Avis Budget Group, Inc. — 2018 Q1 Form 10-Q Summary
Business context and reporting period
Avis Budget Group provides vehicle rental and mobility solutions through Avis, Budget, Zipcar, Payless and other brands. It operates in approximately 180 countries through two reportable segments: Americas and International. This unaudited Form 10-Q covers the three months ended March 31, 2018.
The first quarter is seasonally weaker and lower-margin than the remainder of the year, and management cautions that quarterly results are not necessarily indicative of full-year performance.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $1.968 billion | $1.839 billion | Up 7% |
| Loss before income taxes | $129 million | $165 million | Improved $36 million |
| Income tax benefit | $42 million | $58 million | Lower benefit |
| Net loss | $87 million | $107 million | Improved $20 million |
| Basic and diluted loss per share | $1.08 | $1.25 | Improved $0.17 |
| Adjusted EBITDA | $2 million | $(27) million | Improved $29 million |
| Operating cash flow | $503 million | $447 million | Up $56 million |
| Capital investment in vehicles | $4.226 billion | $3.944 billion | Up $282 million |
| Net cash used in investing activities | $(1.736) billion | $(1.059) billion | Higher use of $677 million |
Net loss margin was approximately negative 4.4% of revenue, compared with negative 5.8% in the prior-year quarter. Adjusted EBITDA margin was approximately 0.1%, compared with negative 1.5% in Q1 2017. Operating expenses declined to 55.5% of revenue from 57.1%, while vehicle depreciation and lease charges declined to 26.2% from 27.4%. SG&A increased to 15.1% of revenue from 14.2%.
- Americas revenue increased 3% to $1.348 billion, while Adjusted EBITDA improved to $15 million from a $20 million loss. Rental volumes increased 3%, utilization rose 120 basis points and per-unit fleet costs decreased 4%.
- International revenue increased 18% to $620 million, primarily due to 9% higher rental volumes and a $61 million currency benefit. Adjusted EBITDA declined to $3 million from $7 million due to higher marketing, airport concession, weather-related maintenance and damage costs.
- Revenue growth reflected a 5% increase in consolidated rental volumes, a 2% increase in revenue per day and a 3% favorable currency impact.
Balance sheet, debt and liquidity
| Balance-sheet item | March 31, 2018 | December 31, 2017 |
|---|---|---|
| Cash and cash equivalents | $544 million | $611 million |
| Cash, program cash and restricted cash | $701 million | $901 million |
| Total assets | $19.222 billion | $17.699 billion |
| Corporate long-term debt | $3.581 billion | $3.573 billion |
| Debt under vehicle programs | $10.382 billion | $9.221 billion |
| Stockholders’ equity | $455 million | $573 million |
Total indebtedness was approximately $14 billion, consisting of approximately $4 billion of corporate debt and $10 billion of vehicle-program debt. Available liquidity included approximately $0.5 billion of cash and cash equivalents, $0.7 billion of available committed corporate credit capacity and $2.6 billion of available vehicle-program capacity.
Vehicle-program debt is collateralized primarily by rental vehicles and related assets. The company reported compliance with its corporate and vehicle-program financial covenants as of March 31, 2018. In February 2018, the maturity of the floating-rate term loan was extended to 2025 and the senior revolving credit facility maturity was extended to 2023.
Cash and cash equivalents, program cash and restricted cash decreased by $200 million during the quarter, compared with a $350 million increase in Q1 2017. The reduction reflected substantial seasonal investment in vehicles, partly offset by operating cash flow and vehicle-program borrowings.
Material changes versus the prior comparable period
- Revenue increased $129 million, supported by higher rental volumes and favorable currency movements.
- Net loss improved by $20 million and Adjusted EBITDA improved by $29 million, primarily due to stronger Americas performance, lower Americas fleet costs and the absence of the prior-year personal-injury legal charge.
- Vehicle depreciation and lease charges increased in dollars but declined as a percentage of revenue, reflecting lower per-unit fleet costs and higher utilization.
- SG&A increased $34 million, including $9 million of non-operational shareholder activist-related costs, as well as higher marketing investment and commissions.
- Vehicle-program assets increased $1.377 billion, largely because of seasonal fleet expansion, while vehicle-program liabilities increased $1.429 billion.
- The company adopted the revenue recognition standard Topic 606 on a modified retrospective basis. The adoption increased the customer loyalty program liability by approximately $50 million and reduced beginning accumulated deficit by approximately $40 million after tax. Q1 2018 revenue was $7 million lower and net loss was $4 million higher than it would have been without adoption.
- The company made a $19 million initial investment for a 20% stake in its Greek licensee and agreed to purchase an additional 20% for $20 million in installments in 2019 and 2020.
- No shares were repurchased under the announced repurchase program during the quarter; approximately $100 million of authorization remained.
Outlook, commentary, risks and unusual items
Management reported increased worldwide rental demand, stabilized U.S. used-vehicle values and improved pricing in the Americas. It expects these conditions to continue through 2018, but identified rising interest rates and other headwinds. The company plans to pursue profitable growth, operational efficiency, fleet optimization, technology investment and improved returns on invested capital. No specific quantitative full-year revenue or earnings guidance was provided in the filing.
- A workforce-planning restructuring initiative began in Q1 2018. The company communicated terminations to 47 employees and expected approximately $15 million of additional related restructuring expense during 2018. It also expected approximately $2 million of additional expense from its truck-rental restructuring initiative.
- The company recorded $6 million of restructuring and related charges, $4 million of transaction-related costs, $5 million of early debt-extinguishment costs and $9 million of shareholder activist-related costs.
- The company has approximately $5.4 billion of vehicle purchase commitments over the following 12 months, financed primarily through vehicle-backed debt and vehicle-sale proceeds.
- Legal proceedings are ongoing. The company has accrued approximately $12 million for two related Georgia personal-injury cases, net of recoverable insurance. Aggregate reasonably possible exposure from other adverse legal outcomes could be up to approximately $50 million above accrued amounts.
- The Tax Act created continuing uncertainty regarding the one-time transition tax, foreign earnings, tax attributes and GILTI. The company had not finalized its accounting for the Tax Act as of March 31, 2018.
- The company expects adoption of the lease accounting standard in 2019 to materially increase reported assets and liabilities because most operating lease commitments will be recognized on the balance sheet.
- Key operating risks include competition and pricing, travel demand, used-vehicle values, manufacturer repurchase and guaranteed-depreciation obligations, financing access, interest rates, foreign exchange, fuel prices, economic conditions, cybersecurity, litigation and compliance with debt covenants.
In April 2018, the vehicle-funding subsidiary issued approximately $400 million of asset-backed notes with an expected final payment date of September 2023 and a weighted-average interest rate of 4%. The short-term stockholder rights plan adopted in January 2018 was terminated on April 16, 2018.
Important facts for investors to verify
- Whether the improvement in Americas profitability and Adjusted EBITDA is sustained after the seasonally weak first quarter.
- The effect of rising interest rates on approximately $14 billion of total indebtedness and vehicle interest expense.
- Fleet growth, utilization, per-unit fleet costs and used-vehicle residual values, particularly given the $5.4 billion of vehicle purchase commitments.
- Liquidity available after seasonal fleet financing, vehicle purchases, debt maturities and potential tax payments.
- Final accounting conclusions and cash implications under the Tax Act, including foreign earnings, GILTI and the transition tax.
- Additional restructuring, activist-related, transaction-related and legal costs not reflected in recurring operating results.
- The impact of adopting the lease accounting standard in 2019 and the company’s ability to maintain debt-covenant compliance.
- Adjusted EBITDA is a non-GAAP measure and may not be comparable with similarly titled measures used by other companies.