AVIS BUDGET GROUP, INC. (CAR) FY 2023 MD&A

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. We are a leading vehicle rental operator in North America, Europe, Australasia and certain other regions we serve, with an average rental fleet of approximately 691,500 vehicles in 2023. 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.

RESULTS OF OPERATIONS

A discussion regarding our financial condition and results of operations for the year ended December 31, 2023 compared to 2022 is presented below. A discussion regarding our financial condition and results of operations for the year ended December 31, 2022 compared to 2021 can be found under Part II, Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 16, 2023, which is available on the SEC’s website at www.sec.gov and our Investor Relations website at ir.avisbudgetgroup.com.

In 2023, we saw strong volume as normal seasonality returned to our industry. This coupled with revenue per day and inflationary pressures resulted in revenues of approximately $12.0 billion, net income of $1.6 billion and Adjusted EBITDA of $2.5 billion for the year ended December 31, 2023.

We continue to be susceptible to a number of industry-specific and global macroeconomic factors that may cause our actual results of operations to differ from our historical results of operations or current expectations. The factors and trends that we currently believe are or will be most impactful to our results of operations and financial condition include the following: interest rates, inflationary impact on items such as commodity prices and wages, disruption in the supply of new vehicles, used car values, and an economic downturn that may impact travel demand, all of which may be exacerbated by the ongoing military conflicts in the Middle East and Eastern Europe. We continue to monitor the potential favorable or unfavorable impacts of these and other factors on our business, operations, financial condition, and future results of operations. Our strategy continues to primarily focus on customer experience and costs to strengthen our Company, maximize profitability, and deliver stakeholder value.

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, with available rental days being 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 management with the most relevant metrics in order to effectively manage the performance of 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.

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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 revenues and Adjusted EBITDA, which we define as income (loss) 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 legal matters, net, which includes amounts recorded in excess of $5 million related to class action lawsuits and personal injury matters; non-operational charges related to shareholder activist activity, which includes third-party advisory, legal and other professional fees; COVID-19 charges, net; cloud computing costs; other (income) expense, net, and income taxes.

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 with U.S. GAAP. Our presentation of Adjusted EBITDA may not be comparable to similarly-titled measures used by other companies.

Year Ended December 31, 2023 vs. Year Ended December 31, 2022

Our consolidated results of operations comprised the following:

__________

n/m    Not meaningful.

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Revenues for the year ended December 31, 2023 were consistent with the similar period in 2022, primarily due to a 5% increase in volume, partially offset by a 5% decrease in revenue per day, excluding exchange rate effects. Total expenses increased 21% for the year ended December 31, 2023, compared to the similar period in 2022, primarily due to increased fleet costs, interest costs, and the impact of inflation. Our effective tax rates for the years ended December 31, 2023 and 2022 were provisions of 14.6% and 24.2%, respectively. As a result of these items, our net income decreased by $1.1 billion compared to the similar period in 2022. For the years ended December 31, 2023 and 2022, we reported earnings per diluted share of $42.08 and $57.16, respectively.

Operating expenses increased to 47.3% of revenue for the year ended December 31, 2023 compared to 44.1% during the similar period in 2022, primarily due to cost inflation. Vehicle depreciation and lease charges increased to 14.5% of revenue for the year ended December 31, 2023 compared to 6.9% during the similar period in 2022, primarily due to increased per unit fleet costs, excluding exchange rate effects, driven by increased fleet levels, increased depreciation rates, and a decrease in the gain on sale of vehicles. Selling, general and administrative costs increased to 11.7% of revenue for the year ended December 31, 2023 compared to 11.2% during the similar period in 2022, primarily due to increased marketing costs and inflation. Vehicle interest costs increased to 6.1% of revenue for the year ended December 31, 2023, compared to 3.4% during the similar period in 2022, primarily due to rising interest rates and additional funding for vehicles.

Following is a more detailed discussion of the results of each of our reportable segments and reconciliation of net income to Adjusted EBITDA:

__________

(a)    Includes unallocated corporate overhead which is not attributable to a particular segment.

(b)    Primarily consists of gains or losses related to our equity investment in a former subsidiary, offset by fleet related and certain administrative services provided to the same former subsidiary.

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Americas

Revenues decreased 1% for the year ended December 31, 2023 compared to the similar period in 2022, primarily due to a 6% decrease in revenue per day, partially offset by a 5% increase in volume.

Operating expenses increased to 47.4% of revenue for the year ended December 31, 2023 compared to 43.8% during the similar period in 2022, primarily due to cost inflation. Vehicle depreciation and lease charges increased to 13.0% of revenue for the year ended December 31, 2023 compared to 4.4% during the similar period in 2022, primarily due to increased per-unit fleet costs, driven by increased fleet levels, increased depreciation rates, and a decrease in the gain on sale of vehicles. Selling, general and administrative costs were approximately 9.6% of revenue for the year ended December 31, 2023, consistent with the similar period in 2022, primarily due to increased marketing costs, offset by a decrease in other selling, general and administrative costs. Vehicle interest costs increased to 6.6% of revenue for the year ended December 31, 2023 compared to 3.7% during the similar period in 2022, primarily due to rising interest rates and additional funding for vehicles.

Adjusted EBITDA decreased 40% for the year ended December 31, 2023 compared to the similar period in 2022, primarily due to higher per-unit fleet costs and inflationary pressures.

International

Revenues increased 6% for the year ended December 31, 2023 compared to the similar period in 2022, primarily due to a 6% increase in volume and a $25 million positive impact from currency exchange rate movements, partially offset by a 1% decrease in revenue per day, excluding exchange rate effects.

Operating expenses increased to 45.6% of revenue for the year ended December 31, 2023 compared to 44.3% during the similar period in 2022, primarily due to cost inflation. Vehicle depreciation and lease charges increased to 19.7% of revenue for the year ended December 31, 2023 compared to 16.4% during the similar period in 2022, primarily due to increased per-unit fleet costs, excluding exchange rate effects, driven by increased fleet levels and increased depreciation rates. Selling, general and administrative costs increased to 15.4% of revenue for the year ended December 31, 2023 compared to 15.0% during the similar period in 2022, primarily due to increased marketing costs and inflation. Vehicle interest costs increased to 4.4% of revenue for the year ended December 31, 2023 compared to 2.2% during the similar period in 2022, primarily due to rising interest rates and additional funding for vehicles.

Adjusted EBITDA decreased 29% for the year ended December 31, 2023 compared to the similar period in 2022, primarily due to higher per-unit fleet costs and inflationary pressures.

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Corporate and Other

__________

n/m    Not meaningful.

Adjusted EBITDA decreased 22% for the year ended December 31, 2023 compared to the similar period in 2022, primarily due to higher selling, general and administrative expenses related to computer technology transformation costs, which are not attributable to a particular segment.

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.

FINANCIAL CONDITION

The increase in assets exclusive of assets under vehicle programs compared to 2022 is principally related to the increase in operating lease right-of-use assets, deferred income taxes, other current assets and property and equipment. See Note 3 – Leases, Note 9 – Income Taxes, Note 10 – Other Current Assets and Note 11 – Property and Equipment, net to our Consolidated Financial Statements.

The increase in liabilities exclusive of liabilities under vehicle programs compared to 2022 is principally related to the increase in operating lease liabilities and corporate indebtedness from the issuance of senior notes. See “Liquidity and Capital Resources,” Note 3 – Leases and Note 13 – Long-term Corporate Debt and Borrowing Arrangements to our Consolidated Financial Statements.

The increases in assets and liabilities under vehicle programs are principally related to the increase in the size and cost of our vehicle rental fleet to meet demand.

The increase in stockholders’ equity compared to 2022 is principally related to comprehensive income, partially offset by our share repurchase activity.

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.

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In July 2023, we issued €400 million of 7.250% euro-denominated Senior Notes due July 2030, at par, with interest payable semi-annually. In September 2023, we used net proceeds from the offering primarily to redeem all of the €300 million of our outstanding 4.125% euro-denominated Senior Notes due 2024 plus accrued interest.

In November 2023, we issued $500 million of 8.000% Senior Notes due February 2031, at 99.3% of face value, with interest payable semi-annually. Net proceeds were used to fully redeem our 4.500% euro-denominated Senior Notes due 2025 and a portion of our outstanding balance on our Term Loan due 2029, with the remainder being used for general corporate purposes.

During 2023, our Avis Budget Rental Car Funding (AESOP) subsidiary issued approximately $3.9 billion of asset-backed notes with expected final payment dates ranging from October 2026 to February 2029, and a weighted average interest rate of 5.81%. In January 2024, AESOP issued $1.2 billion of asset-backed notes to investors with an expected final payment date of June 2029 and a weighted average interest rate of 5.51%. The proceeds from these borrowings were used to fund the repayment of maturing vehicle-backed debt and the acquisition of rental cars in the United States.

In December 2023, we paid a special cash dividend of $10.00 per share to all holders of our common stock as of December 15, 2023, totaling approximately $355 million.

Our Board of Directors has authorized the repurchase of up to approximately $8.1 billion of our common stock under a plan originally approved in 2013 and subsequently expanded, most recently in February 2023. Our stock repurchases may occur through open market purchases, privately negotiated transactions or trading plans pursuant to Rule 10b5-1 of the Exchange Act. The amount and timing of specific repurchases are subject to market conditions, applicable legal requirements, restricted payment capacity under our debt instruments and other factors. The repurchase program may be suspended, modified or discontinued at any time without prior notice. The repurchase program has no set expiration or termination date. For the year ended December 31, 2023, we repurchased approximately 4.3 million shares of common stock at a cost of approximately $889 million (excluding excise taxes due under the Inflation Reduction Act of 2022) under the program. As of December 31, 2023, approximately $802 million of authorization remained available to repurchase common stock under the program.

Cash Flows

Year Ended December 31, 2023 vs. Year Ended December 31, 2022

The following table summarizes our cash flows:

The decrease in cash provided by operating activities during 2023 compared with 2022 is primarily due to the decrease in our net income.

The increase in cash used in investing activities during 2023 compared with 2022 is primarily due to the increase in our net investment in vehicles.

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The increase in cash provided by financing activities during 2023 compared with 2022 is primarily due to the increase in our net borrowings under vehicle programs and the decrease in our common stock repurchases, offset by the increase in our payments of corporate borrowings.

We anticipate that our non-vehicle property and equipment additions will be approximately $285 million in 2024.

Debt and Financing Arrangements

At December 31, 2023, we had approximately $23.8 billion of indebtedness (including corporate indebtedness of approximately $4.8 billion and debt under vehicle programs of approximately $18.9 billion). For information regarding our debt and borrowing arrangements, see Note 1 – Basis of Presentation, Note 13 – Long-term Corporate Debt and Borrowing Arrangements, and Note 14 – Debt Under Vehicle Programs and Borrowing Arrangements 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.

Our liquidity has in the past been, and could in the future be, negatively affected by any financial market disruptions or the absence of a recovery or worsening of the United States 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 affected and could further affect the debt ratings assigned to us by credit rating agencies and the cost of our borrowings. Additionally, a worsening or prolonged downturn in the worldwide economy or a disruption in the credit markets could further 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 Part I, Item 1A, “Risk Factors” for further discussion).

As of December 31, 2023, we had access to $555 million of available cash and cash equivalents and available borrowings under our revolving credit facility of approximately $261 million, providing us with access to an approximate $816 million of total liquidity.

Our liquidity position could also be negatively impacted if we are unable to remain in compliance with the consolidated first lien leverage ratio requirement and other covenants associated with our senior credit facilities and other borrowings. As of December 31, 2023, we were in compliance with the financial covenants governing our indebtedness. For additional information regarding our liquidity risks, see Part I, Item 1A, “Risk Factors”.

CONTRACTUAL OBLIGATIONS

For contractual obligations for material cash requirements from known contractual and other obligations as part of a liquidity and capital resources discussion, see Note 3 – Leases, Note 13 – Long-term Corporate Debt and Borrowing Arrangements, Note 14 – Debt Under Vehicle Programs and Borrowing Arrangements, and Note 15 – Commitments and Contingencies to our Consolidated Financial Statements.

CRITICAL ACCOUNTING ESTIMATES

Accounting Policies

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. However, in presenting our financial statements in conformity with generally accepted accounting principles (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 relate 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

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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.

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, which include forecast of future revenue and Adjusted EBITDA. When appropriate, comparative market multiples and other factors are used to corroborate the discounted cash flow results. 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 2023, 2022 and 2021, there was no impairment of goodwill and other intangible assets. See Note 7 – Intangible Assets to our Consolidated Financial Statements. For our Europe, Middle East and Africa (“EMEA”) reporting unit, the percentage by which the estimated fair value exceeded the carrying value as of October 1, 2023 was approximately 14% and the amount of goodwill allocated to our reporting unit was approximately $460 million. We will continue to closely monitor actual results versus our expectations, as well as any significant changes in events or conditions, and the resulting impact to our assumptions about future estimated cash flows, the discount rate and market multiples. 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 us to make assumptions regarding the age and mileage of the vehicle at the time of disposal, as well as expected used vehicle market conditions. We regularly evaluate 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 – Summary of Significant Accounting Policies to our Consolidated Financial Statements. For a discussion of risk factors and assumptions relative to our vehicle valuations, refer to Item 1A, “Risk Factors”, included under Part 1 of this Annual Report on Form 10-K.

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.

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

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our tax loss carryforwards as there are adequate deferred tax liabilities that could be realized within the carryforward period.

See Note 2 – Summary of Significant Accounting Policies and Note 9 – Income Taxes 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. See Note 2 – Summary of Significant Accounting Policies to our Consolidated Financial Statements.

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 – Summary of Significant Accounting Policies to our Consolidated Financial Statements.

Recently Issued Accounting Pronouncements

For a description of recently issued accounting pronouncements and the impact thereof on our business, see Note 2 – Summary of Significant Accounting Policies to our Consolidated Financial Statements.