Avis Budget Group, Inc. — Fiscal 2020 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2020. Avis Budget Group provides vehicle rental, truck rental, car-sharing and related mobility services through Avis, Budget, Zipcar and other brands in approximately 180 countries. Operations are reported in the Americas and International segments.
COVID-19 travel restrictions caused an unprecedented decline in reservations and rental demand beginning in March 2020. The average global rental fleet declined 19% to approximately 533,000 vehicles, transactions declined 47% to approximately 22 million, and on-airport revenue represented approximately 50% of revenue, down from 64% in 2019.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $5.402 billion | $9.172 billion | Down 41% |
| Income before taxes | $(956) million | $287 million | Decline of $1.243 billion |
| Net income (loss) | $(684) million | $302 million | Decline of $986 million |
| Diluted EPS | $(9.71) | $3.98 | Turned negative |
| Adjusted EBITDA | $(175) million | $788 million | Decline of $963 million |
| Operating cash flow | $691 million | $2.586 billion | Down $1.895 billion |
| Cash, program cash and restricted cash | $765 million | $900 million | Down $135 million |
| Total debt, including vehicle-program debt | Approximately $11.1 billion | Not clearly stated on a comparable basis in the filing summary | Not clearly stated |
Revenue declined primarily due to a 38% decrease in volume and a 6% decrease in revenue per day, excluding currency effects. Americas revenue declined 38% to $3.965 billion and Adjusted EBITDA declined 89% to $72 million. International revenue declined 49% to $1.437 billion and Adjusted EBITDA declined to a loss of $202 million.
Operating expenses were $3.322 billion, vehicle depreciation and lease charges were $1.368 billion, selling, general and administrative expense was $703 million, vehicle interest was $318 million, and corporate interest expense was $231 million. Operating expenses increased to 61.5% of revenue from 51.2% in 2019; vehicle depreciation and lease charges increased to 25.3% from 22.5%; vehicle interest increased to 5.9% from 3.8%; and selling, general and administrative expense decreased to 13.0% from 13.5%.
Investing activities provided $3.177 billion, primarily reflecting substantially lower vehicle purchases and proceeds from vehicle dispositions. Financing activities used $4.045 billion, principally due to lower net borrowings under vehicle programs. Non-vehicle capital expenditures were $94 million, and management expected approximately $235 million of such additions in 2021.
Material changes versus the prior comparable period
- Revenue fell 41%, rental transactions fell 47%, and the average fleet fell 19% as travel demand collapsed.
- The Company reduced its fleet aggressively, ended 2020 with 31% fewer vehicles than the prior year, cancelled vehicle purchases and reduced operating expenditures.
- The Company initiated a global restructuring plan, formally terminating approximately 4,300 employees and recording $118 million of restructuring and other related charges in 2020.
- COVID-19 charges totaled $122 million, including minimum guaranteed airport rent, cleaning and overflow-parking costs and vehicle losses.
- An April 2020 overflow-lot fire destroyed vehicles with an estimated carrying value of approximately $50 million and resulted in an approximately $10 million loss, net of insurance, included in COVID-19 charges.
- Stockholders’ equity declined to $(155) million from $656 million, primarily because of the comprehensive loss and share repurchases.
- The Company repurchased approximately 5.0 million shares for $113 million during the first quarter of 2020. No repurchases occurred during the fourth quarter.
- Corporate debt increased through the issuance of $500 million of 10.5% Senior Secured Notes due 2025 and $350 million of additional 5.75% Senior Notes due 2027. The Company also redeemed $100 million of notes due 2023.
- The Company issued approximately $700 million and $650 million of asset-backed notes to refinance maturing vehicle debt and fund U.S. rental vehicles.
- The Company did not declare or pay cash dividends in 2020 or 2019 and did not anticipate paying dividends in the near term.
Liquidity, debt and contingencies
At December 31, 2020, management reported approximately $0.7 billion of available cash and cash equivalents and approximately $0.6 billion of available borrowing capacity under the revolving credit facility, for approximately $1.3 billion of total liquidity. The $1.8 billion revolving facility matures in 2023, while an approximately $1.2 billion term loan matures in 2027.
The April 2020 credit agreement amendment provided a leverage-covenant holiday through June 30, 2021, but imposed a liquidity covenant, additional reporting requirements, higher pricing and restrictions on certain revolving-facility borrowings. The Company was in compliance with its debt covenants at December 31, 2020.
Contractual obligations totaled approximately $25.105 billion, including $6.902 billion of vehicle-program debt, $4.258 billion of corporate debt, $1.810 billion of debt interest, $3.209 billion of operating leases and $8.740 billion of vehicle purchase commitments, substantially due in 2021. Management stated that, under current operating assumptions, liquidity was adequate beyond the next twelve months and that there were no meaningful corporate debt maturities until 2023.
Unhedged interest-rate-sensitive debt was approximately $1.9 billion at year-end, rising to approximately $5.5 billion during the seasonal borrowing peak. Approximately 76% of the average rental fleet consisted of risk vehicles, exposing the Company to used-vehicle residual-value risk. The filing reports approximately $35 million of reasonably possible additional legal exposure above accrued amounts and $24 million of income-tax uncertainties, with certain amounts subject to indemnification.
Guidance, outlook and management commentary
Management expected its 2021 strategy to emphasize cost discipline, revenue growth and reinvestment as travel demand normalized. Priorities included improving Adjusted EBITDA margins, expanding contactless and mobile rental capabilities, growing off-airport, ride-hail, package-delivery and partnership channels, and investing in technology, direct-to-consumer vehicle sales and other mobility models.
The filing does not provide a specific 2021 revenue, earnings or Adjusted EBITDA forecast. Management stated that the duration and severity of COVID-19, the pace of travel recovery and future operating conditions could not be estimated with reasonable certainty.
Unusual items included $122 million of COVID-19 charges, $118 million of restructuring and related charges, $8 million of unprecedented personal-injury and other legal matters, and $9 million of early debt-extinguishment costs. Adjusted EBITDA is a non-GAAP measure and excludes these and other specified items; its definition was revised in 2020 to exclude COVID-19 charges.
Principal risks
- Extended or renewed COVID-19 effects, travel restrictions, weaker airline activity and reduced commercial or leisure demand.
- Liquidity pressure from high leverage, vehicle-program maturities, covenant requirements, potential credit-rating downgrades and disruption in asset-backed or credit markets.
- Used-vehicle residual-value declines, fleet collateral requirements and manufacturer failures under repurchase or guaranteed-depreciation programs.
- Intense price competition from rental companies, ride-hailing providers, car-sharing businesses, automakers and technology companies.
- Variable interest rates, foreign-exchange movements, fuel prices and the effectiveness of related hedging instruments.
- Legal, insurance, self-insurance, employment, tax, privacy, cybersecurity and regulatory exposures.
- Potential goodwill or intangible-asset impairment; the EMEA reporting unit’s estimated fair value exceeded carrying value by 17% at the October 1, 2020 testing date.
Important facts for investors to verify
- Whether rental volume, revenue per day, fleet utilization and travel demand recovered sufficiently after year-end 2020.
- Compliance with the liquidity covenant and the consolidated first-lien leverage requirement after the June 30, 2021 covenant-relief period.
- Availability and cost of refinancing for vehicle-program debt and the approximately $8.7 billion of vehicle purchase commitments.
- Used-vehicle sale prices, residual values, collateral requirements and manufacturer performance under repurchase and guaranteed-depreciation agreements.
- Cash generation after COVID-19 charges, restructuring costs, interest expense and required fleet investment.
- Potential impairment of goodwill, particularly the EMEA reporting unit, if the recovery outlook deteriorates.
- The filing’s audited financial statements and internal-control report, both of which received unqualified opinions from Deloitte & Touche LLP.