1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1995
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ____ to ____
Commission File Number 1-11237
AT&T CAPITAL CORPORATION
A DELAWARE I.R.S. EMPLOYER
CORPORATION NO. 22-3211453
44 Whippany Road, Morristown, New Jersey 07962-1983
Telephone Number 201-397-3000
Indicate by 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 July 31, 1995, 46,968,810 shares of the registrant's common stock,
par value $.01 per share, were outstanding.
2 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands except per share amounts)
(Unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
________ ________ ________ ________
Revenue:
Finance revenue $ 42,247 $ 29,612 $ 81,032 $ 57,401
Capital lease revenue 142,237 114,638 277,669 221,270
Rental revenue on
operating leases (A) 136,408 117,237 269,369 228,696
Equipment sales 9,049 30,379 16,982 71,999
Other revenue, net 52,015 40,350 99,718 78,862
_______ _______ _______ _______
Total Revenue 381,956 332,216 744,770 658,228
_______ _______ _______ _______
Expenses:
Interest 100,806 65,654 194,804 125,761
Operating and
administrative 121,505 102,351 234,987 202,544
Depreciation on
operating leases 85,907 77,910 171,160 152,911
Cost of equipment
sales 8,247 28,744 15,299 67,288
Provision for credit
losses 18,624 23,224 39,678 49,300
_______ _______ _______ _______
Total Expenses 335,089 297,883 655,928 597,804
_______ _______ _______ _______
Income before income
taxes 46,867 34,333 88,842 60,424
Provision for income
taxes 18,955 15,432 35,848 25,718
________ ________ ________ ________
Net Income $ 27,912 $ 18,901 $ 52,994 $ 34,706
======== ======== ======== ========
(Continued)
3 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Continued)
(Dollars in Thousands except per share amounts)
(Unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
________ ________ ________ _______
Earnings per common
share and common share
equivalent (Note 2):
Earnings Per Share $ .59 $ .40 $ 1.13 $ .74
======== ======== ======== ========
Weighted average shares
outstanding (thousands): 47,027 46,874 47,014 46,898
======== ======== ======== ========
(A) Includes $19,544 and $19,488 for the three months ended
June 30, 1995 and 1994, respectively, and $40,224 and $39,126
for the six months ended June 30, 1995 and 1994, respectively,
from AT&T Corp.("AT&T") and its affiliates.
The accompanying notes are an integral part of these Consolidated
Financial Statements.
4 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
June 30, December 31,
1995 1994
___________ ___________
ASSETS:
Cash and cash equivalents $ 13,989 $ 54,464
Net investment in finance
receivables 1,628,869 1,452,947
Net investment in capital
leases 5,737,396 5,129,326
Investment in operating
leases, net of accumulated
depreciation of $574,652 in
1995 and $567,398 in 1994 946,869 902,525
Deferred charges and other assets 414,776 482,661
___________ __________
Total Assets $ 8,741,899 $ 8,021,923
=========== ==========
LIABILITIES AND SHAREOWNERS' EQUITY:
Liabilities:
Short-term notes, less
unamortized discount of
$7,022 in 1995 and $4,619 in
1994 $ 1,797,403 $ 2,176,877
Deferred income taxes 592,692 555,287
Income taxes and other payables 535,333 545,270
Payables to AT&T and affiliates 336,839 356,690
Medium- and long-term debt 4,428,839 3,379,581
Commitments and contingencies
____________ __________
Total Liabilities $ 7,691,106 $ 7,013,705
____________ __________
(Continued)
5 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Dollars in Thousands)
(Unaudited)
June 30, December 31,
1995 1994
__________ ___________
Shareowners' Equity (Note 2):
Common stock, one cent par value:
Authorized 100,000,000 shares,
issued and outstanding, 46,968,810
shares in 1995 and 46,962,439 shares
in 1994 $ 470 $ 470
Additional paid-in capital 782,362 782,785
Recourse loans to senior executives (18,835) (19,651)
Foreign currency translation
adjustments (3,589) (2,158)
Retained earnings 290,385 246,772
__________ __________
Total Shareowners' Equity 1,050,793 1,008,218
__________ __________
Total Liabilities and
Shareowners' Equity $ 8,741,899 $ 8,021,923
========== ==========
The accompanying notes are an integral part of these Consolidated
Financial Statements.
6 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
For The Six Months
Ended June 30,
1995 1994*
__________ __________
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 52,994 $ 34,706
Noncash items included in income:
Depreciation and amortization 198,217 170,425
Deferred taxes 36,398 55,715
Provision for credit losses 39,678 49,300
Gain on small business loan sales, net (4,577) (188)
Decrease (increase) in deferred charges and
other assets 36,141 (21,449)
Decrease in income taxes and
other payables (10,066) (5,400)
Decrease in payables to AT&T and
affiliates (2,539) (11,809)
___________ ___________
Net Cash Provided by Operating Activities 346,246 271,300
___________ ___________
CASH FLOW FROM INVESTING ACTIVITIES:
Acquisition of fixed assets, net (3,915) (2,334)
Purchase of businesses and finance asset
portfolios, net of cash acquired (307,527) (234,375)
Financings and lease equipment purchases (2,544,010) (2,321,791)
Principal collections from customers,
net of amounts included in income 2,110,425 1,830,229
Cash proceeds from small business loan sales 58,747 2,866
Cash proceeds from receivables securitizations 71,539 62,879
___________ ___________
Net Cash Used for Investing Activities $ (614,741) $ (662,526)
___________ ___________
(Continued)
7 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(Dollars in Thousands)
(Unaudited)
For The Six Months
Ended June 30,
1995 1994*
____________ ___________
CASH FLOW FROM FINANCING ACTIVITIES:
Decrease in short-term notes, net $ (621,993) $ (187,312)
Additions to medium- and long-term debt 1,252,605 1,004,130
Repayments of medium- and long-term debt (458,093) (436,469)
Increase in payables to AT&T
and affiliates 64,882 37,445
Dividends paid (9,381) (8,429)
_________ _________
Net Cash Provided by Financing
Activities 228,020 409,365
_________ _________
Net (Decrease) increase in Cash and Cash
Equivalents (40,475) 18,139
Cash and Cash Equivalents at Beginning of Period 54,464 -
_________ _________
Cash and Cash Equivalents at End of Period $ 13,989 $ 18,139
========= =========
Non-Cash Investing and Financing Activities:
In the first six months of 1995 and 1994, the Company entered into
capital lease obligations of $8,613 and $15,556, respectively, for
equipment that was subleased.
In the first six months of 1995 and 1994, the Company assumed debt of
$436,430 and $106,945, respectively, in conjunction with acquisitions.
* Certain 1994 amounts have been restated to conform to the 1995
presentation.
The accompanying notes are an integral part of these Consolidated
Financial Statements.
8 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have
been prepared by AT&T Capital Corporation and its subsidiaries ("AT&T
Capital" or the "Company") pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") and, in the opinion of
management, include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the results of
operations, financial position and cash flows for each period shown. The
results for interim periods are not necessarily indicative of financial
results for the full year. These unaudited consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1994 and the current
year's previously issued Form 10-Q.
2. Shareowners' Equity and Earnings Per Share
The computation of earnings per common share and common share
equivalent is based upon the weighted average number of common shares
outstanding plus common share equivalents arising from the effect of
dilutive stock options using the treasury stock method. Fully dilutive
earnings per common share and common share equivalents are not presented
since dilution is less than 3%.
On February 28, 1995 and May 31, 1995, the Company paid a dividend of
$.10 per share to shareowners of record as of February 10, 1995 and May
10, 1995, respectively. In addition, on July 17, 1995 the Company's board
of directors declared a second quarter dividend of $.10 per share. The
dividend is payable August 31, 1995 to shareowners of record as of the
close of business on August 10, 1995.
3. Acquisitions
On January 4, 1995, the Company acquired the vendor leasing and
finance companies of Banco Central Hispano and certain of its affiliates
("CFH Leasing International") located in the United Kingdom, Germany,
France, Italy, and Benelux (Belgium, the Netherlands and Luxembourg). CFH
Leasing International provides financial services to equipment
manufacturers and vendors. With offices throughout Western Europe, it
serves approximately 4,600 customers and had assets of approximately $540
million at the time of acquisition. The acquisition was accounted for by
the purchase method and the total cash paid (net of cash acquired) was
approximately $74 million. In addition, on June 30, 1995, the Company
acquired two relatively small businesses, a United States mid-range
computer asset business with approximately $180 million in assets and an
Australian equipment finance company with approximately $40 million in
assets. These acquisitions did not materially impact net income for the
three or six months ended June 30, 1995.
9 FORM 10-Q
AT&T CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
In January 1995, the Company acquired CFH Leasing International
located in the United Kingdom, Germany, France, Italy and Benelux. CFH
Leasing International provides financial services to equipment
manufacturers and vendors. With offices throughout Western Europe, it
serves approximately 4,600 customers and had approximately $540 million in
assets at the time of acquisition. The Company also acquired two
relatively small businesses on June 30, 1995, a United States mid-range
computer asset business with approximately $180 million in assets and an
Australian equipment finance company with approximately $40 million in
assets. These acquisitions did not materially impact net income for the
three or six months ended June 30, 1995.
RESULTS OF OPERATIONS
Six months ended June 30, 1995
Net income for the six months ended June 30, 1995, was $53.0 million,
an increase of $18.3 million, or 52.7% compared with the first six months
of 1994. Earnings per share for the first half of 1995 were $1.13, a
52.7% increase over the $.74 reported for the same period in 1994. Net
income of the Company is highly dependent upon the level of portfolio
assets (investment in finance receivables, capital leases, and operating
leases), the related margins earned on portfolio assets, remarketing
activity, and the quality of portfolio assets. The growth in net income
and earnings per share for the six months ended June 30, 1995, compared
with the same period of 1994 was due primarily to an increase in average
portfolio assets, strong secondary market and renewal activity and a lower
provision for credit losses.
Finance revenue of $81.0 million increased $23.6 million, or 41.2%,
in the first six months of 1995 compared with the same period of 1994,
reflecting a 30.5% increase in the average finance receivable portfolio as
well as higher average yields for the first six months of 1995 compared
with the same period in 1994.
Capital lease revenue of $277.7 million increased $56.4 million, or
25.5%, in the six months ended June 30, 1995, compared with the same
period in 1994. This is reflective of a 24.6% increase in the average
capital lease portfolio during the first half of 1995 compared with the
first half of 1994.
Rental revenue on operating leases of $269.4 million for the six
months ended June 30, 1995 increased $40.7 million, or 17.8%, compared
with the six months ended June 30, 1994. Depreciation expense on
10 FORM 10-Q
operating leases of $171.2 million increased $18.2 million, or 11.9%, for
the six months ended June 30, 1995, compared with the six months
ended June 30, 1994. Rental revenue less associated depreciation
("operating lease margin") for the first half of 1995 was $98.2 million,
or 36.5% of rental revenue, compared with $75.8 million, or 33.1% of
rental revenue for the first half of 1994. The increased operating lease
margin in 1995 relates primarily to renewed leases in the Company's small-
ticket telecommunications equipment portfolio, as well as higher margins
in the automobile lease portfolio, testing and diagnostic equipment
portfolio and reduced levels of lower yielding mainframe business.
Net interest margin (finance revenue, capital lease revenue and
rental revenue, less depreciation on operating leases and interest
expense) of $262.1 million was 6.59% of average portfolio assets for the
first six months of 1995. This compares with net interest margin of
$228.7 million, which was 7.15% of average portfolio assets for the first
six months of 1994. The decrease in net interest margin for the first six
months of 1995 was due primarily to an increase in the Company's average
debt to equity ratio and a change in portfolio mix. Additionally, the
Company has experienced some margin compression in certain small-
ticket equipment leasing portfolios due to the frequency and steepness of
the Federal Reserve Board's rate increases in 1994 and 1995. As interest
rates change, product pricing is generally adjusted to reflect the
Company's higher or lower cost of borrowing. However, the pricing in
connection with some small-ticket portfolios tends to lag and may not be
commensurate with the change in the Company's borrowing costs. The
Company's net interest margin has remained flat when compared with the
period ended March 31, 1995.
Total non-AT&T (i.e., excludes the leasing of AT&T equipment to
customers of AT&T and leasing to AT&T, its affiliates and its employees)
revenue, assets and net income for the six months ended June 30, 1995 were
$422.1 million (or 56.7% of total revenue), $5,714.6 million (or 65.4% of
total assets) and $2.9 million (or 5.6% of total net income),
respectively. This compares with total non-AT&T revenue, assets and net
loss of $370.8 million (or 56.3% of total revenue), $3,935.8 million (or
56.6% of total assets), and $9.3 million, respectively, for the six months
ended June 30, 1994. Although profitability of the Company's non-AT&T
businesses has improved, the non-AT&T net income in 1995 and net loss in
1994 were impacted by start-ups in non-AT&T businesses, particularly as a
result of the Company's international expansion.
Revenue from equipment sales of $17.0 million decreased $55.0
million, or 76.4%, for the six months ended June 30, 1995, compared with
the same period in 1994. Cost of equipment sales of $15.3 million
decreased $52.0 million, or 77.3%, for the six months ended June 30, 1995,
compared with the same period of 1994. Equipment sales revenue less
associated cost of equipment sold ("equipment sales margin") was $1.7
million, or 9.9% of equipment sales revenue for the first six months of
1995. Equipment sales margin for the first six months of 1994 was $4.7
million, or 6.5%, of equipment sales revenue. In 1995, the opportunities
for this type of activity internationally as well as in the United States
continued to decrease due to increased competitive pressures in the
computer mainframe market as more companies move to client/server
technology.
11 FORM 10-Q
Other revenue of $99.7 million grew $20.9 million, or 26.4%, in the
six months ended June 30, 1995, compared with the six months ended June
30, 1994. The increase is primarily due to higher remarketing gains on
end-of-lease equipment of $10.2 million, increased revenue of $4.5 million
related to higher levels of Small Business Administration ("SBA") loans
sold in the secondary market with servicing retained and increased fee
income of $3.2 million.
The Company's mainframe portfolio and related residual amounts
continue to trend downward in 1995. The Company regularly monitors its
estimates of residual values for all leased equipment, including mainframe
computers, and believes that its residual values are conservatively
stated.
Growth in the Company's portfolio assets, including the acquisition
of CFH Leasing International, caused the average borrowings outstanding to
increase by 30.4%, or $1.4 billion, to $6.0 billion. The Company's
interest expense increased $69.0 million, or 54.9%, to $194.8 million for
the six months ended June 30, 1995, compared with the same period in 1994.
The increase in average borrowings caused interest expense to increase by
approximately $38.2 million, of which approximately $7.6 million is
related to additional borrowings brought about by an increase in the
Company's average debt to equity. Debt to equity increased to 5.95 times
at June 30, 1995 compared with 5.01 times at June 30, 1994 as the Company
continues to deploy the initial public offering proceeds and reach it's
target debt to equity ratio of 6.25 times. Higher average interest rates
for the six months ended June 30, 1995, compared with the six months ended
June 30, 1994, caused interest expense to increase by $30.8 million. The
Company's average interest rate on borrowings was 6.52% for the six months
ended June 30, 1995, compared with 5.49% for the six months ended June 30,
1994. The Company's increased cost of borrowing is reflective of the
Federal Reserve Board's interest rate increases during 1994 and 1995. The
impact of these rate increases is beginning to be more evident as the
Company replaces maturing debt with today's higher rate debt. As interest
rates change, product pricing is generally adjusted to reflect the
Company's higher or lower cost of borrowing. See previous discussion on
net interest margin.
Operating and administrative costs of $235.0 million for the six
months ended June 30, 1995, increased $32.4 million, or 16.0%, compared
with the six months ended June 30, 1994. International expansion,
including the acquisition of CFH Leasing International and the Company's
start-up businesses in Australia and Mexico, contributed $8.6 million to
the increase. Also contributing to the increase were higher costs
associated with managing a higher level of portfolio assets. For the
first six months of 1995, annualized operating and administrative costs to
total assets as of June 30, 1995 was 5.38% compared with 5.82% for the
first six months of 1994. For the year ended December 31, 1994, operating
and administrative costs to total year-end assets was 5.33%.
The Company's effective tax rate was 40.3% and 42.6% for the first
six months of 1995 and 1994, respectively. The decrease is due primarily
to lower levels of non-tax deductible goodwill in 1995.
12 FORM 10-Q
Three months ended June 30, 1995
Net income for the quarter ended June 30, 1995, was $27.9 million, an
increase of $9.0 million, or 47.7% compared with the second quarter of
1994. Earnings per share for the second quarter of 1995 were $.59, a
47.5% increase over the $.40 reported for the same period in 1994. Net
income of the Company is highly dependent upon the level of portfolio
assets, the related margins earned on portfolio assets, remarketing
activity, and the quality of portfolio assets. The increase in net income
and earnings per share for the three months ended June 30, 1995, compared
with the same period of 1994 principally resulted from an increase in
average portfolio assets, strong secondary market and renewal activity and
a lower provision for credit losses.
Finance revenue of $42.2 million increased $12.6 million, or 42.7%,
in the second quarter of 1995 compared with the same period of 1994,
reflecting a 32.3% increase in the average finance receivable portfolio as
well as higher average yields for the second quarter of 1995 compared with
the same period in 1994.
Capital lease revenue of $142.2 million increased $27.6 million, or
24.1%, in the three months ended June 30, 1995, compared with the same
period in 1994. This reflects a 24.0% increase in the average capital
lease portfolio during the second quarter of 1995 compared with the second
quarter of 1994.
Rental revenue on operating leases of $136.4 million for the three
months ended June 30, 1995 increased $19.2 million, or 16.4%, compared
with the three months ended June 30, 1994. Depreciation expense on
operating leases of $85.9 million increased $8.0 million, or 10.3%, for
the three months ended June 30, 1995, compared with the three months
ended June 30, 1994. Operating lease margin for the second quarter of
1995 was $50.5 million, or 37.0% of rental revenue, compared with $39.3
million, or 33.5% of rental revenue for the second quarter of 1994. The
increased operating lease margin in 1995 relates primarily to renewed
leases in the Company's small-ticket telecommunications equipment
portfolio, as well as higher margins in the automobile lease portfolio,
testing and diagnostic equipment portfolio and reduced levels of lower
yielding mainframe business.
Net interest margin of $134.2 million was 6.57% of average portfolio
assets for the second quarter of 1995. This compares with net interest
margin of $117.9 million, which was 7.22% of average portfolio assets for
the second quarter of 1994. The decrease in net interest margin for the
second quarter of 1995 is due primarily to an increase in the Company's
debt to equity ratio (debt to equity was 5.95 times and 5.01 times at June
30, 1995 and 1994, respectively) and a change in portfolio mix.
Additionally, the Company has experienced some margin compression in
certain small-ticket equipment leasing portfolios due to the frequency and
steepness of the Federal Reserve Board's rate increases in 1994 and 1995.
As interest rates change, product pricing is generally adjusted to reflect
the Company's higher or lower cost of borrowing. However, the pricing in
connection with some small-ticket portfolios tends to lag and may not be
commensurate with the change in the Company's borrowing costs. The
13 FORM 10-Q
Company's net interest margin remained flat when compared with March 31,
1995.
Total non-AT&T revenue, assets and net income for the three months
ended June 30, 1995 was $221.0 million (or 57.9% of total revenue),
$5,714.6 million (or 65.4% of total assets) and $3.3 million (or 12.0% of
total net income),respectively. This compares with total non-AT&T
revenue, assets and net loss of $187.4 million (or 56.4% of total
revenue), $3,935.8 million (or 56.6% of total assets), and $3.0 million,
respectively, for the three months ended June 30, 1994. Although
profitability of the Company's non-AT&T businesses has improved, the non-
AT&T net income in 1995 and net loss in 1994 were impacted by
start-ups in non-AT&T businesses, particularly as the Company expands
internationally.
Revenue from equipment sales of $9.0 million decreased $21.3 million,
or 70.2%, for the three months ended June 30, 1995, compared with the
quarter ended June 30, 1994. Cost of equipment sales of $8.2 million
decreased $20.5 million, or 71.3%, for the three months ended June 30,
1995, compared with the same period of 1994. Equipment sales margin was
$.8 million, or 8.9% of equipment sales revenue for the second quarter of
1995. Equipment sales margin for the second quarter of 1994 was $1.6
million, or 5.4%, of equipment sales revenue. In 1995, the opportunities
for this type of activity internationally as well as in the United States
continued to decrease due to increased competitive pressures in the
computer mainframe market as more companies move to client/server
technology.
Other revenue of $52.0 million grew $11.7 million, or 28.9%, in the
three months ended June 30, 1995, compared with the three months ended
June 30, 1994. The increase is primarily due to higher remarketing gains
on end-of-lease equipment of $5.8 million, increased revenue of $2.6
million related to higher levels of SBA loans sold in the secondary market
with servicing retained and increased fee income of $1.9 million.
Growth in the Company's portfolio assets, including the acquisition
of CFH Leasing International, caused the average borrowings outstanding to
increase by 29.2%, or $1.4 billion, to $6.1 billion. The Company's
interest expense increased $35.2 million, or 53.5%, to $100.8 million for
the three months ended June 30, 1995, compared with the same period in
1994. The increase in average borrowings caused interest expense to
increase by approximately $19.2 million, of which approximately $7.8
million is related to additional borrowings brought about by an increase
in average debt to equity. Higher average interest rates for the three
months ended June 30, 1995, compared with the three months ended June 30,
1994, caused interest expense to increase by $16.0 million. The Company's
average interest rate on borrowings was 6.66% for the three months ended
June 30, 1995, compared with 5.60% for the three months ended June 30,
1994. The Company's increased cost of borrowing is reflective of the
Federal Reserve Board's interest rate increases during 1994 and 1995. The
impact of these rate increases is beginning to be more evident as the
Company replaces maturing debt with today's higher rate debt. As interest
rates change, product pricing is generally adjusted to reflect the
Company's higher or lower cost of borrowing. See previous discussion on
net interest margin.
14 FORM 10-Q
Operating and administrative costs of $121.5 million for the three months
ended June 30, 1995, increased $19.2 million, 18.7%, compared with the
three months ended June 30, 1994. International expansion, including
the acquisition of CFH Leasing International and the Company's start-
up businesses in Australia and Mexico, contributed $5.3 million to the
increase. Also contributing to the increase were higher costs associated
with managing a higher level of portfolio assets.
The Company's effective tax rate was 40.4% and 44.9% for the second
quarter of 1995 and 1994, respectively. The decrease is due primarily to
lower levels of non-tax deductible goodwill in 1995.
CREDIT QUALITY
The active management of credit losses is an important element of
the Company's business. The Company seeks to minimize its credit risk
through diversification of its portfolio assets by customer, industry
segment, geographic location and maturity. The Company's financing
activities have been spread across a wide range of equipment segments
(e.g., telecommunications, general, data center, other data processing,
and transportation) and a large number of customers located throughout
the United States and, to a lesser extent, abroad.
At At
June 30, December 31,
1995 1994 1994
Allowance for credit losses $202,661 $179,878 $176,428
Nonaccrual assets $107,487 $131,267 $120,494
Net charge-offs/Portfolio
assets .60% .87% .73%
Allowance credit losses/
Portfolio assets 2.38% 2.65% 2.30%
Nonaccrual assets/Portfolio
assets 1.26% 1.93% 1.57%
Delinquency (two months or
greater) 1.16% 1.83% 1.49%
Portfolio credit performance indicators continued to be favorable in
1995 reflecting the strength of the economy. Delinquency and charge-
off levels during 1995 were lower than that of 1994. The lower level of
nonaccrual assets, charge-offs and delinquency for the first six months
as well as the second quarter of 1995, were reflected in the decrease in
the Company's provision for credit losses of $9.6 million, or 19.5%, and
$4.6 million, or 19.8% compared with the first six months and second
quarter of 1994, respectively.
The Company maintains an allowance for credit losses at an amount
based on a review of historical loss experience, a detailed analysis of
delinquencies and problem portfolio assets, and an assessment of probable
15 FORM 10-Q
losses in the portfolio as a whole given its diversification. Management
also takes into consideration the potential impact of existing and
anticipated economic conditions.
FINANCIAL CONDITION
Portfolio assets were $8.3 billion, an increase of $828.3 million,
or 11.1%, at June 30, 1995 compared with December 31, 1994. As a result
of the acquisition of CFH Leasing International, the Company's
international assets (excluding cross border transactions) at June 30,
1995 grew to 17.7% of total assets, up from 10.9% at December 31, 1994.
The net investment in finance receivables increased by $175.9
million, or 12.1% to $1.6 billion at June 30, 1995 compared with December
31, 1994 primarily due to the acquisition of CFH Leasing International and
to increased loans in the Company's manufacturing equipment portfolio and
small business lending portfolio.
The net investment in capital leases increased by $608.1 million, or
11.9%, at June 30, 1995 to $5.7 billion compared with December 31, 1994.
This increase was primarily due to the acquisition of CFH Leasing
International, and to growth in the Company's small-ticket equipment
portfolio.
The net investment in operating leases of $946.9 million at June 30,
1995 increased by $44.3 million, or 4.9%, compared with December 31, 1994.
The increase is primarily due to growth in the Company's automobile lease
portfolio.
At June 30, 1995, the total portfolio assets managed by the Company
on behalf of others was $2.5 billion compared with $2.7 billion at
December 31, 1994. The decrease in portfolio assets managed is
attributable to lower securitized assets managed due to normal run-
off of the receivable stream. Of the total assets managed by the Company
on behalf of others, 60.1% at June 30, 1995 and 55.9% at December 31,
1994, were assets managed on behalf of AT&T and its affiliates.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates a substantial portion of its funds to support
the Company's operations from lease and rental receipts, but is also
highly dependent upon external financing, including the issuance of
commercial paper and medium-and long-term notes in public markets and, to
a lesser extent, privately placed asset-backed financings (or
securitizations). Standard & Poor's Corporation, Moody's Investors
Service, Inc., and Duff & Phelps Credit Rating Co. have rated the
Company's senior medium- and long-term debt A, A3 and A, respectively, and
have rated the Company's commercial paper A-1, P-1 and D-1, respectively.
In the first half of 1995, the Company issued commercial paper of
$11.7 billion and made commercial paper repayments of $12.3 billion, and
issued medium- and long-term debt of $1.3 billion and repaid medium-
and long-term debt of $394.6 million. In the first half of 1994, the
Company
16 FORM 10-Q
issued commercial paper of $10.7 billion, and made commercial paper
repayments of $10.9 billion and issued medium- and long-term debt of $1.0
billion and made medium- and long-term debt repayments of $436.5 million.
During the six month periods ended June 30, 1995 and 1994, principal
collections from customers of $2.1 billion and $1.8 billion, respectively,
were received. These receipts were primarily used for financings and
lease equipment purchases, and purchases of businesses and finance asset
portfolios totalling $2.9 billion and $2.6 billion in the first half of
1995 and 1994, respectively.
In conjunction with acquisitions, the Company assumed approximately
$436 million and $107 million of debt, in the first half of 1995 and 1994,
respectively. Approximately $404 million of such assumed debt was
outstanding at June 30, 1995.
The Company has paid quarterly dividends every quarter since the
fourth quarter of 1993, its first full quarter of operations after its
initial public offering. On May 31, 1995 the Company paid a dividend
of ten cents per share to shareowners of record as of May 10, 1995. In
addition, on July 17, 1995, the Company's board of directors declared a
quarterly dividend of ten cents per share for the fourth consecutive
quarter. The dividend will be payable on August 31, 1995 to shareowners
of record as of the close of business on August 10, 1995.
In July 1995, the Company filed with the SEC an additional $3.0
billion of debt securities (including medium-term notes) and warrants to
purchase debt securities, currency warrants, index warrants and interest
rate warrants. At June 30, 1995 $4.1 billion of medium-term debt was
outstanding under all SEC debt registrations.
On June 30, 1995, the Company reestablished credit facilities of $2.0
billion. These facilities, negotiated with a consortium of 35 lending
institutions, support the commercial paper issued by the Company. At June
30, 1995, these facilities were unused. The Company also has available
local lines of credit to meet local funding requirements in Hong Kong,
Canada, the United Kingdom, Australia, and Mexico of approximately $759
million, of which approximately $445 million was unused at June 30, 1995.
The Company has, from time to time, borrowed funds directly from
AT&T, including on an interest-free basis pursuant to tax agreements.
These interest-free loans amounted to $248.9 million at June 30, 1995.
These sources of funds would not be available if the Company were to cease
being a member of AT&T's consolidated group for federal income tax
purposes.
Future financing is contemplated to be arranged as necessary to meet
the Company's capital and other requirements with the timing of issue,
principal amount and form depending on the Company's needs and prevailing
market and general economic conditions.
The Company anticipates obtaining necessary external financing
through issuances of commercial paper and medium-term notes, available
17 FORM 10-Q
lines of credit for certain foreign operations and privately placed
asset-backed financings (or securitizations).
The Company considers its current financial resources, together with
the debt facilities referred to above and estimated future cash flows, to
be adequate to fund the Company's future growth and operating
requirements.
ASSET AND LIABILITY MANAGEMENT
AT&T Capital's asset and liability management ("ALM") process takes
a coordinated approach to the management of interest rate and foreign
currency risks. The Company's overall strategy is to match the average
cash maturities of its borrowings with the average cash flows of its
portfolio assets, as well as the currency denominations of its borrowings
with those of its portfolio assets, in a manner intended to reduce the
Company's interest rate and foreign currency exposure. The following
discussion describes certain key elements of this process, including AT&T
Capital's use of derivatives to manage risk.
Match Funding
AT&T Capital generally matches the duration and maturity structure
of its liabilities to that of its portfolio assets. The Company
routinely projects the expected future cash flows related to its current
portfolio assets. Based on these projections, the Company is generally
able to match the maturity and duration of its debt with that of its
assets. The cash flow projections incorporate assumptions about customer
behavior such as prepayments, refinancings and charge-offs. The
assumptions are based on historical experience with the Company's
individual markets and customers and are continually monitored and
updated as markets and customer behaviors change, to reflect current
customer preferences, competitive market conditions, portfolio growth
rates and portfolio mix.
Interest Rate Risk and Currency Exchange Risk
AT&T Capital actively manages interest rate risk to protect the
Company's margins on existing transactions. Interest rate risk is the
risk of earnings volatility attributable to changes in interest rates.
The Company routinely analyzes its portfolio assets and strives to match
floating rate assets with floating rate debt and fixed rate assets with
fixed rate debt. The Company generally achieves a matched position
through issuances of commercial paper and medium-term notes, as well as
through the use of interest rate swaps. The Company does not speculate
on interest rates, but rather seeks to mitigate the possible impact of
interest rate fluctuations. This is a continual process due to
prepayments, refinancings, non-performing loans, as well as other
portfolio dynamics, and therefore, interest rate risk can be
significantly limited but never fully eliminated. Additionally, the
Company enters into foreign exchange contracts and participates in the
currency swap market to mitigate its exposure to assets and liabilities
denominated in foreign currencies and to meet local funding requirements.
18 FORM 10-Q
The Company has and expects to enter into more foreign exchange contracts
and currency swaps in 1995 primarily as a result of the January 1995
acquisition of CFH Leasing International, previously discussed.
Using Derivatives to Manage Interest Rate and Currency Risk
AT&T Capital uses derivatives to match fund its portfolio and
thereby manage interest rate and currency risk. Derivatives can be
customized in terms of duration and interest rate basis (i.e., fixed or
floating). Derivatives used by the Company are operationally efficient
to arrange and maintain. Whether AT&T Capital issues medium-term notes,
on which it pays a fixed rate, or issues floating rate debt and utilizes
interest rate swaps, on which it generally pays a fixed rate and receives
a floating rate, the Company's interest rate risk position can be equally
well managed. However, it is the continuing interplay between liquidity,
capital, portfolio characteristics, and economic and market conditions
which determines the changing mix of medium-term notes, commercial paper
and swaps (or other derivatives) used to manage interest rate risk.
At June 30, 1995 and December 31, 1994 the total notional amount of
the Company's interest rate and currency swaps was $2.7 billion and $2.9
billion, respectively. The U.S. dollar equivalent of the Company's
foreign currency forward exchange contracts was $596.7 million at June
30, 1995, compared with $318.1 million at December 31, 1994. The
notional amount of derivative contracts does not represent direct credit
exposure. Rather, credit exposure may be defined as the market value of
the derivative contract and the ability of the counterparty to perform
its payment obligations under the agreement. The majority of the
Company's interest rate swaps require AT&T Capital to pay a fixed rate
and receive a floating rate. Therefore, this risk is reduced in a
declining interest rate environment as the Company is generally in a
payable position, and is increased in a rising interest rate environment
as the Company is generally in a receivable position. The Company seeks
to control the credit risk of its interest rate swap agreements through
credit approvals, exposure limits and monitoring procedures. All swap
agreements are with major money center banks and intermediaries with an
investment grade rating by nationally recognized statistical rating
organizations, with the majority of the Company's counterparties being
rated "AA" or better.
There were no past due amounts or reserves for credit losses at June
30, 1995 related to derivative transactions. The Company has not
experienced a credit related charge-off associated with derivative
transactions.
RECENT PRONOUNCEMENTS
The Company adopted Statements of Financial Accounting Standards
("SFAS") No. 114 ("Accounting by Creditors for Impairment of a Loan") and
No. 118 ("Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures") in the first quarter of 1995. These
standards require that impaired loans be measured based on the present
value of expected cash flows, discounted at the loan's effective interest
rate or, the loans observable market price or, the fair value of the
19 FORM 10-Q
collateral if the loan is collateral dependent, as well as certain related
disclosures. The adoption of these statements did not have a material
effect on the consolidated financial statements of the Company.
In March 1995, the Financial Accounting Standards Board issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-
Lived Assets to be Disposed Of". This statement establishes the
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held
and used and for long-lived assets and certain identifiable intangibles to
be disposed of. This standard is effective for financial statements for
fiscal years beginning after December 15, 1995, which for the Company
would be 1996. Based upon management's review, the adoption of SFAS No.
121 is not expected to have a material impact on the Company's financial
position and results of operations.
20 FORM 10-Q
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit Number
10 AT&T Capital Corporation Executive Benefit Plan as
Amended and Restated Effective as of June 14, 1995.
11 Computation of Primary and Fully Diluted Earnings Per
Share
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b) Reports on Form 8-K: None
21 FORM 10-Q
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.
AT&T CAPITAL CORPORATION
August 8, 1995
Ramon Oliu, Jr.
Controller
Chief Accounting Officer
22 FORM 10-Q
EXHIBIT INDEX
EXHIBITS
Exhibit Description
Number
______
10 AT&T Capital Corporation Executive Benefit Plan as Amended and
Restated Effective as of June 14, 1995.
11 Computation of Primary and Fully Diluted Earnings Per Share
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule