SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
Commission File No. 1-7797
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PHH Corporation
(Exact name of Registrant as specified in its charter)
Maryland 52-0551284
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
6 Sylvan Way
Parsippany, New Jersey 07054
(Address of principal executive (Zip Code)
office)
(973) 428-9700
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if applicable)
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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 and 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.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(In millions)
Three Months Ended
March 31,
1999 1998
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Revenues
Service fees:
Fleet $ 83.2 $ 76.7
Relocation (net of interest of $5.5 and $7.6) 90.9 99.7
Mortgage (net of amortization of mortgage
servicing rights and interest of $60.7 and $48.1) 93.2 78.0
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Service fees, net
267.3 254.4
Fleet leasing (net of depreciation and interest
of $326.4 and $311.6) 18.6 19.9
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Net revenues 285.9 274.3
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Expenses
Operating 138.0 120.2
General and administrative 50.8 42.6
Depreciation and amortization 16.4 10.2
Merger-related costs and other unusual charges - 3.1
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Total expenses 205.2 176.1
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Income before income taxes 80.7 98.2
Provision for income taxes 26.9 34.2
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Net income $ 53.8 $ 64.0
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See accompanying notes to consolidated financial statements.
PHH Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts)
March 31, December 31,
1999 1998
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Assets
Cash and cash equivalents $ 64.4 $ 322.0
Accounts and notes receivable, net 1,028.4 951.2
Property and equipment, net 237.5 241.1
Goodwill 193.5 200.0
Other assets 317.0 324.3
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Total assets exclusive of assets under programs 1,840.8 2,038.6
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Assets under management and mortgage programs
Net investment in leases and leased vehicles 3,873.5 3,801.1
Relocation receivables 620.9 659.1
Mortgage loans held for sale 1,955.6 2,416.0
Mortgage servicing rights 743.5 635.7
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7,193.5 7,511.9
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Total assets $ 9,034.3 $ 9,550.5
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Liabilities and shareholder's equity
Accounts payable and accrued liabilities $ 1,072.0 $ 1,043.6
Deferred income 57.3 52.3
Long-term debt 20.8 18.5
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Total liabilities exclusive of liabilities under programs 1,150.1 1,114.4
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Liabilities under management and mortgage programs
Debt 6,327.3 6,896.8
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Deferred income taxes 328.6 341.0
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Total liabilities 7,806.0 8,352.2
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Commitments and contingencies (Note 4)
Shareholder's equity
Preferred stock - authorized 3,000,000 shares -- --
Common stock, no par value - authorized 75,000,000 shares;
issued and outstanding 1,000 shares 289.2 289.2
Additional paid-in capital 190.7 190.7
Retained earnings 798.7 744.9
Accumulated other comprehensive loss (50.3) (26.5)
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Total shareholder's equity 1,228.3 1,198.3
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Total liabilities and shareholder's equity $ 9,034.3 $ 9,550.5
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See accompanying notes to consolidated financial statements.
PHH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Three Months Ended
March 31,
1999 1998
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Operating Activities
Net income $ 53.8 $ 64.0
Depreciation and amortization 16.4 10.2
Other, net (35.1) (42.4)
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35.1 31.8
Management and mortgage programs:
Depreciation and amortization 312.4 278.5
Origination of mortgage loans (6,819.0) (4,779.3)
Proceeds on sale and payments from mortgage loans
held for sale 7,279.4 4,619.9
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Net cash provided by operating activities 807.9 150.9
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Investing Activities
Additions to property and equipment (26.2) (27.8)
Other, net (3.4) 12.7
Management and mortgage programs:
Investment in leases and leased vehicles (560.8) (626.2)
Proceeds from disposal of leases and leased vehicles 132.6 222.0
Proceeds from sales and transfers of leases and
leased vehicles to third parties 44.6 27.3
Equity advances on homes under management (1,461.9) (1,436.8)
Repayment on advances on homes under management 1,501.5 1,564.5
Additions to mortgage servicing rights (183.4) (109.5)
Proceeds from sales of mortgage servicing rights 56.6 39.9
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Net cash used in investing activities (500.4) (333.9)
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Financing Activities
Proceeds received from parent company capital contribution -- 46.0
Other, net (7.3) 0.9
Management and mortgage programs:
Proceeds from debt issuance or borrowings 1,830.5 983.8
Principal payments on borrowings (2,101.8) (449.1)
Net change in short-term borrowings (299.1) (340.4)
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Net cash (used in) provided by financing activities (577.7) 241.2
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Effect of changes in exchange rates on cash and cash equivalents 12.6 (10.3)
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Net (decrease) increase in cash and cash equivalents (257.6) 47.9
Cash and cash equivalents, beginning of period 322.0 3.7
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Cash and cash equivalents, end of period $ 64.4 $ 51.6
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See accompanying notes to consolidated financial statements.
PHH Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
PHH Corporation, together with its wholly owned subsidiaries (the
"Company"), is a leading provider of fleet, mortgage and relocation
services and is a wholly owned subsidiary of Cendant Corporation
("Cendant" or the "Parent Company"). However, pursuant to certain
covenant requirements in the indentures under which the Company issues
debt, the Company continues to operate and maintain its status as a
separate public reporting entity, which is the basis under which the
accompanying financial statements and footnotes are presented.
The consolidated balance sheet of the Company as of March 31, 1999 and
the consolidated statements of income and cash flows for the three months
ended March 31, 1999 and 1998 are unaudited. In the opinion of
management, all adjustments consisting of normal recurring accruals
considered necessary for a fair presentation of such financial statements
are included. The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information. The December 31,
1998 consolidated balance sheet was derived from the Company's audited
financial statements included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998, as restated giving effect to the
April 1999 merger of certain Parent Company Fleet businesses (See Note
2), and should be read in conjunction with such consolidated financial
statements and notes thereto.
Operating results for the three months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1999.
2. Parent Company Capital Contribution
In April 1999, the Parent Company contributed its fuel card business
subsidiaries, Wright Express Corporation ("WEX") and The Harpur Group,
Ltd. ("Harpur") to the Company. As both entities were under common
control, such transaction has been accounted for in a manner similar to a
pooling of interests. Accordingly, financial results as of December 31,
1998 and for the three months ended March 31, 1998 have been restated as
if the Company, WEX and Harpur had operated as one entity since
inception. However, the operating results of Harpur are included from
January 20, 1998, the date on which Harpur was acquired by the Parent
Company pursuant to a purchase business combination and accordingly, the
date on which common control was established. The impact of the
restatement giving effect to the capital contribution of WEX and Harpur
(collectively, the "Adjustments") in the consolidated financial
statements is as follows:
Statement of Income Data: Three Months Ended March 31, 1998
------------------------------------------------
As
previously As
(In millions) reported Adjustments restated
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Net revenues $ 253.0 $ 21.3 $ 274.3
Total expenses 158.2 17.9 176.1
Provision for income taxes 32.7 1.5 34.2
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Net income $ 62.1 $ 1.9 $ 64.0
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Balance Sheet Data: December 31, 1998
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As
previously As
(In millions) reported Adjustments restated
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Assets
Total assets exclusive of assets under programs $ 1,521.0 $ 517.6 $ 2,038.6
Assets under management and mortgage programs 7,511.9 - 7,511.9
----------- -------------- -------------
Total Assets $ 9,032.9 $ 517.6 $ 9,550.5
=========== ============== =============
Liabilities and Shareholder's Equity
Total liabilities exclusive of liabilities under programs $ 809.0 $ 305.4 $ 1,114.4
Liabilities under management and mortgage programs
Debt 6,896.8 - 6,896.8
Deferred income taxes 341.0 - 341.0
Total shareholder's equity 986.1 212.2 1,198.3
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Total Liabilities and Shareholder's Equity $ 9,032.9 $ 517.6 $ 9,550.5
=========== ============== =============
3. Comprehensive Income
Components of comprehensive income (loss) are summarized as follows:
Three Months Ended
March 31,
(In millions) 1999 1998
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Net income $ 53.8 $ 64.0
Other comprehensive losses:
Currency translation adjustment (22.3) -
Unrealized holding losses on marketable securities (1.5) -
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Comprehensive income $ 30.0 $ 64.0
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The components of accumulated other comprehensive loss for the three months
ended March 31, 1999 are as follows:
Net unrealized Accumulated
loss on Currency other
marketable translation comprehensive
(In millions) securities adjustment loss
-------------- --------------- --------------
Balance, January 1, 1999 $ - $ (26.5) $ (26.5)
Current period change (1.5) (22.3) (23.8)
-------------- --------------- ---------------
Balance, March 31, 1999 $ (1.5) $ (48.8) $ (50.3)
============== =============== ===============
4. Commitments and Contingencies
Parent Company Litigation. In April 1998, the Parent Company publicly
announced that it discovered accounting irregularities in the former
business units of CUC. Such discovery prompted investigations into such
matters by the Parent Company and the Audit Committee of the Parent
Company's Board of Directors. As a result of the findings from the
investigations, the Parent Company restated its previously reported
financial results for the years ended December 31, 1997, 1996 and 1995.
Since such announcement, more than 70 lawsuits claiming to be class
actions, two lawsuits claiming to be brought derivatively on the Parent
Company's behalf and several individual lawsuits have been filed in various
courts against the Parent Company and other defendants. The Court has
ordered consolidation of many of the actions.
The Securities and Exchange Commission ("SEC") and the United States
Attorney for the District of New Jersey are conducting investigations
relating to the matters referenced above. The SEC advised the Parent
Company that its inquiry should not be construed as an indication by the
SEC or its staff that any violations of law have occurred. As a result of
the findings from the investigations, the Parent Company made all
adjustments considered necessary which are reflected in its financial
statements. However, the Parent Company can provide no assurances that
additional adjustments will not be necessary as a result of these
government investigations.
The Parent Company does not believe it is feasible to predict or determine
the final outcome or resolution of these proceedings or to estimate the
amounts or potential range of loss with respect to these proceedings and
investigations. In addition, the timing of the final resolution of these
proceedings and investigations is uncertain. The possible outcomes or
resolutions of these proceedings and investigations could include
judgements against the Parent Company or settlements and could require
substantial payments by the Parent Company. Management believes that
material adverse outcomes with respect to such Parent Company proceedings
could have a material adverse impact on the financial condition and cash
flows of the Company.
Other pending litigation. The Company and its subsidiaries are involved in
pending litigation in the usual course of business. In the opinion of
management, such other litigation will not have a material adverse effect
on the Company's consolidated financial position, results of operations or
cash flows.
5. New Accounting Standards
In October 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 134 "Accounting
for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise", effective
for the first fiscal quarter after December 15, 1998. The Company adopted
SFAS No. 134 effective January 1, 1999. SFAS No. 134 requires that after
the securitization of mortgage loans, an entity engaged in mortgage banking
activities classify the resulting mortgage-backed securities or other
interests based on its ability and intent to sell or hold those
investments. As of January 1, 1999, the Company reclassified
mortgage-backed securities and other interests retained after the
securitization of mortgage loans, from the trading to the available for
sale category. Subsequent to the adoption of SFAS No. 134, such securities
and interests are accounted for in accordance with SFAS No. 115 "Accounting
for Certain Investments in Debt and Equity Securities". The adoption of
SFAS No. 134 did not have a material impact on the financial statements.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". The Company will adopt SFAS No. 133
effective January 1, 2000. SFAS No. 133 requires the Company to record all
derivatives in the consolidated balance sheet as either assets or
liabilities measured at fair value. If the derivative does not qualify as a
hedging instrument, the change in the derivative fair values will be
immediately recognized as a gain or loss in earnings. If the derivative
does qualify as a hedging instrument, the gain or loss on the change in the
derivative fair values will either be recognized (i) in earnings as offsets
to the changes in the fair value of the related item being hedged or (ii)
be deferred and recorded as a component of other comprehensive income and
reclassified to earnings in the same period during which the hedged
transactions occur. The Company has not yet determined what impact the
adoption of SFAS No. 133 will have on its financial statements.
6. Segment Information
Management evaluates each segment's performance on a stand-alone basis
based on a modification of earnings before interest, income taxes,
depreciation and amortization. For this purpose, Adjusted EBITDA is defined
as earnings before (i) non-operating interest, (ii) income taxes, and (iii)
depreciation and amortization (exclusive of depreciation and amortization
on assets under management and mortgage programs), adjusted to exclude any
merger-related costs and other unusual charges. Such charges are of a
non-recurring or unusual nature and are not measured in assessing segment
performance or are not segment specific. Interest expense incurred on
indebtedness which is used to finance fleet leasing, relocation and
mortgage origination and servicing activities is recorded net within
revenues in the applicable reportable operating segment. The Company
determined that it has three reportable operating segments based primarily
on the types of services it provides, the consumer base to which marketing
efforts are directed and the methods used to sell services.
Inter-segment net revenues were not significant to the net revenues of any
one segment or the consolidated net revenues of the Company. A description
of the services provided within each of the Company's reportable operating
segments is as follows:
Fleet
Fleet services primarily consist of fleet and fuel card related products
and services provided to corporate clients and government agencies. These
services include management and leasing of vehicles, fuel card payment and
reporting and other fee-based services for clients' vehicle fleets. The
Company leases vehicles primarily to corporate fleet users under operating
and direct financing lease arrangements.
Mortgage
Mortgage services primarily include the origination, sale and servicing of
residential mortgage loans. Revenues are earned from the sale of mortgage
loans to investors as well as from fees earned on the servicing of loans
for investors. The Company markets a variety of mortgage products to
consumers through relationships with corporations, affinity groups,
financial institutions, real estate brokerage firms and other mortgage
banks.
Mortgage services customarily sells all mortgages it originates to
investors (which include a variety of institutional investors) either as
individual loans, as mortgage-backed securities or as participation
certificates issued or guaranteed by Fannie Mae, the Federal Home Loan
Mortgage Corporation or the Government National Mortgage Association, while
generally retaining mortgage servicing rights. Mortgage servicing consists
of collecting loan payments, remitting principal and interest payments to
investors, holding escrow funds for payment of mortgage-related expenses
such as taxes and insurance, and otherwise administering the Company's
mortgage loan servicing portfolio.
Relocation
Relocation services are provided to client corporations for the transfer of
their employees. Such services include appraisal, inspection and selling of
transferees' homes and providing equity advances to transferees (generally
guaranteed by the corporate customer). Additional services provided include
certain home management services, assistance in locating a new home at the
transferee's destination, consulting services and other related services.
Segment Information
(In millions)
Three Months Ended March 31,
1999 1998
-------------------------- --------------------------
Adjusted Adjusted
Revenues EBITDA Revenues EBITDA
--------- ------------- -------- -------------
Fleet $ 101.8 $ 39.0 $ 96.6 $ 46.7
Mortgage 93.2 44.0 78.0 37.5
Relocation 90.9 17.9 99.7 25.6
Other - (3.8) - 1.7
--------- ------------- -------- -------------
Total $ 285.9 $ 97.1 $ 274.3 $ 111.5
========= ============= ======== =============
Provided below is a reconciliation of total Adjusted EBITDA for reportable
segments to consolidated income before income taxes.
Three Months Ended
March 31,
1999 1998
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Adjusted EBITDA for reportable segments $ 97.1 $ 111.5
Depreciation and amortization 16.4 10.2
Merger-related costs and other unusual charges - 3.1
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Consolidated income before income taxes $ 80.7 $ 98.2
============ ============
Item 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS AND LIQUIDITY
AND CAPITAL RESOURCES
We are a leading provider of fleet, mortgage and relocation services and a
wholly-owned subsidiary of Cendant Corporation ("Cendant" or the "Parent
Company"). However, pursuant to certain covenant requirements in the indentures
under which we issue debt, we continue to operate and maintain our status as a
separate public reporting entity.
As part of Cendant's previously announced strategy to divest non-strategic
assets, we may from time to time explore and discuss internally and with third
parties potential divestitures and enter into related transactions. No assurance
can be given that any divestiture or other transaction will be consummated or,
if consummated, with respect to the magnitude, timing, likelihood, credit
implications or other financial or business effect on us of such transactions
any or all of which could be material. Among the factors considered in
determining whether or not to consummate any transaction is the strategic and
financial impact of such transaction on us and our Parent Company.
Results of Operations - Three Months Ended March 31, 1999
vs.
Three Months Ended March 31, 1998
This discussion should be read in conjunction with the information contained in
our Consolidated Financial Statements and accompanying Notes thereto appearing
elsewhere in this Form 10-Q.
The underlying discussion of each segment's operating results focuses on
Adjusted EBITDA, which is defined as earnings before (i) non-operating interest;
(ii) income taxes and (iii) depreciation and amortization (exclusive of
depreciation and amortization on assets under management and mortgage programs),
adjusted to exclude any merger-related costs and other unusual charges. Such
unusual charges are of a non-recurring or unusual nature and are not measured in
assessing segment performance or are not segment specific. We believe such
discussion is the most informative representation of how our management
evaluates performance. We determined that we have three reportable operating
segments based primarily on the types of services we provide, the consumer base
to which marketing efforts are directed and the methods used to sell services.
For additional information, including a description of the services provided in
each of our reportable operating segments, see Note 6 to the consolidated
financial statements.
Revenues increased $11.6 million (4%) from $274.3 million in 1998 to $285.9
million in 1999. In addition, Adjusted EBITDA decreased $14.4 million (13%) from
$111.5 million in 1998 to $97.1 million in 1999. The Adjusted EBITDA margin in
1999 was 34%, which represents a decrease of seven percentage points over 1998.
Revenues and Adjusted EBITDA within the Mortgage segment increased $15.2 million
(19%) and $6.5 million (17%), respectively, in first quarter 1999 compared to
first quarter 1998 primarily due to substantial growth in mortgage origination.
The Adjusted EBITDA margin decreased from 48% to 47%, as higher revenues were
offset by higher operating expenses related to increases in hiring, technology
and capacity, which we planned to support through continued growth. Mortgage
closings increased, including a shift to more profitable sales and processing
channels, and were responsible for the majority of the segment's revenue growth.
Mortgage closings increased $1.9 billion (40%) to $6.8 billion, while average
production fees decreased 6 basis points, resulting in a $17.6 million net
increase in production revenues. The decrease in the average fees resulted from
the shift to more profitable processing channels being offset by increased
competitive pressures in the mortgage lending market. Although the servicing
portfolio grew $14.5 billion (47%), net servicing revenue decreased $1.7
million, with average servicing fees declining 3 basis points due to increased
amortization of the servicing asset.
Revenues and Adjusted EBITDA within the Relocation segment decreased $8.8
million (9%) and $7.7 million (30%), respectively, in first quarter 1999
compared to first quarter 1998 contributing to a decrease in the Adjusted EBITDA
margin from 26% to 20%. The primary cause of the revenue and Adjusted EBITDA
declines was the sale in the third quarter of 1998 of certain niche-market asset
management operations, which reduced revenues and Adjusted EBITDA by $5.7
million and $4.0 million, respectively. Additionally in 1998, revenues and
Adjusted EBIDTA benefited from an improvement in receivable collections, which
permitted a $4.7 million reduction in billing reserve requirements. Excluding
these two items in 1998, revenue and Adjusted EBITDA increased modestly in 1999
over 1998. As a result of management's efforts to renegotiate certain contracts,
average fees have increased offsetting reduced volumes in home sales, revenue
producing referrals to third parties and household goods moves. In addition,
global services revenue and Adjusted EBITDA improved in 1999. Also in 1999,
revenues and Adjusted EBITDA were negatively impacted by higher borrowing costs
and lower interest income from customers. Operating expenses decreased $4.5
million, principally from cost savings in regional operations, reduced
government home sale expenses and the sale of certain asset management
operations discussed above. Such operating expense reductions were partially
offset by increased investment in information technology.
Our Parent Company contributed its fuel card business subsidiaries, Wright
Express Corporation ("WEX") and The Harpur Group, Ltd. ("Harpur") to the Company
in April 1999. As both entities were under common control, such transaction has
been accounted for in a manner similar to a pooling of interests. Accordingly,
financial results for the three months ended March 31, 1998 were restated to
include the operating results of the contributed Parent Company subsidiaries for
such quarterly period. The operating results of Harpur are included from January
20, 1998, the date on which Harpur was acquired by the Parent Company and
accordingly, when common control was established.
Inclusive of the contributed Parent Company fuel card businesses, fleet segment
revenues increased $5.2 million (5%) and Adjusted EBITDA decreased $7.7 million
(17%), respectively, in first quarter 1999 compared to first quarter 1998
contributing to a decrease in the Adjusted EBITDA margin from 48% to 38%.
Contributing to the revenue increase was a 10% increase in service fee revenue
and a 1% increase in fleet leasing revenue. The number of service cards and
leased vehicles increased by approximately 562,300 (16%) and 22,100 (7%),
respectively. Increased operating expenses associated with the development of
new products, higher borrowing costs and the receipt in 1998 of access fees
related to a key vendor arrangement contributed to the decrease in Adjusted
EIBTDA from the first quarter 1998 to the first quarter 1999.
Liquidity and Capital Resources
We manage our 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. Financial covenants are designed to
ensure our self-sufficient liquidity status. Financial covenants include
restrictions on dividends and other distributions payable to the Parent Company
and loans to the Parent Company from us, limitations on our ratio of debt to
equity, and certain other separate financial restrictions.
Our exposure to interest rate and liquidity risk is minimized by effectively
matching floating and fixed interest rate and maturity characteristics of
funding to related assets, varying short and long-term domestic and
international funding sources, and securing available credit under committed
banking facilities. Using historical information, we project the time period
that a client's vehicle will be in service or the length of time that a home
will be held before being sold on behalf of the client. Once the relevant asset
characteristics are projected, we generally match 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 services, we fund
the mortgage loans on a short-term basis until the mortgage loans are sold 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. Financial derivatives are
also used as a hedge to minimize earnings volatility as it relates to mortgage
servicing assets.
We support purchases of leased vehicles, originated mortgages and advances under
relocation contracts primarily by issuing commercial paper, medium term notes
and by maintaining securitized obligations. Such financing is included in
liabilities under management and mortgage programs since such debt corresponds
directly with high quality related assets. We continue to pursue opportunities
to reduce our borrowing requirements by securitizing increasing amounts of our
high quality assets. We currently have an agreement, expiring May 2001 under
which an unaffiliated Buyer (the "Buyer") commits to purchase, at our option,
mortgage loans originated by us on a daily basis, up to the Buyer's asset limit
of $2.4 billion. Under the terms of this sale agreement, we retain the servicing
rights on the mortgage loans sold to the Buyer and provide the Buyer with the
option to sell or securitize the mortgage loans into the secondary market. At
March 31, 1999, we were servicing approximately $1.8 billion of mortgage loans
owned by the Buyer.
Our long-term and short-term credit ratings remain A3/P2, A-/A2, A+/F1 and A+/D1
with Moody's Investors, Inc., Standard & Poor's Corporation, Fitch IBCA and Duff
& Phelps Credit Rating Co., respectively. (A security rating is not a
recommendation to buy, sell or hold securities and is subject to revision or
withdrawal at any time).
We expect to continue to maximize our access to global capital markets by
maintaining the quality of our 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, we utilize
the United States, European and Canadian commercial paper markets, as well as
other cost-effective short-term instruments. In addition, we will continue to
utilize the public and private debt markets as sources of financing. Augmenting
these sources, we will continue to manage outstanding debt with the potential
sale or transfer of managed assets to third parties while retaining fee-related
servicing responsibility. At March 31, 1999, aggregate borrowings were comprised
of commercial paper, medium-term notes, securitized obligations and other
borrowings of $2.2 billion, $2.3 billion, $1.7 billion, and $0.1 billion,
respectively.
We have an effective shelf registration statement on file with the Securities
and Exchange Commission ("SEC"), providing for the aggregate issuance of up to
$3.0 billion of medium-term note debt securities. These securities may be
offered from time to time, together or separately, based on terms to be
determined at the time of sale. The proceeds will be used to finance assets we
manage for our clients and for general corporate purposes. As of March 31, 1999,
we had approximately $2.3 billion of medium-term notes outstanding under this
shelf registration statement.
Securitized Obligations
We maintain four separate financing facilities, the outstanding borrowings of
which are securitized by corresponding assets under management and mortgage
programs. Such securitized obligations are described below.
Mortgage Facility. We maintain a 364-day financing agreement, expiring in
December 1999, to sell mortgage loans under an agreement to repurchase (the
"Agreement") such mortgages. The Agreement is collateralized by the underlying
mortgage loans held in safekeeping by the custodian to the Agreement. The total
commitment under this Agreement is $500.0 million and is renewable on an annual
basis at the discretion of the lender in accordance with the securitization
agreement. Mortgage loans financed under this Agreement at March 31, 1999
totaled $336.5 million.
Relocation Facilities. We maintain a 364-day asset securitization agreement
expiring in December 1999 under which an unaffiliated buyer has committed to
purchase an interest in the rights to payment related to certain of our
relocation receivables. The revolving purchase commitment provides for funding
up to a limit of $325.0 million and is renewable on an annual basis at the
discretion of the lender in accordance with the securitization agreement. Under
the terms of this agreement, we retain the servicing rights related to the
relocation receivables. At March 31, 1999, we were servicing $248.3 million of
assets which were funded under this agreement.
We also maintain an asset securitization agreement, with a separate unaffiliated
buyer, which has a purchase commitment up to a limit of $350.0 million. The
terms of this agreement are similar to the aforementioned facility, whereby we
retain the servicing rights on the rights of payment related to certain of our
relocation receivables. At March 31, 1999, we were servicing $100.0 million of
assets eligible for purchase under this agreement.
Fleet Facilities. We maintain two secured financing transactions each expiring
December 2003 through our two wholly-owned subsidiaries, TRAC Funding and TRAC
Funding II. Such subsidiaries hold secured leased assets (specified beneficial
interests in a trust which owns the leased vehicles and the leases). Secured
leased assets held by the subsidiaries totaling $600.0 million and $725.3
million, respectively, were initially contributed by us. At March 31, 1999,
outstanding loans to TRAC Funding and TRAC Funding II amounted to $446.9 million
and $536.9 million, respectively, and were secured by the specified beneficial
interests in the trust. Monthly loan repayments conform to the amortization of
the leased vehicles with the repayment of the outstanding loan balance required
at time of disposition of the vehicles. Interest on the loans is based upon the
conduit commercial paper issuance cost and committed bank lines priced on a
London Interbank Offered Rate basis. Repayments of loans are limited to the cash
flows generated from the leases represented by the specified beneficial
interests in the trust.
To provide additional financial flexibility, our current policy is to ensure
that minimum committed facilities aggregate 100 percent of the average amount of
outstanding commercial paper. We maintain $2.65 billion of unsecured committed
credit facilities, which are backed by domestic and foreign banks. The
facilities are comprised of $1.25 billion of syndicated lines of credit maturing
in March 2000 and $1.25 billion of syndicated lines of credit maturing in the
year 2002. In addition, we have a $150 million revolving credit facility, which
matures in December 1999, and other uncommitted lines of credit with various
financial institutions, which were unused at December 31, 1998. We closely
evaluate not only the credit of the banks, but also the terms of the various
agreements to ensure ongoing availability. The full amount of our committed
facilities at December 31, 1998 was undrawn and available. We believe that our
current policy provides adequate protection should volatility in the financial
markets limit our access to commercial paper or medium-term notes funding. We
continually seek additional sources of liquidity to accommodate asset growth and
to provide further protection from volatility in the financial markets.
Pursuant to a covenant in our indenture with The First National Bank of Chicago,
as trustee, relating to our medium-term notes, we are restricted from paying
dividends, making distributions, or making loans to Cendant to the extent that
such payments are collectively in excess of 40% of our consolidated net income
(as defined in the covenant) for each fiscal year. We can distribute to Cendant
10% of any extraordinary gains from asset sales and capital contributions
previously made to us by Cendant. Notwithstanding the foregoing, we are
prohibited under such covenant from paying dividends or making loans to Cendant
if upon giving effect to such dividends and/or loan, our debt to equity ratio
exceeds 8 to 1, at the time of the dividend or loan, as the case may be.
Cash Flows
Cash flows provided by operating activities increased $657.0 million from $150.9
million in 1998 to $807.9 million in 1999. The increase in operating cash flows
primarily reflects a $619.8 million net decrease in mortgage loans held for sale
which reflects loan sales to secondary markets in excess of loan originations.
Net cash used in investing activities increased $166.5 million in 1999 over 1998
which is primarily reflective of our incremental net investments in assets under
management and mortgage programs. Net cash used in financing activities
increased $818.9 million in 1999 over 1998 primarily due to net repayments on
fundings for our investments in assets under management and mortgage programs.
Litigation
In April 1998, our Parent Company publicly announced that it discovered
accounting irregularities in the former business units of CUC International Inc.
Such discovery prompted investigations into such matters by the Parent Company
and the Audit Committee of the Parent Company's Board of Directors. As a result
of the findings from the investigations, the Parent Company restated its
previously reported financial results for 1997, 1996 and 1995. Since such
announcement, more than 70 lawsuits claiming to be class actions, two lawsuits
claiming to be brought derivatively on the Parent Company's behalf and several
individual lawsuits have been filed in various courts against the Parent Company
and other defendants. The Court has ordered consolidation of many of the
actions.
The SEC and the United States Attorney for the District of New Jersey are
conducting investigations relating to the matters referenced above. The SEC
advised the Parent Company that its inquiry should not be construed as an
indication by the SEC or its staff that any violations of law have occurred. As
a result of the findings from the investigations, the Parent Company made all
adjustments considered necessary which are reflected in its financial
statements. However, the Parent Company can provide no assurances that
additional adjustments will not be necessary as a result of these government
investigations.
The Parent Company does not believe that it is feasible to predict or determine
the final outcome of these proceedings or investigations or to estimate the
amount or potential range of loss with respect to these proceedings or
investigations. The possible outcomes or resolutions of the proceedings could
include judgements against the Parent Company or settlements and could require
substantial payments by the Parent Company. In addition, the timing of the final
resolution of the proceedings or investigations is uncertain. We believe that
material adverse outcomes with respect to such Parent Company proceedings could
have a material adverse impact on our financial condition and cash flows.
Impact of New Accounting Pronouncements
In October 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 134 "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise", effective for the first fiscal
quarter after December 15, 1998. We adopted SFAS No. 134 effective January 1,
1999. SFAS No. 134 requires that after the securitization of mortgage loans, an
entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other interests based on its ability and intent to
sell or hold those investments. As of January 1, 1999, we reclassified
mortgage-backed securities and other interests retained after the securitization
of mortgage loans from the trading to the available for sale category.
Subsequent to the adoption of SFAS No. 134, such securities and interests are
accounted for in accordance with SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities". The adoption of SFAS No. 134 did not
have a material impact on our financial statements.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". We will adopt SFAS No. 133 effective
January 1, 2000. SFAS No. 133 requires us to record all derivatives in the
consolidated balance sheet as either assets or liabilities measured at fair
value. If the derivative does not qualify as a hedging instrument, the change in
the derivative fair values will be immediately recognized as a gain or loss in
earnings. If the derivative does qualify as a hedging instrument, the gain or
loss on the change in the derivative fair values will either be recognized (i)
in earnings as offsets to the changes in the fair value of the related item
being hedged or (ii) be deferred and recorded as a component of other
comprehensive income and reclassified to earnings in the same period during
which the hedged transactions occur. We have not yet determined what impact the
adoption of SFAS No. 133 will have on our financial statements.
Year 2000 Compliance
The following disclosure is a Year 2000 readiness disclosure statement pursuant
to the Year 2000 Readiness and Disclosure Act.
The Year 2000 presents the risk that information systems will be unable to
recognize and process date-sensitive information properly from and after January
1, 2000. To minimize or eliminate the effect of the Year 2000 risk on our
business systems and applications, we are continually identifying, evaluating,
implementing and testing changes to our computer systems, applications and
software necessary to achieve Year 2000 compliance. We selected a team of
managers to identify, evaluate and implement a plan to bring all of our critical
business systems and applications into Year 2000 compliance prior to December
31, 1999. The Year 2000 initiative consists of four phases: (i)identification of
all critical business systems subject to Year 2000 risk (the "Identification
Phase"); (ii) assessment of such business systems and applications to determine
the method of correcting any Year 2000 problems (the "Assessment Phase"); (iii)
implementing the corrective measures (the "Implementation Phase"); and (iv)
testing and maintaining system compliance (the "Testing Phase"). We have
substantially completed the Identification and Assessment Phases and have
identified and assessed five areas of risk: (i) internally developed business
applications; (ii) third party vendor software, such as business applications,
operating systems and special function software; (iii) computer hardware
components; (iv) electronic data transfer systems between us and our customers;
and (v) embedded systems, such as phone switches, check writers and alarm
systems. Although no assurance can be made, we believe that substantially all of
our systems, applications and related software that are subject to Year 2000
compliance risk have been identified and that we have either implemented or
initiated the implementation of a plan to correct such systems that are not Year
2000 compliant. In addition, as part of our assessment process we are developing
contingency plans as considered necessary. Substantially all of our mission
critical systems have been remediated during 1998. However, we cannot directly
control the timing of certain Year 2000 compliant vendor products and in certain
situations, exceptions to the December 1998 date have been authorized. We are
closely monitoring those situations and intend to complete testing efforts and
any contingency implementation efforts prior to December 31, 1999. Although we
have begun the Testing Phase, we do not anticipate completion of the Testing
Phase until sometime prior to December 1999.
We rely on third party service providers for services such as
telecommunications, internet service, utilities, components for our embedded and
other systems and other key services. Interruption of those services due to Year
2000 issues could have a material adverse impact on our operations. We initiated
an evaluation of the status of such third party service providers' efforts to
determine alternative and contingency requirements. While approaches to reducing
risks of interruption of business operations vary by business unit, options
include identification of alternative service providers available to provide
such services if a service provider fails to become Year 2000 compliant within
an acceptable timeframe prior to December 31, 1999.
The total cost of our Year 2000 compliance plan is anticipated to be $24
million. Approximately $19 million of these costs had been incurred through
March 31, 1999 and we expect to incur the balance of such costs to complete the
compliance plan. We are expensing and capitalizing the costs to complete the
compliance plan in accordance with appropriate accounting policies. Variations
from anticipated expenditures and the effect on our future results of operations
are not anticipated to be material in any given year. However, if Year 2000
modifications and conversions are not made, including modifications by our third
party service providers, or are not completed in time, the Year 2000 problem
could have a material impact on our operations, cash flows and financial
condition. At this time, we believe the most likely "worst case" scenario
involves potential disruptions in our operations as a result of the failure of
services provided by third parties.
The estimates and conclusions herein are forward-looking statements and are
based on our best estimates of future events. Risks of completing the plan
include the availability of resources, the ability to discover and correct the
potential Year 2000 sensitive problems which could have a serious impact on
certain operations and the ability of our service providers to bring their
systems into Year 2000 compliance.
Forward-Looking Statements
We make statements about our future results in this quarterly report that may
constitute "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are based on our
current expectations and the current economic environment. We caution you that
these statements are not guarantees of future performance. They involve a number
of risks and uncertainties that are difficult to predict. Our actual results
could differ materially from those expressed or implied in the forward-looking
statements. Important assumptions and other important factors that could cause
our actual results to differ materially from those in the forward-looking
statements, include, but are not limited to:
o The resolution or outcome of the pending litigation and government
investigations relating to the previously announced accounting
irregularities at the Parent Company;
o Our ability to successfully divest non-strategic assets;
o Our ability to develop and implement operational and financial systems to
manage rapidly growing operations;
o Competition in our existing and potential future lines of business;
o Our ability to obtain financing on acceptable terms to finance our growth
strategy and for us to operate within the limitations imposed by financing
arrangements; and
o Our ability and our vendors' and customers' ability to complete the
necessary actions to achieve a Year 2000 conversion for computer systems
and applications.
We derive the forward-looking statements in this quarterly report from the
foregoing factors and from other factors and assumptions, and the failure of
such assumptions to be realized as well as other factors may also cause actual
results to differ materially from those projected. We assume no obligation to
publicly correct or update these forward-looking statements to reflect actual
results, changes in assumptions or changes in other factors affecting such
forward-looking statements or if we later become aware that they are not likely
to be achieved.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In normal operations, we must deal with effects of changes in interest rates and
currency exchange rates. The following discussion presents an overview of how
such changes are managed and a view of their potential effects.
We use various financial instruments, particularly interest rate and currency
swaps, but also options, floors and currency forwards, to manage our respective
interest rate and currency risks. We are exclusively an end user of these
instruments, which are commonly referred to as derivatives. Established
practices require that derivative financial instruments relate to specific
asset, liability or equity transactions or to currency exposure.
The SEC requires that registrants include information about potential effects of
changes in interest rates and currency exchange in their financial statements.
Although the rules offer alternatives for presenting this information, none of
the alternatives is without limitations. The following discussion is based on
so-called "shock tests", which model effects of interest rate and currency
shifts on the reporting company. Shock tests, while probably the most meaningful
analysis permitted, are constrained by several factors, including the necessity
to conduct the analysis based on a single point in time and by their inability
to include the extraordinarily complex market reactions that normally would
arise from the market shifts modeled. While the following results of shock tests
for interest rate and currencies may have some limited use as benchmarks, they
should not be viewed as forecasts.
o One means of assessing exposure to interest rate changes is a
duration-based analysis that measures the potential loss in net earnings
resulting from a hypothetical 10% change in interest rates across all
maturities (sometimes referred to as a "parallel shift in the yield
curve"). Under this model, it is estimated that, all else constant, such an
increase, including repricing effects in the securities portfolio, would
not materially effect our 1999 net earnings based on current positions.
o One means of assessing exposure to changes in currency exchange rates is to
model effects on reported earnings using a sensitivity analysis. The three
months ended March 31, 1999 consolidated currency exposures, including
financial instruments designated and effective as hedges, were analyzed to
identify our assets and liabilities denominated in other than their
relevant functional currency. Net unhedged exposures in each currency were
then remeasured assuming a 10% change in currency exchange rates compared
with the U.S. dollar. Under this model, it is estimated that, all else
constant, such a change would not materially effect our 1999 net earnings
based on current positions.
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 12 - Computation of ratio of earnings to fixed charges
Exhibit 27 - Financial data schedule (for electronic
transmission only)
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly cause this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PHH CORPORATION
By: /s/ David M. Johnson
David M. Johnson
Senior Executive Vice President and
Chief Financial Officer
By: /s/ Jon F. Danski
Jon F. Danski
Executive Vice President, Finance
(Principal Accounting Officer)
Date: May 14, 1999