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 March 31, 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 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 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 March 31, 1999 one share of common stock of the Registrant was
outstanding.
1
HIGHLIGHTS: FIRST QUARTER 1999 VS. FIRST QUARTER 1998
First quarter revenues of Caterpillar Financial Services Corporation ("Cat
Financial") were a record $283 million, an increase of $61 million or 27%
over 1998.
Profit was $35 million, an $11 million or 46% increase compared to last
year.
The portfolio increased $2,322 million or 28%, to an all time high of
$10,740 million.
New retail financing decreased slightly to $1,211 million.
James S. Beard, vice president of Caterpillar Inc. and president of Cat
Financial, said, "Our first quarter results demonstrate clearly one of the
benefits of Cat Financial to the Caterpillar enterprise, reliable and
growing profitability."
2
Caterpillar Financial Services Corporation
Form 10-Q for the Quarter Ended March 31, 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 Financial
Condition and Results of Operations 8-11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11-12
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 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 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.
3
Caterpillar Financial Services Corporation
Consolidated Statement Of Financial Position
(Unaudited)
(Millions of Dollars)
March 31, Dec. 31, March 31,
1999 1998 1998
Assets:
Cash and cash equivalents $ 33 $ 49 $ 26
Finance receivables
Wholesale notes receivable 2,057 2,110 1,232
Retail notes receivable 2,278 2,283 1,978
Investment in finance receivables 6,626 6,351 5,409
10,961 10,744 8,619
Less: Unearned income 872 852 720
Allowance for credit losses 125 111 99
9,964 9,781 7,800
Equipment on operating leases,
less accumulated depreciation 731 716 585
Deferred income taxes 9 8 5
Notes receivable from
Caterpillar Inc. 284 246 -
Other assets 378 335 341
Total assets $11,399 $11,135 $8,757
Liabilities and stockholder's equity:
Payable to dealers and others $ 96 $ 113 $ 114
Payable to Caterpillar Inc. -
Borrowings 208 212 63
Payable to Caterpillar Inc. - Other 9 5 3
Accrued interest payable 108 85 87
Income taxes payable 21 106 65
Other liabilities 30 31 34
Short-term borrowings 3,267 3,113 2,877
Current maturities of
long-term debt 2,439 2,179 1,344
Long-term debt 3,946 4,058 3,204
Deferred income taxes 30 32 32
Total liabilities 10,154 9,934 7,823
Common stock - $1 par value
Authorized: 2,000 shares; issued
and outstanding: one share 695 675 495
Retained Earnings 589 555 467
Accumulated other comprehensive
income (39) (29) (28)
Total stockholder's equity 1,245 1,201 934
Total liabilities and
stockholder's equity $11,399 $11,135 $8,757
4
Caterpillar Financial Services Corporation
Consolidated Results of Operations
(Unaudited)
(Millions of Dollars)
Three Months Ended
March 31, March 31,
1999 1998
Revenues:
Wholesale finance $ 37 $ 20
Retail finance 165 140
Rental 59 48
Other 22 14
Total revenues 283 222
Expenses:
Interest 132 106
Depreciation 46 38
General, operating, and
administrative 33 26
Provision for credit losses 17 15
Total expenses 228 185
Profit before income taxes 55 37
Provision for income taxes 20 13
Profit $ 35 $ 24
5
Caterpillar Financial Services Corporation
Consolidated Statement Of Changes in Equity
(Unaudited)
(Millions of Dollars)
Three Months Ended
March 31, March 31,
1999 1998
Retained earnings:
Balance at January 1 $ 554 $ 443
Profit 35 $ 35 24 $ 24
Balance at March 31 $ 589 $467
Accumulated other
comprehensive income:
Balance at January 1 $ (29) $ (27)
Foreign currency
translation adjustment (10) (10) (1) (1)
Comprehensive income $ 25 $ 23
Balance at March 31 $ (39) $ (28)
Paid-in Capital
Balance at January 1 $ 675 $ 395
Equity capital from
Caterpillar 20 100
Balance at March 31 $ 695 $ 495
Total equity $1,245 $ 934
6
Caterpillar Financial Services Corporation
Consolidated Statement Of Cash Flows
(Unaudited)
(Millions of Dollars)
Three Months Ended
March 31, March 31,
1999 1998
Cash flows from operating activities:
Profit $35 $24
Adjustments for non-cash items:
Depreciation 46 38
Provision for credit losses 17 15
Other (28) (4)
Change in assets and liabilities:
Receivables from customers and others 34 (60)
Deferred income taxes (2) (7)
Payable to dealers and others (15) 29
Payable to Caterpillar Inc. - Other 4 (3)
Accrued interest payable 23 40
Income taxes payable (86) (16)
Other, net (1) (8)
Net cash provided by operating activities 27 48
Cash flows from investing activities:
Additions to property and equipment (96) (89)
Disposals of equipment 46 32
Additions to finance receivables (3,085) (3,259)
Collections of finance receivables 2,400 1,715
Proceeds from sales of receivables 414 340
Notes receivable from Caterpillar (38) -
Other, net 3 -
Net cash used for investing activities (356) (1,261)
Cash flows from financing activities:
Additional paid-in capital 20 100
Payable to Caterpillar Inc. - Borrowings - (179)
Proceeds from long-term debt 685 1,466
Payments on long-term debt (536) (280)
Short-term borrowings, net 142 94
Net cash provided by financing activities 311 1,201
Effect of exchange rate changes on cash 2 (4)
Net change in cash and cash equivalents (16) (16)
Cash and cash equivalents at beginning of year 49 42
Cash and cash equivalents at end of quarter $ 33 $ 26
Cash paid for interest $ 103 $ 79
7
Notes to Financial Statements
A. Supplemental segment data for the three months ended March 31,
1999 All
U.S Europe Other Total
Revenue from external
customers $ 201 40 42 $ 283
Inter-segment revenue $ 23 1 - $ 24
Net profit $ 27 3 5 $ 35
Assets $ 9,132 3,165 1,605 $ 13,902
1998 All
U.S Europe Other Total
Revenue from external
customers $ 160 34 28 $ 222
Inter-segment revenue $ 4 1 - $ 5
Net profit $ 19 4 1 $ 24
Assets $ 6,951 2,398 1,272 $ 10,621
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 tax during the first quarter 1999 was $106
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. The $106 million paid during the first quarter includes $98
million, paid to Caterpillar, which was accrued during 1997 and 1998 for
federal income taxes.
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 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 on or
before January 1, 2000. We do not anticipate early adoption. Due to the
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.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
THREE MONTHS ENDED MARCH 31, 1998 VS. THREE MONTHS ENDED MARCH 31, 1999
REVENUES
Total revenues for the first quarter of 1999 were a record $283 million.
The increase of $61 million over the same period last year was primarily
the result of continued portfolio growth.
The annualized interest rate on finance receivables was 8.19% for the
first quarter of 1999 compared with 8.72% for the first 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 $22 million for the first quarter of 1999 included
securitization-related revenue, fees, and other miscellaneous revenue. The
increase of $8 million, as compared to the first quarter of 1998, was
primarily due to a $3 million unrealized exchange gain on a U.S dollar
deposit account held in Brazil and $2 million in increased interest income
from Caterpillar.
8
EXPENSES
Interest expense for the first quarter increased $26 million over the
same period last year. This increase was primarily the result of increased
borrowings partially offset by a lower borrowing rate. The average
interest rate on borrowed funds was 5.63% for the first quarter of 1999 as
compared to 6.08% for the first quarter of 1998.
Depreciation expense increased $8 million over the first quarter of 1998
due to new operating lease business.
General, operating, and administrative expenses increased $7 million
during the first quarter of 1999 as compared to the same period last year.
This increase was primarily due to staff-related expenses and other
expenses
incurred to increase new business and to service the larger managed
portfolio. The number of full-time employees was 857 at March 31, 1999, an
increase of 127 from last year's first quarter.
PROFIT
Profit for the first quarter of 1999 was $35 million, an $11 million
increase from the first quarter of 1998. This increase was predominantly
due to continued portfolio growth.
PORTFOLIO
The portfolio value was $10,740 million at March 31, 1999, an increase
of $2,322 million over the same period last year. During the first quarter
of 1999 we financed new retail business totaling $1,211 million as compared
to $1,246 million during the first quarter of 1998. The slight decrease
is the result of decreased activity in Asia, Australia and Latin America,
partially offset by increases in North America and Europe.
At March 31, 1999, we serviced $1,518 million in receivables sold to
others, which consist of $750 million in wholesale receivables, under a
revolving asset-backed securitization agreement, $641 million of
installment sale contracts and $127 million of finance leases.
ALLOWANCE FOR CREDIT LOSSES
The following table shows activity related to the Allowance for Credit
Losses for the period ending:
March 31, March 31,
1999 1998
Balance at beginning of quarter $ 111 $ 84
Provision for credit losses 17 15
Receivables written off, net of recoveries (1) -
Foreign currency translation adjustment (2) -
$ 125 $ 99
Receivables that were past due over 30 days were 2.0% of the total
receivables at March 31, 1999, as compared to 1.6% at March 31, 1998. 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.
CAPITAL RESOURCES AND LIQUIDITY
Operations for the first quarter of 1999 were funded with a combination
of bank borrowings, commercial paper, equity capital invested by
Caterpillar Inc., medium-term notes and retained earnings.
At March 31, 1999, we had the following credit lines available:
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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 $ 103 $ 290
Caterpillar Financial
Services Corp. 1,688 922 2,610
Total $1,875 $1,025 $2,900
The five-year facility expires on Oct. 5, 2002; the 364-day facility
expires on Oct. 5, 1999.
At March 31, 1999, there were no borrowings under these lines.
European revolving credit line. This $1.0 billion credit line, which
expires on May 1, 2003, supports our Euro-commercial paper program. Under
this program, commercial paper is issued by Caterpillar International
Finance plc, our Irish subsidiary, with our guarantee. At March 31, 1999,
there were no borrowings under this credit line.
Short-term credit lines from banks. These credit lines total $668 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 March 31, 1999, we had $109
million outstanding against these credit lines.
Variable amount lending agreements with Caterpillar. Under these
agreements, we may borrow up to $832 million from Caterpillar, and
Caterpillar may borrow up to $671 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 $208 million
outstanding at March 31, 1999 compared to $212 million at December 31,
1998, and loans receivable of $284 million at March 31, 1999 compared to
$246 million at December 31, 1998 under these agreements.
Total outstanding borrowings at March 31, 1999 were $9,860 million, an
increase of $298 million over December 31, 1998. Outstanding borrowings
primarily include:
$6,347 million of medium-term notes
$3,070 million of commercial paper
$109 million of bank borrowings
In January 1999, Caterpillar Inc. contributed an additional $20 million
of equity capital. Our debt-to-equity ratio at March 31, 1999 was 7.9 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 March 31, 1999, we had interest rate
swap contracts outstanding with notional amounts totaling $2,504 million
and terms up to ten years. These contracts change:
$1,637 million of floating rate debt to fixed rate debt
$ 714 million of fixed rate debt to floating rate debt
$ 153 million of floating rate debt to floating rate debt having
different characteristics
10
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 March 31, 1999, we had
foreign exchange contracts totaling $1,371 million, $3 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. Most of these systems are currently
Y2K compliant. By the end of July 1999, we will install software that
will upgrade the remaining programs, bringing them into compliance. The
failure of systems that are not currently compliant would cause only minor
business disruption as we would perform some tasks manually rather than
electronically, such as calculating quotes for customers manually instead
of by computer.
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 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 June 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. If these items failed to become compliant, they would cause
minimal disruption to particular offices.
Our target is to have our critical internal systems Y2K compliant by
July 1999. 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. We will also continue to communicate with our key
business partners to assess their level of compliance and adjust our
contingency plans as needed.
11
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
On March 25, 1999, we filed an 8-K relating to our S3 filing #333-73083,
which became effective on March 3, 1999.
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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: April 23, 1999 By: /s/K.C. Springer
K.C. Springer, Controller and Principal
Accounting Officer
Date: April 23, 1999 By: /s/J.S. Beard
J.S. Beard, President
13