FORM 10-Q
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 June 30, 1998
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 No. 0-13295
CATERPILLAR FINANCIAL SERVICES CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE
37-1105865
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
3322 WEST END AVENUE, NASHVILLE, TENNESSEE 37203-0983
(Address of principal executive offices)
Registrant's telephone number, including area code:
(615) 386-5800
The Registrant complies with the conditions set forth in General
Instruction (H)(1)(a) and (b) of Form 10-Q is therefore filing this
form with the reduced disclosure format.
Indicate by a 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 June 30, 1998 one share of common stock of the Registrant
was outstanding.
HIGHLIGHTS: SECOND QUARTER 1998 VS. SECOND QUARTER 1997
Caterpillar Financial Services Corporation reported record revenues
and new retail financing activity.
Revenues were a record $255.1 million, an increase of $65.7 million
or 35% from last year.
Profit was $25.5 million, a $3.6 million or 16% increase compared
with 1997.
New retail financing business was a record of $1,660.4 million, an
increase of $541.2 million or 48% from 1997.
As a result of record new business and a $1 billion purchase of
trade receivables from Caterpillar Inc., the portfolio increased
45% over the same period last year to more than $10.0 billion.
James S. Beard, vice president of Caterpillar Inc. and
president of Caterpillar Financial Services Corporation said, "Cat
Financial's service to Caterpillar customers and dealers continues
at high levels. As a result, we achieved record new business
volume while the credit quality of the worldwide portfolio remains
excellent. These achievements are made possible by our employees'
commitment to customer satisfaction and process improvements."
Caterpillar Financial Services Corporation
Form 10-Q for the Quarter Ended June 30, 1998
Index
PART I. FINANCIAL INFORMATION Page
No.
Item 1. Financial Statements (Unaudited)
Consolidated Statement of Financial Position 4
Consolidated Results of Operations 5
Consolidated Statement of Changes in Equity 6
Consolidated Statement of Cash Flows 7
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 8-11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
In addition to our accompanying unaudited consolidated financial
statements, we suggest that you read our Annual Report on Form 10-
K. Although not incorporated by reference in this document,
additional information about us is available in our 1997 Annual
Report and on our web page http://www.CAT.com. The documents
mentioned above are available by writing to: Legal Dept.,
Caterpillar Financial Services Corp.; 3322 West End Ave.;
Nashville, TN 37203.
We believe this information reflects all adjustments, including
normal and recurring accruals, necessary to fairly present the
consolidated statements of financial position, results of
operations, changes in equity, and cash flows for the periods
presented. The results for interim periods do not necessarily
indicate the results we expect for the year.
Caterpillar Financial Services Corporation
Consolidated Statement Of Financial Position
(Unaudited)
(Millions of Dollars)
June 30, Dec. 31, June
30,
1998 1997 1997
Assets:
Cash and cash equivalents $ 45.2 $ 41.5 $ 75.3
Finance receivables
Wholesale notes receivable 2,081.2 497.9 848.0
Retail notes receivable 2,115.9 1,852.1 1,648.1
Investment in finance receivables 6,134.7 4,993.6 4,567.3
10,331.8 7,343.6 7,063.4
Less: Unearned income 836.7 661.8 626.9
Allowance for credit losses 114.3 83.5 81.2
9,380.8 6,598.3 6,355.3
Equipment on operating leases,
less accumulated depreciation 612.2 558.7 554.5
Deferred income taxes 5.7 4.6 3.6
Other assets 292.0 223.7 216.9
Total assets $10,335.9 $7,426.8 $7,205.6
Liabilities and stockholder's equity:
Payable to dealers and others $ 131.3 $ 84.9 $ 99.5
Payable to Caterpillar Inc. - 46.0 243.5 354.0
Borrowings
Payable to Caterpillar Inc. - Other 6.1 4.1 4.1
Accrued interest payable 70.9 47.3 41.5
Income taxes payable 85.2 81.4 63.1
Other liabilities 23.3 22.2 15.5
Short-term borrowings 3,142.4 2,731.5 2,546.0
Current maturities of long-term 1,559.9 1,087.9 1,093.1
debt
Long-term debt 4,243.5 2,274.2 2,225.7
Deferred income taxes 22.2 38.7 34.7
Total liabilities 9,330.8 6,615.7 6,477.2
Common stock - $1 par value
Authorized: 2,000 shares
Issued and outstanding: One 545.0 395.0 345.0
share
Retained Earnings 492.0 442.7 397.5
Foreign currency translation (31.9) (26.6) (14.1)
adjustment
Total stockholder's equity 1,005.1 811.1 728.4
Total liabilities and stockholder's $10,335.9 $7,426.8 $7,205.6
Equity
Caterpillar Financial Services Corporation
Consolidated Results of Operations
(Unaudited)
(Millions of Dollars)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
Revenues:
Wholesale finance $ 35.1 $ 11.0 $ 54.9 $ 16.5
Retail finance 152.4 121.3 291.8 239.4
Rental 50.8 44.3 99.0 85.9
Other 16.8 12.8 31.8 30.6
Total revenues 255.1 189.4 477.5 372.4
Expenses:
Interest 125.1 87.8 230.6 167.3
Depreciation 40.3 34.0 78.0 65.9
General, operating, and 30.2 23.0 56.6 44.3
administrative
Provision for credit 18.1 9.6 33.4 18.2
losses
Other expense 1.0 .7 1.2 .8
Total expenses 214.7 155.1 399.8 296.5
Profit before income 40.4 34.3 77.7 75.9
taxes
Provision for income 14.9 12.4 28.4 27.0
taxes
Profit $ 25.5 $ 21.9 $ 49.3 $ 48.9
Caterpillar Financial Services Corporation
Consolidated Statement Of Changes in Equity
(Unaudited)
(Millions of Dollars)
Six Months Ended
June 30, June 30,
1998 1997
Retained earnings:
Balance at January 1 $442.7 $ 348.6
Profit 49.3 $ 49.3 48.9 48.9
Balance at June 30 $492.0 $ 397.5
Accumulated other
comprehensive income:
Balance at January 1 $(26.6) $1.8
Foreign currency (5.3) (5.3) (15.9) (15.9)
translation adjustment
Comprehensive income $44.0 $ 33.0
Balance at June 30 $(31.9) $(14.1)
Paid-in capital
Balance at January 1 $395.0 $ 345.0
Equity capital from 150.0 -
Caterpillar
Balance at June 30 $ 545.0 $ 345.0
Total equity $ 1,005.1 $ 728.4
Caterpillar Financial Services Corporation
Consolidated Statement Of Cash Flows
(Unaudited)
(Millions of Dollars)
Six months Ended
June 30, June 30,
1998 1997
Cash flows from operating activities:
Profit $49.3 $ 48.9
Adjustments for non-cash items:
Depreciation 78.0 65.9
Provision for credit losses 33.4 18.2
Other (9.2) (8.3)
Change in assets and liabilities:
Receivables from customers and others (107.3) (59.2)
Deferred income taxes (17.6) (6.2)
Payable to dealers and others 46.9 12.9
Payable to Caterpillar Inc. - Other .5 (1.2)
Accrued interest payable 23.6 2.4
Income taxes payable 4.1 22.9
Other, net (10.7) (10.0)
Net cash provided by operating 91.0 86.3
activities
Cash flows from investing activities:
Additions to property and equipment (172.4) (153.6)
Disposals of equipment 54.9 65.3
Additions to finance receivables (7,611.7) (3,236.2)
Collections of finance receivables 4,166.9 1,546.7
Proceeds from sales of receivables 585.3 847.8
Other, net 1.0 (8.6)
Net cash used for investing activities (2,976.0) (938.6)
Cash flows from financing activities:
Additional paid-in capital 150.0 -
Payable to Caterpillar Inc. - borrowings (193.3) 206.0
Proceeds from long-term debt 3031.1 1,275.5
Payments on long-term debt (589.7) (556.5)
Short-term borrowings, net 488.1 ( 24.4)
Net cash provided by financing 2,886.2 900.6
activities
Effect of exchange rate changes on cash and 2.5 -
cash equivalents
Net change in cash and cash equivalents 3.7 48.3
Cash and cash equivalents at beginning of 41.5 27.0
period
Cash and cash equivalents at end of period $ 45.2 $ 75.3
Cash paid for interest $ 220.2 $ 169.5
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
THREE MONTHS ENDED JUNE 30, 1997 VS. THREE MONTHS ENDED JUNE 30,
1998
REVENUES
Total revenues for the second quarter of 1998 were a record
$255.1 million. The increase of $65.7 million over the same period
last year was primarily the result of continued portfolio growth.
$20.9 million of the increase resulted from the revenue earned on
trade receivables purchased from Caterpillar Inc. ("Caterpillar")
this year.
The annualized interest rate on finance receivables was 8.7%
for the second quarter of 1998 compared with 8.6% for the second
quarter of 1997. The tax benefits of governmental lease purchase
contracts and tax-oriented leases are not included in these
annualized interest rates.
Other revenue of $16.8 million for the second quarter of 1998,
an increase of $4.0 million from the same period last year,
included securitization-related revenue, fees, and other
miscellaneous revenue.
EXPENSES
Interest expense for the second quarter increased $37.3 million
over the same period last year. This increase was primarily the
result of increased borrowings. The average interest rate on
borrowed funds was 6.0% for the second quarter of 1998 as compared
to 5.9% for the second quarter of 1997.
Depreciation expense increased $6.3 million over the second
quarter of 1997 due to new operating lease business. Net equipment
on operating leases increased $57.7 million over the second quarter
of 1997.
General, operating, and administrative expenses increased $7.2
million during the second quarter of 1998 as compared to the same
period last year. This increase is primarily due to staff-related
expenses and other expenses incurred due to increased new business
and geographical expansion. The number of full-time employees
increased to 777 at June 30, 1998, an increase of 159 from last
year's second quarter.
The provision for credit losses increased $8.5 million over the
second quarter of 1997 due to record new business.
PROFIT
Profit for the second quarter of 1998 was $25.5 million, a $3.6
million increase from the second quarter of 1997. This increase is
primarily the result of a larger portfolio, partially offset by a
higher provision for credit losses due to record new business.
PORTFOLIO
The net portfolio balance was $10,040.0 million at June 30,
1998, an increase of $3,102.2 million over the same period last
year.
During the second quarter of 1998, we financed new retail
business transactions totaling $1,660.4 million as compared to
$1,119.2 million during the second quarter of 1997. This increase
resulted primarily from financing an increased percentage of
deliveries of Caterpillar product at a higher average cost per
unit.
At June 30, 1998, we serviced $1,200.6 million in receivables
sold to others which consist of $600.0 million in wholesale
receivables, under a revolving asset-backed securitization
agreement, and $600.6 million of installment sale contracts.
In January 1998, we entered into an agreement with Caterpillar
to purchase certain U.S. dealer receivables from Caterpillar at a
discount. Under this agreement Caterpillar will continue to
service the receivables. On a weekly basis, we use a portion of
the collections from these receivables to purchase more
receivables. At June 30, 1998, the balance of receivables owned by
us and serviced by Caterpillar was $1,014.9 million, which is
classified as wholesale notes receivable.
ALLOWANCE FOR CREDIT LOSSES
The following table shows activity related to the Allowance for
Credit Losses:
June 30, June 30,
1998 1997
Balance at beginning of quarter $ 99.3 $ 79.2
Provision for credit losses 18.1 9.6
Receivables written off, net of (2.2) (3.3)
recoveries
Foreign currency translation adjustment (.9) (4.3)
$ 114.3 $ 81.2
Receivables that were past due over 30 days were 1.2% of the
total receivables at June 30, 1998 (1.4% excluding the $1,014.9
million in trade receivables serviced by Caterpillar), as compared
to 1.9% at June 30, 1997. We will continue to monitor the
allowance for credit losses to provide for an amount we believe is
adequate, after considering the value of any collateral, to cover
uncollectible receivables.
SIX MONTHS ENDED JUNE 30, 1997 VS. SIX MONTHS ENDED JUNE 30, 1998
REVENUES
Total revenues for the first six months of 1998 were a record
$477.5 million. The increase of $105.1 million over the same
period last year was primarily the result of continued portfolio
growth.
The annualized interest rate on finance receivables was 8.7% for
the first six months of 1998 compared with 8.6% for the first six
months of 1997. The tax benefits of governmental lease purchase
contracts and tax-oriented leases are not included in these
annualized interest rates.
Other revenue of $31.8 million for the first six months of 1998
included securitization-related revenue, fees, and other
miscellaneous revenue.
EXPENSES
Interest expense for the first six months increased $63.3
million over the same period last year. This increase was
primarily the result of increased borrowings. The average interest
rate on borrowed funds was 6.0% for the first six months of 1998 as
compared to 5.9% for the first six months of 1997.
Depreciation expense increased $12.1 million over the first six
months of 1997 due to new operating lease business.
General, operating, and administrative expenses increased $12.3
million during the first six months of 1998 as compared to the same
period last year. This increase is primarily due to staff-related
expenses and other expenses incurred due to increased new business
and geographical expansion.
The provision for credit losses increased $15.2 million over the
first six months of 1997 due to record new business.
PROFIT
Profit for the first six months of 1998 was $49.3 million, a $.4
million increase from the first six months of 1997. Profit was
significantly impacted by the additional provision for credit
losses taken as a result of record new business.
PORTFOLIO
During the first six months of 1998, we financed new retail
business transactions totaling $2,906.5 million as compared to
$1,972.6 million during the first six months of 1997. This
increase resulted primarily from financing an increased percentage
of deliveries of Caterpillar product at a higher average cost per
unit.
ALLOWANCE FOR CREDIT LOSSES
The following table shows activity related to the Allowance for
Credit Losses:
June 30, June 30,
1998 1997
Balance at beginning of year $ 83.5 $ 74.4
Provision for credit losses 33.4 18.2
Receivables written off, net of (1.8) (6.2)
recoveries
Foreign currency translation adjustment (.8) (5.2)
$ 114.3 $ 81.2
CAPITAL RESOURCES AND LIQUIDITY
Operations for the first half of 1998 were funded with a
combination of bank borrowings, commercial paper, equity capital
invested by Caterpillar Inc., medium-term notes and retained
earnings.
At June 30, 1998, we had the following credit lines available:
Short-term credit lines from banks. These credit lines total
$550.8 million and will be eligible for renewal at various dates
throughout 1998. They are used for bank borrowings and as
support for our outstanding commercial paper and commercial paper
guarantees. At June 30, 1998, we had $152.9 million outstanding
against these credit lines.
Variable amount lending agreements with Caterpillar. Under these
agreements, we may borrow up to $831.3 million from Caterpillar,
and Caterpillar may borrow up to $531.7 million from us. The
agreements are in effect for indefinite periods of time and may
be changed or terminated by either party with 30 days' notice.
We had borrowings of $46.0 million outstanding at June 30,1998
and $243.5 million at December 31, 1997, but had no loans
receivable under these agreements.
Two syndicated revolving credit lines. The two revolving credit
lines totaling $2,500.0 million are shared with Caterpillar with
the following allocation:
Five-year 364-day Total
Facility Facility
Caterpillar $ 187.5 $ 62.5 $ 250.0
Caterpillar Financial 1,687.5 562.5 2,250.0
Services Corp.
Total $1,875.0 $ 625.0 $2,500.0
We can request a change to this distribution to maintain the
required amount of support for our outstanding commercial paper
and guarantees of commercial paper. At June 30, 1998, there were
no borrowings under these lines.
European revolving credit line. This $1.0 billion credit line
supports our Euro-commercial paper and certificate of deposit
program. Under this program, commercial paper and certificates
of deposit are issued by us, or by our Irish subsidiaries with
our guarantee. At June 30, 1998, there were no borrowings under
this credit line.
Total outstanding borrowings at June 30, 1998 were $8,991.8
million, an increase of $2,654.7 million over December 31, 1997.
Outstanding borrowings primarily include:
$5,764.1 million of medium-term notes
$2,932.0 million of commercial paper
$152.9 million of bank borrowings
Caterpillar Inc. contributed an additional $100.0 million of
equity capital in January and an additional $50.0 million in May.
Our debt-to-equity ratio at June 30, 1998 was 8.9 to 1 as compared
to 7.8 to 1 at December 31, 1997 and 8.5 to 1 at June 30, 1997.
Changes in this ratio are due to seasonal activity. We are in
compliance with the requirements of the debt covenant covering our
revolving credit facilities.
DERIVATIVES
We use interest rate derivative financial instruments and
currency derivative financial instruments to manage interest rate
and foreign currency exchange risks that we may encounter as a part
of our normal business. We do not use these instruments for
trading purposes.
Interest rate derivatives. We use interest rate swap agreements to
manage the risk of changes in interest rates, allowing us to gain
competitive and economic advantages by minimizing funding costs
regardless of the direction interest rates move. At June 30,
1998, we had interest rate swap contracts outstanding with
notional amounts totaling $2,237.6 million and terms up to five
years. These contracts change:
$1,409.6 million of floating rate debt to fixed rate debt
$667.5 million of fixed rate debt to floating rate debt
$160.5 million of floating rate debt to floating rate debt having
different characteristics
Foreign currency derivatives. We use foreign exchange contracts to
minimize potential risk of fluctuating exchange rates. These
contracts have terms that generally range up to three months. At
June 30, 1998, we had foreign exchange contracts totaling
$1,231.8 million, $4.3 million of which were with Caterpillar.
They hedge foreign currency denominated receivables and debt of
international subsidiaries.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This Statement
requires that an entity recognize all derivatives as either assets
or liabilities in the statement of financial position and measure
those instruments at fair value. We will be required to adopt this
new accounting standard by January 1, 2000. We do not anticipate
early adoption. Due to the recent release and complexity of this
new standard, we have not completed an assessment of the impact it
will have on our financial position or results of operations.
SUBSEQUENT EVENT
In July 1998, we securitized $605.7 million of Installment
Sales Contracts and Finance Leases. The gain on the securitization
is $6.9 million.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
12 Statement setting forth computation of Ratio of
Profit to Fixed Charges.
27 Financial Data Schedule
(b) Reports on Form 8-K
We filed a report on form 8-K dated June 4, 1998. The form
contained a press release announcing the receipt of a banking
license by Caterpillar International Bank plc, one of our
Irish subsidiaries.
Signatures
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.
Caterpillar Financial Services Corporation
(Registrant)
Date: July 31, 1998 By: /s/K.C. Springer
K.C. Springer,
Controller and
Principal Accounting Officer
Date: July 31, 1998 By: /s/J.S. Beard
J.S. Beard,
President
EXHIBIT 12
CATERPILLAR FINANCIAL SERVICES CORPORATION
COMPUTATION OF RATIO OF PROFIT TO FIXED CHARGES
(Unaudited)
(Millions of Dollars)
Three Months Six Months
Ended Ended
June June June June
30, 30, 30, 30,
1998 1997 1998 1997
Net Income $ 25.5 $ 21.9 $ 49.3 $ 48.9
Add:
Provision for income taxes 14.9 12.4 28.4 27.0
Deduct:
Equity in profit of (1.5) (.7) (2.2) (1.2)
partnerships
Profit before taxes $ 38.9 $ 33.6 $ 75.5 $ 74.7
Fixed charges:
Interest on borrowed funds $125.1 $ 87.8 $230.6 $167.3
Rentals at computed interest* 1.0 .7 1.9 1.3
Total fixed charges 126.1 $ 88.5 232.5 $168.6
Profit before taxes plus fixed 165.0 $122.1 308.0 $243.3
charges
Ratio of profit before taxes
plus 1.31 1.38 1.32 1.44
fixed charges to fixed charges
*Those portions of rent expense that are representative of interest
cost.
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This schedule contains summary financial information extracted from our second
quarter 1998 10-Q and is qualified in its entirety by refernce to such financial
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