UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-Q/A
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X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
--- THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended OCTOBER 31, 1996
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ______ to _____
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Commission File Number 1-7797
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PHH CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 52-0551284
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
11333 McCormick Road, Hunt Valley, Maryland 21031
(Address of principal executive offices) (Zip Code)
(410) 771-3600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Number of shares of PHH Corporation common stock outstanding on November 22,
1996 was 34,904,615.
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<PAGE>
PHH CORPORATION
INDEX
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Page No.
PART I--FINANCIAL INFORMATION:
Item 1 - Financial Statements
Condensed Consolidated Statements of Income--Three
Months and Six Months Ended October 31, 1996
and 1995 3
Condensed Consolidated Balance Sheets --
October 31, 1996 and April 30, 1996 4
Condensed Consolidated Statements of Cash Flows--
Six Months Ended October 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 6 - Exhibits and Reports on Form 8-K 13
Index to Exhibits 14
Signatures 17
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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 Six Months Ended
October 31, October 31,
---------------------- -----------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C>
Revenues:
Vehicle management services $ 345,166 $ 334,291 $ 684,402 $ 668,053
Real estate services 62,490 66,103 129,623 129,681
Mortgage banking services 65,346 48,415 134,738 92,058
-------- -------- ---------- ----------
473,002 448,809 948,763 889,792
------- ------- ------- -------
Expenses:
Depreciation on vehicles under
operating leases 243,734 230,908 482,219 462,396
Costs, including interest, of
carrying and reselling homes 23,004 30,528 53,480 65,197
Direct costs of mortgage banking
services 27,457 15,851 57,269 28,131
Interest 55,966 55,932 113,197 109,384
Selling, general and administrative 82,878 82,373 165,522 159,804
-------- -------- ---------- ----------
433,039 415,592 871,687 824,912
------- ------- ------- ----------
Income before income taxes 39,963 33,217 77,076 64,880
Income taxes 15,997 13,653 31,338 27,015
-------- --------- ----------- ---------
Net income $ 23,966 $ 19,564 $ 45,738 $ 37,865
======== ========= =========== =========
Net income per share $ .68 $ .57 $ 1.29 $ 1.09
======== ========= =========== =========
</TABLE>
See accompanying notes.
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<PAGE>
Item 1. Financial Statements (Continued).
PHH CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
(In thousands)
October 31, 1996 April 30, 1996
---------------- --------------
(Unaudited)
<S> <C>
ASSETS:
Cash $ 11,450 $ 9,288
Accounts receivable, less allowance for
doubtful accounts of $6,232 at October 31,
1996 and $5,478 at April 30, 1996 442,951 468,938
Carrying costs on homes under management 58,916 46,560
Mortgage loans held for sale 872,404 874,794
Mortgage servicing rights and fees 280,344 230,209
Property and equipment, net 92,846 93,089
Goodwill, net 47,656 49,081
Other assets 125,384 117,999
---------- ----------
1,931,951 1,889,958
--------- ---------
ASSETS UNDER MANAGEMENT PROGRAMS:
Net investment in leases and leased vehicles 3,285,721 3,216,224
Equity advances on homes 666,905 566,808
---------- ----------
3,952,626 3,783,032
--------- ---------
$ 5,884,577 $ 5,672,990
========= =========
LIABILITIES:
Accounts payable and accrued expenses $ 418,143 $ 434,109
Advances from clients and deferred revenue 114,021 96,439
Other debt 814,560 903,442
Deferred income taxes 221,700 191,700
---------- ----------
1,568,424 1,625,690
--------- ---------
LIABILITIES UNDER MANAGEMENT PROGRAMS 3,662,245 3,438,804
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, authorized 3,000,000 shares -- --
Common stock, no par value, authorized
75,000,000 shares; issued and out-
standing 34,885,942 shares at October 31,
1996 and 34,661,524 shares at April 30, 1996 99,820 96,081
Cumulative foreign currency translation
adjustment (14,312) (23,483)
Retained earnings 568,400 535,898
--------- ---------
653,908 608,496
--------- ---------
$ 5,884,577 $ 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>
Six Months Ended October 31,
(In thousands) 1996 1995
---- ----
<S> <C>
Operating Activities:
Net income $ 45,738 $ 37,865
Adjustments to reconcile income to cash provided by operating activities:
Depreciation on vehicles under operating leases 482,219 462,396
Other depreciation and amortization 16,359 15,933
Amortization of capitalized servicing rights and fees 27,620 15,016
Additions to originated mortgage servicing rights (29,841) (40,613)
Additions to excess mortgage servicing fees (48,768) (30,263)
Gain on sales of mortgage servicing rights (1,449) (3,386)
Deferred income taxes 29,167 20,095
Gain on sale of assets (2,944) --
Changes in:
Accounts receivable 33,960 2,112
Carrying costs on homes under management (11,717) (5,888)
Mortgage loans held for sale 2,390 (69,622)
Accounts payable and accrued expenses (22,797) (13,907)
Advances from clients and deferred revenue 16,367 10,205
All other operating activity 8,684 (18,501)
----------- ------------
Cash provided by operating activities 544,988 381,442
=========== ============
Investing Activities:
Investment in leases and leased vehicles (805,638) (761,320)
Repayment of investment in leases and leased vehicles 290,395 271,379
Equity advances on homes under management (1,776,201) (2,695,199)
Repayment of advances on homes under management 1,682,051 2,427,642
Purchases of mortgage servicing rights -- (7,718)
Proceeds from sales of mortgage servicing rights 2,303 4,382
Additions to property and equipment, net of dispositions (12,615) (8,913)
Proceeds from sale of assets 4,400 --
All other investing activities (7,887) (28,128)
----------- ------------
Cash used in investing activities (623,192) (797,875)
----------- ------------
Financing Activities:
Net change in borrowings with terms of less than 90 days (156,217) 431,999
Proceeds from issuance of other borrowings 1,024,486 748,915
Principal payment on other borrowings (751,365) (765,534)
Stock option plan transactions 3,739 9,250
Payment of dividends (13,236) (11,628)
----------- ------------
Cash provided by financing activities 107,407 413,002
----------- ------------
Effect of exchange rate changes on cash (27,041) 1,339
----------- ------------
Increase (decrease) in cash 2,162 (2,092)
Cash at beginning of period 9,288 3,412
----------- ------------
Cash at end of period $ 11,450 $ 1,320
=========== ============
Supplemental disclosures of cash flow information:
Cash payments for interest $ 135,501 $ 135,516
=========== ============
Cash payments for income taxes $ 672 $ 4,667
=========== ============
</TABLE>
See accompanying notes.
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<PAGE>
PHH CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements included in this Form 10-Q reflect all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
of the results of operations for the periods presented. The results of
operations for the periods presented are not necessarily indicative of the
results to be expected for the full year.
For further information, refer to the consolidated financial statements and
footnotes included in the Company's annual report included as part of Form 10-K
for the year ended April 30, 1996.
Capital Stock and Net Income Per Share
On June 24, 1996, the Board of Directors authorized a two-for-one common stock
split which was distributed on July 31, 1996, to stockholders of record on July
5, 1996. All per share amounts herein and data as to outstanding common stock at
have been adjusted for the common stock split.
Net income per share is computed on the basis of the weighted average number of
shares of common stock outstanding during each period and common stock
equivalents arising from the assumed exercise of outstanding stock options under
the treasury stock method. See Exhibit 11 to this Form 10-Q which details the
computation of net income per share.
Reclassifications
Certain reclassifications have been made to the prior years' condensed
consolidated financial statements for comparative purposes. Included in these
reclassifications are the effects of reducing real estate services revenue and
"costs, including interest, of carrying and reselling homes" for direct costs
reimbursed by client corporations. Such costs were $131,136 and $140,961 for the
second quarter and $281,032 and $281,835 for the first six months of fiscal 1997
and 1996, respectively.
COMMITMENTS AND 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.
SUBSEQUENT EVENT
On November 10, 1996, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with HFS Incorporated ("HFS"), and Mercury Acq. Corp.,
a wholly-owned subsidiary of HFS. Pursuant to the Merger Agreement, shares of
the Company's common stock will be converted into a right to receive shares of
HFS's common stock as determined in the Merger Agreement. The Merger is
conditioned, among other things, upon the approval of the Company's and HFS's
shareholders and upon certain regulatory approvals. The merger will be accounted
for as a pooling of interests, and is expected to close in the second quarter of
calendar year 1997.
In connection with the Merger Agreement, on November 13, 1996, the Company and
First Chicago Trust company of New York, as Rights Agent, entered into an
amendment to the Rights Agreement, dated as of March 15, 1996, by and between
the Company and the Rights Agent (the "Rights Agreement"), having the effect of
exempting the events and transactions contemplated by the Merger Agreement from
the Rights Agreement.
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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 - Six Months Ended October 31, 1996 vs. October 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 second quarter of
fiscal 1997 increased 23 percent to $24.0 million and 19 percent to $.68,
respectively. For the first six months, consolidated net income and net income
per share increased 21 percent to $45.7 million and 18 percent to $1.29,
respectively. The increases resulted from improved operations in each of the
Company's business segments, led primarily by the vehicle management services
segment.
Consolidated revenues increased 5% to $473.0 million and 7% to $948.8 million
for the second quarter and first six months of fiscal 1997, respectively.
Vehicle management services revenues increased 3% to $345.2 million and 2% to
$684.4 million primarily from increased leasing revenues as a result of an
increased number of and average carrying amount of leased vehicles, partially
offset by a decrease in other vehicle revenues primarily due to a decrease in
gains on sale of used vehicles. Real estate services revenues decreased 5% to
$62.5 million in the second quarter of fiscal 1997 and was flat for the first
six months primarily as a result of a 7% and 1% decrease in transferee homes
sold in the second quarter and first six months, respectively, partially offset
by a 29% and 22% increase, respectively, in the number of fee-based
transactions. Mortgage banking revenue increased 35% to $65.3 million and 46% to
$134.7 million in the second quarter and first six months of fiscal 1997,
respectively. These increases are primarily due to servicing revenues generated
from the 30% growth in the servicing portfolio from $18.6 billion at October 31,
1995 to $24.2 billion at October 31, 1996 and, in the six month period, from
revenues earned on the 14% increase in loans closed. Mortgage services revenues
for the second quarter of fiscal 1997 were negatively effected as the volume of
loans closed decreased 9% compared to the same period in the prior year.
Consolidated expenses increased 4% to $433.0 million and 6% to $871.7 million
for the second quarter and first six months of fiscal 1997, respectively.
Increased depreciation on vehicles under operating leases are primarily due to
increases in leased vehicles as discussed above. Costs, including interest, of
carrying and reselling homes decreased 25% and 18% for the second quarter and
first six months, respectively, primarily as a result of the effects of the
decrease in homes closed as discussed above. Direct costs of mortgage banking
services increased 73% to $27.4 million and 104% to $57.2 million for the second
quarter and first six months, respectively, primarily due to an increase in
amortization of servicing rights and fees and costs associated with the increase
in the loan portfolio. These costs were also affected by the changes in loan
closings as discussed above. Interest expense was flat for the second quarter
and increased 3% for the first six months of fiscal 1997 compared with the same
periods in the prior year. The effects of increases in liabilities under
management programs and other debt were substantially offset by the effect of
lower interest rates, except that the average borrowings in the first quarter of
fiscal 1996 were substantially higher than the prior year due to the significant
increase in loan closings and timing of loan sales during the period. Selling,
general, and administrative costs were flat for the second quarter and increased
4% for the first six months of fiscal 1997 compared with the same periods in the
prior year. Increases in personnel and other operating costs to support the
growth in real estate services fee-based transactions and mortgage production as
well as increased US relocation systems costs during the first quarter, were
partially offset by decreases in vehicle management services costs as a result
of effective cost management, reduction in system spending, reduction in
vehicles acquired and by the decrease in the North American truck fuel
management subsidiary (NTS) expenses as a result of its sale in February 1996.
The second quarter results also benefited from decreased expenses associated
with the sale of the Company's site selection consulting operations.
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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 Company's effective tax rate was 40.7 percent for the first six months of
fiscal 1997 as compared to 41.6 percent for the same period a year ago.
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 direct costs, and by related interest required to fund assets.
Direct costs include depreciation on vehicles under operating leases,
amortization of mortgage servicing rights and certain other costs, including
payments to third parties incurred as a component of service delivery. Operating
expenses are all other costs incurred in delivering services to clients.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
------------------------ ------------------------
Operating Income (in thousands) 1996 1995 1996 1995
------------------------------- ---- ---- ---- ----
<S> <C>
Net revenues $ 154,793 $ 147,085 $ 311,430 $ 287,812
Operating expenses 114,830 113,868 234,354 222,932
-------- ------- -------- --------
Total operating income $ 39,963 $ 33,217 $ 77,076 $ 64,880
======== ======== ======== ========
</TABLE>
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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
----------------------- -----------------------
Operating Income (in thousands) 1996 1995 1996 1995
------------------------------- ---- ---- ---- ----
<S> <C>
Net revenues:
Asset-based $ 32,607 $ 31,901 $ 65,746 $ 64,959
Fee-based 27,975 28,551 54,161 56,904
------ ------ -------- --------
Total net revenues 60,582 60,452 119,907 121,863
Operating expenses 43,297 49,104 87,247 99,485
------ ------ -------- --------
Operating income $ 17,285 $ 11,348 $ 32,660 $ 22,378
====== ====== ======== =======
</TABLE>
Net revenues for vehicle management services represent revenues earned, reduced
by depreciation on vehicles under operating leases and related interest. Total
net revenues for this segment were essentially unchanged for the second quarter
and decreased 2 percent for the first six months of fiscal 1997. However, the
results of operations of the Company's former North American truck fuel
management subsidiary (NTS, Inc.) which was sold in February 1996, are included
in the fiscal 1996 net revenues. If such results are excluded, net revenues
increased by 12 percent and 9 percent for the second quarter and first six
months of fiscal 1997, respectively.
Net revenues derived from asset-based products increased 2 percent for the
second quarter and 1 percent for the first six months of fiscal 1997 primarily
due to a 7 percent increase in units under management.
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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 derived from fee-based services decreased 2 percent and 5 percent
for the second quarter and first six months, respectively. However, excluding
the NTS, Inc. operations in fiscal 1996, net revenues derived from fee-based
services increased 25 percent and 20 percent for the second quarter and first
six months of fiscal 1997, respectively. These increases were due to continued
growth in fuel and truck management programs in the US and UK as well as
maintenance and accident management programs, primarily in the UK.
Vehicle management services operating income increased 52 percent and 46 percent
for the second quarter and first six months, respectively. Such increases
resulted from the increases in net revenues discussed above, as well as
decreases in operating expenses primarily in North America. These decreases
reflect primarily the sale of NTS, Inc., operations, as well as effective cost
management programs and a reduced level of spending for systems improvements 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 primarily assistance in selecting homes in destination
locations, marketing homes, moving household goods and property disposition
services to financial institutions.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
----------------------- -------------------------
Operating Income (in thousands) 1996 1995 1996 1995
------------------------------- ---- ---- ---- ----
<S> <C>
Net revenues:
Asset-based $ 28,334 $ 31,890 $ 56,285 $ 59,226
Fee-based 26,954 23,450 51,126 44,384
Gain on sale of subsidiary - - 2,944 -
-------- -------- -------- --------
Total net revenues 55,288 55,340 110,355 103,610
Operating expenses 43,555 43,955 90,953 85,442
-------- -------- -------- --------
Operating income $ 11,733 $ 11,385 $ 19,402 $ 18,168
======== ======== ======== ========
</TABLE>
Real estate services net revenues are those earned for services provided to
clients, reduced by direct costs incurred on behalf of clients and related
interest. Total real estate services net revenues was essentially unchanged for
the second quarter of fiscal 1997 and increased 7 percent for the first six
months of fiscal 1997.
Asset-based net revenues decreased 11 percent and 5 percent for the second
quarter and first six months of fiscal 1997, respectively. The decrease reflects
a decrease in the number of transferee homes sold and the product mix of homes
sold as compared to that of the prior year reflecting a lower volume of higher
margin services.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Cont.)
PHH CORPORATION AND SUBSIDIARIES
Fee-based net revenues increased 15 percent for both the second quarter and
first six months of fiscal 1997, primarily due to more household goods moves in
the US, increased home finding transactions and increased referral fees from the
Company's network partners. These increases were partially offset by a decrease
in the disposition volume on residential properties managed for financial
institutions in the US as well as a decline in revenues in the second quarter of
fiscal 1997, due to the sale in July 1996, of the Company's site selection
consulting operation.
Real estate services operating income increased 3 percent and 7 percent for the
second quarter and first six months of fiscal 1997, respectively. These
increases reflect the changes in net revenues described above and a 1 percent
decrease in operating expenses in the second quarter and a 6 percent increase in
operating expenses for the first six months of fiscal 1997. The changes in
operating expenses resulted primarily from increased staffing costs to support
asset-based products and services, volume growth in fee-based services and an
increase in systems costs in the US in the first quarter slightly offset by
decreased expenses in the second quarter as a result of the sale of the
Company's site selection consulting operations.
The Company is generally not at risk on its carrying value of homes should there
be a downturn in the housing market. Management anticipates its clients will
continue to reassess their relocation plans as part of cost control measures,
authorizing fewer home purchase transactions while utilizing a greater portion
of fee-based real estate services. Additionally, management anticipates
continued margin pressure in relocation activity in the US and Canada,
especially in the government sector. At the same time, operating results may be
affected positively as clients increasingly choose to outsource their real
estate 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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
----------------------- -----------------------
Operating Income (in thousands) 1996 1995 1996 1995
------------------------------- ---- ---- ---- ----
<S> <C>
Net revenues:
Loan production $ 26,288 $ 19,310 $ 53,138 $ 34,602
Servicing fees 12,635 11,983 26,581 24,351
Gain on sale of servicing
rights - - 1,449 3,386
-------- -------- -------- -------
Total net revenues 38,923 31,293 81,168 62,339
Operating expenses 27,978 20,809 56,154 38,005
-------- -------- -------- -------
Operating income $ 10,945 $ 10,484 $ 25,014 $ 24,334
======== ======= ======== ========
</TABLE>
Mortgage banking services net revenues, measured as revenues earned reduced by
direct costs for amortization and payments to third-party service providers,
increased 24 percent for the second quarter and 30 percent for the first six
months of fiscal 1997.
-10-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Cont.)
PHH CORPORATION AND SUBSIDIARIES
The increases in loan production net revenues resulted from increased margins
realized on loans sold in the second quarter and a 14 percent increase in the
volume of loans sold for the six-month period compared to the same periods in
the prior year. Mortgage loan closings decreased from $2.1 billion to $1.9
billion for the second quarter and increased from $3.6 billion to $4.1 billion
for the first six months compared to the same periods in the prior year.
Mortgages for residential properties being purchased increased to 86 percent
from 74 percent and to 84 percent from 79 percent for the second quarter and
first six months, respectively. The increase in margins on loans sold in the
second quarter resulted from more favorable market conditions and from an
increase in the ratio of retail loans closed compared to wholesale loans.
Net servicing fee revenue increased 5 percent and 9 percent for the second
quarter and first six months of fiscal 1997, respectively, 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 October
31, 1996, was $24.2 billion as compared to $18.6 billion at October 31, 1995.
The gain on sale of servicing rights decreased due to a lower level of servicing
rights sales in the first six months of fiscal 1997 compared to the same period
a year ago.
Mortgage banking services operating income increased 4 percent and 3 percent for
the second quarter and first six months of fiscal 1997, respectively, 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, signing
new clients, and maintaining its system of delivering mortgages in a
cost-efficient manner, should positively affect operating results in the future.
LIQUIDITY AND CAPITAL RESOURCES
The Company manages its funding sources to ensure adequate liquidity.
The sources of liquidity fall into three general areas: ongoing liquidation of
assets under management, global capital markets, and committed credit agreements
with various high-quality domestic and international banks. In the ordinary
course of business, the liquidation of assets under management programs, as well
as cash flows generated from operating activities, provide the cash flow
necessary for the repayment of existing liabilities. For the six months ended
October 31, 1996 cash provided by operating activities increased 43% to $545.0
million primarily due to timing of operating activities, including a $2.4
million decrease in mortgage loans held for sale in fiscal 1997 compared with a
$69.7 million increase in fiscal 1996, and increased depreciation on vehicles
under operating leases. Cash used in investing activities decreased 22% to
$623.2 million in fiscal 1997 primarily as a result of a reduction in the growth
in equity advances on homes under management during the six months ended October
31, 1996 compared with the same period in the prior year.
-11-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Cont.)
PHH CORPORATION AND SUBSIDIARIES
Using historical information, the Company projects the time period that a
client's vehicle will be in service or the length of time that a home will be
held in inventory before being sold on behalf of a client. Once the relevant
asset characteristics are projected, the Company generally matches the projected
dollar amount, interest rate and maturity characteristics of the assets within
the overall funding program. This is accomplished through stated debt terms or
effectively modifying such terms through other instruments, primarily interest
rate swap agreements and revolving credit agreements. Within mortgage banking
services, the company funds the mortgage loans on a short-term basis until sale
to unrelated investors which generally occurs within sixty days. Interest rate
risk on mortgages originated for sale is managed through the use of forward
delivery contracts, financial futures and options. Such financial derivatives
are also used as a hedge to minimize earnings volatility as it relates to
mortgage servicing assets.
The Company has maintained broad access to global capital markets by maintaining
the quality of its assets under management. This is achieved by establishing
credit standards to minimize credit risk and the potential for losses. Depending
upon asset growth and financial market conditions, the Company utilizes the
United States, Euro and Canadian commercial paper markets, as well as other
cost-effective short-term instruments. Foreign currency forward contracts are
utilized to convert to local currency when necessary. In addition, the Company
utilizes the public and private debt markets to issue unsecured senior corporate
debt. Augmenting these sources, the Company has reduced outstanding debt by the
sale or transfer of managed assets to third parties while retaining fee-related
servicing responsibility. The Company's aggregate commercial paper outstanding
totaled $2.1 billion and $2.2 billion at October 31, 1996 and April 30, 1996,
respectively. At October 31, 1996, $2.1 billion in medium-term notes and $321
million in other debt securities were outstanding compared to $2.1 billion and
$54 million, respectively, at April 30, 1996. The Company maintains a leverage
ratio between 7 to 1 and 8 to 1.
Cash provided by financing activities decreased 74% to $107.4 million primarily
as a result of the decline in funding requirements related to changes in
mortgage loans held for sale and equity advances on homes as discussed above.
The shift of net borrowings from borrowings with terms of less than 90 days to
other borrowings in fiscal 1997 compared with the prior year primarily reflects
that the company chose to fund, under the terms of its medium-term note
programs, more favorable conditions existed under that program than from issuing
commercial paper. The effect of the changes in the British pound-sterling
exchange rate during fiscal 1997 had a negative impact on the Company's cash
position compared with the prior year period.
To provide additional financial flexibility, the Company's current policy is to
ensure that minimum committed bank facilities aggregate 80% of the average
amount of outstanding commercial paper. Committed revolving credit agreements
totaling $2.2 billion and uncommitted lines of credit aggregating $377 million
are currently in place with 31 domestic and international banks. Management
closely evaluates not only the credit quality of the banks but the maturity of
the various agreements to ensure ongoing availability. Of the Company's $2.2
billion in committed facilities at October 31, 1996, the full amount was undrawn
and available. Management believes that its current policy provides adequate
protection should volatility in the financial markets limit the Company's access
to commercial paper or medium-term note funding.
These established means of effectively matching floating and fixed interest rate
and maturity characteristics of funding to related assets, the variety of short-
and long-term domestic and international funding sources, and the committed
banking facilities minimize the Company's exposure to interest rate and
liquidity risk.
-12-
<PAGE>
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
PHH CORPORATION AND SUBSIDIARIES
(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.
Report on Form 8-K
The Company filed a Current Report on Form 8-K on November 15, 1996, describing
that the Company entered into an Agreement and Plan of Merger (the "Merger
Agreement") with HFS Incorporated ("HFS"), and Mercury Acq. Corp., a
wholly-owned subsidiary of HFS. Pursuant to the Merger Agreement, shares of the
Company's common stock will be converted into a right to receive shares of HFS's
common stock as determined in the Merger Agreement. The Merger is conditioned,
among other things, upon the approval of the Company's and HFS's shareholders
and upon certain regulatory approvals. The merger, which will be accounted for
as a pooling of interest, is expected to close in the first quarter of calendar
year 1997.
In connection with the Merger Agreement, on November 13, 1996, the Company and
First Chicago Trust company of New York, as Rights Agent, entered into an
amendment to the Rights Agreement, dated as of March 15, 1996, by and between
the Company and the Rights Agent (the "Rights Agreement"), having the effect of
exempting the events and transactions contemplated by the Merger Agreement from
the Rights Agreement.
-13-
<PAGE>
PHH CORPORATION AND SUBSIDIARIES
Index to Exhibits
-----------------
Exhibit No. Page No.
Exhibit (11) - Schedule containing information used in
the computation of net income per share 15
Exhibit (12) - Schedule containing information used in the
computation of the ratio of earnings to fixed charges 16
-14-
<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: March 27, 1997 ______________________
Nan A. Grant
Corporate Controller
-17-
EXHIBIT (11)
PHH CORPORATION AND SUBSIDIARIES
Information Used in the Computation of Net Income Per Share
<TABLE>
<CAPTION>
Six Months Ended October 31,
--------------------------------
(In thousands except per share data) 1996 1995
---- ----
<S> <C>
NET INCOME - as reported $ 45,738 $ 37,865
======== ========
Weighted average number of shares outstanding 34,798 34,116
Give effect to the exercise of dilutive options
determined under the treasury stock method 696 650
Reflect the period-end market price when greater
than the average market price during the
quarter 61 120
-------- --------
Number of shares used in the computation of net
income per share 35,555 34,886
======== ========
NET INCOME PER SHARE $ 1.29 $ 1.09
======== ========
</TABLE>
-15-
EXHIBIT (12)
PHH CORPORATION AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended April 30
Six Months Ended ------------------------------------------------------------------
October 31, 1996 1996 1995 1994 1993 1992
---------------- ---- ---- ---- ---- ----
<S> <C>
Income from continuing operations
before income taxes $ 77,076 $ 139,148 $ 121,318 $ 109,796 $ 94,238 $ 83,117
Add:
Interest expense 126,707 252,966 194,196 162,108 193,935 237,058
Interest portion of rentals* 4,138 7,840 8,065 9,088 8,456 8,665
--------- -------- ------- -------- -------- --------
Earnings available for fixed charges $ 207,921 $ 399,954 $ 323,579 $ 280,992 $ 296,629 $ 328,840
========= ======== ======= ======== ======== ========
Fixed charges:
Interest expense $ 126,707 $ 252,966 $ 194,196 $ 162,108 $ 193,935 $ 237,058
Interest portion of rentals* 4,138 7,840 8,065 9,088 8,456 8,665
--------- -------- --------- -------- -------- --------
$ 130,845 $ 260,806 $ 202,261 $ 171,196 $ 202,391 $ 245,723
========= ======== ========= ======== ======== ========
Ratio of earnings to fixed charges 1.59 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.
-16-
<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 OCTOBER 31, 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000077776
<NAME> PHH CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> OCT-31-1996
<EXCHANGE-RATE> .001
<CASH> 11,450
<SECURITIES> 0
<RECEIVABLES> 449,183
<ALLOWANCES> 6,232
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 92,846
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,884,577
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 99,820
<OTHER-SE> 554,088
<TOTAL-LIABILITY-AND-EQUITY> 5,884,577
<SALES> 0
<TOTAL-REVENUES> 948,763
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 758,490
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 113,197
<INCOME-PRETAX> 77,076
<INCOME-TAX> 31,338
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,738
<EPS-PRIMARY> 1.29
<EPS-DILUTED> 1.29
</TABLE>
