<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------- --------------
Commission file number 1-8198
------
HOUSEHOLD INTERNATIONAL, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3121988
- ------------------------ -----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
2700 Sanders Road, Prospect Heights, Illinois 60070
- ----------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 564-5000
--------------
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 [ ]
At April 30, 1999, there were 479,397,430 shares of registrant's
common stock outstanding.
<PAGE>
<PAGE> 2
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
Table of Contents
PART I. Financial Information Page
----
Item 1. Financial Statements
Condensed Consolidated Statements of Income
(Unaudited) - Three Months
Ended March 31, 1999 and 1998 2
Condensed Consolidated Balance Sheets -
March 31, 1999 (Unaudited) and December 31, 1998 3
Condensed Consolidated Statements of Cash Flows
(Unaudited) - Three Months Ended
March 31, 1999 and 1998 4
Financial Highlights 5
Notes to Interim Condensed Consolidated Financial
Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
PART II. Other Information
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
<PAGE>
<PAGE> 3
PART 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Household International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -------------------------------------------------------
All amounts, except per share data, are stated in millions.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Three months ended March 31 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Finance income $1,498.6 $1,313.6
Other interest income 9.9 15.3
Interest expense 648.9 612.2
-------- --------
Net interest margin 859.6 716.7
Provision for credit losses on owned receivables 417.8 389.3
-------- --------
Net interest margin after provision for credit losses 441.8 327.4
-------- --------
Securitization income 324.9 419.3
Insurance revenues 142.2 119.5
Investment income 41.2 39.9
Fee income 129.7 147.3
Other income 109.2 87.7
Gain on sale of Beneficial Canada - 189.4
-------- --------
Total other revenues 747.2 1,003.1
-------- --------
Salaries and fringe benefits 284.1 292.3
Occupancy and equipment expense 66.8 85.6
Other marketing expenses 88.5 103.0
Other servicing and administrative expenses 162.6 177.3
Amortization of acquired intangibles and goodwill 36.3 42.4
Policyholders' benefits 68.6 63.6
-------- --------
Total costs and expenses 706.9 764.2
-------- --------
Income before income taxes 482.1 566.3
Income taxes 161.3 208.5
-------- --------
Net income* $ 320.8 $ 357.8
======== ========
Earnings per common share:
Net income $ 320.8 $ 357.8
Preferred dividends (2.3) (4.2)
-------- --------
Earnings available to common shareholders $ 318.5 $ 353.6
======== ========
Average common shares 484.7 486.1
-------- --------
Average common and common equivalent shares 490.1 497.0
-------- --------
Basic earnings per common share $ .66 $ .73
-------- --------
Diluted earnings per common share* $ .65 $ .71
-------- --------
Dividends declared per common share .17 .15
======== ========
* Net operating income and diluted operating earnings per common share, which
exclude the gain on sale of Beneficial Canada, were $239.3 and $.47,
respectively, for the three months ended March 31, 1998.
</TABLE>
See notes to interim condensed consolidated financial statements.
<PAGE>
<PAGE> 4
Household International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
- -------------------------------------
In millions, except share data.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
March 31, December 31,
1999 1998
- ------------------------------------------------------------------------------------------
ASSETS (Unaudited)
- ------
<S> <C> <C>
Cash $ 288.9 $ 457.4
Investment securities 2,952.3 3,202.1
Receivables, net 45,236.3 43,948.1
Acquired intangibles and goodwill, net 1,670.5 1,700.8
Properties and equipment, net 483.7 472.1
Real estate owned 244.7 253.9
Other assets 2,999.3 2,858.3
--------- ---------
Total assets $53,875.7 $52,892.7
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Debt:
Deposits $ 2,282.1 $ 2,105.0
Commercial paper, bank and other borrowings 10,402.5 9,917.9
Senior and senior subordinated debt (with
original maturities over one year) 30,803.5 30,438.6
--------- ---------
Total debt 43,488.1 42,461.5
Insurance policy and claim reserves 1,408.6 1,371.7
Other liabilities 2,212.0 2,298.7
--------- ---------
Total liabilities 47,108.7 46,131.9
--------- ---------
Company obligated mandatorily redeemable
preferred securities of subsidiary trusts* 375.0 375.0
--------- ---------
Preferred stock 164.4 164.4
--------- ---------
Common shareholders' equity:
Common stock, $1.00 par value, 750,000,000
shares authorized, 550,132,392 and
544,124,170 shares issued at March 31, 1999
and December 31, 1998, respectively 550.1 544.1
Additional paid-in capital 1,753.7 1,652.5
Retained earnings 5,417.7 5,184.4
Foreign currency translation adjustments (175.3) (167.5)
Unrealized gain (loss) on investments, net (6.6) 22.4
Less common stock in treasury, 67,986,138 and
60,986,431 shares at March 31, 1999 and
December 31, 1998, respectively, at cost (1,312.0) (1,014.5)
--------- ---------
Total common shareholders' equity 6,227.6 6,221.4
--------- ---------
Total liabilities and shareholders' equity $53,875.7 $52,892.7
========= =========
* As described in note 8 to the financial statements, the sole
assets of the three trusts are Junior Subordinated Deferrable
Interest Notes issued by Household International, Inc. in March
1998, June 1996 and June 1995, bearing interest at 7.25, 8.70
and 8.25 percent, respectively, with principal balances of
$206.2, $103.1 and $77.3 million, respectively, and due December
31, 2037, June 30, 2036 and June 30, 2025, respectively.
</TABLE>
See notes to interim condensed consolidated financial statements.
<PAGE>
<PAGE> 5
Household International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -----------------------------------------------------------
In millions.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Three months ended March 31 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
CASH PROVIDED BY OPERATIONS
Net income $ 320.8 $ 357.8
Adjustments to reconcile net income to cash
provided by operations:
Provision for credit losses on owned receivables 417.8 389.3
Insurance policy and claim reserves 37.8 (108.0)
Depreciation and amortization 76.0 76.3
Other, net 176.7 93.0
--------- ---------
Cash provided by operations 1,029.1 808.4
--------- ---------
INVESTMENTS IN OPERATIONS
Investment securities:
Purchased (467.0) (420.3)
Matured 125.0 98.8
Sold 360.6 209.6
Short-term investment securities, net change 134.7 (231.1)
Receivables:
Originations, net (6,837.7) (7,144.1)
Purchases and related premiums (1,010.2) (2,109.1)
Sold 5,707.0 7,359.1
Properties and equipment purchased (58.5) (11.6)
Properties and equipment sold 2.8 20.4
--------- ---------
Cash decrease from investments in operations (2,043.3) (2,228.3)
--------- ---------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt and demand deposits, net change 627.5 (57.8)
Time certificates, net change 125.9 91.8
Senior and senior subordinated debt issued 2,047.4 3,148.8
Senior and senior subordinated debt retired (1,643.9) (1,966.1)
Policyholders' benefits paid (34.9) (27.4)
Cash received from policyholders 32.7 26.6
Shareholders' dividends (84.3) (52.4)
Shareholders' dividends - pooled affiliate - (31.3)
Purchase of treasury stock (232.9) (9.8)
Treasury stock activity - pooled affiliate - (11.0)
Issuance of common stock 1.9 1.9
Issuance of company obligated mandatorily redeemable
preferred securities of subsidiary trusts - 200.0
--------- ---------
Cash increase from financing and
capital transactions 839.4 1,313.3
--------- ---------
Effect of exchange rate changes on cash 6.3 (8.0)
--------- ---------
Decrease in cash (168.5) (114.6)
Cash at January 1 457.4 534.3
--------- ---------
Cash at March 31 $ 288.9 $ 419.7
========= =========
Supplemental cash flow information:
Interest paid $ 587.2 $ 524.6
--------- ---------
Income taxes paid (received) 54.6 (19.6)
--------- ---------
</TABLE>
See notes to interim condensed consolidated financial statements.
<PAGE>
<PAGE> 6
Household International, Inc. and Subsidiaries
FINANCIAL HIGHLIGHTS
- --------------------
All dollar amounts are stated in millions.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Three months ended March 31 1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Net operating income <F1> $ 320.8 $ 239.3
Beneficial Canada gain - 118.5
--------- ---------
Net income $ 320.8 $ 357.8
========= =========
Diluted earnings per common share $ .65 $ .71
========= =========
Diluted operating earnings per common share <F1> $ .65 $ .47
========= =========
Net interest margin and other revenues <F2> $ 1,538.2 $ 1,656.2
--------- ---------
Return on average common shareholders'
equity <F3> 20.3% 15.0%
--------- ---------
Return on average owned assets <F3> 2.38 1.96
--------- ---------
Managed basis efficiency ratio, normalized <F4> 35.6 40.5
--------- ---------
All dollar amounts are stated in millions.
- -----------------------------------------------------------------------------------------
March 31, December 31,
1999 1998
- -----------------------------------------------------------------------------------------
Total assets:
Owned $53,875.7 $52,892.7
Managed 72,796.8 72,594.5
--------- ---------
Receivables:
Owned $45,403.1 $44,205.9
Serviced with limited recourse 18,921.1 19,701.8
--------- ---------
Managed $64,324.2 $63,907.7
========= =========
Total shareholders' equity as a percent of
owned assets <F5> 12.56% 12.78%
--------- ---------
Total shareholders' equity as a percent of
managed assets <F5> 9.30 9.31
--------- ---------
<FN>
<F1> Excludes the gain on the sale of Beneficial Canada.
<F2> Policyholders' benefits have been netted against other revenues.
<F3> Annualized. Excludes the gain on the sale of Beneficial Canada.
<F4> Ratio of normalized operating expenses to managed net interest
margin and other revenues less policyholders' benefits.
<F5> Total shareholders' equity at March 31, 1999 and December 31,
1998 includes common shareholders' equity, preferred stock and
company obligated mandatorily redeemable preferred securities
of subsidiary trusts.
</FN>
</TABLE>
See notes to interim condensed consolidated financial statements.
<PAGE>
<PAGE> 7
Household International, Inc. and Subsidiaries
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
- ------------------------
The accompanying unaudited condensed consolidated financial
statements of Household International, Inc. ("Household") and its
subsidiaries have been prepared in accordance with generally
accepted accounting principles for interim financial information.
Additionally, these financial statements have been prepared in
accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the three months ended March 31,
1999 should not be considered indicative of the results for any
future quarters or the year ending December 31, 1999. Household and
its subsidiaries may also be referred to in this Form 10-Q as "we,"
"us" or "our." For further information, refer to the consolidated
financial statements and footnotes included in our Annual Report on
Form 10-K for the year ended December 31, 1998.
2. INVESTMENT SECURITIES
- ------------------------
Investment securities consisted of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
In millions. March 31, 1999 December 31, 1998
- ----------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE INVESTMENTS
Marketable equity securities $ 63.5 $ 66.3 $ 68.2 $ 70.8
Corporate debt securities 1,694.5 1,683.1 1,705.1 1,731.3
U.S. government and federal
agency debt securities 357.8 356.1 368.4 373.6
Other 806.8 806.8 990.1 990.1
-------- -------- -------- --------
Subtotal 2,922.6 2,912.3 3,131.8 3,165.8
Accrued investment income 40.0 40.0 36.3 36.3
-------- -------- -------- --------
Total investment securities $2,962.6 $2,952.3 $3,168.1 $3,202.1
======== ======== ======== ========
</TABLE>
<PAGE>
<PAGE> 8
3. RECEIVABLES
- --------------
Receivables consisted of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
March 31, December 31,
In millions. 1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage $ 163.8 $ 156.3
Home equity 20,419.4 18,692.7
Auto finance 944.8 805.0
MasterCard/Visa 6,150.3 7,180.2
Private label 9,381.0 9,566.0
Other unsecured 7,707.5 7,108.6
Commercial 636.3 697.1
--------- ---------
Total owned receivables 45,403.1 44,205.9
Accrued finance charges 718.8 642.5
Credit loss reserve for owned receivables (1,729.7) (1,734.2)
Unearned credit insurance premiums and
claims reserves (492.3) (505.1)
Amounts due and deferred from
receivables sales 2,151.2 2,152.9
Reserve for receivables serviced with
limited recourse (814.8) (813.9)
--------- ---------
Total owned receivables, net 45,236.3 43,948.1
Receivables serviced with limited recourse 18,921.1 19,701.8
--------- ---------
Total managed receivables, net $64,157.4 $63,649.9
========= =========
</TABLE>
The outstanding balance of receivables serviced with limited recourse
consisted of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
March 31, December 31,
In millions. 1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Home equity $ 3,298.8 $ 3,637.4
Auto finance 1,101.3 960.3
MasterCard/Visa 8,982.7 9,430.6
Private label 753.2 811.5
Other unsecured 4,785.1 4,862.0
--------- ---------
Total $18,921.1 $19,701.8
========= =========
</TABLE>
The combination of receivables owned and receivables serviced with limited
recourse, which we consider our managed portfolio, is shown below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
March 31, December 31,
In millions. 1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage $ 163.8 $ 156.3
Home equity 23,718.2 22,330.1
Auto finance 2,046.1 1,765.3
MasterCard/Visa 15,133.0 16,610.8
Private label 10,134.2 10,377.5
Other unsecured 12,492.6 11,970.6
Commercial 636.3 697.1
--------- ---------
Total $64,324.2 $63,907.7
========= =========
</TABLE>
<PAGE>
<PAGE> 9
The amounts due and deferred from receivables sales were $2,151.2
million at March 31, 1999 and $2,152.9 million at December 31,
1998. The amounts due and deferred included unamortized
securitization assets and other assets established under the
recourse provisions for certain sales totaling $2,062.8 million at
March 31, 1999 and $2,031.3 million at December 31, 1998. It also
included net customer payments not yet received from the
securitization trustee of $50.4 million at March 31, 1999 and $79.6
million at December 31, 1998. We have agreements with a "AAA"-rated
third party who will insure us for up to $21.2 million in losses
relating to certain securitization transactions. We maintain credit
loss reserves under the recourse requirements for receivables
serviced with limited recourse which are based on estimated
probable losses under those requirements. The reserves totaled
$814.8 million at March 31, 1999 and $813.9 million at December 31,
1998 and represents our best estimate of probable losses on
receivables serviced with limited recourse.
4. CREDIT LOSS RESERVES
- ------------------------
An analysis of credit loss reserves for the three months ended March 31
was as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
In millions. 1999 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
Credit loss reserves for owned receivables
at January 1 $1,734.2 $1,642.1
Provision for credit losses 417.8 389.3
Chargeoffs (480.7) (402.5)
Recoveries 48.6 42.6
Portfolio acquisitions and other, net 9.8 54.1
-------- --------
TOTAL CREDIT LOSS RESERVES FOR OWNED RECEIVABLES
AT MARCH 31 1,729.7 1,725.6
-------- --------
Credit loss reserves for receivables serviced with
limited recourse at January 1 813.9 880.9
Provision for credit losses 253.7 261.5
Chargeoffs (275.8) (314.4)
Recoveries 14.4 18.8
Other, net 8.6 .6
-------- --------
TOTAL CREDIT LOSS RESERVES FOR RECEIVABLES SERVICED
WITH LIMITED RECOURSE AT MARCH 31 814.8 847.4
-------- --------
TOTAL CREDIT LOSS RESERVES FOR MANAGED RECEIVABLES
AT MARCH 31 $2,544.5 $2,573.0
======== ========
</TABLE>
5. MERGER AND INTEGRATION RESERVE
- ---------------------------------
As of March 31, 1999, we have substantially completed the execution
of our merger and integration plan relating to the Beneficial
acquisition. Amounts remaining in our merger and integration reserve
are not significant.
<PAGE>
<PAGE> 10
6. INCOME TAXES
- ---------------
The effective tax rate was 33.5 percent for the three months ended
March 31, 1999 and 36.8 percent in the year-ago period. The
effective tax rate differs from the statutory federal income tax
rate in these years primarily because of the effects of (a) state
and local income taxes and (b) leveraged lease tax benefits.
7. EARNINGS PER COMMON SHARE
- ----------------------------
Computations of earnings per common share for the three months
ended March 31 were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
1999 1998
-------------------- -------------------
In millions, except per share data. Diluted Basic Diluted Basic
- ------------------------------------ ------- ------ ------- ------
<S> <C> <C> <C> <C>
Earnings:
Net income $320.8 $320.8 $357.8 $357.8
Preferred dividends (2.3) (2.3) (4.2) (4.2)
------ ------ ------ ------
Earnings available to common
shareholders $318.5 $318.5 $353.6 $353.6
====== ====== ====== ======
Average shares:
Common 484.7 484.7 486.1 486.1
Common equivalents 5.4 - 10.9 -
------ ------ ------ ------
Total 490.1 484.7 497.0 486.1
====== ====== ====== ======
Earnings per common share $ .65 $ .66 $ .71 $ .73
====== ====== ====== ======
</TABLE>
8. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS
- -------------------------------------------------------------------
In March 1998 Household Capital Trust IV ("HCT IV"), a wholly-owned
subsidiary of Household, issued 8 million 7.25 percent Trust
Preferred Securities ("preferred securities") at $25 per preferred
security. The sole asset of HCT IV is $206.2 million of 7.25
percent Junior Subordinated Deferrable Interest Notes issued by
Household. The junior subordinated notes held by HCT IV mature on
December 31, 2037 and are redeemable by Household in whole or in
part beginning on March 19, 2003, at which time the HCT IV
preferred securities are callable at par ($25 per preferred
security) plus accrued and unpaid dividends. Net proceeds from the
issuance of preferred securities were used for general corporate
purposes.
In June 1996 Household Capital Trust II ("HCT II"), a wholly-owned
subsidiary of Household, issued 4 million 8.70 percent preferred
securities at $25 per preferred security. The sole asset of HCT II
is $103.1 million of 8.70 percent Junior Subordinated Deferrable
Interest Notes issued by Household. The junior subordinated notes
held by HCT II mature on June 30, 2036 and are redeemable by
Household in whole or in part beginning on June 30, 2001, at which
time the HCT II preferred securities are callable at par ($25 per
preferred security) plus accrued and unpaid dividends.
<PAGE>
<PAGE> 11
In June 1995 Household Capital Trust I ("HCT I"), a wholly-owned
subsidiary of Household, issued 3 million 8.25 percent preferred
securities at $25 per preferred security. The sole asset of HCT I
is $77.3 million of 8.25 percent Junior Subordinated Deferrable
Interest Notes issued by Household. The junior subordinated notes
held by HCT I mature on June 30, 2025 and are redeemable by
Household in whole or in part beginning June 30, 2000, at which
time the HCT I preferred securities are callable at par ($25 per
preferred security) plus accrued and unpaid dividends. HCT I may
elect to extend the maturity of the preferred securities to June
30, 2044.
The obligations of Household with respect to the junior
subordinated notes, when considered together with certain
undertakings of Household with respect to HCT I, HCT II and HCT IV,
constitute full and unconditional guarantees by Household of HCT
I's, HCT II's and HCT IV's obligations under the respective
preferred securities. The preferred securities are classified in
our balance sheets as company obligated mandatorily redeemable
preferred securities of subsidiary trusts (representing the
minority interest in the trusts) at their face and redemption
amount of $375 million at March 31, 1999 and December 31, 1998. The
preferred securities have a liquidation value of $25 per preferred
security. Dividends on the preferred securities are cumulative,
payable quarterly in arrears, and are deferrable at Household's
option for up to five years from date of issuance. Household cannot
pay dividends on its preferred and common stocks during such
deferments.
9. COMPREHENSIVE INCOME
- -----------------------
In accordance with the interim reporting guidelines of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," which was adopted in 1998, comprehensive income was $284.0
million for the quarter ended March 31, 1999 and $381.7 million for
the quarter ended March 31, 1998. Excluding the impact of the gain
on sale of Beneficial Canada, comprehensive income was $263.2
million for the quarter ended March 31, 1998.
10. SEGMENT REPORTING
- ----------------------
We have three reportable segments: Consumer, which includes our
branch-based consumer finance, private label and auto finance
businesses; Credit Card, which includes our domestic MasterCard and
Visa business; and International, which includes our United Kingdom
and Canadian operations. There has been no change in the basis of
our segmentation or in the measurement of segment profit as
compared with our Annual Report on Form 10-K for the year ended
December 31, 1998.
<PAGE>
<PAGE> 12
Information about our reportable segments for the three months
ended March 31, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Owned Basis Total
In millions. Total Domestic
For the three months ended March 31, 1999 Consumer Credit Card International
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest margin and other
revenues <F1> $ 938.0 $ 292.5 $ 193.6
Intersegment revenues 31.4 2.7 .8
Segment net income 208.0 12.1 46.2
Total segment assets 36,075.1 6,155.3 7,135.6
Total segment assets - managed 45,100.4 14,898.3 8,288.4
--------- --------- --------
- ------------------------------------------------------------------------------------------
Owned Basis Total
In millions. Total Domestic
For the three months ended March 31, 1998 Consumer Credit Card International
- ------------------------------------------------------------------------------------------
Net interest margin and other
revenues <F1> $ 827.0 $ 328.7 $ 198.9
Intersegment revenues 22.3 2.7 .9
Segment net income 175.0 30.5 36.9
Total segment assets 28,474.0 8,068.5 7,013.2
Total segment assets - managed 39,139.9 19,637.0 8,105.0
--------- --------- --------
<FN>
<F1> Net interest margin and other revenues, including intersegment revenues, net
of policyholders' benefits.
</FN>
</TABLE>
A reconciliation of the total reportable segments' net income to consolidated
net income for the three months ended March 31 is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
In millions. 1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
Reportable segment net income $266.3 $242.4
Other operations not individually reportable 82.6 142.0
Adjustments/eliminations (28.1) (26.6)
------ ------
Total consolidated net income $320.8 $357.8
====== ======
</TABLE>
<PAGE>
<PAGE> 13
11. ACCOUNTING PRONOUNCEMENTS
- ------------------------------
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("FAS No. 133").
FAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in
the balance sheet as either an asset or liability measured at its
fair value. FAS No. 133 requires that changes in a derivative's
fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset
the related results on the hedged item in the income statement, and
requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge
accounting.
FAS No. 133 is effective for fiscal years beginning after June 15,
1999. A company may also implement FAS No. 133 as of the beginning
of any fiscal quarter after issuance (that is, fiscal quarters
beginning June 16, 1998 and thereafter). FAS No. 133 cannot be
applied retroactively. FAS No. 133 must be applied to (a)
derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997. We expect to adopt
FAS No. 133 on January 1, 2000 and have not yet quantified its
impact on our financial statements.
<PAGE>
<PAGE> 14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the consolidated
financial statements, notes and tables included elsewhere in this
report and in the Household International, Inc. Annual Report on
Form 10-K for the year ended December 31, 1998 (the "1998 Form 10-
K") filed with the Securities and Exchange Commission. Management's
discussion and analysis may contain certain estimates and
projections that may be forward-looking in nature, as defined by
the Private Securities Litigation Reform Act of 1995. A variety of
factors may cause actual results to differ materially from the
results discussed in these forward-looking statements. Factors that
might cause such a difference are discussed herein and in the 1998
Form 10-K.
OPERATIONS SUMMARY
- ------------------
Our net income for the first quarter of 1999 was $320.8 million,
compared to net operating income of $239.3 million a year ago.
Diluted earnings per share was $.65 for the first quarter of 1999,
compared to diluted operating earnings per share of $.47 in 1998.
These improved results were due to strong growth in our consumer
finance business, higher income from our tax refund anticipation
loan business and significant year-over-year declines in operating
expenses. Including the gain on the sale of Beneficial Canada,
first quarter 1998 net income was $357.8 million and diluted
earnings per share was $.71.
Our annualized return on average common shareholders' equity for
the first quarter of 1999 was 20.3 percent and, excluding the gain
on the sale of Beneficial Canada, 15.0 percent in the year-ago
period. Our annualized return on average owned assets was 2.38
percent in the 1999 first quarter and, excluding the gain on the
sale of Beneficial Canada, 1.96 percent a year ago. Our annualized
return on average managed assets was 1.75 percent in the first
quarter of 1999 and, excluding the gain on the sale of Beneficial
Canada, 1.32 percent a year ago. Including the gain on the sale of
Beneficial Canada for the first quarter of 1998, our annualized
return on average common shareholders' equity was 22.5 percent, our
return on average owned assets was 2.93 percent and our return on
average managed assets was 1.97 percent.
- - The following summarizes our operating results for our
reportable operating segments for the first quarter of 1999
compared with the prior year period:
Results for our Consumer segment improved from the prior year
period. Return on average owned assets was 2.34 percent in the
first quarter of 1999, compared with 2.55 percent for the same
period in 1998. The decrease in this ratio is due to a higher
proportion of on-balance sheet assets as compared to the same
period in 1998. Return on average managed assets increased to
1.87 percent in the first quarter of 1999 from 1.82 percent in
1998. The improvement in operating results reflects higher net
interest margin and fee income due mainly to higher levels of
average managed receivables. Managed receivables grew 15 percent
to $43.3 billion at March 31, 1999, up from $37.5 billion at
March 31, 1998. The growth was driven by solid growth in home
equity, other unsecured and auto finance receivables. The home
equity and unsecured loan growth in the first quarter reflects
the benefits and on-going potential of the now-integrated HFC
and Beneficial systems. Offsetting these favorable trends, the
Consumer segment experienced higher credit losses reflecting
increased personal bankruptcies as well as the maturing of
promotional balances in our private label business. Compared
with the fourth quarter, the Consumer segment experienced a
decrease in chargeoffs and delinquency.
<PAGE>
<PAGE> 15
Our Credit Card segment reported lower earnings in the first
quarter of 1999. Return on average owned assets was .72 percent
in the first quarter of 1999, compared with 1.65 percent a year
ago. Return on average managed assets was .30 percent in the
first quarter of 1999, compared with .64 percent in 1998. The
decrease in operating results was primarily due to lower average
receivables, increased loss provision and lower fee income.
Managed receivables were $13.4 billion at March 31, 1999,
compared with $17.8 billion at March 31, 1998. The decline
reflected attrition associated with the restructuring of our
domestic MasterCard* and Visa* portfolio in 1998, which included
the sale of $1.9 billion of non-core receivables and the impact
of repricing initiatives mailed late last year. This segment
includes our co-branding and affinity relationships, in
particular our alliance with General Motors Corporation ("GM")
to issue the GM Card, a co-branded credit card, and the AFL-
CIO's Union Privilege affinity relationship.
Our International segment reported improved results in the first
quarter of 1999. Return on average owned assets increased to
2.21 percent in the first quarter of 1999 from 1.72 percent in
the first quarter of 1998. Return on average managed assets
increased to 2.58 percent in the first quarter of 1999 from 1.97
percent in 1998. The improvement in operating results was
primarily the result of improved efficiency, as well as higher
revenues due to receivables growth in the U.K. Managed
receivables in the U.K. grew 11 percent to $6.2 billion at March
31, 1999 from $5.6 billion at March 31, 1998. This increase
reflected growth in the UK's MasterCard and Visa, private label
and other unsecured receivables. The Goldfish card, issued in
alliance with the Centrica Group, contributed significantly to
the higher credit card receivables from the prior year quarter.
- - Revenue from our tax refund anticipation loan ("RAL") business
was up substantially from the prior year. The RAL business
contributed $97 million pretax (10 cents per share) to our first
quarter results, which was $41 million pretax (5 cents per
share) better than 1998. The number of electronic filings of tax
returns increased 20 percent over last year and refund
processing with the Internal Revenue Service went smoothly in
the quarter.
- - Our normalized managed basis efficiency ratio improved to 35.6
percent for the first quarter of 1999 compared with 40.5 percent
a year ago. The efficiency ratio is the ratio of operating
expenses to the sum of our managed net interest margin and other
revenues less policyholders' benefits. We normalize, or adjust
for, items that are not indicative of ongoing operations. The
improvement in the managed ratio resulted from growth in
normalized managed net revenues, compared to a 9 percent
decrease in normalized operating expenses over the comparable
period.
- - During the first quarter of 1998, we completed the sale of
Beneficial's Canadian operations and recorded an after-tax gain
of approximately $118.5 million. In April 1998, the sale of
Beneficial's German operations was also completed. Beneficial
announced its intent to sell the German operations in 1997 and
recorded an after-tax loss of approximately $27.8 million after
consideration of a $31.0 million tax benefit. No additional
losses were realized in 1998 as a result of the sale.
* MasterCard is a registered trademark of MasterCard
International, Incorporated and Visa is a registered trademark
of VISA USA, Inc.
<PAGE>
<PAGE> 16
BALANCE SHEET REVIEW
- --------------------
- - Core products increased 3 percent from the year ago level to
$63.5 billion. Core products exclude first mortgages and commercial
receivables, and receivables relating to Beneficial's German
operations which were disposed of in April 1998. This growth rate
reflects attrition associated with the restructuring of our
domestic MasterCard and Visa portfolio in 1998, which included the
sale of $1.9 billion of non-core receivables and the impact of
repricing initiatives mailed late last year.
Core products, other than MasterCard and Visa, grew over 13
percent from a year ago, with solid growth in all products. The
strongest growth came in our home equity business. During 1999,
we took advantage of a pricing opportunity in the bulk home
equity market and acquired a $750 million portfolio. Excluding
this bulk purchase, our home equity portfolio still grew 14
percent over last year. Auto finance receivables more than
doubled from a year ago reflecting solid loan growth coupled
with firm pricing and good quality credit. This business
continued to benefit from weakened competition and an expanded
sales force. Private label receivables were up 5 percent from
the prior year as this business benefited from the addition of
several new merchants in the last half of 1998. Other unsecured
receivables grew 5 percent from the prior year driven by strong
responses to direct mail and branch-originated programs. The
year-over-year growth rate was impacted by the purchase of an
$850 million unsecured consumer finance portfolio during the
first quarter of 1998.
- - Core products were up compared to the fourth quarter of 1998.
Excluding the MasterCard and Visa portfolio, core products grew 4
percent, led by dynamic growth in our consumer finance business.
Our home equity portfolio grew 6 percent from the prior quarter due
to strong branch and correspondent originations. Excluding the bulk
purchase discussed above, home equity receivables grew 3 percent
from year-end 1998. First quarter growth of 4 percent in other
unsecured receivables was driven by strong responses to direct mail
and branch-originated programs. Auto finance receivables grew 16
percent from the prior quarter. This growth was attributable to
continued weakened competition in the industry and an expanded
sales force. Both our private label and MasterCard and Visa
portfolios were down from the prior quarter due to normal, seasonal
runoff in the first quarter, which was in line with our
expectations. Additionally, our MasterCard and Visa portfolio
experienced some attrition in the 1999 quarter due to repricing
initiatives mailed late last year.
- - Consumer receivables on our balance sheet were $44.8 billion
at March 31, 1999, up from $43.5 billion at December 31, 1998 and
$39.2 billion at March 31, 1998. The level of our owned receivables
may vary from period to period depending on the timing and
significance of securitization transactions.
- - Our managed credit loss reserves were $2,544.5 million at
March 31, 1999, $2,548.1 million at December 31, 1998 and $2,573.0
million at March 31, 1998. Credit loss reserves as a percent of
managed receivables were 3.96 percent, compared with 3.99 percent
at December 31, 1998 and 4.06 percent at March 31, 1998. Reserves
as a percent of nonperforming managed receivables were 104.7
percent, compared with 109.5 percent at December 31, 1998 and 116.1
percent at March 31, 1998. Consumer two-months-and-over contractual
delinquency ("delinquency") as a percent of managed consumer
receivables was 4.81 percent, compared with 4.90 percent at
December 31, 1998 and 4.65 percent at March 31, 1998. The
annualized total consumer managed chargeoff ratio in the first
quarter of 1999 was 4.37 percent, compared with 4.39 percent in the
prior quarter and 4.17 percent in the year-ago quarter.
<PAGE>
<PAGE> 17
- - The ratio of total shareholders' equity (including company
obligated mandatorily redeemable preferred securities of subsidiary
trusts) to total owned assets was 12.56 percent, compared with
12.78 percent at December 31, 1998. The ratio of total
shareholders' equity to managed assets was 9.30 percent at March
31, 1999 and 9.31 percent at December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Our subsidiaries use cash to originate loans, purchase loans or
investment securities and acquire businesses. Their main sources of
cash are the collection of receivable balances; maturities or sales
of investment securities; proceeds from the issuance of debt,
deposits and securitization of consumer receivables; and cash
provided by operations.
On March 9, 1999, the Board of Directors authorized the repurchase
of up to $2 billion of Household's outstanding common shares.
Purchases will occur in the open market, from time to time over a
two-year period from the date of the announcement, depending upon
market conditions. In February and March 1999, we repurchased 5.7
million shares of our common stock. We repurchased 5 million shares
in the quarter to fund employee benefit plans and another .7
million shares following the March 9 announcement of our on-going
share repurchase program. Treasury stock activity during the
quarter also included approximately 1.6 million shares withheld to
cover taxes associated with the exercise of stock options by former
Beneficial employees.
The following describes major changes in our funding base from
December 31, 1998 to March 31, 1999:
- - Deposits increased 10 percent to $2.3 billion from $2.1
billion. Commercial paper, bank and other borrowings increased 5
percent to $10.4 billion from $9.9 billion. Senior and senior
subordinated debt (with original maturities over one year)
increased slightly to $30.8 billion from $30.4 billion. The
increase in debt levels from year end is primarily attributable to
the increase in owned receivables. Senior debt issuances during the
quarter included $1.3 billion of ten-year debt which lengthened the
overall maturities of our funding.
- - Our securitized portfolio of home equity, auto finance,
MasterCard and Visa, private label and other unsecured receivables
totaled $18.9 billion at March 31, 1999, compared with $19.7
billion at December 31, 1998. In the first quarter of 1999, we
securitized, excluding replenishments of certificate holder
interests, $.8 billion of auto finance, MasterCard and Visa and
other unsecured receivables, compared with $.3 billion of other
unsecured receivables a year ago.
The composition of these securitizations by type is as follows
(in billions):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
March 31, March 31,
Three months ended 1999 1998
- ----------------------------------------------------------------------
<S> <C> <C>
Auto finance $ .3 $ -
MasterCard/Visa .2 -
Other unsecured .3 .3
----- -----
Total $ .8 $ .3
===== =====
</TABLE>
The market for securities backed by receivables is a reliable,
efficient and cost-effective source of funds. Although they
currently represent a smaller portion of our total funding mix, we
plan to utilize securitizations as a source of funding in the
future. Securitization balances at the end of the 1999 quarter, as
a percent of the total managed portfolio, equaled just under 30
percent of our funding mix, compared to about 37 percent a year
ago.
<PAGE>
<PAGE> 18
PRO FORMA MANAGED STATEMENTS OF INCOME
- --------------------------------------
Securitizations of consumer receivables have been, and will
continue to be, a source of liquidity and capital management for
us. We continue to service securitized receivables after they have
been sold and retain a limited recourse liability for future credit
losses. We include revenues and credit-related expenses related to
the off-balance sheet portfolio in one line item in our owned
statements of income. Specifically, we report net interest margin,
fee and other income, and provision for credit losses for
securitized receivables as a net amount in securitization income.
We monitor our operations on a managed basis as well as on the
owned basis shown in our statements of income. The managed basis
assumes that the securitized receivables have not been sold and are
still on our balance sheet. The income and expense items discussed
above are reclassified from securitization income into the
appropriate caption. Pro forma managed statements of income, which
reflect these reclassifications, are presented below. For purposes
of this analysis, the managed results do not reflect the
differences between our accounting policies for owned receivables
and the off-balance sheet portfolio. Therefore, net income on a pro
forma managed basis equals net income on an owned basis.
Pro Forma Managed Statements of Income
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
All dollar amounts are stated in millions.
Three months ended March 31 1999 * 1998 *
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Finance and other interest income $ 2,209.3 13.58% $ 2,234.3 13.80%
Interest expense 914.2 5.62 979.9 6.05
--------- ----- --------- -----
Net interest margin 1,295.1 7.96 1,254.4 7.75
Provision for credit losses 671.5 650.8
--------- ---------
Net interest margin after provision
for credit losses 623.6 603.6
--------- ---------
Insurance revenues 142.2 119.5
Investment income 41.2 39.9
Fee income 272.8 290.4
Other income 109.2 87.7
Gain on sale of Beneficial Canada - 189.4
--------- ---------
Total other revenues 565.4 726.9
--------- ---------
Salaries and fringe benefits 284.1 292.3
Occupancy and equipment expense 66.8 85.6
Other marketing expenses 88.5 103.0
Other servicing and administrative expenses 162.6 177.3
Amortization of acquired intangibles
and goodwill 36.3 42.4
Policyholders' benefits 68.6 63.6
--------- ---------
Total costs and expenses 706.9 764.2
--------- ---------
Income before taxes 482.1 566.3
Income taxes 161.3 208.5
--------- ---------
Net income** $ 320.8 $ 357.8
========= =========
Average managed receivables $64,098.7 $63,658.8
Average noninsurance investments 557.6 833.5
Average other interest-earning assets 405.5 281.2
--------- ---------
Average managed interest-earning assets $65,061.8 $64,773.5
========= =========
* As a percent, annualized, of average managed interest earning assets.
**Net operating income, which excludes the gain on sale of Beneficial
Canada, was $239.3 million for the three months ended March 31, 1998.
/TABLE
<PAGE>
<PAGE> 19
The following discussion on revenues, where applicable, and
provision for credit losses includes comparisons to amounts
reported on our historical owned statements of income ("Owned
Basis"), as well as on the above pro forma managed statements of
income ("Managed Basis").
Net interest margin
- --------------------
Net interest margin on an Owned Basis was $859.6 million for the
first quarter of 1999, compared to $716.7 million in the prior
year. Owned margin improved due to an increase in average owned
home equity loans. Net interest margin on a Managed Basis was
$1,295.1 million for the first quarter of 1999, up 3 percent
compared to the year-ago period. The increase was primarily due to
an increase in average managed home equity loans, but was offset by
a decrease in average managed MasterCard and Visa receivables. Net
interest margin as a percent of average managed interest-earning
assets, annualized, was 7.96 percent compared to 7.75 percent in
the year-ago quarter. The improvement reflected lower funding costs
and better pricing.
Provision for credit losses
- ---------------------------
The provision for credit losses for receivables on an Owned Basis
for the first quarter of 1999 totaled $417.8 million, compared to
$389.3 million in the prior year period. The provision as a percent
of average owned receivables, annualized, was 3.74 percent in the
first quarter of 1999, compared to 3.90 percent in the first
quarter of 1998. The provision for credit losses on an Owned Basis
may vary from quarter to quarter, depending on the amount of
securitizations in a particular period.
The provision for credit losses for receivables on a Managed Basis
totaled $671.5 million in the first quarter of 1999, compared to
$650.8 million in the prior year period. As a percent of average
managed receivables, annualized, the provision was 4.19 percent,
compared to 4.09 percent in the first quarter of 1998. The Managed
Basis provision includes the over-the-life reserve requirement on
the off-balance sheet portfolio. This provision is impacted by the
type and amount of receivables securitized in a given period and
substantially offsets the income recorded on the securitization
transactions. In the first quarter of 1999, we securitized
approximately $.8 billion of auto finance, MasterCard and Visa and
other unsecured receivables, compared to approximately $.3 billion
of other unsecured receivables a year ago. See the credit quality
section for further discussion of factors affecting the provision
for credit losses.
Other revenues
- --------------
Securitization income on an Owned Basis was $324.9 million for the
three months ended March 31, 1999 and $419.3 million for the same
period in 1998. Securitization income consists of income associated
with the securitization and sale of receivables with limited
recourse, including net interest income, fee and other income and
provision for credit losses related to those receivables. The
decrease in securitization income compared to the first quarter of
1998 was primarily due to the decrease in average securitized
receivables. The components of securitization income are
reclassified to the appropriate caption in the statements of income
on a Managed Basis.
Insurance revenues were up 19 percent to $142.2 million from $119.5
million in 1998. This increase is somewhat reflective of the
benefits of Beneficial's historically greater emphasis on insurance
sales. Additionally, we have benefited from improved loan
origination and retention in our consumer finance branch system.
<PAGE>
<PAGE> 20
Fee income on an Owned Basis includes revenues from fee-based
products such as credit cards. Fee income was $129.7 million in the
first quarter of 1999, compared to $147.3 million in the comparable
period of the prior year. The decrease in fee income in 1999
reflected lower interchange income and other credit card related
fees due to lower average credit card receivables.
Fee income on a Managed Basis, which in addition to the items
discussed above, includes fees and other income related to the off-
balance sheet portfolio. Managed Basis fee income was $272.8
million in the first quarter of 1999 compared to $290.4 million in
1998. The decrease was primarily due to lower interchange income
and other credit card related fees.
Other income was $109.2 million in the first quarter of 1999, up
from $87.7 million in 1998 primarily due to higher RAL income.
Total other revenue for the first quarter of 1998 included a pretax
gain of $189.4 million from the sale of Beneficial's Canadian
operations, as previously discussed.
Expenses
- --------
Operating expenses for the first quarter of 1999 were $638.3
million, down $62.3 million from $700.6 million in the comparable
prior year period reflecting the cost saves from the Beneficial
integration, as well as continued cost control efforts.
Salaries and fringe benefits were $284.1 million compared with
$292.3 million in the first quarter of 1998. The decrease was due
to efficiencies from the Beneficial merger, partially offset by
higher sales-related compensation related to growing the consumer
finance business.
Occupancy and equipment expense was $66.8 million in the first
quarter of 1999, down from $85.6 million in the prior year. The
decrease was primarily due to the elimination of duplicative branch
offices and operating centers as a result of the Beneficial merger
and sublease of the Beneficial office complex in Peapack, New
Jersey.
Other marketing expenses were $88.5 million compared with $103.0
million in the first quarter of 1998. The decrease in expense in
1999 was primarily due to lower marketing spending on programs in
our MasterCard and Visa business.
Other servicing and administrative expenses were $162.6 million in
the first quarter of 1999, down from $177.3 million in the prior
year. The decrease was primarily due to cost saves in systems as a
result of the consolidation of Beneficial's operations, partially
offset by higher real estate owned expenses.
Amortization of acquired intangibles and goodwill was $36.3 million
in the first quarter of 1999, down from $42.4 million in the prior
year period. The decrease reflects the write-off of intangible
assets in conjunction with portfolio sales in 1998 due to the
repositioning of our Household Bank branded credit card portfolio.
<PAGE>
<PAGE> 21
CREDIT LOSS RESERVES
- --------------------
Our consumer credit management policies focus on product type and
specific portfolio risk factors. The consumer credit portfolio is
diversified by product and geographic location. See Note 3,
"Receivables" in the accompanying financial statements for
receivables by product type.
Total managed credit loss reserves, which include reserves
established on the off-balance sheet portfolio when receivables are
securitized, were as follows (in millions):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
March 31, December 31, March 31,
1999 1998 1998
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Owned $1,729.7 $1,734.2 $1,725.6
Serviced with limited recourse 814.8 813.9 847.4
-------- -------- --------
Total $2,544.5 $2,548.1 $2,573.0
======== ======== ========
</TABLE>
Managed credit loss reserves as a percent of nonperforming managed
receivables were 104.7 percent, compared to 109.5 percent at
December 31, 1998 and 116.1 percent at March 31, 1998.
Total owned and managed credit loss reserves as a percent of
receivables were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
March 31, December 31, March 31,
1999 1998 1998
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Owned 3.81% 3.92% 4.31%
Managed 3.96 3.99 4.06
---- ---- ----
</TABLE>
The level of reserves for consumer credit losses is based on
delinquency and chargeoff experience by product and judgmental
factors. We also evaluate the potential impact of existing and
anticipated national and regional economic conditions on the
managed receivable portfolio when establishing credit loss
reserves. Reserve levels also reflect the impact of a growing
percentage of secured loans. See Note 4, "Credit Loss Reserves" in
the accompanying financial statements for analyses of reserves.
CREDIT QUALITY
- --------------
Delinquency and chargeoff levels in the consumer portfolio were
down compared to the prior quarter, but were higher than the first
quarter of 1998. We track delinquency and chargeoff levels on a
managed basis. We include the off-balance sheet portfolio since we
apply the same credit and portfolio management procedures as on our
owned portfolio. This results in a similar credit loss exposure for
us.
<PAGE>
<PAGE> 22
Delinquency
- -----------
Two-Months-and-Over Contractual Delinquency (as a percent of managed
consumer receivables):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
3/31/99 12/31/98 9/30/98 6/30/98 3/31/98
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
First mortgage 10.91% 14.90% 11.80% 11.07% 9.33%
Home equity 3.54 3.67 3.73 3.55 3.68
Auto finance 1.74 2.29 2.05 1.67 1.84
MasterCard/Visa 3.61 3.75 3.73 3.30 3.10
Private label 6.37 6.20 6.55 6.10 6.04
Other unsecured 7.84 7.94 8.03 7.82 7.72
----- ----- ----- ----- ----
Total 4.81% 4.90% 4.96% 4.65% 4.65%
===== ===== ===== ===== ====
</TABLE>
Delinquency as a percent of managed consumer receivables decreased
from the prior quarter but increased from the prior year quarter.
The decrease from the prior quarter was primarily due to a $35
million decline in dollars of delinquency, led by improvement in
our domestic MasterCard and Visa business. This was the second
consecutive quarter of delinquency improvement and dollars of
delinquency have declined by over $75 million in the last six months.
The increase in the managed delinquency ratio from a year ago was
due to seasoning of the MasterCard and Visa and other unsecured
portfolios as well as the maturing of certain special promotional
balances in our private label portfolio.
Net Chargeoffs of Consumer Receivables
- --------------------------------------
Net Chargeoffs of Consumer Receivables (as a percent, annualized,
of average managed consumer receivables):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
1999 1998 1998 1998 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
First mortgage .48% 1.04% (.32)% .21% .81%
Home equity .55 .68 .72 .52 .61
Auto finance 5.45 5.63 4.89 5.18 5.94
MasterCard/Visa 7.59 6.61 5.96 5.49 5.78
Private label 5.53 5.47 5.33 6.05 5.73
Other unsecured 6.36 6.94 7.50 7.26 6.22
---- ---- ---- ---- ----
Total 4.37% 4.39% 4.33% 4.26% 4.17%
==== ==== ==== ==== ====
</TABLE>
Net chargeoffs as a percent of average managed consumer receivables for
the first quarter of 1999 decreased slightly from the prior quarter but
increased from the prior year quarter. The first quarter chargeoff ratio
was slightly lower than fourth quarter 1998, as total dollars of
chargeoffs dropped in the quarter, led by improvement in our home equity
and other unsecured portfolios. Chargeoff ratios in our MasterCard and
Visa portfolio continued to increase, due, in part, to lower receivables.
Bankruptcy chargeoffs in our MasterCard and Visa business were down compared
to the fourth quarter level. Chargeoffs in the private label portfolio
increased due to higher levels of personal bankruptcies as well as the
maturing of certain special promotional balances.
The higher chargeoff ratio compared to a year ago was primarily due
to increased chargeoffs in our MasterCard and Visa portfolio,
coupled with lower receivables in this portfolio compared to the
prior year.
<PAGE>
<PAGE> 23
Nonperforming Assets
- --------------------
Nonperforming assets consisted of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
In millions. 3/31/99 12/31/98 9/30/98 6/30/98 3/31/98
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual owned receivables $1,192.2 $1,064.1 $1,080.9 $ 948.5 $ 901.2
Accruing owned consumer
receivables 90 or more days
delinquent 601.7 652.4 570.2 548.7 494.7
Renegotiated commercial
loans 12.3 12.3 12.3 12.3 12.3
-------- -------- -------- -------- --------
Total nonperforming owned
receivables 1,806.2 1,728.8 1,663.4 1,509.5 1,408.2
Real estate owned 244.7 253.9 232.2 224.2 214.7
-------- -------- -------- -------- --------
Total nonperforming owned
assets $2,050.9 $1,982.7 $1,895.6 $1,733.7 $1,622.9
======== ======== ======== ======== ========
Owned credit loss reserves as
a percent of nonperforming
owned receivables 95.8% 100.3% 107.4% 116.4% 122.5%
-------- -------- -------- -------- --------
Nonaccrual managed
receivables $1,597.5 $1,439.2 $1,476.4 $1,409.6 $1,390.3
Accruing managed consumer
receivables 90 or more days
delinquent 819.8 874.6 832.0 818.6 812.7
Renegotiated commercial
loans 12.3 12.3 12.3 12.3 12.3
-------- -------- -------- -------- --------
Total nonperforming managed
receivables 2,429.6 2,326.1 2,320.7 2,240.5 2,215.3
Real estate owned 244.7 253.9 232.2 224.2 214.7
-------- -------- -------- -------- --------
Total nonperforming managed
assets $2,674.3 $2,580.0 $2,552.9 $2,464.7 $2,430.0
======== ======== ======== ======== ========
Managed credit loss reserves as
a percent of nonperforming
managed receivables 104.7% 109.5% 114.7% 116.9% 116.1%
-------- -------- -------- -------- --------
</TABLE>
YEAR 2000
- ---------
We continue to remain on target to be substantially complete with
remediation, replacement and testing of all systems for Year 2000
compliance by the end of the second quarter of 1999. Consistent
with previous disclosures, the costs for Year 2000 compliance have
not been, and are not expected to be, material to our operations.
Our current estimate of the aggregate cost of our Year 2000 effort
remains at $20 million after-tax, of which approximately $17
million has been incurred as of March 31, 1999.
<PAGE>
<PAGE> 24
PART II. OTHER INFORMATION
Item 5. Other Information
As stated in Household's 1999 Proxy Statement, in
order for a stockholder proposal to be considered for
inclusion in Household's proxy statement for the 2000
Annual Meeting of Stockholders, the proposal must be
received by Household on or before November 27, 1999.
Household's Bylaws require that any proposal to be
presented from the floor of the 2000 Annual Meeting of
Stockholders must be received by Household no earlier than
December 13, 1999 and no later than January 12, 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12 Statement of Computation of Ratio of Earnings
to Fixed Charges and to Combined Fixed Charges and
Preferred Stock Dividends.
27 Financial Data Schedule.
27.1 Restated Financial Data Schedule.
99.1 Debt and Preferred Stock Securities Ratings.
(b) Reports on Form 8-K
During the first quarter of 1999, the Registrant filed
a Current Report on Form 8-K dated January 28, 1999 with
respect to the financial results of Household International,
Inc., for the quarter and year ended December 31, 1998,
and a Current Report on Form 8-K dated March 9, 1999 noting
the implementation of a stock repurchase program.
<PAGE>
<PAGE> 25
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HOUSEHOLD INTERNATIONAL, INC.
-----------------------------
(Registrant)
Date: May 13, 1999 By: /s/ David A.Schoenholz
------------ -----------------------------
David A. Schoenholz
Executive Vice President -
Chief Financial Officer
and on behalf of
Household International, Inc.
<PAGE>
<PAGE> 26
Exhibit Index
--------------
12 Statement of Computation of Ratio of Earnings
to Fixed Charges and to Combined Fixed Charges and
Preferred Stock Dividends.
27 Financial Data Schedule.
27.1 Restated Financial Data Schedule.
99.1 Debt and Preferred Stock Securities Ratings.
EXHIBIT 12
----------
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
All dollar amounts are stated in millions.
Three months ended March 31 1999 1998
- ------------------------------------------------------------------
<S> <C> <C>
Net income $ 320.8 $ 357.8
Income taxes 161.3 208.5
-------- --------
Income before income taxes 482.1 566.3
-------- --------
Fixed charges:
Interest expense <F1> 651.2 614.2
Interest portion of rentals <F2> 10.9 16.4
-------- --------
Total fixed charges 662.1 630.6
-------- --------
Total earnings as defined $1,144.2 $1,196.9
======== ========
Ratio of earnings to fixed charges 1.73 1.90
======== ========
Preferred stock dividends <F3> $ 3.5 $ 6.6
======== ========
Ratio of earnings to combined fixed charges
and preferred stock dividends 1.72 1.88
======== ========
<FN>
<F1> For financial statement purposes, interest expense includes
income earned on temporary investment of excess funds,
generally resulting from over-subscriptions of commercial
paper.
<F2> Represents one-third of rentals, which approximates the
portion representing interest.
<F3> Preferred stock dividends are grossed up to their pretax
equivalent based upon an effective tax rate of 33.5 percent
for the three months ended March 31, 1999 and 36.8 percent
for the same period in 1998.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FOLLOWING SUMMARY FINANCIAL INFORMATION OF THE COMPANY AND
ITS SUBSIDIARIES IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION AND FINANCIAL STATEMENTS PREVIOUSLY FILED WITH THE
SECURITIES & EXCHANGE COMMISSION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 288,900
<SECURITIES> 2,952,300
<RECEIVABLES> 45,403,100
<ALLOWANCES> (2,544,500)
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 1,280,900
<DEPRECIATION> (797,200)
<TOTAL-ASSETS> 53,875,700
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 30,803,500
0
164,400
<COMMON> 550,100
<OTHER-SE> 6,052,500
<TOTAL-LIABILITY-AND-EQUITY> 53,875,700
<SALES> 0
<TOTAL-REVENUES> 2,255,700
<CGS> 0
<TOTAL-COSTS> 706,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 417,800
<INTEREST-EXPENSE> 648,900
<INCOME-PRETAX> 482,100
<INCOME-TAX> 161,300
<INCOME-CONTINUING> 320,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 320,800
<EPS-PRIMARY> .66<F2>
<EPS-DILUTED> .65<F3>
<FN>
<F1>FINANCIAL STATEMENTS OF THE COMPANY WERE PREPARED IN ACCORDANCE
WITH FINANCIAL INSTITUTION INDUSTRY STANDARDS. ACCORDINGLY, THE
COMPANY'S BALANCE SHEETS WERE NON-CLASSIFIED.
<F2>REPRESENTS BASIC EPS COMPUTED IN ACCORDANCE WITH STATEMENT OF
FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE."
<F3>REPRESENTS DILUTED EPS COMPUTED IN ACCORDANCE WITH STATEMENT OF
FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE."
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998<F1>
<PERIOD-END> MAR-31-1998
<CASH> 419,700
<SECURITIES> 3,259,800
<RECEIVABLES> 40,048,300
<ALLOWANCES> (2,573,000)
<INVENTORY> 0
<CURRENT-ASSETS> 0<F2>
<PP&E> 1,279,600
<DEPRECIATION> (767,000)
<TOTAL-ASSETS> 48,956,400
<CURRENT-LIABILITIES> 0<F2>
<BONDS> 24,959,800
0
264,500
<COMMON> 540,300
<OTHER-SE> 6,405,500
<TOTAL-LIABILITY-AND-EQUITY> 48,956,400
<SALES> 0
<TOTAL-REVENUES> 2,332,000
<CGS> 0
<TOTAL-COSTS> 764,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 389,300
<INTEREST-EXPENSE> 612,200
<INCOME-PRETAX> 566,300
<INCOME-TAX> 208,500
<INCOME-CONTINUING> 357,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 357,800
<EPS-PRIMARY> .73<F3>
<EPS-DILUTED> .71<F4>
<FN>
<F1>RESTATED
<F2>FINANCIAL STATEMENTS OF THE COMPANY WERE PREPARED IN ACCORDANCE
WITH FINANCIAL INSTITUTION INDUSTRY STANDARDS. ACCORDINGLY, THE
COMPANY'S BALANCE SHEETS WERE NON-CLASSIFIED.
<F3>REPRESENTS BASIC EPS COMPUTED IN ACCORDANCE WITH STATEMENT OF
FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE."
AMOUNT HAS BEEN RESTATED AS A RESULT OF HOUSEHOLD'S MERGER WITH
BENEFICIAL, ACCOUNTED FOR AS A POOLING OF INTERESTS, AND FOR
HOUSEHOLD'S 3-FOR-1 STOCK SPLIT EFFECTED IN THE FORM OF A STOCK
DIVIDEND AND PAID ON JUNE 1, 1998.
<F4>REPRESENTS DILUTED EPS COMPUTED IN ACCORDANCE WITH STATEMENT OF
FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS PER
SHARE." AMOUNT HAS BEEN RESTATED AS A RESULT OF HOUSEHOLD'S MERGER
WITH BENEFICIAL, ACCOUNTED FOR AS A POOLING OF INTERESTS, AND FOR
HOUSEHOLD'S 3-FOR-1 STOCK SPLIT EFFECTED IN THE FORM OF A STOCK
DIVIDEND AND PAID ON JUNE 1, 1998.
</FN>
</TABLE>
EXHIBIT 99.1
------------
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
DEBT AND PREFERRED STOCK SECURITIES RATINGS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Standard Moody's Duff & Phelps
& Poor's Investors Fitch Credit Thomson
Corporation Service IBCA Rating Co. BankWatch
- ------------------------------------------------------------------------------------------------------
At March 31, 1999
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Household International, Inc.
Senior debt A A3 A A A
Commercial paper A-1 P-2 F-1 Duff 1 TBW-1
Preferred stock BBB+ baa1 A- A- BBB+
----------- --------- --------- ------------- ---------
Household Finance Corporation
Senior debt A A2 A+ A+ A+
Senior subordinated debt A- A3 A A A
Commercial paper A-1 P-1 F-1 Duff 1+ TBW-1
----------- --------- --------- ------------- ---------
Household Bank, f.s.b.
Senior debt A A2 A A NR
Subordinated debt A- A3 A- A- A
Certificates of deposit
(long/short-term) A/A-1 A2/P-1 A/F-1 A/Duff 1 TBW-1
Thrift notes A-1 P-1 F-1 Duff 1 TBW-1
- ------------------------------------------------------------------------------------------------------
</TABLE>
