Cendant Reports Record Results for Third Quarter 2004
NEW YORK | Cendant Corporation (NYSE: CD - News) today reported record results for third quarter 2004. EPS from Continuing Operations increased 19% to $0.56, versus $0.47 in third quarter 2003. Both of the Company's core residential real estate and travel services verticals reported record operating results, despite weather related challenges in the Southeast, which affected real estate and travel alike.
- 3Q 2004 EPS from Continuing Operations Increased 19% to $0.56 Versus $0.47 in 3Q 2003
- 3Q 2004 Net Cash Provided by Operating Activities Was $2.4 Billion
- 3Q 2004 Free Cash Flow Was $729 Million
- Company Projects 2004 EPS from Continuing Operations of $1.70 - $1.71
Cendant's President and Chief Financial Officer, Ronald L. Nelson, stated: "In addition to another quarter of record results, we also have made substantial progress toward our strategic objective to focus on our core travel and real estate businesses, reduce complexity and increase financial transparency. First, we will secure a leading position in the rapidly growing online travel business through the pending acquisition of Orbitz, using the proceeds from our prior sale of Jackson Hewitt and cash on hand. Second, we announced that the Company intends to spin-off its mortgage and fleet operations, and establish a mutually beneficial joint venture with Cendant Mortgage designed to preserve the cross-selling benefits that exist between it and the Company's residential real estate, relocation and settlement services businesses. We believe these actions will both enhance the Company's growth rate and help to unlock shareholder value."
Cendant projects fourth quarter 2004 EPS of $0.32 - $0.33, an increase of 10% - 14% versus the $0.29 earned in fourth quarter 2003. In addition, the Company has narrowed the range of its projected EPS from Continuing Operations for full year 2004 to $1.70 - $1.71, a 23% - 24% increase versus 2003. Excluding the one-time tax benefit of $0.10 per share recorded in first quarter 2004, EPS from Continuing Operations is projected to increase 16% - 17% in 2004 as compared with 2003. The Company also continues to forecast 2004 Net Cash Provided by Operating Activities of approximately $5 billion and Free Cash Flow of more than $2 billion.
Third Quarter 2004 Results of Reportable Segments
The following discussion of operating results focuses on revenue and EBITDA for each of our reportable operating segments. EBITDA is defined as income from continuing operations before non-program related depreciation and amortization, non-program related interest, amortization of pendings and listings, income taxes and minority interest. EBITDA is the measure that we use to evaluate performance in each of our reportable operating segments. Our presentation of EBITDA may not be comparable to similarly titled measures used by other companies. Revenue and EBITDA are expressed in millions.
Real Estate Franchise and Operations
(Consisting of the Company's real estate franchise brands, brokerage operations and relocation services)
2004 2003 % change
Revenue $1,774 $1,593 11%
EBITDA $358 $325 10%
Revenue and EBITDA increased principally due to strong growth in royalties earned by our real estate franchise businesses and real estate commissions earned by NRT, our real estate brokerage unit. Real estate franchise royalty and marketing fund revenue increased 15%, primarily due to an 11% increase in the average price of homes sold and an 8% increase in the number of homes sold. Revenue generated by NRT increased 12%, principally due to a 17% increase in average price.
Mortgage Services(Consisting of mortgage services and settlement services)
2004 2003 % change
Revenue $283 $411 (31%)
EBITDA $55 $111 (50%)
Revenue and EBITDA decreased due to lower production revenues resulting from the industry-wide decline in mortgage refinancing volumes, as expected, and also, we believe, due to the temporary uncertainty created by our July announcement that we were considering strategic alternatives for the mortgage business. These effects were partially offset by a $206 million increase in net revenues from mortgage servicing activities, driven by a 12% increase in the average size of the servicing portfolio, substantially lower amortization and an increase in the value of our servicing asset, net of hedging activity.
Hospitality Services
(Consisting of the Company's franchised lodging brands, timeshare exchange, timeshare sales and marketing, and vacation rental businesses)
2004 2003 % change
Revenue $789 $696 13%
EBITDA $211 $189 12%
Revenue and EBITDA increased due to growth in virtually all of our hospitality businesses. Revenue from the European Vacation Rental Group increased substantially, due primarily to the May 2004 acquisition of Landal Green Parks, the largest vacation rental company in Holland. Revenue from RCI, the Company's timeshare exchange business, increased 13% and revenue from lodging franchise increased 7%. Revenue from the Timeshare Resort Group increased 3%, reflecting higher close rates and revenue per tour. This was partially offset by the negative effects of the recent hurricanes in Florida on Fairfield's tour flow and of telemarketing restrictions on Trendwest's tour flow. In addition, year-over-year EBITDA comparisons were negatively impacted by $10 million due to the absence of gain on sale accounting and the consolidation of the timeshare securitization structures effective in third quarter 2003.
Travel Distribution Services
(Consisting of electronic global distribution services for the travel industry, corporate and consumer online travel services, and travel agency services)
2004 2003 % change
Revenue $437 $424 3%
EBITDA $123 $119 3%
Revenue and EBITDA were positively impacted principally by the acquisitions of Flairview Travel in second quarter 2004 and Travel 2/Travel 4 in fourth quarter 2003. The impact of these acquisitions was partially offset by a 1% decrease in Galileo worldwide booking fees, which was driven by a 3% decline in global volume partially offset by improvements in global yield. Booking volumes were affected by labor uncertainty surrounding an air carrier in Italy where we have a significant presence and by continued soft travel demand in Europe. In addition, revenue and EBITDA were positively impacted by a 39% increase in global gross online travel bookings, including a 51% increase at our CheapTickets.com site, where conversion rates and gross margins also significantly improved.
Vehicle Services
(Consisting of vehicle rental, vehicle management services and fleet card services)
2004 2003 % change
Revenue $1,693 $1,610 5%
EBITDA $221 $187 18%
EBITDA increased in part due to operating efficiencies realized from the successful integration of Budget, as well as growth in car rental volume, particularly at Budget. Revenue and EBITDA were also positively impacted by growth in our Wright Express fuel card management business and by our PHH Fleet Management unit's February 2004 acquisition of First Fleet Corporation. Avis and Budget car rental experienced increases in car rental day volume of 1% and 9%, respectively, which were offset by decreases in price of 2% and 7%, respectively. The increased volume and reduced pricing at Budget resulted primarily from the Company's strategic decision to reduce its cost structure and pricing to be more competitive with other leisure-focused car rental brands. In addition, pricing at both Avis and Budget was negatively impacted by higher industry fleet levels due to increased incentives from car manufacturers. The impact of lower prices was partially offset in EBITDA by lower fleet costs.
Marketing Services
(Consisting of individual membership products, insurance-related services and financial services enhancement products)
2004 2003 % change
Revenue $389 $358 9%
EBITDA $111 $67 66%
Revenue and EBITDA were positively impacted by $34 million due to the early termination of a contractual relationship originally expected to extend into 2005, which resulted in a cash payment to the Company of $51 million. This early termination will cause the fourth quarter results of the Marketing Services segment to be modestly reduced. In addition, EBITDA was positively impacted by reduced operating costs at Cims, the Company's international membership business.
Other Items
The early termination of a contractual relationship in the Marketing Services segment positively impacted third quarter EPS by approximately $0.02. However, this benefit was offset by the negative impact of the recent hurricanes on many of the Company's businesses in Florida and the adverse consequences to the Company's mortgage business arising from our announcement that we were exploring strategic alternatives for that business.
Recent Achievements and Strategic Initiatives
During the third quarter, the Company made considerable progress toward its cash flow generation, debt reduction and share repurchase goals:
- Generated Net Cash Provided by Operating Activities of $2.4 billion and Free Cash Flow of $729 million. See Table 7 for a description of Free Cash Flow and a reconciliation to Net Cash Provided by Operating Activities.
- Reduced corporate debt, net of cash on the balance sheet, by $1.2 billion (corporate debt excludes Debt under Management and Mortgage Programs). As of September 30, 2004, the Company had Net Debt of approximately $2.8 billion, consisting of $1.6 billion of cash and cash equivalents and $4.5 billion of corporate debt outstanding. This cash balance includes approximately $863 million received in August 2004 in connection with the Company's issuance of approximately 38 million shares of common stock pursuant to the terms of its Upper DECS securities. See Table 5 for more detailed information. The Company projects year-end corporate debt, net of cash on the balance sheet, to be approximately $4 billion, including the impact of the Orbitz acquisition.
- Utilized $103 million of cash for the repurchase of common stock, net of proceeds from option exercises. For the nine months ended September 30, 2004, the Company has utilized $669 million of cash for the repurchase of common stock, net of proceeds from option exercises.
- Announced that it intends to distribute the mortgage and fleet operations of PHH Corporation to its shareholders. The transaction will be structured as a tax-free distribution of the common stock of PHH Corporation. The Company's relocation and fuel card businesses will remain a part of Cendant. The Company anticipates it will establish a joint venture with Cendant Mortgage designed to preserve the mutual cross-selling benefits that exist between the mortgage business and the Company's residential real estate, relocation and settlement services businesses. The spin-off is expected to take place in the first quarter of 2005.
- Announced an agreement to acquire Orbitz, a leading online travel agency, for approximately $1.25 billion in cash. Orbitz is debt-free and, as of June 30, 2004, had approximately $200 million of cash on hand. The acquisition will place Cendant in a leading position in the domestic online travel distribution business and is expected to be accretive to EPS by $0.00 - $0.01 in 2005 and $0.07 - $0.09 in 2006. It is expected to close in fourth quarter 2004 and adversely impact 2004 EPS by approximately $0.02 due to transaction related expenses and integration costs.
- Announced a regular quarterly cash dividend of $0.09 per common share payable December 14, 2004 to stockholders of record as of November 22, 2004 and an increase in the Company's stock repurchase program by $500 million plus an additional repurchase amount equal to the principal amount of any of the Company's 3-7/8 % convertible senior debentures due 2011 which are converted into shares of Cendant common stock in the fourth quarter of 2004.
- Announced its intent to purchase Ramada International Hotels & Resorts, primarily a franchised brand of 204 hotels in 26 countries and territories, from Marriott International Inc. This transaction will complete the acquisition of all worldwide trademark rights for the Ramada(R) brand by Cendant's Hotel Group. Cendant has operated the Ramada franchise system in the United States since 1990.
2004 Outlook
The Company projects the following EPS for 2004:
Fourth Full
Quarter(a) Year(a)
2004 EPS $0.32 - $0.33(b) $1.95 - $1.96(d)(e)
2004 EPS from Continuing Operations $0.32 - $0.33(b) $1.70 - $1.71(c)(e)
2003 EPS from Continuing Operations $0.29(c) $1.38(c)
% Increase in EPS from
Continuing Operations 10% - 14% 23% - 24%
(a) 2003 results and 2004 projections do not reflect any impact from the
planned distribution of the mortgage and fleet operations of PHH
Corporation to the Company's shareholders.
(b) Projection reflects a negative $0.02 impact from transaction-related
expenses and integration costs associated with the Orbitz acquisition,
more than offset by a positive impact from the favorable resolution of
certain tax matters. It also reflects a $0.02 - $0.03 reduction due
primarily to lower mortgage production volumes and a car rental
pricing environment consistent with the third quarter.
(c) 2003 results and full year 2004 projections have been revised to
recast the results of Jackson Hewitt Tax Service as a discontinued
operation as required by GAAP.
(d) Includes $0.06 EPS from Discontinued Operations from Jackson Hewitt
recorded in first and second quarter 2004 and the $0.19 gain on sale
of Jackson Hewitt recorded in second quarter 2004.
(e) Includes the one-time tax benefit of $0.10 per share recorded in first
quarter 2004 related to the transaction with Trilegiant. Excluding
this benefit, 2004 EPS from Continuing Operations is expected to
increase 16% - 17% year-over-year.
The Company also announced the following detailed financial projections
for full year 2004 (in millions):
Full Year 2003 Full Year 2004
Actual(a) Projected(a)(b)
Revenue
Real Estate Franchise and Operations $5,258 $6,125 - 6,175
Mortgage Services 1,483 1,100 - 1,160
Total Real Estate Services 6,741 7,225 - 7,335
Hospitality Services 2,523 2,830 - 2,900
Travel Distribution Services 1,659 1,800 - 1,850
Vehicle Services 5,851 6,100 - 6,150
Total Travel Services 10,033 10,730 -10,900
Marketing Services 1,224 1,450 - 1,500
Total Reportable Segments $17,998 $19,480 -19,600
Corporate and Other 17 20 - 50
Total Company $18,015 $19,500 -19,650
EBITDA
Real Estate Franchise and Operations $892 $1,030 - 1,050
Mortgage Services 380 200 - 225
Hospitality Services 633 740 - 765
Travel Distribution Services 459 470 - 500
Vehicle Services 442 600 - 625
Marketing Services 296 340 - 365
Total Reportable Segments $3,102 $3,440 - 3,460
Corporate and Other (38) (5)- 0
Depreciation and amortization (c) (507) (565 - 560)
Amortization of pendings/listings (20) (20 - 15)
Interest expense, net (c) (d) (364) (270 - 265)
Pretax income $2,173 $2,580 - 2,620
Provision for income taxes (e) (722) (749 - 765)
Minority interest (21) (10 - 5)
Income from continuing operations $1,430 $1,821 - 1,850
Diluted weighted average shares outstanding (f) 1,040 1,080 - 1,070
(a) Full year 2003 results and 2004 projections have been revised to
recast the results of Jackson Hewitt Tax Service as a discontinued
operation as required by GAAP, but do not reflect any impact from
the planned distribution of the mortgage and fleet operations of
PHH Corporation to the Company's shareholders.
(b) Projections do not total because we do not expect the actual results
of all segments to be at the lowest or highest end of any projected
range simultaneously.
(c) Depreciation and amortization excludes amounts related to our assets
under management and mortgage programs, and interest expense excludes
amounts related to our debt under management and mortgage programs,
both of which are already reflected in EBITDA.
(d) 2003 and 2004 interest expense includes approximately $58 million and
$18 million, respectively, of losses on the early extinguishment of
debt. In addition, 2004 interest expense reflects interest income of
approximately $26 million in the third quarter related to a federal
tax refund, which had been included in our prior projections.
(e) Includes the one-time tax benefit of $109 million recorded in first
quarter 2004 related to the transaction with Trilegiant. Excluding
this benefit, the effective tax rate is expected to be approximately
33.3% in 2004.
(f) Forecasted diluted weighted average shares outstanding for 2004
reflect the settlement of the Upper DECS, the treatment of the
Company's 3-7/8% notes under the "if converted" method in fourth
quarter 2004, and incremental dilution from employee stock options,
net of actual and anticipated common stock repurchases.
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