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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, 2001
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 organization) Identification Number)
6 Sylvan Way 07054
Parsippany, New Jersey (Zip Code)
(Address of principal
executive office)
(973) 428-9700
(Registrant's telephone number, including area code)
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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.
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PHH Corporation and Subsidiaries
Index
Page
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PART I Financial Information
Item 1. Financial Statements
Consolidated Condensed Statements of Income for the three months
ended March 31, 2001 and 2000 1
Consolidated Condensed Balance Sheets as of March 31, 2001 and
December 31, 2000 2
Consolidated Condensed Statements of Cash Flows for the three
months ended March 31, 2001 and 2000 3
Notes to Consolidated Condensed Financial Statements 4
Item 2. Management's Narrative Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risks 13
PART II Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Forward-looking statements in this Annual Report on Form 10-K are subject to
known and unknown risks, uncertainties and other factors which may cause our
actual results, performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. These forward-looking statements were based on
various factors and were derived utilizing numerous important assumptions and
other important factors that could cause actual results to differ materially
from those in the forward-looking statements. Forward-looking statements include
the information concerning our future financial performance, business strategy,
projected plans and objectives.
Statements preceded by, followed by or that otherwise include the words
"believes", "expects", "anticipates", "intends", "project", "estimates",
"plans", "may increase", "may fluctuate" and similar expressions or future or
conditional verbs such as "will", "should", "would", "may" and "could" are
generally forward-looking in nature and not historical acts. You should
understand that the following important factors and assumptions could affect our
future results and could cause actual results to differ materially from those
expressed in such forward-looking statements: the effect of economic conditions
and interest rate changes on the economy on a national, regional or
international basis and the impact thereof on our businesses; the effects of
changes in current interest rates, particularly on our mortgage business; the
resolution or outcome of Cendant's unresolved pending litigation relating to the
previously announced accounting irregularities and other related litigation; our
ability to develop and implement operational and financial systems to manage
growing operations and to achieve enhanced earnings or effect cost savings;
competition in our existing and potential future lines of business and the
financial resources of, and products available to, competitors; our ability to
integrate and operate successfully acquired and merged businesses and risks
associated with such businesses, including the acquisition of the fleet
management business of Avis Group Holdings, Inc., the compatibility of the
operating systems of the combining companies, and the degree to which our
existing administrative and back-office functions and costs and those of the
acquired companies are complementary or redundant; our ability to obtain
financing on acceptable terms to finance our growth strategy and to operate
within the limitations imposed by financing arrangements and rating agencies;
and changes in laws and regulations, including changes in accounting standards
and privacy policy regulation. Other factors and assumptions not identified
above were also involved in the derivation of these forward-looking statements,
and the failure of such other assumptions to be realized as well as other
factors may also cause actual results to differ materially from those projected.
Most of these factors are difficult to predict accurately and are generally
beyond our control.
You should consider the areas of risk described above in connection with any
forward-looking statements that may be made by us. Except for our ongoing
obligations to disclose material information under the federal securities laws,
we undertake no obligation to release publicly any revisions to any
forward-looking statements, to report events or to report the occurrence of
unanticipated events. For any forward-looking statements contained in any
document, we claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PHH Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In millions)
Three Months Ended
March 31,
------------------
2001 2000
----- -----
Revenues
Service fees, net $ 222 $ 168
Fleet leasing 128 --
Other 87 7
----- -----
Net revenues 437 175
----- -----
Expenses
Operating 158 117
Vehicle depreciation, lease charges and interest, net 105 --
General and administrative 26 21
Non-vehicle depreciation and amortization 16 10
Other charges 7 2
----- -----
Total expenses 312 150
----- -----
Income before income taxes 125 25
Provision for income taxes 50 10
----- -----
Income before cumulative effect of accounting change 75 15
Cumulative effect of accounting change, net of tax (35) --
----- -----
Net income $ 40 $ 15
===== =====
See Notes to Consolidated Condensed Financial Statements.
1
PHH Corporation and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions, except share data)
March 31, December 31,
2001 2000
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Assets
Cash and cash equivalents $ 269 $ 288
Receivables, net 515 246
Property and equipment, net 182 159
Investment in convertible preferred stock -- 388
Goodwill, net 558 30
Other assets 699 445
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Total assets exclusive of assets under programs 2,223 1,556
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Assets under management and mortgage programs
Relocation receivables 329 329
Mortgage loans held for sale 917 879
Mortgage servicing rights 1,667 1,653
Vehicle-related, net 3,742 --
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6,655 2,861
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Total assets $ 8,878 $ 4,417
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Liabilities and stockholder's equity
Accounts payable and other current liabilities 649 316
Deferred income 29 31
Deferred income taxes 46 4
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Total liabilities exclusive of liabilities under programs 724 351
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Liabilities under management and mortgage programs
Debt 5,897 2,040
Deferred income taxes 658 476
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6,555 2,516
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Commitments and contingencies (Note 4)
Stockholder's equity
Preferred stock - authorized 3,000,000 shares;
none issued and outstanding -- --
Common stock, no par value - authorized
75,000,000 shares; issued and
outstanding 1,000 shares 799 762
Retained earnings 796 792
Accumulated other comprehensive income (loss) 4 (4)
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Total stockholder's equity 1,599 1,550
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Total liabilities and stockholder's equity $ 8,878 $ 4,417
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See Notes to Consolidated Condensed Financial Statements.
2
PHH Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
Three Months Ended
March 31,
------------------
2001 2000
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Operating Activities
Net income $ 40 $ 15
Adjustments to reconcile net income to net cash
provided by operating activities:
Non-vehicle depreciation and amortization 16 10
Cumulative effect of accounting change 59 --
Non-cash portion of other charges, net (2) 2
Deferred income taxes 27 2
Net change in assets and liabilities, excluding
the impact of acquired businesses:
Receivables (67) 13
Income taxes 6 11
Accounts payable and other current liabilities 12 52
Other, net (49) 7
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Net cash provided by operating activities
exclusive of management
and mortgage programs 42 112
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Management and mortgage programs:
Depreciation and amortization 130 27
Origination of mortgage loans (7,326) (3,916)
Proceeds on sale of and payments
from mortgage loans held for sale 7,276 3,802
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80 (87)
------- -------
Net cash provided by operating activities 122 25
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Investing Activities
Property and equipment additions (16) (6)
Purchases of marketable securities (3) (3)
Net assets acquired (net of cash acquired)
and acquisition-related payments (819) --
Other, net (5) (13)
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Net cash used in investing activities
exclusive of management and mortgage programs (843) (22)
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Management and mortgage programs:
Investment in leased vehicles (308) --
Payments received on investment in leased vehicles 166 --
Equity advances on homes under management (176) (1,619)
Repayment on advances on homes under management 169 1,655
Additions to mortgage servicing rights (48) (139)
Proceeds from sales of mortgage servicing rights 13 35
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(184) (68)
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Net cash used in investing activities (1,027) (90)
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Financing Activities
Net borrowings from Parent 138 --
Payment of dividends (36) --
Other, net (3) (1)
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Net cash provided by (used in)
investing activities exclusive of management
and mortgage programs 99 (1)
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Management and mortgage programs:
Proceeds from borrowings 1,907 777
Principal payments on borrowings (1,149) (1,421)
Net change in short-term borrowings 25 672
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783 28
------- -------
Net cash provided by financing activities 882 27
------- -------
Effect of changes in exchange rates on cash and
cash equivalents 4 --
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Net decrease in cash and cash equivalents (19) (38)
Cash and cash equivalents, beginning of period 288 80
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Cash and cash equivalents, end of period $ 269 $ 42
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See Notes to Consolidated Condensed Financial Statements.
3
PHH Corporation and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unless otherwise noted, all amounts are in millions)
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited Consolidated Condensed Financial Statements
include the accounts and transactions of PHH Corporation and its
subsidiaries (collectively, the "Company" or "PHH"). The Company is a
wholly-owned subsidiary of Cendant Corporation ("Cendant" or the "Parent
Company"). 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 Consolidated Condensed Financial
Statements and Notes thereto are presented.
In management's opinion, the Consolidated Condensed Financial Statements
contain all normal recurring adjustments necessary for a fair presentation
of interim results reported. The results of operations reported for
interim periods are not necessarily indicative of the results of
operations for the entire year or any subsequent interim period. In
addition, management is required to make estimates and assumptions that
affect the amounts reported and related disclosures. Estimates, by their
nature, are based on judgment and available information. Accordingly,
actual results could differ from those estimates. The Consolidated
Condensed Financial Statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.
Certain reclassifications have been made to prior period amounts to
conform to the current period presentation.
Changes in Accounting Policies
On January 1, 2001, the Company adopted the provisions of the Emerging
Issues Task Force ("EITF") Issue No. 99-20, "Recognition of Interest
Income and Impairment on Purchased and Retained Interests in Securitized
Financial Assets." EITF Issue No. 99-20 modified the accounting for
interest income and impairment of beneficial interests in securitization
transactions, whereby beneficial interests determined to have an
other-than-temporary impairment are required to be written down to fair
value. The adoption of EITF Issue No. 99-20 resulted in the recognition of
a non-cash charge of $46 million ($27 million, after tax) during first
quarter 2001 to account for the cumulative effect of the accounting
change.
On January 1, 2001, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which was amended by SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." SFAS No. 133, as amended and interpreted, established
accounting and reporting standards for derivative instruments and hedging
activities. As required by SFAS No. 133, the Company has recorded all such
derivatives at fair value in the Consolidated Condensed Balance Sheet at
January 1, 2001. The adoption of SFAS No. 133 resulted in the recognition
of a non-cash charge of $13 million ($8 million, after tax) in the
Consolidated Condensed Statement of Income on January 1, 2001 to account
for the cumulative effect of the accounting change relating to derivatives
designated in fair value type hedges prior to adopting SFAS No. 133, to
derivatives not designated as hedges and to certain embedded derivatives.
As provided for in SFAS No. 133, the Company also reclassified certain
financial investments as trading securities at January 1, 2001, which
resulted in a pre-tax benefit of $82 million recorded in other revenues
within the Consolidated Condensed Statement of Income.
Derivative Instruments
The Company uses derivative instruments as part of its overall strategy to
manage its exposure to market risks associated with fluctuations in
interest rates, foreign currency exchange rates, prices of mortgage loans
held for sale, anticipated mortgage loan closings arising from commitments
issued and changes in the fair value of its mortgage servicing rights. As
a matter of policy, the Company does not use derivatives for trading or
speculative purposes.
4
o All freestanding derivatives are recorded at fair value either
as assets or liabilities.
o Changes in fair value of derivatives not designated as hedging
instruments and of derivatives designated as fair value
hedging instruments are recognized currently in earnings and
included in other revenues in the Consolidated Condensed
Statement of Income.
o Changes in fair value of the hedged item in a fair value hedge
are recorded as an adjustment to the carrying amount of the
hedged item and recognized currently in earnings.
o The effective portion of changes in fair value of derivatives
designated as cash flow hedging instruments is recorded as a
component of other comprehensive income. The ineffective
portion is reported currently in earnings.
o Amounts included in other comprehensive income are
reclassified into earnings in the same period during which the
hedged item affects earnings.
The Company was party to certain contracts containing embedded
derivatives. As required by SFAS No. 133, embedded derivatives are
required to be bifurcated from their host contracts and recorded at fair
value. The Company had no contracts with embedded derivatives as of March
31, 2001.
Recently Issued Accounting Pronouncement
In September 2000, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities -- a replacement of FASB
Statement No. 125." SFAS No. 140 revises criteria for accounting for
securitizations, other financial-asset transfers and collateral and
introduces new disclosures, but otherwise carries forward most of the
provisions of SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" without amendment.
The Company adopted the disclosure requirements of SFAS No. 140 on
December 31, 2000, as required. All other provisions of SFAS No. 140 will
be adopted after March 31, 2001, as required by the standard. The impact
of adopting the remaining provisions of this standard will not be material
to the Company's financial position or results of operations.
2. Acquisition
Avis Group Holdings, Inc. On March 1, 2001, the Company acquired all of
the outstanding shares of Avis Group Holdings, Inc. ("Avis Group") that
Cendant did not already own for $33.00 per share in cash, or approximately
$994 million, including $40 million of transaction costs and expenses. In
connection with the acquisition, the Company's investment in convertible
preferred stock of an Avis Group subsidiary was recapitalized. The
acquisition was primarily funded from cash on hand and borrowings from
Cendant which were subsequently repaid during first quarter 2001.
Simultaneous with the acquisition, the Company distributed the car rental
operations of Avis Group ("ARAC") to a Cendant subsidiary not within the
Company's ownership structure. Accordingly, the Company currently owns and
operates the fleet management business of Avis Group ("Fleet").
The acquisition has been accounted for using the purchase method of
accounting; accordingly, assets acquired and liabilities assumed were
recorded based upon their estimated fair values at the date of
acquisition. The results of operations of Fleet have been included in the
Consolidated Condensed Statement of Income since the date of acquisition.
The excess of the purchase price over the estimated fair value of the
underlying net assets acquired was allocated to goodwill which will be
amortized over 40 years on a straight-line basis. The allocation of the
excess purchase price is based upon preliminary estimates and assumptions
and is subject to revision when appraisals have been finalized.
Accordingly, revisions to the allocation, which may be significant, will
be recorded by the Company as further adjustments to the purchase price
allocation. The preliminary allocation of the purchase price is summarized
as follows:
5
Amount
-------
Cash consideration $ 937
Fair value of converted options 17
Transaction costs and expenses 40
-------
Total purchase price 994
Book value of Cendant's existing net investment
in Avis Group 406
-------
Cendant's basis in Avis Group 1,400
Portion of basis attributable to ARAC (403)
-------
PHH's basis in Fleet 997
Historical value of net assets acquired of Fleet (451)
Fair value adjustments (26)
-------
Unallocated excess purchase price over net
assets acquired of Fleet $ 520
=======
In connection with the acquisition, the Company continues to evaluate the
integration of the operations of Fleet and believes that it may incur
transition costs relating to such integration. Transition costs may result
from integrating operating systems, relocating employees, closure of
facilities, reducing duplicative efforts and exiting and consolidating
certain other activities. These costs will be recorded on the Company's
Consolidated Condensed Balance Sheet as adjustments to the purchase price
or on the Company's Consolidated Condensed Statement of Income as
expenses.
Pro forma net revenues, income before cumulative effect of accounting
change and net income would have been as follows had the acquisition of
Fleet occurred on January 1, for each of the periods presented:
Three Months Ended
March 31,
------------------
2001 2000
---- ----
Net revenues $690 $528
Income before cumulative effect of
accounting change 76 16
Net income 36 16
The pro forma results do not give effect to any synergies expected to
result from the acquisition of Fleet. The pro forma results are not
necessarily indicative of what actually would have occurred if the
acquisition had been consummated on January 1, 2001 and 2000, nor are they
necessarily indicative of future consolidated results.
3. Debt
Medium-Term Notes. During first quarter 2001, the Company issued $650
million of medium-term notes under an existing shelf registration
statement. These notes bear interest at a rate of 8 1/8% per annum and
mature in February 2003.
Credit Facility. During first quarter 2001, the Company renewed its $750
million syndicated revolving credit facility, which was due in 2001. The
new facility bears interest at LIBOR plus an applicable margin, as defined
in the agreement, and terminates on February 21, 2002. The Company is
required to pay a per annum utilization fee of .25% if usage under the
facility exceeds 25% of aggregate commitments. Under the new facility, any
loans outstanding as of February 21, 2002 may be converted into a term
loan with a final maturity of February 21, 2003.
4. Commitments and Contingencies
In June 1999, the Company disposed of certain businesses. The dispositions
were structured as a tax-free reorganization and, accordingly, no tax
provision was recorded on a majority of the gain. However, pursuant to a
recent interpretive ruling, the Internal Revenue Service ("IRS") has taken
the position that similarly structured transactions do not qualify as
tax-free reorganizations under the Internal Revenue Code Section
368(a)(1)(A). If the transaction is not considered a tax-free
reorganization, the resultant incremental liability could range between
$10 million and $170 million depending upon certain factors, including
utilization of tax attributes. Notwithstanding the IRS interpretive
ruling, the Company believes that, based upon analysis of current tax law,
its position would prevail, if challenged.
Cendant is involved in litigation asserting claims associated with the
accounting irregularities discovered in former CUC business units outside
of the principal common stockholder class action litigation. Cendant does
not believe that it is feasible to predict or determine the final outcome
or resolution of these unresolved proceedings. However, Cendant does not
believe that the impact of such unresolved proceedings should result in a
material liability to the Company in relation to its consolidated
financial position or liquidity.
The Company is 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.
6
5. Comprehensive Income
The components of comprehensive income are summarized as follows:
Three Months Ended
March 31,
------------------
2001 2000
---- ----
Net income $ 40 $ 15
Other comprehensive income (loss):
Currency translation adjustments (3) (1)
Unrealized gains on marketable securities,
net of tax 11 1
---- ----
Total comprehensive income $ 48 $ 15
==== ====
The after-tax components of accumulated other comprehensive income (loss)
for the three months ended March 31, 2001 are as follows:
Unrealized Accumulated
Currency Gains/(Losses) on Other
Translation Marketable Comprehensive
Adjustments Securities Income (Loss)
----------- ---------- -------------
Balance, January 1, 2001 $ (1) $ (3) $ (4)
Current period change (3) 11 8
---- ---- ----
Balance, March 31, 2001 $ (4) $ 8 $ 4
==== ==== ====
6. Derivatives
Consistent with its historical risk management policies, the Company
entered into foreign currency forwards during first quarter 2001 to manage
currency fluctuation risks during fiscal year 2001. The Company also
entered into interest rate swaps and instruments with option features to
hedge interest rate risks on certain fleet management and mortgage-related
asset and liability accounts. Such instruments were also used by the
Company to create a desired mix of fixed and floating rate debt.
Foreign Currency Risk
The Company uses forward contracts to manage its exposure to changes in
foreign currency exchange rates. These risks include non-functional
currency receivables, earnings of foreign entities and forecasted royalty
streams in non-functional currencies. The Company primarily hedges its
foreign currency exposure to the British pound, Canadian dollar and Euro.
The majority of the forward contracts do not qualify for hedge accounting
treatment under SFAS No. 133. The fluctuations in the value of these
foreign currency forwards do, however, effectively offset the impact of
changes in the value of the underlying risk that they are intended to
hedge.
Interest Rate Risk
The debt used to finance much of the Company's operations and its
mortgage-related assets is subject to volatility due to interest rate
fluctuations. The Company uses various hedging strategies and derivative
financial instruments to create a desired mix of fixed and floating rate
debt and interest rate related assets. Derivative instruments currently
used in managing the Company's exposure to interest rate fluctuations
include swaps and instruments with option features. A combination of fair
value hedges, cash flow hedges and financial instruments that do not
qualify for hedge accounting treatment under SFAS No. 133 are used to
manage the Company's portfolio of interest sensitive assets and
liabilities.
Fair value hedges are used to manage the Company's mortgage servicing
rights, mortgage loans held for sale and medium-term notes. During first
quarter 2001, the Company recorded a loss of $4 million to reflect the
ineffective portion of its fair value hedges. Such amount is included in
net revenues within the Consolidated Condensed Statement of Income.
7
Cash flow hedges are used to manage the interest expense incurred on the
Company's floating rate debt. No ineffectiveness resulted from these cash
flow hedging relationships during first quarter 2001. Derivative gains and
losses included in other comprehensive income are reclassified into
earnings when interest payments are made. During first quarter 2001, the
amount of gains or losses reclassified from other comprehensive income to
earnings was not material. Over the next 12 months, derivative losses of
approximately $4 million are expected to be reclassified into earnings.
Certain of the Company's forecasted cash flows are hedged up to three
years into the future.
7. Segment Information
In connection with the acquisition of Avis Group during first quarter
2001, the Company realigned the operations and management of certain of
its businesses. Accordingly, the Company's segment reporting structure now
encompasses the following two reportable segments: Real Estate Services
and Fleet Management. Segment information for the three months ended March
31, 2000 has been restated to conform to the current reporting structure.
A description of services provided within each of the Company's reportable
segments is as follows:
o Real Estate Services - consists of the Company's mortgage and
relocation businesses.
o Fleet Management - consists of the Company's fleet management
business.
Management evaluates each segment's performance based upon a modified
earnings before interest, income taxes and depreciation and amortization
calculation. For this purpose, Adjusted EBITDA is defined as earnings
before non-operating interest, income taxes and non-vehicle depreciation
and amortization, adjusted to exclude certain items which are of a
non-recurring or unusual nature and are not measured in assessing segment
performance or are not segment specific.
Three Months Ended March 31,
--------------------------------------------
2001 2000
--------------------- ---------------------
Adjusted Adjusted
Revenues EBITDA Revenues EBITDA
-------- ------ -------- ------
Real Estate Services $222 $ 52 $168 $ 30
Fleet Management 128 9 -- --
---- ---- ---- ----
Total Reportable Segments 350 61 168 30
Corporate and Other 87 87 7 7
---- ---- ---- ----
Total $437 $148 $175 $ 37
==== ==== ==== ====
Included in Corporate and Other are the results of operations of the
Company's non-strategic businesses, unallocated corporate overhead and the
eliminations of transactions between segments.
Provided below is a reconciliation of Adjusted EBITDA to income before
income taxes.
Three Months Ended
March 31,
------------------
2001 2000
---- ----
Adjusted EBITDA $ 148 $ 37
Non-vehicle depreciation and amortization (16) (10)
Other charges (7) (2)
----- -----
Income before income taxes $ 125 $ 25
===== =====
----------
8
Item 2. Management's Narrative Analysis of Financial Condition and Results of
Operations
The following discussion should be read in conjunction with our Consolidated
Condensed Financial Statements and accompanying Notes thereto included elsewhere
herein. Unless otherwise noted, all dollar amounts are in millions.
RESULTS OF CONSOLIDATED OPERATIONS - 2001 vs. 2000
On March 1, 2001, we acquired all of the outstanding shares of Avis Group
Holdings, Inc. that Cendant did not already own for $33.00 per share in cash, or
approximately $994 million, including $40 million of transaction costs and
expenses (referred to herein as "the Acquisition"). The Acquisition was
primarily funded from cash on hand and borrowings from Cendant which were
subsequently repaid during first quarter 2001. Simultaneous with the
Acquisition, we distributed the car rental operations of Avis Group to a Cendant
subsidiary not within our ownership structure. Accordingly, we currently own and
operate the fleet management business of Avis Group ("Fleet"). The results of
operations of Fleet have been included in our consolidated results of operations
since the date of acquisition.
Strong contributions from our Real Estate Services segment, the addition of the
operations of Fleet and an $82 million benefit resulting from the
reclassification of certain financial investments as trading securities at
January 1, 2001 contributed to revenue growth of $262 million, or 150%. As a
result of the Acquisition, our expenses increased $162 million, or 108%.
Our overall effective tax rate for continuing operations was 40% in first
quarter 2001 and 2000.
As a result of the above-mentioned items, income before cumulative effect of
accounting change increased $60 million.
RESULTS OF REPORTABLE SEGMENTS
In connection with the Acquisition during first quarter 2001, we realigned the
operations and management of certain of our businesses. Accordingly, our segment
reporting structure now encompasses the following two reportable segments: Real
Estate Services and Fleet Management. Segment information for March 31, 2000 has
been restated to conform to the current reporting structure.
The underlying discussions of each segment's operating results focuses on
Adjusted EBITDA, which is defined as earnings before non-operating interest,
income taxes and non-vehicle depreciation and amortization, adjusted to exclude
certain items which are of a non-recurring or unusual nature and are not
measured in assessing segment performance or are not segment specific. Our
management believes such discussions are the most informative representation of
how management evaluates performance. However, our presentation of Adjusted
EBITDA may not be comparable with similar measures used by other companies.
Three Months Ended March 31, 2001 vs. Three Months Ended March 31, 2000
Adjusted
EBITDA
Revenues Adjusted EBITDA Margin
------------------ ------------------ -----------
% %
2001 2000 Change 2001 2000 Change 2001 2000
---- ---- ------ ---- ---- ------ ---- ----
Real Estate Services $222 $168 32% $ 52 $ 30 73% 23% 18%
Fleet Management 128 -- * 9 -- * * *
---- ---- ---- ----
Total Reportable Segments 350 168 61 30
Corporate and Other(a) 87 7 * 87 7 * * *
---- ---- ---- ----
Total Company $437 $175 $148 $ 37
==== ==== ==== ====
- ----------
* Not meaningful.
(a) Included in Corporate and Other are the results of operations of our
non-strategic businesses, unallocated corporate overhead and the
elimination of transactions between segments.
9
Real Estate Services
Revenues and Adjusted EBITDA increased $54 million (32%) and $22 million (73%),
respectively. Our brands continue to hold leading market positions in employee
relocation services and Cendant Mortgage is now one of the largest retail
mortgage lenders in the United States. The increase in operating results was
principally driven by a significant increase in mortgage loan production,
mortgage servicing portfolio growth and increased service based fees generated
from client relocations.
Revenues from mortgage loans sold increased $34 million (64%), driven by
significant increases in both purchase and refinancing volume during first
quarter 2001. Collectively, mortgage loans sold increased $2.2 billion (59%) to
$5.9 billion. Beginning in January 2001, Merrill Lynch has outsourced its
mortgage originations and servicing operations to us. On a pro forma basis,
inclusive of Merrill Lynch's loan volume, we would have ranked as the second
largest retail mortgage lender in 2000. Closed mortgage loans increased $3.7
billion (97%) to $7.6 billion. This growth consisted of a $2.5 billion
(approximately 700%) increase in refinancings and a $1.3 billion (36%) increase
in purchase mortgage closings. New Merrill Lynch business accounted for 13% of
our mortgage closings in first quarter 2001. A significant portion of mortgages
closed in any quarter will generate revenues in future periods as such loans are
packaged and sold (revenues are recognized upon the sale of the loan, typically
45-60 days after closing). Loan servicing revenues increased $8 million (34%)
due to a $29 billion (56%) increase in the average servicing portfolio. In
conjunction with Merrill Lynch outsourcing its mortgage origination operations
to us, we added $11.3 billion to the servicing portfolio in first quarter 2001.
Service based fees from relocation activities also contributed to the increase
in revenues and Adjusted EBITDA. Relocation referral fees increased $5 million
due to increased market penetration and higher average fees. During first
quarter 2001, we increased our global client base by 46 clients and increased
services to over 100 clients.
Fleet Management
The businesses comprising this segment were acquired in the Acquisition. The
fleet management businesses provide fully integrated fleet management services
to corporate customers including vehicle leasing, advisory services, fuel and
maintenance cards, other expense management programs and productivity
enhancement. Fleet management operations contributed revenues and Adjusted
EBITDA of $128 million and $9 million, respectively, for the first quarter 2001.
Assuming the Acquisition had occurred on January 1 for each period presented,
revenues and Adjusted EBITDA would have been $383 million and $23 million,
respectively, for the first quarter 2001 and $358 million and $23 million,
respectively, for the first quarter 2000. Revenues would have increased $25
million (7%) with no impact on Adjusted EBITDA, as the increase in operating
costs would have offset the increase in revenues.
10
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
March 31, December 31,
2001 2000 Change
------ ------ ------
Total assets exclusive of assets
under programs $2,223 $1,556 $ 667
Assets under programs 6,655 2,861 3,794
Total liabilities exclusive of
liabilities under programs $ 724 $ 351 $ 373
Liabilities under programs 6,555 2,516 4,039
Stockholder's equity 1,599 1,550 49
Total assets exclusive of assets under programs increased primarily due to an
increase in goodwill resulting from the Acquisition and increases in various
other assets also due to the Acquisition. Assets under programs increased
primarily due to vehicle-related assets acquired in the Acquisition.
Total liabilities exclusive of liabilities under programs increased primarily
due to liabilities assumed in the Acquisition. Liabilities under programs
increased primarily due to approximately $3.0 billion of debt assumed in the
Acquisition, first quarter 2001 debt issuances of $650 million and an increase
in deferred income taxes due to the Acquisition.
Stockholder's equity increased primarily due to first quarter 2001 net income of
$40 million.
Liquidity and Capital Resources
Based upon cash flows provided by our operations and access to liquidity through
various other sources, including public debt markets and financial institutions,
we have sufficient liquidity to fund our current business plans and obligations.
Cash Flows
Three Months Ended
March 31,
-----------------------------------
2001 2000 Change
------- ------- -------
Cash provided by (used in):
Operating activities $ 122 $ 25 $ 97
Investing activities (1,027) (90) (937)
Financing activities 882 27 855
Effects of exchange rate changes
on cash and cash equivalents 4 -- 4
------- ------- -------
Net change in cash and cash equivalents $ (19) $ (38) $ 19
======= ======= =======
Cash flows from operating activities increased primarily related to the
Acquisition and improved operations in the Real Estate Services segment.
Cash flows used in investing activities increased primarily due to the
utilization of cash to fund the Acquisition and a net outflow of cash used in
investing activities of Fleet.
Cash flows from financing activities increased primarily due to a net inflow of
funds from borrowings.
Capital Expenditures
Capital expenditures during first quarter 2001 amounted to $16 million and were
utilized to support operational growth, enhance marketing opportunities and
develop operating efficiencies through technological improvements. We anticipate
a capital expenditure investment during 2001 of approximately $60 million. Such
amount represents an increase from 2000 primarily due to the Acquisition.
11
Debt Financing
Activities of our management and mortgage programs are primarily supported by
the issuance of commercial paper and medium-term notes and by maintaining
secured obligations, depending upon asset growth and financial market
conditions.
Debt related to our management and mortgage programs increased $3.9 billion to
$5.9 billion at March 31, 2001. Such increase was primarily related to debt
attributable to the fleet management business of Avis Group, principally
comprising $1.0 billion of medium-term notes and $1.7 billion of interest
bearing notes, and also additional medium-term notes issuances of $650 million
under an existing shelf registration statement.
Strategic Business Initiatives
We continually explore and conduct discussions with regard to acquisitions and
other strategic corporate transactions in our industries in addition to
transactions previously announced. As part of our regular on-going evaluation of
acquisition opportunities, we currently are engaged in a number of separate,
unrelated preliminary discussions concerning possible acquisitions. The purchase
price for the possible acquisitions may be paid in cash, through the issuance of
debt securities or CD common stock, borrowings, or a combination thereof. Prior
to consummating any such possible acquisition, we will need to, among other
things, initiate and complete satisfactorily our due diligence investigations;
negotiate the financial and other terms (including price) and conditions of such
acquisitions; obtain appropriate Board of Directors, regulatory and other
necessary consents and approvals; and, if necessary, secure financing. No
assurance can be given with respect to the timing, likelihood or business effect
of any possible transaction. In the past, we have been involved in both
relatively small acquisitions and acquisitions which have been significant.
12
Item 3. Quantitative And Qualitative Disclosures About Market Risks
As previously discussed in our 2000 Annual Report on Form 10-K, we assess our
market risk based on changes in interest and foreign currency exchange rates
utilizing a sensitivity analysis. The sensitivity analysis measures the
potential loss in earnings, fair values, and cash flows based on a hypothetical
10% change (increase and decrease) in our market risk sensitive positions. We
used March 31, 2001 market rates to perform a sensitivity analysis separately
for each of our market risk exposures. The estimates assume instantaneous,
parallel shifts in interest rate yield curves and exchange rates. We have
determined, through such analyses, that the impact of a 10% change in foreign
currency exchange rates and prices on our earnings, fair values and cash flows
and that the impact of a 10% change in interest rates on our fair values and
cash flows would not be material. The potential loss in earnings resulting from
the impact of a 10% decrease in interest rates was $58 million for the three
months ended March 31, 2001.
13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index
(b) Reports on Form 8-K
On February 8, 2001, we filed a current report on Form 8-K to report under
Item 5 the supplemental indenture between PHH and Bank One Trust Company.
On March 9, 2001, we filed a current report on Form 8-K to report under
Item 2 the acquisition of Avis Group Holdings, Inc. on March 1,
2001.
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CENDANT CORPORATION
By: /s/ Duncan H. Cocroft
-------------------------------------
Duncan H. Cocroft
Executive Vice President and
Chief Financial Officer
By: /s/ John T. McClain
-------------------------------------
John T. McClain
Senior Vice President, Finance and
Date: May 15, 2001 Corporate Controller
15
Exhibit Index
Exhibit
No. Description
- ------- -----------
3.1 Charter of PHH Corporation, as amended August 23, 1996, filed as Exhibit
3.1 to the Company's Transition Report on Form 10-K filed on July 29,
1997. (*)
3.2 By-Laws of PHH Corporation, as amended October, filed as Exhibit 3.1 to
the Company's Annual Report on Form 10-K for the year ended December 31,
1997. (*)
4.1 Indenture between PHH Corporation and Bank of New York, Trustee, dated as
of May 1, 1992, filed as Exhibit 4(a)(iii) to Registration Statement
33-48125. (*)
4.2 Indenture between PHH Corporation and First National Bank of Chicago,
Trustee, dated as of March 1, 1993, filed as Exhibit 4(a)(i) to
Registration Statement 33-59376. (*)
4.3 Indenture between PHH Corporation and First National Bank of Chicago,
Trustee, dated as of June 5, 1997, filed as Exhibit 4(a) to Registration
Statement 333-27715. (*)
4.4 Indenture between PHH Corporation and Bank of New York, Trustee, dated as
of June 5, 1997, filed as Exhibit 4(a)(11) to Registration Statement
333-27715. (*)
4.5 Indenture dated November 6, 2000 between the Company and Bank One Trust
Company, N.A., as Trustee filed as Exhibit 4.0 to the Company's Current
Report on Form 8-K dated December 12, 2000. (*)
4.6 Supplemental Indenture No. 1 dated November 6, 2000 between the Company
and Bank One Trust Company, N.A., as Trustee filed as Exhibit 4.1 to the
Company's Current Report on Form 8-K dated December 12, 2000. (*)
4.7 Supplemental Indenture No. 2 dated January 30, 2001 between the Company
and Bank One Trust Company, N.A., as Trustee filed as Exhibit 4.1 to the
Company's Current Report on Form 8-K dated February 8, 2001. (*)
10.1 364-Day Competitive Advance and Revolving Credit Agreement dated March 4,
1997, as amended and restated through February 22, 2001, among the
Company, the lenders thereto, and the Chase Manhattan Bank, as
Administrative Agent filed as Exhibit 10.25(a) to Cendant Corporation's
Annual Report on Form 10-K for the year ended December 31, 2000. (*)
10.2 Amendment to the Five Year Competitive Advance and Revolving Credit
Agreement, dated as of February 22, 2001, among the Company, the financial
institutions parties thereto and The Chase Manhattan Bank, as
Administrative Agent filed as Exhibit 10.25 ( c) to Cendant Corporation's
Annual Report on Form 10-K for the year ended December 31, 2000. (*)
12 Statement Re: Computation of Ratio of Earnings to Fixed Charges. (**)
99.1 Segment Information. (**)
- ----------
(*) Incorporated by reference
(**) Filed herewith
16