UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-Q
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X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended JUNE 30, 1997
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ______ to _____
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Commission File Number 1-7797
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PHH CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 52-0551284
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
6 Sylvan Way, Parsippany, New Jersey 07054
(Address of principal executive offices) (Zip Code)
(201) 428-9700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
The Company meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is, therefore, filing this form with the reduced disclosure
format.
PHH CORPORATION
INDEX
PART I--FINANCIAL INFORMATION:
Item 1 - Financial Statements
Consolidated Statements of Operations--Three Months and
Six Months Ended June 30, 1997 and 1996
Consolidated Balance Sheets --
June 30, 1997 and December 31, 1996
Consolidated Statements of Cash Flows --
Six Months Ended June 30, 1997 and 1996
Notes to Consolidated Financial Statements
Item 2 - Management's Narrative Analysis of
Results of Operations
PART II--OTHER INFORMATION:
Item 6 - Exhibits and Reports on Form 8-K
Index to Exhibits
Signatures
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
PHH CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three months ended June 30, Six months ended June 30,
-------------------------------- --------------------------------
(In thousands) 1997 1996 1997 1996
-------------- -------------- --------------- --------------
Net revenues:
Service fees:
Fleet management services $ 50,978 $ 50,308 $ 117,822 $ 109,517
Relocation services, net of interest 95,014 70,203 155,794 133,717
Mortgage services (net of amortization of
mortgage servicing rights and fees and
interest of $30,327, $28,343, $60,365
and $55,371, respectively) 42,501 35,269 76,132 55,154
-------------- -------------- --------------- --------------
Service fees, net 188,493 155,780 349,748 298,388
Fleet leasing (net of depreciation and interest
of $298,200, $272,871, $584,275 and
$555,994, respectively) 14,808 12,514 28,759 24,253
-------------- -------------- --------------- --------------
Net revenues 203,301 168,294 378,507 322,641
-------------- -------------- --------------- --------------
Expenses:
Operating 26,374 28,373 55,371 53,066
General and administrative 104,290 95,819 189,141 184,523
Merger and restructuring charge associated with
business combinations 235,312 -- 235,312 --
Depreciation and amortization 6,193 7,627 12,859 13,577
-------------- -------------- --------------- --------------
Total expenses 372,169 131,819 492,683 251,166
-------------- -------------- --------------- --------------
Income (loss) before income taxes (168,868) 36,475 (114,176) 71,475
Income tax provision (benefit) (24,944) 15,279 (2,417) 29,419
-------------- -------------- --------------- --------------
Net income (loss) $ (143,924) $ 21,196 $ (111,759) $ 42,056
-------------- -------------- --------------- --------------
See accompanying notes.
Item 1. Financial Statements (Continued).
PHH CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
June 30, December 31,
(Dollars in thousands) 1997 1996
-------------- --------------
Assets
Cash $ 12,454 $ 13,779
Restricted cash 23,742 89,849
Accounts receivable, less allowance for doubtful accounts of
$7,475 and $6,319 645,595 540,569
Carrying costs on homes under management 57,218 49,000
Property and equipment, net 92,131 92,145
Goodwill, net 22,817 47,279
Other assets 291,413 183,201
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1,145,370 1,015,822
-------------- --------------
Assets Under Management and Mortgage Programs
Net investment in leases and leased vehicles 3,643,600 3,418,666
Relocation receivables 579,576 647,664
Mortgage loans held for sale 820,615 1,248,299
Mortgage servicing rights and fees 272,042 288,943
-------------- --------------
5,315,833 5,603,572
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$ 6,461,203 $ 6,619,394
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Liabilities
Accounts payable and accrued expenses $ 568,012 $ 534,898
Deferred revenue 57,754 42,045
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625,766 576,943
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Liabilities Under Management and Mortgage Programs
Debt 4,778,861 5,089,943
Deferred income taxes 301,200 281,948
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5,080,061 5,371,891
-------------- ---------------
Commitments and contingencies
Shareholder's Equity
Preferred stock, authorized 3,000,000 shares
Common stock, no par value, authorized 75,000,000 shares;
issued and outstanding shares of 100 at June 30, 1997
and 34,956,835 at December 31, 1996 289,168 101,155
Cumulative foreign currency translation adjustment (11,704) (8,364)
Retained earnings 477,912 577,769
-------------- --------------
755,376 670,560
-------------- --------------
$ 6,461,203 $ 6,619,394
-------------- --------------
See accompanying notes.
Item 1. Financial Statements (Continued).
PHH CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six Months ended June 30,
------------------------------
(In thousands) 1997 1996
------------ -----------
Operating Activities:
Net income (loss) $ (111,759) $ 42,056
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation on vehicles under operating leases 501,206 483,578
Other depreciation and amortization 12,859 13,577
Write-down of goodwill 26,460 23,741
Amortization and write-down of servicing rights and fees 30,440 --
Additions to originated mortgage servicing rights (57,160) (53,405)
Additions to excess mortgage servicing fees (28,835) (36,467)
Gain on sales of mortgage servicing rights (10,215) (5,195)
Deferred income taxes 16,122 3,500
Gain on sale of subsidiary -- (11,688)
Changes in:
Restricted Cash 66,107 --
Accounts receivable (15,884) 18,302
Carrying costs on homes under management 21,344 4,247
Mortgage loans held for sale 427,684 (351,657)
Accounts payable and accrued expenses 111,060 31,614
Deferred revenue 12,126 5,119
All other operating activity (89,231) 55,988
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Cash provided by operating activities 912,324 223,310
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Investing Activities:
Investment in leases and leased vehicles (1,179,905) (936,225)
Repayment of investment in leases and leased vehicles 437,239 339,680
Equity advances on homes under management (2,136,739) (1,415,655)
Repayment of advances on homes under management 2,203,671 1,498,277
Proceeds from sales of mortgage servicing rights 29,134 7,113
Additions to property and equipment (5,861) (12,608)
Proceeds from sale of subsidiary -- 33,618
All other investing activities 13,002 1,481
------------- --------------
Cash used in investing activities (639,459) (484,319)
------------- --------------
Financing Activities:
Net change in borrowings with terms of less than 90 days (54,948) 78,958
Proceeds from issuance of other borrowings 859,196 831,676
Principal payment on other borrowings (1,111,644) (601,993)
Stock option plan transactions 22,014 7,074
Payment of dividends (6,644) (11,758)
------------- --------------
Cash (used in) provided by financing activities (292,026) 303,957
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Effect of exchange rate changes on cash 17,836 (3,003)
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(Decrease) increase in cash (1,325) 39,945
Cash at beginning of period 13,779 11,091
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Cash at end of period $ 12,454 $ 51,036
------------- --------------
See accompanying notes.
Item 1. Financial Statements (Continued).
PHH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1) Merger with HFS Incorporated
Pursuant to a merger agreement (the "Merger Agreement") by and among PHH
Corporation (the "Company"), HFS Incorporated ("HFS") and Mercury
Acquisition Corp. ("Mercury"), a wholly owned subsidiary of HFS, effective
April 30, 1997, Mercury was merged into the Company, with the Company being
the surviving corporation, and the Company became a wholly owned subsidiary
of HFS (the "Merger"). In connection with the Merger, all outstanding
shares of the Company's common stock, including shares issued to holders of
the Company's employee stock options, were converted into approximately
30.3 million shares of HFS common stock. Pursuant to the Merger Agreement,
the number of HFS shares issued to complete the Merger was determined by
multiplying the outstanding shares of the Company as of April 30, 1997 by
the conversion number of 0.825, calculated in accordance with the terms of
the Merger Agreement plus 0.7 million shares of HFS common stock issued in
exchange for outstanding options to purchase shares of the Company's common
stock. The 30.3 million shares of HFS common stock issued to shareholders
and option holders of the Company represented 19.2% of the total
outstanding shares of HFS at April 30, 1997.
Under the change in control provisions of certain grantor trusts
established in connection with the Company's Senior Executive Severance
Plan, Supplemental Executive Retirement Plan and the PHH Excess Benefits
Plan (collectively, the "Plans"), the Company was required to fund the
trusts for the present value of amounts expected to be paid under the
Plans, a portion of which was due and paid on April 30, 1997. The funded
amounts of the grantor trusts are shown as restricted cash in the
Consolidated Balance Sheets.
2) Change in Fiscal Year
On April 30, 1997, the Company's fiscal year was changed from a year ending
on April 30, to a year ending on December 31, and, accordingly, the Company
filed its transition report on Form 10-K for the eight-month period ended
December 31, 1996. The Company's next full year will be for the period
January 1, 1997 to December 31, 1997. Accordingly, this report covers the
three-month and the six-month results for the Company for the period ended
June 30, 1997.
3) Merger with HFS Incorporated Relocation Business
In June 1997, HFS merged its Coldwell Banker Relocation Services, Inc.
("CBRS") and Worldwide Relocation Management, Inc. ("WRM") relocation
businesses into the Company. The transaction has been accounted for as a
pooling of interests and the operations of CBRS and WRM have been included
since April 30, 1997, the date in which of the Company, CBRS and WRM were
all under common ownership.
Item 1. Financial Statements (Continued).
PHH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
4) Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated
financial statements included in this Form 10-Q reflect all adjustments
necessary for a fair presentation of such financial statements. There were
no adjustments of an unusual nature recorded during the three and six-month
periods ended June 30, 1997 and 1996 except for a one-time merger and
restructuring charge of $235.3 million before tax, $182.7 million after tax
(see note 6). The results of operations for the periods presented are not
necessarily indicative of the results to be expected for the full year.
For further information, refer to the consolidated financial statements and
footnotes included in the Company's financial statements included as part
of the transition report on Form 10-K for the eight-month period ended
December 31, 1996.
Certain reclassifications have been made to the Company's consolidated
financial statements to conform with the presentation utilized by its
parent company.
5) New Accounting Pronouncements
In 1996, the FASB issued SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The
statement provides accounting and reporting standards for transfers and
servicing of financial assets and, among other things, SFAS No. 125 also
requires that previously recognized servicing receivables that exceed
contractually specified servicing fees shall be reclassified as
interest-only strips receivable, and subsequently measured under the
provisions of SFAS No. 115 "Accounting for Certain Investments in Debt and
Equity Securities." The Company adopted the provisions of SFAS No. 125 on
January 1, 1997 and has reclassified a portion of its excess servicing fees
to interest-only strips. The effect of adopting SFAS No. 125 was not
material to the Company's operations or financial condition.
6) Merger and Restructuring Charge
In connection with the above-referenced mergers, the Company recorded a
one-time merger and restructuring charge during the second quarter of 1997
of $235.3 million ($182.7 million after tax). The charge includes
severance, facility and system consolidations and terminations, costs
associated with exiting certain activities, and other merger-related costs
associated with the restructuring of the Company's businesses. The cost
will be partially funded with a capital infusion of $136.0 million from
the Company's parent, HFS.
7) Pro-forma Information (Unaudited)
The following information reflects pro-forma statements of income data for
the three-month and six-month periods ended June 30, 1997 and 1996 assuming
the merger with CBRS and WRM occurred January 1, 1996.
Three-months Six-months
ended June 30, ended June 30,
-------------------------- ----------------------------
Operating income ($000's) 1997 1996 1997 1996
----------- ----------- ----------- ------------
Net revenue $ 211,731 $ 195,520 $ 411,402 $ 374,983
=========== =========== =========== ============
Net income (loss) $ (142,452) $ 27,067 $ (107,753) $ 49,498
=========== =========== =========== ============
================================================================================
Item 2. Management's Narrative Analysis of Results of Operations
PHH CORPORATION AND SUBSIDIARIES
RESULTS OF OPERATIONS
Three month and Six month periods Ended June 30, 1997 versus June 30, 1996
All comparisons within the following discussion are to the same period of the
previous year, unless otherwise stated.
In June 1997, HFS merged its Coldwell Banker Relocation Services, Inc. ("CBRS")
and Worldwide Relocation Management, Inc. ("WRM") relocation businesses into the
Company. The transaction has been accounted for as a pooling of interests and
the operations of CBRS and WRM have been included since April 30, 1997, the date
in which the Company, CBRS and WRM were all under common ownership. Accordingly,
the earnings of the HFS subsidiaries of $9.1 million before tax and $5.4 million
after-tax for the two-months ended June 30, 1997 are included in the second
quarter and six-month results.
In connection with the HFS merger on April 30, 1997 and the
above-referenced mergers, the Company recorded a one-time merger and
restructuring charge during the second quarter of 1997 of $235.3 million ($182.7
million after tax). The charge includes severance, facility and system
consolidations and terminations, cost associated with exiting certain
activities, and other merger-related costs associated with the restructuring of
the PHH businesses. The cost was partially funded with a capital infusion of
$136.0 million from the Company's parent, HFS Incorporated.
Prior to recognition of the above two merger-related events, income before
tax would have increased to $57.2 million and $111.9 million in the quarter and
the six-month periods respectively, and net income would have increased to $33.3
million and $65.5 million in the quarter and the six month periods,
respectively, reflecting increases from each segment of the business.
Net revenues increased 21 percent to $203.3 million in the three-month period
ended June 30, 1997. Fleet management services net revenues increased one
percent in the three-month period primarily due to increases in fuel management
programs and vehicle maintenance programs. The fees received from domestic card
service programs are reported net of expenses in 1997 due to the joint venture
transaction which occurred in January 1997. Otherwise, net revenue from fleet
management services would have reflected an increase of 10 percent in the
three-month period. Relocation Services net revenue increased 35 percent in the
three-month period ended June 30, 1997. Relocation services net revenue in 1997
includes the results from the merged entities of CBRS and WRM for the two-month
period ended June 30, 1997. Relocation services net revenue otherwise would have
increased 3 percent primarily due to a 1 percent increase of homes closed,
increased broker-to-broker referrals and improvements in other fee-based
services. Mortgage services net revenues increased 21 percent in the three-month
period ended June 30, 1997, primarily due to a 6 percent increase in loans sold
and increased margins. Additionally, the three-month results include a gain on
the sale of mortgage servicing rights of $2.7 million. Net leasing revenue
increased in the three-month period primarily due to a 5 percent increase in the
number of vehicles under management.
Net revenues increased 17 percent to $378.5 million in the six-month period
ended June 30, 1997. Fleet management services net revenues increased 8 percent
primarily due to increases mentioned above as well as the effects of the gain on
sale of the domestic card service business recorded in January 1997. Relocation
services net revenue increased 17 percent in the six-month period due to the
effects of the CBRS and WRM merger. Relocation services net revenue would have
approximated that of the prior year omitting the effect of the merged entities
primarily resulting from a 4 percent decrease in homes closed offset by
increases in other fee-based services. Mortgage services net revenue increased
19 percent in the six-month period primarily due to increased margins offset
somewhat by a 5 percent decrease in loans sold. Additionally, the six-month
results include a gain on the sale of mortgage servicing rights of $10.2
million. Net leasing revenue increased in the six-month period primarily due to
a 5 percent increase in the number of vehicles under management.
Item 2. Management's Narrative Analysis of Results of Operations (Cont.)
PHH CORPORATION AND SUBSIDIARIES
Operating expense declined in the three-month period while increasing in the
six-month period primarily due to fluctuations in mortgage services operating
expenses. Excluding the effects of CBRS and WRM, general and administrative
expense in both the three-month and the six-month period, declined. The decrease
results from reduced staffing in both fleet management and relocation services
and, to a greater extent within relocation services, spending for system
improvements. Depreciation and amortization expense declined in both the
three-month period and six-month period primarily due to reduced amortization
expense associated with capitalized software costs.
Prior to the recognition of the two merger-related events, the Company's
effective tax rate was 41.7% in the second quarter of 1997 versus 41.9% in the
prior year and was 41.5% in the six-month period of 1997 compared to 41.1% in
the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company manages its funding sources to ensure adequate liquidity.
The sources of liquidity fall into three general areas: ongoing liquidation of
assets under management, global capital markets, and committed credit agreements
with various high-quality domestic and international banks. In the ordinary
course of business, the liquidation of assets under management programs, as well
as cash flows generated from operating activities, provide the cash flow
necessary for the repayment of existing liabilities. For the six months ended
June 30, 1997 cash provided by operating activities increased to $912.3 million
primarily due to timing of operating activities, including a $427.7 million
decrease in mortgage loans held for sale in 1997 compared with a $351.7 million
increase in 1996, and increased depreciation on vehicles under operating leases.
Cash used in investing activities increased to $639.5 million in 1997 primarily
as a result of an increase in the repayment of investments in leases and leased
vehicles and proceeds received from sales of mortgage servicing rights during
the six months ended June 30, 1997 compared with the same period in the prior
year.
Using historical information, the Company projects the time period that a
client's vehicle will be in service or the length of time that a home will be
held in inventory before being sold on behalf of a client. Once the relevant
asset characteristics are projected, the Company generally matches the projected
dollar amount, interest rate and maturity characteristics of the assets within
the overall funding program. This is accomplished through stated debt terms or
effectively modifying such terms through other instruments, primarily interest
rate swap agreements and revolving credit agreements. Within mortgage banking
services, the company funds the mortgage loans on a short-term basis until sale
to unrelated investors which generally occurs within sixty days. Interest rate
risk on mortgages originated for sale is managed through the use of forward
delivery contracts, financial futures and options. Such financial derivatives
are also used as a hedge to minimize earnings volatility as it relates to
mortgage servicing assets.
The Company has maintained broad access to global capital markets by maintaining
the quality of its assets under management. This is achieved by establishing
credit standards to minimize credit risk and the potential for losses. Depending
upon asset growth and financial market conditions, the Company utilizes the
United States, Euro and Canadian commercial paper markets, as well as other
cost-effective short-term instruments. In addition, the Company utilizes the
public and private debt markets to issue unsecured senior corporate debt.
Augmenting these sources, the Company has reduced outstanding debt by the sale
or transfer of managed assets to third parties while retaining fee-related
servicing responsibility. The Company's aggregate commercial paper outstanding
totaled $3.1 billion at both June 30, 1997 and December 31, 1996. At June 30,
1997, $1.5 billion in medium-term notes and $0.2 billion in other debt
securities were outstanding compared to $1.7 billion and $0.3 billion,
respectively, at December 31, 1996. The Company maintains a leverage ratio under
8 to 1.
Item 2. Management's Narrative Analysis of Results of Operations (Cont.)
PHH CORPORATION AND SUBSIDIARIES
Cash used in financing activities decreased to $292.0 million primarily as a
result of a decrease in borrowings with terms of less than 90 days as well as a
reduction in other borrowings. From a risk management standpoint, borrowings not
in the local currency of the business unit are converted to the local currency
through the use of foreign currency forward contracts.
To provide additional financial flexibility, the Company's current policy
is to ensure that minimum committed bank facilities aggregate 80 percent of the
average amount of outstanding commercial paper. The Company has $2.95 billion in
committed and unsecured credit facilities. These facilities are backed by 22
domestic and foreign banks and are comprised of $1.70 billion of lines maturing
in 364 days or less and $1.25 billion maturing in five years. In addition, the
Company has approximately $300 million of uncommitted lines of credit with
various financial institutions. Management closely evaluates not only the credit
quality of the banks but the terms of the various agreements to ensure ongoing
availability. The full amount of the Company's committed facilities at June 30,
1997, was undrawn and available. Management believes that its current policy
provides adequate protection should volatility in the financial markets limit
the Company's access to commercial paper or medium-term note funding.
The Company and HFS currently operate under policies limiting (a) the payment of
dividends on the Company's capital stock to 40% of its net income on an annual
basis, less the outstanding principal balance of loans from the Company to HFS
as of the date of any proposed dividend payment, and (b) the outstanding
principal balance of loans from the Company to HFS to 40% of its net income on
an annual basis, less payment of dividends on the Company's capital stock during
such year.
These established means of effectively matching floating and fixed interest rate
and maturity characteristics of funding to related assets, the variety of short-
and long-term domestic and international funding sources, and the committed
banking facilities minimize the Company's exposure to interest rate and
liquidity risk.
PART II--OTHER INFORMATION
PHH CORPORATION AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit:
Exhibit (12) - Schedule containing information used in the
computation of the ratio of earnings to fixed
charges.
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K dated May 14, 1997, reporting in
Item 1 the consummation of the acquisition of the Company by HFS
Incorporated ("HFS"). The Company reported in Item 4 the change in the
Company's certifying accountants from KPMG Peat Marwick LLP to Deloitte
and Touche LLP, and in Item 8 the change in the Company's fiscal year
from a year ending on April 30 to a year ending December 31.
The Company filed a report on Form 8-K dated June 6, 1997, reporting in
Item 5 the signing by HFS of a definitive merger agreement with CUC
International, Inc. ("CUC") which provides for HFS to be merged with
and into CUC, with CUC continuing as the surviving corporation.
PHH CORPORATION AND SUBSIDIARIES
Index to Exhibit
-----------------
Exhibit No.
Exhibit (12) - Schedule containing information used in the
computation of the ratio of earnings to fixed charges
SIGNATURES
PHH CORPORATION AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHH CORPORATION
(Registrant)
/s/ Michael P. Monaco
Michael P. Monaco
Executive Vice President,
Chief Financial Officer
Date: August 14, 1997