UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-Q
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X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended JULY 31, 1996
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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 1-7797
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PHH CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 52-0551284
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
11333 McCormick Road, Hunt Valley, Maryland 21031
(Address of principal executive offices) (Zip Code)
(410) 771-3600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Number of shares of PHH Corporation common stock outstanding on August 31, 1996
was 34,831,643.
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Total number of pages - - 15
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PHH CORPORATION
INDEX
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Page No.
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PART I--FINANCIAL INFORMATION:
Item 1 - Financial Statements
Condensed Consolidated Statements of Income--Three
Months Ended July 31, 1996 and 1995 3
Condensed Consolidated Balance Sheets --
July 31, 1996 and April 30, 1996 4
Condensed Consolidated Statements of Cash Flows--
Three Months Ended July 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II--OTHER INFORMATION:
Item 4 - Submission of Matters to a Vote of Security Holders 11
Item 6 - Exhibits and Reports on Form 8-K 11
Index to Exhibits 12
Signatures 15
</TABLE>
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<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
PHH CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended
July 31,
1996 1995
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Revenues:
Vehicle management services $ 339,236 $ 333,762
Real estate services 217,029 204,452
Mortgage banking services 69,392 43,643
625,657 581,857
Expenses:
Depreciation on vehicles under
operating leases 238,485 231,488
Costs, including interest, of
carrying and reselling homes 180,372 175,543
Direct costs of mortgage banking
services 29,812 12,280
Interest 57,231 53,452
Selling, general and administrative 82,644 77,431
588,544 550,194
Income before income taxes 37,113 31,663
Income taxes 15,341 13,362
Net income $ 21,772 $ 18,301
Net income per share $ .61 $ .52
</TABLE>
See accompanying notes.
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<PAGE>
Item 1. Financial Statements (Continued).
PHH CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
July 31, 1996 April 30, 1996
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(Unaudited)
(In thousands)
<S> <C>
Assets:
Cash $ 9,854 $ 9,288
Accounts receivable, less allowance for
doubtful accounts of $5,723 at July 31
and $5,478 at April 30 454,804 468,938
Carrying costs on homes under management 43,476 46,560
Mortgage loans held for sale 900,511 874,794
Mortgage servicing rights and fees 259,947 230,209
Property and equipment, net 91,133 93,089
Goodwill, net 48,189 49,081
Other assets 118,367 117,999
1,926,281 1,889,958
Assets Under Management Programs:
Net investment in leases and leased vehicles 3,269,968 3,216,224
Equity advances on homes 635,836 566,808
3,905,804 3,783,032
$ 5,832,085 $ 5,672,990
Liabilities:
Accounts payable and accrued expenses $ 465,176 $ 434,109
Advances from clients and deferred revenue 99,120 96,439
Other debt 836,601 903,442
Deferred income taxes 201,700 191,700
1,602,597 1,625,690
Liabilities Under Management Programs 3,600,047 3,438,804
Stockholders' Equity:
Preferred stock, authorized 3,000,000 shares __ __
Common stock, no par value, authorized
75,000,000 shares; issued and out-
standing 34,806,602 shares at July 31
and 34,661,524 shares at April 30 98,604 96,081
Cumulative foreign currency translation
adjustment (20,225) (23,483)
Retained earnings 551,062 535,898
629,441 608,496
$ 5,832,085 $ 5,672,990
</TABLE>
See accompanying notes.
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<PAGE>
Item 1. Financial Statements (Continued).
PHH CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended July 31,
(In thousands) 1996 1995
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<S> <C>
Operating Activities:
Net income $ 21,772 $ 18,301
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation on vehicles under operating leases 238,485 231,488
Other depreciation and amortization 8,613 8,229
Amortization and write-down of
capitalized servicing rights and fees 11,815 5,666
Additions to originated mortgage servicing rights (26,185) (16,615)
Additions to excess mortgage servicing fees (16,222) (12,145)
Deferred income taxes 9,734 7,521
Gain on sale of assets (2,944) -
Changes in:
Accounts receivable 16,093 3,056
Carrying costs on homes under management 3,188 2,095
Mortgage loans held for sale (25,717) (75,893)
Accounts payable and accrued expenses 28,183 15,055
Advances from clients and deferred revenue 2,271 (1,872)
All other operating activity (767) (11,467)
Cash provided by operating activities 268,319 173,419
Investing Activities:
Investment in leases and leased vehicles (429,623) (391,712)
Repayment of investment in leases and leased vehicles 149,324 151,934
Value of homes acquired (932,886) (1,359,511)
Value of homes sold 866,570 1,189,690
Purchases of mortgage servicing rights - (5,713)
Additions to property and equipment, net of dispositions (4,115) (4,216)
Proceeds from sale of assets 4,400 -
All other investing activities 2,294 (11,413)
Cash used in investing activities (344,036) (430,941)
Financing Activities:
Net change in borrowings with terms of less than 90 days 123,499 175,967
Proceeds from issuance of other borrowings 209,909 241,764
Principal payment on other borrowings (244,787) (146,638)
Stock option plan transactions 2,523 5,865
Payment of dividends (6,608) (5,795)
Cash provided by financing activities 84,536 271,163
Effect of exchange rate changes on cash (8,253) 929
Increase in cash 566 14,570
Cash at beginning of period 9,288 3,412
Cash at end of period $ 9,854 $ 17,982
Supplemental disclosures of cash flow information:
Cash payments for interest $ 66,010 $ 61,497
Cash payments (refunds) for income taxes $ (72) $ 479
</TABLE>
See accompanying notes.
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<PAGE>
Item 1. Financial Statements (Continued).
PHH CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements included in this Form 10-Q reflect all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
of the results of operations for the periods presented. The results of
operations for the periods presented are not necessarily indicative of the
results to be expected for the full year.
For further information, refer to the consolidated financial statements and
footnotes included in the Company's annual report included as part of Form 10-K
for the year ended April 30, 1996.
Reclassifications
Certain reclassifications have been made to the prior year's consolidated
financial statements for comparative purposes.
Capital Stock
On June 24, 1996, the Board of Directors authorized a two-for-one common stock
split which was distributed July 31, 1996, to stockholders of record on July 5,
1996. All per share amounts herein and data as to outstanding common stock at
April 30, 1996, have been adjusted for the common stock split.
On August 19, 1996, the shareholders voted to amend the Company's charter to
increase the number of authorized shares of common stock from 50,000,000 to
75,000,000.
Net Income Per Share
Net income per share is computed on the basis of the weighted average number of
shares of common stock outstanding during each period and common stock
equivalents arising from the assumed exercise of outstanding stock options under
the treasury stock method. See Exhibit 11 to this Form 10-Q which details the
computation of net income per share.
CONTINGENT LIABILITIES
The Company and its subsidiaries are involved in pending litigation of the usual
character incidental to the business transacted by them. In the opinion of
management, such litigation will not have a material effect on the Company's
consolidated financial statements.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
PHH CORPORATION AND SUBSIDIARIES
RESULTS OF OPERATIONS - Three months Ended July 31, 1996 vs. July 31, 1995
All comparisons within the following discussion are to the same period of the
previous year, unless otherwise stated.
Consolidated net income and net income per share for the first quarter of fiscal
1997 increased 19 percent to $21.8 million and 17 percent to $.61, respectively.
The increase resulted from improved operations in each of the Company's business
segments, led by the vehicle management services and real estate services
segments, with a slight increase in the mortgage banking services segment.
Consolidated revenues increased 8 percent to $625.7 million for the first
quarter of fiscal 1997.
The Company's effective tax rate was 41 percent for the first three months of
fiscal 1997 as compared to 42 percent for the same period a year ago.
The Company incurs and pays certain costs on behalf of its clients which include
payments to third parties as a component of its service delivery. These direct
costs are billed to clients and recognized as both revenue and expense.
Additionally, certain other direct costs represent depreciation on vehicles
under operating leases and amortization of mortgage servicing fees. Management
analyzes its business results in terms of net revenues and total operating
expenses. Net revenues, as defined by the Company, include revenues earned
reduced by the direct costs described above, and by related interest required to
fund assets. Operating expenses are all other costs incurred in delivering
services to clients.
Three Months Ended
July 31,
Operating Income (in thousands) 1996 1995
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Net revenues $156,637 $140,727
Operating expenses 119,524 109,064
Total operating income $ 37,113 $ 31,663
Vehicle Management Services
Vehicle management services are primarily offered to corporations and government
agencies to assist them in effectively managing their vehicle fleet costs,
reducing in-house administrative costs and enhancing driver productivity.
Asset-based services generally require an investment by the Company and include
new vehicle purchasing, open- and closed-end leasing, and used vehicle
marketing. Fee-based services include maintenance management programs, expense
reporting, fuel management programs, accident and safety programs and other
driver services which generate recurring fee transactions for managing various
aspects of clients' vehicle fleets.
Three Months Ended
July 31,
Operating Income (in thousands) 1996 1995
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Net revenues:
Asset-based $33,139 $33,058
Fee-based 26,186 28,353
Total net revenues 59,325 61,411
Operating expenses 43,950 50,381
Operating income $15,375 $11,030
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Cont.)
PHH CORPORATION AND SUBSIDIARIES
Net revenues for vehicle management services represents revenues earned and
billed to clients, reduced by depreciation on vehicles under operating leases
and related interest. Total net revenues for this segment decreased 3 percent
for the first quarter of fiscal 1997. However, the results of operations of the
Company's former North American truck fuel management subsidiary (TFM) which was
sold in February 1996, are included in the fiscal 1996 net revenues. If such
results are excluded, net revenues increased by 7 percent.
Net revenues derived from asset-based products were flat for the first quarter
of fiscal 1997. Net revenues resulting from increases in the number of vehicles
leased were offset by the anticipated reduction in domestic volume and per
vehicle gains of remarketed vehicles under closed-end operating leases.
Net revenues from fee-based services declined 1 percent. However, excluding the
TFM operations in fiscal 1996, net revenues derived from fee-based services
increased 17 percent for the first quarter of fiscal 1997. The increase was due
to continued growth in fuel, maintenance and accident management programs,
primarily in the UK, as well as growth in truck management programs in the UK
and US.
Vehicle management services operating income increased 39 percent for the first
quarter of fiscal 1997. The increase resulted from changes in net revenues
described above and decreases in operating expenses, primarily in North America.
These decreases reflect the sale of the TFM operations as well as reduced
systems costs and effective cost management programs in North America.
The Company's profitability from vehicle management services is affected by the
number of vehicles managed and related services provided for clients. Therefore,
profitability can be negatively affected by the general economy as corporate
clients exercise a higher degree of fiscal caution by decreasing the size of
their vehicle fleets or by extending the service period of existing fleet
vehicles. Conversely, operating results are positively affected as clients
increasingly choose to outsource their vehicle management service operations.
Results can also be enhanced as the Company expands into new markets, increases
its product diversity, broadens its client base and continues its productivity
and quality improvement efforts.
Real Estate Services
Real estate services primarily consist of the purchase, management and resale of
homes for transferred employees of corporate clients, government agencies and
members of affinity group clients. Asset-based services are defined as
relocation services involving the purchase and resale of a home. Fee-based
services include assistance in selecting homes in destination locations,
marketing homes, moving household goods and property disposition services for
financial institutions.
Three Months Ended
July 31,
Operating Income (in thousands) 1996 1995
------------------------------- ---- ----
Net revenues:
Asset-based $27,951 $27,336
Fee-based 24,172 20,934
Gain on sale of assets 2,944 -
Total net revenues 55,067 48,270
Operating expenses 47,398 41,487
Operating income $ 7,669 $ 6,783
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Cont.)
PHH CORPORATION AND SUBSIDIARIES
Real estate services net revenues are those earned and billed to clients,
reduced by direct costs paid on behalf of clients and related interest. Total
real estate services net revenues increased 14 percent for the first quarter of
fiscal 1997.
Asset-based net revenues increased 2 percent for the first quarter of fiscal
1997, primarily reflecting a slight increase in the number of US transferee
homes sold and increases in the market value of these homes as compared to that
of the prior year.
Fee-based net revenues increased 15 percent for the first quarter of fiscal
1997, primarily due to more household goods moves in the US and increased
referral fees from the Company's network partners. These increases were
partially offset by a decrease in the disposition volume on residential
properties managed for financial institutions in the US. Fiscal 1997 net
revenues also benefited from the gain on the sale of the Company's site
selection consulting operations in July 1996.
Real estate services operating income increased 13 percent for the first quarter
of fiscal 1997. The increases in net revenues described above were partially
offset by increased systems costs in the US and increased staffing costs
primarily to support the volume growth in fee-based services.
The Company is generally not at risk on its carrying value of homes should there
be a downturn in the housing market. Management anticipates its clients will
continue to reassess their relocation plans as part of cost control measures,
authorizing fewer home purchase transactions while utilizing a greater portion
of fee-based real estate services. At the same time, operating results may be
affected positively as clients increasingly choose to outsource their real
estate services and as the Company expands into new markets, enhances its
product diversity, broadens its client base and continues its productivity and
quality improvement efforts.
Mortgage Banking Services
Mortgage banking services primarily consist of the origination, sale and
servicing of residential first mortgage loans. The Company markets a variety of
first mortgage products to consumers through relationships with corporations,
affinity groups, government agencies, credit unions, real estate brokerage
firms, banks and other mortgage brokers.
Three Months Ended
July 31,
Operating Income (in thousands) 1996 1995
------------------------------- ---- ----
Net revenues:
Loan production $26,849 $15,292
Servicing fees 13,947 12,368
Gain on sale of servicing rights 1,449 3,386
Total net revenues 42,245 31,046
Operating expenses 28,176 17,196
Operating income $14,069 $13,850
Mortgage banking services net revenues, measured as revenues earned reduced by
direct costs for amortization and payments to third-party service providers,
increased 36 percent for the first quarter of fiscal 1997.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Cont.)
PHH CORPORATION AND SUBSIDIARIES
The increase in loan production net revenues resulted from a 47% increase in the
volume loans sold as well as a slight increase in margins realized on loans sold
compared to the same period in the prior year. Mortgage loan closings increased
from $1.5 billion to $2.2 billion for the first quarter of fiscal 1997. This
increase was a result of increased market share due primarily to expanded
relationships with affinity groups which represented 23 percent of the increase
in the quarter, and with financial institutions which represented 15 percent of
the increase. Mortgages for residential properties being purchased continue to
represent the majority of mortgage closing volume and totaled 83 percent of
closing volume compared to 86 percent in the prior year.
Net servicing fee revenue increased 13 percent in the first quarter of fiscal
1997 due to growth of the average servicing portfolio, partially offset by the
increased amortization of mortgage servicing rights. The increased amortization
relates primarily to originated mortgage servicing rights which the Company has
been capitalizing since the beginning of fiscal 1996. The servicing portfolio
balance at July 31, 1996, was $23.0 billion as compared to $17.1 billion at July
31, 1995.
The gain on sale of servicing rights decreased due to a lower level of servicing
rights sales in the first three months of fiscal 1997 compared to the same
period a year ago.
Mortgage banking services operating income increased 2 percent for the first
quarter of fiscal 1997, due to higher net revenues, as described above,
substantially offset by higher operating expenses. Operating expense increased
in support of volume increases of mortgage loan production and additional staff
training to support increased business from affinity and financial institution
relationships.
The Company's profitability from mortgage banking services will be affected by
such external factors as capacity within the industry, the level of interest
rates, the strength of the economy, and the related condition of residential
real estate markets. The Company's broad-based marketing strategies, including
further penetration of existing affinity group and credit union clients,
expansion of its client base, and maintaining its system of delivering mortgages
in a cost-efficient manner, should positively affect operating results in the
future.
FINANCIAL CONDITION
The Company maintains adequate committed credit facilities to support future
requirements. As of July 31, 1996, the Company had outstanding $3.6 billion of
debt for "Assets Under Management Programs". Repayment of outstanding principal
balances is funded from client vehicle lease payments, repayment of equity
advances under home relocation and real estate management contracts, and the
sale or transfer of certain assets to third parties. Lease repayments totaled
$388 million for the first three months of fiscal 1997, while repayments of
equity advances on homes were $549 million.
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<PAGE>
PART II--OTHER INFORMATION
PHH CORPORATION AND SUBSIDIARIES
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Stockholders' Meeting held on August 19, 1996, the
stockholders elected directors for a three-year term as follows: George L.
Bunting, Jr. (14,899,739 shares voted for, 91,574 shares withheld), Alan P.
Hoblitzell, Jr. (14,888,871 shares voted for, 102,442 shares withheld), Donald
J. Shepard (14,899,447 shares voted for, 91,866 shares withheld) and Alexander
B. Trowbridge (14,896,537 shares voted for, 94,776 shares withheld).
The names of the directors whose terms in office have continued are: James S.
Beard; Andrew F. Brimmer; Paul X. Kelley; L. Patton Kline; Robert D. Kunisch;
Francis P. Lucier; Kent C. Nelson; and Anne M. Tatlock.
The stockholders also accepted the proposed amendment to the Company's charter
to increase the number of authorized shares of common stock from 50,000,000 to
75,000,000 with 14,288,028 shares voted for the amendment, 662,941 shares
against and 40,344 shares abstained.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits:
(a) Exhibit (11) - Schedule containing information used in the
computation of net income per share.
(b) Exhibit (12) - Schedule containing information used in the
computation of the ratio of earnings to fixed
charges.
Reports on Form 8-K. None.
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<PAGE>
PHH CORPORATION AND SUBSIDIARIES
Index to Exhibits
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Exhibit No. Page No.
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Exhibit (11) - Schedule containing information used in
the computation of net income per share 13
Exhibit (12) - Schedule containing information used in the
computation of the ratio of earnings to fixed charges 14
</TABLE>
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EXHIBIT (11)
PHH CORPORATION AND SUBSIDIARIES
Information Used in the Computation of Net Income Per Share
<TABLE>
<CAPTION>
Three Months Ended July 31,
(In thousands except per share data) 1996 1995
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<S> <C>
NET INCOME - as reported $21,772 $18,301
Weighted average number of shares outstanding 34,747 33,984
Give effect to the exercise of dilutive options
determined under the treasury stock method 665 664
Reflect the period-end market price when greater
than the average market price during the
quarter - 240
Number of shares used in the computation of net
income per share 35,412 34,888
NET INCOME PER SHARE $ .61 $ .52
</TABLE>
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EXHIBIT (12)
PHH CORPORATION AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
(dollars in thousands)
<TABLE>
<CAPTION>
Three Year Ended April 30
Months Ended
July 31, 1996 1996 1995 1994 1993 1992
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<S> <C>
Income from continuing operations
before income taxes $ 37,113 $ 139,148 $ 121,318 $ 109,796 $ 94,238 $ 83,117
Add:
Interest expense 65,365 252,966 194,196 162,108 193,935 237,058
Interest portion of rentals* 2,011 7,840 8,065 9,088 8,456 8,665
Earnings available for fixed charges $ 104,489 $ 399,954 $ 323,579 $ 280,992 $296,629 $328,840
Fixed charges:
Interest expense $ 65,365 $ 252,966 $ 194,196 $ 162,108 $193,935 $237,058
Interest portion of rentals* 2,011 7,840 8,065 9,088 8,456 8,665
$ 67,376 $ 260,806 $ 202,261 $ 171,196 $202,391 $245,723
Ratio of earnings to fixed charges 1.55 1.53 1.60 1.64 1.47 1.34
</TABLE>
*Amounts reflect a one-third portion of rentals, the portion deemed
representative of the interest factor.
Note: The interest included in fixed charges consists of the amounts
identified as interest expense in the Consolidated Statements of Income,
the substantial portion of which represents interest on debt incurred to
finance leasing activities and mortgage banking activities, as well as
the interest costs associated with home relocation services which are
ordinarily recovered through direct billings to clients and are included
with "Costs, including interest, of carrying and reselling homes" in the
Consolidated Financial Statements.
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<PAGE>
SIGNATURES
PHH CORPORATION AND SUBSIDIARIES
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.
PHH CORPORATION
Date: September 13, 1996
Nan A. Grant
Corporate Controller
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF PHH CORPORATION FILED ON FORM
10-Q FOR THE QUARTERLY PERIOD ENDED JULY 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000077776
<NAME> PHH CORPORATION
<MULTIPLIER> 1000
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> APR-30-1997
<PERIOD-END> JUL-31-1996
<EXCHANGE-RATE> .001
<CASH> 9,854
<SECURITIES> 0
<RECEIVABLES> 460,527
<ALLOWANCES> 5,723
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 91,133
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,832,085
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 98,604
<OTHER-SE> 530,837
<TOTAL-LIABILITY-AND-EQUITY> 5,832,085
<SALES> 0
<TOTAL-REVENUES> 625,657
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 531,313
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57,231
<INCOME-PRETAX> 37,113
<INCOME-TAX> 15,341
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,772
<EPS-PRIMARY> .61
<EPS-DILUTED> .61
</TABLE>
