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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
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 MARCH 31, 1998
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
----------------
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: 74,611,394 shares outstanding as of
March 31, 1998.
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TABLE OF CONTENTS
PAGE
----
Part I--Financial Information
Case Corporation and Consolidated Subsidiaries--
Statements of Income.................................................. 3
Balance Sheets........................................................ 4
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................................................ 10
Part II--Other Information
Item 1. Legal Proceedings............................................... 15
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............................................... 15
Item 6. Exhibits and Reports on Form 8-K................................ 15
- --------
* No response to this item is included herein for the reason that it is
inapplicable or the answer to such item is negative.
2
PART I
FINANCIAL INFORMATION
CASE CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
CASE
CONSOLIDATED INDUSTRIAL CASE CREDIT
------------- ------------- -------------
THREE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31,
------------- ------------- -------------
1998 1997 1998 1997 1998 1997
------ ------ ------ ------ ------ ------
REVENUES:
Net sales.......................... $1,312 $1,176 $1,312 $1,176 $ -- $ --
Interest income and other.......... 69 56 8 10 76 66
------ ------ ------ ------ ------ ------
1,381 1,232 1,320 1,186 76 66
COSTS AND EXPENSES:
Cost of goods sold................. 1,019 910 1,019 910 -- --
Selling, general and
administrative.................... 146 134 152 145 9 8
Research, development and
engineering....................... 52 46 52 46 -- --
Interest expense................... 47 39 18 18 29 22
Other, net......................... 15 8 7 4 8 4
------ ------ ------ ------ ------ ------
Income before taxes.................. 102 95 72 63 30 32
Income tax provision................. 33 31 22 21 11 10
------ ------ ------ ------ ------ ------
69 64 50 42 19 22
Equity in income--Case Credit........ -- -- 19 22 -- --
------ ------ ------ ------ ------ ------
Net income........................... $ 69 $ 64 $ 69 $ 64 $ 19 $ 22
====== ====== ====== ====== ====== ======
Preferred stock dividends............ 2 2
------ ------
Net income to common................. $ 67 $ 62
====== ======
PER SHARE DATA:
Basic earnings per share of common
stock............................. $ 0.91 $ 0.85
====== ======
Diluted earnings per share of
common stock...................... $ 0.88 $ 0.82
====== ======
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 CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1998, AND DECEMBER 31, 1997
(IN MILLIONS, EXCEPT SHARE DATA)
(UNAUDITED)
CONSOLIDATED CASE INDUSTRIAL CASE CREDIT
---------------------- ---------------------- ----------------------
MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31,
ASSETS 1998 1997 1998 1997 1998 1997
------ --------- ------------ --------- ------------ --------- ------------
CURRENT ASSETS:
Cash and cash
equivalents........... $ 152 $ 252 $ 125 $ 185 $ 27 $ 67
Accounts and notes
receivable............ 2,362 2,053 1,770 1,459 661 705
Inventories............ 1,251 1,064 1,251 1,064 -- --
Deferred income taxes.. 190 191 174 175 16 16
Prepayments and other.. 51 40 49 40 2 --
------ ------ ------ ------ ------ ------
TOTAL CURRENT ASSETS
.................... 4,006 3,600 3,369 2,923 706 788
------ ------ ------ ------ ------ ------
Long-Term Receivables... 1,535 1,605 194 252 1,328 1,340
OTHER ASSETS:
Investments in joint
ventures.............. 82 82 66 66 16 16
Investment in Case
Credit................ -- -- 378 357 -- --
Goodwill and
intangibles........... 313 319 313 319 -- --
Other.................. 461 376 175 173 300 215
------ ------ ------ ------ ------ ------
TOTAL OTHER ASSETS... 856 777 932 915 316 231
------ ------ ------ ------ ------ ------
Property, Plant and
Equipment, at cost..... 1,982 1,987 1,978 1,983 4 4
Accumulated
depreciation........... (991) (988) (990) (987) (1) (1)
------ ------ ------ ------ ------ ------
NET PROPERTY, PLANT
AND EQUIPMENT....... 991 999 988 996 3 3
------ ------ ------ ------ ------ ------
TOTAL................ $7,388 $6,981 $5,483 $5,086 $2,353 $2,362
====== ====== ====== ====== ====== ======
LIABILITIES AND EQUITY
----------------------
CURRENT LIABILITIES:
Current maturities of
long-term debt........ $ 8 $ 8 $ 8 $ 8 $ -- $ --
Short-term debt........ 1,410 1,326 526 179 884 1,147
Accounts payable....... 731 708 769 753 32 27
Other accrued
liabilities........... 786 828 769 799 17 67
------ ------ ------ ------ ------ ------
TOTAL CURRENT
LIABILITIES......... 2,935 2,870 2,072 1,739 933 1,241
------ ------ ------ ------ ------ ------
Long-Term Debt.......... 1,681 1,404 667 669 1,014 735
OTHER LIABILITIES:
Pension benefits....... 106 109 106 109 -- --
Other postretirement
benefits.............. 144 137 144 137 -- --
Other postemployment
benefits.............. 38 38 38 38 -- --
Other.................. 153 147 127 120 26 27
------ ------ ------ ------ ------ ------
TOTAL OTHER
LIABILITIES......... 441 431 415 404 26 27
------ ------ ------ ------ ------ ------
Commitments and
Contingencies (Note 6)
Minority Interest....... 4 2 2 -- 2 2
Preferred Stock with
Mandatory Redemption
Provisions............. 77 77 77 77 -- --
STOCKHOLDERS' EQUITY:
Common Stock, $0.01
par value; authorized
200,000,000 shares,
issued 76,705,239,
outstanding,
74,611,394............ 1 1 1 1 -- --
Paid-in capital........ 1,363 1,334 1,363 1,334 244 244
Cumulative translation
adjustment............ (101) (94) (101) (94) (14) (16)
Unearned compensation
on restricted stock... (19) (14) (19) (14) -- --
Pension liability
adjustment............ (8) (8) (8) (8) -- --
Retained earnings...... 1,138 1,074 1,138 1,074 148 129
Treasury stock,
2,093,845 shares, at
cost.................. (124) (96) (124) (96) -- --
------ ------ ------ ------ ------ ------
TOTAL STOCKHOLDERS'
EQUITY.............. 2,250 2,197 2,250 2,197 378 357
------ ------ ------ ------ ------ ------
TOTAL................ $7,388 $6,981 $5,483 $5,086 $2,353 $2,362
====== ====== ====== ====== ====== ======
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."
4
CASE CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(IN MILLIONS)
(UNAUDITED)
CONSOLIDATED CASE INDUSTRIAL CASE CREDIT
-------------- ---------------- --------------
THREE MONTHS THREE MONTHS
ENDED THREE MONTHS ENDED
MARCH 31, ENDED MARCH 31, MARCH 31,
-------------- ---------------- --------------
1998 1997 1998 1997 1998 1997
------ ------ ------- ------- ------ ------
OPERATING ACTIVITIES:
Net income................ $ 69 $ 64 $ 69 $ 64 $ 19 $ 22
Adjustments to reconcile
net income to net cash
provided
(used) by operating
activities:
Depreciation and
amortization........... 43 40 34 35 9 5
Deferred income tax
expense (benefit)...... 4 10 4 12 -- (2)
(Gain) loss on disposal
of fixed assets........ -- (2) -- (2) -- --
Cash paid for
restructuring.......... (10) (24) (10) (24) -- --
Undistributed (earnings)
loss of unconsolidated
subsidiaries........... 2 (7) (18) (29) -- --
Changes in components of
working capital:
(Increase) decrease in
receivables.......... (324) (173) (326) (99) 44 (105)
(Increase) decrease in
inventories.......... (195) (229) (195) (229) -- --
(Increase) decrease in
prepayments and other
current assets....... (9) 10 (7) 11 (2) (1)
Increase (decrease) in
payables............. 74 47 29 85 5 (8)
Increase (decrease) in
accrued liabilities.. (69) (39) (19) (38) (50) (1)
(Increase) decrease in
long-term receivables.. 70 166 61 132 12 31
Increase (decrease) in
other liabilities...... 15 5 15 5 -- --
Other, net.............. (59) (17) (6) (3) (57) (10)
------ ------ ------- ------- ------ ------
NET CASH PROVIDED
(USED) BY OPERATING
ACTIVITIES.......... (389) (149) (369) (80) (20) (69)
------ ------ ------- ------- ------ ------
INVESTING ACTIVITIES:
Proceeds from sale of
businesses and assets.... 1 7 1 7 -- --
Expenditures for property,
plant and equipment...... (24) (18) (24) (17) -- (1)
Expenditures for equipment
on operating leases...... (36) (14) -- -- (36) (14)
Acquisitions and
investments.............. -- (8) -- (8) -- --
------ ------ ------- ------- ------ ------
NET CASH PROVIDED
(USED) BY INVESTING
ACTIVITIES.......... (59) (33) (23) (18) (36) (15)
------ ------ ------- ------- ------ ------
FINANCING ACTIVITIES:
Proceeds from issuance of
long-term debt........... 279 -- -- -- 279 --
Payment of long-term debt. (2) (2) (2) (2) -- --
Net increase (decrease) in
short-term debt and
revolving credit
facilities............... 83 163 346 81 (263) 82
Capital contributions..... -- -- -- (20) -- 20
Proceeds from issuance of
common stock............. 27 13 27 13 -- --
Repurchases of common
stock.................... (27) -- (27) -- -- --
Dividends paid (common and
preferred)............... (6) (5) (6) (5) -- --
Other, net................ (6) 2 (6) 2 -- --
------ ------ ------- ------- ------ ------
NET CASH PROVIDED
(USED) BY FINANCING
ACTIVITIES.......... 348 171 332 69 16 102
------ ------ ------- ------- ------ ------
Effect of foreign exchange
rate changes on cash and
cash equivalents.......... -- (1) -- (1) -- --
------ ------ ------- ------- ------ ------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS...... $ (100) $ (12) $ (60) $ (30) $ (40) $ 18
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD....... 252 116 185 99 67 17
------ ------ ------- ------- ------ ------
CASH AND CASH EQUIVALENTS,
END OF PERIOD............. $ 152 $ 104 $ 125 $ 69 $ 27 $ 35
====== ====== ======= ======= ====== ======
CASH PAID DURING THE PERIOD
FOR INTEREST.............. $ 65 $ 54 $ 28 $ 28 $ 37 $ 26
====== ====== ======= ======= ====== ======
CASH PAID DURING THE PERIOD
FOR TAXES................. $ 41 $ 31 $ 27 $ 28 $ 14 $ 3
====== ====== ======= ======= ====== ======
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,
1996................... $ 1 $1,238 $ (14) $ (9) $(4) $ 693 $ (1) $1,904
Net income............. -- -- -- -- -- 403 -- 403
Dividends declared..... -- -- -- -- -- (22) -- (22)
Translation adjustment. -- -- (80) -- -- -- -- (80)
Capital contributions
on stock issuance..... -- 84 -- -- -- -- -- 84
Recognition of
compensation on
restricted stock...... -- -- -- 6 -- -- -- 6
Issuance of restricted
stock, net of
forfeitures........... -- 12 -- (11) -- -- (1) --
Pension liability
adjustment............ -- -- -- -- (4) -- -- (4)
Acquisition of treasury
stock................. -- -- -- -- -- -- (94) (94)
--- ------ ----- ---- --- ------ ----- ------
BALANCE, DECEMBER 31,
1997................... 1 1,334 (94) (14) (8) 1,074 (96) 2,197
Net income............. -- -- -- -- -- 69 -- 69
Dividends declared..... -- -- -- -- -- (5) -- (5)
Translation adjustment. -- -- (7) -- -- -- -- (7)
Capital contributions
on stock issuance..... -- 21 -- -- -- -- -- 21
Recognition of
compensation on
restricted stock...... -- -- -- 2 -- -- -- 2
Issuance of restricted
stock, net of
forfeitures........... -- 8 -- (7) -- -- (1) --
Acquisition of treasury
stock................. -- -- -- -- -- -- (27) (27)
--- ------ ----- ---- --- ------ ----- ------
BALANCE MARCH 31, 1998.. $ 1 $1,363 $(101) $(19) $(8) $1,138 $(124) $2,250
=== ====== ===== ==== === ====== ===== ======
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 March 31, 1998, and the results of operations,
changes in stockholders' equity and cash flows for the periods indicated. It
is suggested that these interim financial statements be read in conjunction
with the financial statements and the notes thereto included in the Company's
1997 Annual Report on Form 10-K. 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 1998 presentation.
(2) ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This
statement establishes standards for the reporting and display of comprehensive
income and its components. Components of comprehensive income include net
income and all other non-owner changes in equity. SFAS No. 130 requires that
an enterprise classify items of comprehensive income by their nature in a
financial statement for the period in which they are recognized. For interim
reporting, the Company has chosen to disclose comprehensive income in the
Notes to the Financial Statements. See Note 8, "Comprehensive Income."
Effective January 1, 1998, the Company adopted Statement of Position ("SOP")
No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." The Company's accounting for costs of computer software
developed or obtained for internal use is consistent with the guidelines
established in the SOP and, as a result, the adoption of this statement had no
material effect on the Company's financial position or results of operations.
Case will adopt SOP No. 98-5, "Reporting on the Costs of Start-Up
Activities," effective January 1, 1999. Adoption of this statement will have
no material effect on the Company's financial position or results of
operations.
(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):
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
Raw materials...................................... $ 252 $ 207
Work-in-process.................................... 138 135
Finished goods..................................... 861 722
------ ------
Total inventories.............................. $1,251 $1,064
====== ======
7
CASE CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(4) ASSET-BACKED SECURITIZATIONS
During the first quarter of 1998, limited-purpose business trusts organized
by Case Credit issued $614 million of asset-backed securities to outside
investors. As of March 31, 1998, Case Credit has sold $439 million of retail
notes to the trusts in connection with these issuances. The Company will sell
the remaining retail notes to the trusts as receivables are generated. During
the first quarter of 1997, limited-purpose business trusts organized by Case
Credit issued $830 million of asset-backed securities to outside investors, of
which $180 million was issued pursuant to a private Canadian placement. As of
March 31, 1997, Case Credit had sold $502 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 first quarter effective income tax
rate of 32% for 1998 was lower than the U.S. statutory tax rate of 35%,
primarily due to reductions in the tax valuation reserves in certain foreign
jurisdictions, research and development tax credits and recognition of tax
benefits from the Company's foreign sales corporation, partially offset by
state income taxes. In the first quarter of 1997, the effective income tax
rate of 33% was lower than the U.S. statutory tax rate primarily due to
reductions in the tax valuation reserves in certain foreign jurisdictions,
research and development tax credits, and recognition of tax benefits from the
Company's foreign sales corporation, partially offset by state income taxes
and foreign income taxed at different rates.
(6) 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.
8
CASE CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
Other
Case is the subject of various other legal claims arising from its
operations, including product warranty, dealer disputes, worker'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.
(7) EARNINGS PER SHARE OF COMMON STOCK
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1997
--------- ---------
Earnings per average share of Common Stock (shares in
millions):
Basic
Net earnings per share of common stock.................. $ 0.91 $ 0.85
========= =========
Weighted-average shares outstanding..................... 73.9 73.4
Diluted
Net earnings per share of common stock.................. $ 0.88 $ 0.82
========= =========
Weighted-average shares outstanding, assuming full
dilution............................................... 78.5 78.5
(8) COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." The components of comprehensive income for the three
months ended March 31, 1998 and 1997, are as follows (in millions):
THREE MONTHS ENDED
MARCH 31,
---------------------
1998 1997
--------- ---------
Net income........................................ $ 69 $ 64
Pension liability adjustment, net of taxes........ -- --
Translation adjustment, net of taxes.............. (7) (34)
--------- ---------
Comprehensive income.............................. $ 62 $ 30
========= =========
(9) OTHER MATTERS
The Company's 38-month contract with the United Automobile, Aerospace and
Agricultural Implement Workers of America (the "UAW") expired on March 29,
1998. Case and the UAW reached a tentative long-term agreement, pending
ratification by union members, on April 23, 1998. On April 30, 1998, the UAW-
represented employees rejected the tentative agreement with the Company.
Currently, no new contract talks have been scheduled. Production is continuing
at each of Case's UAW-represented facilities.
The Company is unable to predict the timing of concluding the contract
negotiations and any future earnings impact pending the ratification of a new
UAW contract.
The UAW represents approximately 3,300 Case employees at facilities in
Burlington, Iowa; East Moline, Illinois; Burr Ridge, Illinois; Racine,
Wisconsin, and St. Paul, Minnesota.
(10) SUBSEQUENT EVENTS
On April 30, 1998, the Company acquired certain assets of the Tyler
Industries division ("Tyler") of IBOCO, Inc., a privately owned company.
Tyler, with operations in Benson, Minnesota, designs, manufactures and
distributes a complete line of chemical and fertilizer sprayers and
applicators. In 1997, Tyler reported sales of approximately $66 million.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ANALYSIS OF RESULTS OF OPERATIONS
First Quarter 1998 vs. First Quarter 1997
EARNINGS
The Company recorded net income of $69 million for the first quarter of
1998, up 8% or $5 million over net income of $64 million for the first quarter
of 1997. Diluted earnings per share for the first quarter of 1998 was $.88 per
share as compared to $.82 per share in the same quarter of 1997, primarily
reflecting the year-over-year increase in net income.
The Company's industrial operations recorded income, before equity income of
Case Credit, of $50 million in the first quarter of 1998 versus $42 million in
the first quarter of 1997. On a pretax basis, the Company's industrial
operations recorded earnings of $72 million in the first quarter of 1998 as
compared to $63 million in the comparable period last year. The industrial
effective income tax rate decreased from 33% in the first quarter of 1997 to
31% in the first quarter of 1998, primarily due to research and development
tax credits, recognition of tax benefits from the Company's foreign sales
corporation and reductions in the tax valuation reserves in certain foreign
jurisdictions, partially offset by state income taxes. Case Credit recorded
$19 million in net income for the first quarter of 1998, $3 million less than
net income of $22 million in the first quarter of 1997.
Case's operating earnings for the first quarter of 1998 were $109 million
versus $103 million for the same period in 1997. 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. The year-over-year increase in operating earnings reflects
higher volumes and pricing, along with contributions from the Company's
ongoing cost-reduction initiatives. Operating earnings were constrained by
unfavorable exchange rates, driven principally by currency depreciation in
Australia, as well as costs related to the planned launch of several key
products in the second half of 1998.
A reconciliation of the Company's industrial net income to operating
earnings is as follows (in millions):
CASE
INDUSTRIAL
THREE
MONTHS
ENDED
MARCH 31,
-----------
1998 1997
----- -----
Net income.................................................... $ 69 $ 64
Income tax provision.......................................... 22 21
Interest expense.............................................. 18 18
----- -----
Operating earnings........................................ $ 109 $ 103
===== =====
REVENUES
On a consolidated basis, worldwide revenues increased $149 million or 12% in
the first quarter of 1998 to $1,381 million. Net sales of equipment and parts
increased $136 million or 12% to $1,312 million. The increase in net sales
consists primarily of a 12% volume increase and a 2% improvement in price
realization, partially offset by a 2% deterioration resulting from the impact
of foreign exchange. Net sales in the first quarter of 1998 increased in North
America and Europe, with year-over-year increases of 18% and 3%, respectively.
Net sales in the Company's Latin American region increased 52% as compared to
the prior year. Net sales in the Asia Pacific region were down 21% versus the
prior year as unfavorable economic conditions continued in this region during
the first quarter of 1998. Worldwide, net sales of agricultural equipment
increased 15% over the comparable period in 1997, while first quarter net
sales of construction equipment increased 14% over the same period in 1997.
10
NET SALES
Worldwide net sales of agricultural equipment increased 15% in the first
quarter of 1998 as compared to the first quarter of 1997. The increase in
sales of agricultural equipment in North America was driven by increases in
sales of combines and tractors, partially offset by decreased sales of cotton
pickers. In Europe, the Company experienced lower year-over-year first quarter
sales of MAGNUM(TM) (120-plus horsepower) tractors and mid-horsepower
tractors, partially offset by increased sales of combines and implements. This
reflects the impact of weaker European markets, particularly in the United
Kingdom, and restricted availability of newly launched models of the Company's
CX tractor line. In the Company's Asia Pacific region, the decrease in
agricultural sales resulted from lower sales of sugar cane harvesters,
MAGNUM(TM) tractors and cotton pickers, partially offset by increased sales of
combines. In the Company's Latin American region, the Company experienced
increases in sales of cotton pickers and tractors as compared to the prior
year.
Worldwide net sales of construction equipment increased 14% in the first
quarter of 1998 as compared to the first quarter of 1997. In North America,
first quarter sales of construction equipment increased as a result of
increased sales of excavators, skid steers and wheel loaders, partially offset
by lower sales of loader/backhoes. The increase in net sales of construction
equipment in Europe primarily reflects increased sales of excavators and wheel
loaders. In the Company's Asia Pacific region, sales of construction equipment
were impacted by lower sales of loader/backhoes, crawlers and wheel loaders,
as unfavorable economic conditions in this region continued during the first
quarter of 1998. In the Company's Latin American region, increased sales of
construction equipment reflects increased sales of wheel loaders,
loader/backhoes, skid steers and crawlers, partially offset by lower sales of
excavators.
COSTS AND EXPENSES
Cost of goods sold for the industrial operations increased $109 million to
$1,019 million in the first quarter of 1998 as compared to the same quarter in
1997. The increase was primarily due to the sales volume increase, with cost
of goods sold as a percentage of net sales increasing to 77.7% as compared to
77.4% in the first quarter of 1997. This increase as a percentage of net sales
reflects changes in geographic and product line sales mix, and the impact of
foreign currency, partially offset by pricing actions and cost improvement
initiatives.
Selling, general and administrative expenses for the industrial operations
increased $7 million to $152 million in the first quarter of 1998 as compared
to $145 million in the first quarter of 1997. As a percentage of net sales,
selling, general and administrative expenses for the first quarter of 1998
decreased to 11.6% from 12.3% in the first quarter of 1997. 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, 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.
Research, development and engineering expenses increased to $52 million in
the first quarter of 1998 as compared to $46 million in the first quarter of
1997, primarily due to expenditures for new product development.
Interest expense for Case's industrial operations was $18 million in both
the first quarters of 1998 and 1997.
The consolidated effective income tax rate for the first quarter of 1998 was
32% as compared to 33% in the first quarter of 1997. The 1998 effective income
tax rate was lower than the U.S. statutory rate of 35% primarily due to
reductions in the tax valuation reserves in certain foreign jurisdictions,
research and development tax credits, and recognition of tax benefits from the
Company's foreign sales corporation, partially offset by state income taxes.
In the first quarter of 1997, the effective tax rate was lower than the U.S.
statutory tax rate primarily due to reductions in the tax valuation reserves
in certain foreign jurisdictions, research and development tax credits, and
recognition of tax benefits from the Company's foreign sales corporation,
partially offset by state income taxes and foreign income taxed at different
rates.
11
CREDIT OPERATIONS
Net income for the first quarter of 1998 was $19 million as compared to $22
million for the first quarter of 1997. The $3 million decrease in quarter-
over-quarter net income is primarily due to lower securitization and servicing
fee income, and reduced income from Case Corporation marketing programs, as
well as increased depreciation of equipment on operating leases and increased
interest expense due to higher average on-book receivables. These decreases
were partially offset by higher earnings as a result of increased levels of
on-balance-sheet receivables, including higher lease income from operating
leases.
Case Credit reported total revenues of $76 million for the first quarter of
1998 and $66 million for the first quarter of 1997. Finance income earned on
retail notes and finance leases increased to $30 million in the first three
months of 1998 as compared to $22 million for the same period in 1997,
primarily due to increased levels of on-balance-sheet receivables. In
addition, operating lease income increased $5 million to a total of $11
million for the first quarter of 1998, reflecting the growth in Case Credit's
operating lease portfolio. These revenue increases were partially offset by
reduced revenues from Case Corporation marketing programs and lower
securitizations and servicing fee income.
Interest expense for the first three months of 1998 was $29 million, up $7
million from the $22 million reported in the first three months of 1997. The
increase in interest expense resulted from higher average debt levels during
the first quarter of 1998 as compared to the first quarter of 1997, primarily
due to the growth in Case Credit's on-balance-sheet receivables and increased
equipment on operating leases.
Operating expenses increased $5 million to a total of $17 million in the
first quarter of 1998 as compared to the first quarter of 1997. This increase
primarily resulted from higher year-over-year depreciation expense for
equipment on operating leases relating to the Company's larger operating lease
portfolio, as well as higher operating expenses in support of Case Credit's
growth initiatives.
During the first quarter of 1998, Case Credit's serviced portfolio of
receivables increased 18% over the same time last year to a record $5.3
billion. Growth in the quarter resulted from Case Credit's focus on new
markets and new products, including retail financing through Case Credit's
European joint venture, Case Credit Europe S.A.S. Gross receivables acquired
in the first three months of 1998 increased 35% for a total of $887 million
versus the same period in 1997. During the first quarter of 1998, limited-
purpose business trusts organized by Case Credit issued $614 million of asset-
backed securities to outside investors. As of March 31, 1998, Case Credit had
sold $439 million of retail notes to the trusts in connection with these
issuances. Case Credit will sell the remaining retail notes to the trusts as
receivables are generated. During the first quarter of 1997, Case Credit
issued $830 million of asset-backed securities to outside investors, of which
$180 million was issued pursuant to a private Canadian placement. As of March
31, 1997, Case Credit had sold $502 million of U.S. and Canadian retail notes
to the trusts in connection with these issuances. The proceeds from the sale
of the 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.
In the first quarter of 1998, cash used by operating activities was $389
million. Cash used by the industrial operations was $369 million. Cash used by
the industrial operations primarily resulted from increased levels of
wholesale receivables and inventory, reflecting higher levels of actual and
projected sales volumes, as well as the Company's seasonal build-up of
inventory for traditionally strong second quarter shipments. Cash used by
operating activities was $149 million in the first quarter of 1997. This use
of cash was primarily due to increased inventories, partially offset by net
income and depreciation and amortization.
12
During the first quarter of 1998, cash used by investing activities was $59
million as compared to $33 million during the first quarter of 1997. Case
invested $24 million and $18 million in property, plant and equipment during
the first quarter of 1998 and 1997, respectively. Cash used by Case Credit
included $36 million and $14 million for the purchase of equipment on
operating leases during the first quarter of 1998 and 1997, respectively.
Net cash provided by financing activities was $348 million for the first
quarter of 1998, primarily due to the issuance of $279 million of medium-term
notes by Case Credit, as well as a net increase under the Company's short-term
debt facilities to fund seasonal inventory builds. During the quarter, Case
Credit issued an aggregate of $279 million of medium-term notes pursuant to a
shelf registration filed with the Securities and Exchange Commission in
September 1997. The net proceeds from the medium-term note issuances will be
used to fund Case Credit's growth initiatives and for other corporate
purposes, including the repayment of indebtedness. During the first quarter of
1997, net cash provided by financing activities was $171 million, primarily
due to increases under the Company's short-term debt and revolving credit
facilities to fund seasonal inventory builds and Case Credit's growing
receivable portfolio.
Total debt at March 31, 1998, was $3,099 million, $1,898 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 57.1% at March 31,
1998, and the Company's industrial debt to capitalization ratio was 34%. The
consolidated and industrial ratios at December 31, 1997, were 54.6% and 27.3%,
respectively.
FUTURE LIQUIDITY AND CAPITAL RESOURCES
The Company has various sources of future liquidity including asset-backed
securitization markets, public debt offerings and other available lines of
credit.
On April 30, 1998, the Company acquired certain assets of the Tyler
Industries division ("Tyler") of IBOCO, Inc., a privately owned company. The
acquisition of Tyler, a designer, manufacturer and distributor of a complete
line of chemical and fertilizer sprayers and applicators, strengthens Case's
equipment line for large-scale production agriculture and provides another
application for Case's Advanced Farming Systems. Tyler, with operations in
Benson, Minnesota, had sales of approximately $66 million in 1997.
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. During the
first quarter of 1998, the Company repurchased 469,000 shares of its common
stock, bringing the total number of shares purchased under this program to
approximately two million.
OUTLOOK
Solid economic indicators continue to support the worldwide markets for
Case's agricultural and construction equipment.
Long-term agricultural fundamentals remain positive due to increasing world
population and the trend toward greater consumption of protein-rich food in
developing countries. Global commodity prices have dropped somewhat; however,
below-average carryover stocks continue to provide price support. In North
America, land values are increasing, farmers' balance sheets are strong, and
interest rates remain low. These factors are expected to keep North America's
agricultural equipment industry near last year's record levels.
In Western Europe, the agricultural industry is expected to be weak,
particularly in the lower horsepower tractor market. However, this weakness
should be offset by further growth in Central Asian and Eastern European
countries, especially in large tractors and combines. The continued
strengthening of farm economies in Brazil and Argentina should result in
further growth in the farm equipment industry in Latin America.
13
The construction equipment market outlook varies in different regions of the
world. In North America, strong housing starts, low interest rates and solid
construction employment levels should result in a strong construction
equipment industry consistent with last year's levels. In Western Europe,
general market conditions are very supportive, with particular improvement in
France. The Latin American construction equipment market is expected to
further strengthen due to rebounding economic conditions, improving gross
domestic product and higher infrastructure investment.
Both the agricultural and construction equipment markets in the Asia Pacific
region remain depressed as unfavorable economic conditions continue in that
part of the world.
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 and labor 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 1997, 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.
DERIVATIVES
The Company uses derivative financial instruments to manage its foreign
currency and interest rate exposures. Case does not hold or issue financial
instruments for trading purposes. For information regarding Case's foreign
currency and interest rate risk management, reference is made to Item 7 and
Note 11 to the Case Financial Statements in the Company's 1997 Annual Report
on Form 10-K. There has been no material change in the Company's market risk
exposures that affect the quantitative and qualitative disclosures as
presented as of December 31, 1997.
OTHER MATTERS
The Company's 38-month contract with the United Automobile, Aerospace and
Agricultural Implement Workers of America (the "UAW") expired on March 29,
1998. Case and the UAW reached a tentative long-term agreement, pending
ratification by union members, on April 23, 1998. On April 30, 1998, the UAW-
represented employees rejected the tentative agreement with the Company.
Currently, no new contract talks have been scheduled. Production is continuing
at each of Case's UAW-represented facilities.
The Company is unable to predict the timing of concluding the contract
negotiations and any future earnings impact pending the ratification of a new
UAW contract.
The UAW represents approximately 3,300 Case employees at facilities in
Burlington, Iowa; East Moline, Illinois; Burr Ridge, Illinois; Racine,
Wisconsin, and St. Paul, Minnesota.
14
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a description of legal proceedings to which the Company is party, see
footnote 6 to the Case financial statements included in this Form 10-Q.
ITEM 5. OTHER INFORMATION
Ronald E. Goldsberry, Ph.D., Vice President and General Manager, Global Ford
Customer Service Operations, Ford Motor Company, has been nominated to serve as
a new member of the Company's Board of Directors. Dr. Goldsberry will stand for
election at the Company's annual meeting of stockholders on May 13, 1998.
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 quarter
ended March 31, 1998.
15
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: May 12, 1998
16
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.
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.
17