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, 1996
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
incorporation or organization) Identification No.)
3322 WEST END AVENUE, NASHVILLE, TENNESSEE 37203-0983
(Address of principal executive offices)
Registrant's telephone number, including area code:
(615) 386-5800
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
The Registrant complies with the conditions set forth in General
Instruction (H)(1)(a) and (b) of Form 10-Q and is therefore filing
this form with the reduced disclosure format.
At June 30, 1996, one share of common stock of the Registrant
was outstanding.
Caterpillar Financial Services Corporation
Form 10-Q for the Quarter Ended June 30, 1996
Index
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements (Unaudited)
Consolidated Statement of Financial Position 3
Consolidated Statement of Income 4
Consolidated Statement of Cash Flows 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Caterpillar Financial Services Corporation
Consolidated Statement of Financial Position
(Unaudited)
(Millions of Dollars)
June 30, Dec. 31, June
30,
1996 _ 1995 _
1995_
Assets:
Cash and cash equivalents $ 34.6 $ 43.6 $
37.2
Finance receivables:
Wholesale notes receivable 812.4 538.3
1,019.0
Retail notes receivable 1,484.8 1,382.1
1,233.7 Investment in finance receivables 3,726.5 3,471.7
3,337.3 6,023.7
5,392.1 5,590.0
Less: Unearned income 533.9 515.6
503.3
Allowance for credit losses 64.5 57.0
50.1
5,425.3 4,819.5
5,036.6
Equipment on operating leases,
less accumulated depreciation 457.0 437.3
433.0
Deferred income taxes 2.7 - -
Other assets 152.6 121.7
117.4
Total assets $6,072.2 $5,422.1
$5,624.2
Liabilities and stockholder's equity:
Payable to dealers and others $ 110.7 $ 51.0 $
74.0
Payable to Caterpillar Inc. 524.9 480.6
3.1
Accrued interest payable 35.1 39.2
42.7
Income tax payable 21.7 18.5
30.2
Other liabilities 6.4 4.5
2.4
Short-term borrowings 2,140.4 1,453.1
2,056.2
Current maturities of long-term debt 1,224.2 1,105.8
765.7
Long-term debt 1,327.8 1,621.3
2,061.0
Deferred income taxes 44.8 44.8
17.1
Total liabilities 5,436.0 4,818.8
5,052.4
Common stock - $1 par value
Authorized: 2,000 shares
Issued & outstanding: one share 325.0 325.0
325.0
Profit employed in the business 309.3 272.9
241.1
Foreign currency translation
adjustment 1.9 5.4
5.7
Total stockholder's equity 636.2 603.3
571.8
Total liabilities and stockholder's
equity $6,072.2 $5,422.1
$5,624.2
(See Notes to Consolidated Financial Statements)
Caterpillar Financial Services Corporation
Consolidated Statement of Income
(Unaudited)
(Millions of Dollars)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
_ 1996_ _ 1995 _ 1996 _
1995
Revenues:
Wholesale finance income $ 10.2 $ 14.7 $ 16.4 $ 25.4
Retail finance income 103.6 88.8 204.7 171.3
Rental income 38.9 36.1 75.9 71.1
Other income 13.4 13.2 23.3 28.2
Total revenues 166.1 152.8 320.3 296.0
Expenses:
Interest 75.9 73.8 149.6 140.1
Depreciation 29.8 27.7 57.8 54.3
General, operating, and
administrative 18.9 14.3 37.1 28.4
Provision for credit losses 9.8 10.3 17.2 16.4
Other expense .4 .9 .8 2.2
Total expenses 134.8 127.0 262.5 241.4
Income before income taxes 31.3 25.8 57.8 54.6
Provision for income taxes 11.2 10.2 21.4 21.3
Net Income $ 20.1 $ 15.6 $ 36.4 $ 33.3
(See Notes to Consolidated Financial Statements)
Caterpillar Financial Services Corporation
Consolidated Statement of Cash Flows
(Unaudited)
(Millions of Dollars)
Six Months Ended
June 30, June 30,
1996 1995
Cash flows from operating activities:
Net income $ 36.4 $ 33.3
Adjustments for noncash items:
Depreciation 57.8 54.3
Provision for credit losses 17.2 16.4
Mark-to-market adjustment - (10.9)
Other (3.1) (2.0)
Change in assets and liabilities:
Receivables from customers and others (27.6) (31.1)
Deferred income taxes (2.7) 6.7
Payable to dealers and others 59.7 28.9
Payable to Caterpillar Inc. 18.3 (.1)
Accrued interest payable (4.1) 4.6
Income tax payable 3.2 8.6
Other, net 1.9 (12.1)
Net cash provided by operating
activities 157.0 96.6
Cash flows from investing activities:
Additions to property and equipment (112.0) (79.3)
Disposal of equipment 42.9 34.2
Additions to finance receivables (2,739.4) (2,570.2)
Collections of finance receivables 1,302.3 1,154.3
Proceeds from sale of receivables, net 771.5 386.9
Other, net 4.6 (2.0)
Net cash used for investing
activities (730.1) (1,076.1)
Cash flows from financing activities:
Additional paid-in capital - 30.0
Short-term borrowings from
Caterpillar Inc., net 26.0 -
Proceeds from long-term debt 270.9 906.5
Payments on long-term debt (442.1) (568.8)
Short-term borrowings, net 705.0 631.9
Net cash provided by financing
activities 559.8 999.6
Effect of exchange rate changes on cash 4.3 .8
Net change in cash and cash equivalents (9.0) 20.9
Cash and cash equivalents at beginning
of year 43.6 16.3
Cash and cash equivalents at end of quarter $ 34.6 $ 37.2
(See Notes to Consolidated Financial Statements)
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions)
1. The accompanying unaudited consolidated financial statements
have been prepared by Caterpillar Financial Services Corporation
(the "Company") pursuant to the rules and regulations of the
Securities and Exchange Commission. Although the Company believes
the disclosures are adequate, it is suggested that these financial
statements be read in conjunction with the financial statements
and the notes thereto presented in the Company's 1995 Annual
Report and the Company's Annual Report on Form 10-K. Unless the
context otherwise requires, the term "Company" includes subsidiary
companies.
The information furnished reflects, in the opinion of
management, all adjustments, which include normal and recurring
accruals, necessary for a fair presentation of the consolidated
statements of financial position, income, and cash flows for the
periods presented. The results for interim periods are not
necessarily indicative of the results to be expected for the year.
2. Income on financing leases, installment sale contracts, and
customer and dealer loans (retail finance income) is recognized
over the term of the contract at a constant rate of return on the
scheduled uncollected principal balance. Income on dealer floor
planning and rental fleet financing (wholesale finance income) is
recognized based on the daily balance of wholesale receivables
outstanding and the applicable effective interest rate. Income on
operating leases (rental income) is reported over the life of the
operating lease in the period earned. Loan origination fees and
commitment fees in excess of five hundred dollars are amortized to
finance income using the interest method over the contractual
lives of the finance receivables.
3. The Company has a tax sharing agreement with Caterpillar Inc.
("Caterpillar") in which Caterpillar collects from or pays to the
Company its allocated share of any consolidated U.S. income tax
liability or credit applicable to any period for which the Company
is included as a member of the consolidated group. A similar
agreement exists between Caterpillar Financial Australia Limited
and Caterpillar of Australia Ltd. with respect to taxes payable in
Australia.
4. During the first six months of 1996, the Company publicly
issued $269.8 million of medium-term notes. The notes are
generally offered on a continuous basis through agents and have
maturities ranging from nine months to 15 years. Interest rates
on fixed-rate medium-term notes are established by the Company as
of the date of issuance. Interest rates on floating-rate medium-
term notes are primarily indexed to LIBOR. The weighted average
interest rate on all outstanding medium-term notes was 6.4% at
June 30, 1996. Long-term debt outstanding at June 30, 1996,
matures as follows:
1996 $ 672.7
1997 799.0
1998 546.3
1999 347.5
2000 81.8
2001 4.0
Thereafter 100.7
Total $2,552.0
5. At December 31, 1995, the Company did not own any real
estate. In the second quarter of 1996, the Company purchased the
real estate that was being leased in Mexico City at a cost of $3.3
Million.
6. In June 1996, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," effective
for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996.
The Company has not determined the impact that the adoption of
this accounting standard will have on its results of operations or
financial position. The Company will adopt this accounting
standard on January 1, 1997, as required.
Item 2. Management's Discussion and Analysis of Financial
Condition and
Results of Operations
A. Consolidated Results of Operations
Three Months Ended June 30, 1996 vs. Three Months Ended June
30,
1995
Total revenues for the second quarter of 1996 were $166.1
million, a 9% increase over 1995 second quarter revenues of $152.8
million. The increase in revenues resulted primarily from
increased financing volume (the portfolio value increased to
$5,910.1 million at June 30, 1996 from $5,497.8 million at June
30, 1995).
The Company financed new retail business transactions totaling
$971.3 million during the second quarter of 1996 compared with
$730.0 million during the second quarter of 1995. The increase
was the result of financing a higher volume and increased
percentage of Caterpillar product deliveries. Wholesale financing
activity during the second quarter of 1996 was $799.1 million
compared with $892.8 million for the second quarter of 1995. The
decrease was primarily due to a lower volume of Caterpillar dealer
rental fleet financing in North America.
The annualized interest rate on finance receivables (computed
by dividing annualized finance income by the average monthly
finance receivable balances, net of unearned income) was 8.8% for
the second quarter of 1996 compared with 9.0% for the second
quarter of 1995. Tax benefits associated with governmental lease
purchase contracts and tax-oriented leases are not reflected in
such annualized interest rates.
Other income of $13.4 million for the second quarter of 1996
included servicing and other securitization-related income, a gain
on sale of receivables of $3.1 million (See Capital Resources and
Liquidity section), fees, and other miscellaneous income. A $5.1
million mark-to-market gain was included in other income in the
second quarter of 1995 for interest rate caps written by the
Company.
Second quarter interest expense of $75.9 million was $2.1
million higher than 1995 second quarter interest expense due to
increased borrowings to support the larger portfolio, partially
offset by lower borrowing rates. The average cost of borrowed
funds was 6.1% for the second quarter of 1996 compared with 6.7%
for the second quarter of 1995, primarily due to more activity in
short-term borrowing and lower borrowing rates offered by
institutions.
Depreciation expense increased from $27.7 million for the
second quarter of 1995 to $29.8 million for the second quarter of
1996 due to new operating lease business.
General, operating, and administrative expenses increased $4.6
million during the second quarter of 1996 compared with the same
period last year, primarily due to staff-related and other
expenses required to increase new business and service the larger
managed portfolio. The Company's full-time employment increased
from 434 at June 30, 1995 to 553 at June 30, 1996.
Provision for credit losses decreased from $10.3 million
during the second quarter of 1995 to $9.8 million during the
second quarter of 1996, reflecting a higher provision taken during
the second quarter of 1995, mostly offset by an increase in new
retail business. Receivables, net of recoveries, of $4.0 million
were written off against the allowance for credit losses during
the second quarter of 1996 compared with $14.8 million during the
second quarter of 1995. The decreased write-offs were primarily
attributable to recognizing a loss with one customer in the
fishing industry during the second quarter of 1995. Receivables
past due over 30 days were 2.5% of total receivables at June 30,
1996, compared with 2.2% at June 30, 1995. The allowance for
credit losses will continue to be monitored to provide for an
amount which, in management's judgment, is adequate to cover
uncollectible receivables after considering the value of any
collateral. At June 30, 1996, the allowance for credit losses was
$64.5 million which was 1.2% of finance receivables, net of
unearned income (1.4% excluding wholesale receivables), compared
with $50.1 million and 1.0% (1.2% excluding wholesale receivables)
at June 30, 1995, respectively.
The effective income tax rate for the second quarter of 1996
was 36% compared with 40% for the second quarter of 1995. The
decrease was primarily due to offsetting income for European
subsidiaries with prior years' start-up losses.
Net income for the second quarter of 1996 was $20.1 million,
$4.5 million above 1995 second quarter net income of $15.6
million. The increase resulted primarily from a larger portfolio,
lower borrowing rates, and a $2.0 million after-tax gain on sale
of receivables, partially offset by a $3.1 million mark-to-market
after-tax gain in the second quarter of 1995 for interest rate
caps written by the Company (the subject caps were terminated in
the second quarter of 1995).
Six Months Ended June 30, 1996 vs. Six Months Ended June 30,
1995
Total revenues for the first half of 1996 were $320.3 million,
an 8% increase over the revenues for the first half of 1995 of
$296.0 million. The increase in revenues resulted primarily from
increased financing volume. Also, see the change in Other income
described below.
The Company financed new retail business transactions totaling
$1,707.0 million during the first half of 1996 compared with
$1,339.5 million during the first half of 1995. The increase was
the result of financing a higher volume and increased percentage
of Caterpillar product deliveries. Wholesale financing activity
during the first half of 1996 was $1,126.2 million compared with
$1,316.1 million for the first half of 1995. The decrease was
primarily due to a lower volume of Caterpillar dealer rental fleet
financing in North America.
The annualized interest rate on finance receivables (computed
by dividing annualized finance income by the average monthly
finance receivable balances, net of unearned income) was 8.9% for
the first half of 1996 compared with 9.0% for the first half of
1995. Tax benefits associated with governmental lease purchase
contracts and tax-oriented leases are not reflected in such
annualized interest rates.
Other income of $23.3 million for the first half of 1996
included servicing and other securitization-related income, fees,
a gain on sale of receivables, interest from banks, and other
miscellaneous income. The decrease of $4.9 million during the
first six months of 1996, as compared with the same period in
1995, resulted primarily from recording gains of $10.9 million in
the second quarter of 1995 on interest rate caps written by the
Company, partially offset by an increase of $5.1 million in
servicing and other securitization-related income.
Interest expense for the first half of 1996 was $149.6
million, $9.5 million higher than the first six months of 1995 due
to increased borrowings to support the larger portfolio, partially
offset by lower borrowing rates, as the average cost of borrowed
funds was 6.2% for the first half of 1996 compared with 6.7% in
1995.
Depreciation expense increased from $54.3 million for the
first half of 1995 to $57.8 million for the first half of 1996 due
to new operating lease business.
General, operating, and administrative expenses for the first
six months of 1996 increased $8.7 million over the same period
last year, primarily due to staff-related and other expenses
required to increase new business and service the larger managed
portfolio.
Provision for credit losses during the first six months of
1996 increased from $16.4 million in the first half of 1995 to
$17.2 million in the first half of 1996. This increase reflected
increased levels of new retail business, mostly offset by a higher
provision taken during the second quarter of 1995. Receivables,
net of recoveries, of $6.1 million were written off against the
allowance for credit losses during the first half of 1996 compared
with $16.6 million during the first half of 1995. The decreased
write-offs were primarily attributable to recognizing a loss with
one customer in the fishing industry during the second quarter of
1995.
The effective income tax rate for the first half of 1996 was
37% compared with 39% for the first half of 1995. The decrease
was primarily due to offsetting income for European subsidiaries
with prior years' start-up losses.
Net income for the first half of 1996 was $36.4 million
compared with $33.3 million in the first half of 1995. The
increase resulted primarily from a larger portfolio and lower
borrowing rates, partially offset by a $6.8 million mark-to-market
after-tax gain in the first half of 1995 for interest rate caps
written by the Company.
B. Capital Resources and Liquidity
The Company's operations were primarily funded with a
combination of medium-term notes, commercial paper, notes payable
to Caterpillar, bank borrowings, proceeds from sale of
receivables, and retained earnings. The ratio of debt to equity
at June 30, 1996 was 8.2 to 1 compared with 7.7 to 1 at December
31, 1995.
Total debt outstanding as of June 30, 1996 was $4,692.4
million, an increase of $512.2 million over that at December 31,
1995, and was primarily comprised of $2,478.1 million of
medium-term notes, $1,853.4 million of commercial paper, and
$249.7 million of notes payable to banks. The increase in debt
and the funds provided by operations were used to finance the
increase in the portfolio.
In May 1996, $371.9 million of the Company's installment sale
contracts were securitized. The proceeds were used to reduce
debt. The Company recognized a $3.1 million pre-tax gain on this
transaction in the second quarter and will receive fees in future
periods for servicing these sold receivables.
The net amount of sold receivables serviced by the Company was
$983.6 million at June 30, 1996 which consisted of $300.0 million
of wholesale receivables, under a revolving asset-backed
securitization agreement, and $683.6 million of installment sale
contracts.
At June 30, 1996, the Company had available a total of $883.9
million of short-term credit lines which expire at various dates
through the first half of 1997, and a $29.3 million long-term
credit line which expires May 1999. These credit lines are with a
number of banks and are considered support for the Company's
outstanding commercial paper, commercial paper guarantees, the
discounting of trade bills, and bank borrowings. At June 30,
1996, there were $249.7 million of these lines utilized for bank
borrowings in Europe and Mexico.
The Company also participates with Caterpillar in two
syndicated revolving credit facilities aggregating $2.3 billion,
consisting of a $1.4 billion five-year facility and a $.9 billion
364-day revolving facility. The Company's allocation is $1,411.8
million, consisting of a $859.3 million five-year revolving credit
and a $552.5 million 364-day revolving credit. The Company has
the ability to request a change in its allocation to maintain the
required amount of support for the Company's outstanding
commercial paper and commercial paper guarantees. These facilities
provide for borrowings at interest rates which vary according to
LIBOR or money market rates. At June 30, 1996, there were no
borrowings under these facilities.
The Company also has a USD $500.0 million five year revolving
credit facility in the United Kingdom to support it's USD $500.0
million Euro-commercial paper program. The commercial paper is
issued by Caterpillar International Finance plc, an Irish
subsidiary of the Company, with the guarantee of the Company.
Proceeds from the issuance of commercial paper have been used to
replace bank borrowings of certain of the Company's subsidiaries.
At June 30, 1996, there were no borrowings under this facility.
In connection with its match funding objectives, the Company
utilizes a variety of interest rate contracts including swap and
forward rate agreements. All of these interest rate agreements
are held or issued for purposes other than trading. The
agreements are entered into with major financial institutions and
are utilized for two principal reasons: 1) To modify the Company's
debt structure in order to match fund its receivable portfolio
which reduces the risk of deteriorating margins between its
interest-earning assets and interest-bearing liabilities, and 2)
To gain an economic/competitive advantage through lowering the
cost of borrowed funds by either changing the characteristics of
existing debt instruments or entering into agreements in
combination with the issuance of debt.
As of June 30, 1996, the Company had outstanding interest rate
swap contracts with notional amounts totaling $1,580.5 million,
all of which are either designated as hedges of specific debt
issuances or of commercial paper. These swap agreements have
terms generally ranging up to five years, which effectively change
$1,157.4 million of floating rate debt to fixed rate debt, $244.0
million of fixed rate debt to floating rate debt, and $179.1
million of floating rate debt to floating rate debt having
different characteristics. The interest rate swaps designated to
commercial paper provide the ability to obtain fixed rate term
debt utilizing short-term debt markets. The Company also had
swaps having future effective dates with a total notional amount
of $16.1 million, which will effectively change $13.1 million of
floating rate debt to fixed rate debt and $3.0 million of fixed
rate debt to floating rate debt. The effective dates of the
future dated swaps range from third quarter 1996 through 1998, and
the terms of these swaps generally ranging up to four years.
The Company had one outstanding forward rate agreement for
$3.7 million at the end of the second quarter of 1996. This
agreement had a term of eight months.
The Company has forward exchange contracts to hedge its U.S.
dollar denominated obligations in Spain, its U.S. dollar
denominated customer receivables in Australia, and its foreign
denominated short-term intercompany loans receivable against
currency fluctuations. These contracts have terms generally
ranging up to three months and do not subject the Company to risk
due to exchange rate movements, because the gains and losses on
the contracts offset the losses and gains on the items being
hedged. At June 30, 1996, the Company had forward exchange
contracts totaling $562.3 million, of which $2.8 million were with
Caterpillar.
To supplement external debt financing sources, the Company has
variable amount lending agreements with Caterpillar. Under these
agreements, which may be amended from time to time, the Company
may borrow up to $739.4 million from Caterpillar, and Caterpillar
may borrow up to $239.4 million from the Company. All of the
variable amount lending agreements are effective for indefinite
terms and may be terminated by either party upon 30 days' notice.
At June 30, 1996 and December 31, 1995, the Company had
borrowings with Caterpillar totaling $501.5 million and $475.5
million, respectively, but had no loans receivable under these
agreements. At June 30, 1995, the Company had no outstanding
borrowings or loans receivable under these agreements.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
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: August 6, 1996 By: /s/K.C. Springer
K.C. Springer, Controller and
Principal Accounting Officer
Date: August 6, 1996 By: /s/J.S. Beard
J.S. Beard, President
2
5