Cendant Corporation 10-Q Summary: Quarter Ended September 30, 1999
Business Context and Reporting Period
This Form 10-Q covers Cendant Corporation and its subsidiaries for the quarterly period ended September 30, 1999. Cendant is a diversified consumer and business services company operating through four principal divisions: travel, real estate, direct marketing, and other consumer/business services. The reporting period reflects significant strategic restructuring, including the divestiture of the Fleet segment and the spin-off of Netmarket Group, Inc. (NGI).
Key Financial Metrics
| Metric (in millions) | Q3 1999 | Q3 1998 | 9M 1999 | 9M 1998 |
|---|---|---|---|---|
| Net Revenues | $1,410.4 | $1,457.8 | $4,118.7 | $3,865.1 |
| Net Income | $201.7 | $111.0 | $1,426.0 | $436.9 |
| Income from Continuing Ops | $208.6 | $123.1 | $1,251.9 | $461.9 |
| Adjusted EBITDA | $526.7 | $407.1 | $1,417.6 | $1,167.6 |
| Cash & Equivalents | $623.5 | $1,008.7 | $623.5 | $1,611.2 |
| Long-Term Debt | $3,344.3 | $3,362.9 | $3,344.3 | $3,362.9 |
| Diluted EPS (Net Income) | $0.26 | $0.13 | $1.75 | $0.50 |
Note: Fleet segment revenues and results are excluded from Q3 1999 as the business was disposed of on June 30, 1999.
Material Changes vs. Prior Period
- Revenue Decline: Q3 1999 net revenues decreased 3% year-over-year, primarily due to the exclusion of the Fleet segment which contributed $94.8 million in Q3 1998. Excluding divestitures, underlying segments showed growth.
- Profitability Surge: Net income increased 82% in Q3 1999 compared to Q3 1998. This was driven by a $75.3 million net gain on the disposition of businesses in Q3 1999 and the absence of a $50.4 million executive termination charge recorded in Q3 1998.
- Adjusted EBITDA Growth: Adjusted EBITDA rose 29% in Q3 1999, reflecting operational efficiencies and growth in Travel, Real Estate, and Mortgage segments.
- Divestitures: The company completed the sale of the Fleet segment (generating a net gain of $881.4 million, largely recognized in Q2), Global Refund Group, Spark Services, and Central Credit. It also spun off NGI, recording an $84.8 million charge.
- Share Repurchases: The company repurchased $1.8 billion of common stock during the nine months ended September 30, 1999, including a $1.1 billion Dutch Auction tender offer.
Guidance, Outlook, and Risks
- Tracking Stock Plan: The Board approved a plan to create a tracking stock for CompleteHome.com, subject to shareholder approval, to reflect the performance of its internet real estate portal.
- Divestiture Program: Management expects to generate approximately $4.5 billion in proceeds from the ongoing divestiture program, including pending sales of Green Flag ($410 million) and Entertainment Publications (EPub) ($305 million).
- Litigation Risks: Significant uncertainty remains regarding the resolution of class action lawsuits and government investigations related to accounting irregularities in former CUC International units. A settlement regarding PRIDES securities was reached, but appeals are pending.
- Year 2000 Compliance: The company has incurred $49 million of the estimated $55 million total cost for Y2K compliance and believes mission-critical systems are remediated, though risks related to third-party vendors persist.
- Forward-Looking Statements: Management cautions that future results may differ materially due to litigation outcomes, integration of acquisitions, and the ability to manage rapidly growing operations.
Investor Verification Checklist
- Divestiture Proceeds: Verify the closing and final proceeds of the pending EPub and Green Flag sales, and the tax treatment of the Fleet segment disposition.
- Litigation Exposure: Monitor the status of the PRIDES settlement appeal and the SEC investigation into historical accounting irregularities for potential additional charges.
- NGI Valuation: Assess the value of the retained convertible preferred stock in Netmarket Group, Inc., which represents a significant contingent asset.
- Debt Covenants: Review compliance with debt covenants, specifically the 3:1 interest coverage ratio and 0.5:1 debt-to-capitalization ratio, given the high volume of share repurchases.
- Tracking Stock Approval: Confirm shareholder approval for the CompleteHome.com tracking stock and its impact on capital allocation.