Business Context and Reporting Period
Avis Budget Group, Inc. operates the Avis, Budget, Zipcar and other mobility brands in approximately 180 countries. Reportable segments are Americas and International. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods.
Management reported recovering global travel demand, higher rental pricing, disciplined cost management and fleet expansion. The average rental fleet was approximately 707,000 vehicles in the third quarter.
Financial Performance and Key Metrics
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Revenue | $3.547 billion | $3.001 billion | +18% |
| Income before taxes | $1.342 billion | $929 million | +44% |
| Net income attributable to Avis Budget Group | $1.034 billion | $675 million | +53% |
| Diluted EPS | $21.67 | $10.45 | +107% |
| Adjusted EBITDA | $1.460 billion | $1.057 billion | +38% |
Q3 net margin was approximately 29.1%, compared with 22.5% in the prior-year quarter. Adjusted EBITDA margin was approximately 41.2%, compared with 35.2%. Operating expenses rose 20%, less than the 18% revenue increase in absolute terms but increased slightly to 41.3% of revenue from 40.9%. Vehicle depreciation and lease charges declined 52% to $134 million, or 3.8% of revenue, primarily because of favorable used-vehicle pricing and lower per-unit fleet costs.
| Metric | Nine months 2022 | Nine months 2021 | Change |
|---|---|---|---|
| Revenue | $9.223 billion | $6.744 billion | +37% |
| Income before taxes | $3.120 billion | $1.165 billion | +$1.955 billion |
| Net income attributable to Avis Budget Group | $2.341 billion | $903 million | +$1.438 billion |
| Diluted EPS | $46.32 | $13.16 | +252% |
| Adjusted EBITDA | $3.475 billion | $1.728 billion | +101% |
Nine-month net margin was approximately 25.4%, compared with 13.4% in 2021. Adjusted EBITDA margin was approximately 37.7%, compared with 25.6%. Revenue growth reflected a 28% increase in volume and a 9% increase in revenue per day, excluding currency effects. Currency movements reduced nine-month revenue by $248 million.
Americas Q3 revenue increased 12% to $2.703 billion and Adjusted EBITDA increased 24% to $1.185 billion. International revenue increased 41% to $844 million and Adjusted EBITDA increased 127% to $291 million. For the nine-month period, Americas revenue and Adjusted EBITDA increased 33% and 79%, respectively; International revenue and Adjusted EBITDA increased 52% and 478%, respectively.
Cash Flow, Balance Sheet, Debt and Liquidity
- Cash provided by operating activities was $3.862 billion for the first nine months, up from $2.548 billion in 2021.
- Net cash used in investing activities was $3.576 billion, including $7.946 billion invested in vehicles and $4.608 billion of vehicle-disposition proceeds.
- Net cash used in financing activities was $138 million, compared with $2.578 billion of net cash provided in 2021. Financing included $2.574 billion of common-stock repurchases.
- Cash and cash equivalents were $581 million at September 30, 2022. Cash, program cash and restricted cash totaled $721 million, compared with $945 million at September 30, 2021.
- Total indebtedness was approximately $17.7 billion, comprising approximately $4.6 billion of corporate debt and $13.1 billion of debt under vehicle programs.
- Corporate long-term debt was $4.563 billion, compared with $3.990 billion at December 31, 2021. The increase principally reflected a $750 million floating-rate term loan due March 2029.
- Vehicle-program assets increased to $16.935 billion from $14.019 billion at year-end 2021, primarily because of fleet expansion. Vehicle-program liabilities increased to $16.020 billion from $13.876 billion.
- Management reported approximately $1.7 billion of liquidity at September 30, consisting of $0.6 billion of cash and approximately $1.1 billion available under the revolving credit facility. The company was in compliance with its debt covenants.
- Stockholders’ equity was negative $507 million, compared with negative $209 million at December 31, 2021, primarily due to share repurchases partially offset by comprehensive income.
Material Changes Versus the Prior Comparable Period
- Demand and pricing materially improved as travel recovered from pandemic-related disruption. Q3 rental volume increased 17%, and revenue per day increased 4%, excluding currency effects.
- Used-vehicle market conditions materially reduced per-unit fleet costs. Q3 vehicle depreciation and lease charges as a percentage of revenue declined to 3.8% from 9.2%; the nine-month ratio declined to 5.2% from 12.9%.
- Corporate interest expense increased 36% in Q3 to $64 million, and vehicle interest expense increased 34% to $107 million, reflecting higher debt levels and interest rates.
- The prior-year nine-month period included $136 million of early extinguishment-of-debt costs; no such cost was recorded in 2022.
- The company repurchased approximately 13.2 million shares for $2.6 billion during the first nine months, leaving approximately $1.4 billion of authorization. It repurchased an additional approximately 1.5 million shares for $259 million in October 2022.
- On September 1, 2022, the company deconsolidated Avis Mobility Ventures LLC after SRS Mobility Ventures increased its ownership to 51%. Avis recorded a $10 million gain on deconsolidation and now accounts for its retained interest under the equity method.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal quantitative revenue, earnings or cash-flow guidance. Management expects to pursue cost optimization, core revenue growth and fleet investment while seeking to benefit from continued travel demand through the remainder of 2022.
- Supply-chain constraints, including semiconductor shortages, continue to restrict fleet availability and may require the company to hold vehicles longer.
- COVID-19 remains a source of uncertainty through potential new variants, travel restrictions, staffing effects, inflation and interest expense. The company states that the future impact cannot be forecast with reasonable certainty.
- The Russia-Ukraine conflict and related sanctions may increase fuel and fleet costs, impair fleet availability, reduce travel demand and increase cybersecurity risks.
- Approximately $4.2 billion of vehicle purchases were committed over the following 12 months, subject to certain manufacturer repurchase and guaranteed-depreciation obligations.
- The company initiated a 2022 Cost Optimization restructuring plan, terminated approximately 120 employees through September 30 and expects approximately $5 million of additional related restructuring expense.
- Potential exposure from legal proceedings that is reasonably possible but not accrued could be up to approximately $35 million in excess of accrued amounts. Management does not believe these matters will be material to consolidated financial condition or results.
- Management determined that no interim goodwill or indefinite-lived intangible impairment test was required, but adverse economic conditions or changes in cash-flow, discount-rate or market-multiple assumptions could trigger future impairment.
Investor Verification Items
- Verify whether elevated rental pricing, utilization and used-vehicle gains remain sustainable as fleet supply improves and travel demand normalizes.
- Monitor interest-rate exposure, floating-rate debt costs, vehicle-backed financing capacity and compliance with leverage and other covenants.
- Assess liquidity relative to approximately $4.2 billion of vehicle purchase commitments and near-term vehicle-program debt maturities.
- Reconcile Adjusted EBITDA to GAAP results and evaluate the effect of favorable used-vehicle market conditions and other non-recurring items.
- Review the impact of continued share repurchases on leverage, negative book equity and future per-share results.
- Track COVID-19, recession, inflation, fuel-cost, foreign-exchange, supply-chain, manufacturer-credit, litigation and geopolitical risks.
- Review the accounting and valuation consequences of the Avis Mobility Ventures deconsolidation and the company’s retained investment.