowings.
- The company repurchased approximately 3.0 million shares for $80 million, reducing shares outstanding by approximately 3% and leaving approximately $360 million authorized for further repurchases.
Guidance, outlook, commentary and risks
Management provided no specific numerical earnings or revenue guidance. It expects worldwide demand for vehicle rental and car-sharing services to increase in 2016 amid modest and uneven global growth, expects fleet availability to remain adequate, and intends to pursue pricing increases to improve returns and profitability.
- The T15 restructuring was expanded; approximately 240 employees received termination notices and approximately 100 had been terminated by March 31. The company expects approximately $10 million of additional T15 restructuring expense in 2016.
- Acquisition integration activities affected approximately 70 employees, with approximately $8 million of additional related restructuring expense expected in 2016.
- The company issued $350 million of 6.625% senior notes due 2024, primarily to redeem $300 million of 4.75% notes due 2017. In March 2016, vehicle-program financing also included $450 million of asset-backed notes at a weighted average rate of 3.25%.
- In April 2016, the European fleet securitization program was amended to extend maturity to 2019 and increase capacity to approximately $1.6 billion.
- The company had commitments to purchase approximately $5.2 billion of vehicles over the following 12 months, principally supported by manufacturer repurchase or guaranteed-depreciation arrangements.
- Key risks include intense competition and pricing pressure, travel-demand variability, used-vehicle values, manufacturer recalls and creditworthiness, access to asset-backed and other financing, substantial leverage and covenant compliance, foreign exchange and interest-rate exposure, fuel costs, cyber and information-system disruptions, litigation, regulatory matters and adverse economic or geopolitical conditions.
- French competition proceedings could result in a material loss, although the amount cannot currently be estimated. Canadian proceedings seek approximately $25 million in penalties plus customer reimbursements. Other reasonably possible legal exposure was estimated at up to approximately $30 million above accrued amounts, excluding the French matter.
Important facts for investors to verify
- Whether pricing and fleet-cost trends improve sufficiently to restore Adjusted EBITDA margins, particularly in the Americas.
- The sustainability of cash generation after seasonal fleet purchases, vehicle disposals and vehicle-program debt financing.
- Corporate and vehicle-program refinancing requirements, interest costs, available capacity and compliance with leverage and other covenants.
- Progress and final costs of the T15 restructuring and acquisition-integration programs.
- Exposure to used-vehicle prices, manufacturer repurchase obligations and the $5.2 billion vehicle-purchase commitment.
- Potential outcomes and financial effects of the French and Canadian competition matters and other litigation.
- The effect of foreign exchange movements, pricing initiatives and any planned share repurchases on earnings, liquidity and equity.