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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 September 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER 1-13098
CASE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OF INCORPORATION)
76-0433811
(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: 72,841,868 shares outstanding as of
September 30, 1998.
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TABLE OF CONTENTS
PAGE
----
Part I--Financial Information
Case Corporation and Consolidated Subsidiaries--
Statements of Income.................................................. 3
Balance Sheets........................................................ 6
Statements of Cash Flows.............................................. 7
Statements of Changes in Stockholders' Equity......................... 8
Notes to Financial Statements......................................... 9
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................................ 23
- --------
* 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 AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
CONSOLIDATED
-------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1998 1997 1998 1997
--------- --------- -------- --------
Revenues:
Net sales.............................. $ 1,449 $ 1,380 $ 4,433 $ 4,103
Interest income and other.............. 85 64 216 174
--------- --------- -------- --------
1,534 1,444 4,649 4,277
Costs and Expenses:
Cost of goods sold..................... 1,149 1,075 3,442 3,138
Selling, general and administrative.... 146 144 447 421
Research, development and engineering.. 58 49 167 141
Interest expense....................... 66 47 170 126
Other, net............................. 21 14 45 39
--------- --------- -------- --------
Income before taxes...................... 94 115 378 412
Income tax provision..................... 31 37 120 132
--------- --------- -------- --------
63 78 258 280
Equity in income--Case Credit............ -- -- -- --
--------- --------- -------- --------
Net income............................... $ 63 $ 78 $ 258 $ 280
========= ========= ======== ========
Preferred stock dividends................ 2 2 5 5
--------- --------- -------- --------
Net income to common..................... $ 61 $ 76 $ 253 $ 275
========= ========= ======== ========
Per share data:
Basic earnings per share of common
stock................................. $ 0.84 $ 1.03 $ 3.44 $ 3.72
========= ========= ======== ========
Diluted earnings per share of common
stock................................. $ 0.82 $ 0.98 $ 3.30 $ 3.54
========= ========= ======== ========
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 STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
CASE INDUSTRIAL
-------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1998 1997 1998 1997
--------- --------- -------- --------
Revenues:
Net sales............................... $ 1,449 $ 1,380 $ 4,433 $ 4,103
Interest income and other............... 11 7 27 25
--------- --------- -------- --------
1,460 1,387 4,460 4,128
Costs and Expenses:
Cost of goods sold...................... 1,149 1,075 3,442 3,138
Selling, general and administrative..... 165 155 486 451
Research, development and engineering... 58 49 167 141
Interest expense........................ 26 19 70 54
Other, net.............................. 7 8 13 23
--------- --------- -------- --------
Income before taxes....................... 55 81 282 321
Income tax provision...................... 17 26 86 103
--------- --------- -------- --------
38 55 196 218
Equity in income--Case Credit............. 25 23 62 62
--------- --------- -------- --------
Net income................................ $ 63 $ 78 $ 258 $ 280
========= ========= ======== ========
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."
4
CASE CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
CASE CREDIT
-------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1998 1997 1998 1997
--------- --------- -------- --------
Revenues:
Net sales............................... $ -- $ -- $ -- $ --
Interest income and other............... 108 75 264 201
--------- --------- -------- --------
108 75 264 201
Costs and Expenses:
Cost of goods sold...................... -- -- -- --
Selling, general and administrative..... 12 7 33 22
Research, development and engineering... -- -- -- --
Interest expense........................ 43 28 103 72
Other, net.............................. 14 6 32 16
--------- --------- -------- --------
Income before taxes....................... 39 34 96 91
Income tax provision...................... 14 11 34 29
--------- --------- -------- --------
25 23 62 62
Equity in income--Case Credit............. -- -- -- --
--------- --------- -------- --------
Net income................................ $ 25 $ 23 $ 62 $ 62
========= ========= ======== ========
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."
5
CASE CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1998, AND DECEMBER 31, 1997
(IN MILLIONS, EXCEPT SHARE DATA)
(UNAUDITED)
CONSOLIDATED CASE INDUSTRIAL CASE CREDIT
-------------------------- -------------------------- --------------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997 1998 1997 1998 1997
------ ------------- ------------ ------------- ------------ ------------- ------------
Current Assets:
Cash and cash
equivalents........... $ 108 $ 252 $ 85 $ 185 $ 23 $ 67
Accounts and notes
receivable............ 2,712 2,053 1,865 1,459 854 705
Inventories............ 1,445 1,064 1,445 1,064 -- --
Deferred income
taxes................. 181 191 165 175 16 16
Prepayments and
other................. 59 40 59 40 -- --
------ ------ ------ ------ ------ ------
Total current
assets.............. 4,505 3,600 3,619 2,923 893 788
------ ------ ------ ------ ------ ------
Long-Term Receivables... 1,752 1,605 179 252 1,557 1,340
Other Assets:
Investments in joint
ventures.............. 98 82 83 66 15 16
Investment in Case
Credit................ -- -- 411 357 -- --
Goodwill and
intangibles........... 325 319 325 319 -- --
Other.................. 740 376 189 173 567 215
------ ------ ------ ------ ------ ------
Total other assets... 1,163 777 1,008 915 582 231
------ ------ ------ ------ ------ ------
Property, Plant and
Equipment, at cost..... 2,080 1,987 2,076 1,983 4 4
Accumulated
Depreciation........... (1,039) (988) (1,037) (987) (2) (1)
------ ------ ------ ------ ------ ------
Net property, plant
and equipment....... 1,041 999 1,039 996 2 3
------ ------ ------ ------ ------ ------
Total................ $8,461 $6,981 $5,845 $5,086 $3,034 $2,362
====== ====== ====== ====== ====== ======
LIABILITIES AND EQUITY
----------------------
Current Liabilities:
Current maturities of
long-term debt........ $ 5 $ 8 $ 5 $ 8 $ -- $ --
Short-term debt........ 2,115 1,326 920 179 1,195 1,147
Accounts payable....... 667 708 656 753 18 27
Other accrued
liabilities........... 748 828 717 799 31 67
------ ------ ------ ------ ------ ------
Total current
liabilities......... 3,535 2,870 2,298 1,739 1,244 1,241
------ ------ ------ ------ ------ ------
Long-Term Debt.......... 2,020 1,404 669 669 1,351 735
Other Liabilities:
Pension benefits....... 117 109 117 109 -- --
Other postretirement
benefits.............. 155 137 155 137 -- --
Other postemployment
benefits.............. 38 38 38 38 -- --
Other.................. 173 147 147 120 26 27
------ ------ ------ ------ ------ ------
Total other
liabilities......... 483 431 457 404 26 27
------ ------ ------ ------ ------ ------
Commitments and
Contingencies (Note 6)
Minority Interest....... 7 2 5 -- 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 77,650,417,
outstanding
72,841,868, as of
September 30, 1998.... 1 1 1 1 -- --
Paid-in capital........ 1,396 1,334 1,396 1,334 244 244
Cumulative translation
adjustment............ (106) (94) (106) (94) (24) (16)
Unearned compensation
on restricted stock... (17) (14) (17) (14) -- --
Pension liability
adjustment............ (8) (8) (8) (8) -- --
Retained earnings...... 1,316 1,074 1,316 1,074 191 129
Treasury stock,
4,808,549 shares, at
cost, as of September
30, 1998.............. (243) (96) (243) (96) -- --
------ ------ ------ ------ ------ ------
Total stockholders'
equity.............. 2,339 2,197 2,339 2,197 411 357
------ ------ ------ ------ ------ ------
Total................ $8,461 $6,981 $5,845 $5,086 $3,034 $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."
6
CASE CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(IN MILLIONS)
(UNAUDITED)
CONSOLIDATED CASE INDUSTRIAL CASE CREDIT
------------ --------------- -----------
NINE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------- ------------- -------------
1998 1997 1998 1997 1998 1997
--------- -------- -------- -------- -------- --------
Operating activities:
Net income............ $ 258 $ 280 $ 258 $ 280 $ 62 $ 62
Adjustments to
reconcile net income
to net cash provided
(used) by operating
activities--
Depreciation and
amortization....... 135 118 106 102 29 16
Deferred income tax
expense (benefit).. 6 16 6 18 -- (2)
(Gain) loss on
disposal of fixed
assets............. (1) (1) (1) (1) -- --
Cash paid for
restructuring...... (25) (104) (25) (104) -- --
Undistributed
(earnings) loss of
unconsolidated
subsidiaries....... -- (4) (62) (66) 1 --
Changes in
components of
working capital--
Increase in
receivables...... (644) (455) (379) (260) (162) (198)
Increase in
inventories...... (350) (227) (350) (227) -- --
(Increase)
decrease in
prepayments and
other current
assets........... (18) 15 (18) 15 -- --
Increase
(decrease) in
payables......... (53) 72 (146) 79 (10) (3)
Increase
(decrease) in
accrued
liabilities...... (81) (38) (46) (27) (37) (10)
(Increase) decrease
in long-term
receivables........ (197) 26 57 135 (251) (112)
Increase (decrease)
in other
liabilities........ 44 58 44 58 -- --
Other, net.......... (85) (42) (8) (8) (79) (33)
--------- ------- -------- -------- -------- --------
Net cash provided
(used) by
operating
activities...... (1,011) (286) (564) (6) (447) (280)
--------- ------- -------- -------- -------- --------
Investing activities:
Proceeds from sale of
businesses and
assets............... 7 28 7 28 -- --
Expenditures for
property, plant and
equipment............ (108) (65) (108) (64) -- (1)
Expenditures for
equipment on
operating leases..... (273) (68) -- -- (273) (68)
Acquisitions and
investments.......... (61) (28) (61) (12) -- (16)
--------- ------- -------- -------- -------- --------
Net cash provided
(used) by
investing
activities...... (435) (133) (162) (48) (273) (85)
--------- ------- -------- -------- -------- --------
Financing activities:
Proceeds from issuance
of long-term debt.... 629 -- -- -- 629 --
Payment of long-term
debt................. (3) -- (3) -- -- --
Net increase
(decrease) in short-
term debt and
revolving credit
facilities........... 774 463 726 90 48 373
Capital contribution.. -- -- -- (20) -- 20
Proceeds from issuance
of common stock...... 52 45 52 45 -- --
Dividends paid (common
and preferred)....... (16) (16) (16) (16) -- --
Repurchases of common
stock................ (145) (32) (145) (32) -- --
Other, net............ 12 13 12 13 -- --
--------- ------- -------- -------- -------- --------
Net cash provided
(used) by
financing
activities...... 1,303 473 626 80 677 393
--------- ------- -------- -------- -------- --------
Effect of foreign
exchange rate changes
on cash and cash
equivalents........... (1) (3) -- (3) (1) --
--------- ------- -------- -------- -------- --------
Increase (decrease) in
cash and cash
equivalents........... $ (144) $ 51 $ (100) $ 23 $ (44) $ 28
Cash and cash
equivalents, beginning
of period............. 252 116 185 99 67 17
--------- ------- -------- -------- -------- --------
Cash and cash
equivalents, end of
period................ $ 108 $ 167 $ 85 $ 122 $ 23 $ 45
========= ======= ======== ======== ======== ========
Cash paid during the
period for interest... $ 165 $ 143 $ 76 $ 65 $ 89 $ 78
========= ======= ======== ======== ======== ========
Cash paid during the
period for taxes...... $ 106 $ 125 $ 78 $ 94 $ 28 $ 31
========= ======= ======== ======== ======== ========
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."
7
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............. -- -- -- -- -- 258 -- 258
Dividends declared..... -- -- -- -- -- (16) -- (16)
Translation
adjustment............ -- -- (12) -- -- -- -- (12)
Capital contributions
on stock issuance..... -- 52 -- -- -- -- -- 52
Recognition of
compensation on
restricted stock...... -- -- -- 5 -- -- -- 5
Issuance of restricted
stock, net of
forfeitures........... -- 10 -- (8) -- -- (2) --
Acquisition of treasury
stock................. -- -- -- -- -- -- (145) (145)
--- ------ ----- ---- --- ------ ----- ------
Balance, September
30, 1998............... $ 1 $1,396 $(106) $(17) $(8) $1,316 $(243) $2,339
=== ====== ===== ==== === ====== ===== ======
The accompanying notes to financial statements are an integral part of
these Statements of Changes in Stockholders' Equity.
8
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, 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 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 are net income
and all other non-owner changes in equity. SFAS No. 130 requires that an
enterprise classify items of other 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 9, "Comprehensive Income."
Effective January 1, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This statement
standardizes the disclosure requirements for pensions and other postretirement
benefits.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. This statement must be adopted no later than January 1,
2000, although earlier application is permitted. The Company is currently
evaluating the impact of adopting SFAS No. 133.
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
effect on the Company's financial position or results of operations.
9
CASE CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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):
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
Raw materials.................................. $ 291 $ 207
Work-in-process................................ 142 135
Finished goods................................. 1,012 722
------ ------
Total inventories.......................... $1,445 $1,064
====== ======
(4) ASSET-BACKED SECURITIZATIONS
During the first nine months of 1998, limited-purpose business trusts
organized by Case Credit issued $1,379 million of asset-backed securities to
outside investors. Case Credit has sold $1,403 million of U.S. and Canadian
retail notes to the trusts in connection with these issuances. 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 had sold $1,301 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.
(5) INCOME TAXES
On a consolidated basis, the Company's effective income tax rate of 32% for
the first nine months of 1998 and 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.
(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.
10
CASE CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
(7) ACQUISITION OF BUSINESSES AND INVESTMENTS
In the third quarter of 1998, Case and Sumitomo (S.H.I) Construction
Machinery Co., Ltd. completed a global alliance to manufacture and market
hydraulic excavators. This alliance, covering both new and existing
technology, will enable Case to increase its penetration of the global
excavator market and expand its participation in a number of regions around
the world. During the third quarter, the Company also announced an agreement
to acquire certain assets of DMI, Inc. ("DMI"). The acquisition of DMI, the
leading producer of soil management equipment in North America, broadens
Case's implement business to include an innovative line of tillage and
fertilizer applicator products and adds DMI's recognized knowledge in soil
management to Case's growing farm practice expertise. DMI, with operations in
Goodfield, Illinois, had sales of approximately $77 million in 1997.
During the second quarter of 1998, the Company acquired certain assets of
the Tyler Industries division ("Tyler") of IBOCO, Inc. 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.
(8) EARNINGS PER SHARE OF COMMON STOCK
THREE
MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER SEPTEMBER
30, 30,
----------- -----------
1998 1997 1998 1997
----- ----- ----- -----
Earnings per average share of Common Stock (shares in
millions):
Basic
Net earnings per share of common stock.............. $0.84 $1.03 $3.44 $3.72
===== ===== ===== =====
Weighted-average shares outstanding................. 72.6 74.3 73.4 73.8
Diluted
Net earnings per share of common stock.............. $0.82 $0.98 $3.30 $3.54
===== ===== ===== =====
Weighted-average shares outstanding, assuming full
dilution........................................... 76.7 79.3 78.0 78.9
11
CASE CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(9) COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." The components of comprehensive income for the three
and nine months ended September 30, 1998 and 1997, are as follows (in
millions):
NINE
MONTHS
THREE MONTHS ENDED
ENDED SEPTEMBER
SEPTEMBER 30, 30,
-------------- ----------
1998 1997 1998 1997
------ ------ ---- ----
Net income......................................... $ 63 $ 78 $258 $280
Pension liability adjustment, net of taxes......... -- -- -- --
Translation adjustment, net of taxes............... 8 (15) (12) (63)
------ ------ ---- ----
Comprehensive income............................... $ 71 $ 63 $246 $217
====== ====== ==== ====
(10) LONG-TERM DEBT
During the second quarter of 1998, Case Credit increased its $550 million
debt security program to $1 billion pursuant to a shelf registration statement
filed with the Securities and Exchange Commission in May 1998. During the
first nine months of 1998, Case Credit issued $629 million of its medium-term
notes in the United States, with maturities of two to three years and interest
rates ranging from 5.8% to 6.0%, pursuant to this registration statement. The
net proceeds from the offerings will be used to fund Case Credit's growth
initiatives and for other corporate purposes, including the repayment of
short-term indebtedness.
(11) OTHER MATTERS
The Company's contract with the United Automobile, Aerospace and
Agricultural Implement Workers of America (the "UAW") expired on March 29,
1998. During the second quarter, UAW-represented workers ratified a new 73
month labor agreement with the Company.
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.
(12) SUBSEQUENT EVENTS
In the fourth quarter, Case Credit issued $159 million of floating and fixed
rate medium-term notes pursuant to its $1 billion shelf registration statement
filed with the Securities and Exchange Commission in May 1998. These notes
have maturities that range between eighteen to twenty-four months and bear
interest based on three month LIBOR for the floating rate notes, and 6.24% for
the fixed rate notes. Also pursuant to the $1 billion shelf registration
statement, Case Credit issued $100 million principal amount of 6.125% notes
due October 5, 2001, and $100 million principal amount of floating rate notes
due January 21, 2000, with an initial rate of 5.91%. The net proceeds from
these issuances will be used to fund Case Credit's growth initiatives and for
other corporate purposes, including the repayment of short-term indebtedness.
During the fourth quarter of 1998, Case Credit's Canadian subsidiary, Case
Credit, Ltd., established a C$750 million medium-term note program pursuant to
a short form prospectus and prospectus supplement filed with the Canadian
Securities Administrators. As of the date of this filing, Case Credit has not
issued any medium-term notes under this program.
During the fourth quarter, a limited-purpose business trust organized by
Case Credit priced $628.9 million of asset-backed securities for issuance to
outside investors. In connection with these issuances, Case Credit will sell
$448.6 million of retail notes to the trust in November 1998. An additional
$201.4 million of retail notes will be sold to the trust as receivables are
generated. The net proceeds from the sale of the retail notes will be used to
repay short-term indebtedness and to finance additional receivables.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ANALYSIS OF RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 vs. Three Months Ended September 30,
1997
EARNINGS
The Company recorded net income of $63 million for the third quarter of
1998, down 19% or $15 million from $78 million for the third quarter of 1997.
Diluted earnings per share for the third quarter of 1998 was $0.82 per share
as compared to $0.98 per share in the same quarter of 1997, primarily
reflecting the year-over-year decrease in net income partially offset by a
decrease in the number of common shares outstanding.
The Company's industrial operations recorded income, before equity income of
Case Credit, of $38 million in the third quarter of 1998 versus $55 million in
the comparable quarter of 1997. On a pretax basis, the Company's industrial
operations recorded earnings of $55 million in comparison to $81 million in
the same quarter of 1997. The industrial effective income tax rate decreased
from 32% in the third quarter of 1997 to 31% in the third quarter of 1998,
primarily due to tax benefits associated with the Company's foreign sales
corporation, research and development tax credits and a reduction 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 1998 were $106 million
versus $123 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 decrease in operating earnings is
attributable to a decline in sales of higher-margin agricultural equipment,
unfavorable foreign exchange rates in Australia and Canada, and substantially
higher new product launch costs, partially offset by pricing and cost
reduction initiatives.
A reconciliation of the Company's industrial net income to operating
earnings is as follows (in millions):
CASE
INDUSTRIAL
THREE
MONTHS
ENDED
SEPTEMBER
30,
-----------
1998 1997
----- -----
Net income.................................................... $ 63 $ 78
Income tax provision.......................................... 17 26
Interest expense.............................................. 26 19
----- -----
Operating earnings............................................ $ 106 $ 123
===== =====
REVENUES
On a consolidated basis, worldwide revenues increased $90 million or 6% in
the third quarter of 1998 to $1,534 million. Net sales of equipment and parts
increased $69 million or 5% to $1,449 million. The increase in net sales
consists primarily of a 2% volume increase, a 2% increase as a result of
acquisitions and a 1% improvement in pricing realization. Net sales in the
third quarter of 1998 increased in North America and Europe, with year-over-
year increases of 9% and 4%, respectively. In addition, net sales in the
Company's Latin American region increased by 25% as compared to the prior
year. Net sales in the Asia Pacific region were down 28% versus the prior year
due to continued unfavorable economic conditions in that region. Worldwide,
net sales of agricultural equipment decreased 1% over the comparable period in
1997, while third quarter net sales of construction equipment increased 21%
over the same period in 1997.
NET SALES
Worldwide net sales of agricultural equipment decreased 1% in the third
quarter of 1998 as compared to the third quarter of 1997. The decrease in
sales of agricultural equipment in North America reflects lower sales
13
of combines, 40-plus horsepower tractors and four-wheel drive tractors,
partially offset by increased sales of MAGNUM(TM) (120-plus horsepower)
tractors. In Europe, the Company experienced lower year-over-year third
quarter sales of combines and 40-plus horsepower tractors, partially offset by
increased sales of MAGNUM(TM) tractors, cotton pickers, hay and forage
equipment and implements. Year-over-year sales in the Company's Asia Pacific
region also decreased, reflecting continued unfavorable economic conditions in
that region. The decrease in agricultural sales in the Asia Pacific region
reflects lower sales of tractors, sugar cane harvesters and combines,
partially offset by increased sales of hay and forage equipment. In the
Company's Latin American region, the Company experienced increases in year-
over-year sales of cotton pickers, combines and sugar cane harvesters,
partially offset by decreased sales of tractors.
Worldwide net sales of construction equipment increased 21% in the third
quarter of 1998 as compared to the third quarter of 1997. The increase in
sales of construction equipment in North America was driven by increases in
sales of loader/backhoes, crawlers, skid steers and trenchers, partially
offset by decreased sales of wheel loaders and excavators. In Europe, the
Company experienced higher year-over-year third quarter sales of
loader/backhoes and excavators, partially offset by decreased sales of skid
steers. In the Company's Asia Pacific region, sales of construction equipment
were primarily impacted by lower sales of loader/backhoes, wheel loaders and
skid steers, as unfavorable economic conditions in the region continued during
the third quarter of 1998. In the Company's Latin American region, increased
sales of construction equipment reflects increased sales of loader/backhoes,
wheel loaders and excavators, partially offset by lower sales of crawlers.
COSTS AND EXPENSES
Cost of goods sold for the industrial operations increased $74 million to
$1,149 million in the third quarter of 1998 as compared to the same period in
1997, primarily due to the sales volume increase. Cost of goods sold as a
percentage of net sales increased to 79.3% in the third quarter of 1998 from
77.9% in the third quarter of 1997. This increase as a percentage of net sales
reflects the impact of foreign currency exchange and changes in geographic and
product line sales mix, partially offset by pricing actions and cost
improvement initiatives.
Selling, general and administrative expenses for the industrial operations
increased by $10 million to $165 million in the third quarter of 1998 as
compared to $155 million in the third quarter of 1997. As a percentage of net
sales, selling, general and administrative expenses for the third quarter of
1998 was 11.4% as compared to 11.2% in the third quarter of 1997. This year-
over-year increase primarily reflects increased selling expenses related to
low rate and other sales financing programs, partially offset by the Company's
ongoing cost improvement initiatives. Case Industrial makes payments to Case
Credit in an amount equal to the difference between the rate actually paid by
the 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 $58 million in
the third quarter of 1998 as compared to $49 million in the third quarter of
1997, primarily due to expenditures for new product development.
Interest expense for Case's industrial operations was $26 million for the
third quarter of 1998, $7 million higher than the same period of 1997. The
increase in interest expense was due to higher average debt levels during the
third quarter of 1998 as compared to the third quarter of 1997.
CREDIT OPERATIONS
Net income for the third quarter of 1998 of $25 million was $2 million
higher than the $23 million reported in the third quarter of 1997. Net income
for 1998 reflects higher earnings as a result of increased levels of on-
balance-sheet receivables, including higher lease income from operating leases
and higher realized gains from the sale of retail notes under asset-backed
securitizations. These amounts were partially offset by increased interest
expense as a result of higher average on-book receivables, as well as
increased depreciation of equipment on operating leases.
14
Case Credit reported total revenues of $108 million for the third quarter of
1998 as compared to $75 million for the third quarter of 1997. Finance income
earned on retail notes and finance leases increased to $36 million in the
third quarter of 1998 as compared to $29 million for the same period in 1997,
primarily due to increased levels of on-balance-sheet receivables. In
addition, Case Credit realized higher year-over-year gains on retail notes
sold and higher securitization and servicing fee income of $7 million and $2
million, respectively. Operating lease income increased $11 million to a total
of $20 million for the third quarter of 1998, reflecting the growth in Case
Credit's operating lease portfolio.
Interest expense for the third quarter of 1998 was $43 million, up $15
million from the $28 million reported in the third quarter of 1997. The
increase in interest expense resulted from higher average debt levels during
the third quarter of 1998 as compared to the prior year period, primarily due
to the growth in Case Credit's on-balance-sheet receivables and increased
equipment on operating leases.
Operating expenses increased $13 million to a total of $26 million in the
third quarter of 1998 as compared to the third quarter of 1997. This increase
primarily resulted from higher year-over-year depreciation expense relating to
Case Credit's larger operating lease portfolio, as well as higher operating
expenses in support of Case Credit's growth initiatives.
As of September 30, 1998, Case Credit's serviced portfolio of receivables
increased 30% over the same time last year to a record $6.4 billion. This
growth 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 originated in the first nine months of
1998 increased 41% for a total of $3.2 billion versus the same period in 1997.
During the first nine months of 1998, limited-purpose business trusts
organized by Case Credit issued $1,379 million of asset-backed securities to
outside investors. Case Credit has sold $1,403 million of U.S. and Canadian
retail notes to the trusts in connection with these issuances. 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 had sold $1,301 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.
Nine Months Ended September 30, 1998 vs. Nine Months Ended September 30, 1997
EARNINGS
The Company recorded net income of $258 million for the first nine months of
1998, down 8% or $22 million from net income of $280 million for the first
nine months of 1997. Diluted earnings per share for the first nine months of
1998 was $3.30 per share as compared to $3.54 per share in the same period of
1997, primarily reflecting the year-over-year decrease in net income partially
offset by a decrease in the number of common shares outstanding.
The Company's industrial operations recorded income, before equity income in
Case Credit, of $196 million in the first nine months of 1998 versus $218
million in the first nine months of 1997. On a pretax basis, the Company's
industrial operations recorded earnings of $282 million in comparison to $321
million in 1997, a $39 million or 12% decrease from the first nine months of
1997. The industrial effective income tax rate decreased from 32% in the first
nine months of 1997 to 30% in the first nine months of 1998, primarily due to
tax benefits associated with the Company's foreign sales corporation, research
and development tax credits and a reduction 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 first nine months of 1998 were $414
million versus $437 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 decrease in operating earnings
is primarily attributable to expenses and operating inefficiencies related
15
to the Company's negotiations with the United Automobile, Aerospace and
Agricultural Implement Workers of America (the "UAW"), unfavorable foreign
currency exchange rates and substantially higher new product launch expenses,
partially offset by pricing and cost reduction initiatives.
A reconciliation of the Company's industrial net income to operating
earnings is as follows (in millions):
CASE
INDUSTRIAL
NINE MONTHS
ENDED
SEPTEMBER
30,
-----------
1998 1997
----- -----
Net income.................................................... $ 258 $ 280
Income tax provision.......................................... 86 103
Interest expense.............................................. 70 54
----- -----
Operating earnings.......................................... $ 414 $ 437
===== =====
REVENUES
On a consolidated basis, worldwide revenues increased $372 million or 9% in
the first nine months of 1998 to $4,649 million. Net sales of equipment and
parts increased $330 million or 8% to $4,433 million. The increase in net
sales consists primarily of a 7% volume increase and a 2% improvement in price
realization, partially offset by a 1% deterioration resulting from the impact
of foreign exchange. Net sales in the first nine months of 1998 increased in
North America and Europe, with year-over-year increases of 12% and 5%,
respectively. Net sales also increased in the Company's Latin American region,
increasing 35% as compared to the prior year. Net sales in the Asia Pacific
region were down 27% versus the prior year as unfavorable economic conditions
continued in this region during the first nine months of 1998. Worldwide, net
sales of agricultural equipment increased 5% over the comparable period in
1997, while net sales of construction equipment increased 19% over prior year
levels.
NET SALES
Worldwide net sales of agricultural equipment increased 5% in the first nine
months of 1998 as compared to the first nine months of 1997. The increase in
sales of agricultural equipment in North America was driven by increases in
sales of tractors and hay and forage equipment, partially offset by decreased
sales of combines and cotton pickers. In Europe, year-over-year agricultural
equipment sales were flat, with increased sales of cotton pickers, hay and
forage equipment and implements offset by decreased sales of MAGNUM(TM)
tractors, 40-plus horsepower tractors and combines. In the Company's Asia
Pacific region, agricultural sales were down in nearly all product categories,
reflecting continued unfavorable economic conditions in that region. In the
Company's Latin American region, the Company experienced increases in year-
over-year sales of cotton pickers, tractors and combines, partially offset by
decreased sales of sugar cane harvesters.
Worldwide net sales of construction equipment increased 19% in the first
nine months of 1998 as compared to the first nine months of 1997. In North
America, year-to-date sales of construction equipment increased in nearly all
product categories, driven by significant increases in sales of
loader/backhoes, skid steers, excavators, crawlers and wheel loaders. The
increase in net sales of construction equipment in Europe primarily reflects
increased sales of excavators, loader/backhoes, wheel loaders and skid steers.
Unfavorable economic conditions continued during the first nine months of 1998
in the Company's Asia Pacific region. As a result, the Company experienced
lower year-over-year sales of construction equipment in most product
categories, partially offset by increased sales of excavators. In the
Company's Latin American region, increased sales of construction equipment
reflect increased sales of loader/backhoes and wheel loaders.
16
COSTS AND EXPENSES
Cost of goods sold for the industrial operations increased $304 million to
$3,442 million in the first nine months of 1998 as compared to the same period
in 1997, primarily due to the sales volume increase. Cost of goods sold as a
percentage of net sales increased to 77.6% in the first nine months of 1998 as
compared to 76.5% in 1997. This increase as a percentage of net sales reflects
changes in geographic and product line sales mix, the impact of foreign
currency exchange and operating inefficiencies associated with the Company's
negotiations with the UAW, partially offset by pricing actions and cost
improvement initiatives.
Selling, general and administrative expenses for the industrial operations
increased $35 million to $486 million in the first nine months of 1998, as
compared to $451 million in the comparable period of 1997. This year-over-year
increase reflects increases in general and administrative expenses related to
the Company's Year 2000 remediation procedures, one-time costs associated with
the Company's negotiations with the UAW, as well as increased selling expenses
related to low rate and other sales financing programs, partially offset by
the impact of foreign currency exchange and ongoing cost reduction
initiatives. As a percentage of net sales, selling, general and administrative
expenses were 11.0% in the first nine months of 1998 and 1997.
Research, development and engineering expenses increased to $167 million in
the first nine months of 1998 as compared to $141 million in the first nine
months of 1997, primarily due to expenditures for new product development.
Interest expense for Case's industrial operations was $70 million for the
first nine months of 1998, $16 million higher than the same period of 1997.
The increase in interest expense was due to higher average debt levels during
the first nine months of 1998 as compared to the first nine months of 1997.
The consolidated effective income tax rates of 32% for the first nine months
of 1998 and 1997 were lower than the U.S. statutory 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.
CREDIT OPERATIONS
Net income for the first nine months of 1998 of $62 million was consistent
with the comparable period of 1997. Net income for 1998 reflects higher
earnings as a result of increased levels of on-balance-sheet receivables,
including higher lease income from operating leases and higher realized gains
from the sale of retail notes under asset-backed securitizations. These
amounts were offset by increased interest expense as a result of higher
average on-book receivables, as well as increased depreciation of equipment on
operating leases.
Case Credit reported total revenues of $264 million for the first nine
months of 1998 as compared to $201 million for the first nine months of 1997.
Finance income earned on retail notes and finance leases increased to $98
million in the first nine months of 1998 as compared to $75 million for the
same period in 1997, primarily due to increased levels of on-balance-sheet
receivables. In addition, operating lease income increased $23 million to a
total of $46 million for the first nine months of 1998, reflecting the growth
in Case Credit's operating lease portfolio.
Interest expense for the first nine months of 1998 was $103 million, up $31
million from the $72 million reported in the first nine months of 1997. The
increase in interest expense resulted from higher average debt levels during
the first nine months of 1998 as compared to the prior year period, primarily
due to the growth in Case Credit's on-balance-sheet receivables and increased
equipment on operating leases.
Operating expenses increased $27 million to a total of $65 million in the
first nine months of 1998 as compared to the first nine months of 1997. This
increase primarily resulted from higher year-over-year depreciation expense
relating to Case Credit's larger operating lease portfolio, as well as higher
operating expenses in support of Case Credit's growth initiatives.
17
During the first nine months of 1998, Case Credit's serviced portfolio of
receivables increased 30% over the same time last year to a record $6.4
billion. Growth in the first nine months of 1998 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
originated in the first nine months of 1998 increased 41% for a total of $3.2
billion versus the same period in 1997. During the first nine months of 1998,
limited-purpose business trusts organized by Case Credit issued $1,379 million
of asset-backed securities to outside investors. Case Credit has sold $1,403
million of U.S. and Canadian retail notes to the trusts in connection with
these issuances. 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 had sold $1,301 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 nine months of 1998, cash used by operating activities was
$1,011 million. Cash used by the industrial operations and Case Credit during
the first nine months of 1998 was $564 million and $447 million, respectively.
The net cash used by operating activities primarily resulted from increased
levels of wholesale and retail receivables and inventory, partially offset by
net income and depreciation and amortization. The increase in wholesale and
retail receivables reflects higher levels of actual sales volumes, as well as
increased levels of on-balance-sheet receivables as part of Case Credit's
growth initiatives. Inventories have increased since December 31, 1997,
largely due to growth in the Company's Latin American region and the impact of
1997 acquisitions. In addition, inventories have increased as a result of
anticipated third quarter shipments to Eastern Europe and the Commonwealth of
Independent States that, as a result of deteriorating economic conditions in
these regions, are not expected to materialize in 1998. Cash used by operating
activities was $286 million in the first nine months of 1997. This use of cash
primarily reflects increased inventories and retail receivables, as well as
expenditures for restructuring-related activities, including closure costs for
the Neuss, Germany, facility. These uses of cash were partially offset by net
income and depreciation and amortization.
Cash used by investing activities was $435 million in the first nine months
of 1998. As of September 30, 1998, Case has expended approximately $108
million for property, plant and equipment as compared to $65 million for the
comparable period of 1997. Cash used by Case Credit was $273 million versus
$85 million for the first nine months of 1997, reflecting increased year-over-
year expenditures for equipment on operating leases due to the growth in Case
Credit's operating lease portfolio. During the first nine months of 1998, the
Company expended approximately $61 million on strategic acquisitions and
investments. In the third quarter of 1998, Case and Sumitomo (S.H.I.)
Construction Machinery Co., Ltd. completed a global alliance to manufacture
and market hydraulic excavators. In the second quarter of 1998, Case acquired
certain assets of the Tyler Industries division of IBOCO, Inc., a designer,
manufacturer and distributor of a complete line of chemical and fertilizer
sprayers and applicators.
Net cash provided by financing activities was $1,303 million for the first
nine months of 1998. The cash provided by financing activities was primarily
used to support increased levels of receivables and inventories, as well as
increased equipment on operating leases. In addition, the Company used $145
million of cash to repurchase shares of its Common Stock under its previously
announced share repurchase programs. During the first nine months of 1998,
Case Credit issued an aggregate of $629 million of medium-term notes pursuant
to a shelf registration statement filed with the Securities and Exchange
Commission. The net proceeds from the medium-term note issuances will be used
to fund Case Credit's growth initiatives and for other
18
corporate purposes, including the repayment of indebtedness. During the first
nine months of 1997, net cash provided by financing activities was $473
million, primarily due to increased short-term borrowings to fund Case
Credit's growing portfolio of receivables.
Total debt at September 30, 1998, was $4,140 million, of which $2,546
million 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 63.1% at
September 30, 1998, and the Company's industrial debt to capitalization ratio
was 39.75%. 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.
In the fourth quarter, Case Credit issued $159 million of floating and fixed
rate medium-term notes pursuant to its $1 billion shelf registration statement
filed with the Securities and Exchange Commission in May 1998. These notes
have maturities that range between eighteen to twenty-four months and bear
interest based on three month LIBOR for the floating rate notes, and 6.24% for
the fixed rate notes. Also pursuant to the $1 billion shelf registration
statement, Case Credit issued $100 million principal amount of 6.125% notes
due October 5, 2001, and $100 million principal amount of floating rate notes
due January 21, 2000, with an initial rate of 5.91%. The net proceeds from
these issuances will be used to fund Case Credit's growth initiatives and for
other corporate purposes, including the repayment of short-term indebtedness.
During the fourth quarter of 1998, Case Credit's Canadian subsidiary, Case
Credit, Ltd., established a C$750 million medium-term note program pursuant to
a short form prospectus and prospectus supplement filed with the Canadian
Securities Administrators. As of the date of this filing, Case Credit has not
issued any medium-term notes under this program.
During the fourth quarter, a limited-purpose business trust organized by
Case Credit priced $628.9 million of asset-backed securities for issuance to
outside investors. In connection with these issuances, Case Credit will sell
$448.6 million of retail notes to the trust in November 1998. An additional
$201.4 million of retail notes will be sold to the trust as receivables are
generated. The net proceeds from the sale of the retail notes will be used to
repay short-term indebtedness and to finance additional receivables.
During the third quarter, the Company completed the repurchase of Case
Common Stock pursuant to a four million share repurchase program authorized by
the Company's Board of Directors in May 1997. On July 10, 1998, the Company's
Board of Directors authorized a second program for the purchase from time to
time of up to eight 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.
Due to a combination of anticipated lower projected farm income in many of
Case's major markets and deteriorating economic conditions in several emerging
markets, Case announced that it was further reducing its 1998 production of
agricultural equipment by an additional 3% in the fourth quarter, for a total
reduction of 15% for the year. The Company will reduce its worldwide
workforce, including contract and temporary personnel, by approximately 2,000
employees as a result of the lower production volumes and the Company's
continuing process reengineering and outsourcing efforts. As a result of these
initiatives, Case will incur a one-time charge of approximately $70 million to
$80 million in the fourth quarter of 1998. The Company anticipates funding
these actions with cash flows from operations and additional borrowings.
YEAR 2000
In July 1996, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") issued EITF 96-14, "Accounting for the
Costs Associated with Modifying Computer Software for
19
the Year 2000," which requires that costs associated with modifying computer
software for the Year 2000 be expensed as incurred. Through Case's ongoing
process of evaluating and performing systems and software upgrades and
enhancements, the Company has been actively addressing Year 2000 issues since
1995.
Case Corporation understands that it is important to our customers and
stakeholders that Case's products, services and internal systems are not
adversely affected by the Year 2000. Case has implemented procedures that it
deems necessary to safeguard the Company from computer-related issues
associated with adverse effects as a result of improperly recognizing the
millennial date change. These procedures include inventorying/assessing,
planning, constructing/testing, and implementing/certifying, where necessary,
critical internal-use systems. The Company believes, based upon its review and
efforts to date, that future external and internal costs to be incurred for
the modification of internal-use software to address Year 2000 issues will not
have a material adverse effect on Case's financial position, cash flows or
results of operations. The Company believes, based upon its review and efforts
to date, that external and internal remediation costs to be incurred for the
modification of internal-use software to address Year 2000 issues will, in the
aggregate, approximate $40 million to $50 million through the end of 1999.
Through September 30, 1998, the Company has incurred approximately $19 million
of the estimated external and internal remediation costs to address Year 2000
issues.
Case has also undertaken a program to alert its suppliers and dealers of
Year 2000 issues. Based on its contacts with suppliers and dealers, the
Company believes that its most important suppliers will be Year 2000 compliant
by December 31, 1998. Case will continue to work with its remaining suppliers
and its dealers throughout 1999 to secure Year 2000 compliance by December 31,
1999. As a result, and subject to the Company's ongoing compliance efforts,
the costs and uncertainties relating to timely resolution of Year 2000 issues
applicable to the Company's business and operations are not reasonably
expected by the Company to have a material adverse effect on Case's financial
position, cash flows or results of operations.
Based upon Case's review and efforts to date, the Company currently
anticipates completion of critical Year 2000 compliance issues by mid-1999.
The Company plans to continue integration testing throughout the balance of
1999. In the event Case's Year 2000 compliance efforts, as well as the efforts
of the Company's suppliers and dealers, individually and in the aggregate, are
not successful, it could have a material adverse effect on the Company's
financial position, cash flows and results of operations. As a result, the
Company is in the process of developing Year 2000 contingency plans that will
be designed to mitigate the impact on the Company in the event that its Year
2000 compliance efforts are not successful. The targeted completion date for
the Company's contingency planning is mid-1999.
The information included in this "Year 2000" 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.
OUTLOOK
The market outlook for Case's agricultural and construction equipment and
financial services business is decidedly mixed throughout the world.
Demand for agricultural equipment began to drop significantly during the
third quarter of 1998. This decline is the result of low commodity prices,
driven principally by a second consecutive year of strong-to-record harvests
in most major grain crops. In addition, exports of farm commodities have
dropped substantially year-over-year, affecting large-scale production
agriculture farmers, and financing for equipment purchases in emerging markets
is expected to remain extremely difficult. As a result of these factors, sales
of agricultural equipment are projected to continue to decline in 1999 by 15%
to 20% in North America and by 5% to 10% in Europe. Worldwide, the Company
expects the agricultural equipment market to be an additional 7% to 8% lower
than in 1998.
20
The global outlook for the construction equipment market varies by region.
In North America, demand is stable due to a sustained level of housing starts
and a favorable interest rate environment. This outlook is supported by the
new U.S. highway bill that will increase infrastructure spending. In Europe,
the market is expected to weaken for the balance of 1998, following a strong
first half, resulting in modest year-over-year growth. In the Asia Pacific
region, any recovery is dependent upon Japan's ability to stimulate its
economy and resolve its banking crisis. Case is further affected by a weak
Australian dollar, impacting the overall economy and construction activity
there. In Latin America, the markets are expected to be down in the fourth
quarter as a result of current, high interest rates.
Case is proactively managing under these less favorable business conditions.
The Company has taken steps to keep production in line with anticipated retail
demand to maintain inventories at historically low levels relative to the
business cycle. These steps are expected to lower earnings, while also
decreasing the earnings volatility traditionally experienced under these
business conditions. In addition, the company is aggressively reducing costs,
while continuing to execute its operating strategy of simultaneous revenue
growth and cost reduction. These measures are intended to maximize the
Company's earnings and improve performance relative to past downturns.
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 and its customers' 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 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.
21
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 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.
In a Current Report filed on Form 8-K dated June 30, 1998, the Company
reported the issuance of a press release disclosing, among other things, that
delays in large equipment sales to the Commonwealth of Independent States and
surrounding countries would negatively impact Case Corporation's second
quarter 1998 results.
In a Current Report filed on Form 8-K dated July 10, 1998, the Company
reported the issuance of a press release disclosing, among other things, that
Case Corporation was accelerating the completion of its four million share
repurchase program and beginning a second stock repurchase program for up to
eight million shares of common stock.
In a Current Report filed on Form 8-K dated September 9, 1998, the Company
reported the issuance of a press release disclosing, among other things, the
Corporation's plans for responding to an anticipated decline in the market
demand for agricultural equipment and its earnings expectations for the third
quarter of 1998 and the full-year 1998.
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 12, 1998
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
instruments with respect to its guaranty of certain
indebtedness issued by its subsidiaries, which
indebtedness does not exceed 10% of the Company's total
consolidated assets.
*10(a)(1) Form of Confidentiality and Non-Competition Agreement
dated as of May 14, 1997, between Case Corporation and
each of Jean-Pierre Rosso, Steven G. Lamb, Theodore R.
French and Richard M. Christman.
*10(a)(2) Form of Confidentiality and Non-Competition Agreement
dated as of January 26, 1998, between Case Corporation
and Richard S. Brennan.
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
- --------
* Management contract or compensatory plan or arrangement.
24