<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 June 30, 2000
-------------
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)
(847) 564-5000
--------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
At July 31, 2000, there were 472,354,186 shares of registrant's common stock
outstanding.
<PAGE> 2
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
Table of Contents
PART I. Financial Information Page
----
Item 1. Financial Statements
Condensed Consolidated Statements of Operations
(Unaudited) - Three Months and Six Months
Ended June 30, 2000 and 1999.................................. 2
Condensed Consolidated Balance Sheets -
June 30, 2000 (Unaudited) and December 31, 1999............... 3
Condensed Consolidated Statements of Cash Flows
(Unaudited) - Six Months Ended
June 30, 2000 and 1999........................................ 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 4. Submission of Matters to a Vote of Security Holders........... 24
Item 6. Exhibits and Reports on Form 8-K.............................. 25
Signature............................................................. 26
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Household International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
-----------------------------------------------------------
All amounts, except per share data, are stated in millions.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Finance income $2,074.2 $1,583.0 $3,990.2 $3,081.6
Other interest income 9.2 7.4 18.1 17.3
Interest expense 933.0 661.2 1,754.7 1,310.1
--------- --------- --------- --------
Net interest margin 1,150.4 929.2 2,253.6 1,788.8
Provision for credit losses on owned
receivables 495.6 407.3 1,017.7 825.1
--------- --------- --------- --------
Net interest margin after provision for
credit losses 654.8 521.9 1,235.9 963.7
--------- --------- --------- --------
Securitization income 355.6 312.5 702.0 637.4
Insurance revenues 131.8 132.6 266.8 274.8
Investment income 42.5 41.8 83.3 83.0
Fee income 195.9 135.8 375.2 265.5
Other income 31.9 38.4 165.2 147.6
--------- --------- --------- --------
Total other revenues 757.7 661.1 1,592.5 1,408.3
--------- --------- --------- --------
Salaries and fringe benefits 378.9 298.6 723.8 582.7
Occupancy and equipment expense 75.6 66.6 151.1 133.4
Other marketing expenses 125.3 84.0 258.4 172.5
Other servicing and administrative expenses 144.1 142.3 330.9 304.9
Amortization of acquired intangibles
and goodwill 38.9 36.0 82.1 72.3
Policyholders' benefits 64.3 69.4 131.2 138.0
--------- --------- --------- --------
Total costs and expenses 827.1 696.9 1,677.5 1,403.8
--------- --------- --------- --------
Income before income taxes 585.4 486.1 1,150.9 968.2
Income taxes 201.5 159.2 394.1 320.5
--------- --------- --------- --------
Net income $ 383.9 $ 326.9 $ 756.8 $ 647.7
========= ========= ========= ========
Earnings per common share:
Net income $ 383.9 $ 326.9 $ 756.8 $ 647.7
Preferred dividends (2.3) (2.3) (4.6) (4.6)
--------- --------- --------- --------
Earnings available to
common shareholders $ 381.6 $ 324.6 $ 752.2 $ 643.1
========= ========= ========= ========
Average common shares 473.3 479.1 471.9 481.8
Average common and common equivalent --------- --------- --------- --------
shares 477.0 484.3 475.5 487.2
--------- --------- --------- --------
Basic earnings per common share $ .80 $ .67 $ 1.59 $ 1.33
Diluted earnings per common share .80 .67 1.58 1.32
--------- --------- --------- --------
Dividends declared per common share .19 .17 .36 .34
--------- --------- --------- --------
</TABLE>
See notes to interim condensed consolidated financial statements.
2
<PAGE> 4
Household International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
----------------------------------------------
In millions, except share data
--------------------------------------------------------------------------------
June 30, December 31,
2000 1999
--------------------------------------------------------------------------------
ASSETS (UNAUDITED)
Cash $ 478.8 $ 270.6
Investment securities 3,263.6 3,128.1
Receivables, net 61,122.8 52,158.4
Acquired intangibles and goodwill, net 1,781.0 1,590.4
Properties and equipment, net 492.5 476.4
Real estate owned 323.5 271.5
Other assets 3,007.5 2,854.0
----------- -----------
Total assets $ 70,469.7 $ 60,749.4
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt:
Deposits $ 8,106.6 $ 4,980.0
Commercial paper, bank and other borrowings 10,934.7 10,777.8
Senior and senior subordinated debt (with
original maturities over one year) 40,035.1 34,887.3
----------- -----------
Total debt 59,076.4 50,645.1
Insurance policy and claim reserves 1,289.6 1,308.9
Other liabilities 2,039.6 1,805.1
----------- -----------
Total liabilities 62,405.6 53,759.1
----------- -----------
Company obligated mandatorily redeemable
preferred securities of subsidiary trusts* 675.0 375.0
----------- -----------
Preferred stock 164.4 164.4
----------- -----------
Common shareholders' equity:
Common stock, $1.00 par value, 750,000,000
shares authorized, 550,603,738 and
550,431,057 shares issued at June 30, 2000
and December 31, 1999, respectively 550.6 550.4
Additional paid-in capital 1,882.0 1,780.8
Retained earnings 6,920.7 6,338.7
Accumulated other comprehensive income (257.7) (256.9)
Less common stock in treasury, 77,836,657 and
82,519,612 shares at June 30, 2000 and
December 31, 1999, respectively, at cost (1,870.9) (1,962.1)
----------- -----------
Total common shareholders' equity 7,224.7 6,450.9
----------- -----------
Total liabilities and shareholders' equity $ 70,469.7 $ 60,749.4
=========== ===========
* As described in note 8 to the financial statements, the sole assets of the
four trusts are Junior Subordinated Deferrable Interest Notes issued by
Household International, Inc. in June 2000, March 1998, June 1996 and June
1995, bearing interest at 10.00, 7.25, 8.70 and 8.25 percent, respectively,
with principal balances of $309.3, $206.2, $103.1 and $77.3 million,
respectively, and due June 30, 2030, December 31, 2037, June 30, 2036 and
June 30, 2025, respectively.
See notes to interim condensed consolidated financial statements.
3
<PAGE> 5
Household International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-----------------------------------------------------------
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
In millions.
-------------------------------------------------------------------------------------
Six months ended June 30 2000 1999
-------------------------------------------------------------------------------------
<S> <C> <C>
CASH PROVIDED BY OPERATIONS
Net income $ 756.8 $ 647.7
Adjustments to reconcile net income to cash
provided by operations:
Provision for credit losses on owned receivables 1,017.7 825.1
Insurance policy and claim reserves 60.8 23.8
Depreciation and amortization 150.5 150.2
Other, net 212.2 (3.9)
---------- ---------
Cash provided by operations 2,198.0 1,642.9
---------- ---------
INVESTMENTS IN OPERATIONS
Investment securities:
Purchased (448.5) (785.1)
Matured 236.4 286.1
Sold 33.8 465.9
Short-term investment securities, net change 103.3 95.4
Receivables:
Originations, net (18,640.7) (14,322.9)
Purchases and related premiums (4,002.4) (1,296.6)
Sold 12,720.7 11,097.8
Acquisition of business operations (87.1) --
Properties and equipment purchased (74.9) (76.9)
Properties and equipment sold 5.3 15.6
---------- ---------
Cash decrease from investments in operations (10,154.1) (4,520.7)
---------- ---------
FINANCING AND CAPITAL TRANSACTIONS
Short-term debt and demand deposits, net change (2.9) 220.4
Time certificates, net change 2,791.5 250.5
Senior and senior subordinated debt issued 9,038.6 6,516.8
Senior and senior subordinated debt retired (3,730.1) (3,726.0)
Policyholders' benefits paid (63.0) (67.2)
Cash received from policyholders 28.7 41.7
Shareholders' dividends (174.8) (167.9)
Purchase of treasury stock (69.3) (434.5)
Issuance of common stock 41.4 15.7
Issuance of company obligated mandatorily redeemable
preferred securities of subsidiary trusts 300.0 --
---------- ---------
Cash increase from financing and
capital transactions 8,160.1 2,649.5
---------- ---------
Effect of exchange rate changes on cash 4.2 (7.4)
---------- ---------
Increase (decrease)in cash 208.2 (235.7)
Cash at January 1 270.6 457.4
---------- ---------
Cash at June 30 $ 478.8 $ 221.7
========== =========
Supplemental cash flow information:
Interest paid $ 1,814.8 $ 1,329.0
---------- ---------
Income taxes paid 489.4 162.6
---------- ---------
Supplemental non-cash investing and financing activities:
Common stock issued for acquisition $ 209.4 --
---------- ---------
</TABLE>
See notes to interim condensed consolidated financial statements.
4
<PAGE> 6
Household International, Inc. and Subsidiaries
FINANCIAL HIGHLIGHTS
--------------------
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
All dollar amounts are stated in millions, except share data. 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $383.9 $ 326.9 $ 756.8 $ 647.7
Diluted earnings per common share .80 .67 1.58 1.32
Net interest margin and other revenues(1) 1,843.8 1,520.9 3,714.9 3,059.1
Return on average common shareholders' 21.5% 20.9% 21.8% 20.6%
equity, annualized
Return on average owned assets, annualized 2.27 2.37 2.32 2.38
Return on average managed assets,
annualized 1.78 1.78 1.80 1.77
Managed basis efficiency ratio (2) 36.5 36.0 36.3 35.8
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
June 30, December 31,
All dollar amounts are stated in millions. 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total assets:
Owned $ 70,469.7 $ 60,749.4
Managed 89,035.9 80,188.3
Receivables:
Owned 61,378.8 $ 52,289.4
Serviced with limited recourse 18,566.2 19,438.9
--------- ----------
Managed $ 79,945.0 $ 71,728.3
--------- ----------
Total shareholders' equity as a percent of owned assets (3) 11.44% 11.51%
--------- ----------
Total shareholders' equity as a percent of managed
assets (3) 9.06 8.72
--------- ----------
Tangible equity to tangible managed assets (4) 7.23 6.96
--------- ----------
</TABLE>
(1) Net of policyholders' benefits.
(2) Ratio of operating expenses to managed net interest margin and other
revenues less policyholders' benefits.
(3) Total shareholders' equity includes common shareholders' equity, preferred
stock and company obligated mandatorily redeemable preferred securities of
subsidiary trusts.
(4) Tangible equity consists of total shareholders' equity, excluding
unrealized gains and losses on investments, less acquired intangibles and
goodwill. Tangible managed assets represent total managed assets less
acquired intangibles and goodwill.
See notes to interim condensed consolidated financial statements.
5
<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 and 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. Results for the three and six months ended June 30, 2000 should
not be considered indicative of the results for any future quarters or the year
ending December 31, 2000. Household and its subsidiaries may also be referred to
in this Form 10-Q as "we," "us" or "our." These financial statements should be
read in conjunction with the consolidated financial statements and footnotes
included in our Annual Report on Form 10-K for the year ended December 31, 1999.
2. ACQUISITIONS
-----------------
On February 7, 2000, we purchased all of the outstanding capital stock of
Renaissance Holdings, Inc. ("Renaissance"), a privately held issuer of secured
and unsecured credit cards to non-prime customers, for approximately 5.0 million
of our common shares and cash. The acquisition provided us with an established
platform for growing the non-prime credit card business and will expand our
product offerings to customers and prospects in our other businesses. The
acquisition was accounted for as a purchase, and accordingly, Renaissance's
operations have been included in our results of operations from February 7,
2000.
3. INVESTMENT SECURITIES
--------------------------
<TABLE>
<CAPTION>
Investment securities consisted of the following available-for-sale investments:
---------------------------------------------------------------------------------------------------
In millions. June 30, 2000 December 31, 1999
---------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Marketable equity securities $ 34.5 $ 34.2 $ 32.7 $ 33.4
Corporate debt securities 1,921.8 1,800.3 1,790.4 1,692.3
U.S. government and federal
agency debt securities 601.7 593.2 248.6 236.7
Other 793.6 793.7 1,128.0 1,127.5
-------- -------- -------- --------
Subtotal 3,351.6 3,221.4 3,199.7 3,089.9
Accrued investment income 42.2 42.2 38.2 38.2
-------- -------- -------- --------
Total investment securities $ 3,393.8 $ 3,263.6 $ 3,237.9 $ 3,128.1
======== ======== ======== ========
</TABLE>
6
<PAGE> 8
4. RECEIVABLES
----------------
Receivables consisted of the following:
------------------------------------------------------------------------------
June 30, December 31,
In millions. 2000 1999
------------------------------------------------------------------------------
Real estate secured $ 32,168.5 $ 24,661.9
Auto finance 1,753.7 1,233.5
MasterCard/Visa 7,013.7 6,314.4
Private label 9,801.3 10,119.7
Other unsecured 9,947.9 9,151.6
Commercial and other 693.7 808.3
--------- --------
Total owned receivables 61,378.8 52,289.4
Accrued finance charges 1,093.1 879.3
Credit loss reserve for owned receivables (1,986.5) (1,757.0)
Unearned credit insurance premiums and
claims reserves (593.7) (569.3)
Amounts due and deferred from
receivables sales 2,192.8 2,225.6
Reserve for receivables serviced with
limited recourse (961.7) (909.6)
--------- --------
Total owned receivables, net 61,122.8 52,158.4
Receivables serviced with limited recourse 18,566.2 19,438.9
--------- --------
Total managed receivables, net $ 79,689.0 $ 71,597.3
========= ========
Receivables serviced with limited recourse consisted of the following:
------------------------------------------------------------------------------
June 30, December 31,
In millions. 2000 1999
------------------------------------------------------------------------------
Real estate secured $ 1,796.2 $ 2,273.6
Auto finance 2,097.1 1,806.3
MasterCard/Visa 8,873.6 9,478.7
Private label 1,150.0 1,150.0
Other unsecured 4,649.3 4,730.3
--------- --------
Total receivables serviced with limited recourse $ 18,566.2 $ 19,438.9
========= ========
The combination of owned receivables and receivables serviced with limited
recourse, which we consider our managed portfolio, consisted of the following:
------------------------------------------------------------------------------
June 30, December 31,
In millions. 2000 1999
------------------------------------------------------------------------------
Real estate secured $ 33,964.7 $ 26,935.5
Auto finance 3,850.8 3,039.8
MasterCard/Visa 15,887.3 15,793.1
Private label 10,951.3 11,269.7
Other unsecured 14,597.2 13,881.9
Commercial and other 693.7 808.3
--------- --------
Total managed receivables $ 79,945.0 $ 71,728.3
========= ========
7
<PAGE> 9
The amounts due and deferred from receivables sales included unamortized
securitization assets and funds set up under the recourse requirements for
certain sales totaling $2,283.0 million at June 30, 2000 and $2,230.5 million at
December 31, 1999. It also included net customer payments which we owed to the
securitization trustee of $89.8 million at June 30, 2000 and $68.9 million at
December 31, 1999.
The reserve for receivables serviced with limited recourse represents our best
estimate of probable losses on these receivables.
5. CREDIT LOSS RESERVES
-------------------------
An analysis of credit loss reserves for the three and six months ended June 30
was as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
In millions. 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Owned receivables:
Credit loss reserves at
beginning of period $1,909.7 $1,729.7 $ 1,757.0 $1,734.2
Provision for credit losses 495.6 407.3 1,017.7 825.1
Chargeoffs (524.9) (461.7) (1,050.6) (942.4)
Recoveries 50.9 53.7 94.4 102.3
Portfolio acquisitions, net 55.2 8.6 168.0 18.4
Credit loss reserves for owned ------- ------- -------- -------
receivables at June 30 1,986.5 1,737.6 1,986.5 1,737.6
------- ------- -------- -------
Receivables serviced with limited recourse:
Credit loss reserves at 951.4 814.8 909.6 813.9
beginning of period
Provision for credit losses 248.7 223.8 542.8 477.5
Chargeoffs (257.1) (265.6) (521.8) (541.4)
Recoveries 15.2 14.4 30.1 28.8
Other, net 3.5 (1.0) 1.0 7.6
------- ------- -------- -------
Credit loss reserves for
receivables serviced with
limited recourse at June 30 961.7 786.4 961.7 786.4
Total credit loss reserves for ------- ------- -------- -------
managed receivables at June 30 $2,948.2 $2,524.0 $ 2,948.2 $2,524.0
======= ======= ======== =======
</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.
8
<PAGE> 10
6. INCOME TAXES
-----------------
Our effective tax rate was 34.2 percent for the six months ended June 30, 2000
and 33.1 percent for the first six months of 1999. The effective tax rate
differs from the statutory federal income tax rate in these years primarily
because of the effects of state and local income taxes and leveraged lease tax
benefits.
7. EARNINGS PER COMMON SHARE
------------------------------
Computations of earnings per common share for the three and six months ended
June 30 were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
Three Months Ended
June 30,
In millions, except per share data. 2000 1999
----------------------------------------------------------------------------------------------------------------
Diluted Basic Diluted Basic
------- ------ ------- ------
<S> <C> <C> <C> <C>
Earnings:
Net income $383.9 $383.9 $ 326.9 $326.9
Preferred dividends (2.3) (2.3) (2.3) (2.3)
----- ----- ----- -----
Earnings available to common
shareholders $381.6 $381.6 $324.6 $324.6
===== ===== ===== =====
Average shares:
Common 473.3 473.3 479.1 479.1
Common equivalents 3.7 - 5.2 -
----- ----- ----- -----
Total 477.0 473.3 484.3 479.1
===== ===== ===== =====
Earnings per common share $ .80 $ .80 $ .67 $ .67
===== ===== ===== =====
----------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30,
In millions, except per share data. 2000 1999
----------------------------------------------------------------------------------------------------------------
Diluted Basic Diluted Basic
------- ------ ------- ------
Earnings:
Net income $756.8 $756.8 $647.7 $647.7
Preferred dividends (4.6) (4.6) (4.6) (4.6)
----- ----- ----- -----
Earnings available to common
shareholders $752.2 $752.2 $643.1 $643.1
===== ===== ===== =====
Average shares:
Common 471.9 471.9 481.8 481.8
Common equivalents 3.6 - 5.4 -
----- ----- ----- -----
Total 475.5 471.9 487.2 481.8
===== ===== ===== =====
Earnings per common share $ 1.58 $ 1.59 $ 1.32 $ 1.33
===== ===== ===== =====
</TABLE>
9
<PAGE> 11
8. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS.
--------------------------------------------------------------------------------
We have formed special purpose trusts for the purpose of issuing trust preferred
securities including Household Capital Trust V which issued $300 million of
trust preferred securities in June 2000. The sole assets of these trusts are
Junior Subordinated Deferrable Interest Notes ("Junior Subordinated Notes")
issued by Household. The following table summarizes our company obligated
mandatorily redeemable preferred securities of subsidiary trusts ("Preferred
Securities") and the related Junior Subordinated Notes (in millions):
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
Preferred
Securities Junior Subordinated Notes
-----------------------------------------------------------------------------------------------------
Redeemable
Interest Face Issue Principal By Issuer Stated
Issuer rate Value date balance Beginning Maturity
------ --------- --------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Household Capital June June 8, June 30,
Trust V ("HCT V") 10.00% $300 2000 $309.3 2005 2030
Household Capital March March 19, December
Trust IV ("HCT IV") 7.25% 200 1998 206.2 2003 31, 2037
Household Capital June June 30, June 30,
Trust II ("HCT II") 8.70% 100 1996 103.1 2001 2036
Household Capital June June 30, June 30,
Trust I ("HCT I") 8.25% 75 1995 77.3 2000 2025
-----------------------------------------------------------------------------------------------------
</TABLE>
The Preferred Securities must be redeemed when the Junior Subordinated Notes are
paid. The Junior Subordinated Notes have a stated maturity date, but are
redeemable by Household in whole or in part beginning on the dates indicated
above at which time the preferred securities are callable at par ($25 per
Preferred Security) plus accrued and unpaid dividends. Dividends on the
Preferred Securities are cumulative, payable quarterly in arrears, and are
deferrable at Household's option for up to five years. Household cannot pay
dividends on its preferred and common stocks during such deferments. The
Preferred Securities have a liquidation value of $25 per preferred security. HCT
I may elect to extend the maturity of its preferred securities to June 2044.
Dividends on the Preferred Securities have been classified as interest expense
in our statement of income.
HCT I, HCT II, HCT IV, and HCT V (collectively, "the Trusts") are wholly-owned
subsidiaries of Household. Household's obligations with respect to the Junior
Subordinated Notes, when considered together with certain undertakings of
Household with respect to the Trusts, constitute full and unconditional
guarantees by Household of the Trust's obligations under the respective
Preferred Securities. The Preferred Securities are classified in our balance
sheet as company obligated mandatorily redeemable preferred securities of
subsidiary trusts (representing the minority interests in the trusts) at their
face and redemption amount of $675 million at June 30, 2000 and $375 million at
December 31, 1999.
9. FORWARD PURCHASE AGREEMENT
-------------------------------
As of June 30, 2000, we had entered into agreements to purchase, on a forward
basis, approximately 6.8 million shares of our common stock at a weighted
average forward price of $38.13 per share. The agreements may be settled either
physically by purchasing the shares or on a net basis in shares of our common
stock, at our option. The agreements have terms of up to one year but may be
settled earlier at our option. During the current quarter, settlements from
these forward purchase agreements resulted in our receiving 1.3 million shares
of our common stock at an average cost of $35.40 per share.
10
<PAGE> 12
10. COMPREHENSIVE INCOME
-------------------------
Comprehensive income was $333.5 million for the quarter ended June 30, 2000,
$263.0 million for the quarter ended June 30, 1999, $756.0 million for the six
months ended June 30, 2000 and $547.0 million for the six months ended June 30,
1999.
The components of accumulated other comprehensive income are as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
June 30, December 31,
In millions. 2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Foreign currency translation adjustments $ (229.8) $ (185.6)
Unrealized gain (loss) on investments, net (27.9) (71.3)
-------- -------
Accumulated other comprehensive income $ (257.7) $ (256.9)
======== =======
</TABLE>
11. SEGMENT REPORTING
----------------------
We have three reportable segments: Consumer, which includes our domestic
branch-based and correspondent consumer finance, private label credit card 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, 1999.
Information about our reportable segments for the second quarter and first six
months of 2000 compared to the corresponding prior year periods was as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
Owned Basis June 30, June 30,
In millions. 2000 1999
--------------------------------------------------------------------------------------------------------------------
Total Total
Total Credit Inter- Total Credit Inter-
Consumer Card national Consumer Card national
-------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest margin and
other revenues (1) $ 1,192.3 $ 479.7 $ 191.7 $ 975.4 $ 315.5 $ 198.4
Intersegment revenues 53.3 7.5 1.2 28.6 2.4 .8
Segment net income 304.5 48.1 42.1 228.0 29.0 51.9
Total segment assets 50,863.8 7,307.3 7,319.3 38,064.6 6,142.5 7,122.1
Total segment assets -
managed 59,748.4 15,981.2 8,483.8 46,375.8 14,639.3 8,240.6
-------- -------- ------- -------- -------- -------
--------------------------------------------------------------------------------------------------------------------
Six Months Ended Six Months Ended
Owned Basis June 30, June 30,
In millions. 2000 1999
--------------------------------------------------------------------------------------------------------------------
Total Total
Total Credit Inter- Total Credit Inter-
Consumer Card national Consumer Card national
-------- -------- ------- -------- -------- --------
Net interest margin and
other revenues (1) $ 2,352.3 $ 878.4 $ 428.9 $ 1,913.4 $ 608.0 $ 392.0
Intersegment revenues 91.2 15.6 2.4 60.0 5.1 1.6
Segment net income 545.7 77.4 106.4 436.0 41.1 98.1
Total segment assets 50,863.8 7,307.3 7,319.3 38,064.6 6,142.5 7,122.1
Total segment assets -
managed 59,748.4 15,981.2 8,483.8 46,375.8 14,639.3 8,240.6
-------- -------- ------- -------- -------- -------
</TABLE>
(1) Net interest margin and other revenues, including intersegment revenues, net
of policyholders' benefits.
11
<PAGE> 13
A reconciliation of the total reportable segments' net income to consolidated
net income for the second quarter and first six months of 2000 and 1999 is as
follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
In millions. 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Reportable segment net income $394.7 $308.9 $729.5 $575.2
Other operations not individually reportable 28.8 45.7 97.0 128.3
Adjustments/eliminations (39.6) (27.7) (69.7) (55.8)
----- ----- ----- -----
Total consolidated net income $383.9 $326.9 $756.8 $647.7
===== ===== ===== =====
</TABLE>
12. ACCOUNTING PRONOUNCEMENTS
--------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") 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.
FASB Statement No. 137 deferred our required adoption of FAS No. 133 to January
1, 2001. FASB Statement No. 138, which addressed a limited number of issues
causing implementation difficulties, was issued in June 2000. We have not yet
quantified the impact of these pronouncements on our financial statements.
12
<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, 1999 (the "1999 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 1999 Form 10-K.
OPERATIONS SUMMARY
------------------
Our net income for the second quarter of 2000 increased 17 percent to $383.9
million, from $326.9 million a year ago. Net income for the first six months of
2000 was $756.8 million, compared to $647.7 million in the year ago period.
Diluted earnings per share was $.80 in the second quarter and $1.58 for the
first six months of 2000, compared to $.67 and $1.32 in the same periods in
1999. These improved results were due to strong revenue growth driven by
significant receivable growth, partially offset by higher operating expenses
from the portfolio growth as well as increased technology, marketing and
e-commerce spending. In addition, our year-to-date earnings included higher net
income in the first quarter from our tax refund anticipation loan ("RAL")
business which contributed $.12 per share to first quarter 2000 earnings
compared to $.10 in 1999.
Our annualized return on average common shareholders' equity ("ROE")was 21.5
percent for the second quarter of 2000 and 21.8 percent for the first six months
of 2000, compared to 20.9 percent and 20.6 percent in the same periods in 1999.
Our annualized return on average owned assets ("ROA") was 2.27 percent in the
second quarter of 2000 and 2.32 percent for the first six months of 2000,
compared to 2.37 percent and 2.38 percent in the same periods in 1999. Our
annualized return on average managed assets ("ROMA") was 1.78 percent in the
second quarter of 2000 and 1.80 percent for the first six months of 2000,
compared to 1.78 percent and 1.77 percent in the same periods in 1999.
Our normalized managed basis efficiency ratio was 36.5 percent for the second
quarter of 2000 and 36.3 percent for the first six months of 2000 compared to
36.0 percent and 35.8 percent in the same periods in 1999. The efficiency ratio
is the ratio of operating expenses to the sum of our managed net interest margin
and other revenues less policyholders' benefits. The higher managed ratio
reflects additional technology, marketing and e-commerce spending and costs
related to the addition of the Renaissance platform in the first quarter of
2000.
SEGMENT RESULTS
---------------
Our Consumer segment reported improved results from the prior year periods.
Managed receivables grew to $58.2 billion at June 30, 2000, from $53.8 billion
at March 31, 2000 and $44.8 billion at June 30, 1999. Our higher managed
receivables were driven by solid growth in real estate secured, other unsecured
and auto finance receivables. In 2000, we acquired real estate secured
portfolios of $3.7 billion, including a $1.5 portfolio in June 2000. ROA was
2.53 and 2.37 percent in the second quarter and first six months of 2000
compared to 2.45 and 2.40 percent in the year-ago periods. ROMA was 2.14 and
1.98 percent in the second quarter and first six months of 2000 compared to 1.99
and 1.93 percent in the year-ago periods. Operating results reflect higher
dollars of net interest margin partially offset by higher salaries expense,
including higher sales incentive compensation, and higher credit loss provision
reflecting the increased levels of receivables.
13
<PAGE> 15
Our credit card segment also reported improved results for the quarter. Managed
receivables were $14.3 billion at June 30, 2000, $13.8 billion at March 31, 2000
and $13.1 billion at June 30, 1999. The increase over the previous quarter was
primarily due to growth in our Renaissance portfolio and in our GM Card(R)
portfolio due to the launch of the new GM Card in late March. This growth was
partially offset by continued attrition in our legacy undifferentiated Household
Bank branded portfolio on which we have limited marketing efforts. Compared with
the prior year quarter, strong receivables growth in the Union Privilege ("UP")
portfolio and the impact of the Renaissance acquisition was partially offset by
the previously discussed attrition in our Household Bank branded portfolio. ROA
was 2.66 and 2.25 percent in the second quarter and first six months of 2000
compared to 1.86 and 1.27 percent in the year-ago periods. ROMA was 1.22 and .99
percent in the second quarter and first six months of 2000 compared to .79 and
.54 percent in the year-ago periods. The improvement in operating results
primarily was due to increased net interest margin from better pricing and
higher fee income which was partially offset by higher credit loss provision and
increased marketing expenses.
Our International segment reported lower earnings in the second quarter compared
with the prior year quarter, but higher earnings year-to-date compared with the
prior year period. Managed receivables were $7.4 billion at June 30, 2000, $7.6
billion at March 31, 2000 and $7.1 billion at June 30, 1999. All products
reported receivable growth during the quarter. This growth, however, was more
than offset by unfavorable foreign exchange impact. Year-over-year receivables
growth primarily was attributable to higher MasterCard* and Visa* receivables in
the U.K., led by continued strong growth in the Goldfish Card, which we issue as
part of our alliance with the Centrica Group, and marbles(TM), our
Internet-based credit card that was launched in October 1999. ROA was 2.33 and
2.88 percent in the second quarter and first six months of 2000 compared to 2.95
and 2.79 percent in the year-ago periods. ROMA was 2.00 and 2.49 percent in the
second quarter and first six months of 2000 compared to 2.54 and 2.39 percent in
the year-ago period. The decrease in operating results for the quarter were
primarily due to increases in marketing and e-commerce expenses. The improvement
in operating results for the first half of the year primarily was due to
increased revenues and higher receivables, partially offset by higher operating
expenses, particularly marketing, resulting from portfolio growth.
* MasterCard is a registered trademark of MasterCard International,
Incorporated and Visa is a registered trademark of VISA USA, Inc.
14
<PAGE> 16
BALANCE SHEET REVIEW
--------------------
- Strong receivables growth was a key driver of our improved results. Total
managed receivables increased 22 percent from a year ago to $79.9 billion.
Excluding the $3.7 billion real estate secured and the $465 million
Renaissance portfolios that we acquired this year, receivables were up 16
percent with real estate secured loans up 23 percent. All consumer products
contributed to the year-over-year growth. The strongest contributor was our
U.S. consumer finance business, which includes our real estate secured and
unsecured products, which reported growth of 32 percent. The consumer
finance growth was the result of favorable competitor and market
conditions, improved customer retention, and increased productivity from
our branch sales force who continue to benefit from our centralized lead
management and point-of-sale system. Auto finance receivables increased
$1.5 billion over last year to $3.9 billion. This business continued to
benefit from favorable market conditions and an expanded collection and
sales force.
MasterCard and Visa receivables were up 7 percent from last year and were
up 4 percent excluding the purchased Renaissance portfolio. Both our UP
portfolio and our Goldfish card portfolio in the U.K. reported solid
year-over-year growth. This growth was offset, as expected, by continued
attrition in our undifferentiated Household Bank portfolio and reflects our
strategy to de-emphasize this low margin business. Our sub-prime card
program continued to expand. Including the receivables and accounts we
purchased as part of the Renaissance acquisition, we now have almost 2.4
million accounts and over $900 million in receivables.
- Compared to March 31, 2000, managed receivables increased 6 percent.
Excluding the $1.5 billion real estate secured portfolio acquired in June
2000, total managed receivables increased 4 percent and receivables in our
consumer finance business increased 6 percent. MasterCard and Visa
receivables grew over 2 percent in the quarter. Growth in the quarter was
favorably impacted by the launch of the new GM Card where new account
generation is exceeding our expectations. Private label receivables were
flat in the quarter as we focused our attention on strengthening and
expanding existing merchant relationships. Auto finance growth was also
strong in the quarter.
- Owned receivables were $61.4 billion at June 30, 2000, up from $56.2
billion at March 31, 2000 and $47.5 billion at June 30, 1999. The level of
our owned receivables may vary from period to period depending on the
timing and size of securitization transactions.
- Owned consumer two-months-and-over contractual delinquency as a percent of
owned consumer receivables was 4.25 percent, compared with 4.58 percent at
March 31, 2000 and 4.96 percent at June 30, 1999. The annualized total
consumer owned chargeoff ratio in the second quarter of 2000 was 3.27
percent, compared with 3.53 percent in the prior quarter and 3.54 percent
in the year-ago quarter.
- Managed consumer two-months-and-over contractual delinquency as a percent
of managed consumer receivables was 4.16 percent, compared with 4.43
percent at March 31, 2000 and 4.72 percent at June 30, 1999. The annualized
total consumer managed chargeoff ratio in the second quarter of 2000 was
3.74 percent, compared with 4.00 percent in the prior quarter and 4.10
percent in the year-ago quarter.
15
<PAGE> 17
- The ratio of total shareholders' equity (including company obligated
mandatorily redeemable preferred securities of subsidiary trusts) to total
owned assets was 11.44 percent at June 30, 2000, compared with 11.51
percent at December 31, 1999. The ratio of total shareholders' equity to
managed assets was 9.06 percent at June 30, 2000 and 8.72 percent at
December 31, 1999.
- The ratio of tangible equity to tangible managed assets was 7.23 percent,
compared with 6.96 percent at December 31, 1999. We expect this ratio to
increase over the next several quarters to the 7.25 percent to 7.50 percent
range.
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. Our liquidity and interest rate risk strategy
continues to be conservative and we are largely unaffected by changes in rates.
Assuming we were to take no action to mitigate the impact, at June 30, 2000, a
gradual 100 basis point rise in rates over a twelve month period is projected to
reduce our earnings per share by 6 cents.
In June 2000, a wholly-owned special purpose trust subsidiary issued $300
million of company obligated mandatorily redeemable preferred securities
(representing the minority interest in the trust).
As of June 30, 2000, we had entered into agreements to purchase, on a forward
basis, approximately 6.8 million shares of our common stock at a weighted
average price of $38.13 per share. The agreements may be settled either
physically by purchasing the shares or on a net basis in shares of our common
stock, at our option. The agreements have terms of up to one year but may be
settled earlier at our option. During the current quarter, settlements from
these forward purchase agreements resulted in our receiving 1.3 million shares
of our common stock at an average cost of $35.40 per share.
Since announcing our share repurchase program in March 1999, we have repurchased
18.8 million shares for a total of $782.2 million.
Deposits increased to $8.1 billion at June 30, 2000 from $5.0 billion at
December 31, 1999. Commercial paper, bank and other borrowings increased to
$10.9 billion at June 30, 2000 from $10.8 billion at year-end. Senior and senior
subordinated debt (with original maturities over one year) increased to $40.0
billion from $34.9 billion at year-end. The increase in debt levels from year
end is consistent with the increase in owned receivables.
Our securitized portfolio of real estate secured, auto finance, MasterCard and
Visa, private label and other unsecured receivables totaled $18.6 billion at
June 30, 2000, compared with $19.4 billion at December 31, 1999.
We securitized (excluding replenishments of certificate holder interests) the
following receivables:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
In billions. 2000 1999 2000 1999
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Auto finance $ .4 $ .3 $ .9 $ .6
MasterCard/Visa .3 .4 .5 .6
Other unsecured .3 - 1.1 .3
------ ------ ------ ------
Total $ 1.0 $ .7 $ 2.5 $ 1.5
====== ====== ====== ======
</TABLE>
16
<PAGE> 18
We believe the market for securities backed by receivables is a reliable,
efficient and cost-effective source of funds. Although our securitized portfolio
currently represents a smaller portion of our total funding mix, we plan to
continue utilizing securitizations as a source of funding in the future. At June
30, 2000, 23 percent of our managed portfolio had been securitized compared to
27 percent a year ago.
PRO FORMA MANAGED STATEMENTS OF INCOME
---------------------------------------
Securitizations of consumer receivables have been, and will continue to be, a
source of liquidity 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, provision for credit losses, fee
income and securitization related income 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. The pro forma managed
basis statement of income is not intended to reflect the differences between our
accounting policies for owned receivables and the off-balance sheet portfolio,
but merely to report net interest margin, fees and provision for loan losses as
if the securitized loans were held in our portfolio. Therefore, net income on a
pro forma managed basis equals net income on an owned basis.
17
<PAGE> 19
Pro Forma Managed Statements of Income
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
All dollar amounts are June 30, June 30,
stated in millions. 2000 * 1999 * 2000 * 1999 *
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Finance and other interest
income $ 2,839.6 14.54% $ 2,273.1 13.84% $ 5,485.3 14.48% $ 4,482.4 13.71%
Interest expense 1,244.8 6.37 908.9 5.53 2,365.0 6.24 1,823.1 5.57
--------- ------ -------- ------ -------- ------ --------- ------
Net interest margin 1,594.8 8.17 1,364.2 8.31 3,120.3 8.24 2,659.3 8.14
Provision for credit losses 744.3 631.1 1,560.5 1,302.6
--------- -------- -------- ---------
Net interest margin after
provision for credit losses 850.5 733.1 1,559.8 1,356.7
--------- -------- -------- ---------
Insurance revenues 131.8 132.6 266.8 274.8
Investment income 42.5 41.8 83.3 83.0
Fee income 353.3 282.9 686.1 551.2
Securitization related
income 2.5 (45.8) 67.2 (41.3)
Other income 31.9 38.4 165.2 147.6
--------- -------- -------- ---------
Total other revenues 562.0 449.9 1,268.6 1,015.3
--------- -------- -------- ---------
Salaries and fringe
benefits 378.9 298.6 723.8 582.7
Occupancy and equipment
expense 75.6 66.6 151.1 133.4
Other marketing expenses 125.3 84.0 258.4 172.5
Other servicing and
administrative expenses 144.1 142.3 330.9 304.9
Amortization of acquired
intangibles and goodwill 38.9 36.0 82.1 72.3
Policyholders' benefits 64.3 69.4 131.2 138.0
--------- -------- -------- ---------
Total costs and expenses 827.1 696.9 1,677.5 1,403.8
--------- -------- -------- ---------
Income before taxes 585.4 486.1 1,150.9 968.2
Income taxes 201.5 159.2 394.1 320.5
--------- -------- -------- ---------
Net income $ 383.9 $ 326.9 $ 756.8 $ 647.7
========= ========= ========= =========
Average managed receivables $ 77,101.6 $ 64,880.9 $ 74,724.7 $ 64,489.8
Average noninsurance
investments 563.0 376.5 610.5 467.0
Other interest-earning
assets 431.2 420.6 428.6 413.1
-------- --------- -------- ---------
Average managed interest-
earning assets $ 78,095.8 $ 65,678.0 $ 75,763.8 $ 65,369.9
========= ========= ========= =========
</TABLE>
* As a percent, annualized, of appropriate earning assets.
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 $1,150.4 million for the second
quarter of 2000, up from $929.2 million for the prior year quarter. Net interest
margin on an Owned Basis for the first six months of 2000 was $2,253.6 million,
up from $1,788.8 million in the prior year period. Net interest margin on a
Managed Basis increased 17 percent for both the quarter and six months to
$1,594.8 and $3,120.3 million, respectively. The increases were primarily due to
better pricing and receivable growth, which were partially offset by higher
funding costs.
18
<PAGE> 20
Net interest margin as a percent of average managed interest-earning assets,
annualized, declined to 8.17 percent, down from 8.31 percent in both the
previous and year-ago quarters. The decrease from the previous periods reflect
the continued shift in the portfolio to lower margin real estate secured
receivables and higher funding costs due to increases in interest rates.
Compared to the prior year, the margin also reflects improved pricing in our
consumer finance and MasterCard and Visa portfolios.
Provision for credit losses
---------------------------
The provision for credit losses for receivables on an Owned Basis for the second
quarter of 2000 totaled $495.6 million, compared to $407.3 million in the prior
year quarter. The Owned Basis provision for the first six months of 2000 was
$1,017.7 million, compared to $825.1 million in the year-ago period. The
provision as a percent of average owned receivables, annualized, was 3.38
percent in the second quarter of 2000 compared to 3.49 percent in the second
quarter of 1999. 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
$744.3 million in the second quarter of 2000, compared to $631.1 million in the
prior year quarter. The Managed Basis provision for the first six months of 2000
was $1,560.5 million, compared to $1,302.6 million in the year-ago period. As a
percent of average managed receivables, annualized, the provision was 3.86
percent, compared to 3.89 percent in the second quarter of 1999. 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. See "Liquidity and Capital
Resources" for the type and amount of receivables securitized and "Credit
Quality" for further discussion of factors affecting the provision for credit
losses.
Other revenues
--------------
Securitization income on an Owned Basis was $355.6 and $702.0 million for the
second quarter and the first six months of 2000, compared to $312.5 and $637.4
million for the same periods in 1999. 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 increases are primarily due to
changes in average securitized receivables and portfolio mix. The components of
securitization income are reclassified to the appropriate caption in the
Statements of Income on a Managed Basis.
Insurance revenues were $131.8 and $266.8 million in the second quarter and
first six months of 2000 compared to $132.6 and $274.8 million in the year-ago
periods. The decreases were primarily due to lower revenues in the United
Kingdom.
Fee income on an Owned Basis, which includes revenues from fee-based products
such as credit cards, was $195.9 and $375.2 million in the second quarter and
first six months of 2000, compared to $135.8 and $265.5 million in the year-ago
periods. The increases were primarily due to higher credit card fees from the
Renaissance portfolio.
Fee income on a Managed Basis was $353.3 and $686.1 million in the second
quarter and first six months of 2000 compared to $282.9 and $551.2 million in
the year-ago periods. The increases were primarily due to higher credit card
fees as discussed above.
Securitization related income on a Managed Basis, which includes the gross gains
and amortization on our securitized portfolio, was $2.5 and $67.2 million in the
second quarter and first six months of 2000 compared to ($45.8)
19
<PAGE> 21
and ($41.3) million in the year ago periods. Securitization related income will
vary from quarter to quarter depending upon the amount and mix of
securitizations in a particular period.
Other income was $31.9 and $165.2 million in the second quarter and first six
months of 2000 compared to $38.4 and $147.6 million in the prior year periods.
The decrease from the prior year quarter was primarily due to lower gains on
sales of non-strategic assets. The increase for the six months was primarily due
to higher income in our tax refund anticipation loan business. Increases in both
the number of refund anticipation loans and the average balance of such loans
was partially offset by reduced pricing.
Expenses
--------
Total costs and expenses for the second quarter and first six months of 2000
were $827.1 and $1,677.5 million compared to $696.9 and $1,403.8 million in the
comparable prior year periods. Higher expenses were driven by higher receivable
levels and increased technology, marketing and e-commerce spending. Our first
quarter acquisition of Renaissance also contributed to increased expenses over
the comparable prior year periods. Significant fluctuations were as follows:
Salaries and fringe benefits for the second quarter and first six months of 2000
were $378.9 and $723.8 million compared to $298.6 and $582.7 million in the
second quarter and first six months of 1999. The increases were primarily due to
higher sales incentive compensation and additional staffing to support growth in
the consumer finance and credit card businesses and the impact of the
Renaissance acquisition.
Occupancy and equipment expense for the second quarter and first six months of
2000 was $75.6 and $151.1 million compared to $66.6 and $133.4 million in the
comparable prior year periods. The increases were primarily due to support
facility growth associated with our Tampa, Florida collections center and branch
facilities acquired with the first quarter real estate secured portfolio
acquisition.
Other marketing expenses for the second quarter and first six months of 2000
were $125.3 and $258.4 million compared to $84.0 and $172.5 million in the
comparable prior year periods. The increases were primarily due to increased
credit card marketing initiatives.
Other servicing and administrative expenses for the second quarter and first six
months of 2000 were $144.1 and $330.9 million compared to $142.3 and $304.9
million in the comparable prior year periods. The increase for the six month
period was primarily due to e-commerce initiatives and increased costs resulting
from the Renaissance and real estate secured loan portfolio acquisitions.
Amortization of acquired intangibles and goodwill for the second quarter and
first six months of 2000 was $38.9 and $82.1 million compared to $36.0 and $72.3
million in the comparable prior year periods. The increases reflect higher
goodwill amortization associated with the Renaissance acquisition.
20
<PAGE> 22
CREDIT LOSS RESERVES
--------------------
Our consumer credit management policies focus on product type and specific
portfolio risk factors. When evaluating credit risk, we believe that it is
important to also consider risk adjusted revenue because our biggest protection
against credit loss is the ability to price for it. Risk adjusted revenue on a
Managed Basis was 7.37 percent and 7.59 percent for the second quarter and first
six months of 2000 compared to 7.31 percent and 7.23 percent in the comparable
prior year periods. Our consumer credit portfolio is diversified by product and
geographic location. See Note 4, "Receivables" in the accompanying financial
statements for receivables by product type and Note 5, "Credit Loss Reserves,"
for our credit loss reserve methodology and an analysis of changes in the credit
loss reserves for the quarter.
Total managed credit loss reserves, which include reserves established on the
off-balance sheet portfolio when receivables are securitized, were as follows
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
June 30, March 31, December 31, June 30,
In millions. 2000 2000 1999 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Owned $1,986.5 $1,909.7 $1,757.0 $1,737.6
Serviced with limited 961.7 951.4 909.6 786.4
recourse ------- ------- ------- -------
Total $2,948.2 $2,861.1 $2,666.6 $2,524.0
======= ======= ======= =======
</TABLE>
Managed credit loss reserves as a percent of nonperforming managed receivables
were 113.0 percent, compared to 105.9 percent at March 31, 2000 and 104.0
percent at June 30, 1999.
Total owned and managed credit loss reserves as a percent of receivables were as
follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
June 30, March 31, December 31, June 30,
2000 2000 1999 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Owned 3.24% 3.40% 3.36% 3.66%
Managed 3.69 3.79 3.72 3.86
------ ------ ----- -----
</TABLE>
Reserve ratios at June 30, 2000 reflect improved credit quality and the impact
of a growing percentage of secured loans. Real estate secured receivables
represent 42 percent of our total managed receivables at June 30, 2000, compared
to 41 percent at March 31, 2000 and 37 percent at June 30, 1999. MasterCard and
Visa receivables were 20 percent at quarter end, down from 21 percent at March
31, 2000 and 23 percent at June 30, 1999. This continued shift in portfolio mix
to secured products is important, as the loss severity for real estate secured
loans is significantly less than for unsecured products such as credit cards.
CREDIT QUALITY
--------------
We track delinquency and chargeoff levels on a managed basis and we apply the
same credit and portfolio management procedures as on our owned portfolio.
21
<PAGE> 23
Delinquency
-----------
Two-Months-and-Over Contractual Delinquency (as a percent of consumer
receivables):
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
6/30/00 3/31/00 12/31/99 9/30/99 6/30/99
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Managed:
Real estate secured 2.72% 2.99% 3.27% 3.46% 3.29%
Auto finance 1.99 1.52 2.43 2.26 1.87
MasterCard/Visa 3.14 3.06 2.78 3.10 3.11
Private label 5.77 5.94 5.97 6.66 6.62
Other unsecured 7.92 8.56 8.81 8.57 8.17
---- ---- ---- ---- ----
Total 4.16% 4.43% 4.66% 4.89% 4.72%
==== ==== ==== ==== ====
Owned 4.25% 4.58% 4.81% 5.24% 4.96%
==== ==== ==== ==== ====
</TABLE>
Managed delinquency as a percent of managed consumer receivables improved for
the third straight quarter and was substantially lower than both the prior
quarter and the prior year quarter. Dollars of delinquency were also down
compared with the prior quarter. On a sequential quarter basis, real estate
secured delinquency continued to benefit from the growing percentage of loans in
our portfolio on which we hold a first lien position. The increase in auto
finance delinquency was due to seasonality. The decrease in our unsecured
portfolio reflected the impact of adding additional collection staff. The
increase in our MasterCard and Visa delinquency reflected the acquisition of the
non-prime Renaissance portfolio.
The decrease in managed delinquency from the prior year quarter was primarily
driven by improvements in our real estate secured portfolio for the reasons
discussed above and improved collections in private label portfolio.
The trends impacting owned consumer delinquency as a percent of owned
receivables are generally consistent with those described above for our managed
portfolio. Owned delinquency by product is comparable to managed except for
MasterCard and Visa and other unsecured whose owned delinquency is greater due
to the retention of receivables on balance sheet that do not meet the
eligibility criteria for securitization.
Net Chargeoffs of Consumer Receivables
--------------------------------------
Net Chargeoffs of Consumer Receivables (as a percent, annualized, of average
consumer receivables):
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
2000 2000 1999 1999 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Managed:
Real estate secured .47% .52% .54% .58% .64%
Auto finance 4.28 5.25 5.43 4.55 4.41
MasterCard/Visa 5.57 5.69 5.57 6.15 7.30
Private label 5.43 5.65 5.88 5.60 5.57
Other unsecured 7.68 7.41 6.98 7.06 5.61
---- ---- ---- ---- ----
Total 3.74% 4.00% 3.96% 4.09% 4.10%
==== ==== ==== ==== ====
Owned 3.27% 3.53% 3.62% 3.63% 3.54%
==== ==== ==== ==== ====
</TABLE>
22
<PAGE> 24
Managed net chargeoffs as a percent of average managed consumer receivables for
the second quarter of 2000 decreased from the prior quarter and the prior year
quarter. Dollars of chargeoff also declined on a sequential quarter basis.
During the quarter, we experienced improved chargeoffs in all products except
other unsecured where increases were driven largely by certain older Beneficial
vintages.
The improvement in the managed chargeoff ratio over the prior year quarter
primarily was due to lower chargeoffs in our real estate secured and MasterCard
and Visa portfolio, partially offset by increases in our other unsecured
portfolio as previously mentioned.
The trends impacting owned net chargeoffs as a percent of owned receivables are
generally consistent with those described above for our managed portfolio. Owned
chargeoffs for our real estate secured and private label products are comparable
to managed chargeoffs. Chargeoffs for MasterCard and Visa and other unsecured
receivables on an owned basis are higher due to the difference in credit quality
and seasoning of the receivables which remain on our balance sheet. Chargeoffs
for auto finance receivables on an owned basis are lower due to the
predominantly unseasoned nature of the receivables which remain on balance
sheet.
<TABLE>
<CAPTION>
In millions. 6/30/00 3/31/00 12/31/99 9/30/99 6/30/99
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Owned assets:
Nonaccrual receivables $1,462.4 $1,503.6 $1,444.6 $1,421.8 $1,271.9
Accruing consumer receivables
90 or more days delinquent 571.8 570.5 550.4 573.7 567.0
Renegotiated commercial loans 12.3 12.3 12.3 12.3 12.3
------- ------- ------- ------- -------
Total nonperforming receivables 2,046.5 2,086.4 2,007.3 2,007.8 1,851.2
Real estate owned 323.5 301.0 271.5 234.4 249.6
------- ------- ------- ------- -------
Total nonperforming assets $2,370.0 $2,387.4 $2,278.8 $2,242.2 $2,100.8
======= ======= ======= ======= =======
Credit loss reserves as a
percent of nonperforming
receivables 97.1% 91.5% 87.5% 87.2% 93.9%
------- ------- ------- ------- -------
Managed assets:
Nonaccrual receivables $1,841.8 $1,934.2 $1,912.6 $1,803.5 $1,667.4
Accruing consumer receivables
90 or more days delinquent 753.9 755.0 739.9 751.5 747.3
Renegotiated commercial loans 12.3 12.3 12.3 12.3 12.3
------- ------- ------- ------- -------
Total nonperforming
receivables 2,608.0 2,701.5 2,664.8 2,567.3 2,427.0
Real estate owned 323.6 301.0 271.5 234.4 249.6
------- ------- ------- ------- -------
Total nonperforming assets $2,931.6 $3,002.5 $2,936.3 $2,801.7 $2,676.6
======= ======= ======= ======= =======
Credit loss reserves as
a percent of nonperforming
receivables 113.0% 105.9% 100.1% 101.5% 104.0%
------- ------- ------- ------- -------
</TABLE>
23
<PAGE> 25
Item 4. Submission of Matters to a Vote of Security-Holders
The Annual Meeting of Stockholders of Household International was held on
Tuesday, May 9, 2000, for the purpose of (1) electing directors; (2) approving
an increase in the number of shares available for issuance under the Household
International 1996 Long-Term Executive Incentive Compensation Plan; and (3)
ratifying the appointment of Arthur Andersen LLP as the public accountants for
Household. The voting results were as follows:
Each of the following persons received the number of votes set out after his or
her name and were elected directors to hold office for the ensuing year and
until their successors shall be elected and shall qualify:
FOR WITHHELD
----------- --------
W. F. Aldinger 428,084,372 1,997,266
R. J. Darnall 428,138,469 1,943,169
G. G. Dillon 422,320,268 7,761,370
J. A. Edwardson 428,258,043 1,823,595
M. J. Evans 427,675,111 2,406,527
J. D. Fishburn 428,255,157 1,826,481
C. F. Freidheim, Jr. 428,291,591 1,790,047
J. H. Gilliam, Jr. 422,617,028 7,464,610
L. E. Levy 428,138,813 1,942,825
G. A. Lorch 428,245,518 1,836,120
J. D. Nichols 428,033,967 2,047,671
J. B. Pitblado 428,132,673 1,948,965
S. J. Stewart 428,222,387 1,859,251
L. W. Sullivan, M.D. 422,067,775 8,013,863
The amendment to the Household International 1996 Long-Term Executive Incentive
Compensation Plan increasing the number of shares available for issuance under
the Plan was approved by the following vote:
FOR AGAINST ABSTAIN BROKER NON-VOTE
---------- ------- ------- ---------------
324,536,031 102,822,430 2,723,177 0
The appointment of Arthur Andersen LLP as the Corporation's public accountants
for the year 2000 was ratified by the following vote:
FOR AGAINST ABSTAIN BROKER NON-VOTE
---------- ------- ------- ---------------
427,606,408 613,718 1,861,512 0
24
<PAGE> 26
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.
99.1 Debt and Preferred Stock Securities Ratings.
(b) Report on Form 8-K
During the second quarter of 2000, the Registrant filed a Current
Report on Form 8-K dated April 20, 2000 with respect to the press
release pertaining to the financial results of Household
International, Inc. for the quarter ended March 31, 2000.
25
<PAGE> 27
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: August 10, 2000 By: /s/ David A. Schoenholz
---------------- -----------------------------
David A. Schoenholz
Group Executive -
Chief Financial Officer
and on behalf of
Household International, Inc.
26
<PAGE> 28
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.
99.1 Debt and Preferred Stock Securities Ratings.
