Avis Budget Group, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2017; filed August 8, 2017. Avis operates Avis, Budget, Zipcar and other rental and car-sharing brands in approximately 180 countries through its Americas and International segments.
Financial performance and key metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net revenues | $2.238 billion | $2.243 billion | $4.077 billion | $4.124 billion |
| Income before taxes | $11 million | $63 million | Loss of $154 million | Loss of $23 million |
| Net income (loss) | $3 million | $36 million | Loss of $104 million | Loss of $15 million |
| Diluted EPS | $0.04 | $0.38 | $(1.22) | $(0.16) |
| Adjusted EBITDA | $140 million | $204 million | $113 million | $248 million |
| Cash flow from operations | Not separately provided | Not separately provided | $1.139 billion | $1.079 billion |
Q2 net revenue was essentially flat: rental volume increased 5%, but time and mileage revenue per rental day declined 5%. Vehicle depreciation and lease charges rose 12% to $597 million, and represented 26.7% of revenue versus 23.7% in the prior-year quarter. Selling, general and administrative expense declined 6% to $293 million, or 13.1% of revenue. Q2 Adjusted EBITDA margin declined to approximately 6.3% from 9.1%.
For the first six months, rental volume increased 4%, while time and mileage revenue per day declined 5%. Vehicle depreciation and lease charges increased 11% to $1.101 billion, or 27.0% of revenue versus 24.1% in the prior-year period. Adjusted EBITDA margin declined to approximately 2.8% from 6.0%.
- Americas: Q2 revenue declined 2% to $1.565 billion and Adjusted EBITDA declined 41% to $96 million. First-half revenue declined 3% to $2.879 billion and Adjusted EBITDA declined 66% to $76 million, primarily because of lower revenue per day and higher per-unit fleet costs.
- International: Q2 revenue increased 4% to $673 million and Adjusted EBITDA increased 4% to $59 million. First-half revenue increased 3% to $1.198 billion and Adjusted EBITDA increased 14% to $66 million, aided by FranceCars and higher rental volumes.
Liquidity, cash flow and debt
- Cash and cash equivalents were $776 million at June 30, 2017, compared with $490 million at December 31, 2016.
- Six-month investing cash use was $3.019 billion, including $8.116 billion of vehicle purchases and $5.059 billion of vehicle disposal proceeds.
- Six-month financing cash provided was $2.139 billion. The company repurchased approximately 3.4 million shares for $100 million.
- Total indebtedness was approximately $15 billion, comprising approximately $4 billion of corporate debt and $11 billion of vehicle-program debt.
- Corporate debt totaled $3.572 billion before classification between current and long-term debt. The company issued €250 million of 4.5% senior notes due 2025 and increased its 2022 floating-rate term loan by $188 million, using proceeds to refinance or redeem 2017 and 2021 maturities. Management stated there were no significant corporate debt maturities until 2022.
- Available capacity was approximately $499 million under the senior revolving credit facility and $1.591 billion under vehicle programs. The company reported compliance with its debt covenants.
- Vehicle-program assets were $14.019 billion and related liabilities were $14.495 billion at June 30, 2017, reflecting seasonal fleet expansion.
Material changes and unusual items
- The company initiated the T17 restructuring program to reduce headcount, consolidate functions, close locations and reduce fleet size. It recorded $24 million of T17 restructuring expense during the first six months and expects approximately $10 million of additional 2017 expense. Approximately 535 employees were notified of termination and approximately 410 had been terminated by June 30.
- The company recorded $14 million related to a limited voluntary termination program; approximately 325 employees elected to participate and approximately 185 had been terminated by June 30.
- The resignation of President and CFO David B. Wyshner resulted in $7 million of separation-related charges, including $2 million of accelerated stock compensation.
- The company recognized $27 million of recoverable insurance proceeds related to Georgia personal-injury litigation. The net liability for those cases was approximately $12 million at June 30. Potential exposure from reasonably possible adverse legal outcomes was estimated at up to approximately $50 million above accrued amounts.
- The company adopted ASU 2016-09, increasing deferred tax assets by $56 million and reducing accumulated deficit by the same amount at January 1, 2017.
- The company expects the 2019 lease standard to materially increase reported assets and liabilities upon adoption. The new revenue standard is expected to change the presentation of vehicle rental and other revenue and affect loyalty-program and rebate accounting.
Outlook, commentary and risks
Management continued to anticipate increased worldwide rental and car-sharing demand in 2017, supported by modest but uneven global economic growth. Fleet availability was considered adequate, and the company expected to pursue pricing increases, optimize fleet levels, improve customer experience and implement cost-efficiency initiatives. No quantitative full-year earnings guidance was provided in the filing.
Key risks include intense competition and pricing pressure, lower travel demand, soft used-vehicle values, vehicle manufacturer repurchase and guaranteed-depreciation obligations, fleet costs, access to asset-backed and other financing, substantial leverage and covenant compliance, interest-rate, foreign-exchange and fuel-price exposure, cybersecurity and information-system disruptions, litigation and insurance claims, regulatory changes, acquisitions, and geopolitical or economic disruption. The filing also notes dependence on third-party distribution channels, suppliers, licensees and manufacturers.
Important facts for investors to verify
- Whether pricing and rental-volume initiatives can offset declining revenue per rental day.
- Whether used-vehicle values and per-unit fleet costs improve, particularly in the Americas.
- The pace and cash cost of T17 restructuring, the voluntary termination program and executive separation charges.
- Liquidity needs and refinancing capacity given approximately $15 billion of total debt and vehicle-program maturities, including $1.311 billion due within one year.
- The sustainability and strategic rationale of share repurchases while the company reports a first-half net loss and has only $148 million of stockholders’ equity.
- Potential outcomes of personal-injury litigation and other claims, including exposure estimated at up to approximately $50 million above accrued amounts.
- The effect of the 2018 revenue and lease accounting adoptions on reported revenue, assets, liabilities and comparability.