Form 10-Q
For the quarterly period ended September 30, 2005
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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The following discussion should be read in conjunction with our Consolidated Condensed Financial Statements and accompanying Notes thereto included elsewhere herein and with our 2004 Annual Report on Form 10-K filed with the Commission on March 1, 2005 and our Current Report on Form 8-K filed with the Commission on May 5, 2005. Unless otherwise noted, all dollar amounts are in millions.
We are one of the foremost providers of travel and real estate services in the world. We operate our businesses within three divisions: Real Estate, Travel Content and Travel Distribution. Our Real Estate division has two segments: Real Estate Services and Mortgage Services; our Travel Content division has three segments: Hospitality Services, Timeshare Resorts and Vehicle Rental; and our Travel Distribution division has only one segment, Travel Distribution Services. This segment reporting structure was adopted in first quarter 2005 in connection with our strategic realignment, which is discussed in detail below, and now reflects our renewed focus on our travel and real estate services businesses. Following is a brief description of the services provided by each of our operating segments:
In 2005, we have continued our strategic realignment, which was commenced in early 2004 and undertaken to simplify our business model through exiting non-core businesses or businesses that produce volatility to our earnings inconsistent with our business model and the remainder of our core businesses. We began this strategic realignment in 2004 by completing the initial public offering of Jackson Hewitt Tax Service Inc., raising approximately $770 million of cash, and acquiring Orbitz, Inc., an online travel company. We completed the spin-off of our former mortgage, fleet leasing and appraisal businesses in a tax-free distribution of the common stock of PHH Corporation to our stockholders in January 2005. In February 2005, we completed an initial public offering of Wright Express Corporation, raising approximately $965 million of cash, and acquired ebookers plc, a travel agency. We then completed the acquisitions of Gullivers Travel Associates and Octopus Travel Group Limited (collectively “Gullivers”), a wholesaler and global online provider of hotel rooms, destination services, travel packages and group tours, in April 2005 and in October 2005, we completed the sale of our Marketing Services division, which was comprised of our former individual membership and loyalty/insurance marketing businesses, for approximately $1.8 billion (See Note 17 to our Consolidated Condensed Financial Statements) representing the culmination of our strategic realignment.
In connection with the completion of this strategic realignment, our management team and Board of Directors performed a comprehensive review of the growth opportunities and current market valuations for each of our core businesses. As a result of this review, during October 2005, our Board of Directors approved a plan to separate Cendant into four independent, publicly traded companies:
We and our Board of Directors believe that this strategy provides the greatest opportunity for our businesses and brands to achieve their full potential. Additionally, we anticipate that the separation of our core businesses will facilitate a clearer understanding and fairer market valuation of each of these businesses.
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Following the proposed transaction, Cendant’s shareholders will own 100% of the equity in all four companies. The transaction is expected to be effected through three 100% spin-offs no later than the summer of 2006 and is expected to be tax-free for Cendant and its shareholders. We are exploring the possible acceleration of the effectiveness of the proposed transaction. This acceleration may allow the first two spin-offs, Real Estate Services and Hospitality Services, to occur in mid-second quarter 2006.
There can be no assurances, however, that the plan of separation will be completed. Completion of the contemplated separation is subject to various risks, including but not limited to, risks inherent in the contemplated separation and related transactions and borrowings and costs related to the contemplated separation and related transactions; increased demands on Cendant’s management team as a result of the proposed transactions; changes in business, political and economic conditions in the U.S. and in other countries in which we currently do business; changes in governmental regulations and policies and actions of regulatory bodies; changes in operating performance; access to financing sources, required changes to existing financings, and changes in credit ratings, including those that may result from the proposed transaction; our ability to obtain the financing necessary to consummate the transaction; and our ability to satisfy certain conditions precedent, including, final approval by our Board of Directors, receipt of a tax opinion of counsel and the filing and effectiveness of registration statements. Approval by Cendant’s shareholders is not required.
Our management team remains committed to increasing shareholder value. Through September 30, 2005, we used $790 million of cash, net of proceeds from option exercises, to repurchase our common stock and $309 million of cash to pay dividends. Additionally, in October 2005, we repaid approximately $1.0 billion of our outstanding short-term corporate indebtedness at September 30, 2005. We also expect to continue to recommend to our Board of Directors payment of the regular 11-cent quarterly dividend until the separation is completed. Our Board of Directors has already approved the fourth quarter 2005 dividend payment of 11 cents per share. Following the separation, we expect that all four companies will pay dividends, which, in the aggregate, will approximate the dividend currently paid by Cendant. However, individual company payments will be determined at a later date and will be within the discretion of the respective Board of Directors of each company, although we anticipate that the Real Estate Services and Travel Network entities will pay the substantial majority of the post-separation aggregate dividend.
With respect to future share repurchases, we are reassessing the amount and pace of share repurchases within the coming weeks as we refine the capital structure and credit ratings of each of the four new companies. However, we expect to continue to repurchase shares until the separation is complete within the confines of the program so long as such repurchases would not cause our capital to shrink to a position that would limit the ability of any of the new companies to access necessary forms of financing. In connection with such expectation, on October 28, 2005, we entered into an agreement with a broker-dealer that specifies the parameters under which up to $500 million of open-market repurchases of our common stock are expected to be made on our behalf.
Finally, we are focused on growing profitability within each of these new companies before and after the separation. To this end, we have established transition teams that are principally responsible for planning, organizing and implementing the series of transition services and other agreements that are going to be necessary to support the individual companies. With these teams in place, our operating executives can remain focused on delivering profitability and positioning our businesses for long-term growth.
RESULTS OF OPERATIONS
Discussed below are our consolidated results of operations and the results of operations for each of our reportable segments. Generally accepted accounting principles require us to segregate and report as discontinued operations for all periods presented the account balances and activities of Jackson Hewitt, our former fleet leasing and appraisal businesses, Wright Express, and our former Marketing Services division. Although we no longer own our former mortgage services operations, we cannot classify such business as a discontinued operation due to our participation in a mortgage origination venture that was established with PHH in connection with the spin-off.
Management evaluates the operating results of each of our reportable segments based upon revenue and “EBITDA,” which 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. Our presentation of EBITDA may not be comparable to similarly-titled measures used by other companies.
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THREE MONTHS ENDED SEPTEMBER 30, 2005 VS. THREE MONTHS ENDED SEPTEMBER 30, 2004
Our consolidated results of operations comprised the following:
Net revenues and total expenses increased $541 million (12%) and $579 million (15%), respectively, in third quarter 2005 as compared with third quarter 2004, reflecting organic growth across all our segments, particularly within our Vehicle Rental and Real Estate Services segments, the acquisitions of strategic businesses during or subsequent to third quarter 2004 and other items discussed below.
The largest contributor to organic revenue growth quarter-over-quarter was our Vehicle Rental segment, reflecting strong demand at both our domestic and international operations. We experienced greater car rental time and mileage (“T&M”) revenue principally as a result of a 17% increase in the number of days a car was rented domestically and an 18% increase in the number of days a car was rented internationally. Our Real Estate Services segment also experienced strong organic revenue growth quarter-over-quarter primarily as a result of a 15% increase in the average price of home sales at our brokerage business. Revenues at our Timeshare Resorts segment also grew organically principally driven by a 10% increase in tour flow, a 6% increase in revenue per guest and increased consumer finance income. Organic growth at our Hospitality segment resulted from favorable key revenue drivers within our lodging and RCI timeshare exchange businesses, as well as a 5% increase in weeks sold in our European vacation rental businesses. Partially offsetting the favorable revenue trends at our Timeshare Resorts and Vehicle Rental segments are $14 million and $10 million, respectively, of charges incurred during third quarter 2005 to account for the estimated impact of the September 2005 hurricanes experienced in the Gulf Coast. Expenses also increased throughout all of our core operating segments, with the exception of our Travel Distribution Services segment, as a result of organic growth primarily to support additional volume, higher vehicle costs and additional marketing investments. Apart from organic growth, the strategic business we acquired during or subsequent to third quarter 2004 contributed to the quarter-over-quarter increase in net revenues and total expenses as follows:
Partially offsetting these revenue and expense increases was the absence of $175 million in revenue generated and $155 million in expenses incurred by our former mortgage business during third quarter 2004 (this business was disposed on January 31, 2005). Our effective tax rate for continuing operations was 35.0% and 32.3% for third quarter 2005 and 2004, respectively. The change in the effective tax rate for 2005 was primarily due to higher taxes on foreign operations. As a result of the above-mentioned items, income from continuing operations decreased $44 million (9%).
Income from discontinued operations decreased $53 million, which primarily reflects (i) a decrease of $21 million of net income generated by our Marketing Services division due to the absence in 2005 of income recorded in third quarter 2004 in connection with the early termination of a contractual relationship with a third party marketing partner, (ii) a decrease of $19 million in net income generated by our former fleet leasing and appraisal businesses (since their results were included for third quarter 2004 but not in third quarter 2005) and (iii) a decrease of $13 million in net income generated by Wright Express (since its results were included for third quarter 2004 but not in third quarter 2005).
As a result of the above-mentioned items, net income decreased $94 million (16%).
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Following is a discussion of the results of each of our reportable segments during third quarter:
Real Estate Services
Royalty revenue within our real estate franchise business increased $16 million (12%) in third quarter 2005 as compared with third quarter 2004. Such growth was primarily driven by a 15% increase in the average price of homes sold. The number of homesale transactions from our third-party franchisees from which we earn royalties remained relatively flat quarter-over-quarter. The 15% quarter-over-quarter increase in average price is reflective of the supply of, and demand for, homes resulting in an overall increase in the sales prices of homes across the nation. We expect this trend to moderate over time as industry-wide projections indicate slight increases in inventory in future quarters. In addition to royalties received from our third-party franchisees, NRT Incorporated, our wholly-owned real estate brokerage firm, continues to pay royalties to our real estate franchise business. However, these intercompany royalties, which approximated $106 million and $96 million during third quarter 2005 and 2004, respectively, are eliminated in consolidation and therefore have no impact on this segment’s revenues or EBITDA. Our strategy for continued growth in the real estate franchise business is to expand our global franchise base by aggressively marketing our Century 21, Coldwell Banker, Coldwell Banker Commercial, ERA and Sotheby’s International Realty brands.
Revenues within our real estate brokerage business increased $173 million (12%) in third quarter 2005 as compared with third quarter 2004. Such increase is partially attributable to significant acquisitions made by NRT during or subsequent to third quarter 2004, which together contributed incremental revenues and EBITDA of $55 million and $5 million, respectively, to third quarter 2005 operating results. Apart from these acquisitions, NRT’s revenues increased $118 million (8%) in third quarter 2005 compared with third quarter 2004. This increase was substantially comprised of higher commission income earned on homesale transactions, which was primarily driven by a 15% increase in the average price of homes sold, partially offset by a 4% decline in the number of homesale transactions. The 15% quarter-over-quarter increase in average price is reflective of the supply of, and demand for, homes resulting in an overall increase in the sales prices of homes across the nation. We expect this trend to moderate over time as industry-wide projections indicate slight increases in inventory in future periods. We believe that the reduction in homesale transactions and, in part, the increase in price are reflective of relatively low inventories of homes available for sale in many of the coastal regions that NRT serves and increased competition. EBITDA further reflects an increase of $81 million in commission expenses paid to real estate agents as a result of the incremental revenues earned on homesale transactions, as well as a higher average commission rate paid to real estate agents in third quarter 2005 due to the progressive nature of revenue-based agent commission schedules. Our strategy for continued growth in this business includes strategic acquisitions of real estate brokerages, the continued recruitment and retention of real estate agents and maintaining our commission rates in an increasingly competitive market through the delivery of industry-leading sales support technology and customer service.
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NRT has a significant concentration of real estate brokerage offices and transactions in geographic regions where home prices are at the higher end of the U.S. real estate market, particularly the east and west coasts. The real estate franchise business has franchised offices that are more widely dispersed across the United States than our NRT real estate brokerage operations. Accordingly, operating results and homesale statistics may differ between NRT and the real estate franchise business based upon geographic presence and the corresponding homesale activity in each geographic region.
Revenues from our relocation services business increased $11 million (9%) in third quarter 2005 as compared with third quarter 2004. Such increase was primarily driven by $4 million (16%) of higher fixed fee homesale revenues and $8 million (16%) of increased referral fees. The increase in fixed fee homesale revenues is attributable to increased home values and higher volume. The increase in referral fees was due to higher referral rates and transaction volume.
Revenues from our settlement services business increased $8 million (9%) in third quarter 2005 as compared with third quarter 2004 primarily due to increases in title and closing volume and fees.
EBITDA further reflects an increase of approximately $50 million (3%) in operating, marketing and administrative expenses (apart from NRT’s significant acquisitions and real estate agent commission expenses, both of which are discussed separately above) principally resulting from (i) $11 million of incremental rent, office administration and other fixed costs within our real estate brokerage business, (ii) $8 million of expenses incurred within our real estate brokerage business primarily to support an increased number of offices, (iii) a $6 million increase in staffing and other personnel-related costs incurred within our relocation business primarily to support increases in volume, (iv) $4 million of incremental incentive expenses at our real estate brokerage operations due to an anticipated increase in year-over-year profitability, (v) $4 million of increased costs at our settlement services and relocation services businesses primarily in connection with higher volume and (vi) $3 million of higher marketing expenses to support growth in our real estate franchise and brokerage operations.
Hospitality Services
Revenues within our RCI timeshare exchange business increased $5 million (3%) during third quarter 2005 due to a $3 million (3%) increase in exchange and subscription fee revenues and a $6 million (23%) increase in other timeshare points and rental transaction revenues, partially offset by a $4 million decrease in other transactional revenues. The increase in exchange and subscription fee revenues in third quarter 2005 was primarily driven by a 5% increase in the average number of worldwide subscribers and a 6% increase in the average exchange fee, partially offset by a 4% decrease in exchange transaction volumes. The increase in other timeshare points and rental transaction revenues during third quarter 2005 was principally driven by a 20% increase in points and rental transaction volume, partially offset by a 2% decrease in the average price per rental transaction. The decrease in other transactional revenues in third quarter 2005 was primarily due to the absence of travel-related commission fees and increased cancellation fees received in third quarter 2004. Revenue trends reflect the continued shift in the RCI timeshare membership base toward a greater mix of points members from traditional one-week timeshare members. Other timeshare points transactions are those executed by points members for other than a standard, one-week stay at an RCI timeshare property. Timeshare rental transactions are rentals of unused timeshare inventory to RCI members and non-members.
Royalty, marketing and reservation fund revenues within our lodging franchise operations increased $7 million (6%) in third quarter 2005 partially due to our purchase of the exclusive rights to the Ramada International trademark in December 2004. Ramada International contributed $3 million of incremental royalty, marketing and reservation fund revenues to third quarter 2005 results. The Ramada International properties also added approximately 26,000 rooms, which is approximately 5% of the total weighted average rooms available within our lodging franchise system. Apart from this acquisition, royalty, marketing and reservation fund revenues increased $4 million (3%) primarily resulting from a 7% increase in revenue per available room (“RevPAR”), partially offset by a 4% decrease in weighted average rooms available. The RevPAR increase reflects (i) increases in both price and occupancy principally attributable to an overall improvement in the economy lodging segment in which our hotel brands primarily operate, (ii) the termination of underperforming properties throughout 2004 that did not meet our required quality standards or their financial obligations to us and (iii) the strategic assignment of personnel to field locations designed to assist franchisees in improving their hotel operating performance. The decrease in weighted average rooms available reflects our termination of underperforming properties, as discussed above, the expiration of franchise agreements, certain franchisees exercising their right to terminate their agreement and the timing of new additions and terminations to our franchise system. Our Trip Rewards loyalty program also contributed $5 million of incremental revenue during third quarter 2005. On October 11, 2005, we completed our acquisition of the management and franchise business of the Wyndham hotel chain, which was renamed Wyndham Worldwide, for approximately $100 million in cash.
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We acquired Canvas Holidays Limited, a European vacation rental business, in October 2004. The operating results of Canvas have been included in our results for the entire third quarter of 2005 but for none of the third quarter in 2004. Accordingly, Canvas contributed incremental revenues and EBITDA of $10 million and $4 million, respectively, during third quarter 2005. Apart from this acquisition, revenues at our European vacation rental companies increased $8 million (9%) primarily as a result of a 5% increase in weeks sold, which partially reflects a shift in bookings patterns that increased bookings during the third quarter of 2005. In 2005, European consumers’ appear to be booking their vacations closer to their eventual departure dates, which are heavily concentrated during the third quarter of each year, corresponding to the peak vacation season.
EBITDA further reflects an increase of approximately $20 million (9%) in operating, marketing and administrative expenses (excluding the incremental expenses generated by Canvas Holidays) principally resulting from (i) $11 million of additional variable operating expenses principally due to higher transaction volumes in our timeshare exchange and vacation rental businesses and additional infrastructure costs to support growth in our Hospitality Services businesses and (ii) the utilization of $5 million of incremental revenues generated by our Trip Rewards loyalty program to fund related marketing initiatives.
In addition, we have combined our timeshare exchange business, RCI, and our European vacation rental businesses to create the new Vacation Network Group. This combination is expected to result in future cost savings, as well as broaden the marketing capability of our European travel business. As a result, we committed to a plan during fourth quarter 2005 to reduce staff and consolidate facilities and expect to incur associated costs of approximately $16 million in fourth quarter 2005.
Timeshare Resorts
Net sales of vacation ownership interests (“VOIs”) at our timeshare resorts business increased $45 million (13%) in third quarter 2005 despite the September 2005 Gulf Coast hurricanes. Such increase was principally driven by a 10% increase in tour flow and a 6% increase in revenue per guest. This revenue increase includes an $11 million decrease in higher margin upgrade sales at our Trendwest resort properties due to special upgrade promotions conducted in 2004 undertaken to mitigate the negative impact on tour flow of the Do Not Call legislation. Tour flow, as well as revenue per transaction, benefited in third quarter 2005 from our expanded presence in premium destinations such as Hawaii, Las Vegas and Orlando. Tour flow was also positively impacted by the opening of new sales offices, our strategic focus on new marketing alliances and increased local marketing efforts. We believe that VOI sales and tour flow were suppressed during third quarter 2005 due to an interruption in the global travel market caused by the September 2005 Gulf Coast hurricanes. It is too early to determine whether Hurricane Wilma will have a similar effect on VOI sales and tour flow in fourth quarter 2005.
Revenues and EBITDA also increased $18 million in third quarter 2005 as a result of incremental net interest income earned on our contract receivables primarily due to (i) growth in the consolidated portfolio without corresponding increases in net borrowing costs and (ii) more favorable valuation adjustments in 2005 to our retained interest in securitized contract receivables. Contributing to lower net interest costs in third quarter 2005 were more favorable financing arrangements achieved on securitized contract receivables in 2005 compared with 2004.
EBITDA further reflects an increase of approximately $45 million (13%) in operating, marketing and administrative expenses primarily resulting from (i) $15 million of increased cost of sales associated with increased VOI sales, (ii) $13 million of additional commission expense associated with increased VOI sales and increased commission rates, (iii) $7 million of incremental marketing spend to support sales efforts and (iv) $5 million of additional contract receivable provisions recorded in 2005.
Vehicle Rental
Revenues generated by our domestic car rental operations increased $145 million (15%) during third quarter 2005, which was comprised of a $124 million (15%) increase in T&M revenue and a $21 million (19%) increase in ancillary revenues. The
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increase in domestic T&M revenues was principally driven by a 17% increase in the number of days a car was rented, partially offset by a 2% decrease in T&M revenue per day. The increase in rental days reflects, in part, our strategic decision to implement more competitive pricing in third quarter 2004. This program was continued into the second quarter of 2005 when we instituted a price increase in response to rising fleet costs. Accordingly, T&M revenue per day decreased 2% in third quarter 2005 when compared with third quarter 2004 but increased 6% when compared with second quarter 2005. We expect further price increases along with continued volume gains in 2006 as we seek to offset the impact of higher fleet costs and anticipated increases in interest costs, which we began to experience to a slighter degree this quarter as well. Pricing was also negatively impacted during 2005 by competitive conditions in the domestic car rental industry resulting from higher industry-wide fleet levels. Fleet depreciation increased $48 million in third quarter 2005 primarily due to (i) an increase of 16% in the average size of our domestic rental fleet and (ii) reductions to manufacturer incentives received on our 2005 model year inventory (which was in utilization during third quarter 2005) as compared with those received on our 2004 model year inventory (which was in utilization during third quarter 2004). The $21 million increase in ancillary revenues was due primarily to a $13 million increase in gasoline revenues and an $8 million increase in counter sales of insurance and other items. EBITDA from our domestic car rental operations also reflects (i) $65 million of additional expenses primarily associated with increased car rental volume and fleet size, including vehicle maintenance and damage costs, airport commissions, shuttling costs and funding costs on vehicle purchases, (ii) $13 million of increased expenses associated with higher gasoline costs, (iii) $11 million of additional interest expense incurred on debt issued to support the purchase of vehicles, (iv) $10 million of additional litigation expense resulting from the settlement of an ongoing dispute with licensees of our Avis brand arising out of our acquisition of the Budget business in 2002 and (v) $10 million of incremental expenses relating to the estimated damages caused by the hurricanes experienced in the Gulf Coast in September 2005, which primarily includes the impairment of rental cars. The ultimate amount of loss resulting from the Gulf Coast hurricanes will be refined as we gain full access to our rental locations and develop more precise estimates of lost and damaged vehicles, some of which may be recovered in future periods. No further expenses are expected in future quarters as a result of these hurricanes.
Revenues generated by our international car rental operations increased $39 million (28%) due to a $32 million (29%) increase in car rental T&M revenue and a $7 million (25%) increase in ancillary revenues. The increase in T&M revenues was principally driven by an 18% increase in the number of days a car was rented and a 10% increase in T&M revenue per day. The favorable effect of incremental T&M revenues was partially offset in EBITDA by $12 million of increased fleet depreciation and related costs and higher operating expenses principally resulting from increased car rental volume and an increase of 22% in the average size of our international rental fleet to support such volume. EBITDA from our international car rental operations was also negatively impacted by $10 million of additional expenses primarily associated with increased car rental volume, including airport commissions and shuttling costs. The increase in revenue generated by our international car rental operations includes the effect of favorable foreign currency exchange rate fluctuations of $12 million, the majority of which was offset in EBITDA by the opposite impact of foreign currency exchange rate fluctuations on expenses.
We are still negotiating the purchase of a portion of our 2006 model year inventory and expect to incur increased fleet depreciation costs throughout the remainder of 2005 and 2006. Accordingly, our ability to maintain profit margins consistent with prior periods will be dependent on our ability to successfully reflect corresponding changes in our pricing program.
Budget truck rental revenues increased $6 million (4%) in third quarter 2005 primarily representing a $4 million (3%) increase in T&M revenue, which reflects a 3% increase in T&M per day. The favorable impact on EBITDA of increased T&M revenue was partially offset by $4 million of incremental fleet depreciation and related costs resulting from a 5% increase in the average size of our truck rental fleet in anticipation of increased demand.
Travel Distribution Services
Our strategic focus has been to grow our business and enhance profitability by further penetrating corporate and consumer online channels, which we are accomplishing, in part, through our recent strategic acquisitions and ongoing integration efforts. We believe that combining our existing travel businesses with the acquisitions of Orbitz, Gullivers and ebookers will strengthen
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our position as a global travel intermediary. We have expanded our operations within the travel industry such that in addition to our role as an “order taker,” or transaction processor, primarily serving offline travel agencies via their use of our Galileo branded electronic global distribution system (“GDS”) services, we have also grown our presence as an “order maker,” or transaction generator, where we directly serve the end customer.
To execute our strategy, we will continue to integrate our businesses. We have already completed the migration of Cheaptickets.com, Lodging.com and Orbitz to a common technology platform and have made progress in developing the migration plans for the ebookers platform. We are also combining our global base of hotel inventory in order to offer increased supply across our various brands. In the United States, we will continue to promote the Orbitz, Cheaptickets.com and Travelport businesses as differentiated travel brands in the leisure and corporate travel sectors. With the recent acquisitions of Orbitz, ebookers and Gullivers, we expect our integration efforts to continue through 2006, with the most significant cost savings synergies to be recognized beginning in early 2006.
Galileo and supplier services, our “order taker” businesses that primarily provide GDS services to the travel industry, experienced an overall $4 million (1%) increase in revenues primarily driven by an $11 million (4%) increase in worldwide air booking fees, partially offset by an $8 million (26%) decline in subscriber fees. The increase in air booking fees was comprised of a $14 million (7%) increase in international air booking fees, partially offset by a $3 million (5%) decrease in domestic air booking fees. The increase in international air booking fees was principally driven by 4% higher booking volumes, which totaled 42 million segments in third quarter 2005 and which primarily resulted from an increase in travel demand within the Middle East and Asia/Pacific regions. The decrease in domestic air booking fees was driven by a 9% decline in the effective yield on such bookings, partially offset by a 5% increase in booking volumes, which totaled 22 million segments in third quarter 2005. The domestic volume increase and effective yield decline are consistent with our pricing program with major U.S. carriers, which was designed to gain access to all public fares made available by the participating airlines. International air bookings represented approximately two-thirds of our total air bookings during third quarter 2005. The $8 million reduction in subscriber fees is a result of the continuing trend of fewer travel agencies leasing computer equipment from us during third quarter 2005 compared with third quarter 2004.
Apart from the acquisitions described above, revenues generated from our “order maker” travel business increased $3 million (6%) in third quarter 2005 compared to third quarter 2004 primarily due to a 15% increase in online gross bookings, primarily at our Cheaptickets.com website and Travelport, our online corporate travel solutions business. Higher gross bookings at Cheaptickets.com is primarily attributable to improved site functionality resulting in greater conversion rates and enhanced content, including additional online hotel offerings. The Travelport gross bookings increase is the result of our expanded full service offering in our corporate travel solutions business. However, these increases were partially offset in revenue by a decline in revenue generated by our Lodging.com website due to a shift in our strategic focus to the Orbitz brand.
EBITDA further reflects an increase of approximately $15 million in expenses (excluding the impact of the aforementioned acquisitions and the transfer of the membership travel business) principally resulting from (i) $13 million of increased commissions and marketing support primarily attributable to higher booking volumes, principally in the Middle East and Asia/Pacific regions, and a greater mix of booking volumes in higher commission rate countries, (ii) the absence in third quarter 2005 of an $11 million expense reduction realized in third quarter 2004 in connection with a benefit plan amendment and (iii) $6 million of additional expenses associated with developing enhanced technology and other project initiatives. Such amounts were partially offset by (i) an $11 million reduction in costs primarily realized at our CheapTickets.com and Lodging.com businesses as a result of integration efforts executed domestically within our online “order maker” businesses, including the migration of technology to a common platform and (ii) $5 million of expense savings on network communications and equipment maintenance and installation due, in part, to reduced volume within the Galileo subscriber business where travel agents lease computer equipment from us.
Mortgage Services
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NINE MONTHS ENDED SEPTEMBER 30, 2005 VS. NINE MONTHS ENDED SEPTEMBER 30, 2004
Net revenues and total expenses increased approximately $1.2 billion (10%) and $1.4 billion (13%), respectively, in the nine months ended September 30, 2005 as compared with the same period in 2004, reflecting organic revenue growth across all our segments, particularly within our Vehicle Rental and Real Estate Services segments, the acquisitions of strategic businesses subsequent to January 1, 2004 and other items, including a non-cash valuation charge related to the PHH spin-off, discussed below.
The largest contributor to organic revenue growth period-over-period was our Vehicle Rental segment, reflecting strong demand at both our domestic and international operations. We experienced greater T&M revenue principally as a result of a 14% increase in the number of days a car was rented domestically and a 16% increase in the number of days a car was rented internationally. Our Real Estate Services segment also experienced strong organic revenue growth period-over-period primarily as a result of a 15% increase in the average price of home sales at our brokerage business. Revenues at our Timeshare Resorts segment also grew organically principally driven by a 10% increase in tour flow, a 4% increase in revenue per guest and increased consumer finance income. Organic growth at our Hospitality segment resulted from favorable key revenue drivers within our lodging and RCI timeshare exchange businesses. Partially offsetting the favorable revenue trends at our Timeshare Resorts and Vehicle Rental segments are $14 million and $10 million, respectively, of charges incurred during third quarter 2005 to account for the estimated impact of the September 2005 hurricanes experienced in the Gulf Coast. Expenses also increased throughout all of our core operating segments, with the exception of our Travel Distribution Services segment, as a result of organic growth primarily to support additional volume, higher vehicle costs and additional marketing investments. Apart from organic growth, the strategic business we acquired subsequent to January 1, 2004 contributed to the period-over-period increase in net revenues and total expenses as follows:
Partially offsetting these revenue and expense increases was the absence of eight months of revenues generated and expenses incurred by our former mortgage business, which was disposed on January 31, 2005. Our former mortgage business contributed $501 million and $429 million of revenues and expenses, respectively, to our results during the period February 1, 2004 through September 30, 2004. The increase in total expenses also reflects the following transaction-related charges recorded during 2005: (i) a $180 million non-cash impairment charge relating to the PHH spin-off and (ii) charges aggregating $52 million primarily relating to restructuring activities undertaken following the PHH spin-off and initial public offering of Wright Express. Partially offsetting these charges is an $81 million decrease in interest expense primarily relating to the reversal of $73 million of accrued interest associated with the resolution of amounts due under a litigation settlement reached in 1999, as well as an overall reduction in debt extinguishment costs incurred in 2004. Our effective tax rate for continuing operations was 37.8% and 32.5% for the nine months ended September 30, 2005 and 2004, respectively. The change in the
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effective tax rate for 2005 was primarily due to the non-deductibility of the valuation charge associated with the PHH spin-off and a one-time tax expense associated with the planned repatriation of foreign earnings, which was partially offset by a tax benefit related to asset basis differences. As a result of the above-mentioned items, income from continuing operations decreased $208 million (19%).
Income from discontinued operations decreased $383 million, which primarily reflects (i) $64 million in net income generated by Jackson Hewitt Tax Service Inc. prior to its disposition, (ii) a decrease of $70 million in net income generated by our former fleet leasing and appraisal businesses (since their results were included for nine months in 2004 but only one month in 2005 and due to a $24 million tax-related charge recorded in 2005), (iii) a decrease of $42 million in net income generated by Wright Express (since its results were included for nine months in 2004 but only through February 22, 2005 in 2005), and (iv) a decrease of $207 million in net income generated by our Marketing Services division, which principally reflects the reversal of a tax valuation allowance of $121 million in January 2004, a $30 million charge recorded during 2005 in connection with a breach of contract claim and the absence in 2005 of income recorded in third quarter 2004 in connection with the early termination of a contractual relationship with a third party marketing partner. We also incurred a net loss on the disposal of discontinued operations of $131 million in 2005, which includes a $308 million non-cash impairment charge and $4 million of transaction costs relating to the PHH spin-off, partially offset by a net gain of $181 million recognized in connection with the IPO of Wright Express.
As a result of the above-mentioned items, net income decreased $920 million (53%).
Following is a discussion of the results of each of our reportable segments during the nine months ended September 30:
Royalty revenue within our real estate franchise business increased $57 million (17%) in the nine months ended September 30, 2005 as compared with the same period in 2004. Such growth was primarily driven by a 14% increase in the average price of homes sold and a 4% increase in the number of homesale transactions from our third-party franchisees. The 14% period-over-period increase in average price is reflective of the supply of, and the demand for, homes resulting in an overall increase in the sales prices of homes across the nation. We expect this trend to moderate over time as industry-wide projections indicate slight increases in inventory in future quarters. In addition to royalties received from our third-party franchisees, NRT Incorporated, our wholly-owned real estate brokerage firm, continues to pay royalties to our real estate franchise business. However, these intercompany royalties, which approximated $285 million and $260 million during third quarter 2005 and 2004, respectively, are eliminated in consolidation and therefore have no impact on this segment’s revenues or EBITDA. Our strategy for continued growth in the real estate franchise business is to expand our global franchise base by aggressively marketing our Century 21, Coldwell Banker, Coldwell Banker Commercial, ERA and Sotheby’s International Realty brands.
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Revenues within our real estate brokerage business increased $436 million (11%) in the nine months ended September 30, 2005 as compared with the same period in 2004. Such increase is partially attributable to significant acquisitions made by NRT during or subsequent to third quarter 2004, which together contributed incremental revenues and EBITDA of $168 million and $14 million, respectively, to the nine months ended September 30, 2005 operating results. Apart from these acquisitions, NRT’s revenues increased $268 million (7%) in the nine months ended September 30, 2005 as compared with the same period in 2004. This increase was substantially comprised of higher commission income earned on homesale transactions, which was primarily driven by a 15% increase in the average price of homes sold, partially offset by a 6% decline in the number of homesale transactions. The 15% period-over-period increase in average price is reflective of the supply of, and demand for, homes resulting in an overall increase in the sales prices of homes across the nation. We expect this trend to moderate over time as industry-wide projections indicate slight increases in inventory in future quarters. We believe that the reduction in homesale transactions and, in part, the increase in price, are reflective of relatively low inventories of homes available for sale in many of the coastal regions that NRT serves and increased competition. EBITDA further reflects an increase of $190 million in commission expenses paid to real estate agents as a result of the incremental revenues earned on homesale transactions, as well as a higher average commission rate paid to real estate agents in third quarter 2005 due to the progressive nature of revenue-based agent commission schedules. Our strategy for continued growth in this business includes strategic acquisitions of real estate brokerages, the continued recruitment and retention of real estate agents and maintaining our commission rates in an increasingly competitive market through the delivery of industry-leading sales support technology and customer service.
Revenues from our relocation services business increased $32 million (9%) in the nine months ended September 30, 2005 as compared with the same period in 2004. Such increase was primarily driven by $6 million (8%) of higher fixed fee homesale revenues and $22 million (17%) of increased referral fees. The increase in fixed fee homesale revenues is primarily attributable to increased home values and higher volume. The increase in referral fees was due to higher referral rates and transaction volume.
Revenues from our settlement services business increased $5 million (2%) in the nine months ended September 30, 2005 as compared with the same period in 2004 primarily due to a $14 million increase in title and closing volume and fees, partially offset by the absence of a $7 million gain recorded on the sale of certain non-core assets in 2004.
EBITDA further reflects an increase of approximately $125 million (3%) in operating, marketing and administrative expenses (apart from NRT’s significant acquisitions and real estate agent commission expenses, both of which are discussed separately above) principally resulting from (i) $30 million of incremental expenses primarily representing inflationary increases in rent, office administration and other fixed costs within our real estate brokerage business, (ii) a $22 million increase in staffing and other personnel-related costs incurred within our relocation business primarily to support increases in volume, (iii) $20 million of higher marketing expenses to support growth in our real estate franchise and brokerage operations, (iv) $15 million of expenses incurred within our real estate brokerage business primarily to support an increased number of offices, (v) $6 million of expenses resulting from restructuring actions primarily at our settlement services and real estate brokerage businesses, (vi) $5 million of costs at our settlement services business related to developing and enhancing certain infrastructures that were previously maintained at and leveraged from our former mortgage business and (vii) $5 million of costs at our settlement services business related to additional title and closing volume.
Revenues within our RCI timeshare exchange business increased $25 million (5%) during the nine months ended September 30, 2005 due to a $13 million (4%) increase in exchange and subscription fee revenues and a $17 million (21%) increase in other timeshare points and rental transaction revenues, partially offset by a $5 million decrease in other transactional revenues. The increase in exchange and subscription fee revenues in the nine months ended September 30, 2005 was primarily driven by a 5% increase in the average number of worldwide subscribers and an 8% increase in the average exchange fee, partially offset by a 4% decrease in exchange transaction volumes. The increase in other timeshare points and rental transaction revenues during the nine months ended September 30, 2005 was principally driven by a 21% increase in points and rental transaction volume, partially offset by a 3% decrease in the average price per rental transaction. Revenue
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trends reflect the continued shift in the RCI timeshare membership base toward a greater mix of points members from traditional one-week timeshare members.
Royalty, marketing and reservation fund revenues within our lodging franchise operations increased $20 million (7%) in the nine months ended September 30, 2005 partially due to our purchase of the exclusive rights to the Ramada International trademark in December 2004. Ramada International contributed $10 million of incremental royalty, marketing and reservation fund revenues to the nine months ended September 30, 2005. The Ramada International properties also added approximately 26,000 rooms, which is approximately 5% of the total weighted average rooms available within our lodging franchise system. Apart from this acquisition, royalty, marketing and reservation fund revenues increased $10 million (3%) primarily resulting from an 8% increase in revenue per available room (“RevPAR”), partially offset by a 4% decrease in weighted average rooms available. The RevPAR increase reflects (i) increases in both price and occupancy principally attributable to an overall improvement in the economy lodging segment in which our hotel brands primarily operate, (ii) the termination of underperforming properties throughout 2004 that did not meet our required quality standards or their financial obligations to us and (iii) the strategic assignment of personnel to field locations designed to assist franchisees in improving their hotel operating performance. The decrease in weighted average rooms available reflects our termination of underperforming properties, as discussed above, the expiration of franchise agreements, certain franchisees exercising their right to terminate their agreement and the timing of new additions and terminations to our franchise system. Revenue and EBITDA also benefited from a $7 million gain recognized on the sale of an investment within our lodging business during the nine months ended September 30, 2005. Additionally, our Trip Rewards loyalty program contributed $12 million of incremental revenue during the nine months ended September 30, 2005.
We acquired Landal GreenParks and Canvas Holidays Limited, which are both European vacation rental businesses, in May 2004 and October 2004, respectively. The operating results of Landal have been included in our results for the entire nine months ended September 30, 2005 but only for five months of the same period in 2004. The operating results of Canvas have been included in our results for the entire nine months ended September 30, 2005 but for none of the same period in 2004. Accordingly, Landal and Canvas contributed incremental revenues of $41 million and $25 million, respectively, and EBITDA of ($5) million and $7 million, respectively, during the nine months ended September 30, 2005. Apart from these acquisitions, revenues at our European vacation rental companies increased $11 million (5%) primarily as a result of the conversion of a franchised park to a managed park as we previously received only a franchise fee and now have the full benefit of revenue generated by the park.
EBITDA further reflects an increase of approximately $95 million (15%) in operating, marketing and administrative expenses (excluding the incremental expenses generated by Landal and Canvas Holidays acquisitions) principally resulting from (i) $18 million of higher year-over-year bad debt expense primarily due to the absence of a $15 million settlement recorded in the nine months ended September 30, 2004 related to a lodging franchisee receivable, (ii) the utilization of $10 million of incremental revenues generated by our Trip Rewards loyalty program to fund related marketing initiatives, (iii) $19 million of additional marketing-related expenses primarily related to increasing brand recognition within our lodging franchise business and marketing initiatives within our timeshare exchange business, (iv) $17 million of additional variable operating expenses principally due to higher transaction volumes in our timeshare exchange and vacation rental businesses and additional infrastructure costs to support growth in our Hospitality Services businesses and (v) $5 million of restructuring costs incurred as a result of the consolidation of certain call centers and back-office functions.
Net sales of VOIs at our timeshare resorts business increased $84 million (9%) in the nine months ended September 30, 2005 despite the September 2005 Gulf Coast hurricanes. Such increase was principally driven by a 10% increase in tour flow and a 4% increase in revenue per guest. This revenue increase includes a $26 million decrease in higher margin upgrade sales at our Trendwest resort properties due to special upgrade promotions conducted during 2004 undertaken to mitigate the negative impact on tour flow from the Do Not Call legislation. Tour flow, as well as revenue per transaction, benefited in the nine months ended September 30, 2005 from our expanded presence in premium destinations such as Hawaii, Las Vegas and Orlando. Tour flow was also positively impacted by the opening of new sales offices, our strategic focus on new marketing alliances and increased local marketing efforts. We believe that VOI sales and tour flow were suppressed during third quarter
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2005 due to an interruption in the domestic travel market caused by the September 2005 Gulf Coast hurricanes. It is too early to determine whether Hurricane Wilma will have a similar effect on VOI sales and tour flow in fourth quarter 2005.
Revenue and EBITDA also increased $45 million in the nine months ended September 30, 2005 as a result of incremental net interest income earned on our contract receivables primarily due to (i) growth in the consolidated portfolio without corresponding increases in net borrowing costs and (ii) more favorable valuation adjustments in 2005 to our retained interest in securitized contract receivables. Contributing to lower net interest costs in 2005 were more favorable financing arrangements achieved on securitized receivable contracts in 2005 compared with 2004, as well as a greater percentage of contract receivables that were financed through operations in 2005. Revenue and EBITDA comparisons were further impacted by $11 million of income recorded in second quarter 2005 in connection with the disposal of a parcel of land that was no longer consistent with our development plans. The year-over-year revenue and EBITDA comparisons were also impacted by the absence of a $4 million gain recognized in first quarter 2004 in connection with the sale of a third-party timeshare financing operation and $3 million of revenue generated by such operations in 2004 prior to the sale date.
EBITDA further reflects an increase of approximately $105 million (11%) in operating, marketing and administrative expenses primarily resulting from (i) $26 million of increased cost of sales associated with increased VOI sales, (ii) $27 million of additional commission expense associated with increased VOI sales and increased commission rates, (iii) $18 million of incremental marketing spend to support sales efforts and anticipated growth in the business, (iv) $14 million of additional costs incurred to fund additional staffing needs to support continued growth in the business, improve existing properties and integrate the Trendwest and Fairfield contract servicing systems and (v) $13 million of additional contract receivable provisions recorded in 2005.
Revenues generated by our domestic car rental operations increased $271 million (10%) during the nine months ended September 30, 2005, which was comprised of a $226 million (10%) increase in T&M revenue and a $45 million (15%) increase in ancillary revenues. The increase in domestic T&M revenues was principally driven by a 14% increase in the number of days a car was rented, partially offset by a 4% decrease in T&M revenue per day. The increase in rental days reflects, in part, our strategic decision to implement more competitive pricing in third quarter 2004. This program was continued into the second quarter of 2005 when we instituted a price increase in response to rising fleet costs. Accordingly, T&M revenue per day decreased 4% during the nine months ended September 30, 2005 when compared with the nine months ended September 30, 2004 but increased 6% in third quarter 2005 when compared with second quarter 2005. We expect further price increases along with continued volume gains in 2006 as we seek to offset the impact of higher fleet costs and anticipated increases in interest costs, which we began to experience to a slighter degree in third quarter 2005. Pricing was also negatively impacted during 2005 by competitive conditions in the domestic car rental industry resulting from higher industry-wide fleet levels, which we believe were caused by enhanced incentives offered by car manufacturers in prior periods. Fleet depreciation increased $104 million (16%) in 2005 primarily due to (i) an increase of 13% in the average size of our domestic rental fleet and (ii) reductions to manufacturer incentives received on our 2005 model year inventory (which was in utilization during the nine months ended September 30, 2005) as compared with those received on our 2004 model year inventory (which was in utilization during the nine months ended September 30, 2004). The $45 million increase in ancillary revenues was due primarily to a $23 million increase in gasoline revenues and a $22 million increase in counter sales of insurance and other items. EBITDA from our domestic car rental operations also reflects (i) $127 million of additional expenses primarily associated with increased car rental volume and fleet size, including vehicle maintenance and damage costs, airport commissions, shuttling costs and funding costs on vehicle purchases, (ii) $26 million of increased expenses associated with higher gasoline costs, (iii) $10 million of additional litigation expense resulting from the settlement of an ongoing dispute with licensees of our Avis brand arising out of our acquisition of the Budget business in 2002, (iv) $10 million of incremental expenses relating to the estimated damages caused by the hurricanes experienced in the Gulf Coast in September 2005, which primarily included the impairment of rental cars, some of which may be recovered in future periods, and (v) $9 million of additional interest expense incurred on debt issued to support the purchase of vehicles. The ultimate amount of loss resulting from the Gulf Coast hurricanes will be refined as we gain full access to our rental locations and develop more precise estimates of lost and damaged vehicles, some of which may be recovered in future periods. No further expenses are expected in future quarters as a result of these hurricanes.
Revenues generated by our international car rental operations increased $86 million (24%) due to a $66 million (23%) increase in car rental T&M revenue and a $20 million (27%) increase in ancillary revenues. The increase in T&M revenues was
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principally driven by a 16% increase in the number of days a car was rented and a 6% increase in T&M revenue per day. The favorable effect of incremental T&M revenues was partially offset in EBITDA by $32 million of increased fleet depreciation and related costs and $22 million of higher operating expenses, both principally resulting from increased car rental volume and an increase of 20% in the average size of our international rental fleet to support such volume. The increase in revenue generated by our international car rental operations includes the effect of favorable foreign currency exchange rate fluctuations of $27 million, which was principally offset in EBITDA by the opposite impact of foreign currency exchange rate fluctuations on expenses.
We are still negotiating the purchase of a portion of our 2006 model year inventory and expect to incur increased fleet depreciation costs throughout the remainder of 2005 and 2006. Accordingly, our ability to maintain profit margins consistent with prior periods will be dependent on our ability to successfully reflect corresponding charges in our pricing program.
Budget truck rental revenues increased $25 million (6%) in the nine months ended September 30, 2005, primarily representing a $19 million (5%) increase in T&M revenue, which reflects a 4% increase in T&M per day and a 2% increase in rental days. The favorable impact on EBITDA of increased T&M revenue was offset by (i) $22 million of incremental fleet depreciation and related costs resulting from a 13% increase in the average size of our truck rental fleet in anticipation of increased demand and (ii) $6 million of restructuring costs, representing facility, employee relocation and severance costs incurred in connection with the closure of a reservation center and unprofitable Budget truck rental locations.
Galileo and supplier services, our “order taker” businesses that primarily provide GDS services to the travel industry, experienced an overall $6 million (1%) increase in revenues primarily driven by a $19 million (2%) increase in worldwide air booking fees and $7 million of additional ancillary revenue, partially offset by a $20 million (22%) decline in subscriber fees. The increase in air booking fees was comprised of a $28 million (4%) increase in international air booking fees, partially offset by an $8 million (3%) decrease in domestic air booking fees. The increase in international air booking fees was principally driven by 2% higher booking volumes, which totaled 132 million segments during the nine months ended September 30, 2005 and which primarily resulted from a combination of an increase in travel demand within the Middle East and Asia/Pacific regions and travel agency conversions to the Galileo system, partially offset by a decline in demand in Europe. The $8 million decrease in domestic air booking fees was driven by a 9% decline in the effective yield on such bookings, partially offset by a 6% increase in booking volumes, which totaled 69 million segments during the nine months ended September 30, 2005. The domestic volume increase and effective yield decline are consistent with our pricing program with major U.S. carriers, which was designed to gain access to all public fares made available by the participating airlines. International air bookings represented approximately two-thirds of our total air bookings during the nine months ended September 30, 2005. The $7 million decrease in ancillary revenues is due to lower fees earned on long-term technology service arrangements with certain airline carriers. The $20 million reduction in subscriber fees is a result of the continuing trend of fewer travel agencies leasing computer equipment from us during the nine months ended September 30, 2005 compared with the same period in 2004.
Apart from the acquisitions described above, revenues generated from our “order maker” travel business increased $29 million (26%) during the nine months ended September 30, 2005 compared to the same period 2004 primarily due to a 27% increase in online gross bookings primarily at our Cheaptickets.com website and Travelport, our online corporate travel solutions business. Higher gross bookings at Cheaptickets.com is primarily attributable to improved site functionality resulting in greater conversion rates and enhanced content, including additional online hotel offerings. The Travelport gross bookings increase is the result of our expanded full service offering in our corporate travel solutions business.
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EBITDA further reflects an increase of approximately $45 million in expenses (excluding the impact of the aforementioned acquisitions and the transfer of the membership travel business) principally resulting from (i) the absence in 2005 of a $32 million expense reduction realized in the nine months ended September 30, 2004 in connection with a benefit plan amendment, (ii) $14 million of increased commissions attributable to higher booking volumes, principally in the Middle East and Asia/Pacific regions and a greater mix of booking volumes in higher commission rate countries, (iii) $13 million of additional expenses associated with developing enhanced technology and other project initiatives and (iv) $11 million of restructuring charges incurred during the nine months ended September 30, 2005, as a result of actions taken to reduce staff levels in some of our “order taker” related business and the realignment of our global sales force. Such amounts were partially offset by (i) a $15 million reduction in costs primarily realized at our Cheaptickets.com and Lodging.com businesses, as a result of integration efforts executed domestically within our online “order maker” businesses, including the migration of technology to a common platform and (ii) $11 million of expense savings on network communications and equipment maintenance and installation due, in part, to reduced volume within the Galileo subscriber business where travel agents lease computer equipment from us.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
We present separately the financial data of our management programs. These programs are distinct from our other activities as the assets are generally funded through the issuance of debt that is collateralized by such assets. The income generated by these assets is used, in part, to repay the principal and interest associated with the debt. Cash inflows and outflows relating to the generation or acquisition of such assets and the principal debt repayment or financing of such assets are classified as activities of our management programs. We believe it is appropriate to segregate the financial data of our management programs because, ultimately, the source of repayment of such debt is the realization of such assets.
FINANCIAL CONDITION
Total assets exclusive of assets under management programs decreased approximately $4.9 billion primarily due to (i) the spin-off of PHH, which reduced assets by approximately $5.6 billion, (ii) the sale of Wright Express, which (excluding proceeds received on the sale) reduced assets by $685 million and (iii) a reduction of $643 million in our net deferred tax asset principally due to utilization of our net operating loss carryforwards during 2005. These decreases were partially offset by approximately $1.6 billion and $707 million of assets acquired in connection with our acquisitions of Gullivers and ebookers, respectively (See Note 4 to our Consolidated Condensed Financial Statements).
Total liabilities exclusive of liabilities under management programs decreased approximately $3.9 billion primarily due to (i) the spin-off of PHH, which reduced liabilities by approximately $4.4 billion and (ii) the sale of Wright Express, which reduced liabilities by $434 million. These decreases were partially offset by (i) net incremental borrowings of $531 million under our revolving credit facility and commercial paper program, which were utilized to fund a portion of the purchase price of Gullivers (see Note 4 to our Consolidated Condensed Financial Statements) and (ii) $388 million and $253 million of liabilities that we assumed in connection with our acquisitions of Gullivers and ebookers, respectively (See Note 4 to our Consolidated Condensed Financial Statements).
Assets under management programs decreased approximately $2.2 billion primarily due to the spin-off of PHH, which had approximately $4.2 billion of assets. This decrease was partially offset by approximately $1.4 billion of net additions to our vehicle rental fleet, reflecting seasonality and current and projected year-over-year increases in demand, and $260 million of
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additional timeshare-related assets, primarily representing timeshare contract receivables associated with sales of vacation ownership interests.
Liabilities under management programs decreased approximately $1.7 billion primarily due to the spin-off of PHH, which had approximately $3.4 billion of liabilities. This decrease was partially offset by additional borrowings of approximately $1.4 billion to support the growth in our vehicle rental fleet described above and approximately $500 million of net incremental borrowings within our timeshare and relocation businesses. See “Liquidity and Capital Resources—Financial Obligations—Debt Under Management Programs” for a detailed account of the change in our debt related to management programs.
Stockholders’ equity decreased approximately $1.5 billion primarily due to (i) the $1.65 billion dividend of PHH’s equity to our shareholders, (ii) our repurchase of approximately $1.0 billion (approximately 48 million shares) of Cendant common stock and (iii) $309 million of cash dividend payments. Such decreases were partially offset by (i) net income of $805 million for the nine months ended September 30, 2005, (ii) the $488 million adjustment to offset the valuation charge associated with the PHH spin-off (which is included in both the $1.65 billion PHH dividend and in the 2005 net income) and (iii) $270 million related to the exercise of employee stock options (including a $60 million tax benefit). See Note 16 to our Consolidated Condensed Financial Statements for a description of the effect of the PHH spin-off.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are cash on hand and our ability to generate cash through operations and financing activities, as well as available funding arrangements and committed credit facilities, each of which is discussed below.
CASH FLOWS
During the nine months ended September 30, 2005, we generated $230 million less cash from operating activities in comparison with the same period in 2004. This change principally reflects the spin-off of our former mortgage business, which generated $88 million of cash from program activities in the nine months ended September 30, 2005 and generated $365 million in the nine months ended September 30, 2004.
We used approximately $2.1 billion more cash in investing activities during the nine months ended September 30, 2005 compared with the nine months ended September 30, 2004. Such change primarily reflects (i) the use of approximately $1.4 billion more cash to fund acquisitions in 2005 (principally Gullivers and ebookers) and (ii) the use of $919 million more cash to acquire vehicles for our vehicle rental business principally in connection with current and anticipated increases in rental volumes. Capital expenditures, which increased by $23 million during the nine months ended September 30, 2005 as compared with the nine months ended September 30, 2004, are anticipated to be in the range of $450 million to $500 million for 2005.
We generated approximately $1.8 billion more cash from financing activities during the nine months ended September 30, 2005 in comparison with the same period in 2004. Such change principally reflects (i) a reduction of approximately $1.2 billion in cash used to settle corporate indebtedness (including the payment of $778 million to repurchase $763 million of our 6.75% notes in 2004 that formed a portion of the Upper DECS and $345 million to retire our former 11% senior subordinated notes in 2004), (ii) the activities of our management programs, which provided approximately $1.3 billion more cash in the nine months ended September 30, 2005 due to the spin-off of our former mortgage business and greater borrowing activity in our vehicle rental and relocation businesses during the nine months ended September 30, 2004, and (iii) net incremental short-term borrowings of $461 million under our $3.5 billion revolving credit facility and $1.0 billion commercial paper program, which were utilized to fund a portion of the purchase price of Gullivers in April 2005. Such increases were partially offset by (i) a decrease of $863 million of cash generated during the nine months ended September 30, 2004 from the proceeds received in connection with the settlement of the forward purchase contract component of our Upper DECS securities whereby we issued approximately 38 million shares of CD common stock and (ii) an increase of $121 million in cash used for repurchases of Cendant common stock (net of proceeds received on the issuance of Cendant common stock). See “Liquidity and Capital Resources—Financial Obligations” for a detailed discussion of financing activities during 2005.
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44
45
46
47
48
49
Exhibit Index
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