UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form | |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended June 30, 2019
OR
For the transition period from _____ to _____
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Commission File No. 001-10308
(Exact name of registrant as specified in its charter) |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |||||||
(Address of principal executive offices) | (Zip Code) | |||||||
(Registrant’s telephone number, including area code) | ||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☒ | Accelerated Filer | ☐ | Non-accelerated Filer | ☐ | |
Smaller Reporting Company | Emerging Growth Company | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
The number of shares outstanding of the issuer’s common stock was 75,981,420 shares as of July 31, 2019.
Table of Contents
Page | ||
PART I | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 6. | ||
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q may be considered “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995. The forward-looking statements contained herein are subject to known and unknown risks, uncertainties, assumptions and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by any such forward-looking statements. Forward-looking statements include information concerning our future financial performance, business strategy, projected plans and objectives. These statements may be identified by the fact that they do not relate to historical or current facts and may use words such as “believes,” “expects,” “anticipates,” “will,” “should,” “could,” “may,” “would,” “intends,” “projects,” “estimates,” “plans,” and similar words, expressions or phrases. The following important factors and assumptions could affect our future results and could cause actual results to differ materially from those expressed in such forward-looking statements:
• | the high level of competition in the mobility industry, including from new companies or technology, and the impact such competition may have on pricing and rental volume; |
• | a change in our fleet costs as a result of a change in the cost of new vehicles, manufacturer recalls, disruption in the supply of new vehicles, and/or a change in the price at which we dispose of used vehicles either in the used vehicle market or under repurchase or guaranteed depreciation programs; |
• | the results of operations or financial condition of the manufacturers of our cars, which could impact their ability to perform their payment obligations under our agreements with them, including repurchase and/or guaranteed depreciation arrangements, and/or their willingness or ability to make cars available to us or the rental car industry as a whole on commercially reasonable terms or at all; |
• | a change in travel demand, including changes or disruptions in airline passenger traffic; |
• | any change in economic conditions generally, particularly during our peak season or in key market segments; |
• | an occurrence or threat of terrorism, pandemic disease, natural disasters, military conflict, civil unrest or political instability in the locations in which we operate; |
• | any substantial changes in the cost or supply of fuel, vehicle parts, energy, labor or other resources on which we depend to operate our business; |
• | our ability to continue to successfully implement our business strategies, achieve and maintain cost savings and adapt our business to changes in mobility; |
• | political, economic or commercial instability in the countries in which we operate, and our ability to conform to multiple and conflicting laws or regulations in those countries; |
• | our dependence on third-party distribution channels, third-party suppliers of other services and co-marketing arrangements with third parties; |
• | our dependence on the performance and retention of our senior management and key employees; |
• | risks related to completed or future acquisitions or investments that we may pursue, including the incurrence of incremental indebtedness to help fund such transactions and our ability to promptly and effectively integrate any acquired businesses or capitalize on joint ventures, partnerships and other investments; |
• | our ability to utilize derivative instruments, and the impact of derivative instruments we utilize, which can be affected by fluctuations in interest rates, gasoline prices and exchange rates, changes in government regulations and other factors; |
• | our exposure to uninsured or unpaid claims in excess of historical levels; |
1
• | risks associated with litigation, governmental or regulatory inquiries, or any failure or inability to comply with laws, regulations or contractual obligations or any changes in laws, regulations or contractual obligations, including with respect to personally identifiable information and consumer privacy, labor and employment, and tax; |
• | risks related to protecting the integrity of, and preventing unauthorized access to, our information technology systems or those of our third-party vendors, and protecting the confidential information of our employees and customers against security breaches, including physical or cybersecurity breaches, attacks, or other disruptions, and compliance with privacy and data protection regulation; |
• | any impact on us from the actions of our licensees, dealers, third-party vendors and independent contractors; |
• | any major disruptions in our communication networks or information systems; |
• | risks related to tax obligations and the effect of future changes in tax laws and accounting standards; |
• | risks related to our indebtedness, including our substantial outstanding debt obligations, potential interest rate increases, and our ability to incur substantially more debt; |
• | our ability to obtain financing for our global operations, including the funding of our vehicle fleet through the issuance of asset-backed securities and use of the global lending markets; |
• | our ability to meet the financial and other covenants contained in the agreements governing our indebtedness; |
• | our ability to accurately estimate our future results; and |
• | other business, economic, competitive, governmental, regulatory, political or technological factors affecting our operations, pricing or services. |
We operate in a continuously changing business environment and new risk factors emerge from time to time. New risk factors, factors beyond our control, or changes in the impact of identified risk factors may cause actual results to differ materially from those set forth in any forward-looking statements. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. Moreover, we do not assume responsibility for the accuracy and completeness of those statements. Other factors and assumptions not identified above, including those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and other portions of our 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 21, 2019 (the “2018 Form 10-K”), could cause actual results to differ materially from those projected in any forward-looking statements.
Although we believe that our assumptions are reasonable, any or all of our forward-looking statements may prove to be inaccurate and we can make no guarantees about our future performance. Should unknown risks or uncertainties materialize or underlying assumptions prove inaccurate, actual results could differ materially from past results and/or those anticipated, estimated or projected. We undertake no obligation to release any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. For any forward-looking statements contained in any document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
2
PART I — FINANCIAL INFORMATION
Item 1. | Financial Statements |
Avis Budget Group, Inc.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(In millions, except per share data)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||||
Revenues | $ | $ | $ | $ | |||||||||||||
Expenses | |||||||||||||||||
Operating | |||||||||||||||||
Vehicle depreciation and lease charges, net | |||||||||||||||||
Selling, general and administrative | |||||||||||||||||
Vehicle interest, net | |||||||||||||||||
Non-vehicle related depreciation and amortization | |||||||||||||||||
Interest expense related to corporate debt, net: | |||||||||||||||||
Interest expense | |||||||||||||||||
Early extinguishment of debt | |||||||||||||||||
Restructuring and other related charges | |||||||||||||||||
Transaction-related costs, net | |||||||||||||||||
Total expenses | |||||||||||||||||
Income (loss) before income taxes | ( | ) | ( | ) | |||||||||||||
Provision for (benefit from) income taxes | ( | ) | ( | ) | |||||||||||||
Net income (loss) | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||
Comprehensive income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||
Earnings (loss) per share | |||||||||||||||||
Basic | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||
Diluted | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||
See Notes to Consolidated Condensed Financial Statements (Unaudited).
3
Avis Budget Group, Inc.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions, except par value)
(Unaudited)
June 30, 2019 | December 31, 2018 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Receivables, net | ||||||||
Other current assets | ||||||||
Total current assets | ||||||||
Property and equipment, net | ||||||||
Operating lease right-of-use assets | ||||||||
Deferred income taxes | ||||||||
Goodwill | ||||||||
Other intangibles, net | ||||||||
Other non-current assets | ||||||||
Total assets exclusive of assets under vehicle programs | ||||||||
Assets under vehicle programs: | ||||||||
Program cash | ||||||||
Vehicles, net | ||||||||
Receivables from vehicle manufacturers and other | ||||||||
Investment in Avis Budget Rental Car Funding (AESOP) LLC—related party | ||||||||
Total assets | $ | $ | ||||||
Liabilities and stockholders’ equity | ||||||||
Current liabilities: | ||||||||
Accounts payable and other current liabilities | $ | $ | ||||||
Short-term debt and current portion of long-term debt | ||||||||
Total current liabilities | ||||||||
Long-term debt | ||||||||
Long-term operating lease liabilities | ||||||||
Other non-current liabilities | ||||||||
Total liabilities exclusive of liabilities under vehicle programs | ||||||||
Liabilities under vehicle programs: | ||||||||
Debt | ||||||||
Debt due to Avis Budget Rental Car Funding (AESOP) LLC—related party | ||||||||
Deferred income taxes | ||||||||
Other | ||||||||
Commitments and contingencies (Note 13) | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.01 par value—authorized 10 shares; none issued and outstanding, respectively | ||||||||
Common stock, $0.01 par value—authorized 250 shares; issued 137 shares, respectively | ||||||||
Additional paid-in capital | ||||||||
Accumulated deficit | ( | ) | ( | ) | ||||
Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
Treasury stock, at cost—61 shares, respectively | ( | ) | ( | ) | ||||
Total stockholders’ equity | ||||||||
Total liabilities and stockholders’ equity | $ | $ | ||||||
See Notes to Consolidated Condensed Financial Statements (Unaudited).
4
Avis Budget Group, Inc.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Six Months Ended June 30, | |||||||||
2019 | 2018 | ||||||||
Operating activities | |||||||||
Net loss | $ | ( | ) | $ | ( | ) | |||
Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||
Vehicle depreciation | |||||||||
Amortization of right-of-use assets | |||||||||
(Gain) loss on sale of vehicles, net | ( | ) | ( | ) | |||||
Non-vehicle related depreciation and amortization | |||||||||
Stock-based compensation | |||||||||
Amortization of debt financing fees | |||||||||
Early extinguishment of debt costs | |||||||||
Net change in assets and liabilities: | |||||||||
Receivables | ( | ) | ( | ) | |||||
Income taxes and deferred income taxes | ( | ) | ( | ) | |||||
Accounts payable and other current liabilities | |||||||||
Operating lease liabilities | ( | ) | |||||||
Other, net | |||||||||
Net cash provided by operating activities | |||||||||
Investing activities | |||||||||
Property and equipment additions | ( | ) | ( | ) | |||||
Proceeds received on asset sales | |||||||||
Net assets acquired (net of cash acquired) | ( | ) | ( | ) | |||||
Other, net | ( | ) | |||||||
Net cash used in investing activities exclusive of vehicle programs | ( | ) | ( | ) | |||||
Vehicle programs: | |||||||||
Investment in vehicles | ( | ) | ( | ) | |||||
Proceeds received on disposition of vehicles | |||||||||
Investment in debt securities of Avis Budget Rental Car Funding (AESOP) LLC—related party | ( | ) | ( | ) | |||||
Proceeds from debt securities of Avis Budget Rental Car Funding (AESOP) LLC—related party | |||||||||
( | ) | ( | ) | ||||||
Net cash used in investing activities | ( | ) | ( | ) | |||||
5
Avis Budget Group, Inc. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued) (In millions) (Unaudited) | ||||||||
Six Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Financing activities | ||||||||
Proceeds from long-term borrowings | ||||||||
Payments on long-term borrowings | ( | ) | ( | ) | ||||
Net change in short-term borrowings | ( | ) | ||||||
Repurchases of common stock | ( | ) | ( | ) | ||||
Debt financing fees | ( | ) | ||||||
Other, net | ( | ) | ||||||
Net cash used in financing activities exclusive of vehicle programs | ( | ) | ( | ) | ||||
Vehicle programs: | ||||||||
Proceeds from borrowings | ||||||||
Payments on borrowings | ( | ) | ( | ) | ||||
Debt financing fees | ( | ) | ( | ) | ||||
Net cash provided by financing activities | ||||||||
Effect of changes in exchange rates on cash and cash equivalents, program and restricted cash | ( | ) | ||||||
Net decrease in cash and cash equivalents, program and restricted cash | ( | ) | ( | ) | ||||
Cash and cash equivalents, program and restricted cash, beginning of period | ||||||||
Cash and cash equivalents, program and restricted cash, end of period | $ | $ | ||||||
See Notes to Consolidated Condensed Financial Statements (Unaudited).
6
Avis Budget Group, Inc.
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions)
(Unaudited)
Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Stockholders’ Equity | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||
Balance at March 31, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | ( | ) | $ | ( | ) | $ | |||||||||||||||
Comprehensive income: | |||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | |||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | ( | ) | — | — | |||||||||||||||||||||
Total comprehensive income | |||||||||||||||||||||||||||||
Net activity related to restricted stock units | — | — | — | — | |||||||||||||||||||||||||
Option premiums paid | — | — | ( | ) | — | — | — | — | ( | ) | |||||||||||||||||||
Balance at June 30, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | ( | ) | $ | ( | ) | $ | |||||||||||||||
Balance at March 31, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | ( | ) | $ | ( | ) | $ | |||||||||||||||
Cumulative effect of accounting change | — | — | — | — | — | ||||||||||||||||||||||||
Comprehensive loss: | |||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | |||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | ( | ) | — | — | |||||||||||||||||||||
Total comprehensive loss | ( | ) | |||||||||||||||||||||||||||
Net activity related to restricted stock units | — | — | — | — | |||||||||||||||||||||||||
Exercise of stock options | — | — | ( | ) | — | — | — | ||||||||||||||||||||||
Repurchase of common stock | — | — | — | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
Balance at June 30, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | ( | ) | $ | ( | ) | $ | |||||||||||||||
Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Stockholders’ Equity | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||
Balance at December 31, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | ( | ) | $ | ( | ) | $ | |||||||||||||||
Cumulative effect of accounting change | — | — | — | — | — | ||||||||||||||||||||||||
Comprehensive loss: | |||||||||||||||||||||||||||||
Net loss | — | — | — | ( | ) | — | — | — | |||||||||||||||||||||
Other comprehensive loss | — | — | — | — | ( | ) | — | — | |||||||||||||||||||||
Total comprehensive loss | ( | ) | |||||||||||||||||||||||||||
Net activity related to restricted stock units | — | — | ( | ) | — | — | |||||||||||||||||||||||
Exercise of stock options | — | — | ( | ) | — | — | — | ||||||||||||||||||||||
Option premiums paid | — | — | ( | ) | — | — | — | — | ( | ) | |||||||||||||||||||
Balance at June 30, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | ( | ) | $ | ( | ) | $ | |||||||||||||||
Balance at December 31, 2017 | $ | $ | $ | ( | ) | $ | ( | ) | ( | ) | $ | ( | ) | $ | |||||||||||||||
Cumulative effect of accounting change | — | — | — | ( | ) | ( | ) | — | — | ( | ) | ||||||||||||||||||
Comprehensive loss: | |||||||||||||||||||||||||||||
Net loss | — | — | — | ( | ) | — | — | — | |||||||||||||||||||||
Other comprehensive loss | — | — | — | — | ( | ) | — | — | |||||||||||||||||||||
Total comprehensive loss | ( | ) | |||||||||||||||||||||||||||
Net activity related to restricted stock units | — | — | ( | ) | — | — | |||||||||||||||||||||||
Exercise of stock options | — | — | ( | ) | — | — | |||||||||||||||||||||||
Repurchase of common stock | — | — | — | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
Balance at June 30, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | ( | ) | $ | ( | ) | $ | |||||||||||||||
See Notes to Consolidated Condensed Financial Statements (Unaudited).
7
Avis Budget Group, Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
(Unless otherwise noted, all dollar amounts in tables are in millions, except per share amounts)
1. | Basis of Presentation |
Avis Budget Group, Inc. provides mobility solutions to businesses and consumers worldwide. The accompanying unaudited Consolidated Condensed Financial Statements include the accounts and transactions of Avis Budget Group, Inc. and its subsidiaries, as well as entities in which Avis Budget Group, Inc. directly or indirectly has a controlling financial interest (collectively, the “Company”), and have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission for interim financial reporting.
The Company operates the following reportable business segments:
• | Americas—consisting primarily of (i) vehicle rental operations in North America, South America, Central America and the Caribbean, (ii) car sharing operations in certain of these markets, and (iii) licensees in the areas in which the Company does not operate directly. |
• | International—consisting primarily of (i) vehicle rental operations in Europe, the Middle East, Africa, Asia and Australasia, (ii) car sharing operations in certain of these markets, and (iii) licensees in the areas in which the Company does not operate directly. |
The operating results of acquired businesses are included in the accompanying Consolidated Condensed Financial Statements from the dates of acquisition. The fair value of the assets acquired and liabilities assumed in connection with the Company’s 2018 acquisitions of Turiscar Group, Morini S.p.A and various licensees in Europe and North America have not yet been finalized; however, there have been no significant changes to the preliminary allocation of the purchase price during the six months ended June 30, 2019.
In presenting the Consolidated Condensed Financial Statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”), management makes estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgment and available information. Accordingly, actual results could differ from those estimates. In management’s opinion, the Consolidated Condensed Financial Statements contain all adjustments necessary for a fair presentation of interim results reported. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year or any subsequent interim period. These financial statements should be read in conjunction with the Company’s 2018 Form 10-K.
Summary of Significant Accounting Policies
The Company’s significant accounting policies are fully described in Note 2, “Summary of Significant Accounting Policies,” in the Company’s Annual Report on Form 10-K for fiscal year 2018.
Cash and cash equivalents, Program cash and Restricted cash. The following table provides a detail of cash and cash equivalents, program and restricted cash reported within the Consolidated Condensed Balance Sheets to the amounts shown in the Consolidated Condensed Statements of Cash Flows.
As of June 30, | |||||||
2019 | 2018 | ||||||
Cash and cash equivalents | $ | $ | |||||
Program cash | |||||||
Restricted cash (a) | |||||||
Total cash and cash equivalents, program and restricted cash | $ | $ | |||||
________
(a) | Included within other current assets. |
Vehicle Programs. The Company presents separately the financial data of its vehicle programs. These programs are distinct from the Company’s other activities since the assets under vehicle programs are
8
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 acquisition of such assets and the principal debt repayment or financing of such assets are classified as activities of the Company’s vehicle programs. The Company believes it is appropriate to segregate the financial data of its vehicle programs because, ultimately, the source of repayment of such debt is the realization of such assets.
Currency Transactions. The Company records the gain or loss on foreign-currency transactions on certain intercompany loans and the gain or loss on intercompany loan hedges within interest expense related to corporate debt, net. During the three months ended June 30, 2019 and 2018, the Company recorded an immaterial amount, in each period, and during the six months ended June 30, 2019 and 2018, the Company recorded a gain of $3 million and an immaterial amount, respectively, related to such items.
Divestitures. In 2018, the Company entered into a definitive stock purchase agreement to sell its 50% equity method investment in Anji Car Rental & Leasing Company Limited (“Anji”), located in China, to Shanghai Automotive Industry Sales Company, Ltd., a 50% owner of Anji. Upon receiving clearance from applicable regulatory authorities in China during the second quarter of 2019, the Company completed the sale for $64 million, net of cross-border withholding taxes and recorded a $44 million gain within operating expenses. Anji’s operations are reported within the Company’s International segment.
Other Investments. As of June 30, 2019 and December 31, 2018, the Company had equity method investments with a carrying value of $48 million, in each period, which are recorded within other non-current assets. Earnings from the Company’s equity method investments are reported within operating expenses. For the three and six months ended June 30, 2019, the Company recorded income of $4 million related to its equity method investments, and for the three and six months ended June 30, 2018, such amounts were not material.
Nonmarketable Equity Securities. As of June 30, 2019 and December 31, 2018, the Company’s carrying amount of nonmarketable equity securities was $8 million, in each period, and is recorded within other non-current assets. During the six months ended June 30, 2019, the Company realized a $12 million gain from the sale of a nonmarketable equity security which is recorded within operating expenses. No adjustments were made to the carrying amounts during the three months ended June 30, 2019 and 2018, and during the six months ended June 30, 2018.
Revenues. From January 1, 2018 through December 31, 2018, the Company’s revenues were recognized in accordance with ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” Effective January 1, 2019, revenues are recognized under ASU 2016-02, “Leases (Topic 842),” with the exception of royalty fee revenue derived from the Company’s licensees and revenue related to the Company’s customer loyalty program, which were approximately $33 million and $63 million during the three and six months ended June 30, 2019, respectively. The following table presents the Company’s revenues disaggregated by geography.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Americas | $ | $ | $ | $ | ||||||||||||
Europe, Middle East and Africa | ||||||||||||||||
Asia and Australasia | ||||||||||||||||
Total revenues | $ | $ | $ | $ | ||||||||||||
9
The following table presents the Company’s revenues disaggregated by brand.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Avis | $ | $ | $ | $ | ||||||||||||
Budget | ||||||||||||||||
Other | ||||||||||||||||
Total revenues | $ | $ | $ | $ | ||||||||||||
________
Other includes Zipcar and other operating brands.
Deferred Revenue. The following table presents changes in deferred revenue associated with the Company’s customer loyalty program.
Six Months Ended June 30, | |||||||
2019 | 2018 | ||||||
Balance, January 1 | $ | $ | |||||
Revenue deferred | |||||||
Revenue recognized | ( | ) | ( | ) | |||
Balance, June 30 | $ | $ | |||||
_______
At June 30, 2019 and 2018, $22 million and $18 million was included in accounts payable and other current liabilities, respectively, and $44 million and $54 million, respectively, in other non-current liabilities. Non-current amounts are expected to be recognized as revenue within two to three years.
At January 1, 2018, the Company’s prepaid rentals and membership fees related to its car sharing business were $125 million. During the six months ended June 30, 2018, additional revenues of $989 million were deferred and revenues of $883 million were recognized. At June 30, 2018, the ending prepaid rentals and car sharing membership fees were $231 million, of which $229 million was included in accounts payable and other current liabilities and $2 million was included in other non-current liabilities.
Adoption of New Accounting Pronouncements
Nonemployee Share-Based Payment Accounting
On January 1, 2019, as a result of a new accounting pronouncement, the Company adopted Accounting Standards Update (“ASU”) 2018-02, “Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” which simplifies the accounting for share-based payments granted to nonemployees for goods and services and aligns most of the guidance on such payments to nonemployees with the requirements for share-based payments granted to employees. The adoption of this accounting pronouncement did not have an impact on the Company's Consolidated Condensed Financial Statements.
Accounting for Hedging Activities
On January 1, 2019, as the result of a new accounting pronouncement, the Company adopted ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” which amends the existing guidance to allow companies to more accurately present the economic results of an entity’s risk management activities in the financial statements. The adoption of this standard did not have a material impact on the Company’s Consolidated Condensed Financial Statements.
Leases
On January 1, 2019, as the result of a new accounting pronouncement, the Company adopted Topic 842 along with related updates, which require a lessee to recognize all long-term leases on its balance sheet as a liability for its lease obligation, measured at the present value of lease payments not yet paid, and a corresponding asset representing its right to use the underlying asset over the lease term and expands disclosure of key information about leasing arrangements. Topic 842 does not significantly change a lessee’s
10
recognition, measurement and presentation of expenses. Additionally, Topic 842 aligns key aspects of lessor accounting with the revenue recognition guidance in Topic 606.
The Company elected available practical expedients for existing or expired contracts of lessees and lessors wherein the Company is not required to reassess whether such contracts contain leases, the lease classification or the initial direct costs. The Company is not utilizing the practical expedient which allows the use of hindsight by lessees and lessors in determining the lease term and in assessing impairment of its right-of-use (“ROU”) assets. Additionally, the Company elected as accounting policies to not recognize ROU assets or lease liabilities for short-term property leases (i.e., those with a term of 12 months or less at lease commencement) and, by class of underlying asset, to combine lease and nonlease components in the contract. The Company utilized the transition method allowing entities to only apply the new lease standard in the year of adoption.
Lessor
The Company has determined that revenues derived by providing vehicle rentals and other related products and mobility services to customers are within the scope of the accounting guidance contained in Topic 842 with the exception of royalty fee revenue derived from the Company’s licensees and revenue related to the Company’s customer loyalty program. The Company’s rental related revenues have been accounted for under the revenue accounting standard Topic 606, until the adoption of Topic 842.
The Company excludes from the measurement of its lease revenues any tax assessed by a governmental authority that is both imposed on and concurrent with a specific revenue-producing transaction and collected from a customer. As a result, lease revenues exclude such taxes collected. Fees collected from customers for which the Company is the primary obligor such as airport concessions and vehicle licensing are recorded within revenues and corresponding remittances of these fees by the Company are recorded within operating expenses.
Lessee
The Company determines if an arrangement is a lease at inception. Operating leases, other than those associated with the Company’s vehicle rental programs, are included in operating lease ROU assets, accounts payable and other current liabilities, and long-term operating lease liabilities in the Company’s Consolidated Condensed Balance Sheets. Finance leases, other than those associated with the Company’s vehicle rental programs, are included in property and equipment, net, short-term debt and current portion of long-term debt, and long-term debt in the Company’s Consolidated Condensed Balance Sheets.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the expected lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on information available at commencement date in determining the present value of lease payments. The operating lease ROU assets are reduced by any lease incentives. The Company’s lease terms may include options to extend or terminate the lease, which are included in the calculation of ROU assets when it is reasonably certain that the Company will exercise those options. Lease expense for lease payments is usually recognized on a straight-line basis over the lease term.
The Company has lease agreements with lease and non-lease components, which are generally not accounted for separately. Additionally, for certain leases, the Company applies a portfolio approach to account for the operating lease ROU assets and liabilities as the leases are similar in nature and have nearly identical contract provisions.
Adoption of this standard resulted in most of the Company’s operating lease commitments being recognized as operating lease liabilities and right-of-use assets, which increased total assets and total liabilities by approximately $2,811 million related to property operating leases and $183 million related to vehicle operating leases. The Company recorded a beginning accumulated deficit adjustment of $5 million, net of tax, related to the adoption of this standard.
11
Recently Issued Accounting Pronouncements
Intangibles—Goodwill and Other—Internal—Use Software
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-15, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement That Is a Service Contract,” which provides guidance for determining when the arrangement includes a software license. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software (and hosting arrangements that include an internal use software license). The amendments in this update also require the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, to present the expense in the same line in its statement of income as the fees associated with the hosting element (service) of the arrangement and classify payments for capitalized implementation costs in its statement of cash flows in the same manner as payments made for fees associated with the hosting element. The entity is also required to present the capitalized implementation costs in its balance sheet in the same line that a prepayment for the fees of the associated hosting arrangement would be presented. ASU 2018-15 becomes effective for the Company on January 1, 2020. Early adoption is permitted. The Company is currently evaluating the impact of adopting this accounting pronouncement on its Consolidated Condensed Financial Statements.
Compensation—Retirement Benefits—Defined Benefit Plans
In August 2018, the FASB issued ASU 2018-14, “Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans,” which adds, removes, and clarifies disclosure requirements related to defined benefit pension and other postretirement plans. These changes are part of the FASB’s disclosure framework project, which the Board launched in 2014 to improve the effectiveness of disclosures in notes to financial statements. ASU 2018-14 becomes effective for the Company on January 1, 2021. Early adoption is permitted. The adoption of this accounting pronouncement is not expected to have a material impact on the Company's Consolidated Condensed Financial Statements.
Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement,” which adds, removes, and modifies disclosure requirements related to fair value measurements. ASU 2018-13 becomes effective for the Company on January 1, 2020. Early adoption is permitted. The adoption of this accounting pronouncement is not expected to have a material impact on the Company's Consolidated Condensed Financial Statements.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which, along with related clarifying updates, set forth a current expected credit loss impairment model for financial assets that replaces the current incurred loss model. This model requires a financial asset (or group of financial assets), including trade receivables, measured at amortized cost to be presented at the net amount expected to be collected with an allowance for credit losses deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. ASU 2016-13 becomes effective for the Company on January 1, 2020. Early adoption is permitted as of January 1, 2019. The adoption of this accounting pronouncement is not expected to have a material impact on the Company’s Consolidated Condensed Financial Statements.
2. | Leases |
Lessor
For periods after January 1, 2019, the Company combines all lease and nonlease components of its vehicle rental contracts for which the timing and pattern of transfer are the same and the lease component meets the classification of an operating lease, and accounts for them in accordance with Topic 842. The Company derives revenues primarily by providing vehicle rentals and other related products and mobility services to
12
commercial and leisure customers. Other related products and mobility services include sales of collision and loss damage waivers under which a customer is relieved from financial responsibility arising from vehicle damage incurred during the rental; products and services for driving convenience such as fuel service options, chauffeur drive services, roadside safety net, electronic toll collection, tablet rentals, access to satellite radio, portable navigation units and child safety seat rentals; and rentals of other supplemental items including automobile towing equipment and other moving accessories and supplies. The Company also receives payment from customers for certain operating expenses that it incurs, including airport concession fees that are paid by the Company in exchange for the right to operate at airports and other locations, as well as vehicle licensing fees. Vehicle rentals and other related products and mobility services are recognized evenly over the period of rental, which is on average four days. In addition, the Company collects membership leasing fees in connection with its car sharing business. Membership leasing fees are generally nonrefundable, are deferred and recognized ratably over the period of membership.
The following table presents the Company’s lease revenues disaggregated by geography.
Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | |||||||
Americas | $ | $ | ||||||
Europe, Middle East and Africa | ||||||||
Asia and Australasia | ||||||||
Total lease revenues | $ | |||||||