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 JANUARY 31, 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.)
11333 McCormick Road, Hunt Valley, Maryland 21031
(Address of principal executive offices) (Zip Code)
(410) 771-3600
(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
___ ___
Number of shares of PHH Corporation common stock outstanding on February 28,
1997 was 35,119,716.
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Total number of pages--19
PHH CORPORATION
INDEX
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Page No.
PART I--FINANCIAL INFORMATION:
Item 1 - Financial Statements
Condensed Consolidated Statements of Income--Three
Months and Nine Months Ended January 31, 1997
and 1996 3
Condensed Consolidated Balance Sheets--
January 31, 1997 and April 30, 1996 4
Condensed Consolidated Statements of Cash Flows--
Nine Months Ended January 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Position and Results of Operations 8
PART II--OTHER INFORMATION:
Item 6 - Exhibits and Form 8-K. 15
Index to Exhibits 16
Signatures 19
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PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
PHH CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands except per share data)
Three Months Ended Nine Months Ended
January 31, January 31,
---------------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Vehicle management services $ 369,977 $ 344,515 $ 1,054,379 $ 1,012,568
Real estate services 181,572 192,559 592,227 604,075
Mortgage banking services 69,230 49,643 203,968 141,701
--------- ---------- ----------- -----------
620,779 586,717 1,850,574 1,758,344
--------- ---------- ----------- -----------
Operating expenses:
Depreciation on vehicles under
operating leases 246,826 236,553 729,045 698,949
Costs, including interest, of
carrying and reselling homes 147,725 161,083 482,237 508,115
Direct costs of mortgage banking
services 30,595 20,405 87,864 48,536
Interest 58,059 57,727 171,256 167,111
Selling, general and administrative 86,701 77,869 252,223 237,673
--------- ---------- ----------- -----------
569,906 553,637 1,722,625 1,660,384
--------- ---------- ----------- -----------
Income before income taxes 50,873 33,080 127,949 97,960
Income taxes 21,298 13,598 52,636 40,613
--------- ---------- ----------- -----------
Net income $ 29,575 $ 19,482 $ 75,313 $ 57,347
========= ========== =========== ===========
Net income per share $ .79 $ .54 $ 2.08 $ 1.63
========= ========== =========== ===========
See accompanying notes.
-3-
Item 1. Financial Statements (Continued).
PHH CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
January 31, 1997 April 30, 1996
---------------- --------------
(Unaudited)
ASSETS
Cash $ 24,100 $ 9,288
Restricted cash 89,849 --
Accounts receivable, less allowance for
doubtful accounts of $6,188 at January 31,
1997 and $5,478 at April 30, 1996 516,956 468,938
Carrying costs on homes under management 53,166 46,560
Mortgage loans held for sale 771,121 874,794
Mortgage servicing rights and fees 241,648 230,209
Property and equipment, net 90,136 93,089
Goodwill, net 47,089 49,081
Other assets 178,300 117,999
---------- ----------
2,012,365 1,889,958
---------- ----------
ASSETS UNDER MANAGEMENT PROGRAMS
Net investment in leases and leased vehicles 3,414,178 3,216,224
Equity advances on homes 643,637 566,808
---------- ----------
4,057,815 3,783,032
---------- ----------
$6,070,180 $5,672,990
========== ==========
LIABILITIES
Accounts payable and accrued expenses $ 368,881 $ 434,109
Advances from clients and deferred revenue 116,533 96,439
Other debt 749,687 903,442
Deferred income taxes 237,200 191,700
---------- ----------
1,472,301 1,625,690
---------- ----------
LIABILITIES UNDER MANAGEMENT PROGRAMS 3,920,146 3,438,804
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, authorized 3,000,000 shares -- --
Common stock, no par value, authorized
75,000,000 shares; issued and out-
standing 34,988,485 shares at January 31,
1997 and 34,661,524 shares at April 30,
1996 102,843 96,081
Cumulative foreign currency translation
adjustment (16,442) (23,483)
Retained earnings 591,332 535,898
---------- ----------
677,733 608,496
---------- ----------
$6,070,180 $5,672,990
========== ==========
See accompanying notes.
-4-
Item 1. Financial Statements (Continued).
PHH CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements Of Cash Flows
(Unaudited)
Nine Months Ended January 31,
(In thousands) 1997 1996
---- ----
Operating Activities:
Net income $ 75,313 $ 57,347
Adjustments to reconcile income to cash
provided by operating activities:
Depreciation on vehicles under operating leases 729,045 698,949
Other depreciation and amortization 25,073 24,069
Amortization and write-down of
capitalized servicing rights and fees 44,987 25,499
Additions to originated mortgage servicing rights (76,003) (62,895)
Additions to excess mortgage servicing fees (46,796) (45,958)
Gain on sales of servicing rights (8,924) (3,386)
Deferred income taxes 44,851 40,668
Gain on sale of assets (20,444) --
Changes in:
Accounts receivable (42,077) (30,021)
Carrying costs on homes under management (4,841) (16,940)
Mortgage loans held for sale 103,673 (72,654)
Accounts payable and accrued expenses (67,428) (19,600)
Advances from clients and deferred revenue 19,201 27,813
All other operating activity (6,193) (42,360)
------------ -----------
Cash provided by operating activities 769,437 580,531
----------- -----------
Investing Activities:
Investment in leases and leased vehicles (1,347,906) (1,362,639)
Repayment of investment in leases and leased vehicles 443,940 415,490
Equity advances on homes under management (2,434,953) (3,678,051)
Repayment of advances on homes under management 2,364,564 3,441,497
Purchases of mortgage servicing rights -- (14,893)
Proceeds from sales of mortgage servicing rights 21,760 3,426
Additions to property and equipment, net of dispositions (16,642) (14,590)
Proceeds from the sale of assets 21,900 --
Funding of grantor trusts (89,849) --
All other investing activities (3,490) (4,675)
------------ -----------
Cash used in investing activities (1,040,676) (1,214,435)
------------ -----------
Financing Activities:
Net change in borrowings with terms of less than 90 days 791,218 (7,995)
Proceeds from issuance of other borrowings 1,348,118 1,604,268
Principal payment on other borrowings (1,818,787) (964,248)
Stock option plan transactions 6,762 12,309
Payment of dividends (19,879) (17,488)
------------ -----------
Cash provided by financing activities 307,432 626,846
----------- -----------
Effect of exchange rate changes on cash (21,381) 10,460
------------ -----------
Increase in cash 14,812 3,402
Cash at beginning of period 9,288 3,412
----------- -----------
Cash at end of period $ 24,100 $ 6,814
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 207,959 $ 197,025
=========== ===========
Cash paid for income taxes $ 8,126 $ 4,310
=========== ===========
See accompanying notes.
-5-
Item 1. Financial Statements (Continued).
PHH CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements included in this Form 10-Q reflect all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
of the results of operations for the periods presented. 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 annual report included as part of Form 10-K
for the year ended April 30, 1996.
Capital Stock and Net Income Per Share
On June 24, 1996, the Board of Directors authorized a two-for-one common stock
split which was distributed on July 31, 1996, to stockholders of record on July
5, 1996. All per share amounts herein and data as to outstanding common stock
have been adjusted for the common stock split.
Net income per share is computed on the basis of the weighted average number of
shares of common stock outstanding during each period and common stock
equivalents arising from the assumed exercise of outstanding stock options under
the treasury stock method. See Exhibit 11 to this Form 10-Q which details the
computation of net income per share.
Reclassifications
Certain reclassifications have been made to the prior years' condensed
consolidated financial statements for comparative purposes.
New Accounting Pronouncements
On January 1, 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" (SFAS No. 125.) 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 provision of SFAS No. 115
"Accounting for Certain Investments in Debt and Equity Securities." The Company
has reclassified a portion of its excess servicing fees to interest-only strips
which are included in other assets at January 31, 1997. The effect of adopting
SFAS No. 125 was not material to the Company's operations or financial
condition.
CONTINGENT LIABILITIES
The Company and its subsidiaries are involved in pending litigation of the usual
character incidental to the business transacted by them. In the opinion of
management, such litigation will not have a material effect on the Company's
consolidated financial statements.
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PENDING MERGER
On November 10, 1996, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with HFS Incorporated ("HFS"), and Mercury Acq. Corp.,
a wholly-owned subsidiary of HFS. Pursuant to the Merger Agreement, shares of
the Company's common stock will be converted into a right to receive shares of
HFS's common stock as determined in the Merger Agreement. The Merger is
conditioned, among other things, upon the approval of the Company's and HFS's
shareholders and upon certain regulatory approvals. The merger will be accounted
for as a pooling of interests, and is expected to close in the second quarter of
calendar year 1997.
In connection with the Merger Agreement, on November 13, 1996, the Company and
First Chicago Trust company of New York, as Rights Agent, entered into an
amendment to the Rights Agreement, dated as of March 15, 1996, by and between
the Company and the Rights Agent (the "Rights Agreement"), having the effect of
exempting the events and transactions contemplated by the Merger Agreement from
the Rights Agreement.
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, the Company was
required to fund the trusts for the present value of amounts expected to be paid
under the Plans. In the event the Merger is not consummated and is not likely to
be consummated in the near future, the monies in the trusts will revert to the
Company. At January 31, 1997, the funded amounts of the grantor trusts are shown
as restricted cash in the Condensed Consolidated Balance Sheets.
-7-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
PHH CORPORATION AND SUBSIDIARIES
RESULTS OF OPERATIONS
All comparisons within the following discussion are to the same period of the
previous year, unless otherwise stated.
Consolidated net income and net income per share for the third quarter of fiscal
1997 increased 52 percent to $29.6 million and 46 percent to $.79, respectively.
The increase in the quarter was due to improvement in both vehicle management
services and mortgage banking services with a decline in real estate services.
For the first nine months, consolidated net income and net income per share
increased 31 percent to $75.3 million and 28 percent to $2.08, respectively. The
increases in the nine-month period resulted from improved operations in each of
the Company's business segments, led primarily by the vehicle management
services segment and mortgage banking services while real estate services
results were approximately equal to the prior year.
Consolidated revenues increased 6 percent to $620.8 million and 5 percent to
$1.9 billion for the third quarter and first nine months of fiscal 1997,
respectively. Vehicle management services revenues increased 7 percent to $370.0
million and 4 percent to $1.1 billion for the same periods, primarily from
increased leasing revenues as a result of an increased number of and average
carrying amount of leased vehicles and approximately $17.5 million received on
the sale of 50 percent of the Company's service card assets, partially offset by
a decrease in other vehicle revenues primarily due to a decrease in gains on the
sale of used vehicles. Real estate services revenues decreased 6 percent to
$181.6 million and 2 percent to $592.2 million for the third quarter and the
first nine months of fiscal 1997, respectively, primarily as a result of a 6
percent and 2 percent decrease in transferee homes sold in the third quarter and
first nine months, respectively, partially offset by an increase in revenue due
to an increase of 17 percent and 20 percent, respectively, in the number of
fee-based transactions. Mortgage banking revenue increased 39 percent to $69.2
million and 44 percent to $204.0 million in the third quarter and first nine
months of fiscal 1997, respectively. These increases are primarily due to
servicing revenues generated from a 19 percent growth in the servicing portfolio
from $20.5 billion at January 31, 1996 to $24.4 billion at January 31, 1997 and,
in the nine-month period, from revenues earned on an 8 percent increase in loans
closed. Mortgage services revenues in the third quarter of fiscal 1997 also
included $7.5 million from the sale of mortgage servicing rights and were
negatively affected as the volume of loans closed decreased 3 percent compared
to the same period in the prior year due to a reduction in refinancing activity.
Consolidated expenses increased 3 percent to $569.9 million and 4 percent to
$1.7 billion for the third quarter and first nine months of fiscal 1997,
respectively. Increased depreciation on vehicles under operating leases are
primarily due to increases in leased vehicles as discussed above. Costs,
including interest, of carrying and reselling homes decreased 8 percent and 5
percent for the third quarter and first nine months, respectively, primarily as
a result of the effects of the decrease in homes sold as discussed above. Direct
costs of mortgage banking services increased 50 percent to $30.6 million and 81
percent to $87.9 million for the third quarter and first nine months,
respectively, primarily due to an increase in amortization of servicing rights
and fees and costs associated with the increase in the loan portfolio. These
costs were also affected by the changes in loan closings as discussed above.
Interest expense increased 1 percent and 2 percent for the third quarter and
first nine months of fiscal 1997, respectively, compared with the same periods
in the prior year. The effects of increases in liabilities under management
programs and other debt were substantially offset by the effect of lower
interest rates, except that the average borrowings in the first quarter of
fiscal 1997 were substantially higher than the prior year due to the significant
increase in mortgage loan closings and timing of mortgage loan sales during the
period.
-8-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Cont.)
PHH CORPORATION AND SUBSIDIARIES
Selling, general, and administrative costs increased 11 percent and 6 percent
for the third quarter and first nine months of fiscal 1997, respectively,
compared with the same periods in the prior year. Increases in personnel and
other operating costs to support the growth in real estate services fee-based
transactions and mortgage production and increased US relocation systems costs
during the first quarter, were partially offset by decreases in vehicle
management services costs as a result of effective cost management, reduction in
system spending, reduction in vehicles acquired and by the decrease in the North
American truck fuel management subsidiary (NTS) expenses as this operation was
sold in February 1996. Selling, general, and administrative costs for the third
quarter of fiscal 1997 also include approximately $8 million in compensation and
related expense associated with the sale of service card assets discussed above.
The Company's effective tax rate was 41.1 percent for the first nine months of
fiscal 1997 as compared to 41.5 percent for the same period a year ago.
The Company incurs and pays certain costs on behalf of its clients which include
payments to third parties as a component of its service delivery. These direct
costs are billed to clients and recognized as both revenue and expense.
Additionally, certain other direct costs represent depreciation on vehicles
under operating leases and amortization of mortgage servicing fees. Management
analyzes its business results in terms of net revenues and total operating
expenses. Net revenues, as defined by the Company, include revenues earned
reduced by the direct costs described above, and by related interest required to
fund assets. Operating expenses are all other costs incurred in delivering
services to clients.
Three Months Ended Nine Months Ended
January 31, January 31,
------------------- ---------------------
Operating Income (in thousands) 1997 1996 1997 1996
- - ------------------------------- ---- ---- ---- ----
Net revenues $170,811 $144,480 $482,241 $432,292
Operating expenses 119,938 111,400 354,292 334,332
-------- -------- -------- --------
Total operating income $ 50,873 $ 33,080 $127,949 $ 97,960
======== ======== ======== ========
Vehicle Management Services
Vehicle management services are primarily offered to corporations and government
agencies to assist them in effectively managing their vehicle fleet costs,
reducing in-house administrative costs and enhancing driver productivity.
Asset-based services generally require an investment by the Company and include
new vehicle purchasing, open- and closed-end operating leasing, direct finance
leasing and used vehicle marketing. Fee-based services include maintenance
management programs, expense reporting, fuel management programs, accident and
safety programs and other driver services which generate recurring fee
transactions for managing various aspects of clients' vehicle fleets.
-9-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Cont.)
PHH CORPORATION AND SUBSIDIARIES
Vehicle Management Services:
Three Months Ended Nine Months Ended
January 31, January 31,
---------------------- ----------------------
Operating Income (in thousands) 1997 1996 1997 1996
- - ------------------------------- ---- ---- ---- ----
Net revenues:
Asset-based $ 31,880 $ 32,856 $ 97,626 $ 97,815
Fee-based 29,842 31,377 84,003 88,281
Sale of service card assets 17,500 -- 17,500 --
------ ------ ------- -------
Total net revenues 79,222 64,233 199,129 186,096
Operating expenses 51,448 49,050 138,695 148,535
------ ------ ------- -------
Operating income $ 27,774 $ 15,183 $ 60,434 $ 37,561
====== ====== ======= =======
Net revenues for vehicle management services represent revenues earned, reduced
by depreciation on vehicles under operating leases and related interest. Total
net revenues for this segment increased 23 percent for the third quarter and 7
percent for the first nine months of fiscal 1997. Fiscal 1997 net revenues
include the gain from the sale of the Company's service card assets in January
1997. However, the results of operations of the Company's former North American
truck fuel management subsidiary (NTS, Inc.) which was sold in February 1996,
are included in the fiscal 1996 net revenues. Excluding the gain on the sale of
assets and the NTS results in the prior year, net revenues would have increased
6 percent and 8 percent for the third quarter and first nine months of fiscal
1997, respectively.
Net revenues derived from asset-based products decreased 3 percent for the third
quarter and were approximately the same for the first nine months of fiscal 1997
compared to the same periods in the prior year primarily due to a decrease in
vehicles purchased of 17 percent and 14 percent, respectively, partially offset
by a slight increase in units under management. The decline in vehicle purchases
primarily results from extended lives of client vehicles.
In forming a joint venture, the Company sold 50 percent of its interest in the
service card business to First USA Paymentech, Inc. for $17.5 million. The
effect of the joint venture is to reduce net revenues and operating expense for
PHH fee-based services in the US, while reflecting 50 percent of joint venture
operating income as net revenues. The Company believes the joint venture will
provide opportunities for continued growth in the service card business in
future years.
Net revenues derived from fee-based services decreased 5 percent for both the
third quarter and first nine months of fiscal 1997. However, excluding the NTS,
Inc. operations in fiscal 1996, net revenues derived from fee-based services
increased 18 percent and 20 percent for the third quarter and first nine months
of fiscal 1997, respectively. These increases were due to continued growth in
fuel and truck management programs particularly in the UK but also in the US.
Additionally, maintenance and accident management programs improved, primarily
in the UK. Such increases were partially offset by a decrease in revenues
associated with the Company's US service card business which was transferred to
PHH/Paymentech.
-10-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Cont.)
PHH CORPORATION AND SUBSIDIARIES
Vehicle Management Services:
Vehicle management services operating income increased 83 percent and 61 percent
for the third quarter and first nine months, respectively. Such increases
reflect the improvements in net revenues discussed above, as well as an increase
in operating expenses of 5 percent for the third quarter and a decrease of 7
percent for the first nine months of fiscal 1997. However, excluding the NTS
operations in fiscal 1996, operating expenses would have increased 19 percent
for the third quarter and 6 percent for the first nine months of fiscal 1997.
These increases reflect approximately $8 million in compensation and related
benefit expenses associated with the service card transaction, increased costs
related to the growth in the fuel, truck management, maintenance and accident
management programs discussed above which were partially offset by effective
cost management programs and a reduced level of spending for systems
improvements in North America. Without the effects of the service card
transaction and NTS expense in the prior year, operating income would have
increased 22 percent for the third quarter and the first nine months of fiscal
1997, respectively.
The Company's profitability from vehicle management services is affected by the
number of vehicles managed and related services provided for clients. Therefore,
profitability can be negatively affected by the general economy as corporate
clients exercise a higher degree of fiscal caution by decreasing the size of
their vehicle fleets or by extending the service period of existing fleet
vehicles. Conversely, operating results are positively affected as clients
increasingly choose to outsource their vehicle management service operations.
Results can also be enhanced as the Company expands into new markets, increases
its product diversity, broadens its client base and continues its productivity
and quality improvement efforts.
Real Estate Services
Real estate services primarily consist of the purchase, management and resale of
homes for transferred employees of corporate clients, government agencies and
members of affinity group clients. Asset-based services are defined as
relocation services involving the purchase and resale of a home. Fee-based
services include assistance in selecting homes in destination locations,
marketing homes, moving household goods, property disposition services to
financial institutions, and other ancillary services.
Three Months Ended Nine Months Ended
January 31, January 31,
----------------------- ---------------------
Operating Income (in thousands) 1997 1996 1997 1996
------------------------------- ---- ---- ---- ----
Net revenues:
Asset-based $ 26,636 $ 29,249 $ 82,921 $ 88,475
Fee-based 23,108 19,819 74,234 64,203
Gain on sale of subsidiary -- -- 2,944 --
-------- -------- -------- --------
Total net revenues 49,744 49,068 160,099 152,678
Operating expenses 42,346 40,486 133,299 125,928
-------- -------- -------- --------
Operating income $ 7,398 $ 8,582 $ 26,800 $ 26,750
======== ======== ======== ========
Real estate services net revenues are those earned for services provided to
clients, reduced by direct costs incurred on behalf of clients and related
interest. Total real estate services net revenues increased 1 percent and 5
percent for the third quarter and first nine months of fiscal 1997,
respectively.
Asset-based net revenues decreased 9 percent and 6 percent for the third quarter
and first nine months of fiscal 1997, respectively. The decrease reflects a
reduction in the number of transferee homes sold as well as a change in the
product mix of homes sold as compared to that of the prior year. The reduction
in volume reflects a reduction in group move activity by our clients.
-11-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Cont.)
PHH CORPORATION AND SUBSIDIARIES
Real Estate Services:
Fee-based net revenues increased 17 percent and 16 percent for the third quarter
and first nine months of fiscal 1997, respectively, primarily due to more
household goods moves in the US, increased home finding transactions and
increased referral fees from the Company's network partners. These increases
were partially offset by a decrease in the disposition volume on residential
properties managed for financial institutions in the US as well as a decline in
revenues in the second and third quarters of fiscal 1997, due to the sale of the
Company's site selection consulting operation in July 1996.
Real estate services operating income decreased 14 percent for the third quarter
and was approximately the same as the prior year for the first nine-months of
fiscal 1997 compared to the prior year. These changes reflect the changes in net
revenues discussed above combined with a 5 percent and 6 percent increase in
operating expenses for the third quarter and first nine months of fiscal 1997,
respectively. The changes in operating expenses resulted primarily from
increased staffing costs to support asset-based products and services, volume
growth in fee-based services and an increase in systems costs in the US slightly
offset by decreased expenses in the second and third quarters as a result of the
sale of the Company's site selection consulting operations in the first quarter.
The Company is generally not at risk on its carrying value of homes should there
be a downturn in the housing market. Management anticipates its clients will
continue to reassess their relocation plans as part of cost control measures,
authorizing fewer home purchase transactions while utilizing a greater portion
of fee-based real estate services. Additionally, management anticipates
continued margin pressure in relocation activity in the US and Canada,
especially in the government sector. At the same time, operating results may be
affected positively as clients increasingly choose to outsource their real
estate service needs and as the Company expands into new markets, enhances its
product diversity, broadens its client base and continues its productivity and
quality improvement efforts.
Mortgage Banking Services
Mortgage banking services primarily consist of the origination, sale and
servicing of residential first mortgage loans. The Company markets a variety of
first mortgage products to consumers through relationships with corporations,
affinity groups, government agencies, credit unions, real estate brokerage
firms, banks and other mortgage brokers.
Three Months Ended Nine Months Ended
January 31, January 31,
---------------------- ----------------------
Operating Income (in thousands) 1997 1996 1997 1996
------------------------------- ---- ---- ---- ----
Net revenues:
Loan production $ 24,031 $ 19,766 $ 77,169 $ 54,368
Servicing fees 10,339 11,413 36,920 35,764
Gain on sale of servicing rights 7,475 -- 8,924 3,386
------- ------- ------- ------
Total net revenues 41,845 31,179 123,013 93,518
Operating expenses 26,144 21,864 82,298 59,869
------- ------- ------- ------
Operating income $ 15,701 $ 9,315 $ 40,715 $ 33,649
======= ======= ======= ======
Mortgage banking services net revenues, measured as revenues earned reduced by
direct costs for amortization and payments to third-party service providers,
increased 34 percent for the third quarter and 32 percent for the first nine
months of fiscal 1997.
-12-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Cont.)
PHH CORPORATION AND SUBSIDIARIES
Mortgage Banking Services:
The increases in loan production net revenues resulted from increased margins
realized on loans sold in the second and third quarters and a 4 percent and 13
percent increase in the volume of loans sold for the third quarter and the first
nine-months of fiscal 1997 compared to the same periods in the prior year.
Mortgage loan closings decreased 3 percent from $1.9 billion to $1.8 billion for
the third quarter and increased 8 percent from $5.5 billion to $6.0 billion for
the first nine months compared to the same periods in the prior year. Mortgages
for residential properties being purchased increased to 75 percent from 67
percent and to 81 percent from 75 percent for the third quarter and first nine
months, respectively. The increase in margins on loans sold in the second and
third quarters resulted from more favorable market conditions and from an
increase in the ratio of retail loans closed compared to wholesale loans.
Net servicing fee revenue decreased 9 percent for the third quarter and
increased 3 percent for the first nine months of fiscal 1997. Growth of the
average servicing portfolio was offset by the increased amortization of mortgage
servicing rights. The increased amortization relates primarily to originated
mortgage servicing rights which the Company has been capitalizing since the
beginning of fiscal 1996. The servicing portfolio balance at January 31, 1997,
was $24.4 billion as compared to $20.5 billion at January 31, 1996.
The gain on sale of servicing rights increased due to a higher amount of
servicing rights sold in the first nine months of fiscal 1997 compared to the
same period a year ago. The Company sold $975 million and $1.2 billion of its
servicing portfolio in the third quarter and first nine months of fiscal 1997,
respectively, compared to approximately $295 million in the first nine months of
fiscal 1996. There were no sales of servicing during the third quarter of fiscal
1996.
Mortgage banking services operating income increased 69 percent and 21 percent
for the third quarter and first nine months of fiscal 1997, respectively, due to
higher net revenues, as described above, partially offset by higher operating
expenses. Operating expenses increased in support of volume increases of
mortgage loan production, telemarketing operations, and additional staff
training to support increased business from affinity and financial institution
relationships.
The Company's profitability from mortgage banking services will be affected by
such external factors as capacity within the industry, the level of interest
rates, the strength of the economy, and the related condition of residential
real estate markets. The Company's broad-based marketing strategies, including
further penetration of existing affinity group and credit union clients, signing
new clients, and maintaining its system of delivering mortgages in a
cost-efficient manner, should positively affect operating results in the future.
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 nine months ended
January 31, 1997 cash provided by operating activities increased 33 percent to
$769.4 million primarily due to timing of operating activities, including a
$103.7 million decrease in mortgage loans held for sale in fiscal 1997 compared
with a $72.7 million increase in fiscal 1996, and increased depreciation on
vehicles under operating leases. Cash used in investing activities decreased 14
percent to $1.0 billion in fiscal 1997 primarily as a result of a reduction in
the growth of equity advances on homes during the nine months ended January 31,
1997 compared with the same period in the prior year.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Cont.)
PHH CORPORATION AND SUBSIDIARIES
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. (See Liabilities Under
Management Programs in Notes to Consolidated Financial Statements.) 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.
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 $2.9 billion and $2.2 billion at January 31, 1997 and April 30, 1996,
respectively. At January 31, 1997, $1.5 billion in medium-term notes and $321
million in other debt securities were outstanding compared to $2.1 billion and
$154 million, respectively, at April 30, 1996.
Cash provided by financing activities decreased 51 percent to $307.4 million
primarily as a result of the changes in mortgage loans held for sale and equity
advances on homes as discussed above. The shift of net borrowings from
borrowings with terms of less than 90 days to other borrowings in fiscal 1997
compared with the prior year primarily reflects more favorable conditions in
borrowing under the Company's medium-term note program than from issuing
commercial paper. The effect of the changes in the British pound sterling
exchange rate during fiscal 1997 had a negative impact on the Company's cash
flows compared with the prior year period. 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.
The Company maintains a leverage ratio between 7 to 1 and 8 to 1.
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. Effective March 10, 1997, the
Company replaced its $2.2 billion bilateral unsecured committed credit
facilities with a $2.5 billion syndicated unsecured credit facility. The new
facility is backed by 22 domestic and foreign banks and is comprised of $1.25
billion of lines maturing in 364 days 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 January 31, 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.
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.
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PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
PHH CORPORATION AND SUBSIDIARIES
Exhibits:
(a) Exhibit (11)--Schedule containing information used in the
computation of net income per share.
(b) Exhibit (12)--Schedule containing information used in the
computation of the ratio of earnings to fixed charges.
Reports on Form 8-K.--None
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PHH CORPORATION AND SUBSIDIARIES
Index to Exhibits
-----------------
Exhibit No. Page No.
Exhibit (11) - Schedule containing information used in
the computation of net income per share 17
Exhibit (12) - Schedule containing information used in the
computation of the ratio of earnings to fixed charges 18
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