from wsj - notice valuation of "asset sales could raise about $2 billion."
Cendant's Profit Tops Forecasts
For Quarter; 1997 Results Restated
By EMILY NELSON
Staff Reporter of THE WALL STREET JOURNAL
Cendant Corp. posted strong results for the second quarter, although fixing accounting problems will force it to restate 1997 operating earnings downward by 28 cents a share, or about $240 million, the high end of the company's most recent forecast.
The franchising and marketing concern, despite being roiled by management turmoil and the discovery of accounting fraud, had second-quarter net income of $210.9 million, or 24 cents a diluted share, slightly better than analysts had forecast. Results were helped by the company's franchising businesses, which include hotel brands, real-estate units such as Century 21 and Avis rental cars.
How Two Whistle-Blowers Sparked Fraud Probe That Crushed Cendant (Aug. 13)
Cendant, formed last December from the merger of direct-marketer CUC International Inc. and HFS Inc., a travel and real-estate franchiser, has said it found about $500 million in phony revenue and $200 million in accounting "errors" recorded on CUC's books between 1995 though 1997. In an indication of just how complicated it is to unwind the accounting problems, some corrections have hurt Cendant's results, while others helped.
Second-quarter results include a one-time gain of $29 million, or three cents a share, from reversing, or undoing, a charge that was set aside improperly. It also includes a one-time charge of $20.4 million, or two cents a share, related to the accounting problems, the Parsippany, N.J., company said. The second-quarter net income beat analysts' expectations of 21 cents to 23 cents a share, according to First Call. In the year-earlier quarter, on a pro forma basis since the company wasn't yet created, Cendant had a net loss of $92.3 million, or 11 cents a share, including a one-time merger-related charge of $225 million, or 25 cents a share.
"We're going to be [growing] at pretty much the same pace for the rest of the year," said Cendant Chief Executive Officer Henry R. Silverman Thursday, adding, "I don't see how in a business sense it could be worse" than it was in the second quarter.
Indeed, the results won some praise from stock analysts, even though the company's shares have lost about 50% of their value since accounting problems were disclosed in mid-April. In New York Stock Exchange composite trading Thursday, Cendant shares closed up 37.5 cents, or 2.3%, at $16.50.
In the second quarter, revenue from the real-estate franchise business was $131.5 million, up 57% from a year earlier. Another strong spot was the mortgage business, where earnings before interest, taxes and depreciation more than doubled to $44.6 million.
"This was a very powerful growth quarter," says Karen Ficker, analyst at ING Barings Furman Selz, who expects Cendant to have more than $6 billion in revenue this year. Ms. Ficker says Cendant's earnings could grow 20% annually without any acquisitions.
Meanwhile, Cendant said it expects to file restated earnings for the past three years with the U.S. Securities and Exchange Commission later this month. Thursday, it said the accounting problems will lower 1997 operating earnings by 28 cents a share, or roughly $240 million. Last month, the company said it expected the discoveries to reduce results 22 cents to 28 cents a share, or $190 million to $240 million.
But Cendant also said it is undoing, or taking back, $279 million, or 32 cents a diluted share, in merger reserves that CUC had set aside in 1997. Overall, then, the net effect could be to add four cents a share to 1997 results. Analysts, however, have been looking at the operating earnings as a more meaningful indicator of the company's business. In restating its prior years, Cendant said it will lower 1996 results by 18 cents a share and 1995 results by 14 cents a share. It said it will also undo two cents a share in 1996 charges.
Still, even with the firm numbers disclosed Thursday, Cendant's board audit committee hasn't yet completed the report of its investigation of CUC's accounting problems. That, too, is expected later this month.
"While we take no joy in reporting these results, our shareholders should take great comfort from the thoroughness of this investigation," said Michael P. Monaco, Cendant's chief financial officer, in a statement.
Forgiving analysts also said they were encouraged that Cendant in the second quarter classified two former CUC businesses -- a publisher of classified advertising and Cendant Software -- as discontinued operations. Cendant agreed earlier this week to sell the publishing business for about $523 million in cash and stock. It has said it is considering a sale of or public offering of stock in its software business. All told, asset sales could raise about $2 billion, the company said.
"The second quarter had respectable results under the circumstances, and it's a sign of how well the organization hangs together," says Mark Miller, an analyst at Merrill Lynch.
Last month, Cendant said auditors brought in to investigate found wider-than-expected accounting fraud. Its chairman, Walter Forbes, CUC's founder and former chief, resigned under investor and executive pressure, though he has said he didn't know of the accounting problems. The company faces dozens of shareholder lawsuits, and the U.S. attorney's office in Newark, N.J., and the Securities and Exchange Commission are investigating the matter.
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