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Press Release: Cendant Corporation
September 26, 2002
NEW YORK, NY -- Cendant Corporation yesterday announced that it's earnings will be reduced by approximately $175
million, or $0.17 per share, in third quarter 2002 due to a non-cash write-down of the carrying value of its mortgage
servicing rights (MSR) asset, which is the capitalized value of expected future servicing earnings.
The impact of this reduction in earnings is partially offset by strength in other Cendant business units. As a
result, the Company's forecast for third quarter Adjusted EPS has been reduced from $0.42 to $0.28 per share. Cendant's
previously announced projection for fourth quarter 2002 Adjusted EPS of $0.29 is unchanged. For 2003, the Company's
preliminary Adjusted EPS expectation is $1.55 to $1.60. As a result of the revision to the Company's third quarter
forecast, the Adjusted EPS from continuing operations for 2002 is now expected to be $1.26.
In the third quarter, a steep decline in the interest rates on ten-year Treasury Notes and 30-year mortgages has
resulted in the lowest interest rate levels in 41 years. As a result, the Company said, mortgage loan prepayments
and refinancings by homeowners have increased to record levels. This rise in mortgage prepayments has, in turn,
caused Cendant to determine that its MSR asset will be reduced in accordance with generally accepted accounting
principles (GAAP), which require a revaluation to the lower of cost or market value at each quarter end.
"Based on the unprecedented amount of refinancing caused by historically low interest rates, it now appears
that the models we have used to value the MSR asset in the past are not as effective in estimating the volume of
prepayments and refinancings that are occurring in this new environment. While the level of prepayment activity
of our servicing portfolio remains below the industry average, our existing valuation model and the risk management
strategies used to hedge against reductions in interest rates under-estimated the velocity of refinancing due to
the rate shocks experienced in the last 30 to 40 days. As a result, we are adopting a recently released valuation
model and revising certain of our assumptions in order to better reflect the sensitivity of our MSR asset value
to consumer behavior," said Kevin M. Sheehan, Cendant's Chief Financial Officer. "With our continuing
risk management activities, and the adoption of the new valuation model with revised assumptions, we believe the
Company has enhanced its ability to value our MSR portfolio."
The charge reflects both the adoption of the new valuation model and an adjustment to the value under the existing
model due to the lower interest rates. However, the Company is currently benefiting, and will continue to benefit,
from the increase in refinancing activity, as mortgage originations remain at record levels.
Cendant will announce its third quarter results on Monday, October 21 after the market close and will host an investor
conference call to discuss third quarter results on Tuesday, October 22 at 11 a.m. (EDT). Investors may access
the call live at http://www.cendant.com or by dialing 913-981-4900.
Adjusted EPS excludes items that are of a non-recurring or unusual nature, including acquisition and integration
related costs consisting primarily of the non-cash amortization of the pendings and listings intangible asset from
real estate brokerage acquisitions and securities litigation costs. Adjusted EPS is a non-GAAP measure, but the
Company believes that it is useful to assist investors in gaining an understanding of the trends and results of
operations for the Company's core business. Adjusted EPS should be viewed in addition to, and not in lieu of, the
Company's reported results.
Cendant Corporation is primarily a provider of travel and residential real estate services. With approximately
70,000 employees, New York City-based Cendant provides these services to businesses and consumers in over 100 countries.
More information about Cendant, its companies, brands and current SEC filings may be obtained by visiting the Company's
Web site at http://www.cendant.com or by calling 877-4-INFOCD (877-446-3623).
Statements about future results made in this release constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and the
current economic environment. The Company cautions that these statements are not guarantees of future performance.
Actual results may differ materially from those expressed or implied in the forward-looking statements. Important
assumptions and other important factors that could cause actual results to differ materially from those in the
forward-looking statements are specified in Cendant's Form 10-Q for the quarter ended June 30, 2002.
Such forward-looking statements include projections. Such projections were not prepared in accordance with published
guidelines of the American Institute of Certified Public Accountants or the SEC regarding projections and forecasts,
nor have such projections been audited, examined or otherwise reviewed by independent auditors of Cendant or its
affiliates. In addition, such projections are based upon many estimates and are inherently subject to significant
economic and competitive uncertainties and contingencies, many of which are beyond the control of management of
Cendant and its affiliates. Accordingly, actual results may be materially higher or lower than projected. The inclusion
of such projections herein should not be regarded as a representation by Cendant or its affiliates that the projections
will prove to be correct.
Source: Cendant Corporation