AVIS BUDGET GROUP, INC. The following discussion should be read in conjunction with Item 1 Business, Item 1A Risk Factors and our Consolidated Financial Statements and accompanying Notes included in this Annual Report on Form 10-K commencing on page F-1. Our actual results of operations may differ materially from those discussed in forward-looking statements as a result of various factors, including but not limited to those included in Item 1A, "Risk Factors" and other portions of this Annual Report on Form 10-K. Unless otherwise noted, all dollar amounts in tables are in millions. OVERVIEW OUR COMPANY We operate three of the most globally recognized brands in mobility solutions,Avis, Budget and Zipcar together with several other brands, well recognized in their respective markets. Our brands offer a range of options, from car and truck rental to car sharing inNorth America ,Europe ,Australasia and certain other regions we serve, with an average rental fleet of approximately 660,000 vehicles. We also license the use of our trademarks to licensees in the areas in which we do not operate directly. We and our licensees operate our brands in approximately 180 countries throughout the world. During 2019: • Our revenues totaled$9.2 billion , and increased 1% compared to 2018, due
to higher rental volumes, partially offset by 2% negative impact from
currency exchange rate movements.
• Our net income was
primarily driven by higher revenues, Americas' lower per-unit fleet costs
and higher utilization, partially offset by higher salaries, wages and
other related benefits, higher vehicle registration fees and a
negative impact from currency exchange rate movements.
• We repurchased
outstanding by approximately 2.2 million shares, or 3%.
• We issued
of which were used to redeem
Senior Notes due
• We acquired various licensees primarily in
RESULTS OF OPERATIONS A discussion regarding our financial condition and results of operations for the year endedDecember 31, 2019 compared to 2018 is presented below. A discussion regarding our financial condition and results of operations for the year endedDecember 31, 2018 compared to 2017 can be found under Item 7 in our Annual Report on Form 10-K for the year endedDecember 31, 2018 , filed with theSEC onFebruary 21, 2019 , which is available on theSEC's website at www.sec.gov and our Investor Relations website at ir.avisbudgetgroup.com. We measure performance principally using the following key metrics: (i) rental days, which represent the total number of days (or portion thereof) a vehicle was rented, (ii) revenue per day, which represents revenues divided by rental days, (iii) vehicle utilization, which represents rental days divided by available rental days, available rental days is defined as average rental fleet times the number of days in the period, and (iv) per-unit fleet costs, which represent vehicle depreciation, lease charges and gain or loss on vehicle sales, divided by average rental fleet. Our rental days, revenue per day and vehicle utilization metrics are all calculated based on the actual rental of the vehicle during a 24-hour period. We believe that this methodology provides us with the most relevant metrics in order to manage the business. Our calculation may not be comparable to the calculation of similarly-titled metrics by other companies. We present currency exchange rate effects to provide a method of assessing how our business performed excluding the effects of foreign currency rate fluctuations. Currency exchange rate effects are calculated by translating the current-year results at the prior-period average exchange rate plus any related gains and losses on currency hedges. 38
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We assess performance and allocate resources based upon the separate financial information of our operating segments. In identifying our reportable segments, we also consider the nature of services provided by our operating segments, the geographical areas in which our segments operate and other relevant factors. Management evaluates the operating results of each of our reportable segments based upon revenue and "Adjusted EBITDA," which we define as income from continuing operations before non-vehicle related depreciation and amortization, any impairment charges, restructuring and other related charges, early extinguishment of debt costs, non-vehicle related interest, transaction-related costs, net charges for unprecedented personal-injury legal matters, non-operational charges related to shareholder activist activity, gain on sale of equity method investment inChina and income taxes. Net charges for unprecedented personal-injury legal matters and gain on sale of equity method investment inChina are recorded within operating expenses in our consolidated results of operations. Non-operational charges related to shareholder activist activity include third party advisory, legal and other professional service fees and are recorded within selling, general and administrative expenses in our consolidated results of operations. We have revised our definition of Adjusted EBITDA to exclude the gain on sale of equity method investment inChina . We did not revise prior years' Adjusted EBITDA amounts because there were no gains similar in nature to this gain. We believe Adjusted EBITDA is useful as a supplemental measure in evaluating the performance of our operating businesses and in comparing our results from period to period. We also believe that Adjusted EBITDA is useful to investors because it allows them to assess our results of operations and financial condition on the same basis that management uses internally. Adjusted EBITDA is a non-GAAP measure and should not be considered in isolation or as a substitute for net income or other income statement data prepared in accordance withU.S. GAAP. Our presentation of Adjusted EBITDA may not be comparable to similarly-titled measures used by other companies.
Year Ended
Our consolidated results of operations comprised the following:
Year Ended
December 31,
2019 2018 $ Change % Change
Revenues $ 9,172 $ 9,124 $ 48 1 %
Expenses
Operating 4,698 4,639 59 1 %
Vehicle depreciation and lease charges, net 2,063 2,179 (116 ) (5 %)
Selling, general and administrative 1,237 1,220 17 1 %
Vehicle interest, net 344 314 30 10 %
Non-vehicle related depreciation and amortization 263 256
7 3 %
Interest expense related to corporate debt, net:
Interest expense 178 188 (10 ) (5 %)
Early extinguishment of debt 12 19 (7 ) (37 %)
Restructuring and other related charges 80 22 58 n/m
Transaction-related costs, net 10 20 (10 ) (50 %)
Total expenses 8,885 8,857 28 0 %
Income before income taxes 287 267 20 7 %
Provision for (benefit from) income taxes (15 ) 102 (117 ) n/m
Net income $ 302 $ 165 $ 137 83 %
__________
n/m Not meaningful.
Revenues increased during 2019 compared to 2018, primarily due to a 3% increase
in volume, partially offset by a $165 million negative impact from currency
exchange rate movements. Total expenses were primarily unchanged during the year
ended December 31, 2019 , compared to 2018.
Operating expenses increased to 51.2% of revenue during 2019 compared to 50.8%
in 2018, primarily due to higher salaries, wages, and related benefits and
higher vehicle registration fees, partially offset by a gain on the sale of an
equity method investment in China . Vehicle depreciation and lease charges
decreased to 22.5% of
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revenue during 2019 compared to 23.9% in 2018, primarily due toAmericas' lower per-unit fleet costs and higher utilization. Selling, general and administrative costs increased to 13.5% of revenue during 2019 compared to 13.4% in 2018. Vehicle interest costs increased to 3.8% of revenue during 2019 compared to 3.4% in 2018 primarily due to higher interest rates. Our effective tax rates were a benefit of 5% and a provision of 38% for the year endedDecember 31, 2019 and 2018, respectively, which in 2019 included a$113 million one-time benefit arising from the release of valuation allowances on certain of our foreign deferred tax assets primarily driven by tax planning strategies. As a result of these items, our net income increased by$137 million compared to 2018. For 2019, the Company reported earnings of$3.98 per diluted share, which includes a one-time benefit arising from the release of valuation allowances on certain of our foreign deferred tax assets primarily driven by tax planning strategies of$1.50 per share and a benefit from the impact of our 2019 share repurchases of$0.04 per share. For 2018, the Company reported earnings of$2.06 per diluted share, which includes a benefit from the impact of our 2018 share repurchases of$0.05 per share. Following is a more detailed discussion of the results of each of our reportable segments: 2019 2018 Revenues Adjusted EBITDA Revenues Adjusted EBITDA Americas $ 6,352 $ 652$ 6,186 $ 558 International 2,820 203 2,938 287 Corporate and Other (a) - (67 ) - (64 )Total Company $ 9,172 $ 788$ 9,124 $ 781
Reconciliation of net income to Adjusted EBITDA
2019 2018
Net income $ 302 $ 165
Provision for (benefit from) income taxes (15 ) 102
Income before income taxes 287 267
Add: Non-vehicle related depreciation and amortization 263 256
Interest expense related to corporate debt, net:
Interest expense 178 188
Early extinguishment of debt 12 19
Restructuring and other related charges (b) 80 22
Transaction-related costs, net (c) 10 20
Non-operational charges related to shareholder activist activity (d) 2 9
Gain on sale of equity method investment in China (e) (44 ) -
Adjusted EBITDA $ 788 $ 781
__________
(a) Includes unallocated corporate overhead which is not attributable to a
particular segment.
(b) Other related charges include costs associated with the separation of
certain officers of the Company.
(c) Primarily comprised of acquisition- and integration-related expenses.
(d) Reported within selling, general and administrative expenses in our
consolidated results of operations.
(e) Reported within operating expenses in our consolidated results of
operations.
Americas
2019 2018 % Change
Revenues $ 6,352 $ 6,186 3 %
Adjusted EBITDA 652 558 17 %
Revenues increased 3% during 2019, compared to 2018, primarily due to a 3%
increase in volume, partially offset by an $11 million negative effect from
currency exchange rate movements.
Operating expenses increased to 50.2% of revenue during 2019 compared to 49.7%
in 2018, primarily due to higher salaries, wages and related benefits and higher
vehicle registration fees. Vehicle depreciation and lease charges decreased to
23.0% of revenue during 2019 compared to 25.4% in 2018, primarily due to an 8%
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decrease in per-unit fleet costs excluding exchange rate effects and higher utilization. Selling, general and administrative costs increased to 12.1% of revenue during 2019 compared to 11.9% in 2018. Vehicle interest costs increased to 4.5% of revenue during 2019 compared to 4.1% in 2018, primarily due to higher interest rates.
Adjusted EBITDA increased 17% during 2019, compared to 2018, due to higher revenues, lower per-unit fleet costs, partially offset by higher salaries, wages, and related benefits and higher vehicle registration fees. International
2019 2018 % Change
Revenues $ 2,820 $ 2,938 (4 %)
Adjusted EBITDA 203 287 (29 %)
Revenues decreased 4% during 2019, compared to 2018, primarily due to a $154
million negative impact from currency exchange rate movements and a 1% decrease
in revenue per day excluding exchange rate effects, partially offset by a 2%
increase in volume.
Operating expenses increased to 53.5% of revenue during 2019 compared to 52.8%
in 2018, primarily due to lower revenue per day excluding exchange rate effects
and higher public liability and property damage expense, partially offset by a
gain on the sale of an equity method investment in China . Vehicle depreciation
and lease charges increased to 21.3% of revenue during 2019 compared to 20.8% in
2018, primarily due to lower revenue per day excluding exchange rate effects and
a 2% increase in per-unit fleet costs excluding exchange rate effects, partially
offset by higher utilization. Selling, general and administrative costs
decreased to 14.3% of revenue during 2019 compared to 14.5% in 2018. Vehicle
interest costs, at 2.1% of revenue, remained unchanged during 2019 compared to
2018.
Adjusted EBITDA decreased 29% during 2019, compared to 2018, due to lower
revenues, a $21 million negative impact from currency exchange rate movements,
higher public liability and property damage expense and higher per-unit fleet
costs excluding exchange rate effects, partially offset by higher utilization.
Corporate and Other
2019 2018 % Change
Revenues $ - $ - n/m
Adjusted EBITDA (67 ) (64 ) n/m
__________
n/m Not meaningful.
Adjusted EBITDA decreased
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
We present separately the financial data of our vehicle programs. These programs
are distinct from our other activities as the assets under vehicle programs are
generally funded through the issuance of debt that is collateralized by such
assets. The income generated by these assets is used, in part, to repay the
principal and interest associated with the debt. Cash inflows and outflows
relating to the generation or acquisition of such assets and the principal debt
repayment or financing of such assets are classified as activities of our
vehicle programs. We believe it is appropriate to segregate the financial data
of our vehicle programs because, ultimately, the source of repayment of such
debt is the realization of such assets.
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FINANCIAL CONDITION
As of December 31,
2019 2018 Change
Total assets exclusive of assets under vehicle
programs $ 9,311 $ 6,370 $ 2,941
Total liabilities exclusive of liabilities
under vehicle programs 8,538 6,011 2,527
Assets under vehicle programs 13,815 12,779 1,036
Liabilities under vehicle programs 13,932 12,724 1,208
Stockholders' equity 656 414 242
Total assets exclusive of assets under vehicle programs and total liabilities
exclusive of liabilities under vehicle programs increased compared to 2018
primarily due to the adoption of ASU 2016-02 (see Note 3 to our Consolidated
Financial Statements).
Assets and liabilities under vehicle programs increased compared to 2018 primarily due to an increase in the size of our vehicle rental fleet and operating leases recognized upon adoption of ASU 2016-02 (see Note 3 to our Consolidated Financial Statements). The increase in stockholders' equity compared to 2018 is primarily due to our comprehensive income, partially offset by our repurchases of common stock.
LIQUIDITY AND CAPITAL RESOURCES Overview Our principal sources of liquidity are cash on hand and our ability to generate cash through operations and financing activities, as well as available funding arrangements and committed credit facilities, each of which is discussed below. During 2019 our Avis Budget Rental Car Funding subsidiary issued approximately$600 million ,$650 million , and$650 million in asset-backed notes with an expected final payment date ofMarch 2022 ,September 2024 , andMarch 2025 , and a weighted average interest rate of 3.56%, 3.44%, and 2.45%, respectively. The proceeds from these borrowings were used to fund the repayment of maturing vehicle-backed debt and the acquisition of rental cars inthe United States . InJuly 2019 , we issued$400 million of our 5¾% Senior Notes dueJuly 2027 to redeem$400 million of our outstanding 5½% Senior Notes dueApril 2023 . InOctober 2019 , we redeemed$75 million of our 5½% Senior Notes dueApril 2023 . We repurchased approximately 2.2 million shares of our outstanding common stock for approximately$62 million during 2019. Cash Flows Year EndedDecember 31, 2019 vs. Year EndedDecember 31, 2018 The following table summarizes our cash flows: Year Ended December 31, 2019 2018 Change Cash provided by (used in): Operating activities$ 2,586 $ 2,609 $ (23 ) Investing activities (2,752 ) (3,426 ) 674 Financing activities 318 667 (349 ) Effect of changes in exchange rates on cash and cash equivalents, program and restricted cash 13 (16 ) 29 Net change in cash and cash equivalents, program and restricted cash 165 (166 ) 331 Cash and cash equivalents, program and restricted cash, beginning of period 735 901 (166 ) Cash and cash equivalents, program and restricted cash, end of period$ 900 $ 735 $ 165 42
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Cash provided by operating activities during 2019 was substantially unchanged compared with 2018.
The decrease in cash used in investing activities during 2019 compared with 2018 is primarily due to an increase in proceeds received on the disposition of vehicles, partially offset by an increase in investment in vehicles.
The decrease in cash provided by financing activities during 2019 compared with 2018 is primarily due to a decrease in net borrowings under vehicle programs. We anticipate that our non-vehicle property and equipment additions will be approximately$230 million in 2020. Debt and Financing Arrangements AtDecember 31, 2019 , we had approximately$14.5 billion of indebtedness (including corporate indebtedness of approximately$3.4 billion and debt under vehicle programs of approximately$11.1 billion ). For detailed information regarding our debt and borrowing arrangements, see Notes 13 and 14 to our Consolidated Financial Statements.
LIQUIDITY RISK
Our primary liquidity needs include the procurement of rental vehicles to be used in our operations, servicing of corporate and vehicle-related debt and the payment of operating expenses. The present intention of management is to reinvest the undistributed earnings of our foreign subsidiaries indefinitely into our foreign operations. Our primary sources of funding are operating revenue, cash received upon the sale of vehicles, borrowings under our vehicle-backed borrowing arrangements and our senior revolving credit facility, and other financing activities. As ofDecember 31, 2019 , we have cash and cash equivalents of$0.7 billion , available borrowing capacity under our committed credit facilities of$0.7 billion , and available capacity under our vehicle programs of approximately$2.9 billion . Our liquidity position could be negatively affected by financial market disruptions or a downturn in theU.S. and worldwide economies, which may result in unfavorable conditions in the mobility industry, in the asset-backed financing market and in the credit markets, generally. We believe these factors have in the past affected and could in the future affect the debt ratings assigned to us by credit rating agencies and the cost of our borrowings. Additionally, a downturn in the worldwide economy or a disruption in the credit markets could impact our liquidity due to (i) decreased demand and pricing for vehicles in the used vehicle market, (ii) increased costs associated with, and/or reduced capacity or increased collateral needs under, our financings, (iii) the adverse impact of vehicle manufacturers being unable or unwilling to honor their obligations to repurchase or guarantee the depreciation on the related program vehicles and (iv) disruption in our ability to obtain financing due to negative credit events specific to us or affecting the overall debt market (see Item 1A. Risk Factors for further discussion). Our liquidity position could also be negatively impacted if we are unable to remain in compliance with the financial and other covenants associated with our senior revolving credit facility and other borrowings, including a maximum leverage ratio. As ofDecember 31, 2019 , we were in compliance with the financial covenants governing our indebtedness. 43
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CONTRACTUAL OBLIGATIONS The following table summarizes our principal future contractual obligations as ofDecember 31, 2019 : 2020 2021 2022 2023 2024 Thereafter Total Corporate debt$ 19 $ 17 $ 16 $ 216 $ 701 $ 2,505 $ 3,474 Debt under vehicle programs 1,753 3,225 3,032 1,097 1,471 539 11,117 Debt interest 466 413 313 243 168 94 1,697
Operating leases 708 521 417 353 230
1,174 3,403
Commitments to
purchase vehicles
(a) 7,749 2 - - - - 7,751
Defined benefit
pension plan
contributions (b) 11 - - - - - 11
Other purchase
commitments (c) 77 29 19 9 2 - 136
Total (d) $ 10,783 $ 4,207 $ 3,797 $ 1,918 $ 2,572 $ 4,312 $ 27,589
__________(a) Represents commitments to purchase vehicles, the majority of which are from
subject to the vehicle manufacturers satisfying their obligations under the
repurchase and guaranteed depreciation agreements. The purchase of such
vehicles is generally financed through borrowings under vehicle programs in
addition to cash received upon the sale of vehicles, some of which were
purchased under repurchase and guaranteed depreciation programs (see Note 15
to our Consolidated Financial Statements).
(b) Represents the expected contributions to our defined benefit pension plans
in 2019. The amount of future contributions to our defined benefit pension
plans will depend on the rates of return generated from plan assets and
other factors (see Note 18 to our Consolidated Financial Statements) and are
not included above.
(c) Primarily represents commitments under service contracts for information
technology, telecommunications and marketing agreements with travel service
companies.
(d) Excludes income tax uncertainties of $57 million , $13 million of which issubject to indemnification by Realogy and Wyndham. We are unable to estimate
the period in which these income tax uncertainties are expected to be
settled.
For more information regarding guarantees and indemnifications, see Note 15 to our Consolidated Financial Statements. ACCOUNTING POLICIES Critical Accounting Policies In presenting our financial statements in conformity with GAAP, we are required to make estimates and assumptions that affect the amounts reported therein. Several of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events and/or events that are outside of our control. If there is a significant unfavorable change to current conditions, it could result in a material adverse impact to our consolidated results of operations, financial position and liquidity. We believe that the estimates and assumptions we used when preparing our financial statements were the most appropriate at that time. Presented below are those accounting policies that we believe require subjective and complex judgments that could potentially affect reported results. However, our businesses operate in environments where we are paid a fee for a service performed, and therefore the results of the majority of our recurring operations are recorded in our financial statements using accounting policies that are not particularly subjective, nor complex.Goodwill and Other Indefinite-lived Intangible Assets. We have reviewed the carrying value of our goodwill and other indefinite-lived intangible assets for impairment. In performing this review, we are required to make an assessment of fair value for our goodwill and other indefinite-lived intangible assets. When determining fair value, we utilize various assumptions, including the fair market trading price of our common stock and management's projections of future cash flows. A change in these underlying assumptions will cause a change in the results of the tests and, as such, could cause the fair value to be less than the respective carrying amount. In such event, we would then be required to record a charge, which would impact earnings. We review the carrying value of goodwill and other indefinite-lived intangible assets for impairment annually or more frequently if circumstances indicate that an impairment may have occurred. Our goodwill and other indefinite-lived intangible assets are allocated among our reporting units. During 2019, 2018 and 2017, there was no impairment of goodwill and no material impairment of other intangible assets, see 44
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Note 7 to our Consolidated Financial Statements. For ourEurope ,Middle East andAfrica ("EMEA") reporting unit, the percentage by which the estimated fair value exceeded the carrying value as ofOctober 1, 2019 was 25% and the amount of goodwill allocated to our reporting unit was$460 million . In the future, failure to achieve our business plans, a significant deterioration of the macroeconomic conditions of the countries in which we operate, or significant changes in the assumptions and estimates that are used in our impairment testing for goodwill and indefinite-lived intangible assets (such as the discount rate) could result in significantly different estimates of fair value that could trigger an impairment of the goodwill of our reporting units or intangible assets. Vehicles. We present vehicles at cost, net of accumulated depreciation, on the Consolidated Balance Sheets. We record the initial cost of the vehicle, net of incentives and allowances from manufacturers. We acquire our rental vehicles either through repurchase and guaranteed depreciation programs with certain automobile manufacturers or outside of such programs. For rental vehicles purchased under such programs, we depreciate the vehicles such that the net book value on the date of sale or return to the manufacturers is intended to equal the contractual guaranteed residual values. For risk vehicles acquired outside of manufacturer repurchase and guaranteed depreciation programs, we depreciate based on the vehicles' estimated residual market values at their expected dates of disposition. The estimation of residual values requires the Company to make assumptions regarding the age and mileage of the vehicle at the time of disposal, as well as expected used vehicle market conditions. The Company regularly evaluates estimated residual values and adjusts depreciation rates as appropriate. Differences between actual residual values and those estimated result in a gain or loss on disposal and are recorded as part of vehicle depreciation and lease charges, net, at the time of sale. See Note 2 to our Consolidated Financial Statements. Income Taxes. We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been reflected in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Tax Act enacted in the fourth quarter of 2017 included a change in theU.S. federal corporate income tax rate. For more information regarding the accounting for the effects of the Tax Act, see Note 9 to our Consolidated Financial Statements. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent results of operations. In the event we were to determine that we would be able to realize deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance which would reduce the provision for income taxes. Currently we do not record valuation allowances on the majority of our tax loss carryforwards as there are adequate deferred tax liabilities that could be realized within the carryforward period. See Notes 2 and 9 to our Consolidated Financial Statements for more information regarding income taxes. Public Liability, Property Damage and Other Insurance Liabilities. Insurance liabilities on our Consolidated Balance Sheets include supplemental liability insurance, personal effects protection insurance, public liability, property damage and personal accident insurance claims for which we are self-insured. We estimate the required liability of such claims on an undiscounted basis utilizing an actuarial method that is based upon various assumptions which include, but are not limited to, our historical loss experience and projected loss development factors. The required liability is also subject to adjustment in the future based upon changes in claims experience, including changes in the number of incidents for which we are ultimately liable and changes in the cost per incident. Adoption of New Accounting Pronouncements For a description of our adoption of new accounting pronouncements and the impact thereof on our business, see Note 2 to our Consolidated Financial Statements. 45
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Recently Issued Accounting Pronouncements For a description of recently issued accounting pronouncements and the impact thereof on our business, see Note 2 to our Consolidated Financial Statements.
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