Basis Of Presentation | 9 Months Ended |
Sep. 30, 2013 |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | ' |
Basis Of Presentation | ' |
BASIS OF PRESENTATION |
Realogy Holdings Corp. (“Realogy Holdings,” "Realogy" or the "Company") is a holding company for its consolidated subsidiaries including Realogy Intermediate Holdings LLC (“Realogy Intermediate”) and Realogy Group LLC (“Realogy Group”). Neither Realogy Holdings, the indirect parent of Realogy Group, nor Intermediate, the direct parent company of Realogy Group, conducts any operations other than with respect to its direct or indirect ownership of Realogy Group. As a result, the consolidated financial positions, results of operations and cash flows of Realogy Holdings, Realogy Intermediate and Realogy Group are the same. |
Realogy Holdings was incorporated on December 14, 2006. On April 10, 2007, Realogy Holdings, then wholly owned by investment funds affiliated with, or co-investment vehicles managed by, Apollo Management VI, L.P., an entity affiliated with Apollo Management, L.P. (collectively referred to as “Apollo”), acquired the outstanding shares of Realogy Group (then known as Realogy Corporation, a Delaware corporation) pursuant to a merger of its wholly owned subsidiary Domus Acquisition Corp., with and into Realogy Group (the “Merger”) with Realogy Holdings becoming the indirect parent company of Realogy Group. Prior to the consummation of the Realogy Holdings initial public offering and related transactions in October 2012, Realogy Holdings was owned by Apollo and members of the Company’s management. |
On April 16, 2013, Apollo sold 40.25 million shares of Realogy Holdings common stock at $44.00 per share in a public offering. On July 16, 2013, Apollo sold its remaining 25.13 million shares of Realogy Holdings' common stock at $47.57 per share in a public offering. |
Realogy is a global provider of residential real estate services. Realogy Group (then Realogy Corporation) was incorporated in January 2006 to facilitate a plan by Cendant Corporation (now known as Avis Budget Group, Inc.) to separate into four independent companies—one for each of Cendant's business units—real estate services or Realogy, travel distribution services (“Travelport”), hospitality services, including timeshare resorts (“Wyndham Worldwide”), and vehicle rental (“Avis Budget Group”). On July 31, 2006, the separation (“Separation”) from Cendant became effective. |
The accompanying Condensed Consolidated Financial Statements include the financial statements of Realogy Holdings and Realogy Group. Realogy Holdings' only asset is its investment in the common stock of Realogy Intermediate, and Realogy Intermediate's only asset is its investment in Realogy Group. Realogy Holdings' only obligations are its guarantees of certain borrowings and certain franchise obligations of Realogy Group. All expenses incurred by Realogy Holdings and Realogy Intermediate are for the benefit of Realogy Group and have been reflected in Realogy Group's consolidated financial statements. The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and with Article 10 of Regulation S-X. Interim results may not be indicative of full year performance because of seasonal and short-term variations. The Company has eliminated all material intercompany transactions and balances between entities consolidated in these financial statements. In presenting the Condensed Consolidated Financial Statements, management makes estimates and assumptions that affect the amounts reported and the related disclosures. Estimates, by their nature, are based on judgment and available information. Accordingly, actual results could differ materially from those estimates. |
In management's opinion, the accompanying Condensed Consolidated Financial Statements reflect all normal and recurring adjustments necessary to present fairly the Realogy Holdings and Realogy Group's financial position as of September 30, 2013 and the results of operations and comprehensive income (loss) for the three and nine months ended September 30, 2013 and 2012 and cash flows for the nine months ended September 30, 2013 and 2012. |
As the interim Condensed Consolidated Financial Statements are prepared using the same accounting principles and policies used to prepare the annual financial statements, they should be read in conjunction with the Consolidated Financial Statements for the year ended December 31, 2012 included in the Annual Report on Form 10-K for the year ended December 31, 2012. |
Financial Instruments |
The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. |
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Level Input: | | Input Definitions: | | | | | | | | | | | | | | | | |
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Level I | | Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the | | | | | | | | | | | | | | | | |
measurement date. | | | | | | | | | | | | | | | | |
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Level II | | Inputs other than quoted prices included in Level I that are observable for the asset or liability through | | | | | | | | | | | | | | | | |
corroboration with market data at the measurement date. | | | | | | | | | | | | | | | | |
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Level III | | Unobservable inputs that reflect management’s best estimate of what market participants would use in | | | | | | | | | | | | | | | | |
pricing the asset or liability at the measurement date. | | | | | | | | | | | | | | | | |
The availability of observable inputs can vary from asset to asset and is affected by a wide variety of factors, including, for example, the type of asset, whether the asset is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level III. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. |
The fair value of financial instruments is generally determined by reference to quoted market values. In cases where quoted market prices are not available, fair value is based on estimates using present value or other valuation techniques, as appropriate. The fair value of interest rate swaps is determined based upon a discounted cash flow approach. |
The following table summarizes fair value measurements by level at September 30, 2013 for assets/liabilities measured at fair value on a recurring basis: |
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| Level I | | Level II | | Level III | | Total | | | |
Interest rate swaps (included in other non-current liabilities) | $ | — | | | $ | 25 | | | $ | — | | | $ | 25 | | | | |
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Deferred compensation plan assets | 1 | | | — | | | — | | | 1 | | | | |
(included in other non-current assets) | | | |
The following table summarizes fair value measurements by level at December 31, 2012 for assets/liabilities measured at fair value on a recurring basis: |
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| Level I | | Level II | | Level III | | Total | | | |
Interest rate swaps (included in other non-current liabilities) | $ | — | | | $ | 29 | | | $ | — | | | $ | 29 | | | | |
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Deferred compensation plan assets | 1 | | | — | | | — | | | 1 | | | | |
(included in other non-current assets) | | | |
The following table summarizes the carrying amount of the Company’s indebtedness compared to the estimated fair value, primarily determined by quoted market values, at: |
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| September 30, 2013 | | December 31, 2012 | | | |
Debt | Carrying | | Estimated | | Carrying | | Estimated | | | |
Amount | Fair Value (a) | Amount | Fair Value (a) | | | |
Senior Secured Credit Facility: | | | | | | | | | | |
Revolving credit facility | $ | 40 | | | $ | 40 | | | $ | 110 | | | $ | 110 | | | | |
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Term loan facility | 1,897 | | | 1,906 | | | 1,822 | | | 1,831 | | | | |
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7.625% First Lien Notes | 593 | | | 663 | | | 593 | | | 673 | | | | |
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7.875% First and a Half Lien Notes | 700 | | | 768 | | | 700 | | | 763 | | | | |
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9.00% First and a Half Lien Notes | 225 | | | 262 | | | 325 | | | 366 | | | | |
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3.375% Senior Notes | 500 | | | 501 | | | — | | | — | | | | |
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11.50% Senior Notes | — | | | — | | | 489 | | | 527 | | | | |
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12.00% Senior Notes | — | | | — | | | 129 | | | 140 | | | | |
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12.375% Senior Subordinated Notes | — | | | — | | | 188 | | | 192 | | | | |
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13.375% Senior Subordinated Notes | — | | | — | | | 10 | | | 11 | | | | |
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Securitization obligations | 247 | | | 247 | | | 261 | | | 261 | | | | |
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(a) | The fair value of the Company's indebtedness is categorized as Level I. | | | | | | | | | | | | | | | | | |
Income Taxes |
Income tax expense for the nine months ended September 30, 2013 was $25 million. This expense included $19 million for an increase in deferred tax liabilities associated with indefinite-lived intangible assets and $6 million for foreign and state income taxes for certain jurisdictions. The Company's provision for income taxes in interim periods is computed by applying its estimated annual effective tax rate against the income (loss) before income taxes for the period. In addition, non-recurring or discrete items, including the increase in deferred tax liabilities associated with indefinite-lived intangibles, are recorded during the period in which they occur. No federal income tax expense was recognized for the current period due to the recognition of a full valuation allowance for domestic operations. |
In September 2013, the Internal Revenue Service released final tangible property regulations regarding the deduction and capitalization of expenditures related to tangible property. Also released were proposed regulations regarding dispositions of tangible property. The regulations are effective beginning January 1, 2014, however, early adoption is allowed. The Company does not believe the regulations will have a material impact on the Company's financial statements when they are adopted. |
Management continues to evaluate all available evidence, both positive and negative, to determine the appropriate timing to release the valuation allowance recorded against the net definite-lived deferred tax asset balance for our domestic operations. The factors considered include our historical cumulative operating losses in recent years, the significant reductions in our indebtedness and related cash interest due to the Company's initial public offering and related transactions in the fourth quarter of 2012 and subsequent note redemptions during the first nine months of 2013, as well as the long term sustainability of the ongoing recovery in the domestic residential real estate market and overall macroeconomic environment. The Company also continues to closely monitor its improvement in recent operating results and its long term projected taxable income as part of its determination of the appropriate amount of valuation allowance recorded at each respective period end. The weight given by management to both the positive and negative evidence noted above is commensurate with the extent to which the evidence may be objectively verified. Although the Company continues to be in a historical cumulative loss position, management is encouraged by recent profitable quarterly results and the overall favorable trends in the domestic residential real estate market over the past year as potential indicators of a sustained improvement in the Company's ability to generate sufficient operating profit in the foreseeable future. If these recent positive trends continue, absent any other factors to the contrary, management may be in a position to release a substantial portion of its recorded valuation allowance in the relative near term. |
While the reversal of the allowance will have a material positive effect on the Company’s results of operations in the period in which any reversal is recorded, any reversal will most likely have the effect of reducing the Company’s earnings in subsequent periods as a result of an increase in the provision for income taxes relating to operating results in such periods. As a result of the Company's deferred tax assets from net operating losses, the subsequent reduction in earnings will have a limited impact on the Company's cash outflows until such time as the net operating losses are fully utilized. |
Derivative Instruments |
The Company uses foreign currency forward contracts largely to manage its exposure to changes in foreign currency exchange rates associated with its foreign currency denominated receivables and payables. The Company primarily manages its foreign currency exposure to the Euro, British Pound, Canadian Dollar and Swiss Franc. The Company has elected not to utilize hedge accounting for these forward contracts; therefore, any change in fair value is recorded in the Consolidated Statements of Operations. However, the fluctuations in the value of these forward contracts generally offset the impact of changes in the value of the underlying risk that they are intended to economically hedge. As of September 30, 2013, the Company had outstanding foreign currency forward contracts with a fair value of less than $1 million and a notional value of $34 million. As of December 31, 2012, the Company had outstanding foreign currency forward contracts with a fair value of less than $1 million and a notional value of $28 million. |
The Company also enters into interest rate swaps to manage its exposure to changes in interest rates associated with its variable rate borrowings. The Company has five interest rate swaps with an aggregate notional value of $1,025 million to offset the variability in cash flows resulting from the term loan facility. The first swap, with a notional value of $225 million, commenced in July 2012 and expires in February 2018 and the second swap, with a notional value of $200 million, commenced in January 2013 and expires in February 2018. In the third quarter of 2013, the Company entered into three new interest rate swaps, each with a notional value of $200 million, to commence in August 2015 and expire in August 2020. The Company has elected not to utilize hedge accounting for these interest rate swaps; therefore, any change in fair value is recorded in the Consolidated Statements of Operations. |
The fair value of derivative instruments was as follows: |
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Liability Derivatives | | Fair Value | | | | | | | | |
Not Designated as Hedging Instruments | | Balance Sheet Location | | September 30, | | December 31, | | | | | | | | |
2013 | 2012 | | | | | | | | |
Interest rate swap contracts | | Other non-current liabilities | | $ | 25 | | | $ | 29 | | | | | | | | | |
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The effect of derivative instruments on earnings is as follows: |
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Derivative Instruments Not | | Location of (Gain) or Loss | | (Gain) or Loss Recognized on Derivatives |
Designated as Hedging | Recognized | Three Months Ended | | Nine Months Ended |
Instruments | for Derivative Instruments | September 30, | September 30, |
| | | 2013 | | 2012 | | 2013 | | 2012 |
Interest rate swap contracts | | Interest expense | | $ | 8 | | | $ | 3 | | | $ | 2 | | | $ | 13 | |
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Foreign exchange contracts | | Operating expense | | $ | 1 | | | $ | 1 | | | $ | — | | | $ | 1 | |
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Restricted Cash |
Restricted cash primarily relates to amounts specifically designated as collateral for the repayment of outstanding borrowings under the Company’s securitization facilities. Such amounts approximated $11 million and $9 million at September 30, 2013 and December 31, 2012, respectively and are primarily included within Other current assets on the Company’s Condensed Consolidated Balance Sheets. |
Supplemental Cash Flow Information |
Significant non-cash transactions for the nine months ended September 30, 2013 included the issuance of common stock of $22 million for stock-based compensation. In addition, during the nine months ended September 30, 2013, the Company recorded $11 million in capital lease additions and $6 million in tenant improvements primarily related to the new corporate headquarters, both of which resulted in non-cash accruals to fixed assets and other long-term liabilities. |
For the nine months ended September 30, 2012, the Company recorded $4 million in capital lease additions which resulted in non-cash accruals to fixed assets and other long-term liabilities. |
Defined Benefit Pension Plan |
The net periodic pension cost for the three months ended September 30, 2013 was less than $1 million and was comprised of interest cost and amortization of actuarial loss of $2 million offset by a benefit of $2 million for the expected return on assets. The net periodic pension cost for the three months ended September 30, 2012 was $1 million and was comprised of interest cost and amortization of actuarial loss of $3 million offset by a benefit of $2 million for the expected return on assets. |
The net periodic pension cost for the nine months ended September 30, 2013 was $1 million and was comprised of interest cost and amortization of actuarial loss of $6 million offset by a benefit of $5 million for the expected return on assets. The net periodic pension cost for the nine months ended September 30, 2012 was $4 million and was comprised of interest cost and amortization of actuarial loss of $9 million offset by a benefit of $5 million for the expected return on assets. |
Reclassifications from Accumulated Other Comprehensive Income |
The Company adopted FASB's amended guidance for comprehensive income, which requires new footnote disclosures related to reclassifications out of accumulated other comprehensive income to net income. These reclassifications include the amortization of actuarial loss to periodic pension cost of $1 million and $2 million for the three and nine months ended September 30, 2013, respectively, and $1 million and $4 million for the three and nine months ended September 30, 2012, respectively. These amounts were reclassified from accumulated other comprehensive income to the general and administrative expenses line on the statement of operations. |
Recently Adopted Accounting Pronouncements |
In July 2012, the FASB amended the guidance on impairment testing for indefinite-lived intangible assets that allows an entity to elect to qualitatively assess whether it is necessary to perform the current two step impairment test. If the qualitative assessment determines that it is not more-likely-than-not that the fair value of the indefinite-lived intangible asset is less than its carrying amount, then performing the two step test is unnecessary. If the entity elects to bypass the qualitative assessment for any indefinite-lived intangible asset and proceed directly to Step One of the test and validate the conclusion by measuring fair value, it can resume performing the qualitative assessment in any subsequent period. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, however early adoption is permitted. The Company will consider utilizing the new qualitative analysis for its annual impairment test to be performed in the fourth quarter of 2013. |
In February 2013, the FASB amended guidance requiring new footnote disclosures related to reclassifications out of accumulated other comprehensive income to net income. Companies are required to present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by reclassification. A company would not need to show the income statement line item affected for certain components that are not required to be reclassified in their entirety to net income. If the component is not required to be reclassified to net income it its entirety, companies would instead cross reference that amount to the related footnote where additional details about the effect of the reclassification are disclosed. The Company disclosed the reclassifications for the three and nine months ended September 30, 2013 and 2012. |
Recently Issued Accounting Pronouncements |
In July 2013, the FASB amended guidance requiring companies to present in the statement of financial position, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward. To the extent that a net operating loss carryforward or tax credit carryforward at the reporting date is not available under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, the unrecognized tax benefit would be presented in the statement of financial position as a liability. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company currently presents unrecognized tax benefits in accordance with the amended guidance and therefore the new standard will have no impact on the Company's financial statement presentation. |