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, 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
Identification No.)
incorporation or organization)
3322 WEST END AVENUE, NASHVILLE, TENNESSEE 37203-0983
(Address of principal executive offices)
Registrant's telephone number, including area code: (615) 386-5800
The Registrant complies with the conditions set forth in General
Instruction (H)(1)(a) and (b) of Form 10-Q is therefore filing this
form with the reduced disclosure format.
Indicate by a check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
At June 30, 1999 one share of common stock of the Registrant
was outstanding.
HIGHLIGHTS: SECOND QUARTER 1999 VS. SECOND QUARTER 1998
Caterpillar Financial Services Corporation (Cat Financial)
reports record quarter revenues of $294 million for the second
quarter of 1999.
Profit was a second-quarter record $31 million, a $5 million
or 19% increase from second quarter 1998.
The Portfolio increased $1.82 billion, or 18% to $11.86
billion.
James S. Beard, vice president of Caterpillar Inc. and president of
Cat Financial, said, "The continued growth and success of Cat
Financial is a tribute to the dedication of employees worldwide who
have a passion for serving Caterpillar dealers and customers."
2
Caterpillar Financial Services Corporation
Form 10-Q for the Quarter Ended June 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 Results
of Operations and Financial Condition 8-12
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 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)
June 30, Dec. 31, June 30,
1999 1998 1998
Assets:
Cash and cash equivalents $ 72 $ 49 $ 45
Finance receivables
Retail notes receivable 2,508 2,283 2,116
Wholesale notes receivable 2,511 2,110 2,081
Investment in finance receivables 7,108 6,351 6,135
12,127 10,744 10,332
Less: Unearned income 953 852 837
Allowance for credit losses 138 111 114
11,036 9,781 9,381
Equipment on operating leases,
less accumulated depreciation 756 716 612
Deferred income taxes 9 8 6
Notes receivable from Caterpillar Inc. 223 246 -
Other assets 388 335 292
Total assets $12,484 $11,135 $10,336
Liabilities and stockholder's equity:
Payable to dealers and others $ 130 $ 113 $ 131
Payable to Caterpillar Inc. -
Borrowings 207 212 46
Payable to Caterpillar Inc. - Other 7 5 6
Accrued interest payable 82 85 71
Income taxes payable 19 106 85
Other liabilities 24 31 24
Short-term borrowings 3,277 3,113 3,142
Current maturities of long-term debt 2,654 2,179 1,560
Long-term debt 4,781 4,058 4,244
Deferred income taxes 29 32 22
Total liabilities 11,210 9,934 9,331
Common stock - $1 par value
Authorized: 2,000 shares
Issued and outstanding: One share 695 675 545
Retained Earnings 620 554 492
Accumulated other comprehensive income (41) (28) (32)
Total stockholder's equity 1,274 1,201 1,005
Total liabilities and stockholder's
equity $12,484 $11,135 $10,336
4
Caterpillar Financial Services Corporation
Consolidated Results of Operations
(Unaudited)
(Millions of Dollars)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
Revenues:
Wholesale finance $ 43 $ 35 $ 80 $ 55
Retail finance 170 152 335 292
Rental 61 51 120 99
Other 20 17 42 32
Total revenues 294 255 577 478
Expenses:
Interest 139 125 271 231
Depreciation 48 41 93 78
General, operating and
administrative 38 30 71 57
Provision for credit losses 20 18 37 33
Other expense - 1 1 1
Total expenses 245 215 473 400
Profit before income taxes 49 40 104 78
Provision for income taxes 18 14 38 29
Profit $ 31 $ 26 $ 66 $ 49
5
Caterpillar Financial Services Corporation
Consolidated Statement Of Changes in Equity
(Unaudited)
(Millions of Dollars)
Six Months Ended
June 30, June 30,
1999 1998
Retained earnings:
Balance at January 1 $ 554 $ 443
Profit 66 $ 66 49 $ 49
Balance at June 30 $ 620 $ 492
Accumulated other
comprehensive income:
Balance at January 1 $ (28) $ (27)
Foreign currency
translation adjustment (13) (13) (5) (5)
Comprehensive income $ 53 $ 44
Balance at June 30 $ (41) $ (32)
Paid-in capital
Balance at January 1 $ 675 $ 395
Equity capital from
Caterpillar 20 150
Balance at June 30 $ 695 $ 545
Total equity $ 1,274 $ 1,005
6
Caterpillar Financial Services Corporation
Consolidated Statement of Cash Flows
(Unaudited)
(Millions of Dollars)
Six months Ended
June 30, June 30,
1999 1998
Cash flows from operating activities:
Profit $ 66 $49
Adjustments for non-cash items:
Depreciation 93 78
Provision for credit losses 37 33
Other (6) (9)
Change in assets and liabilities:
Receivables from customers and others (75) (107)
Deferred income taxes (3) (18)
Payable to dealers and others 21 48
Accrued interest payable (3) 24
Income taxes payable (87) 4
Other, net (7) (11)
Net cash provided by operating activities 36 91
Cash flows from investing activities:
Additions to property and equipment (185) (172)
Disposals of equipment 85 55
Additions to finance receivables (7,750) (7,612)
Collections of finance receivables 5,646 4,167
Proceeds from sales of receivables 702 585
Notes receivable from Caterpillar Inc. 23 -
Other, net 2 1
Net cash used for investing activities (1,477) (2,976)
Cash flows from financing activities:
Additional paid-in capital 20 150
Payable to Caterpillar Inc. - borrowings - (193)
Proceeds from long-term debt 2,220 3,031
Payments on long-term debt (1,022) (590)
Short-term borrowings, net 247 488
Net cash provided by financing activities 1,465 2,886
Effect of exchange rate changes on cash and
cash equivalents (1) 3
Net change in cash and cash equivalents 23 4
Cash and cash equivalents at beginning of 49 41
period
Cash and cash equivalents at end of period $ 72 $ 45
Cash paid for interest $ 271 $ 220
7
NOTES TO FINANCIAL STATEMENTS
A. Supplemental segment data for the three months ended June 30,
1999 U.S. Europe All Total
Other
Revenue from
external customers $ 214 41 39 $ 294
Inter-segment
revenue $ 9 - - $ 9
Profit $ 26 3 2 $ 31
Assets $ 10,230 1,765 1,787 $ 13,782
1998 U.S. Europe All Total
Other
Revenue from
external customers $ 187 36 33 $ 256
Inter-segment
revenue $ 6 - - $ 6
Profit $ 23 1 1 $ 25
Assets $ 8,275 1,498 1,585 $ 11,358
Supplemental segment data for the six months ended June 30,
1999 U.S. Europe All Total
Other
Revenue from
external customers $ 415 81 81 $ 577
Inter-segment
revenue $ 16 1 - $ 17
Profit $ 53 6 7 $ 66
1998 U.S. Europe All Total
Other
Revenue from
external customers $ 347 70 61 $ 478
Inter-segment
revenue $ 10 1 $ 11
Profit $ 42 5 2 $ 49
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 second quarter 1999 was
$19 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 second 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 JUNE 30, 1998 VS. THREE MONTHS ENDED JUNE 30,
1999
REVENUES
Total revenues for the second quarter of 1999 were a record
$294 million. The increase of $39 million over the same period
last year was primarily the result of continued portfolio growth.
8
The annualized interest rate on finance receivables was 8.01%
for the second quarter of 1999 compared with 8.73% for the second
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 $20 million for the second quarter of 1999, an
increase of $3 million from the same period last year, included
securitization-related revenue, fees and other miscellaneous
revenue.
EXPENSES
Interest expense for the second quarter of 1999 increased $14
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 5.44% for the second quarter of 1999 as compared to 5.99% for
the second quarter of 1998.
Depreciation expense increased $7 million over the second
quarter of 1998 due to new operating lease business.
General, operating and administrative expenses increased $8
million during the second quarter of 1999 as compared to the same
period last year. This increase is primarily due to staff-related
expenses and other expenses incurred due to increased new business
and geographical expansion. There were 893 employees at June 30,
1999, an increase of 116 from last year's second quarter.
The provision for credit losses increased $2 million over the
second quarter of 1998.
PROFIT
Profit for the second quarter of 1999 was $31 million, a $5
million increase from the second quarter of 1998. This increase is
primarily the result of a larger portfolio.
PORTFOLIO
The portfolio value was $11,864 million at June 30, 1999, an
increase of $1,824 million over the same period last year.
During the second quarter of 1999, we financed new retail
business transactions totaling $1,653 million as compared to $1,660
million during the second quarter of 1998.
At June 30, 1999, we serviced $1,397 million in receivables sold
to others, which consist of $750 million in wholesale receivables,
under a revolving asset-backed securitization agreement, $540
million of installment sale contracts and $107 million of finance
leases.
ALLOWANCE FOR CREDIT LOSSES
The following table shows activity related to the Allowance for
Credit Losses for the three months ending:
June 30, June 30,
1999 1998
Balance at beginning of quarter $ 125 $ 99
Provision for credit losses 20 18
Receivables written off, net of (7) (2)
recoveries
Foreign currency translation adjustment - (1)
$ 138 $ 114
Receivables that were past due over 30 days were 2.21% of the
total receivables at June 30, 1999, as compared to 1.24% at June
30, 1998. The increase is largely attributable to increased past
due receivables 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.
9
SIX MONTHS ENDED JUNE 30, 1998 VS. SIX MONTHS ENDED JUNE 30, 1999
REVENUES
Total revenues for the first six months of 1999 were a record
$577 million. The increase of $99 million over the same period
last year was primarily the result of continued portfolio growth.
The annualized interest rate on finance receivables was 8.07%
for the first six months of 1999 compared with 8.70% for the first
six 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 $42 million for the first six months of 1999
included securitization-related revenue, fees and other
miscellaneous revenue.
EXPENSES
Interest expense for the first six months of 1999 increased $40
million over the same period last year. This increase was
primarily the result of increased borrowings. The average interest
rate on borrowed funds was 5.53% for the first six months of 1999
as compared to 6.03% for the first six months of 1998.
Depreciation expense increased $15 million over the first six
months of 1998 due to new operating lease business.
General, operating and administrative expenses increased $14
million during the first six months of 1999 as compared to the same
period last year. This increase is primarily due to staff-related
expenses and other expenses incurred due to increased new business
and geographical expansion.
The provision for credit losses increased $4 million over the
first six months of 1998.
PROFIT
Profit for the first six months of 1999 was $66 million, a $17
million increase from the first six months of 1998.
PORTFOLIO
During the first six months of 1999, we financed new retail
business transactions totaling $2,865 million as compared to $2,907
million during the first six months of 1998.
ALLOWANCE FOR CREDIT LOSSES
The following table shows activity related to the Allowance for
Credit Losses:
June 30, June 30,
1999 1998
Balance at beginning of year $ 111 $ 84
Provision for credit losses 37 33
Receivables written off, net of (8) (2)
recoveries
Foreign currency translation adjustment (2) (1)
$ 138 $ 114
10
CAPITAL RESOURCES AND LIQUIDITY
Operations for the first half 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 June 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 $ 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.
We can request a change to this distribution to maintain the
required amount of support for our outstanding commercial paper
and guarantees of commercial paper. At June 30, 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 and
certificate of deposit program. Under this program, commercial
paper and certificates of deposit are issued by us, or by our
Irish subsidiaries with our guarantee. At June 30, 1999, there
were no borrowings under this credit line.
Short-term credit lines from banks. These credit lines total $516
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 June 30, 1999, we had $111 million outstanding
against these credit lines.
Variable amount lending agreements with Caterpillar. Under these
agreements, we may borrow up to $836 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 $207 million and notes receivable of $223
million outstanding at June 30, 1999 and notes payable of $212
million and notes receivable of $246 million at December 31,
1998.
Total outstanding borrowings. At June 30, 1999, total outstanding
borrowings $10,919 million, an increase of $1,357 million over
December 31, 1998. Outstanding borrowings primarily include:
$7,398 million of medium-term notes
$3,073 million of commercial paper
$ 111 million of bank borrowings
In January 1999, Caterpillar Inc. contributed an additional $20
million of equity capital. Our debt-to-equity ratio at June 30,
1999 was 8.57 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 June 30,
1999, we had interest rate swap contracts outstanding with
notional amounts totaling $2,697 million and terms up to fifteen
years. These contracts change:
11
$1,913 million of floating rate debt to fixed rate debt
$ 744 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
June 30, 1999, we had foreign exchange contracts totaling $1,564
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. During the second
half of the year, we will be performing tests of our internal
systems to assure their performance at January 1, 2000.
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 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 believe our critical internal systems are now Y2K compliant.
We will continue to test these systems through the end of the year.
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.
SUBSEQUENT EVENT
On July 16, 1999, Caterpillar Financial Assets Corporation filed
a prospectus supplement relating to our 1999-A securitization. The
securitization, totaling $594 million, is comprised of $487 million
of installment sales contracts and $107 million of finance leases.
The estimated gain on the securitization, which closed on July 21,
1999, is approximately $3 million.
12
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
13
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Caterpillar Financial Services Corporation
(Registrant)
Date: July 22, 1999 By: /s/K.C. Springer
K.C. Springer, Controller and
Principal Accounting Officer
Date: July 22, 1999 By: /s/J.S. Beard
J.S. Beard, President
14