Business Context and Reporting Period
This Form 10-Q covers Cendant Corporation for the quarterly period ended September 30, 2001. The filing reflects a period of significant transformation driven by major acquisitions, including Avis Group Holdings, Inc. (acquired March 1, 2001) and Fairfield Resorts, Inc. (acquired April 2, 2001). The company also completed the sale of its real estate internet portal, move.com, to Homestore.com in February 2001. Operations were notably impacted by the September 11, 2001 terrorist attacks, particularly affecting the Vehicle Services and Hospitality segments.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2001 | Nine Months Ended Sep 30, 2001 | Nine Months Ended Sep 30, 2000 |
|---|---|---|---|
| Net Revenues | $2,481 million | $6,370 million | $3,490 million |
| Net Income | $210 million | $692 million | $457 million |
| Income Before Taxes/Minority Interest | $335 million | $1,246 million | $852 million |
| Adjusted EBITDA | $603 million | $1,633 million | $1,306 million |
| Cash and Cash Equivalents | $3,201 million | $3,201 million (End of Period) | $1,210 million (End of Period) |
| Total Debt (Excl. Programs) | $5,742 million | $5,742 million | $1,948 million |
| Debt (Mgmt & Mortgage Programs) | $9,741 million | $9,741 million | $2,040 million |
Note: Debt figures exclude "Upper DECS" ($863 million) and debt under management/mortgage programs unless specified. Net Income includes a $435 million gain on the disposition of move.com in the nine-month 2001 period.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 103% ($1.26 billion) for the three months and 83% ($2.88 billion) for the nine months ended September 30, 2001, compared to 2000. This growth is primarily attributable to the inclusion of Avis and Fairfield operations.
- Expense Increases: Total expenses rose 141% for the quarter and 111% for the nine months, driven by the consolidation of acquired entities and increased vehicle depreciation/lease charges.
- Unusual Charges: The company incurred $77 million in charges during the third quarter related to the September 11 terrorist attacks (primarily Avis fleet rationalization). For the nine months, total restructuring and unusual charges were $263 million.
- Asset Base: Total assets grew from $15.1 billion to $30.9 billion, largely due to the acquisition of Avis (adding $8.2 billion in vehicle-related assets) and Fairfield.
- Dispositions: A net gain of $435 million was recognized on the sale of move.com during the nine months ended September 30, 2001.
Guidance, Outlook, and Risks
- September 11 Impact: Management expects a considerable decline in travel demand, negatively impacting operating cash flows for the Vehicle Services and Hospitality segments in the near term. A modest decline in residential real estate transactions is also anticipated.
- Restructuring: The company is reviewing organizational alignment and workforce levels. Additional charges of up to $125 million (after-tax) are expected in the fourth quarter of 2001.
- Asset Impairment Risks:
- Mortgage Servicing Rights: Due to interest rate cuts, the company is reviewing valuations. A potential non-cash charge of up to $60 million (after-tax) is possible but not expected to be material.
- Homestore.com Investment: The company is evaluating if the decline in Homestore's trading value is other-than-temporary. A potential non-cash reduction of up to $260 million (after-tax) could be required.
- Litigation Settlement: A $2.85 billion stockholder class action settlement was approved. As of September 30, $1.1 billion had been paid. The remaining balance (approx. $1.3 billion) is expected to be funded by March 2002.
- Recent Acquisitions: Subsequent to the period end, Cendant acquired Galileo International ($1.9 billion) and Cheap Tickets ($313 million), further expanding its travel distribution capabilities.
Investor Verification Checklist
- September 11 Financial Impact: Verify the magnitude of the $77 million Q3 charge and the projected $125 million Q4 restructuring charge against actual Q4 results.
- Asset Valuation: Monitor Q4 2001 filings for potential impairment charges related to the Homestore.com investment (up to $260 million) and mortgage servicing rights.
- Litigation Funding: Confirm the funding of the remaining $1.3 billion stockholder settlement liability in Q1 2002 and its impact on liquidity.
- Integration Costs: Assess the actual costs and synergies realized from the integration of Avis, Fairfield, Galileo, and Cheap Tickets.
- Debt Structure: Review the terms of the new debt issuances (convertible notes, Upper DECS) and the impact of interest rate fluctuations on the company's extensive debt portfolio.