This MD&A should be read in conjunction with the MD&A presented in our 2019 Form
10-K together with the sections entitled "Cautionary Note Regarding
Forward-Looking Statements," Part II, Item 1A, "Risk Factors," and our unaudited
condensed consolidated financial statements and accompanying notes included in
Part I, Item 1 of this Quarterly Report on Form 10-Q for the quarterly period
ended
In this MD&A we refer to the following non-GAAP measure and key metrics: •Adjusted Corporate EBITDA - important non-GAAP measure to management because it allows management to assess the operational performance of our business, exclusive of certain items, and allows management to assess the performance of the entire business on the same basis as the segment measure of profitability. Management believes that it is important to investors for the same reasons it is important to management and because it allows them to assess our operational performance on the same basis that management uses internally. Adjusted EBITDA, the segment measure of profitability and accordingly a GAAP measure, is calculated exclusive of certain items which are largely consistent with those used in the calculation of Adjusted Corporate EBITDA. •Depreciation Per Unit Per Month - important key metric to management and investors as depreciation of revenue earning vehicles and lease charges is one of our largest expenses for the vehicle rental business and is driven by the number of vehicles, expected residual values at the expected time of disposal and expected hold period of the vehicles. Depreciation Per Unit Per Month is reflective of how we are managing the costs of our vehicles and facilitates a comparison with other participants in the vehicle rental industry. •Total Revenue Per Transaction Day ("Total RPD," also referred to as "pricing") - important key metric to management and investors as it represents a measurement of the changes in underlying pricing in the vehicle rental business and encompasses the elements in vehicle rental pricing that management has the ability to control.
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•Total Revenue Per Unit Per Month ("Total RPU") - important key metric to management and investors as it provides a measure of revenue productivity relative to the total number of vehicles in our fleet whether owned or leased ("Average Vehicles" or "fleet capacity"). •Transaction Days - important key metric to management and investors as it represents the number of revenue generating days ("volume"). It is used as a component to measure Total RPD and Vehicle Utilization. Transaction Days represent the total number of 24-hour periods, with any partial period counted as one Transaction Day, that vehicles were on rent (the period between when a rental contract is opened and closed) in a given period. Thus, it is possible for a vehicle to attain more than one Transaction Day in a 24-hour period. •Vehicle Utilization - important key metric to management and investors because it is the measurement of the proportion of our vehicles that are being used to generate revenues relative to fleet capacity. Higher Vehicle Utilization means more vehicles are being utilized to generate revenues.
Our non-GAAP measure should not be considered in isolation and should not be
considered superior to, or a substitute for, financial measures calculated in
accordance with
OUR COMPANY
OVERVIEW OF OUR BUSINESS AND OPERATING ENVIRONMENT
Overview of the Impact from COVID-19 on our Business
The outbreak of COVID-19 was declared a pandemic in
In response to the outbreak of COVID-19, we began aggressively managing costs
and (i) initiated a restructuring program affecting approximately 11,000
employees in our
Although we took aggressive action to eliminate costs, we faced significant
ongoing monthly expenses, including monthly payments under our Operating Lease,
pursuant to which
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rental car operations. On
Voluntary Petitions for Bankruptcy
In connection with the expiration of the Forbearance Agreement and the Waiver
Agreements described above and the continuing economic impact from COVID-19, on
Liquidity Considerations Following the Chapter 11 Filing
On
As a result of the Lease Rejection Orders approved by the
As a result of our ongoing actions to eliminate costs, in the third quarter of
2020, we (i) negotiated rent concessions in the form of abatement and payment
deferrals of fixed and variable rent payments for our airport and off airport
locations in the amount of
On
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interim fleet financing, giving the Debtors the ability to replenish their
vehicle fleet in the future, and (ii) up to
On
NYSE Delisting
As a result of the filing of the Chapter 11 Cases, on
Our Business
Our profitability is primarily a function of the volume, mix and pricing of
rental transactions and the utilization of vehicles, the related ownership cost
of vehicles and other operating costs. Significant changes in the purchase price
or residual values of vehicles or interest rates can have a significant effect
on our profitability depending on our ability to adjust pricing for these
changes. Our business requires significant expenditures for vehicles, and as
such, we require substantial liquidity to finance such expenditures. However, as
a result of the Interim Lease Order,
Our total revenues are primarily derived from rental and related charges and consist of: •Worldwide vehicle rental revenues - revenues from all company-operated vehicle rental operations, including charges to customers for the reimbursement of costs incurred relating to airport concession fees and vehicle license fees, the fueling of vehicles and revenues associated with value-added services, including the sale of loss or collision damage waivers, theft protection, liability and personal accident/effects insurance coverage, premium emergency roadside service and other products and fees. Also included are ancillary revenues associated with retail vehicle sales and certain royalty fees from our franchisees (such fees are less than 2% of total revenues each period); and •All other operations revenues - revenues from vehicle leasing and fleet management services by our Donlen business and other business activities. Our expenses primarily consist of: •Direct vehicle and operating expense ("DOE"), primarily wages and related benefits; commissions and concession fees paid to airport authorities, travel agents and others; facility, self-insurance and reservation 51
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costs; and other costs relating to the operation and rental of revenue earning vehicles, such as damage, maintenance and fuel costs; •Depreciation expense and lease charges relating to revenue earning vehicles, including costs associated with the disposal of vehicles; •Selling, general and administrative expense ("SG&A"), which includes advertising costs and administrative personnel costs, along with costs for information technology and finance transformation programs; •Interest expense, net; and
•Reorganization items, net, which includes charges associated with the Chapter 11 Cases, primarily professional fees.
Our Business Segments
We have identified three reportable segments, which are organized based on the products and services provided by our operating segments and the geographic areas in which our operating segments conduct business, as follows: •U.S. RAC - Rental of vehicles, as well as sales of value-added services, in theU.S. ; •International RAC - Rental and leasing of vehicles, as well as sales of value-added services, internationally; and •All Other Operations - Comprised primarily of our Donlen business, which provides vehicle leasing and fleet management services, and other business activities. In addition to the above reportable segments, we have corporate operations. We assess performance and allocate resources based upon the financial information for our operating segments.
Seasonality
Our vehicle rental operations are a seasonal business, with decreased levels of
business in the winter months and heightened activity during the spring and
summer months ("our peak season") for the majority of countries where we
generate our revenues. To accommodate increased demand, we typically increase
our available fleet and staff during the second and third quarters of the year.
However, as a result of the COVID-19 mitigation actions, we initiated a
restructuring program in the second quarter of 2020 affecting approximately
11,000 employees in our
Three and Nine Months Ended
The pandemic has continued to cause a substantial reduction to airline travel
for the three and nine months ended
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operations until such travel returns to historic levels. The following provides an overview of our business and financial performance and key factors influencing our results:
U.S. RAC •3Q 2020 versus 3Q 2019: ?Total revenues decreased$1.1 billion , or 56% ?Total RPU decreased 35% and Total RPD decreased 1% ?Transaction Days decreased 57% ?Depreciation of revenue earning vehicles and lease charges decreased 57% to$182 million ?Depreciation Per Unit Per Month decreased 35% to$161 ?Vehicle Utilization decreased to 52% from 79% ?DOE as a percentage of total revenues increased to 75% from 56% ?SG&A as a percentage of total revenues decreased to 5% from 6% •Nine months 2020 versus Nine months 2019: ?Total revenues decreased$2.5 billion , or 47% ?Total RPU decreased 40% and Total RPD decreased 2% ?Transaction Days decreased 47% ?Depreciation of revenue earning vehicles and lease charges decreased 13% to$1.1 billion ?Depreciation Per Unit Per Month was flat ?Vehicle Utilization decreased to 49% from 80% ?DOE as a percentage of total revenues increased to 78% from 59% ?SG&A as a percentage of total revenues increased to 8% from 7%
International RAC
•3Q 2020 versus 3Q 2019: ?Total revenues decreased$449 million , or 64%, and decreased$459 million , or 64%, excluding the impact of foreign currency exchange at average rates ("fx") ?Total RPU decreased 29% and Total RPD decreased 13% ?Transaction Days decreased 60% ?Depreciation of revenue earning vehicles and lease charges decreased 53% to$59 million , and decreased$69 million , or 54%, excluding fx ?Depreciation Per Unit Per Month decreased 8% to$183 ?Vehicle Utilization decreased to 65% from 80% ?DOE as a percentage of total revenues increased to 71% from 55% ?SG&A as a percentage of total revenues increased to 22% from 9% •Nine months 2020 versus Nine months 2019: ?Total revenues decreased$939 million , or 55%, and decreased$933 million or 55%, excluding fx ?Total RPU decreased 35% and Total RPD decreased 10% ?Transaction Days decreased 50% ?Depreciation of revenue earning vehicles and lease charges decreased 31% to$228 million , and decreased$98 million , or 30%, excluding fx ?Depreciation Per Unit Per Month increased 2% to$202 ?Vehicle Utilization decreased to 55% from 77% ?DOE as a percentage of total revenues increased to 77% from 59% ?SG&A as a percentage of total revenues increased to 19% from 10%
For more information on the above, see the discussion of our results on a consolidated basis and by segment that follows herein. In this MD&A, certain amounts in the following tables are denoted as in millions. Amounts such as
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percentages are calculated from the underlying numbers in thousands, and as a result, may not agree to the amount when calculated from the tables in millions.
Critical Accounting Estimates
The impacts from COVID-19 could have a material impact to certain critical accounting estimates, and as a result, may have an adverse impact on our future operating results.
Revenue Earning Vehicles
COVID-19 may have a significant impact on the used-vehicle market, resulting in
a material deterioration of residual values. This deterioration could impact our
current fleet and sales plans resulting in changes to the holding period of our
vehicles as well as our ability to dispose of vehicles in the period originally
anticipated. As a result of the Chapter 11 Cases, the
Recoverability of
Due to the impact related to COVID-19, our reduction in cash flow projections,
the filing of the Chapter 11 Cases and declines in the stock price of
We test the recoverability of our goodwill and indefinite-lived intangible
assets by performing an impairment analysis on an annual basis, as of
Further deterioration in the general economic conditions in the travel industry, our cash flows and our ability to obtain future financing to maintain our fleet or the weighted average cost of capital assumptions may result in an impairment charge to earnings in future quarters. We will continue to closely monitor actual results versus our expectations as well as any significant changes in market events or conditions, including the impact of COVID-19 on our business and the travel industry, and the resulting impact to our assumptions about future estimated cash flows, and the weighted average cost of capital. If our expectations of the operating results, both in magnitude or timing, do not materialize, or if our weighted average cost of capital increases, we may be required to record goodwill and indefinite-lived intangible asset impairment charges, which could be material.
Subrogation Receivables
The impact of COVID-19 could result in a deterioration of the credit worthiness of our customers and third-parties regarding our subrogation receivables, and as a result we could incur material write-offs or a reduction in future collections.
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Tax
We may record additional valuation allowances on our deferred tax assets. Further, in some jurisdictions, we may incur additional cash taxes due to changes in fleet acquisitions and dispositions and limitations on utilization of net operating losses.
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