Case Corporation Reports Strong Second Quarter
16 July 1998
Case Corporation Reports Strong Second Quarter Revenue Growth And Retail Demand
Business Editors RACINE, Wisc.--July 16, 1998-- -- Operating earnings of $199 million, including $15 million of costs related to UAW negotiations; and net income of $126 million (EPS $1.61) -- Worldwide revenues of $1.7 billion, up 8 percent on strong gains in North America and Latin America -- Worldwide retail unit sales up 5 percent, led by double-digit increases in sales of agricultural equipment in North America and construction equipment in Europe, and exceptional growth in Latin America, offset by lower sales in the Asia Pacific region -- New, long-term UAW contract adds significant operations flexibility Case Corporation today reported operating earnings for the second quarter of $199 million, and net income of $126 million or $1.61 per share. These results, while below the record performance reported for the second quarter of 1997, were achieved despite one-time costs associated with the company's negotiations with the UAW and the company's previously announced sales delay of agricultural equipment to the Commonwealth of Independent States and surrounding countries. In the prior year period, Case reported operating earnings of $211 million, and net income of $138 million or $1.75 per share. Second quarter revenues increased to $1.7 billion, up 8 percent from the second quarter of 1997, including double-digit sales growth in North America and Latin America, offset by continued lower sales in the Asia Pacific region. Operating earnings for the second quarter were driven by continued strong pricing of Case equipment and cost reduction initiatives. These were offset by $15 million in expenses and operating inefficiencies related to the company's negotiations with the UAW and by $14 million in unfavorable foreign exchange rates, due primarily to a 17 percent decline in the value of the Australian dollar. In addition, the company reported substantially higher new product launch expenses as compared to last year's second quarter. For the first six months of 1998, net income was $195 million, compared with $202 million for the same period last year. Net income per share was $2.48, compared to $2.57 per share in the comparable period of 1997. Revenues for the first six months of 1998 were $3.1 billion, up 10 percent over the prior year. Operating earnings were $308 million for the first six months of 1998, compared with $314 million last year. "Our market performance in the second quarter was extremely strong," said Jean-Pierre Rosso, Case chairman and chief executive officer. "This performance was supported by the successful launch of new products in both our agricultural and construction equipment businesses." "We continue to actively manage both the cost reduction and growth elements of our operating strategy. The successful execution of our strategy ensures long-term value creation for our shareholders." Operating Strategy Progress Case is consistently following its operating strategy of combining growth and cost reduction initiatives to maximize earnings. In the second quarter, Case announced an expanded focus for its financial services subsidiary by creating Case Capital Corporation, a broad-based financing company for the global marketplace. In addition, the company completed the acquisition of certain assets of the Tyler Industries division of IBOCO, Inc. Tyler is a designer, manufacturer and distributor of chemical and fertilizer sprayers and applicators. Case also launched a number of new products, including higher horsepower MX series Maxxum tractors targeted to the important 150-170 horsepower market. Additionally, the company began shipping telescopic handlers for the construction equipment market under its new supply agreement with Ingersoll-Rand Company. These growth initiatives were balanced by ongoing actions to manage the company's operating costs. Case also took steps during the quarter to keep its equipment inventories at below industry averages. The company decreased its production schedules for small horsepower and large four-wheel drive tractors, and implements, in response to specific market conditions. The depressed agricultural equipment market in the United Kingdom is a major factor in lower sales of smaller tractors, while the four-wheel drive tractor market has been impacted by farming conditions in the Great Plains region of the United States and western Canada. As part of its ongoing supply chain management initiative, the company will continue to adjust production to meet market demand. Other significant developments during the quarter include the ratification by UAW-represented employees of a six-year contract between Case and the union. In addition to favorable economics, the new agreement provides the flexibility necessary to implement Case's manufacturing strategy, a key component of which is the new Case Production System. During the second quarter, Case announced that several large sales of agricultural equipment to the Commonwealth of Independent States and the surrounding region would be delayed from a planned second quarter completion as a result of a less favorable financing environment for emerging markets, including Russia. However, the company was able to complete several sales of agricultural equipment to the region during the second quarter. In addition to the previously announced sale of 100 combines to Russia, Case also completed the sale of a large number of high-horsepower tractors and combines to Uzbekistan. Sales were also made to Ukraine, Turkmenistan, Kazakstan and several regions of Russia. Case will continue to pursue additional sales in these regions during 1998, including the delayed shipments of several orders planned in the second quarter. During the quarter, Case repurchased approximately 500,000 shares of its common stock, as part of its current share repurchase program. The company recently announced that it would accelerate this 4 million share repurchase program, authorized by the company's board of directors in May 1997, and substantially complete the buyback in the third quarter of 1998. Further, the board authorized the repurchase of up to 8 million additional shares of the company's common stock from time to time, depending upon market and financial conditions. Equipment Sales Construction Equipment -- Retail unit sales of Case construction equipment increased in North America, Latin America and Europe in the second quarter, declining only in the company's Asia Pacific region. The gains include a 12 percent increase in Latin America, where improvements came in nearly every product line. The retail sales increase in Latin America was paced by growth in sales of wheel loaders and loader/backhoes, as well as increases in excavators. This reflects favorable customer response to Case's new excavator that the company began selling into the region during the quarter as part of a previously announced global alliance with Sumitomo (S.H.I.) Construction Machinery Co., Ltd. In Europe, retail unit sales of Case construction equipment also rose 12 percent on double-digit increases in loader/backhoes, skid steers, wheel loaders and excavators. This marks the third consecutive quarter of higher retail sales of Case construction equipment in Europe. In the North American construction equipment market, retail unit sales of Case equipment were up 5 percent compared with last year, led by increases in excavators, loader/backhoes and skid steers. The retail unit gains in these regions were partially offset by a 16 percent decline in the company's Asia Pacific region. Agricultural Equipment -- Retail unit sales of Case agricultural equipment in the second quarter were led by strong increases in North America and Latin America, with lower sales from Europe and the Asia Pacific region. The gains in North America were driven by exceptional improvements in retail sales of mid- and high-horsepower row crop tractors. In Latin America, retail unit sales of Case agricultural equipment were up 80 percent over the second quarter of 1997. Retail sales of all row crop tractors and combines more than doubled as Case continued to add to its growing share of the region's agricultural equipment market, particularly in Brazil. In Europe, second quarter retail unit sales of Case agricultural equipment were down 4 percent, reflecting continued lower demand in the United Kingdom, as well as discussion around the future outcome of the development of the Common Agricultural Policy for Europe. In the Asia Pacific region, second quarter retail unit sales of Case agricultural equipment were down 25 percent, with declines in every product category. The decrease was driven by Australia and New Zealand, Case's largest markets in the region, which have been affected by lower exports of farm commodities to Asia and higher import costs driven by the weakness in the Australian dollar. Market Outlook The market conditions for Case's agricultural and construction equipment and financial services businesses vary by regions of the world. Sales of agricultural equipment have been strong in North America and Latin America, although weakness continues in the Asia Pacific region and parts of Europe. Commodity prices, which are comparably lower, have been affected by expectations of a strong harvest and could possibly impact net farm income. However, farmers' balance sheets are in good condition in North America. In other regions of the world, additional factors such as the need for self-sufficiency or the adoption of advanced equipment and farming practices support continued demand. The worldwide construction equipment market is led by excellent demand in North America as a result of continued strong housing starts and a favorable interest rate environment. This outlook is strengthened by increased spending as a result of the new U.S. highway bill. In Europe, economic conditions continue to show signs of improvement, and the construction sectors are beginning to reflect that improvement. In the Asia Pacific region, overall economic conditions have resulted in a weaker Australian dollar, which has impacted the overall economy and construction activity there. In Latin America, economic conditions in Brazil and Mexico are greatly improved and retail sales of construction equipment are expected to continue to show strength year-over-year. The information included in the Market Outlook section and elsewhere in this release 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 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. Case Corporation is a leading worldwide designer, manufacturer and distributor of agricultural and construction equipment and offers a broad array of financial products. Headquartered in Racine, Wisconsin, Case had 1997 revenues of $6 billion and sells its products in 150 countries through a network of approximately 4,900 independent dealers. The following is issued in conjunction with Case Corporation's 1998 second quarter results: For more information, contact: Sandra J. Lasch (414) 636-6473 -0- CASE CREDIT CORPORATION REPORTS 6 PERCENT INCOME GROWTH AND STRONG SECOND QUARTER ORIGINATIONS -- Net income rises 6 percent -- Originations increase 38 percent -- Serviced portfolio reaches record $5.8 billion -- Other manufacturer financing increases significantly -- Case Capital created to expand focus of financial services RACINE, Wisc.--July 16, 1998--Case Credit Corporation, a leading worldwide financial services provider for the equipment industry, today announced net income of $18 million for the second quarter of 1998, up 6 percent from $17 million in the comparable period last year. Revenues increased 33 percent over the prior year to a record $80 million. These improvements are attributed to higher financing income from strong growth in receivables and leases, partially offset by the impact of Case Credit's asset-management strategy. Retaining a larger percentage of assets on balance sheet, as opposed to selling those assets through asset-backed securitizations, in the short term, will constrain earnings but ultimately will generate a more stable earnings performance. For the first six months of 1998, revenues increased 24 percent over the prior year to $156 million. Net income for the period was $37 million, down 5 percent from $39 million in the prior year. Increases in financing income were more than offset by the impact of Case Credit's asset-management strategy and a higher tax rate during the first six months. Net income would have been flat versus the prior year, assuming a comparable tax rate for both periods. Case Credit's serviced portfolio grew to a record $5.8 billion as of June 30, 1998. Financing originations increased 38 percent in the second quarter and 36 percent for the first six months, as compared to the prior year periods. Significantly higher financing of other manufacturers' equipment was one of the key drivers of this growth, representing 21 percent of total retail originations during the second quarter and 19 percent for the first six months. "Case Credit's second quarter results demonstrate the strength of our business strategy," said Ted R. French, Case Credit chairman and Case president, financial services, and chief financial officer. "We continue to make great strides in growing our financial services business outside the established Case dealer network. The growth in our balance sheet and our increased net income demonstrate that we are successfully executing our asset-management strategy. We remain confident in our ability to make a stable, growing contribution to Case Corporation and its shareholders." Case Corporation announced in June that it intends to expand the focus of its financial services business by creating Case Capital Corporation, a broad-based financing company for the global marketplace. Case Capital will include separate businesses that offer loans and leases for construction, agriculture and other industries; commercial lending within equipment industries; multiple lines of insurance products and private label credit cards. "Financial services continue to grow in importance to Case," according to French. "We have already taken a number of steps to diversify beyond our captive business through the establishment of joint ventures with other companies, expansion into new markets around the world and the creation of an insurance company. The formation of Case Capital positions us to strategically expand the scope of our operations and generate non-cyclical earnings growth that will help maximize Case's profitability throughout its business cycles." Case Credit Corporation, a wholly owned subsidiary of Case Corporation, has been serving the financing needs of equipment customers since 1957. Today, the company provides financial services to customers purchasing, leasing and insuring equipment through established dealer networks located primarily in North America, Australia and Europe. Based in Racine, Wisconsin, Case Credit services a $5.8 billion portfolio of receivables and leases. -0- CASE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Millions, except per share data) (Unaudited) CONSOLIDATED Three Months Ended June 30, 1998 1997 ------- ------- Revenues Net sales $1,672 $1,547 Interest income and other 62 54 ------- ------- Total 1,734 1,601 Costs and Expenses Cost of goods sold 1,274 1,153 Selling, general and administrative 155 143 Research, development and engineering 57 46 Interest expense 57 40 Other, net 9 17 ------- ------- Total 1,552 1,399 ------- ------- Income before taxes 182 202 Income tax provision 56 64 ------- ------- 126 138 Equity in income - Case Credit ------- ------- Net income $126 $138 ------- ------- ------- ------- Preferred stock dividends 1 1 ------- ------- Net income to common $125 $137 ------- ------- ------- ------- CASE INDUSTRIAL Three Months Ended June 30, 1998 1997 ------- -------- Revenues Net sales $1,672 $1,547 Interest income and other 8 8 ------- -------- Total 1,680 1,555 Costs and Expenses Cost of goods sold 1,274 1,153 Selling, general and administrative 169 151 Research, development and engineering 57 46 Interest expense 26 17 Other, net (1) 11 -------- -------- Total 1,525 1,378 ------- -------- Income before taxes 155 177 Income tax provision 47 56 -------- -------- 108 121 Equity in income - Case Credit 18 17 -------- -------- Net income $126 $138 -------- -------- -------- -------- CASE CREDIT Three Months Ended June 30, 1998 1997 -------- -------- Revenues Net sales $0 $0 Interest income and other 80 60 ------- -------- Total 80 60 Costs and Expenses Cost of goods sold Selling, general and administrative 12 7 Research, development and engineering Interest expense 31 22 Other, net 10 6 -------- -------- Total 53 35 -------- -------- Income before taxes 27 25 Income tax provision 9 8 -------- -------- 18 17 Equity in income - Case Credit -------- -------- Net income $18 $17 -------- -------- -------- -------- Earnings per Common Share: Basic earnings per common share $1.68 $1.86 Diluted earnings per common share $1.61 $1.75 See Notes to Interim Financial Statements. CASE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Millions, except per share data) (Unaudited) CONSOLIDATED Six Months Ended June 30, 1998 1997 -------- -------- Revenues Net sales $2,984 $2,723 Interest income and other 131 110 -------- -------- Total 3,115 2,833 Costs and Expenses Cost of goods sold 2,293 2,063 Selling, general and administrative 301 277 Research, development and engineering 109 92 Interest expense 104 79 Other, net 24 25 -------- -------- Total 2,831 2,536 -------- -------- Income before taxes 284 297 Income tax provision 89 95 -------- -------- 195 202 Equity in income - Case Credit -------- -------- Net income $195 $202 -------- -------- -------- -------- Preferred stock dividends 3 3 -------- -------- Net income to common $192 $199 -------- -------- -------- -------- CASE INDUSTRIAL Six Months Ended June 30, 1998 1997 -------- -------- Revenues Net sales $2,984 $2,723 Interest income and other 16 18 -------- -------- Total 3,000 2,741 Costs and Expenses Cost of goods sold 2,293 2,063 Selling, general and administrative 321 296 Research, development and engineering 109 92 Interest expense 44 35 Other, net 6 15 -------- -------- Total 2,773 2,501 -------- -------- Income before taxes 227 240 Income tax provision 69 77 -------- -------- 158 163 Equity in income - Case Credit 37 39 -------- -------- Net income $195 $202 -------- -------- -------- -------- CASE CREDIT Six Months Ended June 30, 1998 1997 -------- -------- Revenues Net sales $0 $0 Interest income and other 156 126 -------- -------- Total 156 126 Costs and Expenses Cost of goods sold Selling, general and administrative 21 15 Research, development and engineering Interest expense 60 44 Other, net 18 10 -------- -------- Total 99 69 -------- -------- Income before taxes 57 57 Income tax provision 20 18 -------- -------- 37 39 Equity in income - Case Credit -------- -------- Net income $37 $39 -------- -------- -------- -------- Earnings per Common Share: Basic earnings per common share $2.59 $2.70 Diluted earnings per common share $2.48 $2.57 See Notes to Interim Financial Statements. Case Corporation Net Sales June 30, 1998 (Millions) Three Months Ended % 1998 1997 Change -------- -------- ------ Net sales: Agricultural equipment $840 $820 2% Construction equipment 563 463 22% Parts 269 264 2% -------- -------- Total net sales $1,672 $1,547 8% -------- -------- -------- -------- Net sales: North America $950 $851 12% Europe* 557 521 7% Asia Pacific 77 110 -30% Latin America 88 65 35% -------- -------- Total net sales $1,672 $1,547 8% -------- -------- -------- -------- Six Months Ended % 1998 1997 Change -------- -------- ------ Net sales: Agricultural equipment $1,486 $1,382 8% Construction equipment 1,015 861 18% Parts 483 480 1% -------- -------- Total net sales $2,984 $2,723 10% -------- -------- -------- -------- Net sales: North America $1,735 $1,518 14% Europe* 940 894 5% Asia Pacific 145 196 -26% Latin America 164 115 43% -------- -------- Total net sales $2,984 $2,723 10% -------- -------- -------- -------- * Includes Africa and Middle East CASE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Millions) (Unaudited) CONSOLIDATED June 30, 1998 1997 Assets -------- -------- Cash and cash equivalents $115 $177 Accounts, notes receivable and other - net 4,352 3,314 Inventories 1,363 1,194 Property, plant and equipment - net 1,021 950 Investment in Case Credit Goodwill and intangibles 327 294 Other assets 933 616 -------- -------- Total $8,111 $6,545 -------- -------- -------- -------- Liabilities and Equity Current maturities of long-term debt $5 $8 Short-term debt 2,047 1,413 Accounts payable and other accrued liabilities 1,470 1,480 Long-term debt 1,679 1,108 Other liabilities 490 384 -------- -------- Total Liabilities 5,691 4,393 Equity 2,420 2,152 -------- -------- Total $8,111 $6,545 -------- -------- -------- -------- CASE INDUSTRIAL June 30, 1998 1997 Assets -------- -------- Cash and cash equivalents $94 $85 Accounts, notes receivable and other - net 2,011 1,645 Inventories 1,363 1,194 Property, plant and equipment - net 1,018 947 Investment in Case Credit 391 296 Goodwill and intangibles 327 294 Other assets 458 458 -------- -------- Total $5,662 $4,919 -------- -------- -------- -------- Liabilities and Equity Current maturities of long-term debt $5 $8 Short-term debt 690 249 Accounts payable and other accrued liabilities 1,414 1,435 Long-term debt 671 693 Other liabilities 462 382 -------- -------- Total Liabilities 3,242 2,767 Equity 2,420 2,152 -------- -------- Total $5,662 $4,919 -------- -------- -------- -------- CASE CREDIT June 30, 1998 1997 Assets -------- -------- Cash and cash equivalents $21 $92 Accounts, notes receivable and other - net 2,324 1,662 Inventories Property, plant and equipment - net 3 3 Investment in Case Credit Goodwill and intangibles Other assets 494 174 -------- -------- Total $2,842 $1,931 -------- -------- -------- -------- Liabilities and Equity Current maturities of long-term debt $0 $0 Short-term debt 1,357 1,164 Accounts payable and other accrued liabilities 58 54 Long-term debt 1,008 415 Other liabilities 28 2 -------- -------- Total Liabilities 2,451 1,635 Equity 391 296 -------- -------- Total $2,842 $1,931 -------- -------- -------- -------- See Notes to Interim Financial Statements. CASE CORPORATION Notes to Interim Financial Statements (1) The accompanying financial statements reflect the consolidated results of Case Corporation and consolidated subsidiaries. The supplemental "Case Industrial" consolidating data in each of the financial statements includes Case Corporation's agricultural equipment, construction equipment, parts and wholesale (dealer) financing operations, with Case Credit reflected on the equity basis. The supplemental "Case Credit" consolidating data includes Case Corporation's retail credit operations. Transactions between "Case Industrial" and "Case Credit" have been eliminated to arrive at the "Consolidated" data. (2) During the first half of 1998, limited-purpose business trusts organized by Case Credit issued $716 million of asset-backed securities to outside investors. Case Credit has sold $703 million of U.S. and Canadian retail notes to the trusts in connection with these issuances. During the first half of 1997, limited-purpose business trusts organized by Case Credit issued $830 million of asset-backed securities to outside investors. Case Credit had sold $822 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. (3) During the second quarter of 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. (4) On a consolidated basis, the Company's first half effective income tax rates of 31% for 1998 and 32% for 1997 were 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. (5) 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. A reconciliation of the Company's industrial net income to operating earnings is as follows (in millions): Three Six Months Ended Months Ended Case Industrial June 30, June 30, 1998 1997 1998 1997 ------ ------- ------ ------ Net income $ 126 $ 138 $ 195 $ 202 Income tax provision 47 56 69 77 Interest expense 26 17 44 35 ------ ------- ------ ------ Operating earnings $ 199 $ 211 $ 308 $ 314 ------ ------- ------ ------ ------ ------- ------ ------ (6) Earnings Per Common Share: Three Six Months Ended Months Ended June 30, June 30, 1998 1997 1998 1997 Basic ------ ------- ------ ------ Net earnings available to common (millions) $ 125 $ 137 $ 192 $ 199 Average common shares outstanding (millions) 73.9 73.7 73.9 73.6 Basic earnings per common share $ 1.68 $1.86 $ 2.59 $ 2.70 Diluted Net earnings available to common (millions) $ 126 $ 138 $ 195 $ 202 Average common shares outstanding (millions) 78.4 78.9 78.5 78.7 Diluted earnings per common share $ 1.61 $ 1.75 $ 2.48 $ 2.57 -0-