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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[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
COMMISSION FILE NUMBER 1-13098
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CASE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0433811
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
700 STATE STREET, RACINE, WI 53404
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (414) 636-6011
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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 [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, par value $0.01 per share 75,102,956 shares outstanding as of
September 30, 1997.
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TABLE OF CONTENTS
PAGE
----
Part I--Financial Information
Case Corporation and Consolidated Subsidiaries--
Balance Sheets........................................................ 2
Statements of Income.................................................. 3
Statements of Cash Flows.............................................. 5
Statements of Changes in Stockholders' Equity......................... 6
Notes to Financial Statements......................................... 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 13
Part II--Other Information
Item 1. Legal Proceedings............................................... 22
Item 2. Changes in Securities........................................... *
Item 3. Defaults Upon Senior Securities................................. *
Item 4. Submission of Matters to a Vote of Security Holders............. *
Item 5. Other Information............................................... *
Item 6. Exhibits and Reports on Form 8-K................................ 22
- --------
* No response to this item is included herein for the reason that it is
inapplicable or the answer to such item is negative.
1
PART I
FINANCIAL INFORMATION
CASE CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1997, AND DECEMBER 31, 1996
(IN MILLIONS, EXCEPT SHARE DATA)
(UNAUDITED)
CONSOLIDATED CASE INDUSTRIAL CASE CREDIT
-------------------------- -------------------------- --------------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
ASSETS 1997 1996 1997 1996 1997 1996
------ ------------- ------------ ------------- ------------ ------------- ------------
Current Assets:
Cash and cash
equivalents........... $ 167 $ 116 $ 122 $ 99 $ 45 $ 17
Accounts and notes
receivable:
Trade.................. 2,002 1,674 1,451 1,302 551 372
Affiliates............. -- -- 8 3 13 13
Other.................. 64 25 49 25 15 --
Inventories............ 1,155 988 1,155 988 -- --
Deferred income taxes.. 165 188 146 171 19 17
Prepayments and other.. 45 62 44 62 1 --
------- ------- ------- ------- ------ ------
Total current assets. 3,598 3,053 2,975 2,650 644 419
------- ------- ------- ------- ------ ------
Long-Term Receivables... 1,324 1,361 166 309 1,144 1,036
Other Assets:
Investments in joint
ventures.............. 83 63 67 63 16 --
Investment in Case
Credit................ -- -- 318 240 -- --
Goodwill and
intangibles........... 304 306 304 306 -- --
Other.................. 359 269 190 185 183 100
------- ------- ------- ------- ------ ------
Total other assets... 746 638 879 794 199 100
------- ------- ------- ------- ------ ------
Property, Plant and
Equipment, at cost..... 1,959 2,075 1,955 2,072 4 3
Accumulated
depreciation.......... (1,054) (1,068) (1,053) (1,067) (1) (1)
------- ------- ------- ------- ------ ------
Net property, plant and
equipment.............. 905 1,007 902 1,005 3 2
------- ------- ------- ------- ------ ------
Total................ $ 6,573 $ 6,059 $ 4,922 $ 4,758 $1,990 $1,557
======= ======= ======= ======= ====== ======
LIABILITIES AND EQUITY
----------------------
Current Liabilities:
Current maturities of
long-term debt........ $ 8 $ 9 $ 8 $ 9 $ -- $ --
Short-term debt........ 1,439 1,002 240 173 1,199 829
Accounts payable....... 603 578 596 564 28 30
Restructuring
liability............. 69 176 69 176 -- --
Other accrued
liabilities........... 713 778 681 735 32 43
------- ------- ------- ------- ------ ------
Total current
liabilities......... 2,832 2,543 1,594 1,657 1,259 902
------- ------- ------- ------- ------ ------
Long-Term Debt.......... 1,100 1,119 690 704 410 415
Other Liabilities:
Pension benefits....... 114 128 114 128 -- --
Other postretirement
benefits.............. 133 115 133 115 -- --
Other postemployment
benefits.............. 40 40 40 40 -- --
Other.................. 149 132 149 132 -- --
------- ------- ------- ------- ------ ------
Total other
liabilities......... 436 415 436 415 -- --
------- ------- ------- ------- ------ ------
Commitments and
Contingencies (Note 8
).....................
Minority Interest...... 3 1 -- 1 3 --
Preferred Stock with
Mandatory Redemption
Provisions............ 77 77 77 77 -- --
Stockholders' Equity:
Common Stock, $0.01 par
value; authorized
200,000,000 shares,
issued 75,560,198,
outstanding,
75,102,956, as of
September 30, 1997.... 1 1 1 1 -- --
Paid-in capital........ 1,297 1,238 1,297 1,238 219 199
Cumulative translation
adjustment............ (77) (14) (77) (14) (10) (6)
Unearned compensation
on restricted stock... (15) (9) (15) (9) -- --
Pension liability
adjustment............ (4) (4) (4) (4) -- --
Retained earnings...... 956 693 956 693 109 47
Treasury stock, 457,242
shares, at cost, as of
September 30, 1997.... (33) (1) (33) (1) -- --
------- ------- ------- ------- ------ ------
Total stockholders'
equity................ 2,125 1,904 2,125 1,904 318 240
------- ------- ------- ------- ------ ------
Total................ $ 6,573 $ 6,059 $ 4,922 $ 4,758 $1,990 $1,557
======= ======= ======= ======= ====== ======
The accompanying notes to financial statements are an integral part of these
Balance Sheets.
Reference is made to Note 1 for definitions of "Case Industrial" and "Case
Credit."
2
CASE CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
CONSOLIDATED
----------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1997 1996 1997 1996
------ ------ ------ ------
Revenues:
Net sales...................................... $1,380 $1,149 $4,103 $3,652
Interest income and other...................... 64 50 174 184
------ ------ ------ ------
1,444 1,199 4,277 3,836
Costs and Expenses:
Cost of goods sold............................. 1,075 880 3,138 2,776
Selling, general and administrative............ 144 134 421 393
Research, development and engineering.......... 49 49 141 140
Interest expense............................... 47 43 126 121
Other, net..................................... 14 6 39 22
------ ------ ------ ------
Income before taxes and extraordinary loss....... 115 87 412 384
Income tax provision............................. 37 25 132 137
------ ------ ------ ------
78 62 280 247
Equity in income--Case Credit.................... -- -- -- --
------ ------ ------ ------
Income before extraordinary loss................. 78 62 280 247
Extraordinary loss............................... -- (11) -- (33)
------ ------ ------ ------
Net income....................................... $ 78 $ 51 $ 280 $ 214
====== ====== ====== ======
Preferred stock dividends........................ 2 2 5 5
------ ------ ------ ------
Net income to common............................. $ 76 $ 49 $ 275 $ 209
====== ====== ====== ======
Per share data:
Primary earnings per share of common stock..... $ 1.00 $ 0.66 $ 3.65 $ 2.83
====== ====== ====== ======
Fully diluted earnings per share of common
stock......................................... $ 0.98 $ 0.66 $ 3.54 $ 2.77
====== ====== ====== ======
The accompanying notes to financial statements are an integral part of these
Statements of Income.
Reference is made to Note 1 for definitions of "Case Industrial" and "Case
Credit."
3
CASE INDUSTRIAL CASE CREDIT
-------------------------------- ------------------------------
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
----------------- ------------- -------------- -------------
1997 1996 1997 1996 1997 1996 1997 1996
------- ------- ------ ------ ------ ------ ------ ------
$ 1,380 $ 1,149 $4,103 $3,652 $ -- $ -- $ -- $ --
7 16 25 49 75 61 201 186
------- ------- ------ ------ ------ ------ ------ ------
1,387 1,165 4,128 3,701 75 61 201 186
1,075 880 3,138 2,776 -- -- -- --
155 153 451 423 7 8 22 20
49 49 141 140 -- -- -- --
19 21 54 69 28 22 72 53
8 3 23 14 6 3 16 8
------- ------- ------ ------ ------ ------ ------ ------
81 59 321 279 34 28 91 105
26 20 103 100 11 5 29 37
------- ------- ------ ------ ------ ------ ------ ------
55 39 218 179 23 23 62 68
23 23 62 68 -- -- -- --
------- ------- ------ ------ ------ ------ ------ ------
78 62 280 247 23 23 62 68
-- (11) -- (33) -- (3) -- (3)
------- ------- ------ ------ ------ ------ ------ ------
$ 78 $ 51 $ 280 $ 214 $ 23 $ 20 $ 62 $ 65
======= ======= ====== ====== ====== ====== ====== ======
4
CASE CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(IN MILLIONS)
(UNAUDITED)
CONSOLIDATED CASE INDUSTRIAL CASE CREDIT
-------------- ---------------- --------------
NINE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
-------------- ---------------- --------------
1997 1996 1997 1996 1997 1996
------ ------ ------- ------- ------ ------
Operating activities:
Net income.................. $ 280 $ 214 $ 280 $ 214 $ 62 $ 65
Adjustments to reconcile net
income to net cash provided
(used) by operating
activities--
Depreciation and
amortization............... 118 104 102 95 16 9
Deferred income tax expense
(benefit).................. 16 7 18 8 (2) (1)
(Gain) loss on disposal of
fixed assets............... (1) 3 (1) 3 -- --
Extraordinary loss, after
tax........................ -- 33 -- 33 -- 3
Cash paid for
restructuring.............. (104) (51) (104) (51) -- --
Undistributed earnings of
unconsolidated
subsidiaries............... (4) (4) (66) (51) -- --
Changes in components of
working capital--
Increase in receivables.... (455) (257) (260) (69) (198) (188)
Increase in inventories.... (227) (179) (227) (179) -- --
Decrease (increase) in
prepayments and other
current assets............ 15 (13) 15 (14) -- 1
Increase (decrease) in
payables.................. 72 7 79 12 (3) (5)
Increase (decrease) in
accrued liabilities....... (38) (30) (27) (33) (10) 3
Decrease (increase) in
long-term receivables...... 26 196 135 182 (112) 14
Increase in other
liabilities................ 58 12 58 12 -- --
Other, net.................. (42) 14 (8) 14 (33) (1)
------ ------ ------- ------- ------ ------
Net cash provided (used)
by operating
activities............. (286) 56 (6) 176 (280) (100)
------ ------ ------- ------- ------ ------
Investing activities:
Proceeds from sale of
businesses and assets...... 28 15 28 15 -- --
Expenditures for property,
plant and equipment........ (65) (94) (64) (92) (1) (2)
Expenditures for equipment
on operating leases........ (68) (53) -- -- (68) (53)
Acquisitions and
investments................ (28) (80) (12) (80) (16) --
------ ------ ------- ------- ------ ------
Net cash provided (used)
by investing
activities............. (133) (212) (48) (157) (85) (55)
------ ------ ------- ------- ------ ------
Financing activities:
Proceeds from issuance of
long-term debt............. -- 500 -- 300 -- 200
Payment of long-term debt... -- (644) -- (644) -- --
Net increase (decrease) in
short-term debt and
revolving credit
facilities................. 463 219 90 235 373 (16)
Capital contribution........ -- -- (20) -- 20 --
Proceeds from issuance of
common stock............... 45 55 45 55 -- --
Dividends paid (common and
preferred)................. (16) (16) (16) (16) -- (20)
Repurchases of common
stock...................... (32) -- (32) -- -- --
Other, net.................. 13 4 13 3 -- 1
------ ------ ------- ------- ------ ------
Net cash provided (used)
by financing
activities............. 473 118 80 (67) 393 165
------ ------ ------- ------- ------ ------
Effect of foreign exchange
rate changes on cash and
cash equivalents............ (3) (1) (3) (1) -- --
------ ------ ------- ------- ------ ------
Increase (decrease) in cash
and cash equivalents........ $ 51 $ (39) $ 23 $ (49) $ 28 $ 10
Cash and cash equivalents,
beginning of period......... 116 132 99 117 17 15
------ ------ ------- ------- ------ ------
Cash and cash equivalents,
end of period............... $ 167 $ 93 $ 122 $ 68 $ 45 $ 25
====== ====== ======= ======= ====== ======
Cash paid during the period
for interest................ $ 143 $ 136 $ 65 $ 84 $ 78 $ 52
====== ====== ======= ======= ====== ======
Cash paid during the period
for taxes................... $ 125 $ 102 $ 94 $ 55 $ 31 $ 47
====== ====== ======= ======= ====== ======
The accompanying notes to financial statements are an integral part of these
Statements of Cash Flows.
Reference is made to Note 1 for definitions of "Case Industrial" and "Case
Credit."
5
CASE CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN MILLIONS)
(UNAUDITED)
CUMULATIVE PENSION
COMMON PAID-IN TRANSLATION UNEARNED LIABILITY RETAINED TREASURY
STOCK CAPITAL ADJUSTMENT COMPENSATION ADJUSTMENT EARNINGS STOCK TOTAL
------ ------- ----------- ------------ ---------- -------- -------- ------
BALANCE, DECEMBER 31,
1995................... $ 1 $1,154 $(21) $(10) $(2) $399 $ (1) $1,520
Net income............. -- -- -- -- -- 316 -- 316
Dividends declared..... -- -- -- -- -- (22) -- (22)
Translation adjustment. -- -- 7 -- -- -- -- 7
Capital contributions
on stock issuance..... -- 84 -- -- -- -- -- 84
Recognition of
compensation on
restricted stock...... -- -- -- 4 -- -- -- 4
Issuance of restricted
stock................. -- -- -- (3) -- -- -- (3)
Pension liability
adjustment............ -- -- -- -- (2) -- -- (2)
--- ------ ---- ---- --- ---- ---- ------
BALANCE, DECEMBER 31,
1996................... 1 1,238 (14) (9) (4) 693 (1) 1,904
Net income............. -- -- -- -- -- 280 -- 280
Dividends declared..... -- -- -- -- -- (17) -- (17)
Translation adjustment. -- -- (63) -- -- -- -- (63)
Capital contributions
on stock issuance..... -- 48 -- -- -- -- -- 48
Recognition of
compensation on
restricted stock...... -- -- -- 5 -- -- -- 5
Issuance of restricted
stock................. -- 11 (11) -- -- -- --
Acquisition of treasury
stock................. -- -- -- -- -- -- (32) (32)
--- ------ ---- ---- --- ---- ---- ------
BALANCE, SEPTEMBER 30,
1997................... $ 1 $1,297 $(77) $(15) $(4) $956 $(33) $2,125
=== ====== ==== ==== === ==== ==== ======
The accompanying notes to financial statements are an integral part of
these Statements of Changes in Stockholders' Equity.
6
CASE CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying financial statements reflect the consolidated results of
Case Corporation ("Case" or the "Company") and also include, on a separate and
supplemental basis, the combination of Case's industrial companies and credit
companies as follows:
Case Industrial--The financial information captioned "Case Industrial"
reflects the consolidation of all majority-owned subsidiaries
except for the wholly owned retail credit subsidiaries. The
credit operations are included on an equity basis.
Case Credit--The financial information captioned "Case Credit" reflects the
consolidation of Case's retail credit subsidiaries.
All significant intercompany transactions, including activity within and
between Case Industrial and Case Credit, have been eliminated.
In the opinion of management, the accompanying unaudited financial
statements of Case Corporation and Consolidated Subsidiaries contain all
adjustments which are of a normal recurring nature necessary to present fairly
the financial position as of September 30, 1997, and the results of
operations, changes in stockholders' equity and cash flows for the periods
indicated. Interim financial results are not necessarily indicative of
operating results for an entire year.
Certain reclassifications have been made to conform the prior years'
financial statements to the 1997 presentation.
(2) EXTRAORDINARY LOSS
In the first quarter of 1996, the Company sold $300 million aggregate
principal amount of its 7 1/4% unsecured and unsubordinated notes due 2016
pursuant to a shelf registration statement filed with the Securities and
Exchange Commission in June 1995. The net proceeds from the offering, together
with cash and additional borrowings under the Company's credit facilities,
were used to exercise the Company's option to repurchase for cash all of the
Company's 10 1/2% Senior Subordinated Notes and pay accrued interest thereon.
As a result of the repurchase, the Company recorded a $22 million
extraordinary, after-tax charge in the first quarter of 1996.
On August 23, 1996, the Company established new credit facilities consisting
of $3.4 billion in lines of credit and liquidity facilities. As a result of
establishing the new credit facilities, the Company recorded an $11 million
extraordinary, after-tax charge in the third quarter of 1996 for the write-off
of unamortized bank fees related to the original bank agreements established
at the time of the Company's initial public offering in June 1994.
(3) INVENTORIES
Inventories are stated at the lower of cost or market, generally using the
first-in, first-out (FIFO) method. Inventory cost includes material, labor and
overhead.
Inventories consist of the following (in millions):
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
Raw materials.................................. $ 214 $175
Work-in-process................................ 107 147
Finished goods................................. 834 666
------ ----
Total inventories.......................... $1,155 $988
====== ====
7
CASE CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(4) ASSET-BACKED SECURITIZATIONS
In the first nine months of 1997, limited-purpose business trusts organized
by Case Credit issued $1,706 million of asset-backed securities to outside
investors. Case Credit has sold $1,301 million of U.S. and Canadian retail
notes to the trusts in connection with these issuances. In the first nine
months of 1996, Case Credit issued asset-backed securities totaling $1,646
million, selling $1,238 million of U.S. and Canadian retail notes to the
trusts in connection with these issuances. The proceeds from the sale of
retail notes were used to repay outstanding debt and to finance additional
receivables.
(5) INCOME TAXES
On a consolidated basis, the Company's effective income tax rate of 32% for
the first nine months of 1997 was lower than the U.S. statutory tax rate of
35% primarily due to recognition of tax benefits associated with the Company's
foreign sales corporation, research and development tax credits and a
reduction in the tax valuation reserve in certain foreign jurisdictions,
partially offset by state income taxes and foreign income taxed at different
rates. On a consolidated basis, the Company's effective income tax rate of 36%
for the first nine months of 1996 was slightly higher than the U.S. statutory
tax rate primarily due to state income taxes and foreign income taxed at
different rates, partially offset by the recognition of research and
development tax credits, tax savings related to the Company's foreign sales
corporation and reductions in tax valuation reserves in certain foreign
jurisdictions.
(6) FINANCIAL INSTRUMENTS
Derivatives
The Company uses derivative financial instruments to manage its interest
rate and foreign currency exposures. Case does not hold or issue financial
instruments for trading purposes. The notional amounts of these contracts do
not represent amounts exchanged by the parties and, thus, are not a measure of
the Company's risk. The net amounts exchanged are calculated on the basis of
the notional amounts and other terms of the contracts, such as interest rates
or exchange rates, and only represent a small portion of the notional amounts.
The credit and market risk under these agreements is minimized through
diversification among counterparties with high credit ratings.
Depending on the item being hedged, gains and losses on derivative financial
instruments are either recognized in the results of operations as they accrue
or are deferred until the hedged transaction occurs. Derivatives used as
hedges are effective at reducing the risk associated with the exposure being
hedged and are designated as a hedge at the inception of the derivative
contract. Accordingly, changes in the market value of the derivative are
highly correlated with changes in the market value of the underlying hedged
item at the inception of the hedge and over the life of the hedge contract.
Foreign Exchange Contracts
Case enters into foreign exchange forward contracts and swaps to hedge
certain purchase and sale commitments and loans made to foreign subsidiaries
denominated in foreign currencies. Some of these transactions involve two
foreign currencies depending on the local exchange exposures of foreign
subsidiaries. The terms of these contracts is generally one year or less. The
purpose of the Company's foreign currency hedging activities is to protect the
Company from the risk that the eventual cash flows resulting from loan
repayments and inventory purchases will be adversely affected by changes in
exchange rates.
8
CASE CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The recognition of gains and losses on contracts entered into to hedge
intercompany debt are deferred and included in net income as an adjustment to
"Interest income and other" on the date the forward contract matures. The
recognition of gains or losses on contracts entered into to hedge purchase and
sale commitments are included in net income as an adjustment to "Cost of goods
sold" as foreign exchange rates change. Gains and losses resulting from the
termination of foreign exchange contracts prior to maturity are also included
in net income.
Case had foreign exchange contracts with a notional value of $233 million at
September 30, 1997. Case had foreign exchange contracts with a notional value
of $652 million at December 31, 1996.
INTEREST RATE SWAPS
Case enters into interest rate swaps to stabilize funding costs by
minimizing the effect of potential interest rate increases on floating-rate
debt in a rising interest rate environment. Under these agreements, the
Company contracts with a counterparty to exchange the difference between a
fixed rate and a floating rate applied to the notional amount of the swap.
Swap contracts are principally between one and four years in duration. The
differential to be paid or received on interest rate swap agreements is
accrued as interest rates change and is recognized in net income as an
adjustment to interest expense.
Gains and losses resulting from terminated interest rate swap agreements are
deferred and recognized in net income over the shorter term of the remaining
contractual life of the swap agreement or the remaining term of the debt
underlying the swap agreement. If swap agreements are terminated due to the
underlying debt being extinguished, any resulting gain or loss is recognized
in net income as an adjustment to interest expense at the time of the
termination.
The weighted-average pay and receive rates for the swaps outstanding at
September 30, 1997, were 6.36% and 5.05%, respectively. The weighted-average
pay and receive rates for the swaps outstanding at December 31, 1996, were
6.80% and 5.00%, respectively.
Back-to-Back Interest Rate Caps
The asset-backed commercial paper liquidity facility (the "Liquidity
Facility") requires a subsidiary of Case Credit to have interest rate cap
agreements in place. Due to the relatively high expense of obtaining such an
instrument, Case Credit sells an identical cap, concurrent with the cap
purchase, to the same counterparty. This effectively minimizes the overall
expense to Case Credit, meets the requirements of the Liquidity Facility and
eliminates any risk of financial loss on the purchased cap. The defined term
of the cap is approximately 48 months.
Premiums paid for interest rate cap agreements purchased and sold are
included in "Other assets" and "Other liabilities," respectively, in the
accompanying Balance Sheets, and are amortized to interest expense over the
terms of the agreements. Amounts receivable or payable under cap agreements
are recognized in net income as adjustments to interest expense over the term
of the related debt. If interest rate cap agreements are terminated due to the
underlying debt being extinguished, any resulting gain or loss is recognized
in net income as an adjustment to "Interest income and other" at the time of
the termination.
At September 30, 1997, Case Credit had a back-to-back cap at a rate of
7.00%, at a notional amount of approximately $31 million. At December 31,
1996, Case Credit had a back-to-back cap at a rate of 7.00%, at a notional
amount of approximately $98 million.
9
CASE CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(7) ACQUISITIONS AND INVESTMENTS
During the third quarter of 1997, the Company acquired Gem Sprayers Limited
("Gem"), a U.K.-based manufacturer of self-propelled and trailed/mounted
sprayers for agricultural applications. Gem, with 1996 revenues of
approximately $12 million, is the leading supplier of sprayers in the U.K. In
the first quarter of 1997, the Company acquired bor-mor Inc., a North
American-based manufacturer of directional drilling equipment, with 1996
revenues of approximately $9 million. Also during the first quarter, the
Company acquired Agri-Logic, a leading developer of software for agricultural
applications.
During the third quarter of 1997, Case Credit announced a joint venture with
UFB LOCABAIL, SA, a subsidiary of Compagnie Bancaire, to provide financing for
Case's European dealers and retail customers. The formation of this new
venture, Case Credit Europe S.A.S., establishes the first pan-European finance
organization to serve both the agricultural and construction equipment markets
in the region. Also during the third quarter, Case Credit and Cummins Engine
Company, Inc. ("Cummins") entered into an agreement under which Case Credit
will offer financing to all qualified North American retail purchasers,
dealers and manufacturers of industrial equipment powered by Cummins engines.
(8) COMMITMENTS AND CONTINGENCIES
Environmental
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations
and which do not contribute to current or future revenue generation are
expensed. Liabilities are recorded when environmental assessments indicate
that remedial efforts are probable and the costs can be reasonably estimated.
Estimates of the liability are based upon currently available facts, existing
technology and presently enacted laws and regulations. All available evidence
is considered, including prior experience in remediation of contaminated
sites, other parties' share of liability at the waste sites and their ability
to pay and data concerning the waste sites released by the U.S. Environmental
Protection Agency or other organizations. These liabilities are included in
the accompanying Balance Sheets at their undiscounted amounts. Recoveries are
evaluated separately from the liability and, if appropriate, are recorded
separately from the associated liability in the accompanying Balance Sheets.
Case has received and from time to time receives inquiries and/or notices of
potential liability at multiple sites that are the subject of remedial
activities under Federal or state environmental laws and Case may be required
to share in the cost of clean-up. Case is also involved in remediating a
number of other sites, including certain of its currently and formerly
operated facilities or those assumed through corporate acquisitions. Based
upon information currently available, management is of the opinion that any
such potential liability or remediation costs will not have a material adverse
effect on Case's financial position or results of operations.
Product Liability
Product liability claims against Case arise from time to time in the
ordinary course of business. There is an inherent uncertainty as to the
eventual resolution of unsettled claims. However, in the opinion of
management, any losses with respect to existing claims will not have a
material adverse effect on Case's financial position or results of operations.
Other
Case is the subject of various other legal claims arising from its
operations, including product warranty, dealer disputes, workmen's
compensation and employment matters. Management is of the opinion that the
resolution of these claims, individually and in the aggregate, will not have a
material adverse effect on Case's financial position or results of operations.
10
CASE CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(9) EARNINGS PER SHARE OF COMMON STOCK
THREE
MONTHS
ENDED NINE MONTHS
SEPTEMBER ENDED
30, SEPTEMBER 30,
----------- -------------
1997 1996 1997 1996
----- ----- ------ ------
Earnings per average share of Common Stock (shares
in millions):
Primary
- -------
Net earnings after preferred stock dividends and
before extraordinary loss....................... $1.00 $0.81 $ 3.65 $ 3.28
Extraordinary loss............................... -- (0.15) -- (0.45)
----- ----- ------ ------
Net earnings per share of common stock........... $1.00 $0.66 $ 3.65 $ 2.83
===== ===== ====== ======
Average common and common equivalent shares
outstanding..................................... 76 74 75 74
Fully Diluted
- -------------
Net earnings before extraordinary loss........... $0.98 $0.80 $ 3.54 $ 3.20
Extraordinary loss............................... -- (0.14) -- (0.43)
----- ----- ------ ------
Net earnings per share of common stock........... $0.98 $0.66 $ 3.54 $ 2.77
===== ===== ====== ======
Average common and common equivalent shares
outstanding..................................... 79 78 79 77
In February 1997 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." Case
will adopt SFAS No. 128 effective for the year ending December 31, 1997. The
pro forma impact of adopting SFAS No. 128 for the three and nine month periods
ended September 30, 1997 and 1996, is as follows:
PRO FORMA PRO FORMA
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1997 1996 1997 1996
------ ------ ------ ------
Earnings per average share of Common Stock
(shares in millions):
Basic
- -----
Net earnings after preferred stock dividends
and before extraordinary loss................. $ 1.03 $ 0.83 $ 3.72 $ 3.36
Extraordinary loss............................. -- (0.15) -- (0.46)
------ ------ ------ ------
Net earnings per share of common stock......... $ 1.03 $ 0.68 $ 3.72 $ 2.90
====== ====== ====== ======
Average common shares outstanding.............. 74 72 74 72
Diluted
- -------
Net earnings before extraordinary loss......... $ 0.98 $ 0.80 $ 3.54 $ 3.20
Extraordinary loss............................. -- (0.14) -- (0.43)
------ ------ ------ ------
Net earnings per share of common stock......... $ 0.98 $ 0.66 $ 3.54 $ 2.77
====== ====== ====== ======
Average common and common equivalent shares
outstanding................................... 79 78 79 77
11
CASE CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
(10) SUBSEQUENT EVENTS
In October 1997, the Company announced an agreement to acquire the
outstanding shares of Fortschritt Erntemaschinen GmbH ("Fortschritt"). Based
in Neustadt, Germany, Fortschritt manufactures hay and forage equipment,
including self-propelled forage harvesters, large square balers and
windrowers. Case also agreed to acquire select assets of two other German
companies including intellectual property and production and distribution
rights related to self-propelled forage harvesters and combines. These
acquisitions will provide Case with a broad range of conventional and rotary
combines in Europe and significantly expand the Company's line of harvesting
equipment in that region. Combined sales of the Fortschritt and other products
included in the agreements were approximately $110 million in 1996. The
Company anticipates completion of these acquisitions in the fourth quarter of
1997.
On October 16, 1997, Case Credit issued $150 million aggregate principal
amount of its 6.75% unsecured and unsubordinated notes due 2007 pursuant to a
$700 million shelf registration statement filed with the Securities and
Exchange Commission in September 1997. The net proceeds from the offering will
be used to fund Case Credit's growing portfolio of receivables and for other
corporate purposes, including the repayment of indebtedness.
On October 17, 1997, Case Credit Australia Pty Ltd replaced its A$250
million revolving credit facilities with A$1.0 billion in new credit
facilities. These new facilities are guaranteed by Case Credit Corporation and
are comprised of a A$400 million commercial paper program that is backed by a
syndicated credit facility, and a A$600 million medium-term note program.
Under the terms of the commercial paper program, the principal amount of the
commercial paper outstanding, combined with the amounts outstanding under the
syndicated credit facility, cannot exceed a total of A$400 million.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ANALYSIS OF RESULTS OF OPERATIONS
Third Quarter 1997 vs. Third Quarter 1996
EARNINGS
The Company recorded net income, before extraordinary items, of $78 million
in the third quarter of 1997 up 26% or $16 million from $62 million in the
same period of 1996. Net income in the third quarter of 1997 was $78 million
with primary earnings per share of $1.00, versus net income and primary
earnings per share of $51 million and $0.66, respectively, in the third
quarter of 1996. Case recorded an $11 million extraordinary, after-tax charge
in the third quarter of 1996 for the write-off of unamortized bank fees in
conjunction with the establishment of new credit facilities. The 52% increase
in primary earnings per share reflects the year-over-year increase in net
income partially offset by an increase in the number of common shares
outstanding.
The Company's industrial operations recorded income, before equity income of
Case Credit, of $55 million in the third quarter of 1997 versus $39 million in
the comparable quarter of 1996, an increase of 41% year-over-year. On a pretax
basis, the Company's industrial operations recorded third quarter earnings of
$81 million in comparison to $59 million in 1996, a $22 million or 37%
increase over prior year. The industrial effective income tax rate decreased
from 34% in the third quarter of 1996 to 32% in the third quarter of 1997
primarily due to tax benefits associated with the Company's foreign sales
corporation, research and development tax credits and reductions in the tax
valuation reserves in certain foreign jurisdictions, partially offset by state
income taxes and foreign income taxed at different rates.
Case's operating earnings for the third quarter of 1997 were $123 million
versus $103 million for the same period in 1996. Case defines operating
earnings as industrial earnings before interest, taxes, changes in accounting
principles and extraordinary loss, including the income of Case Credit on an
equity basis. The $20 million year-over-year increase in operating earnings is
primarily attributable to pricing gains and higher volumes, along with
contributions from acquisitions and restructuring-related savings, partially
offset by inflationary cost increases and retail store divestitures.
A reconciliation of the Company's industrial net income to operating
earnings is as follows (in millions):
CASE
INDUSTRIAL
THREE
MONTHS
ENDED
SEPTEMBER
30,
-----------
1997 1996
----- -----
Income before extraordinary loss............................. $ 78 $ 62
Income tax provision......................................... 26 20
Interest expense............................................. 19 21
----- -----
Operating earnings....................................... $ 123 $ 103
===== =====
REVENUES
On a consolidated basis, worldwide revenues increased $245 million or 20% in
the third quarter of 1997 to $1,444 million. Net sales of equipment and parts
increased $231 million or 20% to $1,380 million. The increase in net sales
consists primarily of a 25% volume increase and a 2% pricing increase
partially offset by a 5% deterioration as a result of foreign currency and a
2% decrease resulting from retail store divestitures. The year-over-year
volume increase reflects net sales increases in each of Case's four geographic
regions, including incremental sales from acquisitions. Net sales in the third
quarter of 1997 increased 30% in Europe and 13% in North America, as compared
with prior year levels. In addition, net sales in the Company's emerging
markets increased 27% for the third quarter of 1997 as compared to the prior
year, with increases in the Latin America and Asia Pacific regions of 74% and
6%, respectively. Worldwide, third quarter net sales of agricultural equipment
increased 25% over the comparable period in 1996, while third quarter sales of
construction equipment increased 23% over the same period in 1996.
13
Worldwide net sales of agricultural equipment increased 25% in the third
quarter of 1997 as compared to the same period in 1996. The increase in sales
of agricultural equipment in North America reflects both the success of the new
MX series Maxxum (mid-horsepower) tractors launched earlier this year, as well
as strong increases in sales of MAGNUM(TM) (120-plus horsepower) tractors,
cotton pickers and combines. The increase in sales of agricultural equipment in
Europe reflects a significant increase in sales of combines and high-horsepower
tractors, including higher year-over-year sales of both combines and high-
horsepower tractors to the former Soviet Union, as well as increased sales of
cotton pickers and implements. In Europe, the August 1996 acquisition of Steyr
contributed to the increase in sales of tractors in all horsepower categories,
driven by the combined strength of the Case-Steyr tractor line. In the
Company's Asia Pacific region, the increase in agricultural sales resulted from
strong increases in sales of low and mid-range horsepower tractors, primarily
reflecting strong customer demand for the new MX series tractors, as well as
increased sales of combines. In the Company's Latin America region, the
increase in agricultural sales resulted from strong sales of 40-plus horsepower
tractors, MAGNUM(TM) tractors and implements, along with incremental sales of
sugar cane harvesters as a result of the June 1996 acquisition of Austoft.
Worldwide net sales of construction equipment increased 23% in the third
quarter of 1997 as compared to the third quarter of 1996. The increase in net
sales of construction equipment in North America reflects significant year-
over-year increases in sales of loader/backhoes, wheel loaders, crawlers and
excavators. These increases were partially offset by lower skid steer sales as
a result of the phased launch of the new XT line of high-end skid steers. The
increase in net sales of construction equipment in Europe primarily reflects
increased sales of loader/backhoes, wheel loaders and skid steers as a result
of the October 1996 acquisition of Fermec. In the Company's Asia Pacific
region, sales of construction equipment primarily increased due to higher year-
over-year increases in sales of loader/backhoes and skid steers. In the
Company's Latin American region, sales of construction equipment increased
significantly in all categories, reflecting improvements in the Brazilian and
Mexican economies as compared to 1996.
COSTS AND EXPENSES
Cost of goods sold for the industrial operations increased $195 million to
$1,075 million in the third quarter of 1997 as compared to the same period in
1996, primarily due to the year-over-year volume increase. Cost of goods sold
as a percentage of net sales increased to 77.9% in the third quarter of 1997
from 76.6% in the third quarter of 1996. The year-over-year increase in cost of
goods sold as a percentage of net sales primarily reflects changes in product
and geographic sales mix, including the impact of acquisitions, as well as the
impact of higher new product launch costs and retail store divestitures,
partially offset by pricing actions and the continued success of the Company's
cost reduction initiatives.
Selling, general and administrative expenses for the industrial operations
were $155 million in the third quarter of 1997 as compared to $153 million in
the comparable period of 1996. As a percentage of net sales, selling general
and administrative expenses decreased to 11.2% in the third quarter of 1997 as
compared to 13.3% in the third quarter of 1996. This year-over-year decrease as
a percentage of net sales reflects the impact of the Company's ongoing cost
reduction initiatives including lower retail selling expenses as a result of
restructuring-related sales of company-owned retail stores, the impact of
foreign exchange, and reductions in selling expenses related to low rate and
other sales financing programs. Case Industrial makes payment to Case Credit in
an amount equal to the difference between the rate actually paid by retail
customers and the rate charged by Case Credit. These payments are included in
selling, general and administrative expenses of Case Industrial and are
eliminated to arrive at consolidated selling, general and administrative
expenses. These decreases were partially offset by incremental selling, general
and administrative costs for the acquisitions of Steyr and Fermec in the third
and fourth quarters of 1996, respectively.
Research, development and engineering expenses were $49 million in both the
third quarter of 1997 and 1996, reflecting the Company's continued investment
in new product development.
14
Interest expense for Case's industrial operations was $19 million for the
third quarter of 1997, $2 million lower than the same period of 1996. The
decrease in interest expense was due to lower average debt levels during the
third quarter of 1997 as compared to the third quarter of 1996, and also
reflects the impact of new credit facilities that were established in August
1996.
CREDIT OPERATIONS
Case Credit recorded net income, before extraordinary items, of $23 million
in both the third quarter of 1997 and the third quarter of 1996. Net income in
the third quarter of 1997 was $23 million, or $3 million higher than the $20
million of net income recorded in the comparable period of 1996. As compared
to prior year, Case Credit's net income for the third quarter of 1997 reflects
higher earnings as a result of increased levels of on-balance-sheet
receivables and growth in Case Credit's operating lease portfolio, partially
offset by reduced income from asset-backed securitizations. Case Credit also
recorded a $3 million extraordinary, after-tax charge in the third quarter of
1996 for the write-off of unamortized bank fees in conjunction with the
establishment of new credit facilities. In addition, Case Credit's net income
in the third quarter of 1997 was adversely impacted by a higher tax rate as
compared to the third quarter of 1996.
Case Credit reported revenues of $75 million for the third quarter of 1997
as compared to revenues of $61 million for the third quarter of 1996. Finance
income earned on retail notes and finance leases increased $11 million in the
third quarter of 1997 as compared to the same period in 1996, primarily due to
increased levels of on-balance-sheet receivables. In addition, year-over-year
third quarter revenues from operating leases increased $5 million, reflecting
the growth in Case Credit's operating lease portfolio. These revenue increases
were offset by lower securitization and servicing fee income. Case Credit
continues to implement its asset-management strategy of retaining a larger
percentage of assets on balance sheet, as opposed to selling those assets
through asset-backed securitizations. Long term, the Company believes this
strategy will generate a more stable earnings performance for Case Credit.
Interest expense for the third quarter of 1997 was $28 million as compared
to $22 million for the third quarter of 1996. The $6 million increase in
interest expense primarily relates to higher average debt levels during the
third quarter of 1997 as compared to the third quarter of 1996, largely due to
the growth in Case Credit's on-balance-sheet receivables and increased
equipment on operating leases.
Operating expenses increased $2 million to a total of $13 million in the
third quarter of 1997 as compared to the third quarter of 1996, primarily due
to additional depreciation expense for equipment on operating leases as a
result of Case Credit's larger operating lease portfolio.
As of September 30, 1997, Case Credit's serviced portfolio of receivables
increased 20% over the same time last year to a record $4.9 billion. Gross
receivables acquired in the third quarter of 1997 increased $795 million or
17% to $2.3 billion versus the same period in 1996.
Nine Months Ended 1997 vs. Nine Months Ended 1996
EARNINGS
The Company recorded income, before extraordinary items, of $280 million in
the first nine months of 1997 as compared to $247 million in the first nine
months of 1996. In January 1996, the Company repurchased for cash all of its
10 1/2% Senior Subordinated Notes. As a result of the repurchase, the Company
recorded a $22 million extraordinary, after-tax loss in the first quarter of
1996. In August 1996, the Company established new credit facilities consisting
of $3.4 billion in lines of credit and liquidity facilities. In conjunction
with this refinancing, the Company recorded an $11 million extraordinary,
after-tax charge in the third quarter of 1996 for the write-off of unamortized
bank fees related to the original bank agreements established at the time of
the Company's initial public offering in June 1994. Earnings per share, before
extraordinary items, for the first nine months of 1997 was $3.65 per share
compared to $3.28 per share in the first nine months of 1996.
15
The Company recorded net income of $280 million for the first nine months of
1997, up $66 million or 31% as compared to the comparable period of 1996.
Primary earnings per share for the first nine months of 1997 was $3.65 per
share compared to $2.83 per share for the first nine months of 1996. The 29%
year-over-year increase in primary earnings per share reflects the year-over-
year increase in net income, partially offset by an increase in the number of
common shares outstanding.
The Company's industrial operations recorded income, before equity income of
Case Credit, of $218 million in the first nine months of 1997 versus $179
million in the comparable period of 1996, an increase of $39 million or 22%
year-over-year. On a pretax basis, the Company's industrial earnings increased
$42 million to $321 million in the first nine months of 1997 as compared to the
prior year. The industrial effective income tax rate decreased from 36% in the
first nine months of 1996 to 32% in the first nine months of 1997, primarily
due to recognition of tax benefits associated with the Company's foreign sales
corporation, research and development tax credits and a reduction in the tax
valuation reserve in certain foreign jurisdictions, partially offset by state
income taxes and foreign income taxed at different rates.
Operating earnings for the first nine months of 1997 were $437 million versus
$416 million for the comparable period in 1996. Case defines operating earnings
as industrial earnings before interest, taxes, changes in accounting principles
and extraordinary items, including the income of Case Credit on an equity
basis. Case's operating earnings for the first nine months of 1997 primarily
reflects the impact of higher price realization and restructuring-related
savings, as well as increased volumes, including the impact of acquisitions.
These increases were partially offset by inflationary cost increases and higher
selling, general and administrative expenses including new product launch costs
and product introduction expenses, as well as incremental selling, general and
administrative expenses from acquisitions. In addition, the year-over-year
improvement in operating earnings was adversely impacted by the transferring of
tractor production in the first quarter of 1997 from the now closed Neuss,
Germany, plant to other Case manufacturing facilities in Racine, Wisconsin, and
Doncaster, England.
A reconciliation of the Company's industrial net income to operating earnings
is as follows (in millions):
CASE
INDUSTRIAL
NINE MONTHS
ENDED
SEPTEMBER
30,
-----------
1997 1996
----- -----
Income before extraordinary loss............................. $ 280 $ 247
Income tax provision......................................... 103 100
Interest expense............................................. 54 69
----- -----
Operating earnings....................................... $ 437 $ 416
===== =====
REVENUES
On a consolidated basis, worldwide revenues increased $441 million or 11% in
the first nine months of 1997 to $4,277 million. Net sales of equipment and
parts increased $451 million or 12% to $4,103 million. The increase in net
sales consists primarily of a 15% volume increase and a 2% pricing increase,
partially offset by a 3% deterioration resulting from the impact of foreign
exchange and a 2% decrease due to retail store divestitures. The year-over-year
volume increase reflects net sales increases in each of Case's four geographic
regions, including incremental sales from acquisitions. Net sales in the
Company's emerging markets increased 29% in the first nine months of 1997 as
compared to the same period in 1996, with increases in the Latin America and
Asia Pacific regions of 60% and 15%, respectively. Net sales for the first nine
months of 1997 also increased in Europe and North America, with year-over-year
increases of 17% and 7%, respectively. Worldwide net sales of agricultural
equipment increased 18% over the first nine months of 1996, while worldwide
sales of construction equipment increased 8% over the same period in 1996.
16
Worldwide net sales of agricultural equipment increased 18% in the first nine
months of 1997 as compared to the same period in 1996. The increase in sales of
agricultural equipment in North America reflects both the success of the new MX
series Maxxum (mid-horsepower) tractors launched earlier this year, as well as
strong increases in sales of MAGNUM(TM) (120-plus horsepower) tractors,
combines and implements. The increase in sales of agricultural equipment in
Europe reflects a significant increase in sales of combines and high-horsepower
tractors, including higher year-over-year sales of both combines and high-
horsepower tractors to the former Soviet Union, as well as increased sales of
cotton pickers and implements. In Europe, the August 1996 acquisition of Steyr
contributed to the increase in sales of tractors in all horsepower categories,
driven by the combined strength of the Case-Steyr tractor line. The increase in
sales of agricultural equipment in the Company's Asia Pacific region reflects
strong customer demand for the new MX series tractors, as well as increased
sales of four-wheel drive tractors, combines, cotton pickers and implements. In
addition, the increase in agricultural equipment sales in Case's Asia Pacific
region reflects a strong increase in sales of sugar cane harvesters as a result
of the June 1996 acquisition of Austoft. In the Company's Latin America region,
year-over-year sales of agricultural equipment doubled, reflecting strong
increases in sales of MAGNUM(TM) and 40-plus horsepower tractors, combines,
cotton pickers and implements, along with incremental sales of sugar cane
harvesters.
Worldwide net sales of construction equipment increased 8% in the first nine
months of 1997 versus the first nine months of 1996. The increase in net sales
of construction equipment in Europe primarily reflects increased sales of
loader/backhoes and skid steers as a result of the October 1996 acquisition of
Fermec. In North America, sales of construction equipment in the first nine
months of 1997 were up slightly as compared to prior year, led by higher sales
of loader/backhoes and excavators, partially offset by lower sales of skid
steers as a result of the phased launch of the new XT line of high-end skid
steers. In the Company's Asia Pacific region, higher sales of construction
equipment were led by increases in loader/backhoes, skid steers and excavators.
In the Company's Latin America region, sales of construction equipment
increased in virtually all product lines.
COSTS AND EXPENSES
Cost of goods sold for the industrial operations increased $362 million to
$3,138 million in the first nine months of 1997 as compared to the same period
in 1996, primarily due to the year-over-year volume increase, including the
impact of acquisitions. Cost of goods sold as a percentage of net sales was
76.5% in the first nine months of 1997 versus 76.0% for the comparable period
of 1996. This increase in cost of goods sold as a percentage of net sales
primarily reflects changes in product and geographic sales mix, including the
impact of acquisitions, as well as the impact of higher product launch costs
and retail store divestitures. These increases were partially offset by pricing
actions and cost improvement initiatives from restructuring and other cost
reduction initiatives.
Selling, general and administrative expenses for the industrial operations
were $451 million for the first nine months of 1997 as compared to $423 million
in the comparable period of 1996. As a percentage of net sales, selling general
and administrative expenses decreased to 11.0% in the first nine months of 1997
as compared to 11.6% in the first nine months of 1996. This year-over-year
decrease as a percentage of net sales reflects the impact of the Company's
ongoing cost reduction initiatives including lower retail selling expenses as a
result of restructuring-related sales of company-owned retail stores and the
impact of foreign exchange. These decreases were partially offset by
incremental selling, general and administrative expenses from acquisitions and
higher new product launch costs.
Research, development and engineering expenses increased to $141 million in
the first nine months of 1997 as compared to $140 million in the same period in
1996, reflecting the Company's continued investment in new product development.
During the third quarter of 1997, the Company introduced 17 new models of
agricultural equipment including the 2300 series combine, the CX series
tractor, and the 2555 Cotton Express picker, as well as new large balers,
windrowers and disk harrows. The Company also launched an expansion of its
Advanced Farming Systems line of hardware and software, including new programs
for yield mapping, crop modeling and crop scouting. In addition, new product
introductions of construction equipment include the phased launch of the
Company's new XT line of high-end skid steers. During the third quarter of
1996, the Company introduced more than 20 new agricultural equipment products.
17
Interest expense for Case's industrial operations was $54 million for the
first nine months of 1997, $15 million lower than the same period of 1996. The
decrease in interest expense primarily reflects lower average debt levels
during the first nine months of 1997 as compared to the same period of 1996,
as well as the impact of new credit facilities that were established in August
1996.
On a consolidated basis, the Company's effective income tax rate of 32% for
the first nine months of 1997 was lower than the U.S. statutory tax rate of
35% primarily due to recognition of tax benefits associated with the Company's
foreign sales corporation, research and development tax credits and a
reduction in the tax valuation reserve in certain foreign jurisdictions,
partially offset by state income taxes and foreign income taxed at different
rates. In the first nine months of 1996, the consolidated effective tax rate
of 36% was slightly higher than the U.S. statutory tax rate primarily due to
state income taxes and foreign income taxed at different rates, partially
offset by the recognition of research and development tax credits, tax savings
related to the Company's foreign sales corporation and reductions in the tax
valuation reserves in certain foreign jurisdictions.
RESTRUCTURING PROGRAM
During the third quarter of 1997, the Company continued its restructuring
efforts relative to the closure of its Neuss, Germany, facility, the single
largest step in the Company's long-term restructuring program. Earlier this
year, the Company ceased production and closed the Neuss manufacturing
facility, transferring production of its MX series tractor from Neuss to other
existing Case manufacturing facilities in Racine, Wisconsin, and Doncaster,
England. In addition to the Neuss closure, the Company's 1997 restructuring
activities to date include the closure and sale of its Doncaster, England,
foundry and the sale of a parts depot located in Batley, England. The Company
has also continued its divestiture of company-owned retail stores, having sold
four additional stores in 1997.
CREDIT OPERATIONS
Net income for the first nine months of 1997 was $62 million as compared to
$65 million for the first nine months of 1996. The $3 million decrease in
year-over-year net income primarily reflects lower net operating margins and
reduced income from asset-backed securitizations, partially offset by higher
earnings as a result of increased levels of on-balance-sheet receivables. The
third quarter of 1996 included a $3 million extraordinary, after-tax charge to
write-off unamortized bank fees in conjunction with the refinancing of the
Company's credit facilities in August 1996.
Case Credit reported total revenues of $201 million for the first nine
months of 1997 as compared to revenues of $186 million for the first nine
months of 1996. Finance income earned on retail notes and leases increased to
$75 million in the first nine months of 1997 as compared to $44 million in the
same period in 1996, primarily due to increased levels of on-balance-sheet
receivables. In addition, operating lease revenues increased $13 million in
the first nine months of 1997, reflecting the growth in Case Credit's
operating lease portfolio. These revenue increases were offset by decreases in
net gains on retail notes sold, as well as lower securitization and servicing
fee income. Case Credit continues to implement its asset-management strategy
of retaining a larger percentage of assets on balance sheet, as opposed to
selling those assets through asset-backed securitizations. Long term, the
Company believes this strategy will generate a more stable earnings
performance for Case Credit.
Interest expense for the first nine months of 1997 was $72 million, up $19
million from the $53 million reported in the first nine months of 1996. The
increase in interest expense resulted from higher average debt levels during
the first nine months of 1997 as compared to the first nine months of 1996,
primarily due to the growth in Case Credit's on-balance-sheet receivables and
increased equipment on operating leases.
Operating expenses increased $10 million to a total of $38 million for the
first nine months of 1997 as compared to the first nine months of 1996. This
increase primarily resulted from $8 million of additional depreciation expense
for equipment on operating leases relating to Case Credit's larger operating
lease portfolio.
During the first nine months of 1997, Case Credit's serviced portfolio
increased 20% over the comparable period last year to a record $4.9 billion.
Gross receivables acquired in the first nine months of 1997 were $2.3
18
billion, an increase of 21% versus the same period in 1996. During the first
nine months of 1997, limited-purpose business trusts organized by Case Credit
issued $1,706 million of asset-backed securities to outside investors. Case
Credit has sold $1,301 million of U.S. and Canadian retail notes to the trusts
in connection with these issuances. In the first nine months of 1996, Case
Credit issued asset-backed securities totaling $1,646 million, selling $1,238
million of U.S. and Canadian retail notes to the trusts in connection with
these issuances. The proceeds from the sale of retail notes were used to repay
outstanding debt and to finance additional receivables.
LIQUIDITY AND CAPITAL RESOURCES
The discussion of liquidity and capital resources focuses on the balance
sheets and statements of cash flows. The Company's operations are capital
intensive and subject to seasonal variations in financing requirements for
dealer receivables and inventories. Whenever necessary, funds provided from
operations are supplemented from external sources.
Cash used by operating activities was $286 million in the first nine months
of 1997. Cash used by the industrial operations was $6 million in the first
nine months of 1997 versus cash provided of $176 million in the first nine
months of 1996. Cash used by Case Credit was $280 million for the first nine
months of 1997 as compared to $100 million in the same period of 1996. The net
cash used from operating activities during the first nine months of 1997
primarily reflects increased inventories and retail receivables, offset by net
income and depreciation and amortization. The year-over-year increase in
inventories includes the impact of the Fermec acquisition in the fourth quarter
of 1996. The increase in retail receivables reflects Case Credit's retention of
a larger percentage of receivables as opposed to selling those receivables
under asset-backed securitization transactions. In addition, the Company also
expended $104 million in the first nine months of 1997 for restructuring-
related activities, including closure costs for the Neuss, Germany, facility.
Cash provided by operating activities was $56 million in the first nine months
of 1996, due to net income and depreciation and amortization, partially offset
by increased inventories and receivables.
Cash used by investing activities was $133 million in the first nine months
of 1997 versus $212 million in the comparable period of 1996. Due to the timing
of capital expenditures in 1997, the Company expended $65 million for property,
plant and equipment, as compared to $94 million for the first nine months of
1996. During the first nine months of 1997, the Company received proceeds of
$28 million from the sale of fixed assets as part of the Company's
restructuring program. Cash used by Case Credit included expenditures of $68
million for the purchase of equipment on operating leases, reflecting the year-
over-year growth in Case Credit's operating lease portfolio.
During the first nine months of 1997, the Company's industrial operations
completed three strategic acquisitions resulting in $12 million of investment.
In the first quarter of 1997, the Company acquired bor-mor, Inc., a North
American-based manufacturer of directional drilling equipment, with annual
sales of approximately $9 million. Also during the first quarter, the Company
acquired Agri-Logic, a leading developer of software for agricultural
applications. During the third quarter of 1997, the Company acquired Gem
Sprayers Limited ("Gem") a U.K.-based manufacturer of self-propelled and
trailed/mounted sprayers for agricultural applications. Gem, with 1996 revenues
of approximately $12 million, is the leading supplier of sprayers in the U.K.
During the first nine months of 1996, the Company completed three strategic
acquisitions: Concord, Inc., Austoft Holdings Limited, and Steyr
Landmaschinentechnik AG. These acquisitions resulted in approximately $80
million of investment and an additional $15 million of non-cash consideration.
During the third quarter of 1997, Case Credit announced a joint venture with
UFB LOCABAIL SA, a subsidiary of Compagnie Bancaire, to provide financing for
Case's European dealers and retail customers. The formation of this new
venture, Case Credit Europe S.A.S., establishes the first pan-European finance
organization to serve both the agricultural and construction equipment markets
in that region. Also during the third quarter, Case Credit and Cummins Engine
Company, Inc. ("Cummins") entered into an agreement under which Case Credit
will offer financing to all qualified North American retail purchasers, dealers
and manufacturers of industrial equipment powered by Cummins engines.
19
Net cash provided by financing activities was $473 million in the first nine
months of 1997, primarily due to increased short-term borrowings to fund Case
Credit's growing portfolio of receivables. Also in the first quarter of 1997,
Case Industrial provided $20 million of additional capitalization for Case
Credit. During the second quarter of 1997, the Company initiated a stock
repurchase program to acquire up to four million shares of the Company's Common
Stock. The Company has expended approximately $32 million to repurchase shares
under this program. Purchases of Common Stock are at the Company's discretion,
subject to prevailing financial and market conditions.
The Company received proceeds from the issuance of long-term debt of $500
million in the first quarter of 1996. In January 1996, the Company issued $300
million aggregate principal amount of its 7 1/4% unsecured and unsubordinated
notes due 2016. In February 1996, Case Credit issued $200 million aggregate
principal amount of its 6 1/8% unsecured and unsubordinated notes due 2003
pursuant to a $300 million shelf registration statement filed with the
Securities and Exchange Commission in 1995. The net proceeds from the Case
Credit offering were used to repay indebtedness and finance Case Credit's
growing portfolio of receivables.
The Company repaid $644 million of long-term debt during the first nine
months of 1996. The proceeds from the $300 million note offering, together with
cash and additional borrowings under the Company's credit facilities were used
to exercise the Company's option to repurchase for cash all of the Company's 10
1/2% Senior Subordinated notes and to pay accrued interest thereon. As a result
of this repurchase, the Company recorded an extraordinary, after-tax charge of
$22 million in the first quarter of 1996.
Total debt at September 30, 1997, was $2,547 million, $1,609 million of which
related to Case Credit. The consolidated debt to capitalization ratio, defined
as total debt divided by the sum of total debt, stockholders' equity and
preferred stock with mandatory redemption provisions, was 53.6% at September
30, 1997, and the Company's industrial debt to capitalization ratio was 29.9%.
The consolidated and industrial ratios at December 31, 1996 were 51.8% and
30.9%, respectively.
FUTURE LIQUIDITY AND CAPITAL RESOURCES
The Company has various sources of future liquidity including public debt
offerings and other available lines of credit, as well as the asset-backed
securitization markets. The Company anticipates that it will continue to pool
retail receivables and issue asset-backed securities in the United States and
Canada. In addition, the Company has a $400 million private, revolving
wholesale (dealer) receivable asset-backed securitization facility that can be
utilized to periodically sell wholesale (dealer) receivables to third party
investors.
During the third quarter of 1997, the Company announced that it plans to
invest approximately $100 million over the next three years to expand its
presence in the Latin American agricultural equipment market, including the
establishment of a manufacturing facility in Brazil. The Company anticipates
that funding for these expenditures will be derived from continuing operations
and from additional borrowings under the Company's existing credit facilities.
In October 1997, the Company announced an agreement to acquire the
outstanding shares of Fortschritt Erntemaschinen GmbH ("Fortschritt"). Based in
Neustadt, Germany, Fortschritt manufactures hay and forage equipment, including
self-propelled forage harvesters, large square balers and windrowers. Case also
agreed to acquire select assets of two other German companies including
intellectual property and production and distribution rights related to self-
propelled forage harvesters and combines. Combined sales of the Fortschritt and
other products included in the agreements were approximately $110 million in
1996. The Company anticipates that funding for these acquisitions will be
derived from continuing operations and from additional borrowings under the
Company's existing credit facilities. The Company anticipates completion of
these acquisitions in the fourth quarter of 1997.
On October 16, 1997, Case Credit issued $150 million aggregate principal
amount of its 6.75% unsecured and unsubordinated notes due 2007 pursuant to a
$700 million shelf registration statement filed with the Securities and
Exchange Commission in September 1997. The net proceeds from the offering will
be used to fund Case Credit's growing portfolio of receivables and for other
corporate purposes, including the repayment of indebtedness.
20
On October 17, 1997, Case Credit Australia Pty Ltd replaced its A$250
million revolving credit facilities with A$1.0 billion in new credit
facilities. These new facilities are guaranteed by Case Credit Corporation and
are comprised of a A$400 million commercial paper program that is backed by a
syndicated credit facility, and a A$600 million medium-term note program.
Under the terms of the commercial paper program, the principal amount of the
commercial paper outstanding, combined with the amounts outstanding under the
syndicated credit facility, cannot exceed a total of A$400 million. These
facilities support Case Credit's strategy to leverage its financing options
and broaden its access to traditional capital markets.
On May 14, 1997, the Company's Board of Directors authorized the purchase
from time to time of up to four million shares of the Company's Common Stock.
The purchase of Case Common Stock under this program is at the Company's
discretion, subject to prevailing financial and market conditions.
OUTLOOK
Case continues to benefit from strong worldwide markets and economic
conditions for its agricultural and construction equipment and financial
services businesses, however, the worldwide volatility in the capital markets
could impact business conditions in some parts of the world.
Grain stock levels, while improving, are expected to stay at the low range
of normal levels as demand for agricultural commodities continues to grow
around the world, driven by population growth and improving diets within
developing nations. In North America, net farm income is forecasted to be at
sustained levels as a result of an expected good harvest and solid commodity
prices. These same factors are creating a favorable outlook in Europe,
although the U.K. market has been negatively impacted by higher currency
rates, resulting in lower subsidy payments. In the Asia Pacific region, the
1997-1998 growing season could be affected by uncertain weather conditions. In
Latin America, the agricultural business continues to grow rapidly,
particularly in the higher horsepower categories, and the near-term impact of
uncertain economic conditions in Brazil is currently expected to be minimal.
In Case's construction equipment market, the outlook varies by both country
and economic conditions. In North America, current, or even slightly higher,
interest rates are expected to result in continued strong housing starts. In
Europe, economic conditions are favorable on balance, and France and Germany,
which have been weak, are showing signs of improvement. However the
construction sectors are expected to lag that improvement. In the Asia Pacific
region, the Australian housing market continues to show early signs of
recovery, and the impact to Case of worsening economic conditions in southeast
Asia is currently expected to be minimal, however, conditions continue to be
volatile. In Latin America, economic conditions in Mexico continue to improve
and retail sales of construction equipment are expected to be strong year-
over-year. In Brazil, sales of construction equipment to date have been
strong, however, recent economic measures taken by Brazil's government may
impact sales growth in that country.
The information included in the "Outlook" section represents forward-looking
statements and involves risks and uncertainties that could cause actual
results to differ materially from those in the forward-looking statements. The
Company's outlook is predominantly based on its interpretation of what it
considers key economic assumptions. Crop production and commodity prices are
strongly affected by weather and can fluctuate significantly. Housing starts
and other construction activity are sensitive to interest rates and government
spending. Some of the other significant factors for the Company include
general economic and capital market conditions, the cyclical nature of its
business, foreign currency movements, the Company's access to credit,
political uncertainty and civil unrest in various areas of the world, pricing,
product initiatives and other actions taken by competitors, disruptions in
production capacity, excess inventory levels, the effect of changes in laws
and regulations (including government subsidies and international trade
regulations), changes in environmental laws and employee relations. Further
information concerning factors that could significantly impact expected
results is included in the following sections of the Company's Form 10-K
Annual Report for 1996, as filed with the Securities and Exchange Commission:
Business--Employees, Business--Environmental Matters, Business--Significant
International Operations, Business--Seasonality and Production Schedules,
Business--Competition, Legal Proceedings, and Management's Discussion and
Analysis of Financial Condition and Results of Operations.
21
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a description of legal proceedings to which the Company is party, see
footnote 8 to the Case financial statements included in this Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
A list of the exhibits included as part of this Form 10-Q is set forth in the
Index to Exhibits that immediately precedes such exhibits, which is
incorporated herein by reference.
(b) Reports on Form 8-K.
The Company did not file any Current Reports on Form 8-K during the third
quarter ended September 30, 1997.
22
SIGNATURE
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.
Case Corporation
/s/ Theodore R. French
By __________________________________
Theodore R. French
President, Financial Services and
Chief Financial Officer (Principal
Financial Officer and authorized
signatory for Case Corporation)
Date: November 13, 1997
23
EXHIBIT INDEX
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION OF EXHIBITS NUMBER
------- ----------------------- ----------
4 The Company hereby agrees to furnish to the Securities
and Exchange Commission, upon its request, the instru-
ments with respect to its guaranty of certain indebt-
edness issued by its subsidiaries, which indebtedness
does not exceed 10% of the Company's total consoli-
dated assets.
10(a) --Second Amendment, dated as of August 25, 1997, to
the Revolving Credit and Guarantee Agreement, dated as
of August 23, 1996, among Case Corporation, Case Can-
ada Corporation/Corporation Case Canada, certain for-
eign Subsidiaries from time to time parties thereto,
the Lenders parties thereto, the Co-Agents and Lead
Managers named therein, The Chase Manhattan Bank, as
General Administrative Agent, and The Bank of Nova
Scotia, as Canadian Administrative Agent.
10(b) --Second Amendment, dated as of August 25, 1997, to
the Revolving Credit and Guarantee Agreement, dated as
of August 23, 1996, among Case Credit Corporation,
certain foreign Subsidiaries from time to time parties
thereto, the Lenders parties thereto, the Co-Agents
and Lead Managers named therein, and The Chase Manhat-
tan Bank, as Administrative Agent.
10(c) --Second Amendment, dated as of August 25, 1997, to
the Revolving Credit Agreement, dated as of August 23,
1996, among Case Credit Ltd., the Lenders parties
thereto, Canadian Imperial Bank of Commerce, as Co-
Agent, and The Bank of Nova Scotia, as Administrative
Agent.
10(d) --Deed of Guarantee and Negative Pledge, dated October
17, 1997, executed by Case Credit Corporation pursuant
to which Case Credit Corporation guarantees certain
indebtedness of Case Credit Australia Pty Ltd.
10(e) --Bill Facility Agreement, dated October 17, 1997, be-
tween Case Credit Australia Pty Ltd, the lenders par-
ties thereto, and National Australia Bank Limited, as
Agent.
10(f) --Deed Poll, dated October 17, 1997, executed by Case
Credit Australia Pty Ltd, pursuant to which Case
Credit Australia Pty Ltd may from time to time issue
medium-term notes.
11 Computation of Earnings Per Share of Common Stock.
12 Computation of Ratio of Earnings to Fixed Charges and
Preferred Dividends.
27 Financial Data Schedule.
24