Business Context and Reporting Period
This Form 10-Q covers Cendant Corporation for the quarterly period ended March 31, 1999. The filing includes unaudited consolidated financial statements and management's discussion and analysis. The company operates in four principal divisions: travel-related services, real estate-related services, alliance marketing-related services, and other consumer and business services. The reporting period reflects a strategic shift from acquisitions to maximizing existing businesses and divesting non-strategic assets.
Key Financial Metrics
| Metric | Q1 1999 | Q1 1998 |
|---|---|---|
| Net Revenues | $1,304.9 million | $1,119.9 million |
| Net Income | $362.0 million | $172.9 million |
| Income from Continuing Operations | $181.4 million | $196.3 million |
| Adjusted EBITDA | $449.7 million | $401.4 million |
| Cash and Cash Equivalents (End of Period) | $520.7 million | $150.2 million |
| Long-Term Debt | $3,357.7 million | $3,362.9 million |
| Debt under Management/Mortgage Programs | $6,327.3 million | $6,896.8 million |
| Shares Outstanding (April 30, 1999) | 768.1 million | N/A |
Profitability: Net income increased significantly due to a $192.7 million gain on the sale of discontinued operations (Cendant Software Corporation). Income from continuing operations decreased 8% year-over-year. Adjusted EBITDA increased 12% to $449.7 million.
Liquidity: Cash and cash equivalents decreased by $486.4 million during the quarter, primarily due to $1.14 billion in common stock repurchases and net repayments on management/mortgage program financings, partially offset by strong operating cash flows of $911.9 million.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 17% ($185.0 million) driven by growth in mortgage services, increased royalty fees in real estate franchising, and the inclusion of National Parking Corporation (acquired April 1998).
- Discontinued Operations: The company recorded a $192.7 million gain on the sale of Cendant Software Corporation. Conversely, the Entertainment Publications segment (classified as discontinued) reported a net loss of $12.1 million.
- Expense Increases: Interest expense, net, surged 156% to $48.3 million due to higher average debt balances. Depreciation and amortization increased 43% to $91.0 million due to 1998 acquisitions.
- Unusual Charges: The quarter included a $7.0 million write-off for the termination of the proposed RAC Motoring Services acquisition and $1.7 million in investigation-related costs regarding prior accounting irregularities.
Guidance, Outlook, and Risks
Management Commentary: Management has shifted focus from strategic acquisitions to optimizing existing businesses and divesting non-strategic assets. Proceeds from divestitures and operations are being used to retire debt and repurchase common stock. The company authorized an additional $600 million for share repurchases, bringing the total program authorization to $1.6 billion.
Outlook: Capital expenditures for 1999 are anticipated to be approximately $260.0 million. The company expects to continue using proceeds from asset sales and borrowings to reduce indebtedness.
Risks and Contingencies:
- Litigation: Over 70 lawsuits and government investigations (SEC and U.S. Attorney) remain pending regarding accounting irregularities discovered in 1998. A class action settlement regarding PRIDES securities was reached, involving the issuance of new "Rights" to holders, but court approval is pending.
- Year 2000 Compliance: The company estimates total compliance costs at $55 million, with $37 million incurred by March 31, 1999. Risks include potential disruptions from third-party service providers.
- Market Risk: Exposure to interest rate and currency exchange rate fluctuations, though managed via derivatives. Shock tests indicate a 10% change in rates would not materially impact 1999 net earnings.
Investor Verification Checklist
- Discontinued Operations Gain: Verify the sustainability of net income by excluding the $192.7 million one-time gain from the sale of Cendant Software Corporation.
- Accounting Irregularities: Monitor the status of ongoing SEC and DOJ investigations and the potential for additional restatements or settlements beyond the PRIDES agreement.
- Debt Structure: Review the distinction between corporate long-term debt ($3.4 billion) and debt under management/mortgage programs ($6.3 billion), noting the latter is non-recourse to the parent.
- Share Repurchases: Confirm the impact of the $1.4 billion in share repurchases on diluted earnings per share and future liquidity.
- Year 2000 Status: Assess the progress of the testing phase for critical systems and the contingency plans for third-party vendor failures.