Household Intnl 10-Q Pt 2
HSBC Holdings PLC
17 May 2004
"The following is a Current Report on Form 10-Q containing financial information
for the quarter ended 31 March 2004 filed with the United States Securities and
Exchange Commission by Household International, Inc., a subsidiary of HSBC
Holdings plc.
Copies of the Form 10-Q are available on Household International, Inc.'s website
at www.Household.com and on the SEC website at www.sec.gov."
Reconciliations To GAAP Financial Measures
Three months ended
----------------------
March 31, March 31,
2004 2003
(Dollar amounts are in millions) ---------- ----------
Return on Average Assets:
Net income............................................................... $ 481.1 $ 255.4
HSBC acquisition related costs and other merger related items incurred by
Household, after-tax................................................... -- 167.3
---------- ----------
Operating net income..................................................... $ 481.1 $ 422.7
---------- ----------
Average assets:
Owned basis........................................................... $119,461.5 $100,437.9
Serviced with limited recourse........................................ 25,277.4 24,155.3
---------- ----------
Managed basis......................................................... $144,738.9 $124,593.2
---------- ----------
Return on average owned assets........................................... 1.61% 1.02%
Return on average owned assets, operating basis.......................... 1.61 1.68
Return on average managed assets......................................... 1.33 .82
Return on average managed assets, operating basis........................ 1.33 1.36
========== ==========
Return on Average Common Shareholder's Equity:
Net income............................................................... $ 481.1 $ 255.4
Dividends on preferred stock............................................. (17.9) (22.2)
---------- ----------
Net income available to common shareholders.............................. 463.2 233.2
HSBC acquisition related costs and other merger related items incurred by
Household.............................................................. -- 167.3
---------- ----------
Operating net income available to common shareholders.................... $ 463.2 $ 400.5
---------- ----------
Average common shareholder's equity...................................... $ 16,800.4 $ 9,354.6
---------- ----------
Return on average common shareholder's equity............................ 11.0% 10.0%
Return on average common shareholder's equity, operating basis........... 11.0 17.1
========== ==========
Net Interest Margin:
Net Interest Margin:
Owned basis........................................................... $ 1,905.5 $ 1,633.0
Serviced with limited recourse........................................ 739.1 725.6
---------- ----------
Managed basis......................................................... $ 2,644.6 $ 2,358.6
---------- ----------
Average interest-earning assets:
Owned basis........................................................... $ 99,676.1 $ 89,565.0
Serviced with limited recourse........................................ 25,277.4 24,155.3
---------- ----------
Managed basis......................................................... $124,953.5 $113,720.3
---------- ----------
Owned basis net interest margin.......................................... 7.65% 7.29%
Managed basis net interest margin........................................ 8.47 8.30
========== ==========
Managed Basis Risk Adjusted Revenue:
Net interest margin...................................................... $ 2,644.6 $ 2,358.6
Other revenues, excluding securitization revenue......................... 1,018.5 954.1
Less: Net charge-offs.................................................... (1,441.9) (1,272.3)
---------- ----------
Risk adjusted revenue.................................................... 2,221.2 2,040.4
Average interest-earning assets.......................................... $124,953.5 $113,720.3
---------- ----------
Managed basis risk adjusted revenue...................................... 7.11% 7.18%
========== ==========
40
Three months ended
- ----------------------------------------------
March 31, 2004 March 31, 2003 December 31, 2003
(Dollar amounts are in millions) -------------- -------------- -----------------
Consumer Net Charge-off Ratio:
Consumer net charge-offs:
Owned basis............................................ $ 970.4 $ 873.9 $ 884.1
Serviced with limited recourse......................... 471.5 398.4 420.5
---------- ---------- ----------
Managed basis.......................................... $ 1,441.9 $ 1,272.3 $ 1,304.6
---------- ---------- ----------
Average consumer receivables:
Owned basis............................................ $ 92,973.7 $ 82,920.4 $ 94,187.3
Serviced with limited recourse......................... 25,277.4 24,155.3 24,568.1
---------- ---------- ----------
Managed basis.......................................... $118,251.1 $107,075.7 $118,755.4
---------- ---------- ----------
Owned basis consumer net charge-off ratio................. 4.17% 4.22% 3.75%
Managed basis consumer net charge-off ratio............... 4.88 4.75 4.39
========== ========== ==========
Reserves as a Percentage of Net Charge-offs
Loss reserves:
Owned basis............................................ $ 3,753.0 $ 3,483.1 $ 3,793.1
Serviced with limited recourse......................... 2,158.5 1,776.2 2,373.5
---------- ---------- ----------
Managed basis.......................................... $ 5,911.5 $ 5,259.3 $ 6,166.6
---------- ---------- ----------
Net charge-offs:
Owned basis............................................ $ 970.4 $ 873.9 $ 883.6
Serviced with limited recourse......................... 471.5 398.4 420.5
---------- ---------- ----------
Managed basis.......................................... $ 1,441.9 $ 1,272.3 $ 1,304.1
---------- ---------- ----------
Owned basis reserves as a percentage of net charge-offs... 96.7% 99.6% 107.3%
Managed basis reserves as a percentage of net charge-offs. 102.5 103.3 118.2
========== ========== ==========
Efficiency Ratio:
Total costs and expenses less policyholders' benefits..... $ 1,297.9 $ 1,327.8
HSBC acquisition related costs incurred by Household...... -- (198.2)
---------- ----------
Total costs and expenses less policyholders' benefits,
excluding nonrecurring items............................ $ 1,297.9 $ 1,129.6
---------- ----------
Net interest margin and other revenues less policyholders'
benefits:
Owned basis............................................ $ 2,947.6 $ 2,779.6
Serviced with limited recourse......................... 253.1 407.3
---------- ----------
Managed basis.......................................... $ 3,200.7 $ 3,186.9
---------- ----------
Owned basis efficiency ratio.............................. 44.0% 47.8%
Owned basis efficiency ratio, operating basis............. 44.0 40.6
Managed basis efficiency ratio............................ 40.6 41.7
Managed basis efficiency ratio, operating basis........... 40.6 35.4
========== ==========
41
March 31, December 31, March 31,
2004 2003 2003
(Dollar amounts are in millions) ---------- ------------ ----------
Two-Months-and-Over-Contractual Delinquency:
Consumer two-months-and-over-contractual delinquency:
Owned basis....................................... $ 4,670.9 $ 4,936.1 $ 4,567.1
Serviced with limited recourse.................... 1,280.3 1,431.9 1,177.9
---------- ---------- ----------
Managed basis..................................... $ 5,951.2 $ 6,368.0 $ 5,745.0
---------- ---------- ----------
Consumer receivables:
Owned basis....................................... $ 93,298.7 $ 92,011.9 $ 83,023.1
Serviced with limited recourse.................... 24,356.9 26,200.4 24,255.7
---------- ---------- ----------
Managed basis..................................... $117,655.6 $118,212.3 $107,278.8
---------- ---------- ----------
Consumer two-months-and-over-contractual delinquency:
Owned basis....................................... 5.01% 5.36% 5.50%
Managed basis..................................... 5.06 5.39 5.36
========== ========== ==========
Reserves as a Percentage of Receivables:
Loss reserves:
Owned basis....................................... $ 3,753.0 $ 3,793.1 $ 3,483.1
Serviced with limited recourse.................... 2,158.5 2,373.5 1,776.2
---------- ---------- ----------
Managed basis..................................... $ 5,911.5 $ 6,166.6 $ 5,259.3
---------- ---------- ----------
Receivables:
Owned basis....................................... $ 93,650.0 $ 92,378.2 $ 83,438.4
Serviced with limited recourse.................... 24,356.9 26,200.4 24,255.7
---------- ---------- ----------
Managed basis..................................... $118,006.9 $118,578.6 $107,694.1
---------- ---------- ----------
Reserves as a percentage of receivables:
Owned basis....................................... 4.01% 4.11% 4.17%
Managed basis..................................... 5.01 5.20 4.88
========== ========== ==========
Reserves as a Percentage of Nonperforming Loans:
Loss reserves:
Owned basis....................................... $ 3,753.0 $ 3,793.1 $ 3,483.1
Serviced with limited recourse.................... 2,158.5 2,373.5 1,776.2
---------- ---------- ----------
Managed basis..................................... $ 5,911.5 $ 6,166.6 $ 5,259.3
---------- ---------- ----------
Nonperforming loans:
Owned basis....................................... $ 3,880.8 $ 4,049.7 $ 3,759.6
Serviced with limited recourse.................... 1,055.4 1,176.2 966.7
---------- ---------- ----------
Managed basis..................................... $ 4,936.2 $ 5,225.9 $ 4,726.3
---------- ---------- ----------
Reserves as a percentage of nonperforming loans:
Owned basis....................................... 96.7% 93.7% 92.6%
Managed basis..................................... 119.8 118.0 111.3
========== ========== ==========
42
March 31, December 31,
2004 2003
(Dollar amounts are in millions) ---------- ------------
Tangible common equity:
Common shareholder's equity...................................................... $ 17,048.6 $ 16,560.3
Exclude:
Unrealized gains on cash flow hedging instruments............................. (38.8) (97.4)
Unrealized gains on investments and interest-only strip receivables........... (215.9) (167.0)
Acquired intangibles, net..................................................... (2,749.4) (2,855.8)
Goodwill...................................................................... (6,853.1) (6,697.0)
---------- ----------
Tangible common equity........................................................... 7,191.4 6,743.1
Purchase accounting adjustments.................................................. 2,482.4 2,426.4
---------- ----------
Tangible common equity, excluding purchase accounting adjustments................ $ 9,673.8 $ 9,169.5
========== ==========
Tangible shareholder's equity:
Tangible common equity........................................................... $ 7,191.4 $ 6,743.1
Preferred stock.................................................................. 1,100.0 1,100.0
Mandatorily redeemable preferred securities of Household Capital Trusts.......... 1,029.4 1,031.2
Adjustable Conversion-Rate Equity Security Units................................. 521.8 519.1
---------- ----------
Tangible shareholder's equity.................................................... 9,842.6 9,393.4
Purchase accounting adjustments.................................................. 2,428.0 2,370.2
---------- ----------
Tangible shareholder's equity, excluding purchase accounting adjustments......... $ 12,270.6 $ 11,763.6
========== ==========
Tangible shareholder's equity plus owned loss reserves:
Tangible shareholder's equity.................................................... $ 9,842.6 $ 9,393.4
Owned loss reserves.............................................................. 3,753.0 3,793.1
---------- ----------
Tangible shareholder's equity plus owned loss reserves........................... 13,595.6 13,186.5
Purchase accounting adjustments.................................................. 2,428.0 2,370.2
---------- ----------
Tangible shareholder's equity plus owned loss reserves, excluding purchase
accounting adjustments......................................................... $ 16,023.6 $ 15,556.7
========== ==========
Tangible managed assets:
Owned assets..................................................................... $115,872.7 $119,153.9
Receivables serviced with limited recourse....................................... 24,356.9 26,200.4
---------- ----------
Managed assets................................................................... 140,229.6 145,354.3
Exclude:
Acquired intangibles, net..................................................... (2,749.4) (2,855.8)
Goodwill...................................................................... (6,853.1) (6,697.0)
Derivative financial assets................................................... (3,189.7) (3,117.7)
---------- ----------
Tangible managed assets.......................................................... 127,437.4 132,683.8
Purchase accounting adjustments.................................................. (371.3) (431.2)
---------- ----------
Tangible managed assets, excluding purchase accounting adjustments............... $127,066.1 $132,252.6
========== ==========
Equity ratios:
Common and preferred equity to owned assets...................................... 15.66% 14.82%
Tangible common equity to tangible managed assets................................ 5.64 5.08
Tangible shareholder's equity to tangible managed assets ("TETMA")............... 7.72 7.08
Tangible shareholder's equity plus owned loss reserves to tangible managed assets
("TETMA + Owned Reserves")..................................................... 10.67 9.94
Excluding purchase accounting adjustments:
Tangible common equity to tangible managed assets............................. 7.61 6.93
TETMA......................................................................... 9.66 8.89
TETMA + Owned Reserves........................................................ 12.61 11.76
========== ==========
43
Item 4. Controls and Procedures
Internal Controls In the process of finalizing our quarterly results and
the purchase price allocation resulting from our merger with HSBC, we
identified certain matters indicative of control weaknesses. On investigation
and analysis, our inquiries indicated some weaknesses in internal controls as
related to certain of our processes and we reported these to the Audit
Committee. Consequently, we determined that certain adjustments to prior fair
value estimates were necessary which resulted in a net increase to goodwill in
the approximate amount of $140 million. The adjustments related principally to
writing off several aged items remaining on intercompany accounts and to
correcting errors noted in respect of various marketing, rent and payroll
accruals that arose over several prior periods.
Management has undertaken measures to strengthen the corporation's internal
controls by dedicating additional personnel to the account reconciliation
function and by reinforcing the corporation's accounting policies governing
such items. Management and the Audit Committee continue to review these
exceptions to determine whether additional measures are required.
Disclosure Controls As of the end of the period covered by this report,
with the participation of our Chief Executive Officer and Chief Financial
Officer, we evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934). Based upon that evaluation, our Chief
Executive Officer and our Chief Financial Officer concluded that as of the end
of such period, our disclosure controls and procedures are effective in timely
alerting them to material information relating to Household International, Inc.
required to be included in our periodic reports with the Securities and
Exchange Commission.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
General We are parties to various legal proceedings resulting from ordinary
business activities relating to our current and/or former operations. Certain
of these actions are or purport to be class actions seeking damages in very
large amounts. These actions assert violations of laws and/or unfair treatment
of consumers. Due to the uncertainties in litigation and other factors, we
cannot be certain that we will ultimately prevail in each instance. We believe
that our defenses to these actions have merit and any adverse decision should
not materially affect our consolidated financial condition.
Merger Litigation Several lawsuits were filed alleging violations of law
with respect to the merger with HSBC. We believe that the claims lack merit and
the defendants deny the substantive allegations of the lawsuits. These lawsuits
are described below.
Between August 27, 2002 and January 15, 2003, derivative lawsuits on behalf
of the company and class actions on behalf of Household common stockholders
were filed against Household and certain of its officers and directors. See
Bailey v. Aldinger, et al., No 02 CH 16476 (Circuit Court, Cook County,
Illinois, Chancery Division); McLaughlin v. Aldinger, et al., No. 02 CH 20683
(Circuit Court, Cook County, Illinois, Chancery Division); Pace v. Aldinger, et
al., No. 02 CH 19270 (Circuit Court, Cook County, Illinois, Chancery Division);
Williamson v. Aldinger, et al., No. 03 600331 (United States District Court for
the Northern District of Illinois). The lawsuits principally asserted claims
for breach of fiduciary duty in connection with our restatement of earnings
announced on August 14, 2002, the allegedly improper lending practices by
Household's subsidiaries and the alleged failure by certain Household officers
to take appropriate steps to maximize the value of the merger transaction
between Household and HSBC Holdings plc announced on November 14, 2002. On
March 18, 2003, a memorandum of understanding was signed by the parties
containing the essential terms of the settlement of all four lawsuits. Those
settlement terms included a $55 million reduction in the termination fee for
the Household-HSBC merger, a supplemental disclosure to Household shareholders
in the supplemental Household proxy statement, a confirmation from Goldman
Sachs stating that as of the date of the confirmation it was aware of nothing
that would cause it to withdraw its November 14, 2002 opinion about the
fairness of the Household-HSBC merger to Household's common shareholders and
payment by the defendants of plaintiff's costs relating to notice to
stockholders as well as $2.0 million in attorneys fees for plaintiffs' counsel.
44
A stipulation reflecting the settlement was signed by the parties on September
22, 2003 and the Circuit Court, Cook County, Illinois, Chancery Division
preliminarily approved the settlement of the Bailey, McLaughlin and Pace
lawsuits on September 29, 2003 and directed that notice be provided to
Household stockholders and class members. Following the distribution of the
notice, the Circuit Court, Cook County, Illinois, Chancery Division held a
settlement fairness hearing on December 23, 2003. Issuance of a final judgment
order approving the settlement of the Bailey, McLaughlin and Pace lawsuits is
still pending. The United States District Court for the Northern District of
Illinois has delayed further action in the Williamson lawsuit until the state
court actions are resolved.
Consumer Lending Litigation During the past several years, the press has
widely reported certain industry related concerns that may impact us. Some of
these involve the amount of litigation instituted against finance and insurance
companies operating in certain states and the large awards obtained from juries
in those states (Alabama and Mississippi are illustrative). Like other
companies in this industry, some of our subsidiaries are involved in a number
of lawsuits pending against them in these states. The Alabama and Mississippi
cases, in particular, generally allege inadequate disclosure or
misrepresentation of financing terms. In some suits, other parties are also
named as defendants. Unspecified compensatory and punitive damages are sought.
Several of these suits purport to be class actions or have multiple plaintiffs.
The judicial climate in these states is such that the outcome of all of these
cases is unpredictable. Although our subsidiaries believe they have substantive
legal defenses to these claims and are prepared to defend each case vigorously,
a number of such cases have been settled or otherwise resolved for amounts that
in the aggregate are not material to our operations. Appropriate insurance
carriers have been notified of each claim, and a number of reservations of
rights letters have been received. Certain of the financing of merchandise
claims have been partially covered by insurance.
On November 25, 2003, we announced the proposed settlement of nationwide
class action litigation with the Association of Community Organizations for
Reform Now ("ACORN") and certain borrowers relating to the mortgage lending
practices of HFC's retail branch consumer lending operations (the "ACORN
Settlement Agreement"). Pursuant to the ACORN Settlement Agreement, HFC will
provide monetary relief for certain class members who did not participate in
the settlement with the state attorneys general and regulatory agencies, as
described above, and non-monetary relief for all class members, including those
who participated in the settlement, amongst other relief. The ACORN Settlement
Agreement was approved by the United States District Court for the Northern
District of California on April 30, 2004. The agreed upon relief will not have
a material impact to our financial condition or operating model.
Securities Litigation In August 2002, we restated previously reported
consolidated financial statements. The restatement related 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 auditor, KPMG LLP,
advised us that, in its view, these payments should have either been charged
against earnings at the time they were made or amortized over a shorter period
of time. The restatement resulted in a $155.8 million, after-tax, retroactive
reduction to retained earnings at December 31, 1998. As a result of the
restatement, and other corporate events, including, e.g. the 2002 settlement
with 50 states and the District of Columbia relating to real estate lending
practices, Household, and its directors, certain officers and former auditors,
have been involved in various legal proceedings, some of which purport to be
class actions. A number of these actions allege violations of federal
securities laws, were filed between August and October 2002, and seek to
recover damages in respect of allegedly false and misleading statements about
our common stock. To date, none of the class claims has been certified. These
legal actions have been consolidated into a single purported class action,
Jaffe v. Household International, Inc., et al., No. 02 C 5893 (N.D. Ill., filed
August 19, 2002), and a consolidated and amended complaint was filed on March
7, 2003. The amended complaint purports to assert claims under the federal
securities laws, on behalf of all persons who purchased or otherwise acquired
Household securities between October 23, 1997 and October 11, 2002, arising out
of alleged false and misleading statements in connection with Household's sales
and lending practices, the 2002 state settlement agreement referred to above,
the restatement and the HSBC merger. The amended
45
complaint, which also names as defendants Arthur Andersen LLP, Goldman, Sachs &
Co., and Merrill Lynch, Pierce, Fenner & Smith, Inc., fails to specify the
amount of damages sought. In May 2003, we, and other defendants, filed a motion
to dismiss the complaint. On March 19, 2004, the Court granted in part, and
denied in part the defendant's motion to dismiss the complaint. The Court
dismissed all claims against Merrill Lynch, Pierce, Fenner & Smith, Inc. and
Goldman Sachs & Co. The Court also dismissed certain claims alleging strict
liability for alleged misrepresentation of material facts based on statute of
limitations grounds. The claims that remain against some or all of the
defendants essentially allege the defendants knowingly made a false statement
of a material fact in conjunction with the purchase or sale of securities, that
the plaintiffs justifiably relied on such statement, the false statement(s)
caused the plaintiffs' damages, and that some or all of the defendants should
be liable for those alleged statements. Discovery has begun.
Other actions arising out of the restatement, which purport to assert claims
under ERISA on behalf of participants in Household's Tax Reduction Investment
Plan, have been consolidated into a single purported class action, In re
Household International, Inc. ERISA Litigation, Master File No. 02 C 7921 (N.D.
Ill). A consolidated and amended complaint was filed against Household, William
Aldinger and individuals on the Administrative Investment Committee of the
plan. The consolidated complaint purports to assert claims under ERISA that are
similar to the claims in the Jaffe case. Essentially, the plaintiffs allege
that the defendants breached their fiduciary duties to the plan by investing in
Household stock and failing to disclose information to Plan participants. A
motion to dismiss the complaint was filed in June 2003. On March 30, 2004, the
Court granted in part, and denied in part, the defendants' motion to dismiss
the complaint. The Court dismissed all claims alleging that some or all of the
defendants breached their co-fiduciary obligations; misrepresented the prudence
of investing in Household stock; failed to disclose nonpublic information
regarding alleged accounting and lending improprieties; and failed to provide
other defendants with non-public information. The claims that remain
essentially allege that some or all of the defendants failed to prudently
manage plan assets by continuing to invest in, or provide matching
contributions of, Household stock. Discovery has begun.
On June 27, 2003, a case entitled, West Virginia Laborers Pension Trust Fund
v. Caspersen, et al., was filed in the Chancery Division of the Circuit Court
of Cook County, Illinois as case number 03CH10808. This purported class action
names as defendants the directors of Beneficial Corporation at the time of the
1998 merger of Beneficial Corporation into a subsidiary of Household, and
claims that those directors' due diligence of the Company at the time they
considered the merger was inadequate. The Complaint claims that as a result of
some of the securities law and other violations alleged in the Jaffe case, the
Company's common shares lost value. Under the merger agreement with Beneficial
Corporation, we assumed the defense of this litigation. In September of 2003,
the defendants filed a motion to dismiss. Plaintiffs conducted limited
discovery relating to the jurisdictional issues raised in the defendants'
motion to dismiss. Briefs for that motion are being prepared. The insurance
carriers for Beneficial Corporation have been notified of the action.
With respect to these securities litigation matters, we believe that we have
not, and our officers and directors have not, committed any wrongdoing and in
each instance there will be no finding of improper activities that may result
in a material liability to us or any of our officers or directors.
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.
31 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.1 Debt and Preferred Stock Securities Ratings.
(b) Reports on Form 8-K
46
During the first quarter of 2004, the Registrant filed a Current Report
on Form 8-K on March 1, 2004 with respect to the financial supplement
pertaining to the financial results of Household International, Inc. for the
quarter and twelve months ended December 31, 2003
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: May 17, 2004
/s/ Simon C. Penney
-----------------------------
Simon C. Penney
Senior Executive Vice
President and
Chief Financial Officer
EXHIBIT INDEX
12 Statement of Computation of Ratio of Earnings to Fixed Charges and to Combined Fixed Charges and
Preferred Stock Dividends.
31 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.1 Debt and Preferred Stock Securities Ratings.
47
EXHIBIT 12
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Three
months March 29 January 1
ended through through
March 31, March 31, March 28,
2004 2003 2003
(In millions) ----------- ----------- -------------
(Successor) (Successor) (Predecessor)
Net income..................................................... $ 481.1 $ 9.7 $ 245.7
Income taxes................................................... 240.8 5.0 181.8
-------- ----- --------
Income before income taxes..................................... 721.9 14.7 427.5
-------- ----- --------
Fixed charges:
Interest expense (1)........................................ 637.3 14.6 898.1
Interest portion of rentals (2)............................. 13.8 .6 18.2
-------- ----- --------
Total fixed charges............................................ 651.1 15.2 916.3
-------- ----- --------
Total earnings as defined...................................... $1,373.0 $29.9 $1,343.8
======== ===== ========
Ratio of earnings to fixed charges............................. 2.11 1.97 1.47(4)
Preferred stock dividends (3).................................. 26.9 -- 33.4
Ratio of earnings to combined fixed charges and preferred stock
dividends.................................................... 2.03 1.97 1.41(4)
-------- ----- --------
--------
(1)For financial statement purposes for the periods January 1 through March 28,
2003 and March 29 through March 31, 2003, these amounts are reduced for
income earned on temporary investment of excess funds, generally resulting
from over-subscriptions of commercial paper issuances.
(2)Represents one-third of rentals, which approximates the portion representing
interest.
(3)Preferred stock dividends are grossed up to their pretax equivalents.
(4)The ratios for the period January 1 through March 28, 2003 have been
negatively impacted by $167.3 million (after-tax) of HSBC acquisition
related costs and other merger related items incurred by Household.
Excluding these charges, our ratio of earnings to fixed charges would have
been 1.69 percent and our ratio of earnings to combined fixed charges and
preferred stock dividends would have been 1.63 percent. These non-GAAP
financial ratios are provided for comparison of our operating trends only.
EXHIBIT 31
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
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 report on Form 10-Q of Household International, Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 17, 2004
/s/ William F. Aldinger
-----------------------------
William F. Aldinger
Chairman and Chief Executive
Officer
Certification of Chief Financial Officer
I, Simon C. Penney, Senior Executive Vice President and Chief Financial Officer
of Household International, Inc., certify that:
1. I have reviewed this report on Form 10-Q of Household International, Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 17, 2004
/s/ Simon C. Penney
-----------------------------
Simon C. Penney
Senior Executive Vice
President and
Chief Financial Officer
EXHIBIT 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
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 March 31, 2004 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.
/s/ William F. Aldinger
-----------------------------
William F. Aldinger
Chairman and Chief Executive
Officer
May 17, 2004
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 March 31, 2004 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Simon C. Penney, Senior Executive Vice President and Chief 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/ Simon C. Penney
-----------------------------
Simon C. Penney
Senior Executive Vice
President and
Chief Financial Officer
May 17, 2004
This certification accompanies each Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
Signed originals of these written statements required by Section 906 of the
Sarbanes-Oxley Act of 2002 have been provided to Household International, Inc.
and will be retained by Household International, Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.
EXHIBIT 99.1
HOUSEHOLD INTERNATIONAL, INC. AND SUBSIDIARIES
DEBT AND PREFERRED STOCK SECURITIES RATINGS
Standard Moody's
& Poor's Investors
Corporation Service Fitch, Inc.
----------- --------- -----------
At March 31, 2004
Household International, Inc.
Senior debt............... A A2 A
Preferred stock........... BBB+ Baa1 A-
Household Finance Corporation
Senior debt............... A A1 A
Senior subordinated debt.. A- A2 A-
Commercial paper.......... A-1 P-1 F-1
HFC Bank plc
Senior debt............... A A1 A
Commercial paper.......... A-1 P-1 F-1
Household Bank (SB), N.A.
Senior debt............... A A1 A
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