-----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, SbJOIvXsSfSMENyd2HEZQgxi/4zHpjbuJKDC3ZmpcPrlr0IIhpOIIBi/WiD9pWY5 qia/C3Yrpnb4qKg+C1yKmw== 0000950137-02-005553.txt : 20021024 0000950137-02-005553.hdr.sgml : 20021024 20021024172110 ACCESSION NUMBER: 0000950137-02-005553 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021024 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOUSEHOLD INTERNATIONAL INC CENTRAL INDEX KEY: 0000354964 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 363121988 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08198 FILM NUMBER: 02797727 BUSINESS ADDRESS: STREET 1: 2700 SANDERS RD CITY: PROSPECT HEIGHTS STATE: IL ZIP: 60070 BUSINESS PHONE: 8475645000 MAIL ADDRESS: STREET 1: 2700 SANDERS ROAD CITY: PROSPECT HEIGHTS STATE: IL ZIP: 60070 10-Q 1 c72577e10vq.txt QUARTERLY REPORT 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, 2002 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 September 30, 2002, there were 454,829,105 shares of the registrant's common stock outstanding. HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES TABLE OF CONTENTS
PART I. Financial Information Page ---- Item 1. Financial Statements Condensed Consolidated Statements of Income (Unaudited) - Three and nine months ended September 30, 2002 and 2001................................. 2 Condensed Consolidated Balance Sheets - September 30, 2002 (Unaudited) and December 31, 2001.................................... 3 Condensed Consolidated Statements of Cash Flows (Unaudited) - Nine months ended September 30, 2002 and 2001........................................... 4 Notes to Interim Condensed Consolidated Financial Statements (Unaudited).................................................................. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 14 Item 4. Controls and Procedures................................................................. 29 PART II. Other Information Item 6. Exhibits and Reports on Form 8-K........................................................ 29 Signature ...................................................................................... 30 Certification of Chief Executive Officer........................................................... 31 Certification of Principal Financial Officer....................................................... 32
1 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) 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------------------- Finance and other interest income $ 2,710.9 $ 2,521.7 $ 7,856.5 $ 7,371.3 Interest expense 999.0 1,035.2 2,918.7 3,190.4 - ----------------------------------------------------------------------------------------------------- Net interest margin 1,711.9 1,486.5 4,937.8 4,180.9 Provision for credit losses on owned receivables 973.0 722.9 2,746.9 2,083.6 - ----------------------------------------------------------------------------------------------------- Net interest margin after provision for credit losses 738.9 763.6 2,190.9 2,097.3 - ----------------------------------------------------------------------------------------------------- Securitization revenue 556.3 451.1 1,598.0 1,251.6 Insurance revenue 180.8 169.2 528.4 487.1 Investment income 47.6 42.3 137.8 121.9 Fee income 261.7 235.7 668.5 671.3 Other income 101.8 51.5 385.1 262.6 - ----------------------------------------------------------------------------------------------------- Total other revenues 1,148.2 949.8 3,317.8 2,794.5 - ----------------------------------------------------------------------------------------------------- Salaries and fringe benefits 456.6 408.3 1,354.9 1,173.1 Sales incentives 60.6 74.1 182.3 202.2 Occupancy and equipment expense 94.1 86.1 279.6 253.3 Other marketing expenses 135.4 119.5 409.3 370.0 Other servicing and administrative expenses 199.3 174.1 635.1 542.8 Amortization of acquired intangibles and goodwill 12.7 39.0 45.1 118.6 Policyholders' benefits 101.2 77.5 272.6 228.1 Settlement charge and related expenses 525.0 -- 525.0 -- - ----------------------------------------------------------------------------------------------------- Total costs and expenses 1,584.9 978.6 3,703.9 2,888.1 - ----------------------------------------------------------------------------------------------------- Income before income taxes 302.2 734.8 1,804.8 2,003.7 Income taxes 81.0 249.2 585.2 689.3 - ----------------------------------------------------------------------------------------------------- Net income $ 221.2 $ 485.6 $ 1,219.6 $ 1,314.4 ===================================================================================================== EARNINGS PER COMMON SHARE Net income $ 221.2 $ 485.6 $ 1,219.6 $ 1,314.4 Preferred dividends (16.6) (2.9) (40.6) (7.5) - ----------------------------------------------------------------------------------------------------- Earnings available to common shareholders $ 204.6 $ 482.7 $ 1,179.0 $ 1,306.9 - ----------------------------------------------------------------------------------------------------- Average common shares 455.4 461.3 456.2 463.5 Average common and common equivalent shares 459.6 467.7 461.0 469.7 - ----------------------------------------------------------------------------------------------------- Basic earnings per common share $ .45 $ 1.05 $ 2.58 $ 2.82 Diluted earnings per common share .45 1.03 2.56 2.78 - ----------------------------------------------------------------------------------------------------- DIVIDENDS DECLARED PER COMMON SHARE $ .25 $ .22 $ .72 $ .63 - -----------------------------------------------------------------------------------------------------
See notes to interim condensed consolidated financial statements. 2 HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, (In millions, except share and per share data) 2002 2001 - ---------------------------------------------------------------------------------------------------------------- ASSETS (UNAUDITED) Cash $ 540.6 $ 543.6 Investment securities 10,263.2 3,580.5 Receivables, net 83,157.1 79,263.5 Acquired intangibles, net 405.3 455.6 Goodwill 1,122.1 1,107.4 Properties and equipment, net 533.8 531.1 Real estate owned 451.1 398.9 Other assets 4,605.1 3,030.3 - ---------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 101,078.3 $ 88,910.9 ================================================================================================================ LIABILITIES AND SHAREHOLDERS' EQUITY Debt: Deposits $ 5,364.3 $ 6,562.3 Commercial paper, bank and other borrowings 5,249.8 12,024.3 Senior and senior subordinated debt (with original maturities over one year) 74,831.5 56,823.6 - ---------------------------------------------------------------------------------------------------------------- Total debt 85,445.6 75,410.2 Insurance policy and claim reserves 1,048.3 1,094.5 Other liabilities 3,978.7 3,132.5 - ---------------------------------------------------------------------------------------------------------------- Total liabilities 90,472.6 79,637.2 - ---------------------------------------------------------------------------------------------------------------- Company obligated mandatorily redeemable preferred securities of subsidiary trusts* 975.0 975.0 Preferred stock 1,193.2 455.8 Common shareholders' equity: Common stock, $1.00 par value, 750,000,000 shares authorized, 551,786,728 shares issued at September 30, 2002 and 551,684,740 shares issued at December 31, 2001 551.7 551.7 Additional paid-in capital 2,068.8 2,030.0 Retained earnings 9,688.0 8,837.5 Accumulated other comprehensive income (loss) (824.6) (732.4) Less common stock in treasury, at cost, 96,957,623 shares at September 30, 2002 and 94,560,437 shares at December 31, 2001 (3,046.4) (2,843.9) - ---------------------------------------------------------------------------------------------------------------- Total common shareholders' equity 8,437.5 7,842.9 - ---------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 101,078.3 $ 88,910.9 ================================================================================================================
* As described in note 8 to the condensed consolidated financial statements, the sole assets of the trusts are Junior Subordinated Deferrable Interest Notes issued by Household International, Inc. in November 2001, January 2001, June 2000, March 1998 and June 1995, bearing interest at 7.50, 8.25, 10.00, 7.25 and 8.25 percent, respectively, with principal balances of $206.2, $206.2, $309.3, $206.2 and $77.3 million, respectively, and due November 2031, January 2031, June 2030, December 2037 and June 2025, respectively. See notes to interim condensed consolidated financial statements. 3 HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, (In millions) 2002 2001 - ------------------------------------------------------------------------------------- CASH PROVIDED BY OPERATIONS Net income $ 1,219.6 $ 1,314.4 Adjustments to reconcile net income to cash provided by operations: Provision for credit losses on owned receivables 2,746.9 2,083.6 Insurance policy and claim reserves 52.6 196.6 Depreciation and amortization 170.7 244.4 Interest-only strip receivables, net change (109.9) (46.2) Other assets, excluding FAS No. 133 (263.5) (18.7) Other liabilities, excluding FAS No. 133 2,141.8 42.7 Other, net (40.6) 153.4 - ------------------------------------------------------------------------------------- Cash provided by operations 5,917.6 3,970.2 - ------------------------------------------------------------------------------------- INVESTMENTS IN OPERATIONS Investment securities: Purchased (3,938.4) (1,370.5) Matured 1,729.7 363.8 Sold 488.6 470.1 Short-term investment securities, net change (4,745.7) 152.0 Receivables: Originations, net (36,357.6) (31,888.1) Purchases and related premiums (510.9) (559.0) Sold 30,671.4 22,339.4 Properties and equipment purchased (112.0) (138.4) Properties and equipment sold 15.2 3.3 - ------------------------------------------------------------------------------------- Cash decrease from investments in operations (12,759.7) (10,627.4) - ------------------------------------------------------------------------------------- FINANCING AND CAPITAL TRANSACTIONS Short-term debt and demand deposits, net change (6,127.2) 281.8 Time certificates, net change (1,219.6) (1,164.9) Senior and senior subordinated debt issued 25,851.6 17,520.9 Senior and senior subordinated debt retired (11,604.8) (9,684.2) Policyholders' benefits paid (249.1) (62.6) Cash received from policyholders 62.1 44.2 Shareholders' dividends (368.8) (298.1) Purchase of treasury stock (279.6) (776.9) Issuance of common stock 114.5 97.6 Issuance of preferred stock 726.4 291.4 Issuance of company obligated mandatorily redeemable preferred securities of subsidiary trusts -- 200.0 - ------------------------------------------------------------------------------------- Cash increase from financing and capital transactions 6,905.5 6,449.2 - ------------------------------------------------------------------------------------- Effect of exchange rate changes on cash (66.5) (.1) - ------------------------------------------------------------------------------------- Decrease in cash (3.1) (208.1) Cash at January 1 543.6 490.2 - ------------------------------------------------------------------------------------- Cash at September 30 $ 540.5 $ 282.1 ===================================================================================== SUPPLEMENTAL CASH FLOW INFORMATION Interest paid $ 2,833.3 $ 2,881.6 Income taxes paid 605.0 695.4 - -------------------------------------------------------------------------------------
See notes to interim condensed consolidated financial statements. 4 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 accounting principles generally accepted in the United States of America 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, 2002 should not be considered indicative of the results for any future quarters or the year ending December 31, 2002. Household and its subsidiaries may also be referred to in this Form 10-Q as "we," "us" or "our." These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes included in our restated Annual Report on Form 10-K/A for the year ended December 31, 2001 which was filed with the Securities and Exchange Commission on August 27, 2002. The chief executive officer and principal financial officer of Household have certified that this quarterly report fairly presents, in all material respects, the financial condition and results of operations of Household as of and for the period ended September 30, 2002. These certifications are included as Exhibits 99.2 and 99.3 to this Form 10-Q. The chief executive officer and principal financial officer of Household have also provided certifications as to the effectiveness of our controls and procedures which are included on pages 31 and 32. RESTATEMENT As reported in our Annual Report on Form 10-K/A for the year ended December 31, 2001, which was filed with the Securities and Exchange Commission on August 27, 2002, we have restated our previously reported consolidated financial statements. The restatement relates to certain MasterCard and Visa co-branding and affinity credit card relationships and a third party marketing agreement, which were entered into between 1992 and 1999. All were part of our Credit Card Services segment. In consultation with our prior auditors, Arthur Andersen LLP, we treated payments made in connection with these agreements as prepaid assets and amortized them in accordance with the underlying economics of the agreements. Our current auditors, KPMG LLP, advised us that, in their view, these payments should have either been charged against earnings at the time they were made or amortized over a shorter period of time. There was no significant change as a result of these adjustments on the prior periods net earnings trends previously reported. The restatement resulted in a $359.9 million, after-tax, retroactive reduction to retained earnings at December 31, 2001. 5 2. INVESTMENT SECURITIES Investment securities consisted of the following available-for-sale investments:
- ------------------------------------------------------------------------------------------------------------ SEPTEMBER 30, DECEMBER 31, 2002 2001 - ------------------------------------------------------------------------------------------------------------ AMORTIZED FAIR AMORTIZED FAIR (In millions) COST VALUE COST VALUE - ------------------------------------------------------------------------------------------------------------ Corporate debt securities $ 2,129.7 $ 2,205.1 $ 2,089.5 $ 2,054.0 Money market funds 3,692.9 3,692.9 342.3 342.3 Certificates of deposit 165.9 171.6 246.1 259.8 U.S. government and federal agency debt securities 2,104.9 2,120.3 217.0 217.8 Marketable equity securities 28.6 18.5 24.4 21.2 Other 1,959.5 1,976.9 611.6 638.9 - ------------------------------------------------------------------------------------------------------------ Subtotal 10,081.5 10,185.3 3,530.9 3,534.0 Accrued investment income 77.9 77.9 46.5 46.5 - ------------------------------------------------------------------------------------------------------------ Total available-for-sale investments $ 10,159.4 $ 10,263.2 $ 3,577.4 $ 3,580.5 ============================================================================================================
3. RECEIVABLES Receivables consisted of the following:
- ---------------------------------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, (In millions) 2002 2001 - ---------------------------------------------------------------------------------------- Real estate secured $ 48,535.4 $ 43,856.8 Auto finance 2,316.1 2,368.9 MasterCard*/Visa* 7,642.7 8,141.2 Private label 10,594.3 11,663.9 Personal non-credit card 14,602.1 13,337.0 Commercial and other 473.6 506.9 - ---------------------------------------------------------------------------------------- Total owned receivables 84,164.2 79,874.7 Accrued finance charges 1,540.7 1,559.8 Credit loss reserve for owned receivables (3,127.3) (2,663.1) Unearned credit insurance premiums and claims reserves (833.1) (895.8) Interest-only strip receivables 1,104.9 968.2 Amounts due and deferred from receivable sales 307.7 419.7 - ---------------------------------------------------------------------------------------- Total owned receivables, net 83,157.1 79,263.5 Receivables serviced with limited recourse 23,407.4 20,948.0 - ---------------------------------------------------------------------------------------- Total managed receivables, net $ 106,564.5 $ 100,211.5 ========================================================================================
* MasterCard is a registered trademark of MasterCard International, Incorporated and Visa is a registered trademark of Visa USA, Inc. Interest-only strip receivables are reported net of our estimate of probable losses under the recourse provisions for receivables serviced with limited recourse. Our estimate of the recourse obligation totaled $1,561.5 million at September 30, 2002 and $1,148.3 million at December 31, 2001. Interest-only strip receivables also included fair value mark-to-market adjustments which increased the balance by $375.6 million at September 30, 2002 and $348.6 million at December 31, 2001. 6 Receivables serviced with limited recourse consisted of the following:
- ----------------------------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, (In millions) 2002 2001 - ----------------------------------------------------------------------------------- Real estate secured $ 507.8 $ 861.8 Auto finance 5,024.7 4,026.6 MasterCard/Visa 9,873.5 9,254.0 Private label 3,040.0 2,150.0 Personal non-credit card 4,961.4 4,655.6 - ----------------------------------------------------------------------------------- Total receivables serviced with limited recourse $ 23,407.4 $ 20,948.0 ===================================================================================
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) 2002 2001 - ----------------------------------------------------------------------------------- Real estate secured $ 49,043.2 $ 44,718.6 Auto finance 7,340.8 6,395.5 MasterCard/Visa 17,516.2 17,395.2 Private label 13,634.3 13,813.9 Personal non-credit card 19,563.5 17,992.6 Commercial and other 473.6 506.9 - ----------------------------------------------------------------------------------- Total managed receivables $ 107,571.6 $ 100,822.7 ===================================================================================
4. 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) 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------------------------------- CREDIT LOSS RESERVES FOR OWNED RECEIVABLES: Credit loss reserves at beginning of period $ 2,983.3 $ 2,376.5 $ 2,663.1 $ 2,111.9 Provision for credit losses 973.0 722.9 2,746.9 2,083.6 Charge-offs (900.0) (694.1) (2,509.2) (1,913.4) Recoveries 63.7 63.9 188.5 178.4 Other, net 7.3 7.4 38.0 16.1 - ----------------------------------------------------------------------------------------------------------------- Credit loss reserves for owned receivables at September 30 3,127.3 2,476.6 3,127.3 2,476.6 - ----------------------------------------------------------------------------------------------------------------- CREDIT LOSS RESERVES FOR RECEIVABLES SERVICED WITH LIMITED RECOURSE: Credit loss reserves at beginning of period 1,385.6 1,080.0 1,148.3 1,082.3 Provision for credit losses 498.3 243.9 1,365.1 750.8 Charge-offs (357.2) (257.4) (1,046.2) (796.2) Recoveries 22.6 17.0 71.8 51.8 Other, net 12.2 (5.1) 22.5 (10.3) - ----------------------------------------------------------------------------------------------------------------- Credit loss reserves for receivables serviced with limited recourse at September 30 1,561.5 1,078.4 1,561.5 1,078.4 - ----------------------------------------------------------------------------------------------------------------- TOTAL CREDIT LOSS RESERVES FOR MANAGED RECEIVABLES AT SEPTEMBER 30 $ 4,688.8 $ 3,555.0 $ 4,688.8 $ 3,555.0 =================================================================================================================
We maintain credit loss reserves to cover probable losses of principal, interest and fees, including late, overlimit and annual fees. Credit loss reserves are based on a range of estimates and intended to be adequate but not excessive. We statistically estimate losses for consumer receivables based on delinquency and reage status and past loss experience. In addition, we provide loss reserves on consumer receivables to reflect our assessment of portfolio risk factors which may not be fully reflected in the statistical calculation (which uses roll rates and migration analysis). These risk factors include 7 bankruptcy trends, recent growth, product mix, economic conditions and current levels of charge-offs and delinquencies. 5. ACQUIRED INTANGIBLES AND GOODWILL Effective January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS No. 142"). FAS No. 142 changed the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill recorded in past business combinations ceased upon adoption of the statement on January 1, 2002. We have completed the transitional goodwill impairment test required by FAS No. 142 and have concluded that none of our goodwill is impaired. We do not hold any intangible assets which are not subject to amortization. Amortized acquired intangibles consisted of the following:
- ------------------------------------------------------------------------------------------------------- (In millions) SEPTEMBER 30, DECEMBER 31, 2002 2001 - ------------------------------------------------------------------------------------------------------- Purchased credit card relationships $ 1,038.6 $ 1,038.6 Other intangibles 26.5 26.5 Accumulated amortization - purchased credit card relationships (652.6) (603.8) Accumulated amortization - other intangibles (7.2) (5.7) - ------------------------------------------------------------------------------------------------------- Acquired intangibles, net $ 405.3 $ 455.6 =======================================================================================================
Acquired intangible amortization expense totaled $12.7 million for the quarter ended September 30, 2002, $24.4 million for the quarter ended September 30, 2001, $45.1 million for the nine months ended September 30, 2002, $74.6 million for the nine months ended September 30, 2001 and $99.0 million for the twelve months ended December 31, 2001. Estimated amortization expense associated with our acquired intangibles for each of the following years is as follows: - ------------------------------------------------------------------------------ (In millions) Year ending December 31, - ------------------------------------------------------------------------------ 2002 $57.7 2003 50.3 2004 47.7 2005 43.3 2006 40.9 - ------------------------------------------------------------------------------ The following tables disclose the impact of goodwill amortization on net income and earnings per share for the periods indicated.
- --------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, (In millions) 2002 2001 2002 2001 - --------------------------------------------------------------------------------------------------------------- Reported net income $ 221.2 $ 485.6 $ 1,219.6 $ 1,314.4 Add back: Goodwill amortization, net -- 11.6 -- 34.8 - --------------------------------------------------------------------------------------------------------------- Adjusted net income $ 221.2 $ 497.2 $ 1,219.6 $ 1,349.2 ===============================================================================================================
8
- -------------------------------------------------------------------------------------------- THREE MONTHS ENDED SEPTEMBER 30, 2002 2001 - -------------------------------------------------------------------------------------------- DILUTED BASIC DILUTED BASIC - -------------------------------------------------------------------------------------------- Reported earnings per share $ .45 $ .45 $ 1.03 $ 1.05 Add back: Goodwill amortization, net -- -- .02 .03 - -------------------------------------------------------------------------------------------- Adjusted earnings per share $ .45 $ .45 $ 1.05 $ 1.08 ============================================================================================ - -------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, 2002 2001 - -------------------------------------------------------------------------------------------- DILUTED BASIC DILUTED BASIC - -------------------------------------------------------------------------------------------- Reported earnings per share $ 2.56 $ 2.58 $ 2.78 $ 2.82 Add back: Goodwill amortization, net -- -- .07 .08 - -------------------------------------------------------------------------------------------- Adjusted earnings per share $ 2.56 $ 2.58 $ 2.85 $ 2.90 ============================================================================================
There were no significant changes to our recorded amount of goodwill, either in total or by segment, during the quarter or nine months ended September 30, 2002. 6. INCOME TAXES Our effective tax rate was 26.8 percent for the quarter ended September 30, 2002, 33.9 percent for the quarter ended September 30, 2001, 32.4 percent for the nine months ended September 30, 2002 and 34.4 percent for the nine months ended September 30, 2001. Excluding the settlement charge and related costs, which resulted in a $191.8 million tax benefit, our effective tax rate was 33.0 percent for the current quarter and 33.4 percent for the nine months ended September 30, 2002. The recording of the settlement charge and related expenses resulted in a lower effective tax rate for the quarter and nine months ended September 30, 2002. The effective tax rate differs from the statutory federal income tax rate in all periods because of the effects of state and local income taxes and tax credits. 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) 2002 2001 - --------------------------------------------------------------------------------------------------- Diluted Basic Diluted Basic --------- ---------- ---------- ---------- Earnings: Net income $ 221.2 $ 221.2 $ 485.6 $ 485.6 Preferred dividends (16.6) (16.6) (2.9) (2.9) - --------------------------------------------------------------------------------------------------- Earnings available to common shareholders $ 204.6 $ 204.6 $ 482.7 $ 482.7 - --------------------------------------------------------------------------------------------------- Average shares outstanding: Common 455.4 455.4 461.3 461.3 Common equivalents 4.2 -- 6.4 -- - --------------------------------------------------------------------------------------------------- Average shares outstanding assuming dilution 459.6 455.4 467.7 461.3 - --------------------------------------------------------------------------------------------------- Earnings per common share $ .45 $ .45 $ 1.03 $ 1.05 ===================================================================================================
9
- ----------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, (In millions, except per share data) 2002 2001 - ----------------------------------------------------------------------------------------------------------- Diluted Basic Diluted Basic ------------ ------------ ------------ ------------- Earnings: Net income $ 1,219.6 $ 1,219.6 $ 1,314.4 $ 1,314.4 Preferred dividends (40.6) (40.6) (7.5) (7.5) - ----------------------------------------------------------------------------------------------------------- Earnings available to common shareholders $ 1,179.0 $ 1,179.0 $ 1,306.9 $ 1,306.9 - ----------------------------------------------------------------------------------------------------------- Average shares outstanding: Common 456.2 456.2 463.5 463.5 Common equivalents 4.8 -- 6.2 -- - ----------------------------------------------------------------------------------------------------------- Average shares outstanding assuming dilution 461.0 456.2 469.7 463.5 - ----------------------------------------------------------------------------------------------------------- Earnings per common share $ 2.56 $ 2.58 $ 2.78 $ 2.82 ===========================================================================================================
8. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS We have formed special purpose trusts 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. The following table summarizes our company obligated mandatorily redeemable preferred securities of subsidiary trusts ("Preferred Securities") and the related Junior Subordinated Notes:
- ------------------------------------------------------------------------------------------------------------------- Household Household Household Household Household (Dollar amounts are Capital Trust VII Capital Trust Capital Trust V Capital Trust Capital Trust I in millions) ("HCT VII") VI ("HCT VI") ("HCT V") IV ("HCT IV") ("HCT I") - ------------------------------------------------------------------------------------------------------------------- PREFERRED SECURITIES: Interest rate 7.50% 8.25% 10.00% 7.25% 8.25% Face value $200 $200 $300 $200 $75 Issue date November 2001 January 2001 June 2000 March 1998 June 1995 JUNIOR SUBORDINATED NOTES: Principal balance $206.2 $206.2 $309.3 $206.2 $77.3 Redeemable by issuer November 2006 January 2006 June 2005 March 2003 June 2001 Stated maturity November 2031 January 2031 June 2030 December 2037 June 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 statements of income. HCT I, HCT IV, HCT V, HCT VI and HCT VII (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 $975 million at both September 30, 2002 and December 31, 2001. 10 9. FORWARD PURCHASE AGREEMENTS At September 30, 2002, we had agreements to purchase, on a forward basis, approximately 4.9 million shares of our common stock with a weighted-average forward price of $52.99 per share. The agreements expire at various dates through August 2003. These agreements may be settled physically or on a net basis either in shares of our common stock or in cash, depending on the terms of the various agreements, at our option and consequently are accounted for as permanent equity. Under the terms of the various agreements, expiration dates accelerate if our stock price reaches certain triggers. Currently, these triggers vary between the agreements and range between $12 and $16 per share. During the current quarter, we received approximately 2.1 million shares at an average cost of $55.68 per share as a result of settlements under these forward contracts. Under a net share settlement, if the price of our common stock falls below the forward price, we would be required to deliver common shares to the counterparty based upon the difference between the forward price and the then current stock price. Conversely, if the price of our common stock rises above the forward price, the counterparty would be required to deliver to us shares of our common stock based on the price difference. Based upon the closing price of our common stock of $28.31 at September 30, 2002, we would have been required to deliver approximately 4.2 million shares of our common stock to net share settle these contracts at September 30, 2002. If our common stock price had been $1 lower at September 30, 2002, we would have been required to deliver an additional 332,500 common shares to net share settle these contracts. If our common stock price had been higher by $1 at September 30, 2002, we would have been required to deliver a total of 3.9 million shares of our common stock to net share settle the contracts. These agreements, however, contain limits on the number of shares to be delivered under a net share settlement, regardless of the price of our common stock. At September 30, 2002, the maximum number of common shares we would be required to deliver to net share settle the 4.9 million shares currently outstanding was 29.8 million shares. 10. COMPREHENSIVE INCOME Comprehensive income was $1.9 million for the quarter ended September 30, 2002, $299.3 million for the quarter ended September 30, 2001, $1,127.4 million for the nine months ended September 30, 2002, and $849.0 million for the nine months ended September 30, 2001. The components of accumulated other comprehensive income were as follows:
- ------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, (In millions) 2002 2001 - ------------------------------------------------------------------------------------------------------------- Unrealized losses on cash flow hedging instruments $ (863.6) $ (699.1) Unrealized gains on investments and interest-only strip receivables 305.6 223.3 Foreign currency translation adjustments and other (266.6) (256.6) - ------------------------------------------------------------------------------------------------------------- Accumulated other comprehensive income (loss) $ (824.6) $ (732.4) =============================================================================================================
11. NEW ACCOUNTING PRONOUNCEMENTS AND CHANGES IN ACCOUNTING POLICIES Effective January 1, 2002, we adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS No. 144"). The adoption of FAS No. 144 did not have a significant impact on our operations. In the second quarter, we adopted the fair value method of accounting for our stock option and employee stock purchase plans in 2002. Under the guidance of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", ("FAS No. 123"), companies may either recognize stock-based compensation expense associated with these plans currently in income or disclose the pro forma impact of the expense. Pursuant to the requirements of FAS No. 123, options granted prior to January 1, 2002 continue to be accounted for under Accounting Principles Board Opinion No. 25, 11 "Accounting for Stock Issued to Employees," under which expenses for stock options are generally not recognized. The impact of adopting the expense recognition provisions of FAS No. 123 is not expected to have a significant impact on our future results of operations. 12. SUBSEQUENT EVENT On October 11, 2002, we reached a preliminary agreement with a multi-state working group of state attorneys general and regulatory agencies to effect a nationwide resolution of alleged violations of federal and/or state consumer protection, consumer financing and banking laws and regulations with respect to secured real estate lending from our retail branch consumer lending operations. Consistent with the guidance promulgated by Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies," we recorded a pre-tax charge of $525 million during the third quarter of 2002. The charge reflects the costs of this settlement agreement and related matters and has been reflected in the statement of income in total costs and expenses. Pursuant to the proposed agreement, we will establish a fund of up to $484 million to be divided among the participating states based upon the volume of Household retail branch real estate secured loans which were originated in the state from January 1, 1999 through September 30, 2002 (the "Household Covered Loans"). We will deposit these monies into the fund in three installments, beginning 30 days after the filing of consent decrees representing at least 80 percent of the Household Covered Loans. The amount of the settlement fund will proportionately increase above the $387.5 million minimum for participation in excess of 80 percent of the Household Covered Loans. Household will also reimburse the states for expenses of their investigation, not to exceed $10.2 million, and pay fees and expenses for each state's independent claim administrator. For the agreement to be effective, states representing at least 80 percent of the Household Covered Loans must file mutually agreed consent decrees by December 15, 2002. 13. SEGMENT REPORTING We have three reportable segments: Consumer, Credit Card Services and International. Our Consumer segment consists of our consumer lending, mortgage services, retail services and auto finance businesses. Our Credit Card Services segment consists of our domestic MasterCard and Visa credit card business. Our International segment consists of our foreign operations in the United Kingdom and Canada. There has been no change in the basis of our segmentation or in the measurement of segment profit as compared with the presentation in our Annual Report on Form 10-K/A for the year ended December 31, 2001. We allocate resources and provide information to management for decision making on a managed basis. Therefore, an adjustment is required to reconcile the managed financial information to our reported financial information in our consolidated financial statements. This adjustment reclassifies net interest margin, fee income and loss provision into securitization revenue. 12 REPORTABLE SEGMENTS - MANAGED BASIS
Adjustments/ Credit Card Inter- All Reconciling (In millions) Consumer Services national Other Totals Items - ------------------------------------------------------------------------------------------------------------------------------------ THREE MONTHS ENDED SEPTEMBER 30, 2002 Net interest margin $ 1,789.7 $ 454.7 $ 168.7 $ (24.9) $ 2,388.2 - Fee income 100.3 307.8 17.3 1.2 426.6 - Other revenues (1) 279.0 47.8 53.9 109.2 489.9 $ (47.5)(3) Intersegment revenues 37.5 8.1 2.4 (.5) 47.5 (47.5)(3) Provision for credit losses 998.2 388.3 68.2 14.9 1,469.6 1.7 (4) Net income 86.2 97.7 48.7 19.8 252.4 (31.2) Operating net income(2) 419.4 97.7 48.7 19.8 585.6 (31.2) Receivables 81,291.1 17,028.0 8,079.6 1,172.9 107,571.6 - Assets 84,302.3 20,136.6 9,378.2 20,039.4 133,856.5 (9,370.8)(5) Goodwill 857.6 248.7 1.0 14.8 1,122.1 - - ------------------------------------------------------------------------------------------------------------------------------------ THREE MONTHS ENDED SEPTEMBER 30, 2001 Net interest margin $ 1,478.4 $ 379.9 $ 156.9 $ (6.0) $ 2,009.2 - Fee income 93.3 281.2 13.1 2.2 389.8 - Other revenues (1) 76.7 29.7 37.9 120.1 264.4 $ (60.7)(3) Intersegment revenues 49.9 9.3 2.2 (.7) 60.7 (60.7)(3) Provision for credit losses 578.7 326.6 52.5 8.6 966.4 .4 (4) Net income 376.0 61.8 42.4 44.2 524.4 (38.8) Receivables 70,691.7 16,100.1 8,101.5 761.8 95,655.1 - Assets 73,397.1 17,085.8 9,343.4 14,456.5 114,282.8 (9,526.7)(5) Goodwill 853.8 252.2 1.1 15.0 1,122.1 - - ------------------------------------------------------------------------------------------------------------------------------------ NINE MONTHS ENDED SEPTEMBER 30, 2002 Net interest margin $ 5,166.9 $ 1,295.5 $ 476.1 $ (16.4) $ 6,922.1 - Fee income 273.2 834.9 40.6 5.2 1,153.9 - Other revenues (1) 584.8 156.1 190.2 489.2 1,420.3 $ (148.2)(3) Intersegment revenues 116.1 26.2 7.2 (1.3) 148.2 (148.2)(3) Provision for credit losses 2,760.7 1,105.7 219.1 48.4 4,133.9 (21.9)(4) Net income 756.9 240.9 130.6 171.4 1,299.8 (80.2) Operating net income(2) 1,090.1 240.9 130.6 171.4 1,633.0 (80.2) - ------------------------------------------------------------------------------------------------------------------------------------ NINE MONTHS ENDED SEPTEMBER 30, 2001 Net interest margin $ 4,227.6 $ 1,071.7 $ 456.3 $ (54.2) $ 5,701.4 - Fee income 277.2 808.4 47.2 5.1 1,137.9 - Other revenues (1) 188.4 80.4 121.5 452.7 843.0 $ (184.2)(3) Intersegment revenues 150.9 28.8 6.1 (1.6) 184.2 (184.2)(3) Provision for credit losses 1,680.2 954.6 171.1 27.3 2,833.2 1.2 (4) Net income 1,017.6 131.6 123.6 159.2 1,432.0 (117.6) - ------------------------------------------------------------------------------------------------------------------------------------ Managed Owned Basis Basis Consolidated Securitization Consolidated (In millions) Totals Adjustments Totals - ---------------------------------------------------------------------------------------------- THREE MONTHS ENDED SEPTEMBER 30, 2002 Net interest margin $ 2,388.2 $ (676.3)(6) $ 1,711.9 Fee income 426.6 (164.9)(6) 261.7 Other revenues (1) 442.4 342.9 (6) 785.3 Intersegment revenues - - - Provision for credit losses 1,471.3 (498.3)(6) 973.0 Net income 221.2 - 221.2 Operating net income(2) 554.4 - 554.4 Receivables 107,571.6 (23,407.4)(7) 84,164.2 Assets 124,485.7 (23,407.4)(7) 101,078.3 Goodwill 1,122.1 - 1,122.1 - ---------------------------------------------------------------------------------------------- THREE MONTHS ENDED SEPTEMBER 30, 2001 Net interest margin $ 2,009.2 $ (522.7)(6) $ 1,486.5 Fee income 389.8 (154.1)(6) 235.7 Other revenues (1) 203.7 432.9 (6) 636.6 Intersegment revenues - - - Provision for credit losses 966.8 (243.9)(6) 722.9 Net income 485.6 - 485.6 Receivables 95,655.1 (20,066.4)(7) 75,588.7 Assets 104,756.1 (20,066.4)(7) 84,689.7 Goodwill 1,122.1 - 1,122.1 - ---------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, 2002 Net interest margin $ 6,922.1 $ (1,984.3)(6) $ 4,937.8 Fee income 1,153.9 (485.4)(6) 668.5 Other revenues (1) 1,272.1 1,104.6 (6) 2,376.7 Intersegment revenues - - - Provision for credit losses 4,112.0 (1,365.1)(6) 2,746.9 Net income 1,219.6 - 1,219.6 Operating net income(2) 1,552.8 - 1,552.8 - ---------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, 2001 Net interest margin $ 5,701.4 $ (1,520.5)(6) $ 4,180.9 Fee income 1,137.9 (466.6)(6) 671.3 Other revenues (1) 658.8 1,236.3 (6) 1,895.1 Intersegment revenues - - - Provision for credit losses 2,834.4 (750.8)(6) 2,083.6 Net income 1,314.4 - 1,314.4 - ----------------------------------------------------------------------------------------------
(1) Net of policyholder benefits and excluding fees. (2) Net income excluding settlement charge and related expenses of $333.2 million, after-tax. This is a non-GAAP measurement which is presented for comparison purposes only. (3) Eliminates intersegment revenues. (4) Eliminates bad debt recovery sales and reclassifies loss reserves between operating segments. (5) Eliminates investments in subsidiaries and intercompany borrowings. (6) Reclassifies net interest margin, fee income and loss provisions relating to securitized receivables to other revenues. (7) Represents receivables serviced with limited recourse. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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) 2002 2001 2002 2001 - --------------------------------------------------------------------------------------------------------------------- Net income $ 221.2 (6) $ 485.6 $ 1,219.6 (6) $ 1,314.4 Diluted earnings per common share .45 (6) 1.03 2.56 (6) 2.78 Net interest margin and other revenues (1) 2,758.9 2,358.8 7,983.0 6,747.3 OWNED BASIS RATIOS: Return on average owned assets .88 % (6) 2.34 % 1.72 % (6) 2.19 % Return on average common shareholders' equity 9.5 (6) 25.0 18.5 (6) 23.2 Net interest margin 7.46 7.94 7.62 7.74 Consumer net charge-off ratio, annualized 3.98 3.43 3.79 3.28 Reserves as a percentage of net charge-offs 93.5 98.2 101.1 107.1 Efficiency ratio (2) 53.8 (6) 38.2 43.0 (6) 39.4 MANAGED BASIS RATIOS: (3) Return on average managed assets .72 % (6) 1.89 % 1.40 % (6) 1.76 % Net interest margin 8.35 8.51 8.54 8.31 Consumer net charge-off ratio, annualized 4.39 3.74 4.25 3.67 Reserves as a percentage of net charge-offs 100.1 102.1 106.7 107.5 Efficiency ratio (2) 45.6 (6) 34.6 36.7 (6) 35.5 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- OWNED BASIS MANAGED BASIS:(3) -------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31, (Dollar amounts are in millions) 2002 2001 2002 2001 - --------------------------------------------------------------------------------------------------------------------- Total assets $101,078.3 $ 88,910.9 $124,485.7 $109,858.9 Receivables 84,164.2 79,874.7 107,571.6 100,822.7 Common and preferred equity as a percentage of assets 9.53 % 9.33 % 7.74 % 7.55 % Common and preferred equity and trust preferred securities as a percentage of assets (4) 10.49 10.43 8.52 8.44 Tangible shareholders' equity to tangible managed assets ("TETMA") (4)(5) N/A n/a 7.95 7.57 Two-month-and-over contractual delinquency ratio 5.01 4.53 4.82 4.46 Reserves as a percentage of receivables 3.72 3.33 4.36 3.78 Reserves as a percentage of nonperforming loans 92.1 91.0 113.1 105.0 - ---------------------------------------------------------------------------------------------------------------------
(1) Net of policyholder benefits. (2) Ratio of operating expenses to net interest margin and other revenues less policyholders' benefits. (3) We monitor our operations and evaluate trends on both an owned basis as shown in our financial statements and on a managed basis. Managed basis reporting adjustments assume that securitized receivables have not been sold and are still on our balance sheet. Managed basis information is intended to supplement, and should not be considered a substitute for, owned basis reporting and should be read in conjunction with reported owned basis results. (4) The ratio of common and preferred equity and trust preferred securities as a percentage of owned and managed assets and the ratio of tangible equity to tangible managed assets are non-GAAP ratios that are used by rating agencies as a measure to evaluate capital adequacy. These ratios may differ from similarly named measures presented by other companies. Because of its long-term nature and our ability to defer dividends, rating agencies consider trust preferred securities as equity in calculating these ratios . (5) Tangible shareholders' equity includes trust preferred securities, preferred equity and common shareholders' equity, excluding unrealized gains and losses on investments and cash flow hedging instruments, less acquired intangibles and goodwill. Tangible managed assets represents total managed assets less acquired intangibles, goodwill and derivative assets. (6) The following non-GAAP presentation is being presented for comparison purposes only to present our operating results excluding the $333.2 million (after-tax) settlement charge and related expenses. Three months ended Nine months ended September 30, September 30, 2002 2002 -------------------------------------------------------------------------- Operating net income $ 554.4 $ 1,552.8 Diluted operating earnings per common share 1.17 3.28 Return on average owned assets 2.22% 2.19% Return on average common shareholders' equity 24.7 23.7 Owned basis efficiency ratio (2) 34.7 36.4 Return on average managed assets 1.81 1.78 Managed basis efficiency ratio (2) 29.4 31.1 14 BASIS OF REPORTING This discussion should be read in conjunction with the unaudited condensed consolidated financial statements, notes and tables included elsewhere in this report and in the restated Household International, Inc. Annual Report on Form 10-K/A for the year ended December 31, 2001 (the "2001 Form 10-K/A") filed with the Securities and Exchange Commission on August 27, 2002. Management's discussion and analysis may contain certain statements that may be forward-looking in nature within the meaning of the Private Securities Litigation Reform Act of 1995. Our results may differ materially from those noted in the forward-looking statements. Forward-looking statements are typically identified by words or phrases such as "believe", "expect", "anticipate", "intend", "may", "will", "should", "would" and "could". Forward-looking statements involve risks and uncertainties and are based on current views and assumptions. For a list of important factors that may affect our actual results, see our 2001 Form 10-K/A. We monitor our operations and evaluate trends on a managed basis which assumes that securitized receivables have not been sold and are still on our balance sheet. We manage our operations on a managed basis because the receivables that we securitize are subjected to underwriting standards comparable to our owned portfolio, are serviced by operating personnel without regard to ownership and result in a similar credit loss exposure for us. In addition, we fund our operations, review our operating results and make decisions about allocating resources such as employees and capital on a managed basis. See Note 13, "Segment Reporting," to the accompanying condensed consolidated financial statements for additional information related to our results on a managed basis. The following discussion of our financial condition and results of operations is presented on an owned basis of reporting unless specifically noted. On an owned basis of reporting, net interest margin, provision for credit losses and fee income resulting from securitized receivables are included as components of securitization revenue. OPERATIONS SUMMARY AND TRENDS - - On October 11, 2002, we reached a preliminary agreement with a multi-state working group of state attorneys general and regulatory agencies to effect a nationwide resolution of alleged violations of federal and/or state consumer protection, consumer financing and banking laws and regulations with respect to secured real estate lending from our retail branch consumer lending operations. We recorded a charge of $525 million during the third quarter of 2002 reflecting the costs of this settlement agreement and related matters. The operational changes which will be implemented as a result of the settlement agreement, are expected to reduce earnings per share by $.10 in 2003. This matter is discussed in detail in our Form 8-K dated October 11, 2002 which we filed on October 15, 2002. In conjunction with our efforts to make the most efficient use of our capital and to achieve our stated 8.50 percent TETMA target, we determined that the continued operation of Household Bank, f.s.b. is not in our long-term strategic interest. As a result, management is exploring opportunities to dispose of Household Bank, f.s.b. including its current assets and deposits in the fourth quarter of 2002. The sale will likely result in a $250-300 million after tax loss. On October 11, 2002, Standard & Poor's ("S&P") announced that it had revised its long-term and commercial paper debt ratings for Household International, Inc. and its principal borrowing subsidiaries, including Household Finance Corporation ("HFC"). S&P's ratings were revised as follows: long-term senior debt from "A" to "A-" and short-term debt from "A-1" to "A-2". Also on October 11, 2002 Fitch Ratings announced that it had placed the long-term and commercial paper ratings of Household and each of its subsidiaries on "Ratings Watch Negative," while Moody's Investors Service affirmed all ratings for Household and HFC. The downgrade by S&P is expected to increase our funding costs and may decrease our capacity to issue commercial paper. In addition, this action may reduce the number of investors who are able to purchase our debt securities and possibly affect our ability to grow the business in the future. 15 - - Our net income was $221.2 million for the third quarter and $1.2 billion for the first nine months of 2002. Diluted earnings per share was $.45 in the third quarter and $2.56 for the first nine months of 2002. Our operating net income (a non-GAAP measurement of net income excluding the settlement charge and related expenses of $333.2 million, after-tax) for the third quarter of 2002 was $554.4 million, up 14 percent from net income of $485.6 million a year ago. Operating net income for the first nine months of 2002 was $1.6 billion, compared to net income of $1.3 billion in the year-ago period. Diluted operating earnings per share (a non-GAAP measurement of earnings per share excluding the settlement charge and related expenses) was $1.17 in the third quarter and $3.28 for the first nine months of 2002, compared to $1.03 and $2.78 in the same periods in 2001. Our improved operating results were due to significant receivable and revenue growth which was partially offset by higher operating expenses to support portfolio growth and higher credit loss provision due to the larger portfolio and uncertain economic environment. Our credit loss provision was greater than charge-offs by $136.7 million in the current quarter and $426.2 million for the first nine months of 2002 due to the adverse economic environment affecting customers in the United States. In addition, our year-to-date earnings included higher revenues from our tax refund lending business which contributed $.19 to our first quarter earnings per share, an increase of 27 percent over the $.15 contribution in the first quarter of 2001. Our improved operating results were offset by the settlement charge recorded in the third quarter which reduced net income by $333.2 million. - - In the first nine months of the year, we took a number of steps as part of our liquidity management plans which reduced our reliance on short-term debt and strengthened our position against market induced volatility. These steps included establishing a $6.5 billion investment security liquidity portfolio, issuing long-term debt which lengthened the term of our funding, establishing $6.25 billion in incremental conduit capacity, completing real estate secured whole loan sales of $2.5 billion and issuing securities backed by dedicated home equity loan receivables of $6.2 billion. We intend to maintain an investment security portfolio for the near future to protect us from any liquidity concerns. This action may adversely impact our net income due to the lower return generated by these assets. - - On July 22, 2002, the four federal bank regulatory agencies issued draft guidance for account management and loss allowance practices for credit card lending. The agencies have not yet issued final guidance. Based on its current form, implementation of the draft guidance would not have a material adverse impact on our financial statements or the way we manage our business. SEGMENT RESULTS - MANAGED BASIS Our Consumer segment reported net income of $86.2 million in the quarter and $756.9 million year-to-date. Operating net income (a non-GAAP measurement of net income excluding the settlement charge and related expenses of $333.2 million, after-tax) was $419.4 million for the third quarter compared to net income of $376.0 million in the year-ago quarter. Year-to-date, operating net income was $1.1 billion, compared to net income of $1.0 billion for the first nine months of 2001. The improved operating results were driven by higher net interest margin, fee income and other revenues which increased $520.6 million, to $2.2 billion in the quarter and $1.3 billion, to $6.0 billion year-to-date. Strong receivable growth and higher securitization activity, pursuant to our liquidity management plans, drove the increases. The higher revenues were partially offset by substantially higher credit loss provision and higher expenses. Our credit loss provision rose $419.5 million, to $998.2 million in the quarter and $1.1 billion, to $2.8 billion year-to-date as a result of increased levels of receivables and the continued weak economy. We increased managed loss reserves by recording loss provision greater than charge-offs of $221.6 million in the quarter and $618.7 million year-to-date. Higher salary and operating expenses were the result of additional employees and operating costs to support the increased receivable levels, additional collectors and investments in the growth of our businesses. Managed receivables grew to $81.3 billion at September 30, 2002, from $80.1 billion at June 30, 2002 and $70.7 billion at September 30, 2001. The managed receivable growth was driven by growth in all products with the strongest growth in our real estate secured receivables. This growth was partially offset by whole loan sales in our 16 mortgage services business of $1.6 billion in the current quarter and $900 million in the first quarter. We expect to continue whole loan sales from our mortgage services and consumer lending businesses for the remainder of the year to meet our capital targets. These actions may adversely affect earnings in 2003 until we are able to replace these assets through growth or portfolio purchases. Return on average managed assets ("ROMA") was .41 and 1.26 percent in the third quarter and first nine months of 2002 compared to 2.10 and 1.97 percent in the year-ago periods. Excluding the settlement charge and related expenses, ROMA was 1.99 percent in the third quarter and 1.79 percent in the first nine months of 2002. The decline in the ratio over both prior-year periods reflects higher credit loss provision. Our Credit Card Services segment reported improved results over the prior-year periods. Net income increased to $97.7 million for the third quarter compared to $61.8 million in the year-ago quarter. Year-to-date, net income increased to $240.9 million compared to $131.6 million for the first nine months of 2001. The increase was due primarily to higher net interest margin, which increased $74.8 million, to $454.7 million in the quarter and $223.8 million, to $1.3 billion year-to-date, as a result of higher receivable levels. Net interest margin as a percent of average receivables increased in both the quarter and year-to-date as a result of lower funding costs and pricing floors, which capped rate reductions on certain variable rate credit card products. Fee income also increased during both the quarter and year-to-date. Revenue growth was partially offset by higher credit loss provision and higher operating expenses associated with the higher receivable levels. We increased managed loss reserves by recording loss provision greater than charge-offs of $64.2 million in the quarter and $145.1 million year-to-date. Managed receivables were $17.0 billion at September 30, 2002, $16.6 billion at June 30, 2002 and $16.1 billion at September 30, 2001. The increase in receivables during both the quarter and year reflects controlled growth in our subprime portfolio. Our Union Privilege and Household Bank branded portfolios also reported year-over-year growth. ROMA was 2.00 and 1.76 percent in the third quarter and first nine months of 2002 compared to 1.45 and 1.04 percent in the year-ago periods. Our International segment also reported improved results over prior-year periods. Net income increased to $48.7 million for the third quarter compared to $42.4 million in the year-ago quarter. Year-to-date, net income was $130.6 million compared to $123.6 million for the first nine months of 2001. Net interest margin dollars increased in both the quarter and year-to-date. Average receivables were lower in both the quarter and year-to-date as a result of the fourth quarter 2001 sale of the $1 billion Goldfish credit card portfolio. However, higher yields and lower funding costs resulted in the higher net interest margin dollars. Increased securitization activity contributed to the increase in other revenues during both the quarter and year-to-date. Revenue growth was partially offset by a higher credit loss provision and higher operating expenses associated with our branch expansion efforts. We increased managed loss reserves by recording loss provision greater than charge-offs of $9.9 million in the quarter and $44.3 million year-to-date. Managed receivables were $8.1 billion at September 30, 2002, $7.6 billion at June 30, 2002 and $8.1 billion at September 30, 2001. Receivable balances reflect positive foreign exchange impacts of approximately $87 million during the quarter and $400 million compared to prior year. Growth during the quarter was primarily attributable to MasterCard and Visa receivables in the U.K. and real estate secured receivables. Compared to the prior-year quarter, growth in real estate secured and personal non-credit card receivables was offset by reductions in our MasterCard and Visa portfolio resulting from the fourth quarter 2001 Goldfish receivable sale. ROMA was 2.12 and 2.02 percent in the third quarter and first nine months of 2002 compared to 1.97 and 1.89 percent in the year-ago periods. The increases were primarily attributable to lower asset levels. Securitization activity in the second quarter of 2002 also contributed to the year-to-date increase. 17 BALANCE SHEET REVIEW
INCREASE (DECREASE) INCREASE (DECREASE) FROM PRIOR YEAR FROM PRIOR QUARTER SEPTEMBER 30, ------------------------------------------------- (All dollar amounts are stated in millions) 2002 $ % $ % - ------------------------------------------------------------------------------------------------------------------- Real estate secured $ 48,535.4 $ 7,713.1 19% $ 223.3 -% Auto finance 2,316.1 (24.0) (1) (46.5) (2) MasterCard(1)/Visa(1) 7,642.7 (424.2) (5) 762.0 11 Private label 10,594.3 (142.1) (1) (232.8) (2) Personal non-credit card (2) 14,602.1 1,512.5 12 329.5 2 Commercial and other 473.6 (59.8) (11) (9.2) (2) - ------------------------------------------------------------------------------------------------------------------- Total owned receivables $ 84,164.2 $ 8,575.5 11% $ 1,026.3 1% ===================================================================================================================
(1) MasterCard is a registered trademark of MasterCard International, Incorporated and Visa is a registered trademark of Visa USA, Inc. (2) Personal non-credit card receivables are comprised of the following:
SEPTEMBER 30, JUNE 30, SEPTEMBER 30, (In millions) 2002 2002 2001 ---------------------------------------------------------------------------------------- Domestic personal unsecured $ 6,909.2 $ 6,710.3 $ 6,605.6 Union Plus personal unsecured 1,195.7 1,193.7 995.3 Personal homeowner loans 4,339.2 4,393.2 3,955.2 Foreign unsecured 2,158.0 1,975.4 1,533.5 ---------------------------------------------------------------------------------------- Total personal non-credit card $ 14,602.1 $ 14,272.6 $ 13,089.6 ========================================================================================
Receivables growth was a key contributor to our improved operating results. To support capital levels and maintain acceptable debt ratings, we expect to control receivable growth with portfolio sales and lower originations for the remainder of 2002. Earnings in future periods may be adversely affected if we are unable to replace the sold receivables with comparable receivables through growth or portfolio purchases. Compared to September 30, 2001, owned receivables increased $8.6 billion, or 11 percent, to $84.2 billion at September 30, 2002. Receivable growth was strongest in our real estate secured portfolio, which increased 19 percent over the September 2001 level and was balanced between our branch-based consumer lending business and our mortgage services business. This growth was partially offset by the sale of approximately $2.5 billion in whole loans by our mortgage services business during the first nine months of 2002 pursuant to our liquidity management plans. In our auto finance business, growth resulting from a strong and rational market, larger sales force, increased dealer penetration and strong Internet originations, was more than offset by higher securitization levels. In our MasterCard and Visa portfolio, growth in our subprime, Union Privilege and Household Bank branded portfolios, was more than offset by the December 2001 sale of the $1 billion Goldfish portfolio in the United Kingdom and higher securitization levels. In our private label portfolio, organic growth from existing merchants and a $725 million portfolio acquisition in the fourth quarter of 2001 were also more than offset by higher securitization levels. In our personal non-credit card portfolio, which increased 12 percent to $14.6 billion, growth in our branches was also partially offset by higher securitization levels. During the twelve months ended September 30, 2002, we securitized $9.0 billion including $3.2 billion of auto finance receivables, $1.4 billion of MasterCard and Visa receivables, $1.4 billion of private label receivables and $3.0 billion of personal non-credit card receivables. Compared to June 30, 2002, receivables grew $1.0 billion or an annualized 5 percent. The strongest growth was in our MasterCard and Visa portfolio, especially in our domestic Union Privilege and subprime portfolios and in our marbles(TM) portfolio in the U.K. Good consumer demand resulted in strong volume in our branch-based consumer lending and mortgage services businesses which contributed to growth in our real estate secured and personal non-credit card portfolios. Real estate secured growth was substantially offset by the sale of approximately $1.6 billion in whole loans by our mortgage services business during the current quarter. Growth in our auto finance and private label 18 portfolios was more than offset by higher securitization levels. During the third quarter, we securitized $2.5 billion including $986 million of auto finance receivables, $160 million of MasterCard and Visa receivables, $390 million of private label receivables and $1.0 billion of personal non-credit card receivables. Owned consumer two-months-and-over contractual delinquency as a percent of owned consumer receivables was 5.01 percent at September 30, 2002, compared to 4.61 percent at June 30, 2002 and 4.58 percent at September 30, 2001. The annualized consumer owned charge-off ratio in the third quarter of 2002 was 3.98 percent, compared to 3.76 percent in the prior quarter and 3.43 percent in the year-ago quarter. LIQUIDITY AND CAPITAL RESOURCES Our ratio of tangible equity to tangible managed assets ("TETMA") was 7.95 percent at September 30, 2002, compared to 7.94 percent at June 30, 2002 and 7.57 percent at December 31, 2001. During the current quarter and first nine months of 2002, we completed the following measures to improve our TETMA ratio: - - We issued $350 million of 7.625 percent cumulative preferred stock during the current quarter and $400 million of 7.60 percent cumulative preferred stock during the first quarter of 2002. - - We sold approximately $1.6 billion in real estate secured loans that were held by our mortgage services business during the current quarter and $900 million during the first quarter of 2002. - - We suspended our stock buy-back program in August 2002. Prior to suspending the program, we purchased 2.1 million shares of our common stock for a total of $120 million during the quarter and 4.7 million shares for a total of $280 million during the first nine months of 2002. We are committed to reach a TETMA ratio of 8.50 percent by December 31, 2002. Initiatives to achieve our TETMA target include continued suspension of our stock buy-back program, additional portfolio sales to control balance sheet growth, the sale of additional capital market securities and the possible sale of Household Bank, f.s.b., including its current assets and deposits in the fourth quarter. Throughout 2002, the capital markets have been volatile. Investor demand for both medium and long-term debt has slowed due to adverse economic conditions and lingering concerns about overall business confidence. These conditions, coupled with our restatement in August as well as uncertainty preceding the resolution of certain matters with the various state regulatory agencies, affected the nature of our funding. During the quarter, the cost to access traditional medium and long-term unsecured debt funding sources became significantly higher than expected. We have not experienced funding difficulties. We believe as markets stabilize and we evidence movement toward meeting our capital goals, our access to the capital markets will improve and funding costs will decrease. We may, if we believe circumstances so warrant, issue additional capital securities to accelerate our progress toward meeting the capital goals. The timing and amounts of these offerings will be dependent upon market conditions. On October 11, 2002, Standard & Poor's ("S&P") announced that it had revised its long-term and commercial paper debt ratings for Household International, Inc. and its principal borrowing subsidiary, HFC. S&P's ratings were revised as follows: long-term senior debt from "A" to "A-" and short-term debt from "A-1" to "A-2". Also on October 11, 2002, Fitch Ratings announced that it had placed the long-term and commercial paper ratings of Household and each of its subsidiaries on "Ratings Watch Negative," while Moody's Investors Service affirmed all ratings for Household and HFC. The downgrade by S&P is expected to increase our funding costs and decrease our capacity to issue commercial paper. Commercial paper, bank and other borrowings of $5.3 billion were $1.7 billion higher at September 30, 2002 than the June 30, 2002 level but $6.8 billion lower than the year-end 2001 level. We took advantage of the low interest rate environment and issued long-term debt in early 2002. We also reduced outstanding commercial paper to address general market liquidity concerns. As a result of our split credit 19 rating, outstanding commercial paper, bank and other borrowings may decrease in future quarters as the market for our commercial paper may contract. Senior and senior subordinated debt (with original maturities over one year) increased $18.0 billion from year-end to $74.8 billion at September 30, 2002. During the nine months ended September 30, 2002, we issued $4.7 billion in domestic medium-term notes, $5.0 billion in U.S. dollar-denominated global debt, $4.8 billion in InterNotes(SM) (a retail-oriented medium-term note program), Pound Sterling 500 ($710) million of 10-year debt to investors in the U.K., Euro 3 ($2.7) billion in Euro bonds and $328 million in yen-denominated debt. Of these issuances, $7.2 billion had maturities greater than 5 years which reduced our overall dependence on the potentially volatile commercial paper markets. In addition, we issued $6.2 billion of securities backed by dedicated home equity loan receivables. During the current quarter, we issued $328 million in yen-denominated debt, $1.3 billion in InterNotes(SM) and $3.4 billion of securities backed by dedicated home equity loan receivables. In July 2002, substantially all of the holders of our $1 billion zero-coupon convertible debt securities exercised their put options requiring us to repurchase their outstanding securities. The redemption was funded through our normal funding process. During 2002, we established an investment security portfolio designed to improve liquidity management and provide additional flexibility in the event of potential future volatility in the financial markets. At September 30, 2002, this portfolio totaled $6.5 billion, a $2 billion increase over June 30, 2002. SECURITIZATIONS AND SECURED FINANCINGS Securitizations and secured financings of consumer receivables have been, and will continue to be, a source of liquidity for us. In a securitization, a designated pool of non real estate consumer receivables, typically MasterCard or Visa credit card, private label credit card, personal non-credit card or auto finance, is removed from the balance sheet and transferred to an unaffiliated trust. This unaffiliated trust is a qualifying special purpose entity ("QSPE") as defined by Statement of Financial Accounting Standards No. 140 ("FAS No. 140") and, therefore, is not consolidated. The QSPE funds its receivables purchase through the issuance of securities to investors, entitling them to receive specified cash flows during the life of the securities. The securities are collateralized by the underlying receivables transferred to the QSPE. Under the terms of the securitizations, we receive annual servicing fees on the outstanding balance of the securitized receivables and the rights to future residual cash flows on the sold receivables after the investors receive their contractual return. The estimated present value of these rights to future residual cash flows are recorded on our balance sheet at the time of sale as interest-only strip receivables, net of our recourse obligation to investors for failure of debtors to pay. Our recourse is limited to our rights to future cash flows and any subordinated interests that we may retain. Cash flows related to the interest-only strip receivables and servicing the receivables are collected over the life of the underlying securitized receivables. In a secured financing, a designated pool of receivables, typically real estate secured, are conveyed to a wholly owned limited purpose subsidiary which in turn transfers the receivables to a trust which sells interests to investors. Repayment of the debt issued by the trust is secured by the receivables transferred. The transactions are structured as secured financings under FAS No. 140. Therefore, the receivables and the underlying debt of the trust remain on our balance sheet. Using this source of funding results in similar operating results and cash flows as issuing debt through alternative funding sources. During the third quarter and first nine months of 2002, our securitization activity exceeded that of both prior year periods. The higher securitization levels reflect our liquidity management plans to limit reliance on short-term unsecured debt in potentially volatile markets. Additionally, securitizations were often a more cost-effective source of funding than traditional medium and long-term unsecured debt funding sources. Receivables securitized (excluding replenishments of certificateholder interests) were as follows: 20
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, (In millions) 2002 2001 2002 2001 - -------------------------------------------------------------------------------------- Auto finance $ 986.0 $ 732.0 $ 2,336.0 $ 1,705.8 MasterCard/Visa 160.0 109.9 1,373.4 261.1 Private label 390.0 -- 890.0 -- Personal non-credit card 1,000.0 350.0 2,352.7 1,498.6 - -------------------------------------------------------------------------------------- Total $ 2,536.0 $ 1,191.9 $ 6,952.1 $ 3,465.5 ======================================================================================
Our securitized receivables totaled $23.4 billion at September 30, 2002, compared to $20.9 billion at December 31, 2001. In the first nine months of 2002, we established $6.25 billion in incremental conduit capacity for our real estate secured product. Consistent with previous transactions, draws on these facilities are structured as secured financings for accounting purposes. At September 30, 2002, our undrawn conduit lines totaled $5.2 billion and included $4.4 billion of undrawn capacity on the real estate lines put in place in 2002. We also issued securities backed by dedicated home equity loan receivables of $3.4 billion in the third quarter of 2002 and $6.2 billion year-to-date, compared to $717 million in the nine months ended September 30, 2001. For accounting purposes, these transactions were structured as secured financings. Therefore, the receivables and the related debt remain on our balance sheet. As of September 30, 2002, closed-end real estate secured receivables totaling $7.7 billion secured $6.8 billion of outstanding debt related to these transactions. At December 31, 2001, closed-end real estate secured receivables totaling $1.7 billion secured $1.5 billion of outstanding debt related to these transactions. We believe the market for securities backed by receivables is a reliable, efficient and cost-effective source of funds. At September 30, 2002, securitizations represented 22 percent and secured financings represented 6 percent of the funding associated with our managed portfolio. At December 31, 2001, securitizations represented 22 percent and secured financings represented 2 percent of the funding associated with our managed portfolio. REGULATORY MATTERS In response to revised capital adequacy guidelines relating to subprime lending activities adopted by the Office of Thrift Supervision ("OTS"), Office of the Comptroller of the Currency ("OCC") and the Federal Deposit Insurance Corporation ("FDIC"), in the first quarter, we contributed approximately $1.2 billion of additional capital to our banking subsidiaries. Throughout the year, we have taken actions designed to optimize capital management of our banks, including merging all our credit card banks into a single banking subsidiary of HFC. In conjunction with our efforts to make the most efficient use of our capital and to achieve our 8.50 percent TETMA target, we determined that the continued operation of Household Bank, f.s.b. is not in our long-term strategic interest. As a result, management is exploring opportunities to dispose of Household Bank, f.s.b. including its current assets and deposits in the fourth quarter. We have not utilized deposits to fund our operations since 2000. We do not expect that the loss of the Bank as a funding source for our operations will materially impact our business. The sale will likely result in a $250-300 million loss (after tax) in the fourth quarter. On October 11, 2002, we reached a preliminary agreement with a multi-state working group of state attorneys general and regulatory agencies to effect a nationwide resolution of alleged violations of consumer protection, consumer lending and insurance laws and regulations in our retail branch consumer lending operations. We recorded a charge of $525 million (pre-tax) reflecting the costs of this settlement agreement and related matters. This matter is discussed in detail in our Form 8-K dated October 11, 2002 which we filed on October 15, 2002. 21 RESULTS OF OPERATIONS Unless noted otherwise, the following discusses amounts reported in our owned basis statements of income. NET INTEREST MARGIN Net interest margin on an owned basis was $1.7 billion for the third quarter of 2002, up 15 percent from $1.5 billion for the prior-year quarter. Net interest margin on an owned basis for the first nine months of 2002 was $4.9 billion, up from $4.2 billion in the prior-year period. The increases were primarily due to receivable growth and lower funding costs. Net interest margin as a percent of average owned interest-earning assets, annualized, was 7.46 percent in the quarter and 7.62 percent in the first nine months of 2002, compared to 7.94 and 7.74 percent in the year-ago periods. The declines were due to the impact of our liquidity-related investment portfolio which was established in 2002. These reductions were partially offset by lower funding costs. Our net interest margin on a managed basis includes finance income earned on our owned receivables as well as on our securitized receivables. This finance income is offset by interest expense on the debt recorded on our balance sheet as well as the contractual rate of return on the instruments issued to investors when the receivables were securitized. Managed basis net interest margin increased $379 million, to $2.4 billion in the third quarter of 2002, and $1.2 billion, to $6.9 billion year-to-date. The increases were primarily due to higher receivable levels. Net interest margin as a percent of average managed interest-earning assets, annualized, was 8.35 percent in the current quarter and 8.54 percent in the first nine months of 2002, compared to 8.51 and 8.31 percent in the year-ago periods. The net interest margin on a managed basis is greater than on an owned basis because the managed basis portfolio includes relatively more auto finance, MasterCard and Visa and personal non-credit card loans, which have higher yields. The decrease in the quarter was primarily due to the liquidity-related investment portfolio established in 2002. This portfolio has lower yields than our other products. Lower funding costs were the primary driver of the increased margin for the nine month period. PROVISION FOR CREDIT LOSSES The provision for credit losses for receivables for the third quarter of 2002 totaled $973.0 million, compared to $722.9 million in the prior-year quarter. The provision for the first nine months of 2002 was $2.7 billion, compared to $2.1 billion in the year-ago period. The provision as a percent of average owned receivables, annualized, was 4.61 percent in the third quarter of 2002, compared to 3.91 percent in the third quarter of 2001. We recorded owned loss provision greater than charge-offs of $136.7 million during the third quarter and $462.2 million during the first nine months of 2002. Receivables growth, increases in personal bankruptcy filings and uncertainty as to the timing and extent of an economic recovery contributed to a higher provision. The provision for credit losses may vary from quarter to quarter, depending on the product mix and credit quality of loans in our portfolio. See Note 4, "Credit Loss Reserves" to the accompanying condensed consolidated financial statements for further discussion of factors affecting the provision for credit losses. 22 OTHER REVENUES Total other revenues were $1.1 and $3.3 billion for the third quarter and first nine months of 2002, compared to $949.8 million and $2.8 billion for the same periods in 2001 and included the following:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, (In millions) 2002 2001 2002 2001 - --------------------------------------------------------------------------------------- Securitization revenue $ 556.3 $ 451.1 $ 1,598.0 $ 1,251.6 Insurance revenue 180.8 169.2 528.4 487.1 Investment income 47.6 42.3 137.8 121.9 Fee income 261.7 235.7 668.5 671.3 Other income 101.8 51.5 385.1 262.6 - --------------------------------------------------------------------------------------- Total other revenues $ 1,148.2 $ 949.8 $ 3,317.8 $ 2,794.5 =======================================================================================
Securitization revenue is the result of the securitization of our receivables and includes initial and replenishment gains on sale, net of our estimate of probable credit losses under the recourse provisions, as well as servicing revenue and excess spread. Securitization revenue was $556.3 million and $1.6 billion for the third quarter and first nine months of 2002, compared to $451.1 million and $1.3 billion for the same periods in 2001. The increases were due to higher average securitized receivables as well as increases in the level of receivables securitized during both the quarter and year-to-date. Securitization revenue will vary each period based on the level and mix of receivables securitized in that particular period (which will impact the gross initial gains and related estimated probable credit losses under the recourse provisions). It is also affected by the overall level and mix of previously securitized receivables (which will impact servicing revenue and excess spread). The estimate for probable credit losses for securitized receivables is also impacted by the level and mix of current period securitizations because, depending upon loss estimates and severities, securitized receivables with longer lives may result in higher over-the-life losses than receivables securitized with shorter lives. Securitization revenue included the following:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, (In millions) 2002 2001 2002 2001 - ---------------------------------------------------------------------------------- Net initial gains $ 78.6 $ 38.5 $ 226.8 $ 104.7 Net replenishment gains 132.2 107.4 383.4 305.0 Servicing revenue and excess spread 345.5 305.2 987.8 841.9 - ---------------------------------------------------------------------------------- Total $ 556.3 $ 451.1 $ 1,598.0 $ 1,251.6 ==================================================================================
Our interest-only strip receivables increased $51.2 and $110.0 million in the third quarter and first nine months of 2002 compared to $45.2 and $46.2 million in the year-ago periods. These increases exclude the mark-to-market adjustment recorded in accumulated other comprehensive income. Insurance revenue was $180.8 and $528.4 million in the third quarter and first nine months of 2002 compared to $169.2 and $487.1 million in the year-ago periods. The increases reflect increased sales on a larger receivable portfolio. Investment income, which includes interest income on investment securities in the insurance business as well as realized gains and losses from the sale of investment securities, was $47.6 and $137.8 million in the third quarter and first nine months of 2002 compared to $42.3 and $121.9 million in the year-ago periods. The increases were primarily due to higher interest income, primarily resulting from higher average investment balances consistent with our liquidity management plans, partially offset by lower yields. Fee income, which includes revenues from fee-based products such as credit cards, was $261.7 and $668.5 million in the third quarter and first nine months of 2002, compared to $235.7 and $671.3 million in the year-ago periods. The increase in the quarter was due to higher levels of credit card fees from both 23 card businesses. The year-to-date decrease was attributable to improvements in early stage delinquencies in the first half of the year which resulted in lower late fees in our credit card businesses. The fourth quarter 2001 sale of the $1 billion Goldfish credit card portfolio in the U.K. also resulted in lower fee income. See Note 13, "Segment Reporting," to the accompanying condensed consolidated financial statements for additional information on fee income on a managed basis. Other income, which includes revenue from our tax refund lending business, was $101.8 and $385.1 million in the third quarter and first nine months of 2002 compared to $51.5 and $262.6 million in the prior-year periods. The increases are primarily attributable to increased revenues from our mortgage operations and higher servicing fees. Higher revenues, including higher collections, from our seasonal tax refund lending business also contributed to the year-to-date increase. EXPENSES Total costs and expenses, including the $525 million settlement charge and related expenses, for the third quarter and first nine months of 2002 were $1.6 and $3.7 billion compared to $978.6 million and $2.9 billion in the comparable prior-year periods. Excluding the settlement charge, costs and expenses were $1.1 billion in the current quarter and $3.2 billion year-to-date. The increases were driven by higher compensation and other expenses to support our growing portfolio. Our owned basis efficiency ratio was 53.8 and 43.0 percent in the third quarter and first nine months of 2002 compared to 38.2 and 39.4 percent in the comparable prior-year periods. Excluding the settlement charge, our owned basis efficiency ratio was 34.7 percent in the quarter and 36.4 percent in the first nine months of 2002. Total costs and expenses included the following:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, (In millions) 2002 2001 2002 2001 - --------------------------------------------------------------------------------- --------------------------- Salaries and fringe benefits $ 456.6 $ 408.3 $ 1,354.9 $ 1,173.1 Sales incentives 60.6 74.1 182.3 202.2 Occupancy and equipment expense 94.1 86.1 279.6 253.3 Other marketing expenses 135.4 119.5 409.3 370.0 Other servicing and administrative expenses 199.3 174.1 635.1 542.8 Amortization of acquired intangibles and goodwill 12.7 39.0 45.1 118.6 Policyholders' benefits 101.2 77.5 272.6 228.1 Settlement charge and related expenses 525.0 -- 525.0 -- - ---------------------------------------------------------------------------------------------------------- Total costs and expenses $ 1,584.9 $ 978.6 $ 3,703.9 $ 2,888.1 ==========================================================================================================
Salaries and fringe benefits for the third quarter and first nine months of 2002 were $456.6 million and $1.4 billion compared to $408.3 million and $1.2 billion in the third quarter and first nine months of 2001. The increases were primarily due to additional staffing at all businesses to support growth including sales, collections and service quality. Sales incentives for the third quarter and first nine months of 2002 were $60.6 and $182.3 million compared to $74.1 and $202.2 million in the comparable prior-year periods. The decreases were due to conditions of our 2002 branch incentive plans which, generally, have higher volume requirements than the prior-year plans. Occupancy and equipment expense for the third quarter and first nine months of 2002 was $94.1 and $279.6 million compared to $86.1 and $253.3 million in the comparable prior-year periods. The increases were primarily the result of higher repairs and maintenance costs. Other marketing expenses for the third quarter and first nine months of 2002 were $135.4 and $409.3 million compared to $119.5 and $370.0 million in the comparable prior-year periods. The increases were primarily due to increased credit card marketing initiatives in both our domestic and U.K. MasterCard and Visa portfolios. 24 Other servicing and administrative expenses for the third quarter and first nine months of 2002 were $199.3 and $635.1 million compared to $174.1 and $542.8 million in the comparable prior-year periods. The increases were primarily due to higher collection, REO, legal and consulting expenses. Amortization of acquired intangibles and goodwill for the third quarter and first nine months of 2002 was $12.7 and $45.1 million compared to $39.0 and $118.6 million in the comparable prior-year periods. The decreases were primarily attributable to the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," on January 1, 2002. Amortization of goodwill recorded in past business combinations ceased upon adoption of the new accounting statement. Policyholders' benefits for the third quarter and first nine months of 2002 were $101.2 and $272.6 million compared to $77.5 and $228.1 million in the comparable prior-year periods. The increases are primarily due to and consistent with the increase in insurance revenues resulting from the increased policy sales. Settlement charge and related expenses were $525 million in both the third quarter and first nine months of 2002. The charges are the result of a preliminary agreement with a multi-state group of state attorneys general and regulatory agencies, to effect a nationwide resolution of alleged violations of consumer protection, consumer lending and insurance laws and regulations in our retail branch consumer lending operations as conducted under the HFC and Beneficial brand names. CREDIT LOSS RESERVES Our consumer credit management policies focus on product type and specific portfolio risk factors. Our consumer credit portfolio is diversified by product and geographic location. See Note 3, "Receivables," in the accompanying condensed consolidated financial statements for receivables by product type and Note 4, "Credit Loss Reserves," for our credit loss reserve methodology and an analysis of changes in the credit loss reserves. The following table sets forth owned basis credit loss reserves for the periods indicated:
SEPTEMBER 30, JUNE 30, SEPTEMBER 30, (All dollar amounts are stated in millions) 2002 2002 2001 - ----------------------------------------------------------------------------------------------- Owned credit loss reserves $ 3,127.3 $ 2,983.3 $ 2,476.6 Reserves as a percent of: Receivables 3.72% 3.59% 3.28% Net charge-offs (1) 93.5 97.4 98.2 Previous 12-months' net charge-offs 104.4 106.9 111.3 Nonperforming loans 92.1 96.0 87.9 ===============================================================================================
(1) Quarter-to-date, annualized Reserves as a percentage of receivables at September 30, 2002 reflect higher delinquency levels and continuing uncertainty as to the ultimate impact the weak economy will have on charge-off and delinquency levels. 25 For securitized receivables, we also record a provision for estimated probable losses that we expect to incur under the recourse provisions. The following table sets forth managed credit loss reserves for the periods indicated:
SEPTEMBER 30, JUNE 30, SEPTEMBER 30, (All dollar amounts are stated in millions) 2002 2002 2001 - ----------------------------------------------------------------------------------------------- Managed credit loss reserves $ 4,688.8 $ 4,368.9 $ 3,555.0 Reserves as a percent of: Receivables 4.36% 4.14% 3.72% Net charge-offs (1) 100.1 100.0 102.1 Previous 12-months' net charge-offs 110.1 110.4 111.1 Nonperforming loans 113.1 112.4 103.9 ===============================================================================================
(1) Quarter-to-date, annualized Managed basis reserve ratios are somewhat higher than comparable owned basis ratios because our managed portfolio includes a lower percentage of real estate secured receivables, which historically have had lower credit losses than our other products. CREDIT QUALITY DELINQUENCY - OWNED BASIS Two-Months-and-Over Contractual Delinquency (as a percent of consumer receivables):
SEPTEMBER 30, JUNE 30, SEPTEMBER 30, 2002 2002 2001 - -------------------------------------------------------------------------------- Real estate secured 3.22% 2.78% 2.71% Auto finance 3.33 2.99 2.43 MasterCard/Visa 6.36 6.13 5.22 Private label 6.84 6.19 6.57 Personal non-credit card 9.18 9.12 8.75 - -------------------------------------------------------------------------------- Total 5.01% 4.61% 4.58% ================================================================================
Compared to the previous quarter, the weakened economy contributed to higher delinquencies in all products. These increases were consistent with our expectations. Approximately 25 percent of the increase in our real estate secured portfolio was attributable to the sale of $1.6 billion in predominantly non-delinquent receivables during the quarter. The sequential increase in auto finance delinquency is consistent with historical seasonal trends. Compared to a year ago, the weakened economy negatively affected delinquency rates for all products. These increases were partially offset by improved collections. The improved collections were a direct result of increasing the size of our collection staff, especially in our branch network. 26 NET CHARGE-OFFS OF CONSUMER RECEIVABLES - OWNED BASIS Net Charge-offs of Consumer Receivables (as a percent, annualized, of average consumer receivables):
SEPTEMBER 30, JUNE 30, SEPTEMBER 30, 2002 2002 2001 - ------------------------------------------------------------------------------------------------------------------ Real estate secured 1.03% .85% .51% Auto finance 5.50 4.80 3.72 MasterCard/Visa 9.21 9.94 8.28 Private label 6.65 5.86 5.94 Personal non-credit card 8.96 8.59 7.27 - ------------------------------------------------------------------------------------------------------------------ Total 3.98% 3.76% 3.43% ================================================================================================================== Real estate charge-offs and REO expense as a percent of average real estate secured receivables 1.38% 1.23% .85% ==================================================================================================================
The weak economy, including higher bankruptcy charge-offs, drove the increase in charge-off ratios over the previous quarter. These increases were consistent with our expectations. The decrease in MasterCard and Visa charge-offs reflects decreases across all MasterCard and Visa credit card products. Compared to the prior-year quarter, our net charge-off ratio increased 55 basis points, primarily due to the weak economy. These increases were partially offset by improved collections as a direct result of increasing the size of our collection staff. Charge-offs in our personal non-credit card portfolio increased more than most other products because our typical personal non-credit card customer is less resilient and, therefore, more exposed to the recent economic downturn. The increases in real estate charge-offs and REO expense as a percent of average real estate secured receivables over both of the prior periods were the result of the seasoning of our portfolios, higher loss severities, especially in second lien mortgages, and higher bankruptcy filings. OWNED NONPERFORMING ASSETS
SEPTEMBER 30, JUNE 30, SEPTEMBER 30, (In millions) 2002 2002 2001 - ---------------------------------------------------------------------------------------------------------- Nonaccrual receivables $ 2,569.5 $ 2,356.4 $ 2,009.6 Accruing consumer receivables 90 or more days delinquent 824.2 750.6 806.6 Renegotiated commercial loans 1.3 1.4 -- - ---------------------------------------------------------------------------------------------------------- Total nonperforming receivables 3,395.0 3,108.4 2,816.2 Real estate owned 451.1 456.7 363.0 - ---------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 3,846.1 $ 3,565.1 $ 3,179.2 ========================================================================================================== Credit loss reserves as a percent of nonperforming receivables 92.1% 96.0% 87.9% ==========================================================================================================
27 REAGE STATISTICS - MANAGED BASIS Our credit policies for consumer loans permit the reset of the contractual delinquency status of an account to current, subject to certain limits, if a predetermined number of consecutive payments has been received and there is evidence that the reason for the delinquency has been cured. Such reaging policies vary by product and are designed to manage customer relationships and ensure maximum collections. The tables below summarize reaging statistics in our managed basis domestic portfolio as of September 30, 2002, June 30, 2002 and December 31, 2001.
TOTAL REAGED BY REAGE PERIOD - DOMESTIC PORTFOLIO SEPTEMBER 30, JUNE 30, DECEMBER 31, (Managed Basis) 2002 2002 2001 - -------------------------------------------------------------------------------------------------------- Never reaged 83.9% 83.3% 83.1% Reaged: Reaged in the last 6 months 6.6 7.4 9.0 Reaged in the last 7-12 months 4.9 5.1 3.6 Previously reaged 4.6 4.2 4.3 - -------------------------------------------------------------------------------------------------------- Total ever reaged 16.1 16.7 16.9 - -------------------------------------------------------------------------------------------------------- Total 100.0% 100.0% 100.0% ======================================================================================================== TOTAL REAGED BY PRODUCT - DOMESTIC PORTFOLIO SEPTEMBER 30, JUNE 30, DECEMBER 31, (Managed Basis) 2002 2002 2001 - -------------------------------------------------------------------------------------------------------- Real estate secured 18.5% 19.1% 20.0% Auto finance 16.2 15.9 15.0 MasterCard/Visa 3.4 3.4 3.2 Private label 10.4 10.5 11.1 Personal non-credit card 25.3 27.1 27.2 - -------------------------------------------------------------------------------------------------------- Total 16.1% 16.7% 16.9% ========================================================================================================
The percentage of our domestic, managed basis portfolio which has ever been reaged at September 30, 2002 has declined slightly from both June 30, 2002 and December 31, 2001. NEW LEGAL MATTERS In connection with the restatement of our prior period financial results that occurred in August 2002, we, and our directors and former auditors, have been named in various legal actions, purporting to be class actions, alleging violations of the federal securities law. We believe that the legal actions described above are without merit. We also believe that our officers and directors have not committed any wrong doing and in each instance there will be no finding of improper activities that may result in a material liability to the company or any of its officers or directors. 28 ITEM 4. CONTROLS AND PROCEDURES We maintain a system of internal controls and procedures designed to provide reasonable assurance as to the reliability of our published financial statements and other disclosures included in this report. Our Board of Directors, operating through its audit committee which is composed entirely of independent outside directors, provides oversight to our financial reporting process. Within the 90-day period prior to the date of this report, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and our Principal Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to Household International, Inc. (including its consolidated subsidiaries) required to be included in this quarterly report on Form 10-Q. There have been no significant changes in our internal controls or in other factors which could significantly affect internal controls subsequent to the date that we carried out our evaluation. 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. 99.1 Selected Debt and Preferred Stock Securities Ratings. 99.2 Certification of Chief Executive Officer. 99.3 Certification of Principal Financial Officer. (b) Report on Form 8-K During the third quarter of 2002, we filed the following Current Reports on Form 8-K: - Report filed July 17, 2002 with respect to the press release pertaining to our financial results for the quarter ended June 30, 2002. - Report filed on August 14, 2002 pursuant to Order No. 4-460 of the Securities and Exchange Commission (the "Commission") whereby Household International, Inc. delivered to the Secretary of the Commission sworn statements of William F. Aldinger, its Chairman and Chief Executive Officer and David A. Schoenholz, its President and Chief Operating Officer, as required by such Order, and advised of a restatement of prior period earnings. - Report filed September 16, 2002 reporting the issuance of 350,000 shares of 7 5/8% Cumulative Preferred Stock, Series 2002-B, pursuant to an underwritten public offering of 14,000,000 depositary shares. 29 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: October 24, 2002 By: /s/ David A. Schoenholz ---------------- --------------------------- David A. Schoenholz President and Chief Operating Officer (also as principal financial officer) and on behalf of Household International, Inc. 30 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, William F. Aldinger, Chairman and Chief Executive Officer of Household International, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Household International, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: October 24, 2002 /s/ William F. Aldinger -------------------------------------- William F. Aldinger Chairman and Chief Executive Officer 31 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER I, David A. Schoenholz, President and Chief Operating Officer (as the Principal Financial Officer) of Household International, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Household International, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: October 24, 2002 /s/ David A. Schoenholz ------------------------------------- David A. Schoenholz President and Chief Operating Officer 32 EXHIBIT INDEX 12 Statement of Computation of Ratio of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends. 99.1 Selected Debt and Preferred Stock Securities Ratings. 99.2 Certification of Chief Executive Officer. 99.3 Certification of Principal Financial Officer. 33 EX-12 3 c72577exv12.txt STATEMENT OF COMPUTATION OF RATIO OF EARNINGS 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) 2002 2001 - ------------------------------------------------------------------------------------ Net income $ 1,219.6 $ 1,314.4 Income taxes 585.2 689.3 - ------------------------------------------------------------------------------------ Income before income taxes 1,804.8 2,003.7 - ------------------------------------------------------------------------------------ Fixed charges: Interest expense (1) 2,914.2 3,206.9 Interest portion of rentals (2) 50.9 45.2 - ------------------------------------------------------------------------------------ Total fixed charges 2,965.1 3,252.1 - ------------------------------------------------------------------------------------ Total earnings as defined $ 4,769.9 $ 5,255.8 ==================================================================================== Ratio of earnings to fixed charges (4) 1.61 1.62 Preferred stock dividends (3) $ 60.1 $ 11.5 Ratio of earnings to combined fixed charges and preferred stock dividends (4) 1.58 1.61 - ------------------------------------------------------------------------------------
(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 32.4 percent for the nine months ended September 30, 2002 and 34.4 percent for the same period in 2001. (4) The 2002 ratio has been negatively impacted by the settlement charge and related expenses associated with our preliminary agreement with a multi-state working group of attorneys general and regulatory agencies to effect a nationwide resolution of alleged violations of consumer protection, consumer lending and insurance laws and regulations in our retail branch consumer lending operations. Excluding the settlement charge and related expenses of $333.2 million (after-tax), our ratio of earnings to fixed charges would have been 1.79 percent and our ratio of earnings to combined fixed charges and preferred stock dividends would have been 1.75 percent. EX-99.1 4 c72577exv99w1.txt SELECTED DEBT AND PREF. STOCK SECURITIES RATINGS EXHIBIT 99.1 HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES SELECTED DEBT AND PREFERRED STOCK SECURITIES RATINGS
STANDARD MOODY'S & POOR'S INVESTORS FITCH, INC.(1) CORPORATION SERVICE - -------------------------------------------------------------------------------------------- HOUSEHOLD INTERNATIONAL, INC.: Senior debt A- A3 A Commercial paper A-2 P-2 F-1 Preferred stock BBB Baa2 A- HOUSEHOLD FINANCE CORPORATION: Senior debt A- A2 A Senior subordinated debt BBB+ A3 A- Commercial paper A-2 P-1 F-1 HOUSEHOLD BANK, F.S.B.: Senior debt A- A2 A Subordinated debt BBB+ A3 A- Certificates of deposit (long/short-term) A-/A-2 A2/P-1 A+/F-1 Bank notes A-2 P-1 F-1 HOUSEHOLD BANK PLC: Senior debt A- A2 A Commercial paper A-2 P-1 NR HOUSEHOLD FINANCIAL CORP. LTD. Senior Debt A- A2 A Commercial paper A-2 P-1 NR - --------------------------------------------------------------------------------------------
NR - Not rated (1) All ratings on Ratings Watch Negative EX-99.2 5 c72577exv99w2.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Household International, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William F. Aldinger, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18. U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ William F. Aldinger ----------------------- William F. Aldinger Chairman and Chief Executive Officer October 24, 2002 EX-99.3 6 c72577exv99w3.txt CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER EXHIBIT 99.3 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Household International, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the Report"), I, David A. Schoenholz, President and Chief Operating Officer (as Principal Financial Officer) of the Company, certify, pursuant to 18. U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ David A. Schoenholz ------------------- David A. Schoenholz President and Chief Operating Officer October 24, 2002 -----END PRIVACY-ENHANCED MESSAGE-----