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 September 30, 1999
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 (I.R.S. Employer
jurisdiction of Identification
incorporation or No.)
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 September 30, 1999 one share of common stock of the
Registrant was outstanding.
HIGHLIGHTS: THIRD QUARTER 1999 VS. THIRD QUARTER 1998
Caterpillar Financial Services Corporation (Cat Financial)
reports record revenues of $303 million for the third quarter of
1999.
Profit was a record $37 million, a $2 million or 6% increase
from third quarter of 1998.
The portfolio increased $1.15 billion, or 11% to $11.57
billion.
James S. Beard, vice president of Caterpillar Inc. and president of
Cat Financial, said, "We are pleased with our financial results,
as our people and technology assist a growing number of Caterpillar
users and dealers world-wide."
Caterpillar Financial Services Corporation
Form 10-Q for the Quarter Ended September 30, 1999
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 8-12
Results of Operations and Financial Condition
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
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 1998 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 normal and recurring
adjustments 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)
September December September
30, 31, 30,
1999 1998 1998
Assets:
Cash and cash equivalents $ 52 $ 49 $ 63
Finance receivables
Retail notes receivable 2,481 2,283 2,145
Wholesale notes receivable 2,366 2,110 2,505
Investment in finance receivables 6,961 6,351 6,005
11,808 10,744 10,655
Less: Unearned income 934 852 819
Allowance for credit losses 144 111 101
10,730 9,781 9,735
Equipment on operating leases,
less accumulated depreciation 787 716 630
Deferred income taxes 9 8 6
Notes receivable from Caterpillar 226 246 -
Other assets 361 335 290
Total assets $12,165 $11,135 $10,724
Liabilities and stockholder's equity:
Payable to dealers and others $ 119 $ 113 $ 91
Notes payable to Caterpillar Inc. 214 212 45
Payable to Caterpillar Inc. - Other 6 5 82
Accrued interest payable 127 85 122
Income taxes payable 14 106 20
Other liabilities 26 31 66
Short-term borrowings 2,090 3,113 2,973
Current maturities of longterm debt 2,885 2,179 1,853
Long-term debt 5,284 4,058 4,321
Deferred income taxes 34 32 27
Total liabilities 10,799 9,934 9,600
Common stock - $1 par value
Authorized: 2,000 shares
Issued and outstanding: One share 745 675 625
Retained Earnings 658 554 527
Accum. other comprehensive income (37) (28) (28)
Total stockholder's equity 1,366 1,201 1,124
Total liabilities and stockholder's
equity $12,165 $11,135 $10,724
Caterpillar Financial Services Corporation
Consolidated Results of Operations
(Unaudited)
(Millions of Dollars)
Three Months Ended Nine months Ended
September September September September
30, 30, 30, 30,
1999 1998 1999 1998
Revenues:
Wholesale finance $ 47 $ 46 $ 127 $ 101
Retail finance 173 159 509 451
Rental 62 53 182 152
Other 21 25 62 56
Total revenues 303 283 880 760
Expenses:
Interest 144 136 416 366
Depreciation 49 42 142 120
General, operating and
administrative 38 30 109 88
Provision for credit losses 13 18 50 51
Other expense 1 - 1 1
Total expenses 245 226 718 626
Profit before income taxes 58 57 162 134
Provision for income taxes 21 22 58 50
Profit $ 37 $ 35 $ 104 $ 84
Caterpillar Financial Services Corporation
Consolidated Statement Of Changes in Equity
(Unaudited)
(Millions of Dollars)
Nine Months Ended
September 30, September 30,
1999 1998
Retained earnings:
Balance at January 1 $ 554 $ 443
Profit 104 $ 104 84 $ 84
Balance at September 30 658 527
Accumulated other comprehensive
income:
Balance at January 1 (28) (27)
Foreign currency
translation adj. (9) (9) (1) (1)
Comprehensive income $ 95 $ 83
Balance at September 30 (37) (28)
Paid-in capital:
Balance at January 1 675 395
Equity capital from
Caterpillar 70 230
Balance at September 30 745 625
Total equity $ 1,366 $ 1,124
Caterpillar Financial Services Corporation
Consolidated Statement of Cash Flows
(Unaudited)
(Millions of Dollars)
Nine months Ended
September September
30, 30,
1999 1998
Cash flows from operating activities:
Profit $ 104 $ 84
Adjustments for non-cash items:
Depreciation 142 120
Provision for credit losses 50 51
Other (9) (31)
Change in assets and liabilities:
Receivables from customers and others (71) (84)
Deferred income taxes 2 (14)
Payable to dealers and others 7 84
Accrued interest payable 42 75
Income taxes payable (93) (61)
Other, net (3) 37
Net cash provided by operating activities
171 261
Cash flows from investing activities:
Additions to property and equipment (298) (236)
Disposals of equipment 132 76
Additions to finance receivables (11,990) (10,933)
Collections of finance receivables 10,029 6,407
Proceeds from sales of receivables 921 1,332
Notes receivable from Caterpillar Inc. 21 -
Other, net 1 1
Net cash used for investing activities (1,184) (3,353)
Cash flows from financing activities:
Additional paid-in capital 70 230
Payable to Caterpillar Inc. - borrowings 52 (195)
Proceeds from long-term debt 3,477 3,601
Payments on long-term debt (1,544) (789)
Short-term borrowings, net (1,035) 272
Net cash provided by financing 1,020 3,119
activities
Effect of exchange rate changes on cash and
cash equivalents (4) (6)
Net change in cash and cash equivalents 3 21
Cash and cash equivalents at beginning of
period 49 42
Cash and cash equivalents at end of period $ 52 $ 63
Cash paid for interest $ 361 $ 318
NOTES TO FINANCIAL STATEMENTS
A. Supplemental segment data for the three months ended
September 30,
1999 U.S. Europe All Total
Other
Revenue from external
customers $ 217 43 43 $ 303
Inter-segment revenue $ 16 1 - $ 17
Profit $ 28 4 5 $ 37
Assets $10,446 1,946 1,832 $14,224
1998 U.S. Europe All Total
Other
Revenue from external
customers $ 201 40 41 $ 282
Inter-segment revenue $ 6 1 - $ 7
Profit $ 27 2 6 $ 35
Assets $ 8,490 1,551 1,630 $ 11,671
Supplemental segment data for the nine months ended
September 30,
1999 U.S. Europe All Total
Other
Revenue from external
customers $ 632 124 124 $ 880
Inter-segment revenue $ 32 2 - $ 34
Profit $ 82 10 12 $ 104
1998 U.S. Europe All Total
Other
Revenue from external
customers $ 548 110 102 $ 760
Inter-segment revenue $ 16 2 - $ 18
Profit $ 69 7 8 $ 84
Due to accounting differences in the presentation of
supplemental data and our GAAP-based external statements, total
segment information may not equal amounts reflected in our GAAP
statements.
B. Cash paid for income taxes
Cash paid for income taxes during the third quarter of 1999 was
$21 million. Under our tax sharing agreement with Caterpillar we
pay to, or receive from Caterpillar, our allocated share of federal
income taxes or credits in the U.S. and Australia. In the past, we
have made payments as requested by Caterpillar, based on actual tax
settlements. Beginning January 1999, we agreed to make quarterly
payments to Caterpillar based on estimated tax liabilities.
C. 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 entities recognize all derivatives as either assets
or liabilities in the statement of financial position and measure
those instruments at fair value. During the third quarter of 1999,
an amendment to the Statement changed the implementation date of
this standard to January 1, 2001. We have not elected early
adoption. We continue to assess the impact this requirement will
have on our financial position and results of operations.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
THREE MONTHS ENDED SEPTEMBER 30, 1998 VS. THREE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES
Total revenues for the third quarter of 1999 were a record $303
million. The increase of $20 million over the same period last
year was primarily the result of continued portfolio growth.
The annualized interest rate on finance receivables was 8.03%
for the third quarter of 1999 compared with 8.76% for the third
quarter of 1998. The tax benefits of governmental lease purchase
contracts and tax-oriented leases are not included in these
annualized interest rates.
Other revenue of $21 million for the third quarter of 1999, a
decrease of $4 million from the same period last year, included
securitization-related revenue, fees and other miscellaneous
revenue.
EXPENSES
Interest expense for the third quarter of 1999 increased $8
million over the same period last year. This increase was
primarily the result of increased borrowings partially offset by
lower borrowing rates. The average interest rate on borrowed funds
was 5.28% for the third quarter of 1999 as compared to 5.99% for
the third quarter of 1998.
Depreciation expense increased $7 million over the third
quarter of 1998 due to new operating lease business.
General, operating and administrative expenses increased $8
million during the third quarter of 1999 as compared to the same
period last year. This increase is primarily due to staff-related
expenses and other expenses incurred to support the larger
portfolio and geographic expansion. There were 927 employees at
September 30, 1999, an increase of 131 from last year's third
quarter.
The provision for credit losses decreased from $18 million for
the third quarter of 1998 to $13 million for the third quarter of
1999 based upon the adequacy of the allowance account.
PROFIT
Profit for the third quarter of 1999 was a record $37 million.
The $2 million increase from the third quarter of 1998 is primarily
the result of a larger portfolio.
PORTFOLIO
The portfolio value was $11,572 million at September 30, 1999,
an increase of $1,155 million over the same period last year.
During the third quarter of 1999, we financed new retail
business transactions totaling $1,369 million as compared to $1,423
million during the third quarter of 1998. The $54 million decline
is principally related to decreased transactions in North and Latin
America due to lower retail industry demand for Caterpillar
machinery. The decreases were partially offset by increases in
Europe, which resulted from higher retail demand for Caterpillar
machinery and our financing of a higher percentage of Caterpillar
deliveries worldwide.
In July 1999, we securitized $594 million of our receivables
consisting of $487 million of installment sale contracts and $107
million of finance leases. We recognized a $3 million pre-tax gain
in the third quarter and will receive fees in future periods for
servicing these sold receivables.
At September 30, 1999, we serviced $1,796 million in receivables
sold to others, which consist of $750 million in wholesale
receivables, under a revolving asset-backed securitization
agreement, $863 million of installment sale contracts and $183
million of finance leases.
ALLOWANCE FOR CREDIT LOSSES
The following table shows activity related to the Allowance for
Credit Losses for the three months ended:
September September
30, 1999 30, 1998
Balance at beginning of quarter $ 138 $ 114
Provision for credit losses 13 18
Receivables written off, net of recoveries (4) (27)
Adjustment for sale of receivables (5) (5)
Foreign currency translation adjustment 2 1
$ 144 $ 101
Receivables that were past due over 30 days were 2.49% of the
total receivables at September 30, 1999, as compared to 1.26% at
September 30, 1998. This increase is principally related to past
due receivables with 2 large customers in Latin America. 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. Bad debt write-
offs, net of recoveries, were $4 million for the quarter compared
with $27 for the same period one year ago. The decrease in write-
offs is primarily due to high 1998 losses in Southeast Asia.
NINE MONTHS ENDED SEPTEMBER 30, 1998 VS. NINE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES
Total revenues for the first nine months of 1999 were $880
million. The increase of $120 million over the same period last
year was primarily the result of continued portfolio growth.
The annualized interest rate on finance receivables was 8.08%
for the first nine months of 1999 compared with 8.78% for the first
nine months of 1998. The tax benefits of governmental lease
purchase contracts and tax-oriented leases are not included in
these annualized interest rates.
Other revenue of $62 million for the first nine months of 1999
includes securitization-related revenue, the gain on sale of
receivables, fees and other miscellaneous revenue.
EXPENSES
Interest expense for the first nine months of 1999 increased $50
million over the same period last year. This increase was
primarily the result of increased borrowings. The average interest
rate on borrowed funds was 5.44% for the first nine months of 1999
as compared to 6.02% for the first nine months of 1998.
Depreciation expense increased $22 million over the first nine
months of 1998 due to new operating lease business.
General, operating and administrative expenses increased $21
million during the first nine months of 1999 as compared to the
same period last year. This increase is primarily due to staff-
related expenses and other expenses incurred to support the larger
portfolio and geographic expansion.
The provision for credit losses decreased $1 million compared to
the first nine months of 1998.
PROFIT
Profit for the first nine months of 1999 was $104 million, a $20
million increase from the first nine months of 1998.
PORTFOLIO
During the first nine months of 1999, we financed new retail
business transactions totaling $4,233 million as compared to $4,329
million during the first nine months of 1998. The $96 million
decline is principally related to decreased transactions in North
and Latin America due to lower retail industry demand for
Caterpillar machinery. The decreases were partially offset by
increases in Europe, which resulted from higher retail demand for
Caterpillar machinery, and our financing of a higher percentage of
Caterpillar deliveries worldwide.
ALLOWANCE FOR CREDIT LOSSES
The following table shows activity related to the Allowance for
Credit Losses for the nine months ended:
September September
30, 1999 30, 1998
Balance at beginning of year $ 111 $ 84
Provision for credit losses 50 51
Receivables written off, net of (12) (28)
recoveries
Adjustments for sale of receivable (5) (5)
Foreign currency translation adjustment - (1)
$ 144 $ 101
CAPITAL RESOURCES AND LIQUIDITY
Operations for the first nine months of 1999 were funded with a
combination of bank borrowings, commercial paper, equity capital
invested by Caterpillar Inc., medium-term notes, proceeds from the
sale of receivables and retained earnings.
At September 30, 1999, we had the following credit lines available:
Two syndicated revolving credit lines. Two revolving credit lines,
used to support our commercial paper and commercial paper
guarantees totaling $2,900 million, are shared with Caterpillar
under the following allocation:
Five-year 364-day
Facility Facility Total
Caterpillar $ 187 $ 113 $ 300
Caterpillar Financial Services Corp. 1,688 912 2,600
Total $1,875 $1,025 $2,900
The five-year facility expires on Oct. 5, 2002; the 364-day
facility expires on Sept. 28, 2000.
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 September 30, 1999, there
were no borrowings under these lines.
European revolving credit line. This $1.0 billion credit line,
which expires May 1, 2003, supports our Euro-commercial paper.
Under this program, commercial paper is issued by our subsidiary,
Caterpillar International Finance, Plc. with our guarantee, or by
us. At September 30, 1999, there were no borrowings under this
credit line.
Short-term credit lines from banks. These credit lines total $447
million and will be eligible for renewal at various dates
throughout 1999. They are used for bank borrowings and as
support for our outstanding commercial paper and commercial paper
guarantees. At September 30, 1999, we had $98 million
outstanding against these credit lines.
Variable amount lending agreements with Caterpillar. Under these
agreements, we may borrow up to $835 million from Caterpillar,
and Caterpillar may borrow up to $673 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 notes payable of $214 million and notes receivable of $226
million outstanding at September 30, 1999.
Total outstanding borrowings. At September 30, 1999, total
outstanding borrowings were $10,473 million, an increase of $911
million over December 31, 1998. Outstanding borrowings primarily
include:
$8,133 million of medium-term notes
$1,895 million of commercial paper
$ 98 million of bank borrowings
Caterpillar Inc. contributed an additional $20 million of equity
capital in January 1999 and $50 million in August 1999. Our debt-
to-equity ratio at September 30, 1999 was 7.67 to 1 as compared to
8.0 to 1 at December 31, 1998.
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 September 30,
1999, we had interest rate swap contracts outstanding with
notional amounts totaling $3,419 million and terms up to fifteen
years. These contracts change:
$2,223 million of floating rate debt to fixed rate debt
$1,156 million of fixed rate debt to floating rate debt
$ 40 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
September 30, 1999, we had foreign exchange contracts totaling
$1,401 million, $2 million of which were with Caterpillar. They
hedge foreign currency denominated receivables and debt of
international subsidiaries.
YEAR 2000 READINESS
The Year 2000 ("Y2K") issue relates to the inability of computer
applications to distinguish between years with the same last two
digits in different centuries such as 1900 and 2000. In 1997, we
began to evaluate this ability in the systems we use. At that
time, we evaluated our exposure in key internal systems, key
external systems and non-critical systems. During 1998 and 1999,
we have continued to increase our preparedness, or "compliance," in
each area.
Our key internal systems include software and hardware used to
track our contract, customer and financial information as well as
internal communications and quoting software. We believe these
systems are now Y2K compliant. We will continue to test these
systems through the end of the year.
Our key external systems include utilities, banking, and
facility control hardware and software. In these areas, we have
contacted our key business partners and asked them to certify their
compliance. In situations where they are not compliant, we are
closely monitoring their plans to implement the changes necessary
to become compliant. If these business partners do not become
compliant, it could have a significant negative impact on our
ability to operate. However, in most cases, we have multiple
suppliers that could mitigate the adverse impact. We have
developed contingency plans that would allow at least a minimal
level of operation to continue in the event that certain key
suppliers, such as electric power or data communication systems, do
not become compliant by 2000. We will continue to communicate with
our key business partners to assess their level of compliance and
adjust our contingency plans as needed.
We are also dependent on the dealers' ability to continue
selling equipment. Caterpillar has taken steps to assess the
dealers' readiness. Through their communications, we expect that
substantially all of our dealers will be in a position to service
customers without significant business disruption from Y2K by the
end of 1999.
Our non-critical systems include business software used in non-
critical functions, such as spreadsheets used to report information
which could be manually reported and office support machines which
are not vital to daily operations. Although we believe these
systems to be compliant at this time, if these items failed, they
would cause minimal disruption to particular offices.
We estimate the cost incurred to become Y2K compliant to be less
than $1.0 million and not material to our financial position or
results of operations.
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
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: October 22, 1999 By: /s/K.C. Springer
K.C. Springer, Controller and
Principal Accounting Officer
Date: October 22, 1999 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 Nine months
Ended Ended
September September September September
30, 1999 30, 1999 30, 1998 30, 1998
Net Income $ 37 $ 35 $ 104 $ 84
Add:
Provision for income taxes 21 22 58 50
Deduct:
Equity in profit of
partnerships (1) (1) (1) (2)
Profit before taxes $ 57 $ 56 $161 $ 132
Fixed charges:
Interest on borrowed funds $144 $136 $416 $366
Rentals at computed 1 1 3 3
interest*
Total fixed charges $145 $137 $419 $369
Profit before taxes plus fixed
charges $202 $193 $580 $501
Ratio of profit before taxes
plus fixed charges to fixed
charges 1.39 1.41 1.38 1.36
*Those portions of rent expense that are representative of interest
cost.
<TABLE> <S> <C>
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<LEGEND>
This schedule contains summary financial information extracted from Caterpillar
Financial Services Corporation's third quarter 10-Q and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 52
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<RECEIVABLES> 11664
<ALLOWANCES> 934
<INVENTORY> 31
<CURRENT-ASSETS> 0<F1>
<PP&E> 34
<DEPRECIATION> 16
<TOTAL-ASSETS> 12165
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 8133
0
0
<COMMON> 745
<OTHER-SE> 621
<TOTAL-LIABILITY-AND-EQUITY> 12165
<SALES> 0
<TOTAL-REVENUES> 880
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 252
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<INCOME-PRETAX> 162
<INCOME-TAX> 58
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<F1>We are a captive finance subsidiary which does not have a classified balance
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