Business Context and Reporting Period
This Form 10-Q covers Cendant Corporation for the quarterly period ended March 31, 2002. The Company 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 filing reflects the impact of major 2001 acquisitions (Avis, Galileo, Cheap Tickets, Fairfield Resorts) and significant legal settlements regarding prior accounting irregularities.
Key Financial Metrics
| Metric | Q1 2002 | Q1 2001 |
|---|---|---|
| Net Revenues | $2,713 million | $1,486 million |
| Net Income | $342 million | $239 million |
| Diluted EPS | $0.34 | $0.26 |
| Adjusted EBITDA | $697 million | $443 million |
| Cash and Equivalents | $1,138 million | $2,092 million |
| Total Debt (Corporate + Programs) | $16.5 billion | N/A |
| Available Credit Facilities | $4.5 billion | N/A |
Note: Q1 2001 results included a $435 million gain on the disposition of move.com and $185 million in restructuring charges, which are not present in Q1 2002.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 83% ($1.2 billion) primarily due to the full quarter impact of 2001 acquisitions, particularly Avis (Vehicle Services) and Galileo/Cheap Tickets (Travel Distribution).
- Profitability: Net income increased 43% to $342 million. This was driven by organic growth and the absence of the $185 million restructuring charges and $435 million disposition gain recorded in Q1 2001.
- Legal Settlement: The Supreme Court denied petitions to overturn a stockholder litigation settlement. Consequently, the Company applied $1.41 billion of prior trust payments to extinguish a portion of the liability, reducing the remaining obligation to $1.19 billion (due July 16, 2002).
- Cash Flow: Net cash used in operating activities was $559 million, compared to $105 million provided in Q1 2001. This shift was largely due to the accounting treatment of the litigation settlement trust payments.
Guidance, Outlook, and Risks
- Acquisitions: Subsequent to the quarter end, the Company acquired NRT Incorporated ($230 million), Arvida Realty Services ($160 million), and 90% of Trendwest Resorts ($850 million) to expand real estate and timeshare operations.
- Outlook: Management expects travel volumes to continue rebounding toward normalized levels, though the impact of the September 11 attacks remains a factor. The Company anticipates aggregate capital expenditures of approximately $375 million for 2002.
- Liquidity: The Company plans to fund the remaining $1.19 billion litigation liability by July 2002 using cash on hand and credit facilities. It maintains $4.5 billion in available funding arrangements.
- Risks: Key risks include the ongoing impact of the September 11 attacks on travel demand, potential IRS challenges regarding the tax-free status of the 1999 fleet disposition (potential liability $10M-$170M), and credit rating downgrades affecting securitization facilities.
Investor Verification Checklist
- Litigation Liability Funding: Verify the Company's ability to fund the remaining $1.19 billion settlement by the July 16, 2002 deadline.
- Travel Industry Recovery: Monitor RevPAR and rental day trends to confirm the anticipated rebound in Hospitality and Vehicle Services segments post-September 11.
- Acquisition Integration: Assess the financial impact and integration progress of the subsequent acquisitions (NRT, Arvida, Trendwest) announced in April/May 2002.
- Debt Covenants: Confirm continued compliance with financial ratios required by securitization facilities and credit agreements, particularly given the high leverage in mortgage and vehicle programs.
- Tax Position: Review the status of the IRS interpretive ruling regarding the 1999 fleet disposition and any potential incremental tax liabilities.