Avis Budget Group, Inc. — FY2016 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2016, filed February 21, 2017. Avis Budget operates Avis, Budget, Zipcar, Budget Truck, Payless, Apex, Maggiore and France Cars businesses across approximately 180 countries through its Americas and International segments. The company averaged approximately 600,000 vehicles and completed more than 39 million rental transactions during 2016.
Operations are seasonal, with the third quarter historically the strongest. Fourth-quarter 2016 revenue was $1.879 billion and net loss was $31 million, compared with fourth-quarter 2015 revenue of $1.902 billion and net loss of $5 million.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net revenue | $8.659 billion | $8.502 billion | Up 2% |
| Vehicle rental revenue | $6.081 billion | $6.026 billion | Up 1% |
| Other revenue | $2.578 billion | $2.476 billion | Up 4% |
| Net income | $163 million | $313 million | Down 48% |
| Diluted EPS | $1.75 | $2.98 | Down 41% |
| Adjusted EBITDA | $838 million | $903 million | Down 7% |
| Operating cash flow | $2.629 billion | $2.584 billion | Up $45 million |
Rental days increased 3%, but pricing declined 2%, including a $36 million adverse currency impact. Per-unit fleet costs increased 3%, and vehicle depreciation and lease charges rose 6% to $2.047 billion, or 23.6% of revenue versus 22.7% in 2015. Operating expenses were 50.6% of revenue, compared with 50.4% in 2015. The effective tax rate increased to 42% from 18%; 2015 benefited from a $98 million prior-year tax resolution.
Americas revenue increased 1% to $6.121 billion, while Adjusted EBITDA declined 7% to $633 million. International revenue increased 4% to $2.538 billion, while Adjusted EBITDA declined 1% to $273 million. Total company Adjusted EBITDA margin was approximately 9.7%, compared with approximately 10.6% in 2015.
Cash flow, debt and liquidity
- Cash and cash equivalents increased to $490 million from $452 million.
- Cash used in investing activities was $2.149 billion, including $12.461 billion of vehicle purchases and $10.504 billion of vehicle disposition proceeds.
- Total debt was approximately $12.4 billion, consisting of $3.5 billion of corporate debt and $8.9 billion of debt under vehicle programs.
- Vehicle-program assets totaled $11.578 billion, including $10.464 billion of vehicles. Debt under vehicle programs represented 77% of vehicle-program assets, compared with 76% in 2015.
- Available liquidity included $1.0 billion under committed non-vehicle credit facilities and approximately $3.6 billion under vehicle programs.
- The company was in compliance with applicable financial covenants at December 31, 2016.
- Corporate debt maturities totaled $279 million in 2017; vehicle-program debt maturities totaled $1.094 billion in 2017 and $2.508 billion in 2018.
Material changes versus the prior comparable period
- Profitability weakened despite modest revenue and volume growth, primarily because of lower pricing, higher fleet costs, increased marketing and commissions, and unfavorable currency movements.
- Net income declined $150 million, while Adjusted EBITDA declined $65 million.
- The company recorded $29 million of restructuring expense, $21 million of transaction-related costs, $27 million of early debt-extinguishment costs and a $26 million charge related to a personal-injury legal matter.
- The company repurchased approximately 12.3 million shares for approximately $390 million, reducing shares outstanding by approximately 13%; approximately $300 million remained available under the authorization at year-end.
- The company issued $350 million of 6.375% senior notes due 2024 and €300 million of 4.125% senior notes due 2024, using proceeds primarily to refinance nearer-term or higher-cost debt. It also extended $825 million of term-loan borrowings to March 2022.
- France Cars was acquired in December 2016 for approximately $45 million, net of acquired cash, expanding the company’s French light-commercial-vehicle operations.
- Stockholders’ equity declined to $221 million from $439 million, primarily due to share repurchases partially offset by net income.
Guidance, outlook, risks and unusual items
Management expected worldwide demand for rental and car-sharing services to increase in 2017 amid modest and uneven global economic growth. Management expected adequate access to fleet vehicles and planned to pursue pricing increases to improve returns and profitability. It also expected to use most of the approximately $300 million of remaining share-repurchase authorization during 2017, incur approximately $210 million of non-vehicle capital expenditures, and purchase approximately $7.7 billion of vehicles over the following 12 months. No specific revenue or earnings guidance was provided.
- Key risks include intense price competition, travel-demand volatility, fleet acquisition and residual-value risk, manufacturer repurchase obligations, recalls, used-car pricing, fuel and labor costs, foreign exchange, interest rates and access to asset-backed financing.
- Substantial leverage and vehicle-backed maturities create refinancing and collateral risks. Approximately $2.6 billion of debt was unhedged interest-rate-sensitive debt at year-end.
- The company relies on airports, airlines, hotels, online travel agencies, global distribution systems, licensees and other third parties.
- Cybersecurity, information-system outages, privacy regulation, litigation, insurance claims, regulatory investigations and actions by licensees or independent operators could adversely affect results.
- The French Competition Authority proceeding remained unresolved, with potential losses described as possibly material but not estimable.
- A Georgia personal-injury verdict and a similar case resulted in a recognized liability of $26 million; the company intended to appeal.
- The company had $2.701 billion of operating-lease commitments, $141 million of other purchase commitments, and $40 million of income-tax uncertainties excluded from the contractual-obligations table.
- A January 2017 stockholder rights plan was adopted, expiring January 22, 2018, and generally triggered if a person or group acquired 10% or more of the company’s outstanding common stock.
Most important facts for investors to verify
- Whether pricing, fleet costs and Adjusted EBITDA margins improved after the 2016 deterioration.
- The company’s ability to refinance approximately $1.1 billion of vehicle-program maturities in 2017 and meet longer-term maturities.
- Actual utilization, residual values, program-car economics and manufacturer performance under repurchase and guaranteed-depreciation agreements.
- Progress and returns from the France Cars acquisition, Zipcar expansion and restructuring initiatives.
- Outcomes and additional exposure related to the French competition matter, personal-injury litigation and other claims.
- The effect of share repurchases on leverage, liquidity, per-share earnings and stockholders’ equity.
- Implementation effects of new lease and revenue-recognition accounting standards, particularly the expected increase in recognized assets and liabilities from operating leases.