-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QkZP6xykOoVK+ef08DmElSlKqVZGdkm7uO8kPytaphixGspEdpKEQBH7pT4tA4IK bidqYUOg8VaBkk6yLSbrSw== /in/edgar/work/0000950137-00-004837/0000950137-00-004837.txt : 20001115 0000950137-00-004837.hdr.sgml : 20001115 ACCESSION NUMBER: 0000950137-00-004837 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOUSEHOLD INTERNATIONAL INC CENTRAL INDEX KEY: 0000354964 STANDARD INDUSTRIAL CLASSIFICATION: [6141 ] IRS NUMBER: 363121988 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08198 FILM NUMBER: 764192 BUSINESS ADDRESS: STREET 1: 2700 SANDERS RD CITY: PROSPECT HEIGHTS STATE: IL ZIP: 60070 BUSINESS PHONE: 8475646996 MAIL ADDRESS: STREET 1: 2700 SANDERS ROAD CITY: PROSPECT HEIGHTS STATE: IL ZIP: 60070 10-Q 1 c58638e10-q.txt QUARTERLY REPORT 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 SEPTEMBER 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 October 31, 2000, there were 470,850,702 shares of registrant's common stock outstanding. 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 Nine Months Ended September 30, 2000 and 1999....................................................... 2 Condensed Consolidated Balance Sheets - September 30, 2000 (Unaudited) and December 31, 1999.................................... 3 Condensed Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended September 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 6. Exhibits and Reports on Form 8-K........................................................ 23 Signature ..................................................................................... 24
1 3 PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, (In millions, except per share data) 2000 1999 2000 1999 - -------------------------------------------------------------------------------------------------------------------- Finance income $ 2,262.1 $ 1,694.7 $ 6,252.3 $ 4,776.3 Other interest income 8.3 8.0 26.4 25.3 Interest expense 1,057.2 703.7 2,811.9 2,013.8 --------- --------- --------- --------- Net interest margin 1,213.2 999.0 3,466.8 2,787.8 Provision for credit losses on owned receivables 524.4 438.1 1,542.1 1,263.2 --------- --------- --------- --------- Net interest margin after provision for credit losses 688.8 560.9 1,924.7 1,524.6 --------- --------- --------- --------- Securitization income 379.9 357.9 1,081.9 995.3 Insurance revenues 146.7 130.6 413.5 405.4 Investment income 43.9 45.0 127.2 128.0 Fee income 216.2 155.7 591.4 421.2 Other income 30.1 32.4 195.3 180.0 --------- --------- --------- --------- Total other revenues 816.8 721.6 2,409.3 2,129.9 --------- --------- --------- --------- Salaries and fringe benefits 333.0 262.6 956.6 778.5 Sales incentives 53.1 42.1 153.3 108.9 Occupancy and equipment expense 78.4 66.6 229.5 200.0 Other marketing expenses 108.2 91.5 366.6 264.0 Other servicing and administrative expenses 136.0 128.5 466.9 433.4 Amortization of acquired intangibles and goodwill 39.0 35.5 121.1 107.8 Policyholders' benefits 67.1 61.0 198.3 199.0 --------- --------- --------- --------- Total costs and expenses 814.8 687.8 2,492.3 2,091.6 --------- --------- --------- --------- Income before income taxes 690.8 594.7 1,841.7 1,562.9 Income taxes 239.6 194.8 633.7 515.3 - -------------------------------------------------------------------------------------------------------------------- Net income $ 451.2 $ 399.9 $ 1,208.0 $ 1,047.6 ==================================================================================================================== EARNINGS PER COMMON SHARE Net income $ 451.2 $ 399.9 $ 1,208.0 $ 1,047.6 Preferred dividends (2.3) (2.3) (6.9) (6.9) --------- --------- --------- --------- Earnings available to common shareholders $ 448.9 $ 397.6 $ 1,201.1 $ 1,040.7 --------- --------- --------- --------- Average common shares 472.4 475.6 472.1 479.7 Average common and common equivalent shares 477.6 480.2 476.2 484.8 --------- --------- --------- --------- Basic earnings per common share $ .95 $ .84 $ 2.54 $ 2.17 Diluted earnings per common share .94 .83 2.52 2.15 - -------------------------------------------------------------------------------------------------------------------- DIVIDENDS DECLARED PER COMMON SHARE .19 .17 .55 .51 - --------------------------------------------------------------------------------------------------------------------
See notes to interim condensed consolidated financial statements. 2 4 HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, (In millions, except per share data) 2000 1999 - -------------------------------------------------------------------------------------------------------------------- ASSETS (UNAUDITED) Cash $ 403.1 $ 270.6 Investment securities 3,275.1 3,128.1 Receivables, net 64,372.8 52,158.4 Acquired intangibles and goodwill, net 1,743.5 1,590.4 Properties and equipment, net 503.7 476.4 Real estate owned 336.9 271.5 Other assets 3,093.5 2,854.0 - -------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $73,728.6 $60,749.4 ==================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Debt: Deposits $ 8,530.7 $ 4,980.0 Commercial paper, bank and other borrowings 10,882.6 10,777.8 Senior and senior subordinated debt (with original maturities over one year) 42,487.3 34,887.3 --------- --------- Total debt 61,900.6 50,645.1 Insurance policy and claim reserves 1,283.6 1,308.9 Other liabilities 2,154.6 1,805.1 --------- --------- Total liabilities 65,338.8 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, 550,806,786 and 550,431,057 shares issued at September 30, 2000 and December 31, 1999, respectively 550.8 550.4 Additional paid-in capital 1,900.7 1,780.8 Retained earnings 7,279.9 6,338.7 Accumulated other comprehensive income (259.2) (256.9) Less common stock in treasury, 78,820,334 and 82,519,612 shares at September 30, 2000 and December 31, 1999, respectively, at cost (1,921.8) (1,962.1) --------- --------- Total common shareholders' equity 7,550.4 6,450.9 - -------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $73,728.6 $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 5 HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, (In millions) 2000 1999 - --------------------------------------------------------------------------------------------------------- CASH PROVIDED BY OPERATIONS Net income $ 1,208.0 $ 1,047.6 Adjustments to reconcile net income to cash provided by operations: Provision for credit losses on owned receivables 1,542.1 1,263.2 Insurance policy and claim reserves 129.5 60.7 Depreciation and amortization 219.8 222.3 Other, net 159.8 258.6 --------- --------- Cash provided by operations 3,259.2 2,852.4 --------- --------- INVESTMENTS IN OPERATIONS Investment securities: Purchased (636.1) (979.2) Matured 260.7 412.4 Sold 67.0 536.5 Short-term investment securities, net change 120.4 96.1 Receivables: Originations, net (29,436.8) (22,918.4) Purchases and related premiums (4,128.4) (1,505.0) Sold 19,659.5 17,768.4 Acquisition of business operations (87.1) (43.4) Properties and equipment purchased (125.5) (106.2) Properties and equipment sold 9.1 17.7 --------- --------- Cash decrease from investments in operations (14,297.2) (6,721.1) --------- --------- FINANCING AND CAPITAL TRANSACTIONS Short-term debt and demand deposits, net change 136.1 (1,360.7) Time certificates, net change 3,257.7 1,602.2 Senior and senior subordinated debt issued 14,200.5 9,950.5 Senior and senior subordinated debt retired (6,356.8) (5,472.8) Policyholders' benefits paid (94.5) (97.6) Cash received from policyholders 46.2 51.7 Shareholders' dividends (266.7) (250.3) Purchase of treasury stock (133.7) (790.4) Issuance of common stock 56.4 36.7 Issuance of company obligated mandatorily redeemable preferred securities of subsidiary trusts 300.0 -- --------- --------- Cash increase from financing and capital transactions 11,145.2 3,669.3 --------- --------- Effect of exchange rate changes on cash 25.3 (6.0) --------- --------- Increase (decrease) in cash 132.5 (205.4) Cash at January 1 270.6 457.4 - --------------------------------------------------------------------------------------------------------- Cash at September 30 $ 403.1 $ 252.0 ========================================================================================================= SUPPLEMENTAL CASH FLOW INFORMATION Interest paid $ 2,817.1 $ 1,971.9 Income taxes paid 570.4 199.1 Non-cash investing and financing activities: Common stock issued for acquisition 209.4 15.0 - ---------------------------------------------------------------------------------------------------------
See notes to interim condensed consolidated financial statements. 4 6 HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, (Dollar amounts are in millions, except per share data) 2000 1999 2000 1999 - ----------------------------------------------------------------------------------------------------------------- Net income $ 451.2 $ 399.9 $ 1,208.0 $ 1,047.6 Diluted earnings per common share .94 .83 2.52 2.15 Net interest margin and other revenues (1) 1,962.9 1,659.6 5,677.8 4,718.7 Return on average common shareholders' equity, annualized 24.2% 25.3% 22.6% 22.2% Return on average owned assets, annualized 2.48 2.80 2.38 2.52 Return on average managed assets, annualized 1.98 2.14 1.87 1.89 Managed basis efficiency ratio (2) 33.8 31.9 35.5 34.4 - -----------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, (Dollar amounts are in millions) 2000 1999 - ------------------------------------------------------------------------------------------------------- Total assets: Owned $ 73,728.6 $ 60,749.4 Managed 92,596.1 80,188.3 ---------- ---------- Receivables: Owned $ 64,586.4 $ 52,289.4 Serviced with limited recourse 18,867.5 19,438.9 ---------- ----------- Managed $ 83,453.9 $ 71,728.3 ========== =========== Total shareholders' equity as a percent of owned assets (3) 11.38% 11.51% Total shareholders' equity as a percent of managed assets (3) 9.06 8.72 Tangible equity to tangible managed assets (4) 7.33 6.96 - -------------------------------------------------------------------------------------------------------
(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 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 nine months ended September 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 is expanding 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 since February 7, 2000. 3. INVESTMENT SECURITIES Investment securities consisted of the following available-for-sale investments:
- --------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, (Dollar amounts are in millions) 2000 1999 - -------------------------------------------------------------------------------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value --------- --------- --------- ------- Marketable equity securities $ 25.8 $ 25.5 $ 32.7 $ 33.4 Corporate debt securities 1,931.1 1,822.9 1,790.4 1,692.3 U.S. government and federal agency debt securities 273.4 266.7 248.6 236.7 Other 1,115.6 1,116.1 1,128.0 1,127.5 --------- --------- --------- -------- Subtotal 3,345.9 3,231.2 3,199.7 3,089.9 Accrued investment income 43.9 43.9 38.2 38.2 - -------------------------------------------------------------------------------------------------------------- Total investment securities $ 3,389.8 $ 3,275.1 $ 3,237.9 $3,128.1 ==============================================================================================================
6 8 4. RECEIVABLES Receivables consisted of the following:
- ------------------------------------------------------------------------------------------------------------------ SEPTEMBER 30, DECEMBER 31, (In millions) 2000 1999 - ------------------------------------------------------------------------------------------------------------------ Real estate secured $ 33,595.1 $ 24,661.9 Auto finance 1,917.7 1,233.5 MasterCard*/Visa* 7,203.0 6,314.4 Private label 10,128.0 10,119.7 Other unsecured 11,100.3 9,151.6 Commercial and other 642.3 808.3 - ------------------------------------------------------------------------------------------------------------------ Total owned receivables 64,586.4 52,289.4 Accrued finance charges 1,187.2 879.3 Credit loss reserve for owned receivables (2,009.2) (1,757.0) Unearned credit insurance premiums and claims reserves (646.0) (569.3) Amounts due and deferred from receivables sales 2,231.2 2,225.6 Reserve for receivables serviced with limited recourse (976.8) (909.6) ---------- ---------- Total owned receivables, net 64,372.8 52,158.4 Receivables serviced with limited recourse 18,867.5 19,438.9 - ------------------------------------------------------------------------------------------------------------------ Total managed receivables, net $ 83,240.3 $ 71,597.3 ==================================================================================================================
Receivables serviced with limited recourse consisted of the following:
- ------------------------------------------------------------------------------------------------------------------ SEPTEMBER 30, DECEMBER 31, (In millions) 2000 1999 - ------------------------------------------------------------------------------------------------------------------ Real estate secured $ 1,693.9 $ 2,273.6 Auto finance 2,411.8 1,806.3 MasterCard/Visa 9,173.8 9,478.7 Private label 1,150.0 1,150.0 Other unsecured 4,438.0 4,730.3 - ------------------------------------------------------------------------------------------------------------------ Total receivables serviced with limited recourse $ 18,867.5 $ 19,438.9 ==================================================================================================================
The combination of owned receivables and receivables serviced with limited recourse, which we consider our managed portfolio, consisted of the following:
- ------------------------------------------------------------------------------------------------------------------ SEPTEMBER 30, DECEMBER 31, (In millions) 2000 1999 - ------------------------------------------------------------------------------------------------------------------ Real estate secured $ 35,289.0 $ 26,935.5 Auto finance 4,329.5 3,039.8 MasterCard/Visa 16,376.8 15,793.1 Private label 11,278.0 11,269.7 Other unsecured 15,538.3 13,881.9 Commercial and other 642.3 808.3 - ------------------------------------------------------------------------------------------------------------------ Total managed receivables $ 83,453.9 $ 71,728.3 ==================================================================================================================
* MasterCard is a registered trademark of MasterCard International, Incorporated and Visa is a registered trademark of Visa USA, Inc. 7 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 $2,295.2 million at September 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 $64.5 million at September 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 nine months ended September 30 was as follows:
- --------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, (In millions) 2000 1999 2000 1999 - --------------------------------------------------------------------------------------------------------------------- Owned receivables: Credit loss reserves at beginning of period $ 1,986.5 $ 1,737.6 $ 1,757.0 $ 1,734.2 Provision for credit losses 524.4 438.1 1,542.1 1,263.2 Chargeoffs (523.6) (491.8) (1,574.2) (1,434.3) Recoveries 48.7 50.5 143.1 152.9 Other, net (26.8) 15.9 141.2 34.3 - -------------------------------------------------------------------------------------------------------------------- Credit loss reserves for owned receivables at September 30 2,009.2 1,750.3 2,009.2 1,750.3 - --------------------------------------------------------------------------------------------------------------------- Receivables serviced with limited recourse: Credit loss reserves at beginning of period 961.7 786.4 909.6 813.9 Provision for credit losses 250.5 302.9 793.3 780.5 Chargeoffs (245.7) (252.3) (767.5) (793.6) Recoveries 16.4 16.0 46.5 44.8 Other, net (6.1) 2.5 (5.1) 9.9 - --------------------------------------------------------------------------------------------------------------------- Credit loss reserves for receivables serviced with limited recourse at September 30 976.8 855.5 976.8 855.5 - --------------------------------------------------------------------------------------------------------------------- Total credit loss reserves for managed receivables at September 30 $ 2,986.0 $ 2,605.8 $ 2,986.0 $ 2,605.8 =====================================================================================================================
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. 6. INCOME TAXES Our effective tax rate was 34.4 percent for the nine months ended September 30, 2000 and 33.0 percent for the first nine months of 1999. The effective tax rate differs from the statutory federal income tax rate primarily because of the effects of state and local income taxes and leveraged lease tax benefits. 8 10 7. EARNINGS PER COMMON SHARE Computations of earnings per common share for the three and nine months ended September 30 were as follows:
- ----------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, (In millions, except per share data) 2000 1999 - ----------------------------------------------------------------------------------------------------------- Diluted Basic Diluted Basic ------------ ------------ ------------ ------------ Earnings: Net income $ 451.2 $ 451.2 $ 399.9 $ 399.9 Preferred dividends (2.3) (2.3) (2.3) (2.3) ------------ ------------ ------------ ------------ Earnings available to common shareholders $ 448.9 $ 448.9 $ 397.6 $ 397.6 ------------ ------------ ------------ ------------ Average shares outstanding: Common 472.4 472.4 475.6 475.6 Common equivalents 5.2 -- 4.6 -- ------------ ------------ ------------ ------------ Average shares outstanding assuming dilution 477.6 472.4 480.2 475.6 - ----------------------------------------------------------------------------------------------------------- Earnings per common share $ 0.94 $ 0.95 $ 0.83 $ 0.84 ===========================================================================================================
- ----------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, (In millions, except per share data) 2000 1999 - ----------------------------------------------------------------------------------------------------------- Diluted Basic Diluted Basic ------------ ------------ ------------ ------------ Earnings: Net income $ 1,208.0 $ 1,208.0 $ 1,047.6 $ 1,047.6 Preferred dividends (6.9) (6.9) (6.9) (6.9) --------- --------- --------- --------- Earnings available to common shareholders $ 1,201.1 $ 1,201.1 $ 1,040.7 $ 1,040.7 --------- --------- --------- --------- Average shares outstanding: Common 472.1 472.1 479.7 479.7 Common equivalents 4.1 -- 5.1 -- --------- --------- --------- --------- Average shares outstanding assuming dilution 476.2 472.1 484.8 479.7 - ----------------------------------------------------------------------------------------------------------- Earnings per common share $ 2.52 $ 2.54 $ 2.15 $ 2.17 ===========================================================================================================
8. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS. We have formed special purpose trusts, including Household Capital Trust V which was formed in June 2000, for the purpose of issuing trust preferred securities. The sole assets of these trusts are Junior Subordinated Deferrable Interest Notes ("Junior Subordinated Notes") issued by Household. 9 11 The following table summarizes our company obligated mandatorily redeemable preferred securities of subsidiary trusts ("Preferred Securities") and the related Junior Subordinated Notes:
- ------------------------------------------------------------------------------------------------------------------------ Household Capital Household Household Household Capital Trust V Capital Trust IV Capital Trust II Trust I ("HCT V") ("HCT IV") ("HCT II") ("HCT I") (Dollar amounts are in millions) - ----------------------------------------------------------------------------------------------------------------------- Preferred Securities: Interest rate 10.00% 7.25% 8.70% 8.25% Face value $300 $200 $100 $75 Issue date June 2000 March 1998 June 1996 June 1995 Junior Subordinated Notes: Principal balance $309.3 $206.2 $103.1 $77.3 Redeemable by issuer June 8, 2005 March 19, 2003 June 30, 2001 June 30, 2000 Stated maturity June 30, 2030 December 31, 2037 June 30, 2036 June 30, 2025 - ----------------------------------------------------------------------------------------------------------------------
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 September 30, 2000 and $375 million at December 31, 1999. 9. FORWARD PURCHASE AGREEMENT As of September 30, 2000, we had entered into agreements to purchase, on a forward basis, approximately 6.6 million shares of our common stock at a weighted-average forward price of $39.35 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 1.2 million shares of our common stock at an average cost of $34.46 per share. 10. COMPREHENSIVE INCOME Comprehensive income was $449.7 million for the quarter ended September 30, 2000, $418.7 million for the quarter ended September 30, 1999, $1,205.7 million for the nine months ended September 30, 2000 and $965.7 million for the nine months ended September 30, 1999. The components of accumulated other comprehensive income are as follows:
- --------------------------------------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, (In millions) 2000 1999 - --------------------------------------------------------------------------------------------- Foreign currency translation adjustments $ (247.2) $ (185.6) Unrealized gain (loss) on investments (12.0) (71.3) - --------------------------------------------------------------------------------------------- Accumulated other comprehensive income $ (259.2) $ (256.9) =============================================================================================
10 12 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 third quarter and first nine months of 2000 compared to the corresponding prior-year periods was as follows:
- ---------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED THREE MONTHS ENDED Owned Basis SEPTEMBER 30, SEPTEMBER 30, (In millions) 2000 1999 - ---------------------------------------------------------------------------------------------------------------- Credit Inter- Credit Inter- Consumer Card national Consumer Card national ------------ ------------- ------------- ------------- ------------- ------------- Net interest margin and other revenues (1) $ 1,256.0 $ 519.7 $ 201.6 $ 1,075.2 $ 374.8 $ 197.5 Intersegment revenues 51.4 8.7 1.3 31.8 7.6 1.0 Net income 343.7 59.8 57.8 268.4 48.2 66.7 Total assets 53,907.5 7,535.7 7,529.5 40,009.7 5,982.2 7,475.1 Total assets - managed 62,839.3 16,515.0 8,588.5 48,633.4 14,706.9 8,620.0 - ----------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED NINE MONTHS ENDED Owned Basis SEPTEMBER 30, SEPTEMBER 30, (In millions) 2000 1999 - ---------------------------------------------------------------------------------------------------------------- Credit Inter- Credit Inter- Consumer Card national Consumer Card national ------------ ------------- ------------- ------------- ------------- ------------- Net interest margin and other revenues (1) $ 3,608.2 $ 1,398.0 $ 630.5 $ 2,988.6 $ 982.8 $ 589.5 Intersegment revenues 142.6 24.3 3.7 91.8 12.7 2.6 Net income 889.3 137.2 164.3 704.4 89.3 164.8 Total assets 53,907.5 7,535.7 7,529.5 40,009.7 5,982.2 7,475.1 Total assets - managed 62,839.3 16,515.0 8,588.5 48,633.4 14,706.9 8,620.0 - ----------------------------------------------------------------------------------------------------------------
(1) Net interest margin and other revenues, including intersegment revenues, net of policyholders' benefits A reconciliation of the total reportable segments' net income to consolidated net income for the third quarter and first nine months of 2000 and 1999 is as follows:
- ------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, (In millions) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------- Reportable segment net income $ 461.3 $ 383.3 $ 1,190.8 $ 958.5 Other operations not individually reportable 29.1 43.4 126.1 171.7 Adjustments/eliminations (39.2) (26.8) (108.9) (82.6) - ------------------------------------------------------------------------------------------------------- Total consolidated net income $ 451.2 $ 399.9 $ 1,208.0 $ 1,047.6 =======================================================================================================
11 13 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 estimate that our net-of-tax cumulative-effect-type adjustment to earnings and equity as a result of implementing FAS No. 133 will not be material. In September 2000, the FASB issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement No. 125" ("FAS No. 140"). FAS No. 140 revises the standards for accounting for securitizations and requires certain disclosures, but carries over most of FASB Statement No. 125's provisions without amendment. FAS No. 140 is effective for all transfers of financial assets occurring after March 31, 2001 and for disclosures relating to securitization transactions for fiscal years ending after December 15, 2000. We do not believe the adoption of the non-disclosure-related provisions of FAS No. 140 will have a significant effect on the results of our operations. 12 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 third quarter of 2000 increased 13 percent to $451.2 million, from $399.9 million a year ago. Net income for the first nine months of 2000 was $1,208.0 million, a 15 percent increase from $1,047.6 million in the year-ago period. Diluted earnings per share was $.94 in the third quarter and $2.52 for the first nine months of 2000, compared to $.83 and $2.15 in the same periods in 1999. Strong revenue growth, driven by significant receivable growth, partially offset by higher operating expenses including increased technology, marketing, e-commerce, and personnel spending, drove the improved results. Our annualized return on average common shareholders' equity ("ROE") was 24.2 percent for the third quarter of 2000 and 22.6 percent for the first nine months of 2000, compared to 25.3 percent and 22.2 percent in the same periods in 1999. Our annualized return on average owned assets ("ROA") was 2.48 percent in the third quarter of 2000 and 2.38 percent for the first nine months of 2000, compared to 2.80 percent and 2.52 percent in the same periods in 1999. Our annualized return on average managed assets ("ROMA") was 1.98 percent in the third quarter of 2000 and 1.87 percent for the first nine months of 2000, compared to 2.14 percent and 1.89 percent in the same periods in 1999. Our normalized managed basis efficiency ratio was 33.8 percent for the third quarter of 2000 and 35.5 percent for the first nine months of 2000 compared to 31.9 percent and 34.4 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, e-commerce, and personnel spending. SEGMENT RESULTS Our Consumer segment reported higher net income over the comparable prior-year quarter and year-to-date periods. Managed receivables grew to $61.3 billion at September 30, 2000, from $58.2 billion at June 30, 2000 and $46.9 billion at September 30, 1999. The managed receivable growth was driven by solid growth in real estate secured, other unsecured and auto finance receivables. In 2000, we acquired real estate secured portfolios of $2.2 billion in March and $1.5 billion in June. ROA was 2.63 and 2.46 percent in the third quarter and first nine months of 2000 compared to 2.74 and 2.52 percent in the year-ago periods. ROMA was 2.26 and 2.08 percent in the third quarter and first nine months of 2000 compared to 2.27 and 2.05 percent in the year-ago periods. The improved operating results reflect higher dollars of net interest margin partially offset by higher salary expense, including higher sales incentive compensation, higher marketing expenses and higher credit loss provision resulting from the increased levels of receivables. 13 15 Our Credit Card segment also reported improved results. Managed receivables were $14.8 billion at September 30, 2000, $14.3 billion at June 30, 2000 and $13.1 billion at September 30, 1999. The increase over the previous quarter was primarily due to growth in our non-prime and Union Privilege ("UP") portfolios. Compared with the prior-year quarter, strong receivables growth in the UP portfolio and the impact of the Renaissance acquisition was partially offset by attrition in our legacy undifferentiated Household Bank branded portfolio on which we have limited marketing efforts. ROA was 3.09 and 2.55 percent in the third quarter and first nine months of 2000 compared to 3.09 and 1.86 percent in the year-ago periods. ROMA was 1.47 and 1.15 percent in the third quarter and first nine months of 2000 compared to 1.31 and .79 percent in the year-ago periods. The improved operating results primarily were 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 third quarter compared to the prior-year quarter. The decrease in operating results for the quarter was primarily due to higher provision for credit losses and negative foreign currency translation of $4 million which were partially offset by higher net interest margin and other revenues. Including negative foreign exchange impact of $18 million, earnings for the nine months were comparable to prior year. Managed receivables were $7.5 billion at September 30, 2000 and $7.4 billion at both June 30, 2000 and September 30, 1999. Receivable balances reflect the negative foreign exchange impact of approximately $200 million compared to the prior quarter and $800 million compared to the prior year. When reported in local currency, all products reported receivable growth. Higher MasterCard* and Visa* receivables in the U.K., led by growth in marbles(TM), our Internet-based credit card that was launched in October 1999, and the Goldfish Card, which we issue as part of our alliance with the Centrica Group accounted for most of the year-over-year growth. ROA was 3.19 and 2.98 percent in the third quarter and first nine months of 2000 compared to 3.53 and 3.05 percent in the year-ago periods. ROMA was 2.77 and 2.58 percent in the third quarter and first nine months of 2000 compared to 3.06 and 2.62 percent in the year-ago periods. BALANCE SHEET REVIEW Strong receivable growth drove our improved results with all consumer products reporting year-over-year growth. Our managed receivables increased 23 percent from a year ago to $83.5 billion. Excluding the $3.7 billion real estate secured and the $465 million Renaissance portfolios that we acquired in the first half of the year, receivables were up 17 percent over the prior year. Our U.S. consumer finance business, which includes our real estate secured and other unsecured products, reported total growth of 33 percent and internally-generated growth of 19 percent. The strong contribution of our consumer finance business was the result of favorable market and competitor 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 $1.6 billion over last year to $4.3 billion. This business continued to benefit from favorable market conditions and an expanded sales force. Private label receivables increased 8 percent to $11.3 billion. MasterCard and Visa receivables were up 9 percent from last year and were up 6 percent excluding the purchased Renaissance portfolio. Our UP portfolio and our marbles(TM) and Goldfish card portfolios 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 non-prime card program also reported strong growth. Including the receivables and accounts we purchased as part of the Renaissance acquisition, we now have almost 3.0 million accounts and $1.2 billion in non-prime receivables. In the third quarter, managed receivables increased 4 percent, led by 5 percent growth in our U.S. consumer finance business. MasterCard and Visa receivables increased over 3 percent primarily due to growth in our UP and non-prime portfolios. Private label receivables increased 3 percent from June 30, 2000 and auto finance receivables increased 12 percent. Owned receivables were $64.6 billion at September 30, 2000, up from $61.4 billion at June 30, 2000 and $49.3 billion at September 30, 1999. The level of our owned receivables may vary from period to period depending on the timing and size of securitization transactions. * MasterCard is a registered trademark of MasterCard International, Incorporated and Visa is a registered trademark of VISA USA, Inc. 14 16 Owned consumer two-months-and-over contractual delinquency as a percent of owned consumer receivables was 4.29 percent at September 30, 2000, compared with 4.25 percent at June 30, 2000 and 5.24 percent at September 30, 1999. The annualized consumer owned chargeoff ratio in the third quarter of 2000 was 3.01 percent, compared with 3.27 percent in the prior quarter and 3.63 percent in the year-ago quarter. Managed consumer two-months-and-over contractual delinquency as a percent of managed consumer receivables was 4.21 percent at September 30, 2000, compared with 4.16 percent at June 30, 2000 and 4.89 percent at September 30, 1999. The annualized consumer managed chargeoff ratio in the third quarter of 2000 was 3.47 percent, compared with 3.74 percent in the prior quarter and 4.09 percent in the year-ago quarter. The ratio of total shareholders' equity (including company obligated mandatorily redeemable preferred securities of subsidiary trusts) to owned assets was 11.38 percent at September 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 September 30, 2000 and 8.72 percent at December 31, 1999. The ratio of tangible equity to tangible managed assets was 7.33 percent, compared with 6.96 percent at December 31, 1999. 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. 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 September 30, 2000, we had entered into agreements to purchase, on a forward basis, approximately 6.6 million shares of our common stock at a weighted-average forward price of $39.35 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 1.2 million shares of our common stock at an average cost of $34.46 per share. During the third quarter, we repurchased 1.6 million shares of our common stock, for a total of $64.0 million. Since announcing our share repurchase program in March 1999, we have repurchased 20.4 million shares for a total of $846.2 million. Deposits increased to $8.5 billion at September 30, 2000 from $5.0 billion at December 31, 1999. Commercial paper, bank and other borrowings increased to $10.9 billion at September 30, 2000 from $10.8 billion at year-end. Senior and senior subordinated debt (with original maturities over one year) increased to $42.5 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 receivable portfolio totaled $18.9 billion at September 30, 2000, compared with $19.4 billion at December 31, 1999. 15 17 We securitized (excluding replenishments of certificate holder interests) the following receivables:
- --------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, (In billions) 2000 1999 2000 1999 - --------------------------------------------------------------------------------------------------------------------------- Auto finance $ .5 $ .5 $ 1.4 $ 1.1 MasterCard/Visa .8 .5 1.3 1.1 Other unsecured .4 .7 1.5 1.0 - --------------------------------------------------------------------------------------------------------------------------- Total $ 1.7 $ 1.7 $ 4.2 $ 3.2 ===========================================================================================================================
We believe the market for securities backed by receivables is a reliable, efficient and cost-effective source of funds. At September 30, 2000, 23 percent of our managed portfolio had been securitized compared to 27 percent a year earlier. 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. 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 reported 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. 16 18
- --------------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, (Dollar amounts are in millions) 2000 * 1999 * 2000 * 1999 * - --------------------------------------------------------------------------------------------------------------------------------- Finance and other interest income $ 3,033.9 14.67% $ 2,368.2 14.04% $ 8,519.2 14.54% $ 6,850.6 13.82% Interest expense 1,390.6 6.72 958.3 5.68 3,755.6 6.41 2,781.4 5.61 --------- ----- --------- ------ --------- ----- --------- ----- Net interest margin 1,643.3 7.95 1,409.9 8.36 4,763.6 8.13 4,069.2 8.21 Provision for credit losses 774.9 741.1 2,335.4 2,043.7 --------- --------- --------- ---------- Net interest margin after provision for credit losses 868.4 668.8 2,428.2 2,025.5 --------- --------- --------- ---------- Insurance revenues 146.7 130.6 413.5 405.4 Investment income 43.9 45.0 127.2 128.0 Fee income 380.3 309.8 1,066.4 861.1 Securitization related income 36.2 95.9 103.4 54.5 Other income 30.1 32.4 195.3 180.0 --------- --------- --------- ---------- Total other revenues 637.2 613.7 1,905.8 1,629.0 --------- --------- --------- ---------- Salaries and fringe benefits 333.0 262.6 956.6 778.5 Sales incentives 53.1 42.1 153.3 108.9 Occupancy and equipment expense 78.4 66.6 229.5 200.0 Other marketing expenses 108.2 91.5 366.6 264.0 Other servicing and administrative expenses 136.0 128.5 466.9 433.4 Amortization of acquired intangibles and goodwill 39.0 35.5 121.1 107.8 Policyholders' benefits 67.1 61.0 198.3 199.0 --------- --------- --------- ---------- Total costs and expenses 814.8 687.8 2,492.3 2,091.6 --------- --------- --------- ---------- Income before taxes 690.8 594.7 1,841.7 1,562.9 Income taxes 239.6 194.8 633.7 515.3 - ------------------------------------------------------------------------------------------------------------------------ Net income $ 451.2 $ 399.9 $ 1,208.0 $ 1,047.6 ======================================================================================================================== Average managed receivables $ 81,803.4 $ 66,423.6 $ 77,084.3 $ 65,134.4 Average noninsurance investments 471.4 607.6 564.1 513.9 Other interest-earning assets 436.7 418.0 431.3 414.7 - ------------------------------------------------------------------------------------------------------------------------ Average managed interest- earning assets $ 82,711.5 $ 67,449.2 $ 78,079.7 $ 66,063.0 ========================================================================================================================
* As a percent, annualized, of average managed interest-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 $1,213.2 million for the third quarter of 2000, up from $999.0 million for the prior-year quarter. Net interest margin on an Owned Basis for the first nine months of 2000 was $3,466.8 million, up from $2,787.8 million in the prior-year period. Net interest margin on a Managed Basis increased 17 percent for both the quarter and nine months to $1,643.3 and $4,763.6 million, respectively. The increases were primarily due to better pricing and receivable growth, which were partially offset by higher funding costs. 17 19 Net interest margin as a percent of average managed interest-earning assets, annualized, declined to 7.95 percent, from 8.17 percent in the previous quarter and 8.36 percent in the year-ago quarter. 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. Managed Basis risk adjusted margin, which is net interest margin and other revenues adjusted for securitization income and net charge-offs, was 7.45 percent and 7.54 percent for the third quarter and first nine months of 2000 compared to 7.41 percent and 7.29 percent in the comparable prior-year periods. The increases are the result of reductions in chargeoff rates, partially offset by the previously discussed reductions in net interest margin. PROVISION FOR CREDIT LOSSES The provision for credit losses for receivables on an Owned Basis for the third quarter of 2000 totaled $524.4 million, compared to $438.1 million in the prior-year quarter. The Owned Basis provision for the first nine months of 2000 was $1,542.1 million, compared to $1,263.2 million in the year-ago period. The provision as a percent of average owned receivables, annualized, was 3.30 percent in the third quarter of 2000, compared to 3.59 percent in the third 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 $774.9 million in the third quarter of 2000, compared to $741.1 million in the prior-year quarter. The Managed Basis provision for the first nine months of 2000 was $2,335.4 million, compared to $2,043.7 million in the year-ago period. As a percent of average managed receivables, annualized, the provision was 3.79 percent in the third quarter of 2000, compared to 4.46 percent in the third 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 $379.9 and $1,081.9 million for the third quarter and the first nine months of 2000, compared to $357.9 and $995.3 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 increases 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 $146.7 and $413.5 million in the third quarter and first nine months of 2000 compared to $130.6 and $405.4 million in the year-ago periods. The increase reflected increased sales on a larger portfolio. Fee income on an Owned Basis, which includes revenues from fee-based products such as credit cards, was $216.2 and $591.4 million in the third quarter and first nine months of 2000, compared to $155.7 and $421.2 million in the year-ago periods. The increases were primarily due to higher credit card fees from our non-prime credit card portfolio. Fee income on a Managed Basis was $380.3 and $1,066.4 million in the third quarter and first nine months of 2000 compared to $309.8 and $861.1 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 $36.2 and $103.4 million in the third quarter and first nine months of 2000 compared to $95.9 and $54.5 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. 18 20 Other income was $30.1 and $195.3 million in the third quarter and first nine months of 2000 compared to $32.4 and $180.0 million in the prior-year periods. The increase for the nine 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 third quarter and first nine months of 2000 were $814.8 and $2,492.3 million compared to $687.8 and $2,091.6 million in the comparable prior-year periods. Higher expenses were driven by higher receivable levels and increased operating, technology, marketing, e-commerce, and personnel spending. Acquisitions during the first half of the year also contributed to increased expenses over the comparable prior-year periods. Significant fluctuations were as follows: Salaries and fringe benefits for the third quarter and first nine months of 2000 were $333.0 and $956.6 million compared to $262.6 and $778.5 million in the third quarter and first nine months of 1999. The increases were primarily due to additional staffing to support growth in the consumer finance and credit card businesses and the impact of acquisitions. Sales incentives for the third quarter and first nine months of 2000 were $53.1 and $153.3 million compared to $42.1 and $108.9 million in the comparable prior-year periods. The increases were due to higher sales volumes in our branches. Occupancy and equipment expense for the third quarter and first nine months of 2000 was $78.4 and $229.5 million compared to $66.6 and $200.0 million in the comparable prior-year periods. The increases were primarily associated with our Tampa, Florida collections center and facilities acquired with acquisitions in the first half of the year. These facilities have supported our strong receivable growth. Other marketing expenses for the third quarter and first nine months of 2000 were $108.2 and $366.6 million compared to $91.5 and $264.0 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 third quarter and first nine months of 2000 were $136.0 and $466.9 million compared to $128.5 and $433.4 million in the comparable prior-year periods. The increases were 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 third quarter and first nine months of 2000 was $39.0 and $121.1 million compared to $35.5 and $107.8 million in the comparable prior-year periods. The increases reflect higher goodwill amortization resulting from the Renaissance acquisition. 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 economic protection against credit loss is the ability to price for it. Risk adjusted margin on a Managed Basis was 7.45 percent and 7.54 percent for the third quarter and first nine months of 2000 compared to 7.41 percent and 7.29 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. 19 21 Total managed credit loss reserves, which include reserves established on the off-balance sheet portfolio when receivables are securitized, were as follows:
- ---------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, (in millions) 2000 2000 2000 1999 1999 - ---------------------------------------------------------------------------------------------------------------- Owned $ 2,009.2 $ 1,986.5 $ 1,909.7 $ 1,757.0 $ 1,750.3 Serviced with limited recourse 976.8 961.7 951.4 909.6 855.5 - ---------------------------------------------------------------------------------------------------------------- Total managed $ 2,986.0 $ 2,948.2 $ 2,861.1 $ 2,666.6 $ 2,605.8 ================================================================================================================
Managed credit loss reserves as a percent of nonperforming managed receivables were 106.7 percent, compared to 113.0 percent at June 30, 2000 and 101.5 percent at September 30, 1999. Total owned and managed credit loss reserves as a percent of receivables were as follows:
- ---------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, 2000 2000 2000 1999 1999 - ---------------------------------------------------------------------------------------------------------------- Owned 3.11% 3.24% 3.40% 3.36% 3.55% Managed 3.58 3.69 3.79 3.72 3.84 - ----------------------------------------------------------------------------------------------------------------
Reserve ratios at September 30, 2000 reflect improved credit quality and underwriting and the impact of a growing percentage of secured loans which have lower loss rates than unsecured loans. Real estate secured receivables represent 42 percent of our total managed receivables at September 30, 2000 and June 30, 2000, compared to 37 percent at September 30, 1999. 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. DELINQUENCY Two-Months-and-Over Contractual Delinquency (as a percent of consumer receivables):
- ---------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, 2000 2000 2000 1999 1999 - ---------------------------------------------------------------------------------------------------------------- Managed: Real estate secured 2.77% 2.72% 2.99% 3.27% 3.46% Auto finance 2.19 1.99 1.52 2.43 2.26 MasterCard/Visa 3.48 3.14 3.06 2.78 3.10 Private label 5.67 5.77 5.94 5.97 6.66 Other unsecured 7.72 7.92 8.56 8.81 8.57 - ---------------------------------------------------------------------------------------------------------------- Total managed 4.21% 4.16% 4.43% 4.66% 4.89% - ---------------------------------------------------------------------------------------------------------------- Owned 4.29% 4.25% 4.58% 4.81% 5.24% ================================================================================================================
Managed delinquency as a percent of managed consumer receivables increased slightly during the quarter, but was substantially lower than the prior-year quarter. The modest sequential increase in delinquency during the quarter is due to normal aging of our portfolios and seasonality in our auto finance portfolio. 20 22 Improvements in our real estate secured, private label and other unsecured portfolios drove the decrease in the delinquency ratio from a year ago. In our real estate secured portfolio, we continue to benefit from the growing percentage of loans on which we hold a first lien position. Additional collection staff in our private label and other unsecured businesses has resulted in decreased delinquency. Delinquency in our MasterCard and Visa portfolio has increased over the prior year as a result of the increase in the non-prime 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):
- --------------------------------------------------------------------------------------------------------- THIRD SECOND FIRST FOURTH THIRD QUARTER QUARTER QUARTER QUARTER QUARTER 2000 2000 2000 1999 1999 - --------------------------------------------------------------------------------------------------------- MANAGED: Real estate secured .41% .47% .52% .54% .58% Auto finance 4.45 4.28 5.25 5.43 4.55 MasterCard/Visa 5.23 5.57 5.69 5.57 6.15 Private label 5.28 5.43 5.65 5.88 5.60 Other unsecured 7.00 7.68 7.41 6.98 7.06 - -------------------------------------------------------------------------------------------------------- Total 3.47% 3.74% 4.00% 3.96% 4.09% - -------------------------------------------------------------------------------------------------------- OWNED 3.01% 3.27% 3.53% 3.62% 3.63% ========================================================================================================
Managed net chargeoffs as a percent of average managed consumer receivables for the third quarter of 2000 decreased from both the prior quarter and the prior-year quarter. Dollars of chargeoff also declined from both prior periods. Our MasterCard and Visa portfolio continues to benefit from lower bankruptcy rates and higher recoveries partially offset by higher chargeoffs in our non-prime credit card portfolio. Our private label and other unsecured portfolios reflect the benefits of improved collections resulting from the addition of collection staff. The sequential increase in our auto finance portfolio is attributable to seasonality and aging of the portfolio. 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. 21 23 NONPERFORMING ASSETS
- -------------------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, (In millions) 2000 2000 2000 1999 1999 - -------------------------------------------------------------------------------------------------------------------------- Owned assets: Nonaccrual receivables $ 1,593.3 $ 1,462.4 $ 1,503.6 $ 1,444.6 $ 1,421.8 Accruing consumer receivables 90 or more days delinquent 604.6 571.8 570.5 550.4 573.7 Renegotiated commercial loans 12.3 12.3 12.3 12.3 12.3 --------- --------- --------- --------- --------- Total nonperforming receivables 2,210.2 2,046.5 2,086.4 2,007.3 2,007.8 Real estate owned 336.9 323.5 301.0 271.5 234.4 - -------------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 2,547.1 $ 2,370.0 $ 2,387.4 $ 2,278.8 $ 2,242.2 - -------------------------------------------------------------------------------------------------------------------------- Credit loss reserves as a percent of nonperforming receivables 90.9% 97.1% 91.5% 87.5% 87.2% - -------------------------------------------------------------------------------------------------------------------------- Managed assets: Nonaccrual receivables $ 1,984.1 $ 1,841.8 $ 1,934.2 $ 1,912.6 $ 1,803.5 Accruing consumer receivables 90 or more days delinquent 802.8 753.9 755.0 739.9 751.5 Renegotiated commercial loans 12.3 12.3 12.3 12.3 12.3 --------- --------- --------- --------- --------- Total nonperforming receivables 2,799.2 2,608.0 2,701.5 2,664.8 2,567.3 Real estate owned 336.9 323.6 301.0 271.5 234.4 - -------------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 3,136.1 $ 2,931.6 $ 3,002.5 $ 2,936.3 $ 2,801.7 - -------------------------------------------------------------------------------------------------------------------------- Credit loss reserves as a percent of nonperforming receivables 106.7% 113.0% 105.9% 100.1% 101.5% - --------------------------------------------------------------------------------------------------------------------------
22 24 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 third quarter of 2000, the Registrant filed a Current Report on Form 8-K dated July 19, 2000 with respect to the press release pertaining to the financial results of Household International, Inc. for the quarter ended June 30, 2000. 23 25 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HOUSEHOLD INTERNATIONAL, INC. -------------------------------------- (Registrant) Date: November 10, 2000 By: /s/ David A. Schoenholz ----------------- -------------------------------------- David A. Schoenholz Group Executive - Chief Financial Officer and on behalf of Household International, Inc. 24 26 EXHIBIT INDEX 12 Statement of Computation of Ratio of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends. 27 Financial Data Schedule. 99.1 Debt and Preferred Stock Securities Ratings. 25 EX-12 2 c58638ex12.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12 HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
- ---------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, (In millions) 2000 1999 - -------------------------------------------------------------------------------- Net income $ 1,208.0 $ 1,047.6 Income taxes 633.7 515.3 --------- --------- Income before income taxes 1,841.7 1,562.9 --------- --------- Fixed charged: Interest expense (1) 2,822.9 2,016.0 Interest portion of rentals (2) 40.0 33.4 --------- --------- Total fixed charges 2,862.9 2,049.4 --------- --------- Total earnings as defined $ 4,704.6 $ 3,612.3 ========= ========= Ratio of earnings to fixed charges 1.64 1.76 Preferred stock dividends (3) $ 10.5 $ 10.4 Ratio of earnings to combined fixed charges and preferred stock dividends 1.64 1.75 ================================================================================
(1) For financial statement purposes, interest expense includes income earned on temporary investment of excess funds, generally resulting from over-subscriptions of commercial paper. (2) Represents one-third of rentals, which approximates the portion representing interest. (3) Preferred stock dividends are grossed up to their pretax equivalent based upon an effective tax rate of 34.4 percent for the nine months ended September 30, 2000 and 33.0 percent for the same period in 1999. 26 EX-27 3 c58638ex27.txt FINANCIAL DATA SCHEDULE
5 THE FOLLOWING SUMMARY FINANCIAL INFORMATION OF THE COMPANY AND ITS SUBSIDIARIES IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION AND FINANCIAL STATEMENTS PREVIOUSLY FILED WITH THE SECURITIES & EXCHANGE COMMISSION. 1,000 9-MOS DEC-31-2000 SEP-30-2000 478,800 3,263,600 61,378,800 2,948,200 0 0 1,397,900 905,400 70,469,700 0 42,487,300 0 164,400 550,600 7,349,100 70,469,700 0 5,600,800 0 1,677,500 0 1,017,700 1,754,700 1,150,900 394,100 756,800 0 0 0 756,800 1.59 1.58 FINANCIAL STATEMENTS OF THE COMPANY WERE PREPARED IN ACCORDANCE WITH FINANCIAL INSTITUTION INDUSTRY STANDARDS. ACCORDINGLY, THE COMPANY'S BALANCE SHEETS WERE NON-CLASSIFIED.
EX-99.1 4 c58638ex99-1.txt DEBT AND PREFERRED STOCK SECURITIES RATINGS 1 EXHIBIT 99.1 HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES DEBT AND PREFERRED STOCK SECURITIES RATINGS
STANDARD MOODY'S & POOR'S INVESTORS FITCH THOMAS CORPORATION SERVICE INC. BANKWATCH - ------------------------------------------------------------------------------------------------------------ At September 30, 2000 - ------------------------------------------------------------------------------------------------------------ Household International, Inc. Senior debt A A3 A A Commercial paper A-1 P-2 F-1 TBW-1 Preferred stock BBB+ baal A- BBB+ Household Finance Corporation Senior debt A A2 A+ A+ Senior subordinated debt A- A3 A A Commercial paper A-1 P-1 F-1 TBW-1 Household Bank, f.s.b. Senior debt A A2 A NR Subordinated debt A- A3 A- A Certificates of deposit (long/short-term) A/A-1 A2/P-1 A/F-1 TBW-1 Thrift notes A-1 P-1 F-1 TBW-1 - ------------------------------------------------------------------------------------------------------------
27 -----END PRIVACY-ENHANCED MESSAGE-----