Business Context and Reporting Period
This summary covers the Form 10-K for Cendant Corporation (Note: The input metadata references "AVIS BUDGET GROUP, INC.", but the filing text is for Cendant Corporation, which acquired Avis and Budget in 2001 and 2002, respectively). The reporting period is the fiscal year ended December 31, 2002. Cendant is a global provider of travel and real estate services operating through five segments: Real Estate Services, Hospitality, Travel Distribution, Vehicle Services, and Financial Services. The year was defined by significant strategic acquisitions, including NRT Incorporated (real estate), Trendwest Resorts (timeshare), and Budget Group (vehicle rental), alongside the adoption of SFAS No. 142 regarding goodwill.
Key Financial Metrics
| Metric | 2002 | 2001 |
|---|---|---|
| Net Revenues | $14,088 million | $8,613 million |
| Income from Continuing Operations | $1,081 million | $342 million |
| Net Income | $846 million | $385 million |
| Diluted EPS (Net Income) | $0.81 | $0.41 |
| Total Assets | $35,897 million | $33,544 million |
| Total Long-Term Debt (excl. Upper DECS) | $5,601 million | $6,132 million |
| Cash and Cash Equivalents | $126 million | $1,942 million |
| Adjusted EBITDA | $2,761 million | $2,087 million |
Note: The filing does not provide a specific "profit margin" percentage; however, Net Income as a percentage of Net Revenues was approximately 6.0% in 2002 compared to 4.5% in 2001.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased by $5.475 billion (63.6%) primarily driven by the full-year or partial-year inclusion of major acquisitions: NRT ($3.0 billion contribution), Trendwest ($348 million), and Budget ($161 million).
- Profitability: Income from continuing operations increased by $739 million (216%). This was aided by the elimination of goodwill amortization under new accounting standards (SFAS No. 142) and strong performance in Vehicle Services and Travel Distribution.
- Cash Position: Cash and cash equivalents decreased by approximately $1.8 billion to $126 million. This reduction was due to the full funding of a $2.85 billion stockholder litigation settlement, significant acquisition costs, and debt repayments.
- Discontinued Operations: The company sold its National Car Parks (NCP) subsidiary for $1.2 billion, recording an after-tax loss of $256 million due to foreign currency translation.
- Segment Performance:
- Real Estate Services: Revenue up 152% due to NRT acquisition, though Adjusted EBITDA declined 9% due to a $275 million non-cash impairment of mortgage servicing rights.
- Vehicle Services: Revenue up 26% and Adjusted EBITDA up 41%, driven by the Avis acquisition and the late-year acquisition of Budget.
- Travel Distribution: Revenue up 288% and Adjusted EBITDA up 385%, driven by the Galileo and Cheap Tickets acquisitions.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects to use discretionary cash in 2003 for debt repurchases, acquisitions, and share repurchases. They are analyzing the potential for future dividends but do not anticipate paying them in the immediate future.
- Unusual Items:
- Stockholder Litigation: The company fully funded a $2.85 billion settlement liability related to prior accounting irregularities in 2002.
- MSR Impairment: A $275 million non-cash charge was recorded for the impairment of mortgage servicing rights due to declining interest rates and increased prepayment speeds.
- Accounting Changes: Adoption of SFAS No. 142 eliminated goodwill amortization, improving reported earnings compared to prior years.
- Risks and Contingencies:
- United Airlines Bankruptcy: United Air Lines (UAL) filed for bankruptcy in December 2002. UAL represents approximately 11% of Galileo's GDS revenue. While contracts were approved for payment, there is a risk of non-recovery of approximately $30 million in outstanding amounts.
- Interest Rate Risk: Significant exposure to interest rate fluctuations affecting mortgage servicing rights and vehicle financing costs.
- Consolidation of VIEs: The company expects to consolidate certain Variable Interest Entities (e.g., Bishop's Gate Residential Mortgage Trust) in July 2003, which may increase reported assets and liabilities by approximately $2.5 billion each.
Important Facts for Investor Verification
- Acquisition Integration: Verify the realization of synergies from the NRT, Trendwest, and Budget acquisitions, particularly regarding the integration of systems and cost savings.
- United Airlines Exposure: Monitor the resolution of UAL's bankruptcy and the impact on Galileo's revenue stream and receivables.
- Debt Maturities: Review the schedule of debt maturities, including the Upper DECS (due 2004/2006) and the significant refinancing activities planned for 2003.
- MSR Valuation: Assess the sensitivity of the $1.38 billion Mortgage Servicing Rights asset to further declines in interest rates.
- Accounting Standard Adoption: Confirm the impact of the July 2003 consolidation of Variable Interest Entities (VIEs) on the balance sheet and potential non-cash charges.