Cendant Corporation 10-Q Summary: Quarter Ended September 30, 2002
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2002, for Cendant Corporation (Note: The input metadata referenced "AVIS BUDGET GROUP," but the filing text is for Cendant Corporation, which owned Avis and was in the process of acquiring Budget Group). Cendant operates five primary segments: Real Estate Services, Hospitality, Travel Distribution, Vehicle Services, and Financial Services. The period was marked by significant strategic acquisitions, the resolution of a major securities class action lawsuit, and a substantial non-cash impairment charge related to mortgage servicing rights.
Key Financial Metrics
| Metric (Nine Months Ended Sep 30, 2002) | Value ($ Millions) | Comparison (Nine Months Ended Sep 30, 2001) |
|---|---|---|
| Net Revenues | $10,238 | $6,119 (+67%) |
| Income from Continuing Operations | $834 | $667 (+25%) |
| Net Income | $599 | $692 (-13%) |
| Diluted EPS (Net Income) | $0.58 | $0.77 |
| Adjusted EBITDA | $2,097 | $1,544 (+36%) |
| Cash and Cash Equivalents | $205 | $1,942 (Dec 31, 2001) |
| Total Debt (Corporate + Programs) | ~$17.0 Billion | ~$16.4 Billion (Dec 31, 2001) |
| Stockholders' Equity | $9,137 | $7,068 (Dec 31, 2001) |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased by $4.1 billion (67%) year-over-year, driven primarily by the acquisitions of NRT Incorporated (Real Estate), Trendwest Resorts (Hospitality), and Galileo International (Travel Distribution), as well as the full-year inclusion of Avis Group Holdings.
- Impairment Charge: A significant non-cash provision of $275 million was recorded in the third quarter for the impairment of Mortgage Servicing Rights (MSRs). This was caused by declining interest rates and increased prepayment rates, which reduced the fair value of the asset.
- Discontinued Operations: The company sold its car parking facility business, National Car Parks (NCP), in May 2002 for approximately $1.2 billion, recording an after-tax loss of $256 million on the disposal.
- Litigation Settlement: Cendant fully funded its principal securities class action lawsuit liability in May 2002 with a final payment of approximately $1.2 billion, eliminating a $2.85 billion liability from the balance sheet.
- Acquisition Costs: Acquisition and integration-related costs totaled $263 million for the nine months ended September 30, 2002, largely due to the amortization of intangible assets from the NRT acquisition.
Guidance, Outlook, and Risks
- Acquisition of Budget Group: On August 22, 2002, Cendant announced a definitive agreement to acquire Budget Group, Inc. for approximately $110 million in cash plus transaction costs, subject to regulatory and bankruptcy court approvals. Closing is expected in the fourth quarter of 2002.
- Capital Allocation: Management intends to use cash on hand and operating cash flows to reduce outstanding indebtedness and repurchase common stock. As of September 30, 2002, approximately $255 million remained available for stock repurchases (including a $200 million authorization approved in October 2002).
- Segment Outlook:
- Real Estate: Transaction volume significantly outperformed the industry, though results were impacted by the MSR impairment.
- Vehicle Services: Avis increased its domestic airport market share to 23.4% through July 2002.
- Travel Distribution: Air travel booking volumes remained down compared to pre-September 11, 2001 levels, though a progressive rebound was noted.
- Risks and Contingencies:
- Interest Rate Sensitivity: Declining interest rates negatively impact the value of mortgage servicing rights and prepayment speeds.
- Liquidity: Liquidity is dependent on secondary markets for mortgage loans and the ability to refinance asset-backed debt. Credit ratings (Baa1/BBB) are monitored closely as they affect access to securitization facilities.
- Legal: Ongoing litigation related to prior accounting irregularities (CUC International) remains unresolved, though management does not expect a material liability beyond current provisions.
Investor Verification Checklist
- MSR Valuation: Verify the assumptions used for the $275 million impairment charge regarding prepayment rates and interest rate sensitivity.
- Budget Group Acquisition: Monitor the closing status of the Budget Group acquisition and the refinancing of the $2.6 billion in asset-backed vehicle debt.
- Cash Position: Confirm the sustainability of the $205 million cash balance given the recent $2.85 billion litigation payout and ongoing debt reduction strategy.
- Goodwill and Intangibles: Review the $10.2 billion goodwill balance and the impact of SFAS No. 142 (non-amortization of goodwill) on future earnings comparisons.
- Debt Covenants: Ensure continued compliance with financial covenants across corporate and program-specific debt facilities, particularly given the high leverage in the mortgage and vehicle programs.