AVIS BUDGET GROUP, INC. quarterly report, Q1 FY2020

Avis Budget Group, Inc. — Q1 2020 Form 10-Q Summary

Business context and reporting period

Filing for the quarter ended March 31, 2020, filed April 30, 2020. Avis Budget Group operates Avis, Budget, Zipcar and other mobility brands in approximately 180 countries through its Americas and International segments. Results were materially affected by the COVID-19 pandemic, travel restrictions and the resulting unprecedented decline in rental demand.

Key financial metrics

Metric	Q1 2020	Q1 2019	Change
Revenue	$1,753 million	$1,920 million	Down 9%
Loss before taxes	$(265) million	$(136) million	Loss increased $129 million
Net loss	$(158) million	$(91) million	Loss increased $67 million
Adjusted EBITDA	$(87) million	$(1) million	Loss increased $86 million
Diluted loss per share	$(2.16)	$(1.20)	Worsened $0.96
Net cash from operating activities	$370 million	$440 million	Down $70 million
Cash, cash equivalents, program and restricted cash	$721 million	$676 million	Up $45 million year over year

Revenue declined primarily because rental volume fell 7%, including a 20 million negative foreign-exchange impact and a 1% decrease in revenue per day excluding currency effects. Americas revenue declined 5% and International revenue declined 16%.

Total expenses were $2,018 million, down 2% year over year, but expenses remained high relative to revenue. Operating expenses were 60.3% of revenue versus 55.8% in the prior-year quarter; vehicle depreciation and lease charges were 26.2% versus 25.3%; and vehicle interest was 4.7% versus 4.2%.

Adjusted EBITDA was $(30) million in Americas, $(40) million in International and $(17) million for Corporate and Other. The company excluded $7 million of COVID-19 charges from Adjusted EBITDA, which is a non-GAAP measure.

Balance sheet, debt and liquidity

Total assets were $23.6 billion at March 31, 2020, including $14.3 billion of assets under vehicle programs.
Corporate debt was approximately $3.5 billion, including $3.4 billion of long-term debt. Debt under vehicle programs was approximately $12.0 billion, resulting in approximately $15.5 billion of total indebtedness.
Cash and cash equivalents were $679 million, compared with $686 million at December 31, 2019.
The company reported approximately $590 million of available capacity under its $1.8 billion senior revolving credit facility after letters of credit.
Management estimated approximately $1.3 billion of total liquidity from cash and revolving-credit availability, plus access to up to $1.0 billion of available cash and cash equivalents from AESOP.
The company had no meaningful corporate debt maturities until 2023 and no fleet debt refinancing requirement in 2020 under its stated plans.
Vehicle-program debt increased to $12.0 billion from $11.1 billion at year-end 2019, while stockholders’ equity declined to $292 million from $656 million, primarily due to comprehensive loss and share repurchases.

Cash flow and capital allocation

Investing activities used $1.5 billion, including $3.8 billion invested in vehicles and $2.5 billion of proceeds from vehicle dispositions.
Financing activities provided $962 million, primarily through vehicle-program borrowings.
In January 2020, Avis Budget Rental Car Funding issued approximately $700 million of asset-backed notes at a weighted-average interest rate of 2.42%.
The company repurchased approximately 5.0 million shares for $113 million at an average price of $22.49; approximately $76 million remained under the authorization at March 31, 2020.
Vehicle purchase commitments for the next 12 months declined to approximately $2.7 billion, down $5.1 billion from December 31, 2019.

Material changes versus the prior comparable period

COVID-19 caused a sharp decline in reservations, rental volume and revenue, with the International segment particularly affected.
Adjusted EBITDA shifted from a $1 million loss to an $87 million loss.
Net loss increased from $91 million to $158 million.
Operating and fleet-related costs became larger percentages of revenue despite lower absolute expenses.
Restructuring and other related charges increased to $44 million from $21 million, including the COVID-related 2020 Optimization Plan, Brazil restructuring, employee separation costs and a former executive’s separation.
Corporate interest expense increased to $48 million from $42 million, and the company recorded $4 million of early debt-extinguishment costs.
Comprehensive loss was $257 million versus $96 million, including $99 million of other comprehensive loss primarily from currency translation and hedging effects.

Guidance, outlook, risks and unusual items

Management did not provide quantitative financial guidance and stated that the magnitude, duration and speed of the pandemic made future results and liquidity requirements difficult to predict.
Reservations for the remainder of 2020 were significantly behind the prior year, potentially affecting the historically most profitable summer quarter.
The company expected to end June with more than 20% fewer fleet units than the prior year through vehicle dispositions, cancellations and reduced purchases.
Cost actions included workforce reductions and furloughs, compensation reductions, hiring and merit freezes, elimination of certain 401(k) matching, lower capital expenditures and negotiations with suppliers.
The 2020 Optimization Plan resulted in approximately 585 communicated employee terminations, with approximately 450 completed by March 31. Further restructuring expense of approximately $15 million was expected in 2020; approximately $7 million of additional Brazil restructuring expense was also expected.
In April 2020, the company amended its senior credit facilities, including a waiver of the quarterly-tested leverage covenant through June 30, 2021. The amendment increases pricing, imposes a liquidity covenant and adds borrowing and reporting conditions.
Moody’s and S&P Global downgraded the company’s long-term corporate debt ratings in April 2020. Further downgrades could increase borrowing costs and restrict financing access.
An April 2020 fire destroyed vehicles with an estimated carrying value of approximately $50 million. The company estimated a loss of up to $10 million, net of insurance, to be treated as a COVID-19 charge.
Management determined that an interim goodwill and indefinite-lived intangible-asset impairment test was not required at March 31, but warned that continued deterioration could require material impairment charges in future periods.
Key risks include prolonged travel restrictions, weaker used-vehicle residual values, collateral requirements under asset-backed financing, manufacturer or supplier failures, covenant compliance, refinancing access, foreign exchange, interest rates, gasoline prices and litigation.
Potential exposure from reasonably possible adverse legal outcomes was estimated at up to approximately $40 million above accrued amounts; a separate Georgia litigation liability of approximately $12 million had been recognized.

Investor verification checklist

Verify the pace of reservation and rental-volume recovery, particularly for the summer season and airport-related demand.
Monitor cash burn, available revolving capacity, AESOP liquidity access and compliance with the amended liquidity and leverage covenants.
Assess used-vehicle prices, fleet disposition volumes, residual-value losses and asset-backed financing collateral requirements.
Reconcile Adjusted EBITDA with GAAP loss and review the company’s expanded exclusion for COVID-19 charges.
Track the impact of debt-rating downgrades, borrowing costs and upcoming corporate and vehicle-program maturities.
Evaluate potential goodwill, trademark and other asset impairments if travel demand or market conditions remain weak.
Confirm the actual costs and savings from workforce reductions, fleet cuts and restructuring programs.