Basis Of Presentation | 9 Months Ended |
Sep. 30, 2014 |
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") and its consolidated subsidiaries. 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 respective direct or indirect ownership of Realogy Group. As a result, the consolidated financial positions, results of operations, comprehensive income 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 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. |
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 (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 Condensed Consolidated Financial Statements. |
The Condensed Consolidated Financial Statements 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 Realogy Holdings and Realogy Group's financial position as of September 30, 2014 and the results of operations and comprehensive income for the three and nine months ended September 30, 2014 and 2013 and cash flows for the nine months ended September 30, 2014 and 2013. As the interim Condensed Consolidated Financial Statements are prepared using the same accounting principles and policies used to prepare the annual consolidated financial statements, they should be read in conjunction with the Consolidated Financial Statements for the year ended December 31, 2013 included in the Annual Report on Form 10-K for the year ended December 31, 2013. |
The Condensed Consolidated Financial Statements as of September 30, 2014 and for the three- and nine-month periods ended September 30, 2014 and 2013 have been reviewed by PricewaterhouseCoopers LLP, an independent registered public accounting firm. Their reports, dated November 5, 2014, are included on pages 4 and 5. The reports of PricewaterhouseCoopers LLP state that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited financial information because that report is not a "report" or a "part" of the registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act. |
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, 2014 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) | $ | — | | | $ | 30 | | | $ | — | | | $ | 30 | | | | |
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Deferred compensation plan assets | 2 | | | — | | | — | | | 2 | | | | |
(included in other non-current assets) | | | |
The following table summarizes fair value measurements by level at December 31, 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) | $ | — | | | $ | 18 | | | $ | — | | | $ | 18 | | | | |
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Deferred compensation plan assets | 2 | | | — | | | — | | | 2 | | | | |
(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, 2014 | | December 31, 2013 | | | |
Debt | Carrying | | Estimated | | Carrying | | Estimated | | | |
Amount | Fair Value (a) | Amount | Fair Value (a) | | | |
Senior Secured Credit Facility: | | | | | | | | | | |
Revolving credit facility | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | |
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Term loan facility | 1,875 | | | 1,843 | | | 1,887 | | | 1,906 | | | | |
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7.625% First Lien Notes | 593 | | | 640 | | | 593 | | | 664 | | | | |
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7.875% First and a Half Lien Notes | 332 | | | 348 | | | 700 | | | 765 | | | | |
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9.00% First and a Half Lien Notes | 196 | | | 212 | | | 225 | | | 260 | | | | |
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3.375% Senior Notes | 500 | | | 501 | | | 500 | | | 504 | | | | |
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4.50% Senior Notes | 450 | | | 440 | | | — | | | — | | | | |
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Securitization obligations | 281 | | | 281 | | | 252 | | | 252 | | | | |
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(a) | The fair value of the Company's indebtedness is categorized as Level I. | | | | | | | | | | | | | | | | | |
Investment in PHH Home Loans and Transactions with PHH Corporation |
The Company owns 49.9% of PHH Home Loans, which was created for the purpose of originating and selling mortgage loans primarily sourced through the Company’s real estate brokerage and relocation businesses. PHH Corporation ("PHH") owns the remaining percentage. The Company has an agreement with PHH and PHH Home Loans regarding the operation of the venture and a marketing agreement with PHH whereby PHH is the recommended provider of mortgage products and services promoted by the Company to its independently owned and operated franchisees. The Company also entered into a license agreement with PHH whereby PHH Home Loans was granted a license to use certain of the Company’s real estate brand names. The Company also maintains a relocation agreement with PHH whereby PHH outsources its employee relocation function to the Company and the Company subleases office space to PHH Home Loans. In connection with these agreements, the Company recorded net revenues of $1 million and $4 million for the three and nine months ended September 30, 2014, respectively and $1 million and $4 million, for the three and nine months ended September 30, 2013, respectively. In addition, the Company recorded equity earnings related to its investment in PHH Home Loans of $4 million and $5 million for the three and nine months ended September 30, 2014, respectively, and equity earnings related to its investment in PHH Home Loans of $3 million and $24 million for the three and nine months ended September 30, 2013, respectively. The Company received no cash dividends from PHH Home Loans during the nine months ended September 30, 2014 and $40 million of cash dividends from PHH Home Loans during the nine months ended September 30, 2013. |
Income Taxes |
The Company's provision for income taxes in interim periods is computed by applying its estimated annual effective tax rate against the income before income taxes for the period. In addition, non-recurring or discrete items are recorded during the period in which they occur. The provision for income taxes was $71 million and $9 million for the three months ended September 30, 2014 and 2013, respectively and $88 million and $25 million for the nine months ended September 30, 2014 and 2013, respectively. In 2013, the Company did not record federal income tax expense due to a full valuation allowance for domestic operations. At December 31, 2013, the Company evaluated all available positive and negative evidence and determined that substantially all of the valuation allowance associated with U.S. federal and certain state deferred tax assets should be reversed. |
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, Swiss Franc, Canadian Dollar and British Pound. The Company has elected not to utilize hedge accounting for these forward contracts; therefore, any change in fair value is recorded in the Condensed 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, 2014, the Company had outstanding foreign currency forward contracts with a fair value of less than $1 million and a notional value of $27 million. As of December 31, 2013, 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 forward starting 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 Condensed 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, 2014 | | December 31, 2013 | | | | | | | | |
Interest rate swap contracts | | Other non-current liabilities | | $ | 30 | | | $ | 18 | | | | | | | | | |
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The effect of derivative instruments on earnings was as follows: |
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Derivative Instruments Not Designated as Hedging Instruments | | Location of (Gain) or Loss Recognized for Derivative Instruments | | (Gain) or Loss Recognized on Derivatives |
Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Interest rate swap contracts | | Interest expense | | $ | (3 | ) | | $ | 8 | | | $ | 19 | | | $ | 2 | |
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Foreign exchange contracts | | Operating expense | | (2 | ) | | 1 | | | (2 | ) | | — | |
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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 and other obligations. Such amounts approximated $14 million at September 30, 2014 and December 31, 2013 and are primarily included within Other current assets on the Company’s Condensed Consolidated Balance Sheets. |
Supplemental Cash Flow Information |
During the nine months ended September 30, 2014, the Company recorded $6 million in capital lease additions, which resulted in non-cash accruals to fixed assets and other long-term liabilities. |
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. |
Defined Benefit Pension Plan |
The net periodic pension benefit for the three months ended September 30, 2014 was less than $1 million and was comprised of a benefit of $2 million for the expected return on assets offset by interest cost and amortization of actuarial loss of $2 million. 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 benefit for the nine months ended September 30, 2014 was less than $1 million and was comprised of a benefit of $6 million for the expected return on assets offset by interest cost and amortization of actuarial loss of $6 million. 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, partially offset by a benefit of $5 million for the expected return on assets. |
Recently Adopted 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 presents unrecognized tax benefits in accordance with the amended guidance and therefore the new standard had no impact on the Company's financial statement presentation. |
Recently Issued Accounting Pronouncements |
The Company considers the applicability and impact of all Accounting Standards Updates ("ASU"). ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of operations. |
In May 2014, the FASB and IASB issued a converged standard on revenue recognition that will have an effect on most entities to some extent. The objective of the revenue standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital markets. The revenue standard contains principles that an entity will apply to determine the measurement of revenue and the timing of revenue recognition. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is not permitted. The Company is currently evaluating the impact of the standard on its consolidated financial statements. |