5
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, 1997
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
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 Sept. 30, 1997 one share of common stock of the Registrant
was outstanding.
Caterpillar Financial Services Corporation
Form 10-Q for the Quarter Ended September 30, 1997
Index
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements (Unaudited)
Consolidated Statement of Financial Position
3
Consolidated Statement of Income and Retained Earnings 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
7-10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
11
Signatures
12
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Caterpillar Financial Services Corporation
Consolidated Statement Of Financial Position
(Unaudited)
(Millions of Dollars)
Sept. 30, Dec. 31, Sept. 30,
1997 1996 1996
Assets:
Cash and cash equivalents $ 30.3 $ 27.0 $ 27.9
Finance receivables
Wholesale notes receivable 941.5 465.1 917.2
Retail notes receivable 1,724.3 1,535.9 1,503.6
Investment in finance 4,884.4 4,352.5 3,994.9
receivables
7,550.2 6,353.5 6,415.7
Less: Unearned income 657.0 604.3 567.8
Allowance for credit 85.0 74.4 68.4
losses
6,808.2 5,674.8 5,779.5
Equipment on operating leases,
less accumulated depreciation 553.3 511.0 479.6
Deferred income taxes 4.1 2.9 2.9
Other assets 166.5 148.5 155.0
Total assets $7,562.4 $6,364.2 $6,444.9
Liabilities and stockholder's
equity:
Payable to dealers and others $ 74.5 $ 88.1 $ 84.8
Payable to Caterpillar Inc. - 200.0 150.0 333.5
Borrowings
Payable to Caterpillar Inc. - 2.6 3.1 3.2
Other
Accrued interest payable 77.4 39.2 61.1
Income taxes payable 73.2 40.4 33.9
Other liabilities 26.4 23.5 10.2
Short-term borrowings 2,646.1 2,678.9 2,448.0
Current maturities of long-term
debt 1,077.5 1,057.8 1,134.1
Long-term debt 2,570.1 1,545.7 1,614.1
Deferred income taxes 36.4 42.2 43.5
Total liabilities 6,784.2 5,668.9 5,766.4
Common stock - $1 par value
Authorized: 2,000 shares
Issued and outstanding: one 375.0 345.0 345.0
share
Retained Earnings 420.4 348.5 331.4
Foreign currency translation (17.2) 1.8 2.1
adjustment
Total stockholder's equity 778.2 695.3 678.5
Total liabilities and stockholder's $7,562.4 $6,364.2 $6,444.9
equity
(See Notes to Consolidated Financial Statements)
Caterpillar Financial Services Corporation
Consolidated Statement Of Income
(Unaudited)
(Millions of Dollars)
Three Months Ended Nine months Ended
Sept. Sept. Sept. Sept.
30, 30, 30, 30,
1997 1996 1997 1996
Revenues:
Wholesale finance income $ 19.2 $ 18.3 $ 35.7 $ 34.7
Retail finance income 125.9 106.7 365.3 311.4
Rental income 47.0 39.1 132.9 115.0
Other income 13.4 11.2 44.0 34.5
Total revenues 205.5 175.3 577.9 495.6
Expenses:
Interest 96.6 82.7 263.9 232.3
Depreciation 36.4 30.5 102.4 88.3
General, operating, and
administrative 25.3 19.7 69.5 56.8
Provision for credit 10.9 8.3 29.1 25.5
losses
Other expense .1 .4 .9 1.2
Total expenses 169.3 141.6 465.8 404.1
Income before income taxes 36.2 33.7 112.1 91.5
Provision for income taxes 13.2 11.6 40.2 33.0
Net income $ 23.0 $ 22.1 $ 71.9 $ 58.5
(See Notes to Consolidated Financial Statements)
Caterpillar Financial Services Corporation
Consolidated Statement Of Cash Flows
(Unaudited)
(Millions of Dollars)
Nine months Ended
Sept. 30, Sept. 30,
1997 1996
Cash flows from operating activities:
Net income $ 71.9 $ 58.5
Adjustments for non-cash items:
Depreciation 102.4 88.3
Provision for credit losses 29.1 25.5
Other (10.8) (4.4)
Change in assets and liabilities:
Receivables from customers and others (8.9) (43.8)
Deferred income taxes (5.5) (4.2)
Payable to dealers and others (11.9) 33.8
Payable to Caterpillar Inc. - Other (.1) (1.9)
Accrued interest payable 38.4 21.9
Income taxes payable 33.0 15.4
Other, net (7.4) 5.7
Net cash provided by operating 230.2 194.8
activities
Cash flows from investing activities:
Additions to property and equipment (215.1) (175.0)
Disposals of equipment 89.9 67.1
Additions to finance receivables (4,900.1) (4,157.9)
Collections of finance receivables 2,453.8 2,167.1
Proceeds from sales of receivables 1,118.8 963.8
Other, net (1.1) 7.6
Net cash used for investing activities (1,453.8) (1,127.3)
Cash flows from financing activities:
Additional paid-in capital 30.0 20.0
Payable to Caterpillar Inc. - Borrowings 50.0 (142.0)
Proceeds from long-term debt 1,819.0 773.9
Payments on long-term debt (771.0) (745.0)
Short-term borrowings, net 96.1 1,015.4
Net cash provided by financing 1,224.1 922.3
activities
Effect of exchange rate changes on cash 2.8 (5.5)
Net change in cash and cash equivalents 3.3 (15.7)
Cash and cash equivalents at beginning of
period 27.0 43.6
Cash and cash equivalents at end of period $30.3 $ 27.9
(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"), which is a wholly owned subsidiary of Caterpillar
Inc. ("Caterpillar"), 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 1996 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 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 nine months of 1997, the Company publicly
issued $1,816.7 million medium-term notes. The notes are 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 6.1% at September 30, 1997.
Long-term debt outstanding at September 30, 1997, matures as
follows:
1997 288.7
1998 1,087.9
1999 1,192.2
2000 623.8
2001 287.0
Thereafter 168.0
Total 3,647.6
Cash paid for interest on all debt for the nine months ended
September 30, 1997 and September 30, 1996 was $230.5 million and
$220.2 million, respectively.
5. In June 1996, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards 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. This statement establishes new criteria for determining
whether a transfer of financial assets should be accounted for as a
sale or as a secured borrowing. The accounting treatment of such
transactions focuses on who controls the transferred assets, and
whether or not those assets have been isolated from the transferor
and put beyond the reach of creditors. The Company adopted this
accounting standard on January 1, 1997. There has been no material
impact on the Company's results of operations or financial position
due to the adoption of this accounting standard.
Item 2. Management's Discussion and Analysis of Financial Condition
and
Results of Operations
A. Consolidated Results of Operations
Three Months Ended September 30, 1997 vs. Three Months Ended
September 30,1996
Total revenues for the third quarter of 1997 were $205.5
million, a 17% increase over 1996 third quarter revenues of $175.3
million. The increase in revenues resulted primarily from
continued growth in the Company's portfolio. The portfolio value
increased to $7,388.2 million at September 30, 1997 from $6,293.7
million at September 30, 1996.
The Company financed new retail business transactions totaling
$1,028.0 million during the third quarter of 1997 compared with
$833.7 million during the third quarter of 1996. The increase was
the result of financing a higher volume and increased percentage of
Caterpillar product deliveries. Wholesale financing activity
during the third quarter of 1997 was $716.9 million, compared with
$643.5 million for the third quarter of 1996. The increase resulted
primarily from a higher volume of Caterpillar 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 8.7% for the third
quarter of 1997 compared with 8.8% for the third quarter of 1996.
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 third quarter of 1997
included securitization-related income, fees, and other
miscellaneous income.
Third quarter 1997 interest expense of $96.6 million was $13.9
million higher than 1996 third 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 5.9% for the third quarter of 1997 compared with 6.0% for the
third quarter of 1996.
Depreciation expense increased from $30.5 million for the third
quarter of 1996 to $36.4 million for the third quarter of 1997 due
to new operating lease business.
General, operating, and administrative expenses increased $5.6
million during the third quarter of 1997 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 571
at September 30, 1996 to 660 at September 30, 1997.
Provision for credit losses increased from $8.3 million during
the third quarter of 1996 to $10.9 million during the third quarter
of 1997. Receivables, net of recoveries, of $6.3 million were
written off against the allowance for credit losses during the
third quarter of 1997, compared with $4.5 million during the third
quarter of 1996. Receivables past due over 30 days were 1.6% of
total receivables at September 30, 1997, compared with 1.8% at
September 30, 1996. 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 September 30, 1997, the
allowance for credit losses was $85.0 million which was 1.2% of
finance receivables, net of unearned income (1.4% excluding
wholesale receivables), compared with $68.4 million and 1.2% (1.4%
excluding wholesale receivables) at September 30, 1996.
The effective income tax rate was 36% for the third quarter 1997
and 34% for the third quarter 1996. The increase was due to a $.6
million state tax refund received in 1996.
Net income for the third quarter of 1997 was $23.0 million, $.9
million above 1996 third quarter net income of $22.1 million. The
increase resulted primarily from a larger portfolio.
Nine months Ended September 30, 1997 vs. Nine months Ended
September 30, 1996
Total revenues for the first nine months of 1997 were $577.9
million, a 17% increase over the revenues for the first nine months
of 1996 of $495.6 million. The increase in revenues resulted
primarily from an increase in financing volume. Also, see the
change in Other income described below.
The Company financed new retail business transactions
totaling $3,000.7 million during the first nine months of 1997
compared with $2,540.7 million during the first nine months of
1996. The increase was the result of financing a higher volume and
increased percentage of Caterpillar product deliveries. Wholesale
financing activity during the first nine months of 1997 was
$2,087.7 million compared with $1,769.7 million for the first nine
months of 1996. The increase resulted primarily from a higher
volume of Caterpillar rental fleet financing in North America.
Wholesale finance income did not increase correspondingly due to
increasing the volume of wholesale receivables securitized.
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 8.7% for
the first nine months of 1997 compared with 8.8% for the first nine
months of 1996. Tax benefits associated with governmental lease-
purchase contracts and a portion of tax benefits associated with
long-term tax-oriented leases are not reflected in such annualized
interest rates.
Other income of $44.0 million for the first nine months of 1997
included servicing and other securitization-related income, fees,
gain on sale of equipment returned from lease, gain on sale of
receivables, and other miscellaneous income. The increase of $9.5
million during the first nine months of 1997, as compared with the
same period in 1996, was primarily due to an increase of $6.1
million in servicing and other securitization-related income.
Interest expense for the first nine months of 1997 was $263.9
million, $31.6 million higher than the first nine months of 1996
due to increased borrowings to support the larger portfolio,
partially offset by lower borrowing rates, as the average cost of
borrowed funds was 5.9% for the first nine months of 1997 compared
with 6.1% in 1996.
Depreciation expense increased from $88.3 million for the first
nine months of 1996 to $102.4 million for the first nine months of
1997 due to new operating lease business.
General, operating, and administrative expenses for the first
nine months of 1997 increased $12.7 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 increased from $25.5 million in the
first nine months of 1996 to $29.1 million in the first nine months
of 1997. This increase reflected increased levels of new retail
business. Receivables, net of recoveries, of $12.6 million were
written off against the allowance for credit losses during the
first nine months of 1997 compared with $10.6 million during the
first nine months of 1996.
The effective income tax rate for both the first nine months of
1997 and 1996 was 36%.
Net income for the first nine months of 1997 was $71.9 million
compared with $58.5 million in the first nine months of 1996. The
increase resulted primarily from a larger portfolio and increased
other income.
B. Capital Resources and Liquidity
The Company's operations were primarily funded with a
combination of bank borrowings, commercial paper, medium-term
notes, notes payable to Caterpillar, proceeds from the sale of
receivables, retained earnings, and additional equity capital of
$30.0 million invested by Caterpillar. The ratio of debt to equity
at September 30, 1997 was 8.3 to 1 compared with 7.8 to 1 at
December 31, 1996.
Total debt outstanding as of September 30, 1997 was $6,493.7
million, an increase of $1,061.3 million over that at December 31,
1996, and was primarily comprised of $3,603.7 million of
medium-term notes, $2,448.4 million of commercial paper, and $146.7
million of bank borrowings. The increase in debt and the funds
provided by operations were used to finance the increase in the
portfolio.
In May 1997, $346.6 million of the Company's installment sale
contracts were securitized, and in September 1997, the Company's
private placement, revolving, asset-backed securitization of
wholesale receivables was increased from $500 million to $600
million. The Company recognized a $2.3 million pre-tax gain on the
second quarter transaction, a $.6 million pre-tax gain on the third
quarter transaction and is servicing these sold receivables. The
proceeds from these securitizations and the equity capital provided
by Caterpillar were used to reduce debt.
The amount of sold receivables serviced by the Company was
$1,200.3 million at September 30, 1997 which consisted of $600.0
million of wholesale receivables, under a revolving asset-backed
securitization agreement, and $600.3 million of installment sale
contracts. The Company receives fees for servicing these
receivables.
At September 30, 1997, the Company had available, from a number
of banks, a total of $862.4 million of short-term credit lines
which expire at various dates over the next fifteen months. These
credit lines support the Company's outstanding commercial paper and
commercial paper guarantees and are utilized for bank borrowings.
At September 30, 1997, there were $146.7 million of these lines
utilized for bank borrowings.
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 $736.0 million from Caterpillar, and Caterpillar may
borrow up to $236.0 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
September 30, 1997, December 31, 1996, and September 30, 1996, the
Company had borrowings with Caterpillar totaling $200.0 million,
$150.0 million, and $333.5 million, respectively, but had no loans
receivable under these agreements.
The Company participates with Caterpillar in two syndicated
revolving credit facilities aggregating $2.8 billion, consisting of
a $1.7 billion five-year revolving facility and a $1.1 billion 364-
day revolving facility. The Company's allocation is $1,840.0
million, consisting of a $1,120.0 million five-year revolving
credit and a $720.0 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 September 30, 1997, there were no
borrowings under these facilities. These facilities were amended
and restated as of October 6, 1997. The facilities now aggregate to
$2.5 billion, consisting of a $1,875.0 million five-year facility
and a $625.0 million 364-day facility. The Company's allocation is
$2,250.0 million, consisting of a $1,687.5 million five-year
revolving credit and a $562.5 million 364-day revolving credit.
The Company has a $1.0 billion five year revolving credit
facility to support its $1.0 billion 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 September 30, 1997, there were no borrowings
under this facility.
Through the course of normal business, the Company is exposed to
market risk from fluctuations in interest rates and foreign
currency exchange rates. To manage these exposures, the Company
uses interest rate and currency derivative financial instruments.
The Company does not use any of these instruments for trading
purposes.
Interest rate swap agreements are used to manage the risk due to
fluctuations in interest rates. These agreements reduce the risk of
deteriorating margins between interest-earning assets and interest-
bearing liabilities and allow the Company to gain competitive and
economic advantages by minimizing funding costs regardless of the
direction interest rates move. As of September 30, 1997, the
Company had outstanding interest rate swap contracts with notional
amounts totaling $1,778.5 million, all of which are designated as
hedges of either specific debt issuances or of commercial paper.
These swap agreements have terms generally ranging up to five
years, which effectively change $1,452.5 million of floating rate
debt to fixed rate debt, $107.5 million of fixed rate debt to
floating rate debt, and $218.4 million of floating rate debt to
floating rate debt having different characteristics.
Foreign exchange contracts are used to minimize the risk
associated with fluctuations in exchange rates. The Company has
foreign exchange contracts to hedge its U.S. dollar denominated
obligations in Spain and Thailand, its U.S. dollar denominated
positions in Australia, its capital investment in Thailand, and its
foreign currency denominated short-term intercompany loans
receivable against currency fluctuations. The Company only enters
into foreign currency related derivative instruments to neutralize
risk - not as speculative instruments. These contracts have terms
generally ranging up to one year. At September 30, 1997, the
Company had foreign exchange contracts totaling $883.0 million, of
which $1.2 million were with Caterpillar.
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
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: October 31, 1997 By: /s/K.C. Springer
K.C. Springer, Controller and
Principal Accounting Officer
Date: October 31, 1997 By: /s/J.S. Beard
J.S. Beard,
President