-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WGTC8wc8YDVaf/vnUEqSsEIY7syC1jfc5JAVzvugoPpGyuRNY2dMshbzvi4ahIdm qBJF4Jch3wP+2UntX882mg== 0000950131-96-000892.txt : 19960306 0000950131-96-000892.hdr.sgml : 19960306 ACCESSION NUMBER: 0000950131-96-000892 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960305 SROS: CSX SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CATERPILLAR INC CENTRAL INDEX KEY: 0000018230 STANDARD INDUSTRIAL CLASSIFICATION: CONSTRUCTION MACHINERY & EQUIP [3531] IRS NUMBER: 370602744 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-00768 FILM NUMBER: 96531290 BUSINESS ADDRESS: STREET 1: 100 NE ADAMS ST CITY: PEORIA STATE: IL ZIP: 61629-7310 BUSINESS PHONE: 3096751000 FORMER COMPANY: FORMER CONFORMED NAME: CATERPILLAR TRACTOR CO DATE OF NAME CHANGE: 19860623 10-K 1 FORM 10-K ============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______. Commission File No. 1-768 CATERPILLAR INC. (Exact name of Registrant as specified in its charter) DELAWARE 37-0602744 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 100 NE ADAMS STREET, PEORIA, ILLINOIS 61629 ---------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (309) 675-1000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- Common Stock ($1.00 par value) Chicago Stock Exchange New York Stock Exchange Pacific Stock Exchange Preferred Stock Purchase Rights Chicago Stock Exchange New York Stock Exchange Pacific Stock Exchange 9 1/8% Notes due December 15, 1996 New York Stock Exchange 9 3/8% Notes due July 15, 2000 New York Stock Exchange 9 3/8% Notes due July 15, 2001 New York Stock Exchange 9% Debentures due April 15, 2006 New York Stock Exchange 9 3/8% Debentures due August 15, 2011 New York Stock Exchange 9 3/4% Sinking Fund Debentures due New York Stock Exchange June 1, 2019 9 3/8% Debentures due March 15, 2021 New York Stock Exchange 8% Debentures due February 15, 2023 New York Stock Exchange 6% Debentures due May 1, 2007 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] As of December 31, 1995, there were 194,015,118 shares of common stock of the Registrant outstanding, and the aggregate market value of the voting stock held by non-affiliates of the Registrant (assuming only for purposes of this computation that directors and officers may be affiliates) was $11,332,764,139. DOCUMENT INCORPORATED BY REFERENCE Portions of the document listed below have been incorporated by reference into the indicated parts of this report, as specified in the responses to the item numbers involved. 1996 Annual Meeting Proxy Statement (Parts I, II, III and IV) ============================================================================== PART I ITEM 1. BUSINESS. Principal Business Segments - --------------------------- Caterpillar Inc., together with its consolidated subsidiaries, (the "Company") operates in three principal business segments: (1) Machinery--Design, manufacture, and marketing of construction, mining, and agricultural machinery--track and wheel tractors, track and wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, and related parts. (2) Engines--Design, manufacture, and marketing of engines for earthmoving and construction machines, on-highway trucks, and locomotives; marine, petroleum, agricultural, industrial, and other applications; electric power generation systems; and related parts. Caterpillar reciprocating diesel and spark-ignited engines meet power needs ranging from 40 to 8,050 horsepower. Turbines range from 1,340 to 15,000 horsepower (1000 to 11 200 kilowatts). (3) Financial Products--Provides financing alternatives for Caterpillar and noncompetitive related equipment, and extends loans to Caterpillar customers and dealers. Also provides various forms of insurance for Caterpillar dealers and customers to help support their purchase and financing of Caterpillar equipment. Note 23 of the Notes to Consolidated Financial Statements on pages A-23 through A-25 of the Appendix to the Company's 1996 Annual Meeting Proxy Statement contains additional information regarding the Company's business segments and geographic segments and is incorporated herein by reference. Company Operations - ------------------ The Company conducts operations in the Machinery and Engines segments of its business under highly competitive conditions, including intense price competition. It places great emphasis upon the high quality and performance of its products and the service support for such products which is supplied by its dealers. Although no one competitor is believed to produce all of the same types of machines and engines produced by the Company, there are numerous companies, large and small, which compete with the Company in the sale of each of its products. Machines are distributed principally through a worldwide organization of independent full-line dealers, and one company-owned dealership, 65 located in the United States and 121 located outside the United States. Worldwide, these dealers have more than 1,300 places of business. Diesel and spark-ignited engines are sold through the worldwide dealer organization and to other manufacturers for use in products manufactured by them. Caterpillar dealers do not deal exclusively in the Company's products, although in most cases sales and servicing of the Company's products are the dealers' principal business. Turbines are sold through a sales force employed by Solar Turbines Incorporated, a wholly owned subsidiary, or its subsidiaries and associated companies. These employees are from time to time assisted by independent sales representatives. Financial Products consists primarily of Caterpillar Financial Services Corporation and its subsidiaries, and Caterpillar Insurance Services Corporation. Page 1 Further information concerning the Company's operations in 1995 and its outlook for 1996 appears under the caption "Management's Discussion and Analysis" on pages A-28 through A-36 of the Appendix to the Company's 1996 Annual Meeting Proxy Statement, which pages are incorporated herein by reference. Patents and Trademarks - ---------------------- The Company's products are sold primarily under the marks "Caterpillar," "Cat," "Solar," and "Barber-Greene." The Company owns a number of patents and trademarks relating to the products manufactured by it, which have been obtained over a period of years. These patents and trademarks have been of value in the growth of the Company's business and may continue to be of value in the future. The Company does not regard any segment of the Company's business as being dependent upon any single patent or group of patents. Research and Development - ------------------------ The Company has always placed strong emphasis on product-oriented research and engineering relating to the development of new or improved machines, engines and major components. In 1995, 1994 and 1993, the Company expended $532 million, $435 million and $455 million, respectively, on its research and engineering program. Of these amounts, $375 million in 1995, $311 million in 1994 and $319 million in 1993 were attributable to new prime products and major component development and major improvements to existing products. The remainders were attributable to engineering costs incurred during the early production phase as well as ongoing efforts to improve existing products. During 1995 the Company announced several new products as well as improvements to existing products. The Company expects to continue the development of new products and improvements to existing products in the future. Employment - ---------- At December 31, 1995, the Company employed 54,352 persons of whom 14,374 were located outside the United States. Sales - ----- Sales outside the United States were 52% of consolidated sales in 1995, compared with 49% in 1994 and 1993. Environmental Matters - --------------------- Environmental considerations are a very important factor in the Company's product development and operations planning. This past year, two Company manufacturing facilities were recognized by the state of Illinois for their pollution prevention efforts and the Company's Engine Division announced participation in a joint government-industry effort to reduce on-highway engine emissions. In 1995, the Company had capital expenditures of about $11 million for projects related to the environment (including $3 million in costs related to compliance with the Clean Air Act), approximately equal to amounts for 1994. In 1996 and 1997, these expenditures are expected to increase moderately. In addition to these expenditures, the Company had depreciation, research and engineering, administrative, and operating expenses related to environmental regulation of about $131 million in 1995 (including $28 million for compliance with the Clean Air Act), slightly more than comparable expenses in 1994. These expenses are expected to remain at similar levels for 1996 and 1997. The Company also is involved in a number of remediation actions to clean up hazardous wastes as required by federal and state laws. These laws often require responsible parties to fund remediation actions regardless of fault, legality of original disposal or ownership of a disposal site. Under accounting Page 2 guidelines, the Company is required to accrue and charge to income management's best estimate of future costs associated with these sites. When there appears to be a range of possible costs with equal likelihood, liabilities are based on the lower end of that range. For 1995, the amount accrued for potential clean up costs is contained in the line item, "Accounts payable and accrued expenses" on Statement 3 of the Appendix to the 1996 Annual Meeting Proxy Statement, and represents an immaterial portion of that line item. While the Company may have rights of contribution or reimbursement under insurance policies, amounts that may be recoverable from other entities are not considered in establishing the accrual. In deciding upon amounts to be reserved for potential environmental liability at a particular site, the Company looks at several factors including: . prior experience regarding environmental remediation at a similar site; . experience of other companies and industries with respect to a similar site; . technology available for remediation at the time; . the stage of remediation for the particular site (i.e., whether the site is at the identification stage or whether a remedial investigation or feasibility study has been conducted); . documentation, if any, linking the Company to a particular site; . the amount the Company has been asked to contribute to a particular site; and . aspects of the law under which the Company is alleged to be liable for clean up. The Company also looks at these factors in deciding whether it could incur liabilities beyond that which it has accrued for future remediation. Although it is difficult to estimate with any meaning potential liability at sites in very early stages of remediation (of which the Company has seven currently) or sites yet to be identified because of the many uncertainties involved, including uncertainties about the status of the law, regulation, technology and information related to individual sites, at this time the Company believes the likelihood of incurring any material environmental liability beyond that accrued is remote. ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT AS OF DECEMBER 31, 1995.
PRESENT CATERPILLAR PRINCIPAL POSITIONS HELD NAME AND AGE INC. POSITION AND DURING THE DATE OF PAST FIVE YEARS OTHER THAN INITIAL ELECTION CATERPILLAR INC. POSITION CURRENTLY HELD - -------------------------------------------------------------------------------- Donald V. Fites (61) Chairman of the Board (1990) - -------------------------------------------------------------------------------- Glen A. Barton (56) Group President (1990) - -------------------------------------------------------------------------------- Gerald S. Flaherty (57) Group President (1990) - -------------------------------------------------------------------------------- James W. Owens (49) Group President (1995) Vice President; Chief Financial Officer; President, Solar Turbines Incorporated - -------------------------------------------------------------------------------- Richard L. Thompson (56) Group President (1995) Vice President - -------------------------------------------------------------------------------- R. Rennie Atterbury III Vice President, Associate General Counsel (58) General Counsel and Secretary (1991) - -------------------------------------------------------------------------------- James W. Baldwin (58) Vice President (1991) General Manager, Parts and Service Support - -------------------------------------------------------------------------------- Vito H. Baumgartner (55) Vice President (1990) - -------------------------------------------------------------------------------- James S. Beard (54) Vice President (1990) - -------------------------------------------------------------------------------- Richard A. Benson (52) Vice President (1989) President, Caterpillar Industrial Inc. - -------------------------------------------------------------------------------- Ronald P. Bonati (56) Vice President (1990) - --------------------------------------------------------------------------------
Page 3 - -------------------------------------------------------------------------------- James E. Despain (58) Vice President (1990) - -------------------------------------------------------------------------------- Roger E. Fischbach (54) Vice President (1989) - -------------------------------------------------------------------------------- Michael A. Flexsenhar (56) Vice President (1995) General Manager, Large Engines, Lafayette Plant; Plant Manager, Lafayette - -------------------------------------------------------------------------------- Donald M. Ings (47) Vice President (1993) President, Solar Turbines Incorporated; Business Unit Manager, York; Plant Manager, York - -------------------------------------------------------------------------------- Duane H. Livingston (54) Vice President (1995) Director of Corporate Auditing, Corporate Services Division; Controller, Parts Distribution Accounting, Morton Distribution Center - -------------------------------------------------------------------------------- Douglas R. Oberhelman (42) Vice President (1995) Managing Director and Vice General Manager, Strategic Planning, Shin Caterpillar Mitsubishi Ltd. (Tokyo); District Manager, Peoria District, Central Region, N.A. Commercial Division - -------------------------------------------------------------------------------- Gerald Palmer (50) Vice President (1992) Director of Technical Services, Technical Services Division; President, CONEK S.A. de C.V. - -------------------------------------------------------------------------------- Robert C. Petterson (57) Vice President (1991) President, Caterpillar Brasil S.A.; Regional Manager, Caterpillar Overseas S.A. - -------------------------------------------------------------------------------- John E. Pfeffer (53) Vice President (1995) Business Unit Manager, York Plant; President, CONEK S.A. de C.V.; Regional Manager, Central Region, N.A. Commercial Division - -------------------------------------------------------------------------------- Siegfried R. Ramseyer (58) Vice President (1992) Managing Director, Caterpillar Overseas S.A.; Manager, Construction Equipment and Dealer Administration, Caterpillar Overseas S.A. - -------------------------------------------------------------------------------- Alan J. Rassi (55) Vice President (1992) General Manager, Aurora Plant - -------------------------------------------------------------------------------- Gerald L. Shaheen (51) Vice President (1995) Managing Director, Caterpillar Overseas S.A.; Regional Manager, Eastern Region, N.A. Commercial Division - -------------------------------------------------------------------------------- Gary A. Stroup (46) Vice President (1992) Business Unit Manager, Component Products Division - -------------------------------------------------------------------------------- Sherril K. West (48) Vice President (1995) Marketing Support Services Manager, Corporate Services Division; General Manager, Caterpillar Service Technology, Caterpillar Internal Ventures - -------------------------------------------------------------------------------- Donald G. Western (47) Vice President (1995) Managing Director, Caterpillar Belgium S.A. - -------------------------------------------------------------------------------- Wayne M. Zimmerman (60) Vice President (1989) - -------------------------------------------------------------------------------- Robert R. Gallagher (55) Controller (1990) - -------------------------------------------------------------------------------- Rudolf W. Wuttke (57) Treasurer (1991) Secretary and Treasurer, Caterpillar Overseas S.A. - --------------------------------------------------------------------------------
ITEM 2. PROPERTIES. The Company's operations are highly integrated. Although the majority of the Company's plants are involved primarily in the production of either machines or engines, several of the Company's plants are involved in the manufacture of both machines and engines. In addition, several plants are involved in the manufacture of components which are used in the assembly of both machines and engines. The Company's distribution centers and regional distribution centers are involved in the storage and distribution of parts for machines and engines. Also, the research and development activities carried on at the Technical Center involve both machines and engines. Page 4 The corporate headquarters for the Company are located in Peoria, Illinois. Additional marketing headquarters are located both inside and outside the United States. All square footage and acreage provided herein is approximated as of December 31, 1995. Total Properties - ---------------- Total properties owned or leased by the Company consist of 61,706,142 square feet of building area, of which 87.9% is owned in fee and 12.1% is leased. Owned Properties - ---------------- Properties owned in fee by the Company consist of 54,225,183 square feet of building area and 18,639 acres of land. Properties owned by the Company are believed to be generally well maintained and adequate for the purposes for which they are presently used. Through planned capital expenditures, the Company expects these properties to remain adequate for future needs. Consolidations / Closures / Sales - --------------------------------- Over the last five years, in the ordinary course of business, the Company has consolidated operations and/or closed a number of its facilities. The Company continues to own closed properties totaling 35,694 square feet of building area and 5,742 acres of land which are no longer utilized in current operations. These closed properties have been declared surplus and are for sale. In December, 1991, the Company announced the probable closure of its manufacturing facility in York, Pennsylvania. The Company determined that unless significant cost reductions were made, the unit would be closed. The Company has notified the United Auto Workers union ("UAW"), which represents approximately 1,100 of the 1,400 active employees at the York facility, of its willingness to negotiate a labor agreement that would allow the unit to remain open. Unless a satisfactory contract is reached, the Company plans to close the plant beginning in the 1996 time frame. Leased Properties - ----------------- Properties leased by the Company consist of 7,480,959 square feet of building area. These properties are covered by leases expiring over terms of generally 1 to 10 years. The Company anticipates no difficulty in retaining occupancy of any of its leased facilities, either by renewing leases prior to expiration or by replacing them with equivalent leased facilities. Manufacturing - ------------- Manufacturing activities are conducted at 30 locations inside the United States and 13 locations outside the United States. Remanufacturing and Overhaul activities are conducted at 3 locations inside the United States and 3 locations outside the United States. These facilities have a total building area of 39,835,217 square feet, of which 98.4% is used for manufacturing and 1.6% is used for remanufacturing and overhaul. These facilities are believed to be suitable for their intended purposes with adequate capacities for current and projected needs for existing Company products. A list of the Company's manufacturing, remanufacturing and overhaul facilities follows with principal use indicated: Plant Locations inside the U.S. Principal Use ------------------------------- ------------- Gardena, California........................... Manufacturing San Diego, California......................... Manufacturing Jacksonville, Florida......................... Manufacturing Jefferson, Georgia............................ Manufacturing Aurora, Illinois.............................. Manufacturing Decatur, Illinois............................. Manufacturing DeKalb, Illinois.............................. Manufacturing Page 5 Dixon, Illinois............................... Manufacturing East Peoria, Illinois......................... Manufacturing Joliet, Illinois.............................. Manufacturing Mapleton, Illinois............................ Manufacturing Mossville, Illinois........................... Manufacturing Peoria, Illinois.............................. Manufacturing Pontiac, Illinois............................. Manufacturing Sterling, Illinois............................ Manufacturing Lafayette, Indiana............................ Manufacturing Wamego, Kansas................................ Manufacturing Menominee, Michigan........................... Manufacturing Minneapolis, Minnesota........................ Manufacturing New Ulm, Minnesota............................ Manufacturing Corinth, Mississippi.......................... Remanufacturing Boonville, Missouri........................... Manufacturing Clayton, North Carolina....................... Manufacturing Franklin, North Carolina...................... Manufacturing Leland, North Carolina........................ Manufacturing Dallas, Oregon................................ Manufacturing York, Pennsylvania............................ Manufacturing Greenville, South Carolina.................... Manufacturing Dyersburg, Tennessee.......................... Manufacturing Rockwood, Tennessee........................... Manufacturing DeSoto, Texas................................. Overhaul Houston, Texas................................ Manufacturing Mabank, Texas................................. Overhaul Plant Locations outside the U.S. Principal Use -------------------------------- ------------- Melbourne, Australia.......................... Manufacturing Gosselies, Belgium............................ Manufacturing Piracicaba, Brazil............................ Manufacturing Edmonton, Canada.............................. Overhaul Shanghai, China............................... Manufacturing Xuzhou, China................................. Manufacturing Leicester, England............................ Manufacturing Grenoble, France.............................. Manufacturing Rantigny, France.............................. Manufacturing Godollo, Hungary.............................. Manufacturing Jakarta, Indonesia............................ Manufacturing Bazzano, Italy................................ Manufacturing Monterrey, Mexico............................. Manufacturing Nuevo Laredo, Mexico.......................... Remanufacturing Tijuana, Mexico............................... Overhaul St. Petersburg, Russia........................ Manufacturing Financial Products - ------------------ A majority of the activity of the Financial Products Division is conducted from its leased headquarters located in Nashville, Tennessee. The Financial Products Division also leases 6 other office locations inside the United States and 9 office locations outside the United States and shares other office space with other Company entities. Page 6 Distribution - ------------ The Company's distribution activities are conducted at 10 Distribution Center locations (3 inside the United States and 7 outside the United States) and 13 Regional Distribution Center locations (12 inside the United States and 1 outside the United States). These locations have a total building area of 9,406,738 square feet and are used for the distribution of Company products. Caterpillar Logistics Services, Inc. distributes other companies' products utilizing certain of the Company's distribution facilities as well as other non- Company facilities located both inside and outside the United States. The Company also owns or leases other storage facilities which support distribution activities. Technical Center, Training/Demonstration Areas and Proving Grounds - ------------------------------------------------------------------ The Company owns a Technical Center located in Mossville, Illinois and various other training/demonstration areas and proving grounds located both inside and outside the United States. Capital Expenditures - -------------------- During the five years ended December 31, 1995, changes in investment in land, buildings, machinery and equipment of the Company were as follows (stated in millions of dollars):
- -------------------------------------------------------------------------------------------------------------- EXPENDITURES DISPOSALS AND NET INCREASE ----------------------------- PROVISIONS FOR OTHER (DECREASE) YEAR U.S. OUTSIDE U.S. DEPRECIATION ADJUSTMENTS DURING PERIOD - -------------------------------------------------------------------------------------------------------------- 1991 $610 $164 $(593) $(118) $ 63 - -------------------------------------------------------------------------------------------------------------- 1992 $502 $138 $(644) $ (91) $ (95) - -------------------------------------------------------------------------------------------------------------- 1993 $508 $124 $(661) $ (98) $(127) - -------------------------------------------------------------------------------------------------------------- 1994 $508 $186 $(680) $ (65) $ (51) - -------------------------------------------------------------------------------------------------------------- 1995 $506 $173 $(679) $(132) $(132) - --------------------------------------------------------------------------------------------------------------
At December 31, 1995, the net book value of properties located outside the United States represented 25.2% of the net properties on the consolidated financial position. Further information concerning the Company's investment in land, buildings, machinery and equipment appears under Notes 1D and 10 of the "Notes to Consolidated Financial Statements" on pages A-10 and A-16, respectively, of the Appendix to the 1996 Annual Meeting Proxy Statement, which Notes are incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS. The Company is a party to litigation matters and claims which are normal in the course of its operations, and, while the results of such litigation and claims cannot be predicted with certainty, management believes, based on the advice of counsel, the final outcome of such matters will not have a materially adverse effect on the consolidated financial position. On September 6, 1994, the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America ("UAW"), UAW Local 974, and Citizens for a Better Environment filed a complaint against the Company with the Illinois Pollution Control Board ("Board"). The complaint generally alleges, in seven counts, that the Company has violated certain provisions of the Illinois Environmental Protection Act and Board regulations with respect to a particular property in East Peoria, Illinois. The Company believes the claims are without merit and will vigorously contest them. The Company further believes final resolution of this matter will not have a material impact on the Company's liquidity, capital resources, or results of operations. Page 7 On May 12, 1993, a Statement of Objections ("Statement") was filed by the Commission of European Communities against Caterpillar Inc. and certain overseas subsidiaries ("Company"). The Statement alleges that certain service fees payable by dealers, certain dealer recordkeeping obligations, a restriction which prohibits a European Community ("EC") dealer from appointing subdealers, and certain export pricing practices and parts policies violate EC competition law under Article 85 of the European Economic Community Treaty. The Statement seeks injunctive relief and unspecified fines. Based on an opinion of counsel, the Company believes it has strong defenses to each allegation set forth in the Statement. On November 19, 1993, the Commission of European Communities informed the Company that a new complaint has been received by it alleging that certain export parts policies violate Article 85 and Article 86 of the European Economic Community Treaty. The Commission advised the Company that it intends to deal with the new complaint within the framework of the proceedings initiated on May 12, 1993. Based on an opinion of counsel, the Company believes it has strong defenses to the allegations set forth in the new complaint. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information required by Item 5 is incorporated by reference from under the caption "Common Stock Price Range" and the first paragraph under the caption "Number of Stockholders" appearing on page A-37 and under the caption "Dividends" appearing on page A-33 of the Appendix to the Company's 1996 Annual Meeting Proxy Statement. ITEM 6. SELECTED FINANCIAL DATA. The information required by Item 6 is incorporated by reference from pages A-26 and A-27 of the Appendix to the Company's 1996 Annual Meeting Proxy Statement under the caption "Eleven-year Financial Summary" but only for the years 1991-1995, inclusive, and then only with respect to the information set forth for each of such years under the following captions: "Sales and revenues," "Profit (loss) before effects of accounting changes/(1)/" (including the footnote indicated), "Effects of accounting changes/(2)/" (including the footnote indicated), "Profit (loss)/(1)/," (including the footnote indicated), "Profit (loss) per share of common stock: /(1)//(3)/ Profit (loss) before effects of accounting changes/(1)/" (including the footnotes indicated), "Profit (loss) per share of common stock:/(1)//(3)/ Effects of accounting changes/(2)/" (including the footnotes indicated), "Profit (loss) per share of common stock:/(1)//(3)/ Profit (loss)" (including the footnotes indicated), "Dividends declared per share of common stock," "Total assets: Machinery and Engines," "Total assets: Financial Products," "Long-term debt due after one year: Machinery and Engines," and "Long-term debt due after one year: Financial Products." ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by Item 7 is incorporated by reference from under the caption "Management's Discussion and Analysis" on pages A-28 through A-36 of the Appendix to the Company's 1996 Annual Meeting Proxy Statement ("Appendix"). Page 8 Contingencies discussed on page A-36 of the Appendix under the caption, "1996 Economic and Industry Outlook" are the principal factors which may influence the Company's 1996 Outlook. Other significant factors include: . strategies pursued by domestic and foreign competitors, potentially having an impact on market share; . changes in dealer inventory levels for both new and rental equipment; . currency fluctuations, particularly in Europe and Japan; . ability to realize price increases, particularly as a result of changes in industry demand, product mix, competitive environment, and inflation levels; . rates of inflation, particularly in the U.S., Europe, and Japan; . commodity prices throughout the world; . infrastructure spending, particularly in Europe, Latin America, and Asia; . growth in housing starts, commercial construction, and mining, particularly in the U.S.; . political uncertainty in China and CIS; and . production cost levels at key plants located in the U.S., U.K., France, Belgium, Brazil, Mexico, and Japan. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by Item 8 is incorporated by reference from the Report of Independent Accountants appearing on page A-3, and the Financial Statements and Notes to Consolidated Financial Statements appearing on pages A-4 through A-25 of the Appendix to the Company's 1996 Annual Meeting Proxy Statement. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by Item 10 relating to identification of directors is incorporated by reference from pages 2 through 6 of the Company's 1996 Annual Meeting Proxy Statement under the captions "Nominees for Election as Directors for Terms Expiring in 1999," "Directors Continuing in Office in the Class of 1997," and "Directors Continuing in Office in the Class of 1998." Identification of executive officers appears herein under Item 1a. There are no family relationships between the officers and directors of the Company. All officers serve at the pleasure of the Board of Directors and are regularly elected at a meeting of the Board of Directors in April of each year. Information required Page 9 under Item 405 of Regulation S-K is incorporated by reference from under the caption "Filings Pursuant to Section 16 of the Securities and Exchange Act of 1934" appearing on page 25 of the Company's 1996 Annual Meeting Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION. The information required by Item 11 is incorporated by reference from under the caption "Compensation of Directors" which appears on page 8, from under the caption "Report of the Compensation Committee on Executive Compensation" on pages 10 through 14, from under the caption "Performance Graph" on page 15, from under the caption "Executive Compensation" and the tables thereunder which appear on pages 16 through 18, from under the caption "Pension Program" (including footnote) and the table thereunder which appear on pages 18 and 19, and from under the caption "Compensation Committee Interlocks and Insider Participation" which appears on page 15 of the Company's 1996 Annual Meeting Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by Item 12 is incorporated by reference from pages 9 and 10 of the Company's 1996 Annual Meeting Proxy Statement under the caption "Equity Security Ownership of Management and Certain Other Beneficial Owners (as of December 31, 1995)." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by Item 13 is incorporated by reference from the Company's 1996 Annual Meeting Proxy Statement from under the caption "Certain Relationships and Related Transactions" appearing on page 19 and from under the caption "Compensation Committee Interlocks and Insider Participation" on page 15. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report: 1. Financial Statements: Report of Independent Accountants (p. A-3)* Statement 1 Consolidated Results of Operations for the Years Ended December 31 (p. A-4)* Statement 2 Changes in Consolidated Stockholders' Equity for the Years Ended December 31 (p. A-5)* Statement 3 Financial Position at December 31 (p. A-6 and p. A-7)* Statement 4 Statement of Cash Flows for the Years Ended December 31 (p. A-8 and p. A-9)* Notes to Consolidated Financial Statements (pp. A-10 through A-25)* 2. Financial Statement Schedule: Report of Independent Accountants on Financial Statement Schedule Schedule VIII Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto incorporated by reference. (b) There were no reports on Form 8-K filed during the last quarter of 1995. Page 10 (c) Exhibits: 3 (i) (a) Restated Certificate of Incorporation (incorporated by reference from Exhibit 3(a)(i) to Form 10-K for the year ended December 31, 1994, Commission File No. 1-768). 3 (i) (b) Certificate of Designation, Preferences and Rights of the Terms of the Series A Junior Participating Preferred Stock (incorporated by reference from Exhibit 3(a) to Form 10-K for the year ended December 31, 1991, Commission File No. 1-768). 3 (ii) Bylaws (incorporated by reference from Exhibit 3(ii) to Form 10-Q for the quarter ended September 30, 1995, Commission File No. 1-768). 4 Rights Agreement dated as of November 12, 1986, between Caterpillar Inc., the Registrant hereunder, and First Chicago Trust Company of New York (formerly Morgan Shareholder Services Trust Company) (incorporated by reference from Exhibit 10(a) to Form 10-K for the year ended December 31, 1990, Commission File No. 1-768) and First Amendment to Rights Agreement dated December 9, 1992 (incorporated by reference from Exhibit 10(a) to Form 10-K for the year ended December 31, 1992, Commission File No. 1-768). 10 (a) 1977 Stock Option Plan, as amended (incorporated by reference from Exhibit 10(b) to Form 10-K for the year ended December 31, 1984, Commission File No. 1-768).** 10 (b) 1987 Stock Option Plan, as amended and Long Term Incentive Supplement.** 10 (c) Supplemental Pension Benefit Plan, as amended and restated (incorporated by reference from Exhibit 10(c) to Form 10-K for the year ended December 31, 1993, Commission File No. 1-768).** 10 (d) Supplemental Employees' Investment Plan, as amended and restated.** 10 (e) Caterpillar Inc. 1993 Corporate Incentive Compensation Plan Management and Salaried Employees, as amended and restated (incorporated by reference from Exhibit 10(e) to Form 10-K for the year ended December 31, 1993, Commission File No. 1-768).** 10 (f) Directors' Deferred Compensation Plan, as amended and restated (incorporated by reference from Exhibit 10(f) to Form 10-K for the year ended December 31, 1993, Commission File No. 1-768).** 10 (g) Directors' Retirement Plan (incorporated by reference from Exhibit 10(i) to Form 10-K for the year ended December 31, 1991, Commission File No. 1-768).** 10 (h) Directors' Charitable Award Program (incorporated by reference from Exhibit 10(h) to Form 10-K for the year ended December 31, 1993, Commission File No. 1-768).** 10 (i) Deferred Employees' Investment Plan.** 11 Computations of Earnings Per Share 12 Statement Setting Forth Computation of Ratios of Profit to Fixed Charges 21 Subsidiaries and Affiliates of the Registrant 23 Consent of Independent Accountants 27 Financial Data Schedule 99 (a) Form 11-K for Caterpillar Foreign Service Employees' Stock Purchase Plan. 99 (b) Appendix to the Company's 1996 Annual Meeting Proxy Statement (furnished for the information of the Commission and not deemed to be filed except for those portions expressly incorporated by reference herein). - ----------------------- * Incorporated by reference from the indicated pages of the Appendix to the 1996 Annual Meeting Proxy Statement. ** Compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of this Form 10-K. Page 11 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. CATERPILLAR INC. (Registrant) By: /s/R. R. ATTERBURY III ------------------------------------- Date: March 4, 1996 R. R. Atterbury III, Secretary PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE COMPANY AND IN THE CAPACITIES AND ON THE DATES INDICATED. Chairman of the Board, Director and Chief March 4, 1996 /s/DONALD V. FITES Executive Officer -------------------------- (Donald V. Fites) March 4, 1996 /s/GLEN A. BARTON Group President -------------------------- (Glen A. Barton) March 4, 1996 /s/GERALD S. FLAHERTY Group President -------------------------- (Gerald S. Flaherty) March 4, 1996 /s/JAMES W. OWENS Group President -------------------------- (James W. Owens) March 4, 1996 /s/RICHARD L. THOMPSON Group President -------------------------- (Richard L. Thompson) Vice President and March 4, 1996 /s/DOUGLAS R. OBERHELMAN Chief Financial Officer -------------------------- (Douglas R. Oberhelman) /s/ROBERT R. GALLAGHER Controller and March 4, 1996 -------------------------- Chief Accounting Officer (Robert R. Gallagher) March 4, 1996 /s/LILYAN H. AFFINITO Director -------------------------- (Lilyan H. Affinito) Director -------------------------- (W. Frank Blount) Page 12 March 4, 1996 /s/JOHN W. FONDAHL Director -------------------------- (John W. Fondahl) March 4, 1996 /s/DAVID R. GOODE Director -------------------------- (David R. Goode) March 4, 1996 /s/JAMES P. GORTER Director -------------------------- (James P. Gorter) March 4, 1996 /s/JERRY R. JUNKINS Director -------------------------- (Jerry R. Junkins) March 4, 1996 /s/PETER A. MAGOWAN Director -------------------------- (Peter A. Magowan) March 4, 1996 /s/GORDON R. PARKER Director -------------------------- (Gordon R. Parker) March 4, 1996 /s/GEORGE A. SCHAEFER Director -------------------------- (George A. Schaefer) March 4, 1996 /s/JOSHUA I. SMITH Director -------------------------- (Joshua I. Smith) March 4, 1996 /s/CLAYTON K. YEUTTER Director -------------------------- (Clayton K. Yeutter) Page 13 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Caterpillar Inc.: Our audits of the consolidated financial statements of Caterpillar Inc. referred to in our report dated January 18, 1996 appearing on page A-3 of the Appendix to the 1996 Annual Meeting Proxy Statement (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/Price Waterhouse LLP PRICE WATERHOUSE LLP Peoria, Illinois January 18, 1996 CATERPILLAR INC. AND CONSOLIDATED SUBSIDIARY COMPANIES SCHEDULE VIII- VALUATION AND QUALIFYING ACCOUNTS (Millions of dollars) YEARS ENDED DECEMBER 31,
Balance at Balance at Beginning Close of Description of Year Additions Deductions Year ------------- ------------ ----------- ------------ ------------ 1995 - ---- Reserves for plant closing and consolidation costs: Included in current liabilities: Accounts payable and accrued expenses............... $ 56 $ - $ 1(1) $ 55 Accrued wages, salaries, and employee benefits...... 122 - 7(1) 115 Deducted from assets: Land, buildings, machinery, and equipment - net..... 149 - 50(2) 99 1994 - ---- Reserves for plant closing and consolidation costs: Included in current liabilities: Accounts payable and accrued expenses............... $ 58 $ - $ 2(1) $ 56 Accrued wages, salaries, and employee benefits...... 138 - 16(1) 122 Deducted from assets: Land, buildings, machinery, and equipment - net..... 150 - 1 149 1993 - ---- Reserves for plant closing and consolidation costs: Included in current liabilities: Accounts payable and accrued expenses............... $ 80 $ - $22(1) $ 58 Accrued wages, salaries, and employee benefits...... 150 - $12(1) 138 Deducted from assets: Land, buildings, machinery, and equipment - net..... 164 - 14(2) 150 - ----------------
(1) Expenditures made. (2) Related to assets disposed of. EX-10.(B) 2 1987 STOCK OPTION PLAN, AS AMENDED Exhibit 10(b) CATERPILLAR INC. 1987 STOCK OPTION PLAN, AS AMENDED (As of April 12, 1995) 1. Establishment of Plan Caterpillar Inc. (hereafter referred to as the "Company") proposes to grant to selected key employees of the Company and its subsidiaries restricted stock awards, options to purchase common stock of the Company and stock appreciation rights in conjunction therewith for the purposes of (i) furnishing to such employees maximum incentive through ownership of Company shares to improve operations and increase profits and (ii) encouraging such persons to accept or continue employment with the Company and its subsidiaries. Such restricted stock awards, options and stock appreciation rights will be granted pursuant to the plan herein set forth, which shall be known as the Caterpillar Inc. 1987 Stock Option Plan (hereafter referred to as the "Plan"). The Company also proposes to grant to the members of the Company's Board of Directors who are not officers or employees of the Company at the time of a grant (hereinafter referred to as "Outside Directors") options to purchase common stock of the Company pursuant to the Plan. The Company also proposes to grant to Outside Directors restricted shares of Company common stock pursuant to the Plan. The purpose of such grants is to provide incentives for highly qualified individuals to stand for election to the Board and to continue service on the Board and to encourage increased stock ownership by Outside Directors in order to promote long-term stockholder value. Stock appreciation rights, and incentive stock options, as defined in Section 422A of the Internal Revenue Code, will not be granted to Outside Directors under the Plan. 2. Stock Reserved for Options and Restricted Stock Awards Subject to adjustment as provided in Section 3, the maximum number of shares of the Company that may be issued upon the granting of restricted stock awards, performance awards or the exercise of options and Stock Appreciation Rights under the Plan or any Supplement hereto shall not exceed 7,500,000. The shares so issued may be authorized but unissued shares, Treasury shares, or previously issued shares purchased for purposes of the Plan. Any shares subject to options or awards may thereafter be subject to new stock options or awards under the Plan if there is a forfeiture of any such awards or lapse, expiration or termination of any such option but not if there is a surrender of an option or portion thereof pursuant to a stock appreciation right as provided hereafter in Section 7. 3. Adjustment Provisions If there is any change in the outstanding shares of common stock without any consideration to the Company by stock dividend, stock split-up, change in par or no par value, or other similar event, the number and kind of shares then remaining available for issue under the Plan shall be correspondingly changed, and a similar adjustment shall be made in the unexercised portion of all options then outstanding without change in the aggregate purchase price to be paid. Options and stock appreciation rights may also contain provisions for the continuation thereof, and for other equitable adjustments, after other changes in the Company's shares, including changes resulting from recapitalization, reorganization, sale, merger, consolidation, or other similar occurrence. 4. Administration of the Plan The authority to grant restricted stock awards, options and stock appreciation rights to officers and employees under the Plan shall be vested in the Stock Option and Officers' Compensation Committee (hereafter referred to as the "Committee") consisting of not less than three members of the Board of Directors appointed from time to time by the Board. No member of the Board shall serve on the Committee at a time when such member is, or within one year prior thereto has been, eligible to receive restricted stock awards, options, or stock appreciation rights under the Plan, or restricted stock awards, options, or stock appreciation rights under any other stock option or stock bonus plan of the Company; provided, however, that Outside Directors who receive options and restricted stock under this Plan may serve on the Committee. The Committee shall have no authority regarding the granting of options and restricted stock to Outside Directors. Subject to the provisions of the Plan, the Committee from time to time shall determine (except as to options and restricted stock granted to Outside Directors) the individuals to whom, and the time or times at which, restricted stock awards, options, or stock appreciation rights shall be granted; the number of shares to be subject to each restricted stock award, each option, and each stock appreciation right; the option price per share; the extent to which stock appreciation rights are exercisable for cash, or stock, or a combination of cash and stock; whether restricted shares [shares of common stock issued under restrictions which subject them to a "substantial risk of forfeiture" (as defined in Section 83 of the Internal Revenue Code of 1986, as amended) until the restrictions lapse] should be issued on the exercise of an option or stock appreciation right and, if so, the nature of the restrictions; the duration of each option; the specific restrictions applicable to restricted stock awards and the other terms and provisions of each restricted stock award, option, and stock appreciation right. In the case of officers to whom restricted stock awards, options, or stock appreciation rights may be granted, the selection of such officers and all of the foregoing determinations shall be made directly by the Committee in its sole discretion. In the case of key employees other than officers, the selection of such employees and all of the foregoing determinations may be delegated by the Committee to an administrative group of officers chosen by the Committee. Neither restricted stock awards, options, nor stock appreciation rights granted to one employee need be identical to those granted other employees. Commencing with the 1988 annual meeting of stockholders, options with a term of ten years and one day shall be granted to each Outside Director for 1,000 shares of the Company's common stock effective as of the close of each annual meeting of the stockholders (i) at which such individual is elected a director or (ii) following which such individual will continue to serve as a director as a member of a continuing class of directors. Any option so granted shall be a nonqualified stock option. In the event any change in the outstanding shares of the Company's common stock occurs and an adjustment is made in the unexercised portion of options outstanding, as provided in Section 3 above, a similar adjustment shall be made in the number of shares to be granted to Outside Directors thereafter under this paragraph. On April 14, 1995, and each January 1 thereafter, 200 shares of restricted stock shall be granted to each Outside Director. The stock will be held in escrow for a period of three years from the award date. Stock issued as restricted stock shall be forfeited if the director ceases to serve as a director of the Company for any reason other than death, disability, or retirement under the Directors' Retirement Plan. In the event any change in the outstanding shares of the Company's common stock occurs as provided in Section 3 above, a similar adjustment shall be made in the number of restricted shares to be granted to Outside Directors thereafter under this paragraph. Subject to the provisions of the Plan specifically governing options and restricted stock granted or to be granted to Outside Directors, the Committee may also interpret the Plan; prescribe, amend and rescind rules and regulations relating to the Plan; and make all other determinations necessary or advisable for the administration of the Plan. The determinations of the Committee shall be made in accordance with its judgment as to the best interests of the Company and its stockholders and in accordance with the purposes of the Plan. The Committee's determinations shall in all cases be conclusive. A majority of the members of the Committee shall constitute a quorum, and all determinations of the Committee shall be made by a majority of its members. Any determination of the Committee may be made, without notice or meeting, by the written consent of a majority of the Committee members. 5. Eligibility Restricted stock awards, options, and stock appreciation rights may be granted to officers and other key employees of the Company or of its present or future subsidiaries. Options and restricted stock will be granted to Outside Directors as provided in Sections 4 and 14 hereof. A director of the Company or a subsidiary who is not also an employee of the Company or a subsidiary shall not be eligible to receive a stock appreciation right or an alternative stock option. An employee or officer who has been granted a restricted stock award, option, or stock appreciation right under this or any other stock option plan may or may not be granted additional restricted stock awards, options, and stock appreciation rights at the direction of the Committee. Options and Stock Appreciation Rights 6. Option Price The per share option price shall not be less than 100% of the fair market value of the common stock at the time the option is granted. The per share option price of options granted to Outside Directors shall be 100% of the market value of the common stock at the time an option is granted. 7. Stock Appreciation Rights Stock appreciation rights will permit the holder to elect to surrender any option or any portion thereof which is then exercisable and receive in exchange therefor shares of common stock, cash, or a combination thereof. Such stock, cash, or combination shall have an aggregate value equal to the excess of the fair market value of one share of common stock over the purchase price specified in such option multiplied by the number of shares of common stock covered by such option or portion thereof which is so surrendered. The fair market value of one share of common stock shall equal (a) in the case of such a holder who is not a Company officer, the mean of the highest and lowest quoted selling price of shares of the Company's common stock on the New York Stock Exchange on the date of surrender and (b) in the case of such a holder who is a Company officer, but subject to the provisions of the succeeding sentence, the highest of the means of the highest and lowest quoted selling price of shares of the Company's common stock on the New York Stock Exchange determined for each day occurring during the window period during which such election to surrender the option or portion thereof is made; and the window period is the applicable period for making such an election (currently ten business days) prescribed from time to time pursuant to Rule 16b-3 promulgated under the Securities Exchange Act of 1934. In the case of such a holder who is a Company officer, the fair market value of one share of common stock with respect to the surrender of an incentive stock option granted, shall equal the mean of the highest and lowest quoted selling price of shares of the Company's common stock on the New York Stock Exchange on the date of surrender unless it is specifically provided in the option form, or any amendment thereto, that the valuation described in item (b) above shall apply. In the case of any option holder who at the time of an election is an officer of the Company, each election to receive cash alone or in combination with stock shall be subject to the approval of the Committee in its sole discretion. Stock appreciation rights may be granted as part of a stock option or as a separate right to any holder of any option theretofore or then being granted under this Plan. A stock appreciation right shall be exercisable upon any additional terms and conditions (including, without limitation, the issuance of restricted shares and the imposition of restrictions upon the timing of exercise) which may be determined as provided in Section 4 of the Plan. In the event of the exercise of a stock appreciation right, the number of shares reserved for issuance under the Plan shall be reduced by the number of shares of common stock covered by such option or portion thereof which is surrendered in connection with such exercise. No fractional shares shall be issued on the exercise of a stock appreciation right. 8. Exercise of Options and Stock Appreciation Rights Options (other than options granted to Outside Directors) shall be exercisable in such installments and during such periods as may be fixed by the Committee at the time of granting. Options granted to Outside Directors shall become exercisable as follows: one-third at the end of each of the three successive one-year periods commencing on the date of each option grant. Notwithstanding any other provision hereof, no option and no stock appreciation right shall be exercisable after the expiration of ten years and one day from the date such option or stock appreciation right is granted, provided that no incentive stock option (or related stock appreciation right) shall be exercisable after the expiration of ten years from the date such option is granted. Payment of the purchase price shall be made upon exercise of all or a portion of any option. Such payment shall be made pursuant to rules adopted by the Committee and the Company in cash or by the tendering (through one transaction or in a series of consecutive transactions) of shares of common stock of the Company having a fair market value equal to 100% of such purchase price or by any combination thereof. The fair market value of a share of common stock so tendered shall be the mean of the highest and lowest quoted selling price of shares of the Company's common stock on the New York Stock Exchange on date of exercise. In addition, on the exercise of an option, surrender of a stock appreciation right, or upon the granting of any restricted stock award or performance award, any applicable taxes which the Company is required to withhold shall be paid to the Company and any information which the Company deems necessary shall be provided to the Company. In fulfilling its withholding obligation, the Company may withhold a portion of any shares to be issued to satisfy such withholding obligation in accordance with rules promulgated by the Committee, in its sole discretion. 9. Termination of Employment Each option granted to an officer or employee shall, and each stock appreciation right granted to an officer or employee may, in the Committee's sole discretion require a period or periods of continued employment with the Company and/or its subsidiaries before it may be exercised in whole or in part. No such period shall be less than one year except that the Committee may permit a shorter period in the event of termination of employment by reason of retirement or death. Termination of the employment with the Company and its subsidiaries of an officer or employee who holds an option shall terminate any remaining rights under options and stock appreciation rights then held by such holder except as hereinafter provided. Each option and stock appreciation right granted to an officer or employee may provide that if employment of the holder with the Company and its subsidiaries terminates after completion of a period of employment so specified, the option or stock appreciation right may be exercised (to the extent then exercisable) by the holder (or, in the event of the holder's death, by whoever shall have received the holder's rights under the option or stock appreciation right) during a specified period of time after such termination of employment. Such a specified period of time may not exceed sixty months where termination of employment is caused by retirement or death and sixty days where it results from any other cause; provided that if death occurs after termination of employment but during the period of time so specified, such period may be extended to not more than sixty-six months after retirement, or thirty-eight months after termination of employment for any other cause. In the event that any such option or stock appreciation right granted under the Plan has a specified period for exercise after retirement or death which is less than the maximum period permitted under this section, the Committee may modify such option or right to extend such specified period up to such maximum period. Such options and stock appreciation rights shall not be affected by authorized leaves of absence or by any change of employment so long as the holder continues to be an employee of the Company or a subsidiary. Nothing in the Plan or in any such option or stock appreciation right shall interfere with or limit in any way the right of the Company or of any of its subsidiaries to terminate any employee's employment at any time, nor confer upon any employee any right to continue in the employ of the Company or any of its subsidiaries. Notwithstanding the foregoing, the Committee may change the post- termination period of exercisability of an option or stock appreciation right provided that no such change shall extend the original maximum term of the option or stock appreciation right. 9A. Termination of Outside Directorship No period of continued service as an Outside Director following the grant of an option shall be required to render exercisable an option granted to an Outside Director in the event an Outside Director holding an option which has not become exercisable or has not been fully exercised shall cease to be an Outside Director. In such event any such option may be exercised at any time within sixty months of the date such Director ceased to be a Director. In the event an Outside Director shall die holding an option which has not become exercisable or has not been fully exercised, his executors, administrators, heirs or distributees, as the case may be, may exercise such option at any time within sixty months of the date of such death provided that if death occurs after the date an Outside Director ceases to be a Director, such option shall be exercisable within sixty-six months of such date. In no event, however, shall an option which has expired by its terms be exercisable. 10. Incentive Stock Options Notwithstanding anything contained herein to the contrary, there may be granted under the Plan, other than to Outside Directors, incentive stock options as defined in Section 422A of the Internal Revenue Code as it may be amended from time to time. The Committee from time to time shall determine whether any incentive stock options shall be granted. It shall also determine in its full discretion the individuals to whom, and the time or times at which, any such grants shall be made. Incentive stock options shall not by their terms be transferable by the holder other than by will or the laws of descent and distribution and shall be exercisable during the holder's lifetime only by the holder. The aggregate fair market value (determined at the time the option is granted) of the stock with respect to which incentive stock options are exercisable for the first time by the holder during any calendar year (under all incentive stock option plans of the Company) shall not exceed $100,000; provided, however, that all or any portion of an option which cannot be exercised as an incentive stock option because of such limitation may be converted by the Committee to an option other than an incentive stock option. The Board of Directors of the Company may amend the Plan from time to time as may be necessary (1) to comply with Section 422A of the Internal Revenue Code, or other sections of the Code or other applicable laws or regulations, and (2) to permit any options granted as, or converted to, incentive stock options to have all of the features provided for incentive stock options in the applicable laws and regulations. 11. Transferability of Options and Stock Appreciation Rights Options and stock appreciation rights shall not be transferable otherwise than by will or the laws of descent and distribution, and shall be exercisable, during the holder's lifetime, only by the holder except in the case of holder's incapacity or disability when such options and stock appreciation rights may be exercised by the holder's duly appointed guardian or representative. A holder, however, may file with the Company a written designation of a beneficiary or beneficiaries (subject to such limitations as to the classes and number of beneficiaries and contingent beneficiaries and such other limitations as the Committee from time to time may prescribe) to exercise, in the event of the death of the optionee, an option or stock appreciation right, subject to the provisions of the Plan. A holder may from time to time revoke or change any such designation of beneficiary and any designation of beneficiary under the Plan shall be controlling over any other disposition, testamentary or otherwise; provided, however, that if the Committee shall be in doubt as to the right of any such beneficiary to exercise any option or stock appreciation right, the Committee may determine to recognize only an exercise by the legal representative of the optionee, in which case the Company, the Committee and the members thereof shall not be under any further liability to anyone. Restricted Stock Awards to Company Employees 12. Granting of Awards The Committee from time to time may determine whether any restricted stock awards shall be granted to other than an Outside Director either alone or in combination with the granting of options under the Plan. The Committee will in so granting establish the time, conditions and restrictions in connection with the issuance or transfer of a restricted stock award, including the restriction period which may differ with respect to each grantee. 13. Shares and Restrictions Restricted stock awards will be made from shares of Company common stock otherwise available for stock option grants under the Plan. During the restriction period the grantee shall have a beneficial interest in the restricted stock and all rights and privileges of a stockholder with respect thereto, including the right to vote and receive dividends, subject to the restrictions imposed by the Committee at the time of grant. The following restrictions will be imposed on shares of common stock issued as a restricted stock award until the expiration of the restricted period: (a) The grantee shall not be entitled to delivery of the stock certificate which certificate shall be held in escrow by the secretary of the Committee; (b) None of the stock issued as a restricted stock award may be transferred other than by will or by the laws of descent and distribution; and (c) Stock issued as a restricted stock award shall be forfeited and the stock certificate shall be returned to the Company if the grantee terminates employment with the Company and its subsidiaries except for termination due to retirement after a specified age, disability, death or other special circumstances approved by the Committee. Shares awarded as a restricted stock award will be issued subject to a restriction period set by the Committee of no less than two nor more than ten years. The Committee except for the restrictions specified in the preceding paragraphs shall have the discretion to remove any or all of the restrictions on a restricted stock award whenever it may determine that such action is appropriate. Upon the expiration of the restriction period with respect to any shares of a restricted stock award, a stock certificate will be delivered out of escrow, subject to satisfaction by the grantee of the applicable withholding tax requirements, without charge to the grantee. Restricted Stock Awards to Outside Directors 14. Terms of Grant and Restrictions On April 14, 1995, and each January 1 thereafter, 200 shares of restricted stock shall be granted to each Outside Director who following such date continues to serve as a director. Restricted stock awards will be made from shares of Company common stock otherwise available for stock option grants under the Plan. The stock will be subject to a restriction period of three years from the date of grant. During that restricted period, subject to the restrictions set forth in the next paragraph, the grantee shall have a beneficial interest in the restricted stock and all rights and privileges of a stockholder with respect thereto, including the right to vote and receive dividends. The following restrictions will be imposed on shares of common stock issued as a restricted stock award until the expiration of the restricted period: (a) The grantee shall not be entitled to delivery of the stock certificate which certificate shall be held in escrow by the secretary of the Committee; (b) None of the stock issued pursuant to a restricted stock award may be transferred other than by will or by the laws of descent and distribution; and (c) Stock issued pursuant to a restricted stock award shall be forfeited and the stock certificate returned to the Company if the grantee ceases to serve as a director of the Company, except for termination due to death, disability, or retirement under the Directors' Retirement Plan. Upon expiration of the restricted period with respect to any shares of a restricted stock award, a stock certificate will be delivered out of escrow, subject to satisfaction by the grantee of applicable tax withholding requirements, without charge to the grantee. General Provisions 15. Amendment and Termination The Plan may be terminated at any time by the Board of Directors except with respect to any restricted stock awards, options, or stock appreciation rights then outstanding. Also, the Board may, from time to time, amend the Plan as it may deem proper and in the best interests of the Company or as may be necessary to comply with any applicable laws or regulations, provided that no such amendment shall (i) increase the total number of shares which may be issued under the Plan, (ii) reduce the minimum purchase price or otherwise materially increase the benefits under the Plan, (iii) change the basis for valuing stock appreciation rights, (iv) impair any outstanding option, stock appreciation right or restricted stock award without the consent of the holder, (v) alter the class of employees eligible to receive options, stock appreciation rights or restricted stock awards, or (vi) amend any provision of the Plan insofar as it applies specifically to options and restricted stock granted or to be granted to Outside Directors, unless, in each case, such amendment is required in order to assure the Plan's continued compliance with applicable laws, including Rule 16b- 3 under the Securities Exchange Act of 1934. Plan provisions applicable to Outside Director option and restricted stock awards shall not be amended more than once every six months other than to comply with changes in the Internal Revenue Code, Employee Retirement Income Security Act, or rules thereunder. 16. Regulatory Compliance Notwithstanding any other provision of the Plan, the issuance or delivery of any shares of common stock may be postponed for such period as may be required to comply with any applicable requirements of any national securities exchange or any requirements under any other law or regulation applicable to the issuance or delivery of such shares. The Company shall not be obligated to issue or deliver any shares if such issuance or delivery shall constitute a violation of any provision of any law or regulation of any governmental authority or national securities exchange. 17. Miscellaneous For purposes of this Plan: (i) The term "subsidiary" means any corporation in which the Company owns, directly or indirectly, at least 35% of the total combined voting power of all classes of stock; except that for purposes of any option subject to the provisions of Section 425 of the Internal Revenue Code, as amended, the term "subsidiary" means any corporation in an unbroken chain of corporations beginning with the Company if, at the time of the granting of an option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. (ii) "Retirement" as used herein means retirement under any pension or retirement plan of the Company or of a subsidiary, or termination of employment with the Company or a subsidiary, by action of the employing company, because of disability. CATERPILLAR INC. LONG TERM INCENTIVE SUPPLEMENT ARTICLE I - PURPOSE The provisions of this Long Term Incentive Supplement (the "Supplement") shall supplement the provisions of the Caterpillar Inc. 1987 Stock Option Plan (the "Plan") and, unless otherwise expressly qualified by the context of the Supplement, the conditions contained in the Plan shall be applicable to the Supplement and terms used in the Supplement shall have the meanings defined in the Plan. The purposes of the Supplement are to (i) strengthen the commonality of interest between management and Caterpillar Inc.'s stockholders, (ii) link effectively executive motivation and compensation with Caterpillar Inc.'s performance, (iii) provide incentives and rewards for key executives to accomplish Caterpillar Inc.'s goals and objectives over the long term, (iv) offer a comprehensive and competitive total compensation program, and (v) attract and retain executives of high caliber and ability. ARTICLE II - DEFINITIONS For purposes of the Supplement: 2.1 "AWARD" shall mean the sum of the cash amount and/or restricted stock awarded to a Participant following the conclusion of a Performance Period in which Performance Measures were met or exceeded. 2.2 "DISABILITY" shall mean the total and permanent disability of a Participant as defined by any Caterpillar Inc. long-term disability plan in effect for such Participant. 2.3 "PARTICIPANT" shall mean any employee of Caterpillar Inc. or any subsidiary of Caterpillar Inc. holding a position which the Committee has determined is eligible to participate in the Supplement. 2.4 "PERFORMANCE MEASURES" shall mean the criteria established by the Committee at the beginning of each Performance Period as the basis for making Awards. 2.5 "PERFORMANCE PERIOD" shall mean any period of time determined by the Committee for which the Performance Measures are established. ARTICLE III - TERM OF PLAN This Supplement shall be effective from the 1st day of January, 1993, and shall remain in effect until terminated by the Board of Directors of Caterpillar Inc. ARTICLE IV - PAYMENT AND AMOUNT OF BENEFITS 4.1 Payment of Awards - Awards shall be paid in cash, shares of restricted stock, or a combination of cash and restricted stock as determined by the Committee in its sole discretion. A check for any cash Award or a certificate for shares of restricted stock awarded shall be delivered to each Participant not later than 90 days following the end of the relevant Performance Period. The number of Caterpillar Inc. shares of restricted stock awarded shall be determined by dividing the portion of the Award payable in restricted stock by the average of the high and low price of Caterpillar Inc. shares on the New York Stock Exchange on the last business day of the Performance Period for which payment is made. The terms of any such restricted stock shall be determined by the Committee in its sole discretion subject to the restrictions of Section 13 of the Plan. Federal, state and local taxes will be withheld as appropriate. 4.2 Amount of Award - Prior to the beginning of any Performance Period, the Committee in its sole discretion will determine the target award for each salary grade or position for all Participants. The Award amount will be calculated by multiplying such target award by the percentage of the Award payable based on attainment of the applicable Performance Measures. 4.3 Required Employment - An eligible Participant shall receive an Award under this Supplement for a Performance Period provided he is actively employed by Caterpillar Inc. on the last day of the Performance Period, except for a Participant whose employment terminates during a Performance Period by reason of death, disability, or retirement in which case a prorated Award shall be paid for the time during the Performance Period that he was actively employed. Participants who are employed on the last day of the Performance Period but were not Participants for the entire Performance Period shall receive an Award prorated for that part of the Performance Period for which they were Participants. ARTICLE V - ADMINISTRATION 5.1 Authority - The Supplement shall be administered by the Committee which shall have full power and authority to administer and interpret the Supplement within its terms. The Committee's authority shall include, but not be limited to, (i) selecting participants, (ii) determining the timing, amounts and composition of Awards, (iii) setting the duration of Performance Periods, (iv) establishing performance goals for the Performance Periods, and (v) measuring such performance at the end of each Performance Period. All decisions made by the Committee shall be final and binding and shall be given the maximum deference provided by law. 5.2 Adjustments of Company Performance Measures - At any time during a Performance Period, the Committee may, in its discretion, increase or decrease previously set Performance Measures for such Performance Period to reflect changes in tax laws, regulations or rulings; changes in accounting principles or practices; mergers, acquisitions or divestitures; major technical innovations; or extraordinary, nonrecurring or unusual items. 5.3 Suspension and Termination - The Committee and/or the Board of Directors of Caterpillar Inc. may suspend or terminate this Supplement at any time. In such event, all Performance Periods then in effect shall be deemed to have ended on the effective date of such suspension or termination, the applicable Performance Measures shall be appropriately prorated and modified to apply to the shortened Performance Periods, and Awards shall be appropriately prorated and based upon results accomplished over the time intervals from the start of each respective Performance Period through the effective date of suspension or termination. 5.4 Rules and Regulations - The Committee may adopt from time to time such rules and regulations as it reasonably deems appropriate to assist in administration of this Supplement. ARTICLE VI - MISCELLANEOUS 6.1 Other Benefit Plans - No Award amount shall be taken into account under the Retirement Income Plan, the Employees' Investment Plan, the Insurance Benefits Plan, or any other employee benefit plan or payroll practice of Caterpillar Inc. or its subsidiaries. 6.2 Beneficiaries - If an Employee is deceased at the time any benefit is payable to him, the amount of such benefit shall be payable to the same person or persons and in the same proportionate amount as shall be payable to the beneficiary or beneficiaries for his basic life insurance under the applicable insurance plan of Caterpillar Inc. or its subsidiaries, or if no beneficiary is so designated, to the executor of his estate. 6.3 Employment Rights - Participation in the Supplement will not give any Participant the right to be retained in the service of Caterpillar Inc., or its subsidiaries, nor shall such participation provide any right or claim to any benefit under the Supplement unless such right or claim has specifically accrued under the terms of the Supplement. 6.4 Gender and Number - Where the context permits, words in the masculine gender shall include the feminine gender, the plural shall include the singular, and the singular shall include the plural. 6.5 Governing Law - The Supplement shall be construed in accordance with and governed by the laws of the State of Illinois. EX-10.(D) 3 SUPPLEMENTAL EMPLOYEES' INVESTMENT PLAN Exhibit 10(d) CATERPILLAR INC. SUPPLEMENTAL EMPLOYEES' INVESTMENT PLAN (Restated as of July 1, 1995) 1. Purpose The purpose of the Caterpillar Inc. (Company) Supplemental Employees' Investment Plan (SEIP), as set forth in the succeeding sections of this document, is to provide additional investment opportunities for those employees whose participation in the Employees' Investment Plan (EIP) is restricted because of the limitations imposed by Section 401(a)(17) and 415(c)(1)(A) of the Internal Revenue Code of 1986, as amended, or any successor statute thereto (hereinafter referred to as the "Limitation"). The SEIP shall be effective October 14, 1987. 2. Eligibility An employee shall be eligible for the SEIP if he is participating in the EIP and his contributions and related employer contributions to Part 1 after 1987 can reasonably be expected to be restricted by the Limitation. As used herein, "Part 1" refers to the EIP without the Special Investment Supplement thereto. In addition, effective December 1, 1994, an employee shall be eligible for the SEIP if he is participating in the EIP and contributions to his account in the Special Investment Supplement ("Part 2") are restricted because of the Limitation. 3. Participant Deferrals An employee must make a valid election (to become a "Participant") on or before the last Company business day in November of any year to participate in the SEIP during the following calendar year. Such election shall defer all or a portion of his compensation that would otherwise qualify as participant contributions under Part 1, Part 2 or both were it not for the Limitation. Any such election must be made (on a form provided by the Company) and delivered to the Director, Compensation and Benefits before the end of normal office hours on such last Company business day in November and shall remain in effect until it is revised as provided herein. If a Participant wants to change or terminate the amount of compensation deferred, he shall deliver a revised election form to the Director, Compensation and Benefits; provided, however, that (i) such revised election shall become effective (when and so long as the Participant is eligible) for each calendar year following the year in which such form is delivered, and shall remain effective until such election is further revised as provided herein, and (ii) any such election must be filed before the end of normal office hours on the last Company business day in November. When an employee first becomes eligible to participate in the SEIP (including those employees who first become eligible on the effective date), he may elect to defer compensation (or file a revised election) in accordance with the foregoing, except that any such election with respect to compensation payable to him during the calendar year in which he becomes eligible for the SEIP (i) must be filed within a 30-day period that begins on the date he becomes eligible, and (ii) shall be applicable only to compensation paid for months that commence after the date of such election. 4. Employer Amounts An employee will be credited with the same amount that would otherwise be contributed to his account as an employer contribution under Part 1 were it not for the Limitation. 5. Status of Accounts All amounts in the SEIP shall be held in the general funds of the Company, but the Company will establish an individual bookkeeping account for each Participant. Amounts of compensation deferred by the Participant and employer amounts related to such compensation will be credited to the individual account of the Participant in accordance with his election(s). Each Participant may elect to have all or a specified percentage of his deferred compensation allocated to an interest account or allocated and treated as though it were invested in Company common stock ("Stock Election"). Amounts allocated to the stock account (or interest account) of a Participant who is an officer of the Company subject to Section 16 of the Securities Exchange Act of 1934 ("Officer") may not be transferred to his interest account (or, respectively, his stock account) until at least six months after he ceases to be subject to such Section. Under such a Stock Election, dividend equivalents will accrue to the account (when dividends are payable) and will be reinvested and a Participant's account will in all other respects reflect share ownership for events such as a stock split but no voting rights will exist. The number of shares of stock equivalents shall be determined by dividing the amount of deferred compensation (or dividend equivalents credited) by the average of the high and low prices of Company common stock on the New York Stock Exchange on the date of such deferral or dividend credit (or the next succeeding trading day if there is no trading on that date). Stock equivalents will be valued based on the average of the high and low prices of Company common stock on the New York Stock Exchange as of the effective date of a transfer into or out of the stock account ("Transfer"), the date on which the Participant terminates employment, the date of distribution elected by the Participant hereunder or the date as of which he is considered totally and permanently disabled under EIP, whichever date applies (or the next succeeding trading day if there is no trading on that date). The Company will credit interest accounts on a quarterly basis. The interest rate will be equal to the base corporate lending rate (sometimes referred to as the "prime rate") applicable to commercial lending customers of Citibank, N.A., New York, New York (or any successor thereto) on the last business day of each calendar quarter. The annual interest rate will be divided by four and applied effective the last day of each quarter to the average daily amount in each Participant's account in that quarter. In any calendar quarter in which a Participant does not have amounts credited to his account for the entire period of that quarter, interest will be credited pro rata based on the number of business days that amounts are credited to his account in that quarter compared to the total number of business days in that quarter. Participants who are not Officers may Transfer or make changes to the investment allocation of future deferred compensation which shall be effective as of the first day of a calendar quarter, provided that such Participant shall have filed an appropriate form with the Director, Compensation and Benefits, by the twentieth (20th) day of the preceding month. All amounts in the SEIP and the establishment of individual bookkeeping accounts shall not be deemed to have created a trust, and no Participant shall have any ownership interest in any such account. A Participant's rights to any amounts credited to his account shall not be transferable or assignable. Each Participant will receive an annual report showing the status of his account at the close of each calendar year. 6. Disbursement Following his termination of employment with the Company (or total and permanent disability), the value of the Participant's SEIP account will be payable to him as soon as practicable in cash, in a lump sum (including interest up to the date of payment) unless such Participant has elected a later payment date in writing that is acceptable to and approved by the Director, Compensation and Benefits; provided, however, that no such election shall be effective unless it shall have been filed on or before the last Company business day in November of the calendar year preceding the calendar year of such termination. 7. Death of a Participant Upon the death of a Participant prior to payment of his SEIP account, the balance in the Participant's account (including interest for the elapsed portion of the year of death) shall be determined as of the date of death. Such balance shall be paid as soon as reasonably possible thereafter in a lump sum payment to (i) the same beneficiary or beneficiaries and in the same proportionate amount as he shall have designated under the EIP, in the absence of any designation to the contrary, or (ii) the beneficiary or beneficiaries for purposes of the SEIP as such Participant shall have designated in writing (in a form acceptable to, and filed with, the Director, Compensation and Benefits). 8. Amendment or Termination The Compensation Committee of the Board of Directors or the Investment Plan Committee (for EIP) may at any time amend, merge, consolidate or terminate the SEIP, but no amendment, merger, consolidation or termination will have the effect of reducing the amount that any Participant is entitled to receive prior to such amendment, merger, consolidation or termination nor of changing the time of payment of any amount credited to a Participant's account. 9. Administration Except as otherwise expressly provided herein, the SEIP shall be administered under the direction of the Director, Compensation and Benefits, of the Company. APPROVED BY THE INVESTMENT PLAN COMMITTEE: 06/29/95 /s/W.M. Zimmerman - ------------------------------- --------------------------------- (Date) W.M. Zimmerman 07/03/95 /s/D.R. Oberhelman - ------------------------------- --------------------------------- (Date) D.R. Oberhelman 07/12/95 /s/J.W. Owens - ------------------------------- --------------------------------- (Date) J.W. Owens 07/16/95 /s/D.V. Fites - ------------------------------- --------------------------------- (Date) D.V. Fites EX-10.(I) 4 DEFERRED EMPLOYEES' INVESTMENT PLAN Exhibit 10 (i) CATERPILLAR INC. DEFERRED EMPLOYEES' INVESTMENT PLAN 1. Purpose The purpose of the Caterpillar Inc. (Company) Deferred Employees' Investment Plan (DEIP), as set forth in the succeeding sections of this document, is to provide additional investment opportunities for those employees whose participation in Part 2 of the Employees' Investment Plan (EIP) is restricted because of limitations imposed by the Internal Revenue Code of 1986, as amended. The DEIP shall be effective June 30, 1995. 2. Eligibility An employee shall be eligible to participate in the DEIP if he is in salary grade 30 or higher and currently defers compensation into Part 2 of EIP (to the maximum allowed by EIP). 3. Participant Deferrals An employee must make a valid election (to become a "Participant") on or before the last Company business day in November of any year to participate in the DEIP during the following calendar year. Such election shall defer a portion of his compensation not to exceed the excess of (a) 6% of his base salary over (b) the total amount deferred by him into Part 2 of EIP and into the Supplemental Employees' Investment Plan (SEIP) because of any limitation on the amount that can be deferred under Part 2 of EIP. Any such election must be made (on a form provided by the Company) and delivered to the Director, Compensation and Benefits before the end of normal office hours on such last Company business day in November and shall remain in effect until it is revised as provided herein. If a Participant wants to change or terminate the amount of compensation deferred, he shall deliver a revised election form to the Director, Compensation and Benefits; provided, however, that (i) such revised election shall become effective (when and so long as the Participant is eligible) for each calendar year following the year in which such form is delivered, and shall remain effective until such election is further revised as provided herein, and (ii) any such election must be filed before the end of normal office hours on the last Company business day in November. When an employee first becomes eligible to participate in the DEIP (including those employees who first become eligible on the effective date), he may elect to defer compensation (or file a revised election) in accordance with the foregoing, except that any such election with respect to compensation payable to him during the calendar year in which he becomes eligible for the DEIP (i) must be filed within a 30-day period that begins on the date he becomes eligible, and (ii) shall be applicable only to compensation paid for months that commence after the date of such election. 4. Status of Accounts All amounts in the DEIP shall be held in the general funds of the Company, but the Company will establish an individual bookkeeping account for each Participant. Amounts of compensation deferred by the Participant will be credited to the individual account of the Participant in accordance with his election(s). Each Participant may elect to have all or a specified percentage of his deferred compensation allocated to an interest account or allocated and treated as though it were invested in Company common stock ("Stock Election"). Amounts allocated to the stock account (or interest account) of a Participant who is an officer of the Company subject to Section 16 of the Securities Exchange Act of 1934 ("Officer") may not be transferred to his interest account (or, respectively, his stock account) until at least six months after he ceases to be subject to such Section. Under such a Stock Election, dividend equivalents will accrue to the account (when dividends are payable) and will be reinvested and a Participant's account will in all other respects reflect share ownership for events such as a stock split but no voting rights will exist. The number of shares of stock equivalents shall be determined by dividing the amount of deferred compensation (or dividend equivalents credited) by the average of the high and low prices of Company common stock on the New York Stock Exchange on the date of such deferral or dividend credit (or the next succeeding trading day if there is no trading on that date). Stock equivalents will be valued based on the average of the high and low prices of Company common stock on the New York Stock Exchange as of the effective date of a transfer into or out of the stock account ("Transfer"), the date on which the Participant terminates employment, the date of distribution elected by the Participant hereunder or the date as of which he is considered totally and permanently disabled under EIP, whichever date applies (or the next succeeding trading day if there is no trading on that date). The Company will credit interest accounts on a quarterly basis. The interest rate will be equal to the base corporate lending rate (sometimes referred to as the "prime rate") applicable to commercial lending customers of Citibank, N.A., New York, New York (or any successor thereto) on the last business day of each calendar quarter. The annual interest rate will be divided by four and applied effective the last day of each quarter to the average daily amount in each Participant's account in that quarter. In any calendar quarter in which a Participant does not have amounts credited to his account for the entire period of that quarter, interest will be credited pro rata based on the number of business days that amounts are credited to his account in that quarter compared to the total number of business days in that quarter. Participants who are not Officers may Transfer or make changes to the investment allocation of future deferred compensation which shall be effective as of the first day of a calendar quarter, provided that such Participant shall have filed an appropriate form with the Director, Compensation and Benefits, by the twentieth (20th) day of the preceding month. All amounts in the DEIP and the establishment of individual bookkeeping accounts shall not be deemed to have created a trust, and no Participant shall have any ownership interest in any such account. A Participant's rights to any amounts credited to his account shall not be transferable or assignable. Each Participant will receive an annual report showing the status of his account at the close of each calendar year. 5. Disbursement Following his termination of employment with the Company (or total and permanent disability), the value of the Participant's DEIP account will be payable to him as soon as practicable in cash, in a lump sum (including interest up to the date of payment) unless such Participant has elected a later payment date in writing that is acceptable to and approved by the Director, Compensation and Benefits; provided, however, that no such election shall be effective unless it shall have been filed on or before the last Company business day in November of the calendar year preceding the calendar year of such termination. 6. Death of a Participant Upon the death of a Participant prior to payment of his DEIP account, the balance in the Participant's account (including interest for the elapsed portion of the year of death) shall be determined as of the date of death. Such balance shall be paid as soon as reasonably possible thereafter in a lump sum payment to (i) the same beneficiary or beneficiaries and in the same proportionate amount as he shall have designated under the EIP, in the absence of any designation to the contrary, or (ii) the beneficiary or beneficiaries for purposes of the DEIP as such Participant shall have designated in writing (in a form acceptable to, and filed with, the Director, Compensation and Benefits). 7. Amendment or Termination The Compensation Committee of the Board of Directors or the Investment Plan Committee (for EIP) may at any time amend, merge, consolidate or terminate the DEIP, but no amendment, merger, consolidation or termination will have the effect of reducing the amount that any Participant is entitled to receive prior to such amendment, merger, consolidation or termination nor of changing the time of payment of any amount credited to a Participant's account. 8. Administration Except as otherwise expressly provided herein, the DEIP shall be administered under the direction of the Director, Compensation and Benefits, of the Company. APPROVED: /s/D.V. Fites - -------------------------------- D.V. Fites 06/29/95 - -------------------------------- (Date) EX-11 5 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 CATERPILLAR INC. AND CONSOLIDATED SUBSIDIARY COMPANIES COMPUTATIONS OF EARNINGS PER SHARE FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993 ---- ---- ---- I. Net profit for year (millions of dollars):.................................. $ 1,136 $ 955 $ 652 ======= ====== ====== II. Determination of shares (millions): Weighted average number of common shares outstanding........................ 198.4 203.0 202.7 Shares issuable on exercise of stock options, net of shares assumed to be purchased out of proceeds at average market price......................... 1.7 2.1 2.2 ------- ------ ------ Average common shares outstanding for fully diluted computation............. 200.1 205.1 204.9 ======= ====== ====== III. Profit per share of common stock: Assuming no dilution........................................................ $ 5.72 $ 4.70 $ 3.21 Assuming full dilution...................................................... $ 5.67 $ 4.65 $ 3.18
EX-12 6 STATEMENT SETTING FORTH COMPUTATION OF RATIOS EXHIBIT 12 CATERPILLAR INC., CONSOLIDATED SUBSIDIARY COMPANIES, AND 50%-OWNED AFFILIATED COMPANIES STATEMENT SETTING FORTH COMPUTATION OF RATIOS OF PROFIT TO FIXED CHARGES (Millions of dollars) YEARS ENDED DECEMBER 31,
1995 1994 1993 ---- ---- ---- Profit........................................................................... $ 1,136 $ 955 $ 681 Add: Provision for income taxes..................................................... 536 397 43 ------- ------ ------ Profit before taxes.............................................................. $ 1,672 $1,352 $ 724 Fixed charges: Interest and other costs related to borrowed funds/(1)/........................ $ 502 $ 430 $ 464 Rentals at computed interest factors/(2)/...................................... 51 51 53 ------- ------ ------ Total fixed charges.............................................................. $ 553 $ 481 $ 517 ------- ------ ------ Profit before provision for income taxes and fixed charges....................... $ 2,225 $1,833 $1,241 ======= ====== ====== Ratio of profit to fixed charges................................................. 4.0 3.8 2.4 ======= ====== ======
- ---------------- /(1)/Interest expense as reported in the Consolidated Results of Operations plus the Company's proportionate share of 50 percent-owned affiliated companies' interest expense. /(2)/Amounts represent those portions of rent expense that are reasonable approximations of interest costs. EX-21 7 SUBSIDIARIES AND AFFILIATES OF THE REGISTRANT Exhibit 21 SUBSIDIARIES AND AFFILIATES OF THE REGISTRANT
Percentage of Voting Securities Jurisdiction Owned Directly in which or Indirectly at Name of Company Organized 12/31/95* --------------- --------- --------- Caterpillar Inc. (Registrant) Delaware Parent Affiliates of the Registrant: Advanced Filtration Systems Inc. Delaware 50 AO Novotruck Russia 33.33 Caterpillar Elphinstone Pty. Ltd. Australia 50 Subsidiary: Elphinstone Commercial Services Ltd. Canada 100 Caterpillar Hungary Component Manufacturing Company Ltd. Hungary 42.9 Cyclean, Inc. Delaware 9.74 Peoria Medical Research Corporation Illinois 14.29 Rapisarda Industries S.r.L. Italy 25.01 UNOC Equipment and Supply, L.L.C. Delaware 30 Subsidiary: AO UNOC Equipment and Supply Russia 100 Subsidiaries of the Registrant: Advanced Fuels, L.L.C. Delaware 51 Advanced Technology Services, Inc. Illinois 91.29 Anchor Coupling Inc. Delaware 100 AO Caterpillar Commercial Russia 100 AO Nevamash Russia 65 Balderson Inc. Kansas 100 Carter Machinery Company, Incorporated Delaware 100 Caterpillar Americas Co. Delaware 100 Caterpillar Asia Pacific Holding Inc. Delaware 100 Subsidiaries: Caterpillar Shanghai Engine Company Ltd. China 55 Caterpillar Xuzhou Ltd. China 60 Caterpillar Asia Pte. Ltd. Singapore 100 Caterpillar of Australia Ltd. Australia 100 Affiliates: Energy Power Systems Australia Pty Limited Australia 50 Affiliate: Mine Power Australia Pty. Ltd. Australia 50 Subsidiary: Energy Power Systems PNG Pty Limited New Guinea 100 EPSA Superannuation Nominees Pty. Ltd. Australia 100 Caterpillar Brasil Ltda. Brazil 100 Subsidiary: Caterpillar Administracao e Participacoes S/C Ltda. Brazil 100 Caterpillar Building Construction Products AG Switzerland 100 Caterpillar of Canada Ltd. Canada 100 Caterpillar Capital Company, Inc. Delaware 100
Caterpillar Commercial N.V. Belgium 100 Affiliate: Hindustan Powerplus Limited India 37.74 Subsidiary: Caterpillar Group Services N.V. Belgium 100 Caterpillar Commercial Services Ltd. Canada 100 Caterpillar of Delaware, Inc. Delaware 100 Subsidiary: Caterpillar Industrial Products, Inc. Delaware 100 Subsidiary: Nexus International Inc. Delaware 100 Caterpillar Export Limited U.S. Virgin Islands 100 Caterpillar Financial Services Corporation Delaware 100 Affiliate: Bio-energy Partners Illinois 50 Subsidiaries: Caterpillar Finance France S.A. France 100 Caterpillar Financial Asset Sales L.L.C. Tennessee 99 Caterpillar Financial Australia Limited Australia 100 Caterpillar Financial Funding Corporation Nevada 100 Caterpillar Financial Leasing, S.A. Spain 100 Caterpillar Financial Corporacion Financiera S.A. Spain 100 Caterpillar Financial Member Company Delaware 100 Caterpillar Financial Nordic Services A.B. Sweden 100 Subsidiary: Caterpillar Financial Services Norway AS Norway 100 Caterpillar Financial Receivables Inc. Delaware 100 Caterpillar Financial Renting S.A. Spain 100 Caterpillar Financial Services Holding GmbH Germany 100 Affiliates: EDC European Excavator Design Center GmbH & Co. KG Germany 41.9 EDC European Excavator Design Center Verwaltungs GmbH Germany 41.9 Subsidiaries: Caterpillar Leasing GmbH (Ismaning) Germany 100 Caterpillar Leasing GmbH (Leipzig) Germany 100 Caterpillar Financial Services Limited Canada 100 Caterpillar Financial Services (U.K.) Limited England 100 Grupo Financiero Caterpillar Mexico, S.A. de C.V. Mexico 100 Subsidiaries: Caterpillar Credito, S.A. de C.V. Soc. Fin. de Obj. Lim. Mexico 100 Caterpillar Arrendadora Financiera, S.A. de C.V. Mexico 100 Caterpillar Factoraje Financiero, S.A. de C.V. Mexico 100 GFCM Servicios, S.A. de C.V. Mexico 100 MICA Energy Systems Michigan 85 Caterpillar Financial Services N.V. Netherlands Antilles 100 Caterpillar Industrial Inc. Ohio 100 Affiliates: Mitsubishi Caterpillar Forklift America Inc. Delaware 20 Mitsubishi Caterpillar Forklift Asia Pte. Ltd. Singapore 20 Mistubishi Caterpillar Forklift Europe B.V. Netherlands 20 Rapidparts Inc. Michigan 50 Subsidiary: Matchparts N.V. Belgium 50.5 Caterpillar Insurance Co. Ltd. Bermuda 100 Caterpillar Insurance Services Corporation Tennessee 100 Caterpillar International Finance Plc. Ireland 100
Caterpillar International Leasing L.L.C. Delaware 100 Caterpillar Investment Management Ltd. Delaware 100 Subsidiary: Caterpillar Securities Inc. Delaware 100 Caterpillar Logistics Services, Inc. Delaware 100 Subsidiary: Caterpillar Logistics Services Belgium N.V. Belgium 100 Caterpillar Logistics Services Spain, S.A. Spain 100 Caterpillar Marketing Services Inc. Illinois 100 Caterpillar Mexico S.A. de C.V. Mexico 100 Subsidiary: Inmobiliaria Conek, S.A. Mexico 100 Caterpillar Overseas Credit Corporation S.A. Switzerland 100 Caterpillar Overseas S.A. Switzerland 100 Affiliates: Caterpillar MHI Marketing Ltd. Japan 50 Shin Caterpillar Mitsubishi Ltd. Japan 50 Affiliates: Aishin Co. Japan 20 D.O.M. Ltd. Japan 10 G. M. Kenki Lease Co. Japan 37.5 Hama-rental Co. Japan 20 Hokken Service Co. Japan 40 Itoh Tekkosho Co., Ltd. Japan 34 K-Lea Co., Ltd. Japan 9.8 Kyoei Co. Japan 12.5 Rentec Co. Japan 10 Sowa System Co. Japan 17.5 Sagakiko-shokai Co., Ltd. Japan 5.7 Tokyo Rental Co. Japan 45 Tokuden Co. Japan 19 Tunnel Rental Co., Ltd. Japan 9.5 Subsidiaries: Akashi GS Co., Ltd. Japan 100 Chubu Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan 100 CMEC Co., Ltd. Japan 100 CM Human Services Co., Ltd. Japan 100 CM Logistics Services Co., Ltd. Japan 100 East Chugoku Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan 100 East Kanto Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan 100 Affiliate: Clean World Co. Japan 18.3 Tone Lease Co. Japan 18.3 Hokkaido Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan 100 Affiliate: Ryosey Kenpan Co., Ltd. Japan 16.7 Subsidiary: Shin Hokken Ltd. Japan 100 Hokuetsu Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan 100 Affiliates: Akira Shoji Co., Ltd. Japan 28.6 F. M. K. Co., Ltd. Japan 25 Hokuriku Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan 51 Affiliate: Dia Rental Hokuriku Co., Ltd. Japan 15 Kanagawa Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan 100
Kansai Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan 100 Kinki Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan 100 Affiliate: Rental Sanwa Co., Ltd. Japan 45 Koshin Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan 100 Affiliate: Sanko Rental Co. Japan 20 North Kanto Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan 100 Affiliate: Takuma Co. Japan 16.3 Sagami GS Co., Ltd. Japan 100 SCM Operator Training Co., Ltd. Japan 100 SCM Shoji Co., Ltd. Japan 100 SCM System Service Co., Ltd. Japan 100 Shizuoka Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan 51 Subsidiary: Seiryo Co., Ltd. Japan 100 Tokyo Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan 100 Subsidiary: Aiwa Co., Ltd. Japan 19.2 West Chugoku Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan 100 Affiliate: Yeep Co. Japan 16.7 Tractor Engineers Limited India 50 Subsidiaries: Caterpillar (Africa) (Proprietary) Limited South Africa 100 Caterpillar Asia Limited Hong Kong 100 Caterpillar Belgium S. A. Belgium 100 Caterpillar China Limited Hong Kong 100 Caterpillar Commercial APS Denmark 100 Caterpillar Commercial S.A.R.L. France 100 Caterpillar Commerciale S.r.L. Italy 100 Caterpillar France S.A. France 100 Caterpillar Logistics Services Limited England 100 Mec-Track S.r.L. Italy 100 Caterpillar (U.K.) Limited England 100 P.T. Natra Raya Indonesia 80 Solar Turbines Canada Ltd. Canada 100 Solar Turbines S.A. Belgium 100 Caterpillar Paving Products Inc. Oklahoma 100 Subsidiary: Caterpillar Materiels Routiers S.A. France 100 Caterpillar Power Systems Inc. Delaware 100 Caterpillar Redistribution Services Inc. Delaware 100 Subsidiary: Duecosa Limited Channel Islands 100 Caterpillar Rental Services Network Inc. Delaware 100 Caterpillar Risk Management Services Ltd. Delaware 100 Caterpillar Services Limited Delaware 100 Caterpillar World Trading Corporation Delaware 100 Depositary (Bermuda) Limited Bermuda 100 Engine Service Specialists, Inc. Delaware 100 Subsidiaries: Road Ready Inc. Delaware 100 RR-1 Limited Partnership Illinois 68.35
Solar Turbines Incorporated Delaware 100 Subsidiaries: Compsolven Corporation California 100 OTSG, Inc. Delaware 100 Affiliate: Innovative Steam Technologies California 50 Solar Turbines International Company Delaware 100 Affiliate: Turboservices SDN BHD Malaysia 26 Subsidiaries: Energy Services International Group, Ltd. Delaware 100 Energy Services International Limited Bermuda 100 Servtech Limited Ireland 100 Turbinas Solar S.A. de C.V. Mexico 100 Turbinas Solar de Venezuela, C.A. Venezuela 100 Turbo Tecnologia de Reparaciones S.A. de C.V. Mexico 100 Tecnologia Modificada S.A. de C.V. Mexico 100
____________________________ * Qualifying shares have been ignored in giving ownership percentage figures. For further information see Notes to Consolidated Financial Statements incorporated by reference from the 1996 Annual Meeting Proxy Statement. EX-23 8 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Forms S-8 (No. 2-90123, as amended, 2-97450, as amended, 33-3718, as amended, 33-8003, 33-14116, 33-37353, 33-39280 and 33-40598) of Caterpillar Inc. of our report dated January 18, 1996 related to the financial statements of Caterpillar Inc., appearing on page A-3 of the Appendix to the Company's 1996 Annual Meeting Proxy Statement which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule listed in Item 14(a) of such Annual Report on Form 10-K. We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 (No. 33-46194) of Caterpillar Inc. of our report dated January 18, 1996 related to the financial statements of Caterpillar Inc., appearing on page A-3 of the Appendix to the Company's 1996 Annual Meeting Proxy Statement which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule listed in Item 14(a) of this Form 10-K. /s/Price Waterhouse LLP - -------------------------- PRICE WATERHOUSE LLP Peoria, Illinois February 27, 1996 EX-27 9 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from financial statements for the year ended December 31, 1995 and is qualified in its entirety by reference to such financial statements. 1,000,000 YEAR DEC-31-1995 DEC-31-1995 116 522 2,531 0 1,921 7,647 8,303 4,659 16,830 6,049 3,964 194 0 0 3,194 16,830 15,451 16,072 12,000 14,391 (125) 0 191 1,615 501 1,136 0 0 0 1,136 5.72 5.67 Notes and accounts receivable - trade are reported net of allowances for doubtful accounts in the Statement of Financial Position. Amounts inapplicable or not disclosed as a separate line on the Statement of Financial Position or Results of Operations are reported as zero herein.
EX-99.(A) 10 FORM 11-K Exhibit 99(a) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 11-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the Fiscal Year Ended November 30, 1995 OR TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from _______ to _______ Commission File Number 1-768 CATERPILLAR FOREIGN SERVICE EMPLOYEES' STOCK PURCHASE PLAN (Full title of the Plan) CATERPILLAR INC. (Name of issuer of the securities held pursuant to the Plan) 100 NE ADAMS STREET, PEORIA, ILLINOIS 61629 (Address of principal executive offices) REQUIRED INFORMATION Item 1. Financial Statements for this Plan are not enclosed since the requirements to file such financial statements were deemed inapplicable in accordance with the letter from the Securities and Exchange Commission dated January 26, 1973. Item 2. (See response to Item 1). Item 3. (See response to Item 1). Item 4. Not Applicable. EX-99.(B) 11 APPENDIX TO THE COMPANY'S 1996 ANNUAL MEETING Exhibit 99(b) APPENDIX CATERPILLAR INC. GENERAL AND FINANCIAL INFORMATION 1995 A-1 TABLE OF CONTENTS Page Report of Management...................................................... A-3 Report of Independent Accountants......................................... A-3 Consolidated Financial Statements and Notes............................... A-4 Eleven-year Financial Summary............................................. A-26 Management's Discussion and Analysis (MD&A) Results of Operations - 1995 Compared with 1994................................. A-28 - 1994 Compared with 1993................................. A-32 Liquidity & Capital Resources..................................... A-33 Employment........................................................ A-33 Other Matters..................................................... A-33 Labor Update...................................................... A-36 1996 Economic and Industry Outlook................................ A-36 1996 Company Outlook.............................................. A-36 Supplemental Stockholder Information...................................... A-37 Directors and Officers.................................................... A-38 A-2 REPORT OF MANAGEMENT Caterpillar Inc. - -------------------------------------------------------------------------------- The management of Caterpillar Inc. has prepared the accompanying consolidated financial statements for the years ended December 31, 1995, 1994, and 1993, and is responsible for their integrity and objectivity. The statements were prepared in conformity with generally accepted accounting principles and, reflecting management's best judgment, present fairly the company's results of operations, financial position, and cash flows. Management maintains a system of internal accounting controls which has been designed to provide reasonable assurance that: transactions are executed in accordance with proper authorization, transactions are properly recorded and summarized to produce reliable financial records and reports, assets are safeguarded, and the accountability for assets is maintained. The system of internal controls includes statements of policies and business practices, widely communicated to employees, which are designed to require them to maintain high ethical standards in their conduct of company affairs. The internal controls are augmented by careful selection and training of supervisory and other management personnel, by organizational arrangements that provide for appropriate delegation of authority and division of responsibility, and by an extensive program of internal audit with management follow-up. The financial statements have been audited by Price Waterhouse LLP, independent accountants, in accordance with generally accepted auditing standards. They have made similar annual audits since initial incorporation of the company. Their role is to render an objective, independent opinion on management's financial statements. Their report appears below. Through its Audit Committee, the board of directors reviews the company's financial and accounting policies, practices, and reports. The Audit Committee consists exclusively of five directors who are not salaried employees and who are, in the opinion of the board of directors, free from any relationship that would interfere with the exercise of independent judgment as a committee member. The Audit Committee meets several times each year with representatives of management, the internal auditing department, and the independent accountants to review the activities of each and satisfy itself that each is properly discharging its responsibilities. Both the independent accountants and the internal auditors have free access to the Audit Committee and meet with it periodically, with and without management representatives in attendance, to discuss, among other things, their opinions as to the adequacy of internal controls and to review the quality of financial reporting. /s/ Donald V. Fites Chairman of the Board /s/ Douglas R. Oberhelman Chief Financial Officer January 18, 1996 - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS Price Waterhouse LLP [LOGO] TO THE STOCKHOLDERS OF CATERPILLAR INC.: In our opinion, the accompanying consolidated financial statements, Statements 1 through 4, present fairly, in all material respects, the financial position of Caterpillar Inc. and subsidiaries at December 31, 1995, 1994, and 1993, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP Peoria, Illinois January 18, 1996 A-3 STATEMENT 1 Consolidated Results of Operations for the Years Ended December 31 (Millions of dollars except per share data) - --------------------------------------------------------------------------------
1995 1994 1993 ------- ------- ------- Machinery and Engines: Sales (note 1B) .............................................. $15,451 $13,863 $11,235 ------- ------- ------- Operating costs: Cost of goods sold ........................................ 12,000 10,834 9,075 Selling, general, and administrative expenses ............. 1,483 1,348 1,262 Research and development expenses (note 4) ................ 375 311 319 ------- ------- ------- 13,858 12,493 10,656 ------- ------- ------- Operating profit ............................................. 1,593 1,370 579 Interest expense ............................................. 191 200 268 ------- ------- ------- 1,402 1,170 311 Net interest income on U.S. tax settlement (note 7) .......... -- -- 251 Other income (expense) (note 6) .............................. 92 43 92 ------- ------- ------- Profit before taxes .......................................... 1,494 1,213 654 ------- ------- ------- Financial Products: Revenues (note 1B) ........................................... 621 465 380 ------- ------- ------- Operating costs: Selling, general, and administrative expenses ............. 240 191 161 Interest expense .......................................... 293 210 172 ------- ------- ------- 533 401 333 ------- ------- ------- Operating profit ............................................. 88 64 47 Other income (expense) (note 6) .............................. 33 (4) 21 ------- ------- ------- Profit before taxes .......................................... 121 60 68 ------- ------- ------- Consolidated profit before taxes ................................ 1,615 1,273 722 Provision for income taxes (note 7) .......................... 501 354 42 ------- ------- ------- Profit of consolidated companies ............................. 1,114 919 680 Equity in profit of affiliated companies (notes 1A and 11) ... 22 36 1 ------- ------- ------- Profit before extraordinary loss ............................. 1,136 955 681 Extraordinary loss on early retirement of debt (note 14) ..... -- -- (29) ------- ------- ------- Profit ....................................................... $ 1,136 $ 955 $ 652 ======= ======= ======= Profit per share of common stock: Profit before extraordinary loss ............................. $ 5.72 $ 4.70 $ 3.36 Extraordinary loss on early retirement of debt ............... -- -- (.15) ------- ------- ------- Profit ....................................................... $ 5.72 $ 4.70 $ 3.21 ======= ======= ======= Dividends declared per share of common stock .................... $ 1.30 $ .63 $ .30
See accompanying Notes to Consolidated Financial Statements. A-4 STATEMENT 2 Caterpillar Inc. Changes in Consolidated Stockholders' Equity for the Years Ended December 31 (Dollars in millions) - -------------------------------------------------------------------------------- 1995 1994 1993 -------- -------- -------- Common stock (note 18): Balance at beginning of year..................... $ 745 $ 835 $ 799 Common shares issued, including treasury shares reissued: 1995 - 713,131; 1994 - 1,144,631; 1993 - 1,819,130................................ 15 48 36 Treasury shares purchased: 1995 - 7,140,100; 1994 - 4,426,200............. (427) (240) - Issuance of common stock to effect 2-for-1 stock split.......................................... - 102 - ------ ------ ------ Balance at year-end.............................. 333 745 835 ------ ------ ------ Profit employed in the business: Balance at beginning of year..................... 1,961 1,234 643 Profit........................................... 1,136 955 652 Dividends declared............................... (257) (126) (61) Issuance of common stock to effect 2-for-1 stock split.......................................... - (102) - ------ ------ ------ Balance at year-end.............................. 2,840 1,961 1,234 ------ ------ ------ Minimum pension liability adjustment (note 5A)..... - - (40) ------ ------ ------ Foreign currency translation adjustment (note 3): Balance at beginning of year..................... 205 170 133 Aggregate adjustment for year.................... 10 35 37 ------ ------ ------ Balance at year-end.............................. 215 205 170 ------ ------ ------ Stockholders' equity at year-end................... $3,388 $2,911 $2,199 ====== ====== ====== See accompanying Notes to Consolidated Financial Statements. A-5
STATEMENT 3 Financial Position at December 31 (Dollars in millions) - ------------------------------------------------------------------------------------------------------------------------------------ Consolidated (Caterpillar Inc. and subsidiaries) ------------------------------------ 1995 1994 1993 ------------------------------------ Assets Current assets: Cash and short-term investments............................................. $ 638 $ 419 $ 83 Receivables - trade and other............................................... 2,531 2,971 2,637 Receivables - finance (note 8).............................................. 1,754 1,319 988 Deferred income taxes and prepaid expenses (note 7)......................... 803 865 838 Inventories (notes 1C and 9)................................................ 1,921 1,835 1,525 ------------------------------------ Total current assets........................................................... 7,647 7,409 6,071 Land, buildings, machinery, and equipment - net (notes 1D and 10).............. 3,644 3,776 3,827 Long-term receivables - trade and other........................................ 126 125 132 Long-term receivables - finance (note 8)....................................... 3,066 2,669 2,152 Investments in affiliated companies (notes 1A and 11).......................... 476 455 395 Investments in Financial Products subsidiaries................................. - - - Deferred income taxes (note 7)................................................. 1,127 1,243 1,321 Intangible assets (notes 1E and 5A)............................................ 170 237 353 Other assets (notes 5B and 20)................................................. 574 336 556 ------------------------------------ Total assets..................................................................... $16,830 $16,250 $14,807 ==================================== Liabilities Current liabilities: Short-term borrowings (note 13).............................................. $ 1,174 $ 740 $ 822 Accounts payable and accrued expenses........................................ 2,579 2,624 2,055 Accrued wages, salaries, and employee benefits............................... 875 1,047 957 Dividends payable............................................................ 68 50 15 Deferred and current income taxes payable (note 7)........................... 91 144 111 Long-term debt due within one year (note 14)................................. 1,262 893 711 ------------------------------------ Total current liabilities...................................................... 6,049 5,498 4,671 Long-term debt due after one year (note 14).................................... 3,964 4,270 3,895 Liability for postemployment benefits (note 5)................................. 3,393 3,548 4,018 Deferred income taxes and other liabilities (note 7)........................... 36 23 24 ------------------------------------ Total liabilities................................................................ 13,442 13,339 12,608 ------------------------------------ Contingencies (notes 17 and 21) Stockholders' equity (Statement 2) Common stock of $1.00 par value (note 18): Authorized shares: 450,000,000 Issued shares (1995, 1994, and 1993 - 203,723,656) at paid-in amount.......................................................... 901 923 835 Profit employed in the business................................................ 2,840 1,961 1,234 Minimum pension liability adjustment (note 5A)................................. - - (40) Foreign currency translation adjustment (note 3)............................... 215 205 170 Treasury stock (1995 - 9,708,538 shares; and 1994 - 3,281,569 shares) at cost......................................... (568) (178) - ------------------------------------ Total stockholders' equity....................................................... 3,388 2,911 2,199 ------------------------------------ Total liabilities and stockholders' equity....................................... $16,830 $16,250 $14,807 ====================================
See accompanying Notes to Consolidated Financial Statements. A-6 Caterpillar Inc.
Supplemental consolidating data ------------------------------------------------------------------------- Machinery and Engines (Caterpillar Inc. with Financial Products on the equity basis) Financial Products ------------------------------------------------------------------------- 1995 1994 1993 1995 1994 1993 ------------------------------------------------------------------------- $ 580 $ 395 $ 62 $ 58 $ 24 $ 21 2,910 2,919 2,612 132 96 63 -- -- -- 1,754 1,319 988 834 888 869 13 3 2 1,921 1,835 1,525 -- -- -- ------------------------------------------------------------------------- 6,245 6,037 5,068 1,957 1,442 1,074 3,199 3,343 3,456 445 433 371 126 125 132 -- -- -- -- -- -- 3,066 2,669 2,152 476 455 395 -- -- -- 658 548 457 -- -- -- 1,171 1,254 1,334 -- -- -- 170 237 353 -- -- -- 330 143 398 244 193 158 - -------------------------------------------------------------------------- $12,375 $12,142 $11,593 $ 5,712 $ 4,737 $ 3,755 ========================================================================== $ 14 $ 17 $ 139 $ 1,160 $ 723 $ 683 2,358 2,416 1,925 776 278 201 873 1,045 955 2 2 2 68 50 15 -- -- -- 40 112 71 51 32 40 156 86 218 1,106 807 493 - -------------------------------------------------------------------------- 3,509 3,726 3,323 3,095 1,842 1,419 2,049 1,934 2,030 1,915 2,336 1,865 3,393 3,548 4,018 -- -- -- 36 23 23 44 11 14 - -------------------------------------------------------------------------- 8,987 9,231 9,394 5,054 4,189 3,298 - -------------------------------------------------------------------------- 901 923 835 333 303 258 2,840 1,961 1,234 320 245 206 -- -- (40) -- -- -- 215 205 170 5 -- (7) (568) (178) -- -- -- -- - -------------------------------------------------------------------------- 3,388 2,911 2,199 658 548 457 - -------------------------------------------------------------------------- $12,375 $12,142 $11,593 $ 5,712 $ 4,737 $ 3,755 ==========================================================================
The supplemental consolidating data is presented for the purpose of additional analysis and to provide required supplemental disclosure of information about the Financial Products subsidiaries. See note 1A on page A-10 for a definition of the groupings in these statements. A-7 STATEMENT 4 STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31 (Millions of dollars) - -------------------------------------------------------------------------------
Consolidated (Caterpillar Inc. and subsidiaries) ----------------------------------- 1995 1994 1993 ----------------------------------- Cash flows from operating activities: Profit ................................................................. $ 1,136 $ 955 $ 652 Adjustments for noncash items: Depreciation and amortization ....................................... 682 683 668 Profit of Financial Products ........................................ -- -- -- Other ............................................................... 324 166 (153) Changes in assets and liabilities: Receivables -- trade and other ...................................... 461 (308) (524) Inventories ......................................................... (77) (315) 154 Accounts payable and accrued expenses ............................... (43) 519 315 Other -- net ........................................................ (293) 57 293 ----------------------------------- Net cash provided by operating activities ................................. 2,190 1,757 1,405 ----------------------------------- Cash flows from investing activities: Capital expenditures -- excluding equipment leased to others ........... (464) (501) (417) Expenditures for equipment leased to others ............................ (215) (193) (215) Proceeds from disposals of land, buildings, machinery, and equipment ... 119 88 90 Additions to finance receivables ....................................... (4,869) (2,934) (2,024) Collections of finance receivables ..................................... 2,787 1,850 1,389 Proceeds from sale of finance receivables .............................. 1,262 241 -- Net short-term loans to Financial Products ............................. -- -- -- Other -- net ........................................................... (369) (63) (41) ----------------------------------- Net cash used for investing activities .................................... (1,749) (1,512) (1,218) ----------------------------------- Cash flows from financing activities: Dividends paid ......................................................... (239) (91) (61) Common stock issued, including treasury shares reissued ................ 11 12 36 Treasury shares purchased .............................................. (427) (240) -- Net short-term loans from Machinery and Engines ........................ -- -- -- Proceeds from long-term debt issued .................................... 1,414 1,083 1,218 Payments on long-term debt ............................................. (997) (746) (936) Short-term borrowings -- net ........................................... 30 74 (451) ----------------------------------- Net cash provided by financing activities ................................. (208) 92 (194) ----------------------------------- Effect of exchange rate changes on cash ................................... (14) (1) (29) ----------------------------------- Increase (decrease) in cash and short-term investments .................... 219 336 (36) Cash and short-term investments at the beginning of the period ............ 419 83 119 ----------------------------------- Cash and short-term investments at the end of the period .................. $ 638 $ 419 $ 83 ===================================
All short-term investments, which consist primarily of highly liquid investments with original maturities of three months or less, are considered to be cash equivalents. See accompanying Notes to Consolidated Financial Statements. A-8 Caterpillar Inc. - -------------------------------------------------------------------------------- Supplemental consolidating data ----------------------------------------------------------------------- Machinery and Engines (Caterpillar Inc. with Financial Products on the equity basis) Financial Products ----------------------------------------------------------------------- 1995 1994 1993 1995 1994 1993 ----------------------------------------------------------------------- $ 1,136 $ 955 $ 652 $ 75 $ 39 $ 43 580 588 598 102 95 70 (75) (39) (43) - - - 233 126 (201) 91 40 48 505 (281) (488) (36) (33) (7) (77) (315) 154 - - - (28) 471 322 (5) 47 (28) (328) 73 279 17 (9) 5 ----------------------------------------------------------------------- 1,946 1,578 1,273 244 179 131 ----------------------------------------------------------------------- (460) (498) (415) (4) (3) (2) (9) (9) (12) (206) (184) (203) 35 15 57 84 73 33 - - - (4,869) (2,934) (2,024) - - - 2,787 1,850 1,389 - - - 1,262 241 - (475) - - - - - (359) (81) (85) (40) (27) 15 ----------------------------------------------------------------------- (1,268) (573) (455) (986) (984) (792) ----------------------------------------------------------------------- (239) (91) (61) - - - 11 12 36 30 45 30 (427) (240) - - - - - - - 475 - - 270 - 201 1,144 1,083 1,017 (91) (240) (419) (906) (506) (517) (3) (112) (620) 33 186 169 ----------------------------------------------------------------------- (479) (671) (863) 776 808 699 ----------------------------------------------------------------------- (14) (1) 3 - - (32) ----------------------------------------------------------------------- 185 333 (42) 34 3 6 395 62 104 24 21 15 ----------------------------------------------------------------------- $ 580 $ 395 $ 62 $ 58 $ 24 $ 21 ======================================================================= The supplemental consolidating data is presented for the purpose of additional analysis and to provide required supplemental disclosure of information about the Financial Products subsidiaries. See note 1A on page A-10 for a definition of the groupings in these statements. A-9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions except per share data) ________________________________________________________________________________ 1. Summary of significant accounting policies A. Basis of consolidation The accompanying financial statements include the accounts of Caterpillar Inc. and all its subsidiaries. Affiliated companies (50% interest or less) are accounted for by the equity method. Accordingly, the company's share of the affiliates' profit or loss is included in Statement 1 as "Equity in profit of affiliated companies" and the company's investments in these affiliates, including its share of their retained profits, are included in Statement 3 as "Investments in affiliated companies." Financial information of the affiliated companies is included in note 11. Information in the accompanying financial statements and supplemental consolidating data, where applicable, has been grouped as follows: Consolidated - represents the consolidated data of Caterpillar Inc. and subsidiaries, in accordance with Statement of Financial Accounting Standards (SFAS) 94. Machinery and Engines - company operations excluding the Financial Products subsidiaries; consists primarily of the company's manufacturing, marketing, and parts distribution operations. Financial Products - the company's finance and insurance subsidiaries, primarily Caterpillar Financial Services Corporation and Caterpillar Insurance Services Corporation. Certain amounts for prior years have been reclassified to conform with the current year financial statement presentation. B. Sales and revenue recognition Sales of machines and engines are generally unconditional sales that are recorded when product is shipped and invoiced to independently owned and operated dealers or customers. Revenues primarily represent finance and rental revenues of Caterpillar Financial Services Corporation, a wholly owned subsidiary of Caterpillar Inc. Finance revenues are recognized over the term of the contract at a constant rate of return on the scheduled uncollected principal balance, and rental revenues are recognized in the period earned. Recognition of income is suspended when collection of future income is not probable. Income recognition is resumed if the receivable becomes contractually current and collection doubts are removed; previously suspended income is recognized at that time. C. Inventories The cost of inventories is determined principally by the LIFO (last-in, first-out) method of inventory valuation. This method was first adopted for the major portion of inventories in 1950. The value of inventories on the LIFO basis represented approximately 90% of total inventories at current cost value on December 31, 1995, 1994, and 1993. If the FIFO (first-in, first-out) method had been in use, inventories would have been $2,103, $2,035, and $1,818 higher than reported at December 31, 1995, 1994, and 1993, respectively. D. Depreciation Depreciation is computed principally using accelerated methods. These methods result in a larger allocation of the cost of buildings, machinery, and equipment to operations in the early years of the lives of assets than does the straight- line method, which allocates costs evenly over the lives of assets. When an asset becomes fully depreciated, its cost is eliminated from both the asset and the accumulated depreciation accounts. E. Amortization The cost of purchased intangibles is amortized using the straight-line method. Amortization periods are based on estimated remaining useful lives which, at December 31, 1995, averaged 23 years. Accumulated amortization was $185, $182, and $178, at December 31, 1995, 1994, and 1993, respectively. When a purchased intangible becomes fully amortized, its cost is eliminated from the reported accumulated amortization. F. Derivative financial instruments Derivative financial instruments are principally used by the company in the management of its interest rate, foreign currency and commodity exposures. Except as described in Note 3, derivative instruments are not reflected in the financial statements at fair market value. Amounts payable or receivable under interest rate swap agreements are recognized as adjustments to interest expense in the periods in which they accrue. Gains and losses on foreign currency instruments that hedge anticipated cash flows during the next 12 months are also recognized in the results of operations as they accrue. Gains and losses related to effective hedges of identified firm foreign currency commitments are deferred and recognized in the results of operations in the same period as the hedged transaction. Net premiums paid for derivative financial instruments are deferred and recognized ratably over the life of the instrument. G. Use of estimates in the preparation of financial statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales, expenses, and disclosure of contingent liabilities. Actual results could differ from these estimates. Warranty accruals, and actuarially determined product liability loss reserves and postemployment benefits require the use of significant estimates. The company believes the techniques and assumptions used in establishing these liabilities are appropriate. Significant estimates are also used in the determination of environmental liabilities, income taxes, and plant closing and consolidation costs, which are discussed in the respective notes to the financial statements. 2. Accounting changes A. Change in method In the first quarter of 1994, the company changed its method of computing LIFO inventories from a single pool approach to a multiple pool approach for substantially all of its inventories. The company believes that the multiple pool method results in a better matching of revenues and expenses. The cumulative effect of the change on prior years was not determinable. This change did not have a material effect on 1994 results of operations or financial position. A-10 Caterpillar Inc. ________________________________________________________________________________ B. Impact of accounting standards issued in 1995 In March 1995, the Financial Accounting Standards Board issued SFAS 121, "Accounting for the Impairment of Long-Lived Assets." The new statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill. This standard is effective for fiscal years beginning after December 15, 1995, and will therefore be adopted in 1996. It will not have a material impact on the company's financial position or results of operations. In October 1995, SFAS 123, "Accounting for Stock-Based Compensation" was issued, which is effective for fiscal years beginning after December 15, 1995. The new standard encourages companies to adopt a fair value based method of accounting for employee stock options, but allows companies to continue to account for those plans using the accounting prescribed by APB Opinion 25, "Accounting for Stock Issued to Employees." The company will adopt the disclosure requirements of the standard in 1996 and plans to continue accounting for stock compensation using APB 25, making pro forma disclosures of net income and earnings per share as if the fair value based method had been applied. 3. Foreign exchange The U.S. dollar is the functional currency for most of Caterpillar's consolidated companies. The functional currency for equity-basis companies is the local currency of the country in which the company is located. Net foreign exchange gains or losses for companies with the U.S. dollar as their functional currency are included in "Other income (expense)" in Statement 1. For all other companies, the exchange effects from translating all assets and liabilities at current exchange rates are reported as "Foreign currency translation adjustment" in Statements 2 and 3. Profit of consolidated companies for 1995 and 1993 included net pretax foreign exchange losses of $20 and $25, respectively. There were no net pretax foreign exchange gains or losses included in profit of consolidated companies for 1994. The aftertax net gains (losses) for 1995, 1994, and 1993 were $(11), $1, and $(19), respectively. Certain gains or losses may impact either taxes or pretax income, when stated in U.S. dollars, without impacting the other and; accordingly, the relationship between the pretax and aftertax effects may be disproportionate. The company's operations are subject to foreign exchange risk through future foreign currency cash flows as movement in currency exchange rates impact: (1) the U.S. dollar value of sales made in foreign currencies, and (2) the U.S. dollar value of costs incurred in foreign currencies. The company enters into forward exchange contracts and certain foreign currency option contracts to manage these foreign currency cash flows. Other than premiums associated with foreign currency option contracts, gains or losses on this hedging activity are realized in the form of cash receipts or payments at the maturity of the contracts. Realized and unrealized gains or losses on all financial instruments which are designated as, and are effective as, hedges of firmly committed future foreign currency transactions are deferred and are recognized in the results of operations when the operating revenues and/or expenses are recognized. The cash flows from these transactions are classified consistent with the cash flows for the transaction or event being hedged. Similar accounting treatment is applied to gains and losses on purchased foreign currency option hedges of probable net anticipated foreign currency transactions. In those situations where these financial instruments are either terminated or mature prior to the transaction or event being hedged, the gains or losses continue to be deferred and are recognized in the results of operations when the transaction or event being hedged is recognized. Conversely, deferred gains and losses are recognized in the results of operations immediately when the hedged firmly committed or anticipated transaction is no longer anticipated to occur. At December 31, 1995, the company had approximately $95 in forward exchange and foreign currency option contracts to sell foreign currency to hedge firmly committed revenue (sale) transactions. Realized losses totaling less than $1, associated with hedges of future firmly committed revenue transactions that had matured or been canceled prior to December 31, 1995, will be recognized when the underlying hedged transactions occur. This amount is reflected as an asset ("Receivables - trade and other") in Statement 3. Gains or losses on financial instruments, other than certain purchased foreign currency options, used as hedges of anticipated but not firmly committed foreign currency cash flow exposures are reported in the results of operations as exchange rates change and included with amounts reported in "Other income (expense)" on Statement 1. At December 31, 1995, the company had approximately $219 in forward exchange and foreign currency option contracts to buy or sell foreign currency to hedge anticipated, but not firmly committed, net foreign currency cash flow exposures for the next 12 months. The company also had $86 of written foreign currency options open at December 31, 1995. These written options were originally entered into as a part of a combination option strategy. The related purchased options were either sold or terminated prior to the maturity date and were replaced with forward contracts. The maturity dates of the outstanding written options are within the first quarter of 1996. The company has applied mark-to-market accounting treatment to these written options. Net unrealized losses on the $305 of outstanding contracts and written options total less than $1 and have been recognized in "Other income (expense)" on Statement 1. This amount is reflected as a reduction of assets ("Receivables - trade and other") in Statement 3. The fair market value of all outstanding forward exchange and foreign currency option contracts based on quoted market prices of comparable instruments was a loss of $1. The value of the contracts upon ultimate settlement is dependent upon actual currency exchange rates at the various maturity dates which range through mid-1996. At December 31, 1994, and 1993, the company had approximately $1,003, and $1,345, respectively, in forward exchange and foreign currency option contracts to buy or sell foreign currency. At December 31, 1994, and 1993, the carrying value of such contracts was a loss of $4 and $2, respectively, and the fair value, based on quoted market prices of comparable instruments, was a loss of $97, and $16, respectively. For 1993 and the first half of 1994, net foreign exchange gains arising from operations in Brazil's highly inflationary economy were removed from "Other income (expense)" in Statement 1 A-11 NOTES continued (Dollars in millions except per share data) ________________________________________________________________________________ and included on the operating statement lines where the related inflationary effects were reported. Consequently, exchange gains and losses on local currency denominated debt and cash deposits, where the interest rates reflect the rate of inflation, were offset against interest expense and interest income, respectively. Similarly, exchange gains on local currency liabilities subject to monetary correction were offset against the related expense. Additionally, in the first half of 1994, noninterest bearing trade receivables in Brazil were discounted to present value with the implicit interest income reported as a component of interest income. Exchange losses on these receivables were offset against interest income. These reclassifications were no longer applicable in 1995 or the second half of 1994 as inflation in Brazil dropped dramatically following the implementation of a new economic reform package. Exchange gains and losses were reclassified as follows: 1994 1993 ---- ---- Interest expense............................... $ 10 $ 72 Cost of goods sold............................. 29 33 Provision for income taxes..................... 10 11 Interest Income................................ (53) -- ---- ---- $ (4) $116 ==== ==== 4. Research and engineering expenses Research and engineering expenses are charged against operations as incurred. The portions of these expenses related to new product development and major improvements to existing products are classified as "Research and development expenses" in Statement 1. The remaining portions, attributable to engineering expenses incurred during the early production phase, as well as ongoing efforts to improve existing products, are included in "Cost of goods sold" in Statement 1. 5. Postemployment benefit plans A. Pension plans The company has pension plans covering substantially all employees. These defined benefit plans provide a benefit based on years of service and/or the employee's average earnings near retirement. Pension expense for 1995, 1994, and 1993 was $50, $81, and $95, respectively. The company's funding policy for these plans is to contribute amounts which comply with applicable laws and regulations and are tax deductible. Cost components of consolidated pension expense were as follows: 1995 1994 1993 --------- --------- --------- Service cost - benefits earned during the period....................... $95 $108 $103 Interest cost on projected benefit obligation...................... 409 393 387 Return on plan assets:/(1)/ Actual........................ $(1,167) $(124) $(674) Deferred...................... 685 (335) 248 ------- ----- ----- Recognized............................ (482) (459) (426) Amortization of: Net asset existing at adoption of SFAS 87................... (23) (22) (22) Prior service cost/(2)/................ 63 60 51 Net actuarial (gain) loss.............. (12) 1 2 --- --- --- Pension expense......................... $50 $81 $95 === === === /(1)/ Although the actual return on plan assets is shown, the expected long-term rate of return on plan assets of 9.4%, 9.4%, and 9.9% was used in determining consolidated pension expense for 1995, 1994, and 1993, respectively. The difference between the actual return and the recognized return on plan assets is shown as deferred return on plan assets. /(2)/ Prior service costs are amortized using a straight-line method over the average remaining service period of employees expected to receive benefits from the plan amendment. A reconciliation of the funded status of both U.S. and non-U.S. pension plans at their plan year-end (November 30 for U.S. plans and September 30 for non-U.S. plans) with the amount recognized in Statement 3 is presented in Table I on page A-13. For certain pension plans with accumulated benefits in excess of plan assets, an additional long-term liability was recorded as required by SFAS 87. This amount is included in Table I as "Adjustment required to recognize minimum liability." A related intangible asset of $130, $209, and $323 was recorded at December 31, 1995, 1994, and 1993, respectively. As the intangible asset may not exceed unrecognized prior service cost, at December 31, 1993, this adjustment resulted in a reduction to stockholders' equity of $40 (after deferred taxes of $24). Plan assets consist principally of common stocks, corporate bonds, and U.S. government obligations. The actuarial present value of benefits was determined using a weighted average discount rate of 7.4%, 8.3%, and 7.3% for 1995, 1994, and 1993, respectively. The projected benefit, for those plans with benefit payments based upon earnings near retirement, includes an expected annual rate of increase in future compensation of 4.1%, 4.6%, and 4.1% for 1995, 1994, and 1993, respectively. A point-in-time comparison of the projected benefit obligation to the market value of assets is only one indicator of the pension plans' ability to pay benefits when due. The benefit information is based on estimated conditions over many future years, while the asset information relates to market values prevailing at a specific moment. The plans' long-range ability to pay benefits also depends on the future financial health of the company. B. Other postretirement benefit plans The company has defined benefit retirement health care and life insurance plans for substantially all U.S. employees. Most of the plans are non-contributory although some plans require retiree contributions. Cost components of postretirement benefit expense were as follows: 1995 1994 1993 --------- --------- --------- Service cost - benefits earned during the period.................. $73 $83 $79 Interest cost on accumulated benefit obligation................. 232 223 227 Return on plan assets:/(1)/ Actual...................... $(58) $ 3 $ - Deferred.................... 34 (26) - ---- ---- ---- Recognized....................... (24) (23) - Amortization of: Prior service cost/(2)/........... (190) (190) (189) Net actuarial (gain) loss......... (3) 2 1 --- --- ---- Postretirement benefit expense..... $88 $95 $118 === === ==== A-12 Caterpillar Inc. - -------------------------------------------------------------------------------- TABLE I
- ------------------------------------------------------------------------------------------------------------------------------------ 1995 1994 1993 ----------------------- ----------------------- ----------------------- Assets Accumulated Assets Accumulated Assets Accumulated Exceed Benefits Exceed Benefits Exceed Benefits Accumulated Exceed Accumulated Exceed Accumulated Exceed Benefits Assets Benefits Assets Benefits Assets ----------- ----------- ----------- ----------- ----------- ----------- Actuarial present value of: Vested benefit obligation................................. $(2,844) $(2,124) $(2,379) $(1,823) $(2,453) $(2,047) Nonvested benefit obligation.............................. (142) (383) (146) (402) (190) (476) ------- ------- ------- ------- ------- ------- Accumulated benefit obligation............................ $(2,986) $(2,507) $(2,525) $(2,225) $(2,643) $(2,523) ======= ======= ======= ======= ======= ======= Actuarial present value of projected benefit obligation... $(3,310) $(2,533) $(2,829) $(2,248) $(2,928) $(2,587) Plan assets at market value............................... 3,917 2,282 3,310 1,810 3,257 1,922 ------- ------- ------- ------- ------- ------- Funded status at plan year-end............................ 607 (251) 481 (438) 329 (665) Unrecognized net asset existing at adoption of SFAS 87.... (93) (5) (114) (9) (160) 13 Unrecognized prior service cost........................... 155 233 158 279 115 351 Unrecognized net actuarial (gain) loss.................... (418) (74) (342) (45) (124) 63 Adjustment required to recognize minimum liability........ - (130) - (209) - (387) ------- ------- ------- ------- ------- ------- Prepaid pension cost (pension liability) at December 31... $ 251 $ (227) $ 183 $ (422) $ 160 $ (625) ======= ======= ======= ======= ======= ======= - ------------------------------------------------------------------------------------------------------------------------------------
/(1)/ Although the actual return on plan assets is shown, the expected long-term rate of return on plan assets of 9.5% was used in determining consolidated postretirement benefit expense for both 1995 and 1994. The difference between the actual return and the recognized return on plan assets is shown as deferred return on plan assets. /(2)/ Prior service costs are amortized using a straight-line method over the average remaining service period of employees impacted by the plan amendment. The company makes contributions to Voluntary Employees' Beneficiary Association (VEBA) trusts for payment of certain employee benefits for substantially all active and retired U.S. employees. Postretirement benefits funded through VEBA contributions include life insurance for hourly and salaried employees and medical expenses for employees not enrolled in health maintenance organizations. The company currently funds plan obligations on a pay-as-you-go basis. Balances in the VEBA trusts have accumulated over time primarily from earnings on assets previously contributed to the trusts. Assets in the trusts consist principally of mutual funds, common stocks, corporate bonds, and government obligations. Earnings from trust assets of $34 were included in Statement 1 as a component of "Other income (expense)" (note 6) for 1993. As of December 31, 1993, the carrying value of trust assets was $220, and was a component of "Other assets" in Statement 3. Effective January 1, 1994, VEBA trust assets for retiree benefits were legally segregated from those for active employees. As such, these assets are recorded as a reduction to the liability for postretirement benefits rather than as a component of "Other assets." Beginning in 1994, return on plan assets was a component of postretirement benefit expense rather than a component of "Other income (expense)." The components of the liability for postretirement benefits (other than pensions) as of December 31, were as follows: 1995 1994 1993 ------- ------- ------- Accumulated postretirement benefit obligation: Retirees...................................... $(2,149) $(1,910) $(1,965) Fully eligible active plan participants....... (225) (242) (323) Other active plan participants................ (657) (604) (722) ------- ------- ------- (3,031) (2,756) (3,010) Plan assets at market value.................... 297 239 - Unrecognized prior service cost................ (479) (669) (861) Unrecognized net actuarial (gain) loss......... (182) (265) 132 ------- ------- ------- Liability for postretirement benefits (other than pensions)......................... $(3,395) $(3,451) $(3,739) ======= ======= ======= The assumed health care cost trend rate used to measure the accumulated postretirement benefit obligation at December 31, 1995, was 8.7% for 1996, declining gradually to 5.0% in 2001. Postretirement benefit expense for 1995 and the accumulated postretirement benefit obligation at December 31, 1994, were determined using a health care cost trend rate of 9.4% for 1995, declining gradually to 5.0% in 2001. Postretirement benefit expense for 1994 and the accumulated postretirement benefit obligation at December 31, 1993, were determined using a health care cost trend rate of 10.2% for 1994, declining gradually to 4.5% in 2001. Postretirement benefit expense for 1993 was determined using a health care cost trend rate of 11.5% for 1993, declining gradually to 5.0% in 2001. Increasing the assumed health care trend rate by 1% each year would increase the accumulated postretirement benefit obligation as of December 31, 1995, 1994, and 1993 approximately $226, $202, and $234, respectively, and the aggregate of the service and interest cost components of 1995, 1994, and 1993 postretirement benefit expense by approximately $25, $24, and $25, respectively. The accumulated postretirement benefit obligation was determined using a weighted average discount rate of 7.5%, 8.5%, and 7.4% for 1995, 1994, and 1993, respectively. A-13 NOTES continued (Dollars in millions except per share data) ________________________________________________________________________________ C. Other postemployment benefit plans The company offers various other postemployment benefits to substantially all U.S. employees. These benefits are provided to former or inactive employees after employment but before retirement. Inactive employees are those who are not currently rendering service but have not been terminated, excluding those who have not been terminated but have been laid off for greater than one year. Postemployment benefits include disability benefits, supplemental unemployment benefits, workers' compensation benefits, and continuation of health care benefits and life insurance coverage. D. Summary of long-term liability The components of the long-term liability for postemployment benefits at December 31 were as follows: 1995 1994 1993 ------ ------ ------ Pensions.............................................. $ 130 $ 209 $ 387 Postretirement benefits other than pensions........... 3,199 3,275 3,566 Other postemployment benefits......................... 64 64 65 ------ ------ ------ $3,393 $3,548 $4,018 ====== ====== ====== 6. Other income (expense) The components of other income (expense) were as follows for the years ended December 31: 1995 1994 1993 ---- ---- ---- Foreign exchange gains (losses)............... $(20) $ $(25) Investment and interest income................ 90 48 97 License fees.................................. 28 23 28 Miscellaneous income (expense)................ 27 (32) 13 ---- ---- ---- $125 $ 39 $113 ==== ==== ==== 7. Income taxes The provision for income taxes for the years ended December 31 was: 1995 1994 1993 ---- ---- ---- Machinery and Engines......................... $456 $333 $ 19 Financial Products............................ 45 21 23 ---- ---- ---- Provision for income taxes.................... $501 $354 $ 42 ==== ==== ==== The components of the provision (credit) for income taxes were as follows for the years ended December 31: 1995 1994 1993 ---- ---- ---- Current tax provision: U.S. federal taxes........................... $244 $164 $ 63 Foreign taxes................................ 92 73 25 U.S. state taxes............................. 17 25 10 ---- ---- ---- 353 262 98 ---- ---- ---- Deferred tax provision (credit): U.S. federal taxes........................... 147 87 (51) Foreign taxes................................ (6) (8) (2) U.S. state taxes............................. 7 13 (3) ---- ---- ---- 148 92 (56) ---- ---- ---- Total provision for income taxes.............. $501 $354 $ 42 ==== ==== ==== Current tax provision is the amount of income taxes reported or expected to be reported on the company's tax returns. Income taxes paid in 1995, 1994, and 1993 totaled $327, $199, and $10, respectively. During 1993, the company reached a settlement with the U.S. Internal Revenue Service (IRS) covering tax years 1979 through 1987. As a result of this settlement, credits of $134 and $10 were recorded to U.S. federal and U.S. state taxes, respectively. Net interest income associated with the settlement was $251 upon which U.S. federal taxes of $88 and U.S. state taxes of $7 were provided. In August 1993, the U.S. federal income tax rate for corporations was increased from 34% to 35% effective January 1, 1993. As a result of the rate increase, net U.S. deferred tax assets were increased $36, and a credit of the same amount was recorded to the 1993 provision for income taxes. Differences between accounting rules and tax laws cause differences between the bases of certain assets and liabilities for financial reporting purposes and tax purposes. The tax effects of these differences, to the extent they are temporary, are recorded as deferred tax assets and liabilities under SFAS 109, and consisted of the following components at December 31: 1995 1994 1993 ---- ---- ---- U.S. federal, U.S. state, and foreign taxes: Deferred tax assets: Postemployment benefits other than pensions............................. $1,309 $1,331 $1,345 Inventory valuation method.................. 65 62 66 Unrealized profit excluded from inventories.......................... 170 156 193 Plant closing and consolidation costs....................... 53 55 58 Net operating loss carryforwards............ 150 166 253 Warranty reserves........................... 105 108 67 Accrued vacation............................ 30 29 29 Qualified deficits.......................... - 33 54 Foreign tax credit carryforwards............ - - 62 Minimum tax credit carryforwards............ - - 18 Sales discounts............................. 18 12 17 Other....................................... 23 143 109 ------ ------ ------ 1,923 2,095 2,271 Deferred tax liabilities: Capital assets.............................. (83) (84) (77) Pension..................................... (91) (36) (22) ------ ------ ------ (174) (120) (99) ------ ------ ------ Valuation allowance for deferred tax assets......................... (176) (182) (284) ------ ------ ------ Deferred taxes - net.......................... $1,573 $1,793 $1,888 ====== ====== ====== From December 31, 1994 to December 31, 1995, the valuation allowance for deferred tax assets decreased by $6. This was the result of origination and reversal of temporary differences and changes in exchange rates at certain foreign locations where valuation allowances are recorded. During 1995, no changes occurred in the conclusions regarding the need for a valuation allowance in any tax jurisdiction. SFAS 109 requires that individual tax paying entities of the company offset all current deferred tax liabilities and assets within each particular tax jurisdiction and present them as a single amount in the Statement of Financial Position. A similar procedure is followed for all noncurrent deferred tax liabilities and assets. Amounts in different tax jurisdictions cannot be offset against each other. Deferred taxes appear in Statement 3, at December 31, on the following lines: A-14 Caterpillar Inc. ________________________________________________________________________________ 1995 1994 1993 ------ ------ ------ Assets: Deferred income taxes and prepaid expenses.................... $ 464 $ 575 $ 584 Deferred income taxes................ 1,127 1,243 1,321 ------ ------ ------ 1,591 1,818 1,905 ------ ------ ------ Liabilities: Deferred and current income taxes payable................ (3) (6) (2) Deferred income taxes and other liabilities............... (15) (19) (15) ------ ------ ------ (18) (25) (17) ------ ------ ------ Deferred taxes - net.................. $1,573 $1,793 $1,888 ====== ====== ====== The provision for income taxes was different than would result from applying the U.S. statutory rate to profit before taxes for the reasons set forth in the following reconciliation: 1995 1994 1993 ---- ---- ---- Taxes computed at U.S. statutory rates......... $565 $445 $ 253 Increases (decreases) in taxes resulting from: Subsidiaries' results subject to tax rates other than U.S. statutory rates............. (7) (9) 1 Net operating loss carryforwards............. (10) (50) (19) Benefit of Foreign Sales Corporation......... (41) (34) (21) IRS settlement............................... - - (144) Change in U.S. tax rate...................... - - (36) State income taxes - net of federal taxes.... 15 25 11 Valuation allowance adjustment............... - (22) - Research and experimentation credit.......... (4) - (4) Other - net.................................. (17) (1) 1 ---- ---- ----- Provision for income taxes..................... $501 $354 $ 42 ==== ==== ===== U.S. income taxes, net of foreign taxes paid or payable, have been provided on the undistributed profits of subsidiaries and affiliated companies, except in those instances where such profits have been permanently invested and are not considered to be available for distribution to the parent company. In accordance with this practice, the consolidated "Profit employed in the business" in Statement 3 at December 31, 1995, 1994, and 1993, included the company's share of undistributed profits of subsidiaries and affiliated companies, totaling $932, $753, and $680, respectively, on which U.S. income taxes, net of foreign taxes paid or payable, have not been provided. If for some reason not presently contemplated, such profits were to be remitted or otherwise become subject to U.S. income taxes, available credits would reduce the amount of taxes otherwise due. Determination of the amount of unrecognized deferred tax liability related to these permanently invested profits is not practicable. The domestic and foreign components of profit before taxes of consolidated companies were as follows: 1995 1994 1993 ------ ------ ---- Domestic............................. $1,205 $ 779 $611 Foreign.............................. 410 494 111 ------ ------ ---- $1,615 $1,273 $722 ====== ====== ==== The foreign component of profit before taxes comprises the profit of all consolidated subsidiaries located outside the United States. This profit information differs from that reported in note 23C, which shows operating profit for foreign geographic segments based only on the company's manufacturing and financing operations located outside the United States. Taxation of a multinational company involves many complex variables, such as differing tax structures from country to country and the effect of U.S. taxation of foreign profits. These complexities do not permit meaningful comparisons of the U.S. and foreign components of profit before taxes and the provision for income taxes. Additionally, current relationships between the U.S. and foreign components are not reliable indicators of such relationships in future periods. Net operating loss carryforwards were available in various foreign tax jurisdictions at December 31, 1995. The amounts and expiration dates of these carryforwards are as follows: 1999......................................... $ 3 2000......................................... 42 2001......................................... 12 Unlimited.................................... 293 ---- Total....................................... $350 ==== There were no tax credit carryforwards available in the U.S. at December 31, 1995. Realization of deferred tax assets is dependent upon taxable income within the carryback and carryforward periods available under the tax laws. The company's domestic operations have generated significant cumulative profit over the last three years. Although realization of the $1,355 of U.S. deferred tax assets in excess of deferred tax liabilities is not certain, management has concluded that it is "more likely than not" that the company will realize the full benefit of U.S. deferred tax assets. While, in the aggregate, the company's foreign subsidiaries have also generated cumulative profit over the last three years, certain foreign subsidiaries are still in net operating loss carryforward positions. With the exception of one subsidiary, there is not currently sufficient positive evidence as required by SFAS 109 to substantiate recognition of net deferred tax assets in the financial statements for those foreign subsidiaries in net operating loss carryforward positions. Accordingly, a valuation allowance of $176 has been recorded. It is reasonably possible that sufficient positive evidence could be generated in the near term at one or more of these foreign subsidiaries to support a reduction in the valuation allowance and the resulting recognition of additional net deferred tax assets. 8. Finance receivables Finance receivables are receivables of Caterpillar Financial Services Corporation, which generally may be repaid or refinanced without penalty prior to contractual maturity. Contractual maturities of outstanding receivables (rental fleet financings of $331 are included in 1996 maturities due to the company's experience that most terminate in six months) at December 31, 1995 were: A-15 NOTES continued (Dollars in millions except per share data) - ------------------------------------------------------------------------------- Installment Financing Amounts Due In Contracts Leases Notes Total - -------------- ----------- --------- ------- ------- 1996................... $ 505 $ 657 $ 976 $2,138 1997................... 356 511 250 1,117 1998................... 218 336 257 811 1999................... 95 172 177 444 2000................... 27 71 117 215 Thereafter............. 3 111 143 257 ------ ------ ------ ------ 1,204 1,858 1,920 4,982 Residual value......... - 410 - 410 Less: Unearned Income.. (141) (363) (11) (515) ------ ------ ------ ------ Total.................. $1,063 $1,905 $1,909 $4,877 ====== ====== ====== ====== The average recorded investment in impaired loans and leases for 1995 and 1994 was $51 and $49, respectively. The total recorded investment in impaired loans and leases was $37 and $47 at December 31, 1995 and 1994, respectively. These amounts, less the fair value of the underlying collateral of $25 and $32, represented a $12 and $15 projected loss on impaired loans and leases at December 31, 1995 and 1994, respectively, for which related allowances for credit losses were recorded. Recognition of income on finance receivables is suspended when management determines that collection of future income is not probable. Accrual is resumed if the receivables become contractually current and collection doubts are removed; previously suspended income is recognized at that time. Total finance receivables reported in Statement 3 are net of an allowance for credit losses. Activity relating to the allowance was as follows: 1995 1994 1993 ---- ---- ---- Balance at beginning of year..................... $ 50 $ 41 $ 37 Provision for credit losses...................... 43 23 20 Less: Receivables, net of recoveries, written off.................. (33) (13) (19) Other - net...................................... (3) (1) 3 ---- ---- ---- Balance at end of year........................... $ 57 $ 50 $ 41 ==== ==== ==== At December 31, 1995, 1994, and 1993, the fair value of finance receivables (excluding finance type leases classified as finance receivables with net carrying value of $613, $391, and $333, respectively) was $4,175, $3,582, and $2,822, respectively. Fair value was estimated by discounting the future cash flows using the current rates at which receivables of similar remaining maturities would be entered into. Historical bad debt experience was also considered. Cat Financial's "Net investment in financing leases" at December 31 consisted of the following components: 1995 1994 1993 ------ ------ ------ Total minimum lease payments receivable.............. $1,858 $1,387 $1,135 Estimated residual value of leased assets: Guaranteed......................................... 113 84 71 Unguaranteed....................................... 297 208 149 ------ ------ ------ 2,268 1,679 1,355 Less: Unearned income................................ 363 265 229 ------ ------ ------ Net investment in financing leases................... $1,905 $1,415 $1,126 ====== ====== ====== 9. Inventories Inventories at December 31, by major classification, were as follows: 1995 1994 1993 ------ ------ ------ Raw materials and work-in-process................... $ 710 $ 697 $ 545 Finished goods...................................... 1,006 942 812 Supplies............................................ 205 196 168 ------ ------ ------ $1,921 $1,835 $1,525 ====== ====== ====== Reductions in individual LIFO inventory pools decreased cost of goods sold for 1995, 1994, and 1993 by $22, $28, and $38, respectively. The company has entered into commodity price swap and option agreements to reduce the company's exposure to changes in the price of material purchased from various suppliers resulting from underlying commodity price changes. The results of these hedging transactions become a part of the cost of the related inventory transactions. At December 31, 1995, 1994, and 1993, the amounts of the contracts hedging future commodity purchases were immaterial. 10. Land, buildings, machinery, and equipment Land, buildings, machinery, and equipment at December 31, by major classification, were as follows: 1995 1994 1993 ------ ------ ------ Land - at original cost.............................. $ 102 $ 105 $ 105 Buildings............................................ 2,548 2,597 2,485 Machinery and equipment.............................. 3,657 3,609 3,594 Patterns, dies, jigs, etc............................ 453 441 428 Furniture and fixtures............................... 179 163 144 Computers............................................ 479 474 469 Transportation equipment............................. 61 44 28 Equipment leased to others........................... 674 633 536 Construction-in-process.............................. 150 164 176 ------ ------ ------ 8,303 8,230 7,965 Accumulated depreciation............................. (4,659) (4,454) (4,138) ------ ------ ------ Land, buildings, machinery, and equipment - net.................................... $3,644 $3,776 $3,827 ====== ====== ====== The company had commitments for the purchase or construction of capital assets of approximately $150 at December 31, 1995. Capital expenditure plans are subject to continuous monitoring, and changes in such plans could reduce the amount committed. Maintenance and repair expense for 1995, 1994, and 1993 was $499, $461, and $458, respectively. Equipment leased to others Equipment leased to others, primarily by Caterpillar Financial Services Corporation, consisted of the following components at December 31: 1995 1994 1993 ---- ---- ---- Equipment leased to others - at cost................. $674 $633 $536 Less: Accumulated depreciation........................... 220 189 150 ---- ---- ---- Equipment leased to others - net..................... $454 $444 $386 ==== ==== ==== Scheduled minimum rental payments to be received for equipment leased to others during each of the years 1996 through 2000, and in total thereafter, are $133, $95, $67, $38, $20, and $5, respectively. A-16 Caterpillar Inc. - -------------------------------------------------------------------------------- 11. Affiliated companies The company's investments in affiliated companies consist principally of a 50% interest in Shin Caterpillar Mitsubishi Ltd., Japan ($438). The other 50% owner of this company is Mitsubishi Heavy Industries, Ltd., Japan. Combined financial information of the affiliated companies, as translated to U.S. dollars (note 3), was as follows: Years ended September 30, 1995 1994 1993 ------ ------ ------ Results of Operations Sales..................................... $3,789 $3,324 $2,776 ====== ====== ====== Profit.................................... $ 44 $ 63 $ 1 ====== ====== ====== Profit for the year ended September 30, 1994, includes $19 representing aftertax gain on the sale of surplus assets. September 30, 1995 1994 1993 ------ ------ ------ Financial Position Assets: Current assets........................... $1,872 $1,853 $1,691 Land, buildings, machinery, and equipment - net........................ 780 781 750 Other assets............................. 322 298 310 ------ ------ ------ 2,974 2,932 2,751 ------ ------ ------ Liabilities: Current liabilities...................... 1,676 1,575 1,441 Long-term debt due after one year........ 215 332 449 Other liabilities........................ 155 150 90 ------ ------ ------ 2,046 2,057 1,980 ------ ------ ------ Ownership.................................. $ 928 $ 875 $ 771 ====== ====== ====== At December 31, 1995, the company's consolidated "Profit employed in the business" included $125 representing its share of undistributed profit of the affiliated companies. In 1995, 1994, and 1993, the company received $8, $3, and $3, respectively, in dividends from affiliated companies. 12. Credit commitments The company has arrangements with a number of U.S. and non-U.S. banks to provide lines of credit. These credit lines are changed as anticipated needs vary and are not indicative of short-term borrowing capacity. In the United States, the company has a long-term, contractually committed credit agreement, which requires a minimum level of net worth and a maximum ratio of debt to capitalization. Unsecured, confirmed credit lines available from banks were $4,000 at December 31, 1995 (U.S. $2,453 and non-U.S. $1,547), of which $2,573 was unused. For the purpose of computing unused credit lines, the total borrowings under these lines and outstanding commercial paper supported by these lines was considered to constitute utilization. Machinery and Engines At December 31, 1995, Machinery and Engines had $2,633 confirmed credit lines (U.S. $2,453 and non-U.S. $180), of which $5 was utilized as backup for bank borrowings. Under the contractually committed credit agreements, $1,427 is available from various banks through October 2000, and $918 is available through October 1996. The latter agreement may be extended on an annual basis subject to mutual agreement. These two credit agreements may be used at the company's option by either the company or up to 90% by Caterpillar Financial Services Corporation, with a $300 sublimit for Caterpillar Financial Australia Limited, a wholly owned subsidiary of Cat Financial. Financial Products At December 31, 1995, Financial Products had $2,807 of confirmed lines (U.S. $1,440 and non-U.S. $1,367), including the $1,440 of the company's credit agreements, of which $710 was utilized as backup for outstanding commercial paper and $712 for bank borrowings. Based on long-term credit agreements, $294, $660, and $455 of commercial paper outstanding at December 31, 1995, 1994, and 1993, respectively, was classified as long-term debt due after one year. 13. Short-term borrowings Short-term borrowings at December 31 consisted of the following: 1995 1994 1993 ------ ------ ------ Machinery and Engines: Notes payable to banks.................... $ 14 $ 17 $104 Commercial paper.......................... - - 35 ------ ---- ---- 14 17 139 Financial Products: Notes payable to banks.................... 712 532 336 Commercial paper.......................... 416 181 342 Other..................................... 32 10 5 ------ ---- ---- 1,160 723 683 ------ ---- ---- $1,174 $740 $822 ====== ==== ==== Interest paid on short-term borrowings for 1995, 1994, and 1993 was $122, $99, and $94, respectively (interest paid in 1994 and 1993 was $109 and $166, respectively, excluding the reclassification described in note 3). At December 31, 1995, 1994, and 1993, the carrying value of short-term borrowings approximated fair value. The weighted average interest rates on short-term borrowings at December 31 were as follows: 1995 1994 1993 ---- ---- ---- Notes payable to banks......................... 5.4% 5.8% 6.6% Notes payable to others........................ 5.4% 5.3% 3.6% Commercial paper............................... 5.9% 6.1% 3.6% The balances used to calculate the weighted average interest rates for notes payable to banks exclude borrowings in high inflation countries (including Brazil). The weighted average interest rates for these borrowings were not considered meaningful because rates were impacted by the effect of significant inflation. The balances used to calculate the weighted average interest rates for commercial paper included $294, $660, and $455 of commercial paper supported by revolving credit agreements which were classified as long-term debt due after one year (note 12). A-17 NOTES continued (Dollars in millions except per share data) - -------------------------------------------------------------------------------- 14. Long-term debt Debt due after one year at December 31 consisted of the following: 1995 1994 1993 ------ ------ ------ Machinery and Engines: Notes - 9-1/8% due 1996..................... $ - $ 150 $ 150 Notes - 9-3/8% due 2000..................... 149 149 149 Notes - 9-3/8% due 2001..................... 183 183 183 Debentures - 9% due 2006.................... 202 202 202 Debentures - 6% due 2007.................... 131 127 124 Debentures - 9-3/8% due 2011................ 123 123 123 Debentures - 9-3/4% due 2000-2019........... 199 199 200 Debentures - 9-3/8% due 2021................ 236 236 236 Debentures - 8% due 2023.................... 199 199 199 Medium-term notes........................... 300 300 379 Capital lease obligation - 7.4%............. 257 - - Other....................................... 70 66 85 ------ ------ ------ 2,049 1,934 2,030 Financial Products: Commercial paper supported by revolving credit agreement (note 12)................ 294 660 455 Medium-term notes........................... 1,553 1,616 1,366 Other....................................... 68 60 44 ------ ------ ------ 1,915 2,336 1,865 ------ ------ ------ $3,964 $4,270 $3,895 ====== ====== ====== The aggregate amounts of maturities and sinking fund requirements of long-term debt during each of the years 1996 through 2000, including that due within one year and classified as current are: 1996 1997 1998 1999 2000 ------ ---- ---- ---- ---- Machinery and Engines.............. $ 156 $129 $ 41 $ 61 $169 Financial Products................. 1,106 711 486 238 82 ------ ---- ---- ---- ---- $1,262 $840 $527 $299 $251 ====== ==== ==== ==== ==== Interest paid on total long-term borrowings, excluding the reclassification described in note 3, for 1995, 1994, and 1993 was $353, $307, and $308, respectively. In 1993, portions of various long-term debt issuances with total principal of $203 were repurchased on the open market by utilizing a portion of the proceeds received from the tax settlement with the IRS (note 7). As a result, the company incurred an extraordinary loss on early retirement of debt of $29 (net of income tax benefit of $19). The extraordinary loss consisted primarily of redemption premiums paid to holders. Other than the notes of the Financial Products subsidiaries, all outstanding notes and debentures itemized above are unsecured direct obligations of the parent company. The capital lease obligation is collateralized by the leased manufacturing equipment and a security deposit. The 6% debentures were sold at significant original issue discounts. This issue is carried net of the unamortized portion of its discount, which is amortized as interest expense over the life of the issue. The 6% debentures, with a principal at maturity of $250 and original issue discount of $144, have an effective annual cost of 13.3%. The 6% debentures may be redeemed at any time, at the company's option, at an amount equal to the respective principal at maturity. The company may, at its option, redeem annually an additional amount for the 9-3/4% sinking fund debenture issue, without premium, equal to 200% of the amount of the sinking fund requirement. The company may also, at its option, redeem additional portions of the sinking fund debentures by the payment of premiums which, starting in 1999, decrease periodically. The premium at the first redemption date of June 1, 1999, is 4.875%. All other notes and debentures are not redeemable prior to maturity. The medium-term notes are offered on a continuous basis through agents and are primarily at fixed rates. Machinery and Engines' medium-term notes may have maturities from nine months to 30 years. At December 31, 1995, these notes had a weighted average interest rate of 7.6% with about 17 months to eight years remaining to maturity. The notes of the Financial Products subsidiaries primarily represent medium-term notes having a weighted average interest rate of 6.2% with maturities up to 15 years at December 31, 1995. At December 31, 1995, 1994, and 1993, the fair value of long-term debt, including that due within one year, was approximately $2,550, $2,127 and $2,646, respectively, for Machinery and Engines and $3,083, $3,108, and $2,397, respectively, for Financial Products. For Machinery and Engines notes and debentures, the fair value was estimated based on quoted market prices. For other issues and for Financial Products, the fair value was estimated using discounted cash flow analyses, based on the company's current incremental borrowing rates for similar types of borrowing arrangements. 15. Interest rate derivative contracts To manage its exposure to interest rate changes and lower the cost of borrowed funds, the company uses various interest rate derivative contracts, including swaps, caps, floors, and forward rate agreements. Interest rate derivative contracts are linked to specific debt instruments. Interest differentials currently payable or receivable under the derivative contracts are recognized each period as adjust ments to "Interest expense" in Statement 1. Current period income is not affected by the increase or decrease in the fair market value of derivative instruments as interest rates change. Interest rate swap agreements are settled in cash at specified intervals based on the difference between the fixed-rate and floating-rate interest amounts calculated by reference to the contractual notional amount. Premiums paid on purchased interest rate caps and the cash settlement at the initial effective date of forward rate agreements are deferred and recognized ratably as adjustments to "Interest expense" on Statement 1 over the lives of the agreements. Interest accruals in a net payable position are recorded as accrued interest payable, while those accruals in a net receivable position are recorded as other assets. Early termination of a derivative instrument does not result in recognition of immediate gain or loss except in those cases when the debt instrument to which a contract is specifically linked is terminated. The notional amount of Financial Products subsidiaries' outstanding forward rate agreements, which are utilized to manage interest rate exposure on short-term borrowings, totaled $14 and $3 at December 31, 1995 and 1994, respectively. These agreements generally range up to six months. At December 31, 1995, Financial Products subsidiaries also had swaps having future effective dates with a total notional amount of $59, which will effectively change $3 of fixed rate A-18
Caterpillar Inc. - -------------------------------------------------------------------------------------------------------- TABLE II - -------------------------------------------------------------------------------------------------------- Interest Rate Swaps Expected Maturity ----------------------------------------------------------------------- At December 31, 1995 1996 1997 1998 1999 2000 2001-05 Total ---- ---- ---- ---- ---- ------- ------ Machinery & Engines: Fixed-to-Floating Swaps Notional Amount............. $ - $150 $300 $200 $150 $ - $ 800 Weighted Average: Receive Rate.............. - 6.2% 5.5% 5.6% 6.2% - 5.8% Pay Rate.................. - 5.8% 5.8% 5.8% 5.8% - 5.8% Pay Rate Index: Federal Reserve H-15 30 Day Commercial Paper Financial Products: Floating-to-Fixed Swaps Notional Amount............. $436 $284 $211 $ 16 $ 33 $ 121 $1,101 Weighted Average: Receive Rate.............. 5.8% 6.0% 5.9% 6.5% 5.9% 5.8% 5.9% Pay Rate.................. 5.9% 6.4% 6.3% 7.3% 6.4% 6.7% 6.2% Receive Rate Index: LIBOR, Commercial Paper Fixed-to-Floating Swaps Notional Amount............. $176 $115 $ 20 $ - $ - $ - $ 311 Weighted Average: Receive Rate.............. 4.6% 7.4% 5.2% - - - 5.7% Pay Rate.................. 5.8% 5.6% 5.9% - - - 5.7% Pay Rate Index: LIBOR Floating-to-Floating Swaps Notional Amount............. $ 97 $ - $ 50 $ 60 $ - $ - $ 207 Weighted Average: Receive Rate.............. 5.0% - 6.4% 5.0% - - 5.3% Pay Rate.................. 5.9% - 6.0% 5.7% - - 5.9% Receive/Pay Rate Indices: LIBOR - --------------------------------------------------------------------------------------------------------
TABLE III - -------------------------------------------------------------------------------------------------------- Interest Rate Swaps Machinery & Engines Financial Products --------- ------------------------------------------------- Fixed-to- Floating- Fixed-to- Floating- Floating to-Fixed Floating to-Floating Total --------- --------- --------- ----------- ------- Balance, December 31, 1993................. $500 $ 851 $329 $867 $2,047 Additions................................ 200 363 89 287 739 Maturities/Amortizations................. (100) (220) (96) (241) (557) Terminations............................. - (54) (18) (421) (493) F/X Translation Adjustment............... - 11 - - 11 ---- ------ ---- ---- ------ Balance, December 31, 1994................. $600 $ 951 $304 $492 $1,747 ---- ------ ---- ---- ------ Additions................................ 220 420 70 60 550 Maturities/Amortizations................. - (282) (63) (245) (590) Terminations............................. (20) (3) - (100) (103) F/X Translation Adjustment............... - 15 - - 15 ---- ------ ---- ---- ------ Balance, December 31, 1995................. $800 $1,101 $311 $207 $1,619 ==== ====== ==== ==== ====== - --------------------------------------------------------------------------------------------------------
debt to floating rate debt and $56 of floating rate debt to fixed rate debt. The effective dates of the future dated swaps range from 1996 through 1998, and the terms of these swaps generally range up to four years. The notional amounts of interest rate swap agreements outstanding (excluding swaps with future effective dates) as of December 31, 1995, segregated by type of instrument and year of maturity are presented in Table II on Page A-19. The weighted average receive and pay interest rates and the primary index to which the floating interest rates are linked are also presented. The notional amounts are not indicative of the company's exposure to credit risk. The floating interest rates presented are based on the interest rates in effect at the reporting date. These rates may change substantially in the future due to open market factors. At December 31, 1994, Financial Products subsidiaries had three written index-amortizing interest rate cap agreements A-19 NOTES continued (Dollars in millions except per share data) - -------------------------------------------------------------------------------- outstanding. Two of these caps had notional amounts of $100 and one had a notional amount of Canadian $50 (U.S. dollar equivalent $36). The company entered into these agreements, in return for a premium, in order to reduce the overall cost of borrowing. Fair value or mark-to-market accounting treatment was applied to these instruments. Accordingly, unrealized and realized gains and losses on these instruments were recorded as "Other income (expense)" on Statement 1 and as "Accounts payable and accrued expenses" on Statement 3. Increases in interest rates during 1994 resulted in a recognized but unrealized mark-to-market loss on these written options of $18. Lower interest rates in 1995 resulted in a reduction of the loss to $7. The company terminated these cap agreements during 1995. In the future, the use of interest rate contracts will be limited to those that qualify for deferred accounting treatment, thereby minimizing fluctuations to the earnings of the company created by mark-to-market accounting treatment. The company's activity for 1995 and 1994 for each type of interest rate swap agreement (excluding swaps with future effective dates) is summarized in Table III on Page A-19. The notional amounts of interest rate swaps, caps and forward rate agreements outstanding at December 31, 1993 were as follows: 1993 ----- Machinery and Engines: Interest rate swaps: Fixed to floating rate.................... $ 500 ===== Financial Products: Interest rate swaps and caps: Floating to fixed rate.................... $1,051 Fixed to floating rate.................... 629 Floating to floating rate................. 867 ------ $2,547 ====== Forward rate agreements.................... $ 246 ====== For Machinery and Engines, the carrying value of interest rate swaps and options in a net receivable position was approximately zero at December 31, 1995, and the fair value was $9. The carrying value and the fair value of interest rate swaps and options in a net receivable position at December 31, 1994 were approximately zero. The carrying value of interest rate swaps and options in a net receivable position was $1 at December 31, 1993, and the fair value was $8. The carrying value of interest rate swaps and options in a net payable position was $2 at both December 31, 1995 and 1994, and the fair value was $1 and $50, respectively. For Financial Products, at December 31, 1995, 1994, and 1993, the carrying value of interest rate swaps and options in a net receivable position was $2, $3, and $3, respectively, and the fair value was $7, $46, and $8, respectively. The carrying value of interest rate swaps and options in a net payable position at December 31, 1995, 1994, and 1993 was $4, $23, and $7, respectively. The fair value was $17, $62, and $24 at December 31, 1995, 1994, and 1993, respectively. The fair values represent the estimated amount that the company would receive or pay to terminate the agreements taking into account current interest rates. Fair values for related short-term borrowings and long-term debt are presented in Table IV on Page A-20. 16. Fair Values of Financial Instruments The following methods and assumptions were used by the company in estimating its fair value disclosures for financial instruments: Cash and Short-term Investments: The carrying amount reported in the balance sheet for cash and short-term investments approximated its fair value. Long-term Investments: The fair value of long-term investments was based on quoted market prices.
TABLE IV - ------------------------------------------------------------------------------------------------------------------------------------ Fair Values of Financial Instruments 1995 1994 1993 Asset (Liability) ------------------- ------------------- ------------------- At December 31 Carrying Fair Carrying Fair Carrying Fair Note Amount Value Amount Value Amount Value Reference # -------- -------- -------- -------- -------- -------- -------------------- Cash and Short-term Investments............. $ 638 $ 638 $ 419 $ 419 $ 83 $ 83 Statement 3, Note 20 Long-term Investments....................... 449 449 172 172 362 362 Note 20 Foreign Currency Exchange Contracts......... - (1) (4) (97) (2) (16) Note 3 Finance Receivables - net (excluding operating and finance type leases and currency swaps)................. 4,207 4,175 3,603 3,582 2,807 2,822 Note 8 Short-term Borrowings....................... 1,174 1,174 740 740 822 822 Note 13 Long-term Debt (including amounts due within one year) Machinery and Engines.................... (2,205) (2,550) (2,020) (2,127) (2,248) (2,646) Note 14 Financial Products....................... (3,021) (3,083) (3,143) (3,108) (2,358) (2,397) Note 14 Interest Rate Swaps and Options Machinery and Engines...................... - 9 - - 1 8 Note 15 Machinery and Engines...................... (2) (1) (2) (50) - - Note 15 Financial Products......................... 2 7 3 46 3 8 Note 15 Financial Products......................... (4) (17) (23) (62) (7) (24) Note 15 - ------------------------------------------------------------------------------------------------------------------------------------
A-20 Caterpillar Inc. - -------------------------------------------------------------------------------- Foreign Currency Contracts (Forwards and Options): Fair value for foreign currency exchange contracts was based on quoted market prices of comparable instruments. Finance Receivables: Fair value of finance receivables was estimated by discounting the future cash flows using the current rates at which receivables of similar remaining maturities would be entered into. Historical bad debt experience was also considered. Short-term Borrowings: The carrying amount of short-term borrowings approximated fair value. Long-term Debt: For Machinery and Engines notes and debentures, the fair value was estimated based on quoted market prices. For other issues and for Financial Products, the fair value was estimated using discounted cash flow analyses, based on the company's current incremental borrowing rates for similar types of borrowing arrangements. Interest Rate Swaps and Options: The fair values of interest rate swaps and options represent the estimated amount that the company would receive or pay to terminate the agreements taking into account current interest rates. Dealer quotes are available for most of these agreements. The carrying amounts and fair values of the company's financial instruments are presented in Table IV on Page A-20. 17. Litigation On September 6, 1994, the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America ("UAW"), UAW Local 974, and Citizens for a Better Environment filed a complaint against the company with the Illinois Pollution Control Board ("Board"). The complaint generally alleges, in seven counts, that the company has violated certain provisions of the Illinois Environmental Protection Act and Board regulations with respect to a particular property in East Peoria, Illinois. The company believes the claims are without merit and will vigorously contest them. The company further believes final resolution of this matter will not have a material impact on the company's liquidity, capital resources, or results of operations. On May 12, 1993, a Statement of Objections ("Statement") was filed by the Commission of European Communities against Caterpillar Inc. and certain overseas subsidiaries. The Statement alleges that certain service fees payable by dealers, certain dealer recordkeeping obligations, a restriction which prohibits a European Community ("EC") dealer from appointing subdealers, and certain export pricing practices and parts policies violate EC competition law under Article 85 of the European Economic Community Treaty. The Statement seeks injunctive relief and unspecified fines. Based on an opinion of counsel, the company believes it has strong defenses to each allegation set forth in the Statement. On November 19, 1993, the Commission of European Communities informed the company that a new complaint has been received by it alleging that certain export parts policies violate Article 85 and Article 86 of the European Economic Community Treaty. The Commission advised the company that it intends to deal with the new complaint within the framework of the proceedings initiated on May 12, 1993. Based on an opinion of counsel, the company believes it has strong defenses to the allegations set forth in the new complaint. The company is party to other litigation matters and claims which are normal in the course of its operations, and while the results of litigation and claims cannot be predicted with certainty, management believes, based on advice of counsel, the final outcome of such matters will not have a materially adverse effect on the consolidated financial position. 18. Capital stock A. Stock Options In 1977 and 1987, stockholders approved plans providing for the granting to officers and other key employees of options to purchase common stock of the company. In 1988, the 1987 plan was amended to annually grant each non-employee director options to purchase 2,000 shares each year of the company's common stock. The 1987 plan provided an additional 6,000,000 shares for grants. In 1993 and 1991, the 1987 plan was amended to provide an additional 2,000,000 and 7,000,000 shares, respectively, for grants. Options granted under both plans carry prices equal to the average market price on the date of grant and therefore, in accordance with APB 25, no compensation expense is incurred in association with the options. Options are exercisable upon completion of one full year of service following the grant date (except in the case of death or retirement) and vest at the rate of one-third per year over the three years following the grant. Common shares issued under stock options, including treasury shares reissued, totaled 713,131; 1,144,631; and 1,819,130 in 1995, 1994, and 1993, respectively. Stock appreciation rights may be granted as part of 1977 or 1987 plan options or as separate rights to holders of options previously granted. Stock appreciation rights permit option holders to exchange exercisable options for shares of common stock, cash, or a combination of both. No stock appreciation rights have been issued since 1990. Compensation expense related to stock appreciation rights was not material in 1995, 1994, or 1993. Of the shares covered by options outstanding at December 31, 1995, 2% were the subject of stock appreciation rights. Changes in the status of common shares subject to issuance under options were as follows: Shares ----------------------------------- 1995 1994 1993 --------- --------- ---------- Options outstanding at beginning of year..................... 6,553,371 7,351,800 10,012,730 Granted to officers and key employees in 1995, 1994, and 1993 at $60.31, $53.53, and $37.53, per share, respectively............... 1,602,640 1,581,540 1,488,280 Granted to outside directors in 1995, 1994, and 1993 at $55.81, $56.69, and $30.38, per share, respectively............... 20,000 22,000 16,000 Exercised..............................(1,503,330) (2,344,369) (4,122,368) Lapsed................................. (38,857) (57,600) (42,842) ---------- ---------- ---------- Options outstanding at year-end........ 6,633,824 6,553,371 7,351,800 ========== ========== ========== Options outstanding at December 31, 1995, had exercise prices ranging from $23.56 to $60.31 per share with an average exercise price of $43.91 per share and had expiration dates ranging from June 10, 1996, to June 6, 2005. At December 31, 1995, the number of shares exercisable totaled 3,584,140. A-21 NOTES continued (Dollars in millions except per share data) - ------------------------------------------------------------------------------- At December 31, unissued common shares were reserved for potential stock option grants and for issuance to other employee benefit plans in the following amounts: Shares ----------------------------------- 1995 1994 1993 ---------- ---------- ----------- 1977 stock option plan 2,547,304 2,547,304 2,547,304 1987 stock option plan 1,288,509 2,879,292 4,425,232 Employee investment and other benefit plans 11,400,178 11,400,178 11,400,178 ---------- ---------- ---------- 15,235,991 16,826,774 18,372,714 ========== ========== ========== B. Stockholders' Rights Plan The company is authorized to issue 5,000,000 shares of preferred stock, of which 2,000,000 shares have been designated as Series A Junior Participating Preferred Stock of $1.00 par value. None of the preferred shares or the Series A Junior Participating Preferred Stock have been issued. Under the company's Stockholders' Rights Plan, every two shares of common stock represent one preferred stock purchase right. Every right entitles the holder to purchase 1/100th of a share of the company's Series A Junior Participating Preferred Stock, $1.00 par value, at $150.00. The rights are exercisable only after a third party acquires 20% or more of the company's common stock or after commencement of a tender offer by a third party which would result in control of 30% or more of the company's common stock. If after the rights become exercisable, the company is involved in a business combination or the acquiror engages in certain self-dealing transactions, each right entitles the holder to purchase stock of the resulting company at a 50% discount. The rights expire on December 1, 1996. 19. Operating leases The company leases certain computer and communications equipment, transportation equipment, and other property through operating leases. Lease expense on these leases is charged to operations as incurred. Total rental expense for operating leases was $139, $137, and $137 for 1995, 1994, and 1993, respectively. Minimum payments for operating leases having initial or remaining non-cancelable terms in excess of one year are: Years ending December 31, 1996......................................... $ 99 1997......................................... 65 1998......................................... 34 1999......................................... 14 2000......................................... 12 Thereafter................................... 53 ---- Total lease commitments...................... $277 ==== 20. Concentration of credit risk Financial instruments which potentially subject the company to credit risk consist primarily of trade and finance receivables and short-term and long-term investments. Additionally, to a lesser extent, the company is potentially subject to credit risk associated with counterparties to derivative contracts. Trade receivables are primarily short-term receivables from independently owned and operated dealers which arise in the normal course of business. The company performs regular credit evaluations of its dealers. The company generally doesn't require collateral, and the majority of its trade receivables are unsecured. The company does make use of various devices such as security agreements and letters of credit to protect its interests as it deems necessary. No single dealer or region represents a significant concentration of credit risk. At December 31, 1995, 1994, and 1993, the carrying value of trade receivables approximated fair value. Finance receivables primarily represent receivables under installment sales contracts, receivables arising from leasing transactions, and notes receivable. The company generally maintains a secured interest in the equipment financed. Receivables from customers in construction-related industries made up approximately one-third of total finance receivables at December 31, 1995, 1994, and 1993, respectively. No single customer or region represents a significant concentration of credit risk. Fair value information on finance receivables is included in note 8. The company has short-term and long-term investments with high quality institutions and, by policy, limits the amount of credit exposure to any one institution. At December 31, 1995, 1994, and 1993, the carrying value of short-term investments approximated fair value. Long-term investments are held by Caterpillar Insurance Co. Ltd. and are a component of "Other assets" on Statement 3. VEBA trusts were a component of "Other assets" on Statement 3 at December 31, 1993. Beginning in 1994, VEBA trust assets were recorded as a reduction to the liability for postretirement benefits (note 5B). At December 31, 1995, the company had a long-term investment which collateralizes a capital lease obligation (note 14). At December 31, 1995, 1994, and 1993, the carrying value of long-term investments was $449, $172, and $362, respectively, which, based on quoted market prices, approximated fair value. At December 31, 1995 and 1994, Caterpillar Financial Services Corporation was contingently liable under guarantees of securities of certain Caterpillar dealers totaling $282 and $258, respectively, of which $222 and $165 was outstanding, respectively. These guarantees are fully secured by dealer inventories. No loss is anticipated from these guarantees. At December 31, 1995, the company had outstanding derivative contracts with notional amounts totaling $2,892 with terms generally ranging up to five years. To minimize the risk of credit losses, the company deals only with major financial institutions. The company does not anticipate nonperformance by any of the counterparties. Collateral is not required of the counterparties or of the company. The company's exposure to credit loss in the event of nonperformance by the counterparties is limited to only the recognized but not realized gains incurred on the derivative contracts. At December 31, 1995, the company's exposure to credit loss was $2. 21. Environmental matters Environmental considerations are a very important factor in the company's product development and operations planning. In 1995, the company had capital expenditures of about $11 for projects related to the environment (including $3 in costs related to compliance with the Clean Air Act), approximately equal to amounts for 1994. In addition to these expenditures, the company had depreciation, research and engineering, administrative, and operating expenses related to environmental regulation of about $131 in 1995 (including $28 for compliance with the Clean Air Act), slightly more than comparable expenses in 1994. A-22 Caterpillar Inc. - ------------------------------------------------------------------------------- The company also is involved in a number of remediation actions to clean up hazardous wastes as required by federal and state laws. These laws often require responsible parties to fund remediation actions regardless of fault, legality of original disposal or ownership of a disposal site. Under accounting guidelines, the company is required to accrue and charge to income management's best estimate of future costs associated with these sites. When there appears to be a range of possible costs with equal likelihood, liabilities are based on the lower end of that range. For 1995, the amount accrued for potential clean-up costs is contained in the line item, "Accounts payable and accrued expenses" on Statement 3, and represents an immaterial portion of that line item. While the company may have rights of contribution or reimbursement under insurance policies, amounts that may be recoverable from other entities are not considered in establishing the accrual. In deciding upon amounts to be reserved for potential environmental liability at a particular site, the company looks at several factors including: . prior experience regarding environmental remediation at a similar site; . experience of other companies and industries with respect to a similar site; . technology available for remediation at the time; . the stage of remediation for the particular site (i.e., whether the site is at the identification stage or whether a remedial investigation or feasibility study has been conducted); . documentation, if any, linking the company to a particular site; . the amount the company has been asked to contribute to a particular site; and . aspects of the law under which the company is alleged to be liable for clean up. The company also looks at these factors in deciding whether it could incur liabilities beyond that which it has accrued for future remediation. Although it is difficult to estimate with any meaning potential liability at sites in very early stages of remediation (of which the company has seven currently) or sites yet to be identified because of the many uncertainties involved, including uncertainties about the status of the law, regulation, technology and information related to individual sites, at this time the company believes the likelihood of incurring any material environmental liability beyond that accrued is remote. 22. Plant closing and consolidation costs At December 31, 1995, the reserve for plant closing and consolidation costs was $269. Of this balance, $173 related to costs associated with the probable closure of the Component Products Division's York, Pennsylvania, facility. Significant costs related to the York portion of the reserve are employee severance benefits (pension, medical, and supplemental unemployment benefits), rearrangement and start-up costs related to the relocation of production, and write-down of buildings, machinery, and equipment. The probable closing of the York manufacturing facility was announced in December 1991. The company determined that unless significant cost reductions were made, the unit would be closed. The company has notified the United Auto Workers union (UAW), which represents approximately 1,100 of the 1,400 active employees of the York facility, of its willingness to negotiate a labor agreement that would allow the unit to remain open. Unless a satisfactory contract is reached, the company plans to close the plant beginning in the 1996 time frame. Also included in the reserve for plant closing and consolidation costs at December 31, 1995, was $69 for write-downs of buildings, machinery, and equipment at previously closed facilities. The write-downs establish a new cost basis for assets that have been permanently impaired. The remainder of the reserve at December 31, 1995, related to severance benefits provided to former employees at previously closed facilities. Such benefits are amortized over the expected time period over which the benefits are provided. Currently amortization periods are through 2003. 23. Segment information A. Nature of operations The company operates in three principal business segments: (1) Machinery - Design, manufacture, and marketing of construction, mining, and agricultural machinery - track and wheel tractors, track and wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, and related parts. (2) Engines - Design, manufacture, and marketing of engines for earthmoving and construction machines, on-highway trucks, and locomotives; marine, petroleum, agricultural, industrial, and other applications; electric power generation systems; and related parts. Caterpillar reciprocating diesel and spark-ignited engines meet power needs ranging from 40 to 8,050 horsepower. Turbines range from 1,340 to 15,000 horsepower (1,000 to 11,200 kilowatts). (3) Financial Products - Provides financing alternatives for Caterpillar and noncompetitive related equipment, and extends loans to Caterpillar customers and dealers. Also provides various forms of insurance to Caterpillar dealers and customers to help support their purchase and financing of Caterpillar equipment. The company conducts operations in the Machinery and Engines segments of its business under highly competitive conditions, including intense price competition. It places great emphasis upon the high quality and performance of its products and the service support for such products which is supplied by its dealers. Although no one competitor is believed to produce all of the same types of machines and engines produced by the company, there are numerous companies, large and small, which compete with the company in the sale of each of its products. The company's products are sold primarily under the marks "Caterpillar," "Cat," "Solar," and "Barber-Greene." Machines are distributed principally through a worldwide organization of independent full-line dealers, and one company-owned dealership, 65 located in the United States and 121 located outside the United States. Worldwide, these dealers have more than 1,300 places of business. Diesel and spark-ignited engines are sold through the worldwide dealer organization and to other manufacturers for use in products manufactured by them. Caterpillar dealers do not deal exclusively in the company's products, A-23 NOTES continued (Dollars in millions except per share data) - -------------------------------------------------------------------------------- although in most cases sales and servicing of the company's products are the dealers' principal business. Turbines are sold through a sales force employed by Solar Turbines Incorporated, a wholly owned subsidiary, or its subsidiaries and associated companies. These employees are from time to time assisted by independent sales representatives. Financial Products consists primarily of Caterpillar Financial Services Corporation and its subsidiaries, and Caterpillar Insurance Services Corporation. The principal markets for the Machinery and Engines segments are located in the United States, Europe, Asia/Pacific, and Latin America. The United States is the principal market for the Financial Products segment. The majority of the company's sales and revenues is derived from the Machinery segment. B. Business segments The high degree of integration of the company's manufacturing operations necessitates the use of a substantial number of allocations in the determination of business segment information. Intersegment sales and revenues, which primarily represent intersegment engine sales, are valued at prices comparable to those for unaffiliated customers. Information on the company's business segments was as follows: 1995 1994 1993 ------- ------- ------- For the years ended December 31: Sales: Machinery................................. $11,336 $10,164 $ 8,132 Engines................................... 4,920 4,381 3,735 Elimination of intersegment engine sales... (805) (682) (632) ------- ------- ------- Consolidated sales......................... 15,451 13,863 11,235 Financial Products revenues................ 621 465 380 ------- ------- ------- Sales and revenues......................... $16,072 $14,328 $11,615 ======= ======= ======= Operating profit: Machinery................................. $ 1,210 $ 1,099 $ 436 Engines................................... 462 348 226 Financial Products........................ 88 64 47 ------- ------- ------- 1,760 1,511 709 General corporate expenses................. (79) (77) (83) ------- ------- ------- Operating profit........................... $ 1,681 $ 1,434 $ 626 ======= ======= ======= Capital expenditures - including equipment leased to others: Machinery................................ $ 256 $ 272 $ 243 Engines.................................. 179 182 154 Financial Products....................... 210 187 205 General corporate........................ 34 53 30 ------- ------- ------- $ 679 $ 694 $ 632 ======= ======= ======= Depreciation and amortization: Machinery................................. $ 375 $ 394 $ 405 Engines................................... 172 168 163 Financial Products........................ 102 95 70 General corporate......................... 33 26 30 ------- ------- ------- $ 682 $ 683 $ 668 ======= ======= ======= At December 31: Identifiable assets: Machinery................................. $ 5,122 $ 5,773 $ 5,393 Engines................................... 2,746 2,570 2,358 Financial Products........................ 5,592 4,668 3,676 ------- ------- ------- 13,460 13,011 11,427 General corporate assets................... 2,894 2,784 2,986 Investments in affiliated companies........ 476 455 394 ------- ------- ------- Total assets............................... $16,830 $16,250 $14,807 ======= ======= ======= C. Geographic segments Manufacturing activities of the Machinery and Engines segments are carried on in 30 plants in the United States, two each in France and China, and one each in Australia, Belgium, Brazil, United Kingdom, Hungary, Indonesia, Italy, Mexico, and Russia. Three major distribution centers are located in the United States and seven are located outside the United States. While the majority of the activity of the Financial Products segment is carried on in the United States, it also conducts operations in Australia, Canada, and Europe. Caterpillar is a highly integrated company. The product of subsidiary companies' manufacturing operations located outside the United States, in most instances, consists of components manufactured or purchased locally which are assembled with components purchased from related companies. As a result, the profits of these operations do not bear any definite relationship to their assets, and individual subsidiaries' results cannot be viewed in isolation. Prices between Caterpillar companies are established at levels deemed equivalent to those which would prevail between unrelated parties. Information on the company's geographic segments, based on the location of the company's manufacturing operations for Machinery and Engines, was as follows: 1995 1994 1993 ------- ------- ------- For the years ended December 31: Sales: United States........................... $12,191 $10,994 $ 9,159 Europe.................................. 2,638 2,358 1,678 All other............................... 1,200 1,050 737 Elimination of intersegment sales from: United States........................... (308) (266) (154) Europe.................................. (125) (141) (97) All other............................... (145) (132) (88) ------- ------- ------- Consolidated sales....................... 15,451 13,863 11,235 Revenues: United States........................... 482 362 309 All other............................... 139 103 71 ------- ------- ------- Sales and revenues....................... $16,072 $14,328 $11,615 ======= ======= ======= Operating profit: Machinery and Engines: United States.......................... $ 1,356 $ 1,108 $ 620 Europe................................. 206 244 46 All other.............................. 110 95 (4) ------- ------- ------- 1,672 1,447 662 ------- ------- ------- Financial Products: United States.......................... 81 61 43 All other.............................. 7 3 4 ------- ------- ------- Total Financial Products................ 88 64 47 ------- ------- ------- 1,760 1,511 709 General corporate expenses............... (79) (77) (83) ------- ------- ------- Operating profit......................... $ 1,681 $ 1,434 $ 626 ======= ======= ======= A-24 Caterpillar Inc. - -------------------------------------------------------------------------------- 1995 1994 1993 ------- ------- ------- At December 31: Identifiable assets: Machinery and Engines: United States........................ $ 5,836 $ 6,445 $ 5,996 Europe............................... 1,229 1,160 1,101 All other............................ 803 738 654 ------- ------- ------- 7,868 8,343 7,751 ------- ------- ------- Financial Products: United States........................ 4,042 3,557 2,896 All other............................ 1,550 1,111 780 ------- ------- ------- 5,592 4,668 3,676 ------- ------- ------- 13,460 13,011 11,427 General corporate assets............... 2,894 2,784 2,986 Investments in affiliated companies.... 476 455 394 ------- ------- ------- Total assets........................... $16,830 $16,250 $14,807 ======= ======= ======= D. Non-U.S. sales Sales outside the United States were 52% of consolidated sales for 1995, and 49% for both 1994 and 1993. Information on the company's sales outside the United States, based on dealer location, was as follows: 1995 1994 1993 ------ ------ ------ For the years ended December 31: Sales of U.S. manufactured product: Europe................................ $1,005 $ 821 $ 645 Asia/Pacific.......................... 1,505 1,338 1,172 Latin America......................... 829 763 570 Canada................................ 852 806 625 Africa/Middle East.................... 644 522 577 ------ ------ ------ 4,835 4,250 3,589 ------ ------ ------ Sales of non-U.S. manufactured product: Europe................................ 1,681 1,257 933 Asia/Pacific.......................... 785 626 440 Latin America......................... 354 388 279 Canada................................ 104 103 59 Africa/Middle East.................... 270 231 225 ------ ------ ------ 3,194 2,605 1,936 ------ ------ ------ Total sales outside the United States: Europe................................ 2,686 2,078 1,578 Asia/Pacific.......................... 2,290 1,964 1,612 Latin America......................... 1,183 1,151 849 Canada................................ 956 909 684 Africa/Middle East.................... 914 753 802 ------ ------ ------ $8,029 $6,855 $5,525 ====== ====== ====== 24. Selected quarterly financial results (unaudited) Financial information for interim periods was as follows: 1995 Quarter ----------------------------- 1st 2nd 3rd 4th ------ ------ ------ ------ Sales and revenues...................... $3,913 $4,213 $3,733 $4,213 Less: Revenues.......................... 140 154 165 162 ------ ------ ------ ------ Sales................................... 3,773 4,059 3,568 4,051 Cost of goods sold...................... 2,890 3,110 2,878 3,122 ------ ------ ------ ------ Gross margin............................ 883 949 690 929 Profit.................................. 300 323 213 300 Profit per share of common stock........ $ 1.50 $ 1.62 $ 1.07 $ 1.53 1994 Quarter ----------------------------- 1st 2nd 3rd 4th ------ ------ ------ ------ Sales and revenues...................... $3,286 $3,605 $3,509 $3,928 Less: Revenues.......................... 105 113 119 128 ------ ------ ------ ------ Sales................................... 3,181 3,492 3,390 3,800 Cost of goods sold...................... 2,483 2,730 2,674 2,947 ------ ------ ------ ------ Gross margin............................ 698 762 716 853 Profit.................................. 192 240 244 279 Profit per share of common stock........ $ .94 $ 1.18 $ 1.20 $ 1.38 A-25
Eleven-year Financial Summary (Dollars in millions except per share data) - ------------------------------------------------------------------------------------------------------------ 1995 1994 1993 1992 ------- ------- ------- ------- For the Years Ended December 31: Sales and revenues................................................. $16,072 14,328 11,615 10,194 Sales............................................................ $15,451 13,863 11,235 9,840 Percent inside the United States............................... 48% 51% 51% 45% Percent outside the United States.............................. 52% 49% 49% 55% Revenues......................................................... $ 621 465 380 354 Profit (loss) before effects of accounting changes(1).............. $ 1,136 955 652 (218) Effects of accounting changes(2)................................... $ - - - (2,217) Profit (loss)(1)................................................... $ 1,136 955 652 (2,435) Profit (loss) per share of common stock:(1)(3) Profit (loss) before effects of accounting changes(1)............ $ 5.72 4.70 3.21 (1.08) Effects of accounting changes(2)................................. $ - - - (10.98) Profit (loss).................................................... $ 5.72 4.70 3.21 (12.06) Dividends declared per share of common stock....................... $ 1.30 .63 .30 .30 Return on average common stock equity.............................. 36.1% 37.4% 34.6% (86.7%) Capital expenditures: Land, buildings, machinery, and equipment........................ $ 464 501 417 515 Equipment leased to others....................................... $ 215 193 215 125 Depreciation and amortization...................................... $ 682 684 668 654 Research and engineering expenses.................................. $ 532 435 455 446 As a percent of sales and revenues............................... 3.3% 3.0% 3.9% 4.4% Provision (credit) for income taxes(4)............................. $ 501 354 42 (114) Wages, salaries, and employee benefits............................. $ 2,919 3,146 3,038 2,795 Average number of employees 54,263 52,778 50,443 52,340 At December 31: Total receivables: Trade and other................................................. $ 2,657 3,096 2,769 2,330 Finance......................................................... $ 4,820 3,988 3,140 2,525 Inventories....................................................... $ 1,921 1,835 1,525 1,675 Total assets: Machinery and Engines........................................... $11,238 11,582 11,131 10,979 Financial Products.............................................. $ 5,592 4,668 3,676 2,956 Long-term debt due after one year: Machinery and Engines........................................... $ 2,049 1,934 2,030 2,753 Financial Products.............................................. $ 1,915 2,336 1,865 1,366 Total debt: Machinery and Engines........................................... $ 2,219 2,037 2,387 3,271 Financial Products.............................................. $ 4,181 3,866 3,041 2,401 Ratios - excluding Financial Products: Ratio of current assets to current liabilities..................1.78 to 1 1.62 to 1 1.53 to 1 1.57 to 1 Percent of total debt to total debt and stockholders' equity...................................... 39.6% 41.2% 52.1% 67.5%
(1) 1993 profit was after extraordinary loss on early retirement of debt; profit before extraordinary loss was $681, $3.36 per share of common stock. 1987 profit was after extraordinary tax benefit; profit before extraordinary tax benefit was $319, $1.60 per share of common stock. (2) Effective January 1, 1992, the company adopted SFAS 106, SFAS 109, and SFAS 112. (3) Computed on weighted average number of shares outstanding. (4) The company adopted SFAS 109 in 1992. Prior to 1992, the tax provision was determined in accordance with APB 11. The 1987 provision for income taxes, including the reduction for the $31 extraordinary tax benefit, was $87. A-26 Caterpillar Inc. - ------------------------------------------------------------------------------ 1991 1990 1989 1988 1987 1986 1985 --------- --------- --------- --------- --------- --------- --------- 10,182 11,436 11,126 10,435 8,294 7,380 6,760 9,838 11,103 10,882 10,255 8,180 7,321 6,725 41% 45% 47% 50% 52% 54% 56% 59% 55% 53% 50% 48% 46% 44% 344 333 244 180 114 59 35 (404) 210 497 616 350 76 198 -- -- -- -- -- -- -- (404) 210 497 616 350 76 198 (2.00) 1.04 2.45 3.04 1.76 .39 1.01 -- -- -- -- -- -- -- (2.00) 1.04 2.45 3.04 1.76 .39 1.01 .53 .60 .60 .43 .28 .31 .25 (9.4%) 4.7% 11.6% 16.0% 10.4% 2.4% 6.7% 653 926 984 732 463 290 228 121 113 105 61 30 41 55 602 533 471 434 425 453 485 441 420 387 334 298 308 326 4.3% 3.7% 3.5% 3.2% 3.6% 4.2% 4.8% (152) 78 162 262 118 21 25 3,051 3,032 2,888 2,643 2,284 2,184 2,173 55,950 59,662 60,784 57,954 53,770 54,024 55,815 2,133 2,361 2,353 2,349 2,044 1,755 1,305 2,145 1,891 1,498 1,222 795 466 108 1,921 2,105 2,120 1,986 1,323 1,211 1,139 9,346 9,626 9,100 8,226 6,647 6,134 5,951 2,696 2,325 1,826 1,460 984 627 235 2,676 2,101 1,797 1,428 900 963 1,177 1,216 789 491 525 387 171 87 3,136 2,873 2,561 2,116 1,484 1,582 1,404 2,111 1,848 1,433 1,144 712 370 130 1.74 to 1 1.67 to 1 1.78 to 1 1.76 to 1 1.55 to 1 1.50 to 1 1.69 to 1 43.7% 38.8% 36.4% 34.0% 29.4% 33.4% 31.4% A-27 MANAGEMENT'S DISCUSSION AND ANALYSIS The discussions of Results of Operations, and Liquidity and Capital Resources are grouped as follows: Consolidated--Represents the consolidated data of Caterpillar Inc. and subsidiaries, including the Financial Products subsidiaries. Machinery and Engines--Company operations excluding the Financial Products subsidiaries. This category consists primarily of the company's manufacturing, marketing, and parts distribution operations, which are highly integrated. Unless attributed to a particular subsidiary, items discussed in Management's Discussion and Analysis reflect the consolidated effect of contributions by worldwide operations. Financial Products--The company's Financial Products subsidiaries, primarily Caterpillar Financial Services Corporation and Caterpillar Insurance Services Corporation. Cat Financial and its subsidiaries in Australia, Canada, and Europe derive earnings from financing sales and leases of Caterpillar products and noncompetitive related equipment and from loans extended to Caterpillar customers and dealers. Cat Insurance provides insurance services to Caterpillar dealers and customers to help support their purchase and financing of Caterpillar equipment. RESULTS OF OPERATIONS 1995 COMPARED WITH 1994 Profit for 1995 of $1.14 billion or $5.72 per share was an all-time record and an improvement of $181 million from 1994 profit of $955 million or $4.70 per share. 1995 sales and revenues of $16.07 billion, also an all-time record, increased 12% from last year and were the most significant reason for the higher profit. Machinery and Engines Sales of Machinery and Engines were $15.45 billion, $1.59 billion higher than 1994. Profit before tax was $1.49 billion, an improvement of $281 million. The primary reason for the increase in profit was higher sales--a 9% increase in physical sales volume and 2% better price realization. The increase in physical sales volume was due to higher sales of machines and engines both inside and outside the United States. Price realization improved primarily because of price increases taken over the past year and the effect of the weaker dollar as sales in European currencies translated into more U.S. dollars. These factors were partially offset by higher sales discounts and an unfavorable change in geographic sales mix. The benefit to sales (and margin) of the weaker dollar was limited by currency hedges (forward contracts) covering most U.S. manufactured product sold in Europe. The hedges were put in place in 1991 to protect margins against potential strengthening of the U.S. dollar. Without these currency hedges, sales and margin during the year would have been about $135 million higher. All such forward contracts matured during 1995. Margin increased $422 million, primarily a result of higher sales volume and improved price realization. These favorable items were partially offset by the effect of the weaker dollar on costs, proportionately higher sales of lower margin products and higher costs due to inflation. In addition, there was a decrease in LIFO decrement benefits ($28 million in 1994 versus $22 million in 1995). Total margin as a percent of sales was 22.3%, a 0.5 percentage point increase from a year ago. SG&A (selling, general and administrative) expenses were up $135 million from the previous year because of higher spending levels to support increased sales volume and expanded operations around the world, higher costs due to inflation and the effect of the weaker dollar as costs in European currencies translated into more U.S. dollars. In addition, the absence of the assignment of labor costs from SG&A to cost of goods sold for employees working in manufacturing functions during 1994 contributed to the increase. Partially offsetting these factors were a decrease in incentive pay expense and a favorable adjustment to insurance reserves based on an actuarial valuation. R&D (research and development) expenses were $64 million higher than 1994, a result of a decrease in the assignment of labor costs from R&D to cost of goods sold as fewer employees were working in manufacturing areas in 1995 compared with 1994, expanded activity for new product introductions and higher costs due to inflation. Operating profit for 1995 was $1.59 billion, an increase of $223 million from last year. As a percent of sales, operating profit was 10.3%, compared with 9.9% for 1994. Interest expense of $191 million was $9 million lower than a year ago as the benefit of lower average debt of approximately $160 million was partially offset by higher interest rates. Other income/expense was income of $92 million compared with income of $43 million a year earlier. The improvement reflects the absence of a $17 million expense in 1994 for the settlement of two class action complaints and a $10 million recovery in 1995 from the company's insurer related to this settlement. In addition, interest on short-term investments contributed to the increase. Partially offsetting these factors was an unfavorable change in foreign exchange gains and losses. Financial Products Before-tax profit for Financial Products was $121 million, up $61 million from 1994. The increase was a result of Cat Financial's larger portfolio of earning assets and a $29 million favorable change in the mark-to-market adjustment for Cat Financial's written interest rate caps. These written caps were terminated during the second quarter of 1995. Revenues of $621 million increased $156 million from a year ago, the result of Cat Financial's larger portfolio. SG&A expenses were $240 million, compared with $191 million last year. The increase reflects a higher provision for credit losses and other volume-related expenses at Cat Financial. Interest expense was $293 million, up $83 million because of higher average borrowings to support the larger portfolio. Other income/expense was income of $33 million compared with expense of $4 million a year ago. The favorable change resulted from an $11 million mark-to- market gain for interest rate caps in 1995, compared with an $18 million mark-to-market loss in 1994. Income Taxes Tax expense was $501 million, $147 million higher than a year ago. The increase reflects higher before-tax profit and a 31% effective tax rate compared with 28% in 1994. A-28 Caterpillar, Inc. - ------------------------------------------------------------------------------ Affiliated Companies The company's share of affiliated companies' profits was $22 million, down $14 million because of the unfavorable impact of the stronger yen on SCM (Shin Caterpillar Mitsubishi Ltd.) sales outside Japan and lower land sale gains at SCM in 1995. FOURTH QUARTER 1995 COMPARED WITH FOURTH QUARTER 1994 Machinery and Engines Sales of Machinery and Engines were $4.05 billion, up $251 million from the fourth quarter of 1994. The sales increase resulted from a 7% increase in physical sales volume. Profit before tax of $408 million was $54 million better than last year's fourth quarter primarily because of the higher sales. The increase in physical sales volume resulted principally from higher machine sales outside the United States and higher worldwide engine sales. Machine sales inside the United States declined. Price realization was about the same as a year ago. The benefits from price increases taken over the past year and the effect of the weaker dollar on sales in European currencies were offset by higher sales discounts, which were unusually low a year ago, and an unfavorable change in geographic sales mix. The benefit to sales (and margin) of the weaker dollar was limited by currency hedges (forward contracts) covering most U.S. manufactured product sold in Europe. The hedges were put in place in 1991 to protect margins against potential strengthening of the U.S. dollar. Without these currency hedges, sales and margin during the fourth quarter would have been about $30 million higher. As of the end of the quarter, all such forward contracts had matured. Margin (sales less cost of goods sold) of $929 million increased $76 million primarily because of higher sales. Margin as a percent of sales was 22.9% compared with 22.4% during last year's fourth quarter. In addition to higher sales volume, the improvement reflects a favorable change in product sales mix as relatively more higher margin products were sold. These factors were partially offset by the effect of the weaker dollar as costs in European currencies translated into more U.S. dollars and a decrease in LIFO (last-in, first-out) inventory decrement benefits from $28 million a year ago to $22 million in the current quarter. Manufacturing costs incurred during the quarter were lower than last year's fourth quarter; however, this benefit was about offset by an increase in cost of goods sold resulting from changes in inventory levels between the two quarters. There was a $104 million inventory increase in the fourth quarter of 1994 compared with a $267 million inventory decrease in the current quarter. When inventory increases, a benefit results from absorption of certain of the period's fixed costs. When inventory decreases, these fixed costs inventoried in prior periods are charged to cost of goods sold. SG&A expenses were $392 million, compared with $374 million during the fourth quarter of 1994. Last year, a number of SG&A employees were working in manufacturing areas as a result of the United Auto Workers (UAW) union's strike. Consequently, the labor costs associated with those employees were assigned to cost of goods sold. SG&A expenses increased in 1995 as those employees have returned to their regular jobs. The increase also reflects activity to support higher sales volume and expanded operations around the world, inflation and the effect of the weaker dollar as costs in European currencies translated into more U.S. dollars. Partially offsetting these items was lower incentive pay expense. R&D expenses of $102 million were $20 million higher because R&D employees who worked in manufacturing functions last year were back in their regular jobs in 1995. In addition, there was expanded activity in new product introductions. Operating profit of $435 million was up $38 million from a year ago. As a percent of sales, operating profit was 10.7%, up slightly from the year-earlier quarter. Interest expense was about the same as the fourth quarter of last year. Other income/expense was income of $20 million compared with income of $7 million a year ago. The change reflects the absence of several small unfavorable items recorded in the fourth quarter of 1994 and interest on short-term investments partially offset by an unfavorable change in foreign exchange gains and losses. Financial Products Before-tax profit for Financial Products was $20 million, an improvement of $8 million from last year's fourth quarter. The higher profit was primarily a result of a larger portfolio of earning assets at Caterpillar Financial Services Corporation. Revenues of $162 million were up $34 million, reflecting Cat Financial's larger portfolio. Cat Financial financed new retail business of $906 million, a $201 million or 29% increase compared with the fourth quarter a year ago. SG&A expenses were $70 million, $15 million higher than the same quarter of 1994. The increase reflects a higher provision for credit losses and other volume-related expenses at Cat Financial. Interest expense was $16 million higher because of an increase in average borrowings to support the larger portfolio. Other income/expense was income of $3 million compared with expense of $2 million during the year-earlier quarter. The improvement reflects the absence of a $4 million mark-to-market charge for Cat Financial's written interest rate caps. The caps were terminated during the second quarter of 1995. Income Taxes Tax expense of $133 million was $33 million higher than the same quarter last year. The increase was due to higher before-tax profit and an effective tax rate of 31% compared with 28% for the fourth quarter of 1994. Affiliated Companies The company's share of affiliated companies' profits was $5 million, down $8 million. The decrease reflects the unfavorable impact of the stronger yen on sales outside Japan plus the absence of favorable year-end adjustments and a gain on sale of surplus land recorded in 1994 at the company's 50%-owned affiliate, SCM in Japan. A-29 MANAGEMENT'S DISCUSSION AND ANALYSIS continued - ------------------------------------------------------------------------------ FOURTH QUARTER 1995 COMPARED WITH THIRD QUARTER 1995 Fourth-quarter profit of $300 million or $1.53 per share improved $87 million from the $213 million or $1.07 per share profit reported in the third quarter of this year. An increase in sales volume was the most significant factor contributing to the higher profit. Machinery and Engines Profit before tax for Machinery and Engines was $408 million, an increase of $167 million from the previous quarter. Sales of $4.05 billion were up $483 million because of higher machine and engine sales both inside and outside the United States. Margin improved $239 million from the third quarter, largely a result of higher sales. As a percent of sales, the margin rate was 22.9% compared with 19.3% last quarter. The increase reflects higher sales volume, a favorable change in sales mix and LIFO decrement benefits of $22 million recorded in the fourth quarter versus none in the third quarter. SG&A expenses of $392 million increased $40 million. The increase was the result of the absence of a favorable adjustment to insurance reserves recorded in the third quarter and timing of expenses, as the fourth quarter is generally a higher cost quarter for these types of expenses. R&D expenses were $13 million higher than the previous quarter because of expanded activity for new product introductions. Operating profit of $435 million increased $186 million. As a percent of sales, operating profit was 10.7%, up 3.7 percentage points from the third quarter. Interest expense was about the same as last quarter. Other income/expense was income of $20 million compared with income of $40 million in the third quarter. The decrease reflects the absence of a $10 million reimbursement under the company's insurance coverage for the settlement of two class action complaints recorded last quarter and an unfavorable change in foreign exchange gains and losses. Financial Products Financial Products' before-tax profit was $20 million, $19 million less than the previous quarter. The decrease reflects a higher provision for credit losses at Cat Financial, lower investment income at Cat Insurance, and the absence of a gain on sale of receivables at Cat Financial recognized in the third quarter. Income Taxes Tax expense of $133 million increased $64 million, reflecting higher profit before tax and the absence of a favorable year-to-date adjustment of $18 million made in the third quarter. 1995 SALES 1995 1994 1993 ------------------------ (Billions) Sales...................................... $15.45 $13.86 $11.24 - --------------------------------------------------------------------- Caterpillar worldwide sales were a record $15.45 billion in 1995, a $1.59 billion or 11% increase over 1994. Total physical sales volume increased about 9% due primarily to higher industry demand. Sales increased in all regions of the world except Japan and the Commonwealth of Independent States (CIS). Large gains were registered in Europe, Africa and developing Asia. Dealer sales to end-users were at an all-time high and Caterpillar's share of the global market continued at record levels. Sales by Business Segment 1995 1994 1993 ---------------------- (Billions) Machinery.................................. $11.33 $10.16 $ 8.14 Engines.................................... 4.12 3.70 3.10 ------ ------ ------ $15.45 $13.86 $11.24 ====== ====== ====== - --------------------------------------------------------------------- Worldwide sales for the Machinery segment increased 12% from 1994, setting an all-time record. Most of the improvement was due to higher industry demand, with double digit increases in Europe, Africa/Middle East, and developing Asia. Higher price realization also contributed to the gain. Engine sales increased 11% over 1994 levels for a fourth consecutive year of record sales. Higher industry demand as well as an increased share of industry sales for turbines contributed most to the increase with volume gains recorded in all regions of the world. Truck and commercial engine demand was particularly strong in the United States, while demand for turbines was strong outside the United States. Caterpillar Sales Inside the United States 1995 1994 1993 ---------------------- (Billions) Machinery.................................. $ 5.49 $ 5.16 $ 4.27 Engines.................................... 1.93 1.85 1.44 ------ ------ ------ $ 7.42 $ 7.01 $ 5.71 ====== ====== ====== - --------------------------------------------------------------------- Caterpillar sales inside the United States were $7.42 billion, a $414 million or 6% increase over 1994. Higher industry demand and improved price realization more than offset the impact of a reduction in dealer machine inventories. Sales inside the United States represented 48% of the worldwide total versus 51% in 1994. In 1995, both the machine and engine industries surpassed their previous 1988-1989 peak. Moderate economic growth, good profitability, favorable economic prospects and continued growth in many of the industries that employ Caterpillar equipment all contributed to the record year. As a result of the higher industry demand and continued record share of industry sales, deliveries of Caterpillar machinery increased in 1995 for the third consecutive year. Increases were registered in both sales to end-users and deliveries to dealers' dedicated rental fleets which constituted about one quarter of all deliveries. Sales to end-users of machines increased in construction due to growth in the highway sector: . Highway sales were higher even though highway construction spending remained near 1994 levels. . Sales to the commercial, industrial and government building sector fell after three years of growth despite higher levels of private and public non-residential building construction. . Housing-related sales were flat although housing starts declined. A-30 Caterpillar Inc. - -------------------------------------------------------------------------------- Sales to end-users increased in all the commodity sectors except metals: . Coal mining sales were higher although mine production was up only slightly and coal prices were down. . Sales to the sand and quarry mining sector improved in line with higher mine production. . Metal mining-related sales were flat despite higher mine production and better metals prices. . Sales to agriculture were higher reflecting the addition of several new models in 1995 as well as a healthy farm economy. . Forestry-related sales were up. Although lumber prices and production were near 1994 levels, pulp production and especially pulp prices were higher. . Sales to the petroleum sector were also higher although pipeline construction continues to trend down. Sales to both solid waste and industrial applications were lower. Engine segment sales rose 4% in 1995 reflecting higher industry demand for diesel and gas engines. Turbine sales remained near 1994 levels. . Sales to end-users for diesel and gas engines rose in all major applications including power generation, marine, material handling, oil and gas, and agriculture. . Sales to truck Original Equipment Manufacturers (OEMs) also increased. Caterpillar Sales Outside the United States 1995 1994 1993 --------------------- (Billions) Machinery.............. $5.84 $5.00 $3.87 Engines................ 2.19 1.85 1.66 ----- ----- ----- $8.03 $6.85 $5.53 ===== ===== ===== - ---------------------------------------------- Caterpillar sales outside the United States were $8.03 billion, a $1.17 billion or 17% increase from 1994. These sales represented 52% of worldwide sales, up from 49% in 1994. Sales increased in all regions except Japan and the CIS. Machinery segment sales rose 17%. Higher industry demand, improved price realization and an increase in dealer inventories contributed to the gain. Dollar sales registered the largest increases in Europe, Asia and Africa/Middle East. Engine segment sales rose 18% primarily due to higher industry demand and an increased share of industry sales for turbines. Diesel and gas engine sales registered gains in all regions except Canada, with the largest gains in Europe and Africa/Middle East. Sales increased to all major applications except truck OEMs, with the largest increases in demand for marine engines and power generation sets. Turbine sales also increased in key applications including oil and gas and industrial power generation with the largest gain in Latin America. Europe/CIS Sales increased 29% as the western European economy continued to register moderate growth despite worries early in the year that stronger currencies would derail recovery. Low interest rates and continued expansion of construction activity fueled replacement demand leading to higher sales in all major western European countries. Sales to central European countries increased reflecting the economic recovery underway in the region. In the CIS sales declined from very favorable 1994 levels which had benefited from large deals to the natural resource sectors. Asia/Pacific Sales rose 17%, just slightly less than the increases posted the last two years. Sales were up in Australia as the economy continued to register moderate growth. Sales in Japan remained near 1994 levels as the economy failed to gain enough momentum to end the three year recession. In China sales increased due to an acceleration of infrastructure work. Overall economic activity remained strong. Sales also rose in the rest of the Asia/Pacific region. Excellent economic growth combined with numerous infrastructure projects led to higher end-user demand for machines in all major applications except housing. Company sales rose in most countries with large gains in Thailand, Indonesia and Malaysia. Sales of diesel and gas engines also increased. Latin America Sales remained near 1994 levels as strong engine sales offset weak machine sales. Turbine sales in particular registered large gains, especially in Venezuela. Sales fell in both Mexico and Argentina due to the year-long recessions, but increased in all other key countries. Concerns over a trade imbalance led to slower growth in Brazil, and Venezuela remained in recession but sales still exceeded 1994 levels for both countries. End-user demand for machines, however, did decline for the region as a whole as a result of the sharp declines in Mexico and Argentina. Canada Sales rose 5% following two years of strong growth. The improvement was due primarily to higher industry demand despite slower economic growth, much lower housing starts and uncertainty over the future of Quebec. End-user demand for machines was up in most applications including highway construction, metals and nonmetals mining and forestry. Diesel and gas engine sales were flat but turbine sales rose. Africa/Middle East After three years of decline, sales rose 21% for the region as a whole, primarily due to gains in Africa. Higher commodity prices, devaluations and economic reform contributed to much better growth in the region. South Africa, in particular, registered a large improvement in sales. Sales were flat in the Middle East. Sales increased in half the countries of the region including Saudi Arabia and United Arab Emirates but these gains were offset by declines elsewhere, including Israel and Egypt. Dealer Inventories of Machines U.S. dealers' new machine inventories declined in 1995, and at year-end were about normal relative to current selling rates. Outside the United States, dealers' new machine inventories rose and at year-end were about normal relative to current selling rates. A-31 MANAGEMENT'S DISCUSSION AND ANALYSIS continued - -------------------------------------------------------------------------------- U.S. dealers' dedicated rental inventories were higher in December than a year earlier but lower than the peak reached in October. At year-end, dedicated rental fleets were about twice the size of new machine inventory. 1994 COMPARED WITH 1993 Profit for 1994 was $955 million or $4.70 per share, an all-time record and a significant improvement from 1993 profit of $345 million (excluding nonrecurring tax-related items and extraordinary loss totalling $307 million). 1994 sales and revenues of $14.33 billion, also an all-time record, were 23% higher than 1993 and were the most significant factor contributing to the increase in profit. At December 31, 1994, the United Auto Workers (UAW) union's strike, which began on June 21, 1994, at eight U.S. facilities was ongoing. At the outset of the strike, the company implemented plans designed to meet the needs of its customers and quickly ramped up production schedules. These plans have been immensely successful. The average production rate at the struck manufacturing facilities was 14% higher during the last six months than during the first six months of 1994. Machinery and Engines Sales of Machinery and Engines were $13.86 billion for 1994, $2.63 billion higher than 1993. The improvement resulted from a 19% increase in physical sales volume and a 4% improvement in price realization. Profit before tax was $1.21 billion, up $810 million from 1993 (excluding net interest income of $251 million on the nonrecurring U.S. tax settlement). Higher physical sales volume was the primary reason for the significant improvement in profit. Sales volume increased substantially both inside and outside the United States, a result of strong worldwide demand. The improvement in price realization reflects price increases taken during 1994. Margin increased $869 million from 1993 primarily because of higher sales. Margin as a percent of sales was 21.8%, up 2.6 percentage points from 1993. The margin rate improved because of higher sales volume and better price realization. These favorable items were partially offset by proportionately higher sales of lower margin products, inflation on costs, higher incentive compensation expense (related to the higher profit), and a decrease in LIFO decrement benefits ($28 million in 1994 versus $38 million in 1993). The favorable impact on margin resulting from the absence of labor costs for UAW-represented employees on strike for a portion of 1994 was offset by strike-related costs. These include costs for temporary and contract personnel, overtime, other incremental expenses related to the strike, and the inclusion in cost of goods sold of labor costs for employees working in manufacturing operations that are normally included in SG&A or R&D expense. SG&A expenses were $86 million higher than in 1993. The increase was a result of additional volume-related parts distribution costs and higher incentive compensation expense (related to the higher profit). The assignment of labor costs for SG&A employees working in manufacturing areas to cost of goods sold partially offset the increase. All other costs were about the same despite inflation. R&D expenses declined $8 million to $311 million. The decrease reflects the assigning of labor costs for R&D employees working in manufacturing functions to cost of goods sold, partially offset by increased activity for new product introductions. Interest expense declined $68 million as average debt outstanding was $768 million lower compared with 1993. Other income/expense was income of $43 million in 1994, compared with income of $92 million in 1993. The decline resulted principally from the reclassification of investment income from the company's VEBA (Voluntary Employees' Beneficiary Association) trusts to operating profit (as a reduction of employee benefit expense). VEBA income included in operating profit in 1994 was $23 million. VEBA income included in other income/expense in 1993 was $34 million. In addition, the decline reflects a $17 million charge in 1994 for the settlement of two class action complaints and the absence of a 1993 gain on the sale of a closed facility at the company's Brazilian subsidiary. These unfavorable items were partially offset by a favorable change in foreign exchange gains and losses. Brazilian operations for 1994 returned to a more normal level of profit in line with sales volume. Results were significantly improved from 1993 but had no material effect on 1994 consolidated results. Financial Products The before-tax profit for Financial Products was $60 million, $8 million lower than 1993. The primary reason for the decrease in profit was unrealized mark-to-market charges of $18 million for interest rate caps and swaptions written by Cat Financial, partially offset by increased profit from Cat Financial's larger portfolio of earning assets. Revenues of $465 million were up $85 million from 1993, reflecting Cat Financial's larger portfolio. Cat Financial financed new retail business of $2.18 billion, a $267 million or 14% increase compared with 1993. SG&A expenses increased $30 million from 1993 reflecting higher depreciation of equipment on operating leases and other volume-related expenses at Cat Financial. Interest expense of $210 million was $38 million higher, a result of increased borrowings to support Cat Financial's larger portfolio. Other income/expense was expense of $4 million, compared with income of $21 million in 1993. The primary reason for the change was unrealized mark-to-market charges for Cat Financial's written interest rate caps and swaptions and a decrease in investment income at Cat Insurance. Income Taxes Tax expense was $354 million. 1993 income tax expense of $42 million included $85 million of favorable nonrecurring items related to a tax settlement with the U.S. Internal Revenue Service and restatement of net deferred tax assets as a result of a change in the U.S. corporate tax rate. Excluding these items, tax expense for 1993 was $127 million. The increase of $227 million was a result of higher before-tax profit and an effective tax rate of 28% for 1994, compared with a rate of 27% for 1993. Affiliated Companies The company's share of affiliated companies' results was a profit of $36 million, a $35 million improvement from a year ago. The A-32 Caterpillar Inc. - -------------------------------------------------------------------------------- increase was a result of higher sales and cost-cutting measures at SCM plus favorable nonrecurring items at SCM, primarily a gain on the sale of surplus land. LIQUIDITY & CAPITAL RESOURCES - ----------------------------- Consolidated operating cash flows totaled $2.19 billion in 1995, compared with $1.76 billion in 1994. Total debt at the end of 1995 was $6.40 billion, an increase of $497 million from year end 1994. Over this period, debt related to Machinery and Engines increased $182 million, to $2.22 billion, while debt related to Financial Products increased $315 million to $4.18 billion. During 1995, the company announced a plan to repurchase up to 10% of its outstanding common stock over the next three to five years. At December 31, 1995, 6.5 million shares had been purchased under the plan. Machinery and Engines Operating cash flows totaled $1.95 billion in 1995, compared with $1.58 billion in 1994. The cash flow increase is primarily the result of improved profitability and lower receivables, partially offset by a decrease in payables and an increase in inventories. Capital expenditures, excluding equipment leased to others, totaled $460 million in 1995, compared with $498 million a year ago. During 1995, Machinery and Engines debt increased $182 million. During 1995 the company entered into a $257 million capital lease obligation, collateralized by leased manufacturing equipment and a security deposit. In addition, $91 million of long-term debt matured or was retired. The percent of debt to debt plus stockholders equity improved to 40% at December 31, 1995, from 41% at December 31, 1994. Financial Products Operating cash flows totaled $244 million in 1995, compared with $179 million in 1994. Cash used to purchase equipment leased to others totaled $206 million in 1995. In addition, at December 31, 1995 net finance receivables increased $820 million from December 31, 1994 levels. Financial Products' debt was $4.18 billion at December 31, 1995, an increase of $315 million from December 31, 1994 and was primarily comprised of $2.62 billion of medium-term notes, $712 million of notes payable to banks and $710 million of commercial paper. At the end of 1995, finance receivables past due over 30 days were 2.0%, compared with 2.2% at the end of the same period one year ago. The ratio of debt to equity of Cat Financial was 7.7:1 at December 31, 1995, compared with 7.3:1 at December 31, 1994. Financial Products had outstanding credit lines totaling $2.80 billion at year-end 1995, which included $1.44 billion of the company's revolving credit agreement. These credit lines are with a number of banks and are considered support for the company's outstanding commercial paper, commercial paper guarantees, the discounting of bank and trade bills, and bank borrowings. Dividends Quarterly dividends paid per share of common stock for the last three years were as follows: Quarter 1995 1994 1993 - ------------------------------------- First...........$ .25 $.07 $.07 Second.......... .25 .08 .08 Third........... .35 .15 .07 Fourth.......... .35 .15 .08 ----- ---- ---- $1.20 $.45 $.30 ===== ==== ==== - ------------------------------------- EMPLOYMENT - ---------- At year-end, Caterpillar's worldwide employment, including UAW members that had not yet been called back to work, was 54,352, compared with 53,986 one year ago. Hourly employment decreased 33 to 31,994, while salaried and management employment increased 399 to 22,358. Year-End Employment 1995 1994 - -------------------------------------------------------------- Inside United States........... 39,978 39,749 Outside United States Europe....................... 8,413 8,146 Latin America................ 4,104 4,500 Asia/Pacific................. 1,630 1,383 Canada....................... 121 117 Other........................ 106 91 ------ ------ 14,374 14,374 14,237 14,237 ------ ------ Total Employment............... 54,352 53,986 ====== ====== - -------------------------------------------------------------- OTHER MATTERS - ------------- ENVIRONMENTAL MATTERS Environmental considerations are a very important factor in the company's product development and operations planning. This past year, two company manufacturing facilities were recognized by the state of Illinois for their pollution prevention efforts and the company's Engine Division announced participation in a joint government-industry effort to reduce on-highway engine emissions. In 1995, the company had capital expenditures of about $11 million for projects related to the environment (including $3 million in costs related to compliance with the Clean Air Act), approximately equal to amounts for 1994. In 1996 and 1997, these expenditures are expected to increase moderately. In addition to these expenditures, the company had depreciation, research and engineering, administrative, and operating expenses related to environmental regulation of about $131 million in 1995 (including $28 million for compliance with the Clean Air Act), slightly more than comparable expenses in 1994. These expenses are expected to remain at similar levels for 1996 and 1997. The company also is involved in a number of remediation actions to clean up hazardous wastes as required by federal and state laws. These laws often require responsible parties to fund remediation actions regardless of fault, legality of original disposal or ownership of a disposal site. Under accounting guidelines, the company is required to accrue and charge to income A-33 MANAGEMENT'S DISCUSSION AND ANALYSIS continued - -------------------------------------------------------------------------------- management's best estimate of future costs associated with these sites. When there appears to be a range of possible costs with equal likelihood, liabilities are based on the lower end of that range. For 1995, the amount accrued for potential clean-up costs is contained in the line item, "Accounts payable and accrued expenses" on Statement 3, and represents an immaterial portion of that line item. While the company may have rights of contribution or reimbursement under insurance policies, amounts that may be recoverable from other entities are not considered in establishing the accrual. In deciding upon amounts to be reserved for potential environmental liability at a particular site, the company looks at several factors including: . prior experience regarding environmental remediation at a similar site; . experience of other companies and industries with respect to a similar site; . technology available for remediation at the time; . the stage of remediation for the particular site (i.e., whether the site is at the identification stage or whether a remedial investigation or feasibility study has been conducted); . documentation, if any, linking the company to a particular site; . the amount the company has been asked to contribute to a particular site; and . aspects of the law under which the company is alleged to be liable for clean up. The company also looks at these factors in deciding whether it could incur liabilities beyond that which it has accrued for future remediation. Although it is difficult to estimate with any meaning potential liability at sites in very early stages of remediation (of which the company has seven currently) or sites yet to be identified because of the many uncertainties involved, including uncertainties about the status of the law, regulation, technology and information related to individual sites, at this time the company believes the likelihood of incurring any material environmental liability beyond that accrued is remote. LITIGATION On September 6, 1994, the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America ("UAW"), UAW Local 974, and Citizens for a Better Environment filed a complaint against the company with the Illinois Pollution Control Board ("Board"). The complaint generally alleges, in seven counts, that the company has violated certain provisions of the Illinois Environmental Protection Act and Board regulations with respect to a particular property in East Peoria, Illinois. The company believes the claims are without merit and will vigorously contest them. The company further believes final resolution of this matter will not have a material impact on the company's liquidity, capital resources, or results of operations. On May 12, 1993, a Statement of Objections ("Statement") was filed by the Commission of European Communities against Caterpillar Inc. and certain overseas subsidiaries. The Statement alleges that certain service fees payable by dealers, certain dealer recordkeeping obligations, a restriction which prohibits a European Community ("EC") dealer from appointing subdealers, and certain export pricing practices and parts policies violate EC competition law under Article 85 of the European Economic Community Treaty. The Statement seeks injunctive relief and unspecified fines. Based on an opinion of counsel, the company believes it has strong defenses to each allegation set forth in the Statement. On November 19, 1993, the Commission of European Communities informed the company that a new complaint has been received by it alleging that certain export parts policies violate Article 85 and Article 86 of the European Economic Community Treaty. The Commission advised the company that it intends to deal with the new complaint within the framework of the proceedings initiated on May 12, 1993. Based on an opinion of counsel, the company believes it has strong defenses to the allegations set forth in the new complaint. The company is party to other litigation matters and claims which are normal in the course of its operations, and while the results of litigation and claims cannot be predicted with certainty, management believes, based on advice of counsel, the final outcome of such matters will not have a materially adverse effect on the consolidated financial position. ACCOUNTING CHANGES In the first quarter of 1994, the company changed its method of computing LIFO inventories from a single pool approach to a multiple pool approach for substantially all of its inventories. The company believes that the multiple pool method results in a better matching of revenues and expenses. The cumulative effect of the change on prior years was not determinable. This change did not have a material effect on 1994 results of operations or financial position. In March 1995, the Financial Accounting Standards Board issued SFAS 121, "Accounting for the Impairment of Long-Lived Assets." The new statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill. This standard is effective for fiscal years beginning after December 15, 1995, and will therefore be adopted in 1996. It will not have a material impact on the company's financial position or results of operations. In October 1995, SFAS 123, "Accounting for Stock-Based Compensation" was issued, which is effective for fiscal years beginning after December 15, 1995. The new standard encourages companies to adopt a fair value based method of accounting for employee stock options, but allows companies to continue to account for those plans using the accounting prescribed by APB Opinion 25, "Accounting for Stock Issued to Employees." The company will adopt the disclosure requirements of the standard in 1996 and plans to continue accounting for stock compensation using APB 25, making pro forma disclosures of net income and earnings per share as if the fair value based method had been applied. A-34 Caterpillar Inc. - ------------------------------------------------------------------------------ DERIVATIVE FINANCIAL INSTRUMENTS Derivative financial instruments are principally used by the company in the management of foreign currency, interest rate, and commodity price exposures. Foreign Currency Movements in foreign currency exchange rates create a degree of risk to the company's operations. These movements affect: . The U.S. dollar value of sales made in foreign currencies, and . The U.S. dollar value of costs incurred in foreign currencies. Changing currency exchange rates also affect the company's competitive position, as exchange rate changes may affect profitability and business and/or pricing strategies of non-U.S. based competitors. The company's policy is to use foreign currency related derivative instruments only as needed to operate the business and protect the company's interests. The company only enters into foreign currency related derivative instruments to neutralize risk--not as speculative instruments. The company buys and sells currencies only in amounts large enough to cover business needs, and to protect its financial and competitive position. The company's general approach is to manage future foreign currency cash flows; it normally does not manage or hedge specific asset or liability positions. In managing foreign currency, the company's objective is to maximize consolidated aftertax U.S. dollar cash flows. To this end, the company's policy allows for actively managing: . cash flows related to firmly committed foreign currency transactions; . anticipated foreign currency cash flows for a future rolling twelve- month period; and . outstanding hedging transactions. The company uses forward exchange contracts and foreign currency option contracts (purchased option contracts and/or combination option contracts) to manage foreign currency cash flows, including firmly committed future transactions. When using forward exchange contracts, the company is protected from unfavorable exchange rate movements, but has given up any potential benefit from favorable changes in exchange rates. Purchased option contracts, on the other hand, protect from unfavorable rate movements while permitting the company to benefit from the effect of favorable exchange rate fluctuations. The company does not use historic rate rollovers or leveraged options, nor does it sell foreign currency options, except in the case of combination option contracts that limit the unfavorable effect of exchange rate movements, while allowing a limited potential benefit from favorable exchange rate movements. None of the forward exchange or foreign currency option contracts used by the company is exchange traded. Each month, the company's financial officers approve the company's outlook for expected currency exchange rate movements, as well as its policy on desired future foreign currency cash flow positions (long, short, balanced) for those currencies in which the company has significant activity. Financial officers receive a daily report on currency exchange rates, cash flow exposure, and open foreign currency hedges. Expected future cash flow positions and strategies are continuously monitored. The company's foreign exchange management practices, including the use of derivative financial instruments, are presented to the Audit Committee of the company's Board of Directors at least annually. The following table summarizes the company's anticipated cash inflows and outflows for the next 12 months, including those cash flows from firmly committed foreign currency transactions. The table also shows the contractual amounts of related outstanding forward exchange and foreign currency option contracts as of December 31, 1995:
Exposures Hedges ------------------ ------------------- Buy Sell Foreign Foreign Inflows Outflows Currency Currency ------- -------- -------- -------- European Currencies... $2,951 $3,276 $ 41 $ 4 Japanese Yen.......... 150 618 67 -- Australian Dollar..... 612 223 -- 191 Brazilian Real........ 207 201 -- -- Canadian Dollar....... 182 168 5 -- All Other Currencies.. 5 126 6 --
Except for changes related to business volume, the company's annual foreign currency cash flows for periods beyond the next 12 months are not expected to be materially different from those indicated in the above table. Interest Rate To manage its exposure to interest rate changes and lower the cost of borrowed funds, the company uses various interest rate derivative instruments, including interest rate swap agreements, interest rate cap (option) agreements, and forward rate agreements. At the time these agreements are executed, they are linked to a specific debt instrument. The company enters into such agreements only with major financial institutions. The company's Financial Products subsidiaries, in connection with their match funding objective, use interest rate derivative instruments to modify debt structures to match fund receivable portfolios. This match funding reduces the risk of deteriorating margins between interest-bearing assets and interest-bearing liabilities, regardless of which direction interest rates move. The company, including Financial Products subsidiaries, also uses these instruments to gain an economic and/or competitive advantage through a lower cost of borrowed funds. This is accomplished by changing the characteristics of existing debt instruments or entering into new agreements in combination with the issuance of new debt. Commodity Prices The company's operations are also subject to commodity price risk, as material prices change with movements in underlying commodity prices. The company has used some commodity swap and option agreements to reduce this risk. However, the use of these types of derivative financial instruments has not been material. A-35 MANAGEMENT'S DISCUSSION AND ANALYSIS continued - ------------------------------------------------------------------------------ LABOR UPDATE In early December 1995, UAW leaders informed Caterpillar and their members that they were recessing the strike that began on June 21, 1994, at eight U.S. facilities. Following the announcement, the UAW membership rejected a new six- year contract proposal from the company. The company completed the return-to- work process by the end of January, 1996. They are working under the company's previously implemented contract proposal. The transition went very smoothly and production targets and customer needs continue to be met. 1996 ECONOMIC AND INDUSTRY OUTLOOK World economic growth should be similar to that experienced in 1995 but the geographic mix will be different. Recoveries in Latin America, Japan and the CIS, combined with faster growth in Africa and Middle East, should offset slower growth in the United States, Canada and Australia. Moderate growth should continue in Europe with strong growth forecast to continue in Asia, including China. In this economic environment, worldwide industry demand for machines is expected to remain near 1995 levels as lower demand in North America is nearly offset by stronger demand elsewhere. Worldwide demand for engines, however, will likely decline as the expected drop in North America industry demand is not expected to be fully offset by growth in the rest of the world. The U.S. Gross Domestic Product (GDP) is expected to slow further in 1996 to the 1.0% to 1.5% range primarily due to the tight monetary policy pursued by the Federal Reserve since 1994. Although further interest rate cuts are anticipated, they are not expected to reverse the slowdown which will likely be more pronounced in the second half and could result in a mild recession. Housing starts are forecast to decline, and growth in commercial construction and mining should slow. The weaker U.S. economy combined with a drop in replacement demand is expected to result in lower industry demand for both machines and engines. Heavy duty truck industry demand in particular is forecast to drop sharply in 1996 from its 1995 peak. Industry demand for machines and engines is also expected to be lower in Canada due to a weakening economy and reduced spending for infrastructure. Better growth in North America could result if the Federal Reserve cuts interest rates aggressively or if Congress enacts substantial tax cuts early in 1996. In western Europe, moderate economic growth is forecast to continue. Although some economies slowed in the second half of 1995, interest rate reductions last year should lead to a resumption of moderate growth of 2.5% in 1996. Inflation and interest rates remain low, capacity utilization is high and profits are rising. In central Europe good economic growth has resumed in many countries and should continue in 1996. In this environment, European industry demand is expected to increase again in 1996. Demand in Germany, however, is unlikely to exceed last year's levels as unification-related construction activity continues to wind down. Economic recovery is finally expected to take hold in Japan although growth will likely be too weak to support much improvement in industry demand. In Australia, slower economic growth should result in a declining construction industry, but mining activity is forecast to remain strong. Economic growth is forecast to accelerate in the developing countries leading to higher industry demand. Continued strong growth in the developing countries of Asia should lead to another year of higher industry sales. Inflation concerns are expected to moderate China's growth slightly but sales are still expected to grow considerably. Higher sales are also forecast for the Africa/Middle East region where economic growth is expected to accelerate in response to high commodity prices, good export demand and economic restructuring. In Latin America, the recessions in Mexico and Argentina are forecast to end and healthy growth is forecast for most other major countries. Nevertheless, industry demand is unlikely to improve much over 1995 levels. The severe, six- year decline in the CIS is also forecast to end but the political instability will likely remain. Some growth in industry demand is anticipated for 1996. 1996 COMPANY OUTLOOK Worldwide company sales are expected to be somewhat lower than 1995 levels as improved sales in the developing regions and Europe are not expected to offset lower sales in the United States, Canada and Australia. However, if moderate economic growth continues in the United States throughout 1996, rather than the projected weaker growth and mild recession, then company sales should increase from 1995 levels. Improved manufacturing flexibility should allow the company to readily adjust to changes in demand during 1996. Profit is expected to be in line with physical sales volume. Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: The information included in the Outlook section is forward looking and involves risks and uncertainties that could significantly impact expected results. While it is impossible to itemize the many factors and specific events that could affect the outlook of any company operating in the global economy, the company's outlook for 1996 is predominately based on its interpretation of what it considers key economic assumptions. These include, but are not limited to, measures of monetary and fiscal policies. If, as most economists are projecting, the U.S. economy realizes a "soft landing" rather than the slowdown and mild recession forecast by the company, business in the U.S. could prove better than is currently anticipated. Conversely, if, as some economists predict, the European economy fails to grow as expected by the company, sales could suffer and fail to partially offset projected declines in North America. Lower than expected growth in other regions also could reduce company sales. World economic activity will be greatly influenced by government actions and political policies. The above contingencies are seen as the principal risks to the company's 1996 Outlook. Other significant risks include factors discussed in Item 7 of the company's Form 10-K for 1995. MANAGEMENT'S DISCUSSION AND ANALYSIS. A-36 SUPPLEMENTAL STOCKHOLDER INFORMATION Annual Meeting On Wednesday, April 10, 1996, at 10:30 a.m., MST, the annual meeting of stockholders will be held at the Loews Ventana Canyon Hotel, Tucson, Arizona. Requests for proxies are being sent to stockholders with this report mailed on or about March 1, 1996. Stock Transfer Agent First Chicago Trust Company of New York P.O. Box 2500 Jersey City, NJ 07303-2500 Telephone: (201) 324-0498 Stock Exchange Listings Caterpillar common stock is listed on stock exchanges in the United States, Belgium, France, Germany, Great Britain, and Switzerland. Number of Stockholders Stockholders of record at year-end totaled 31,585, compared with 29,363 at the end of 1994. Approximately 5% of the outstanding shares are held by about 30,500 individuals. The remaining shares are held by trustees, banks, and other institutions for additional thousands of owners. Employees' investment and profit-sharing plans acquired 1,486,881 shares of Caterpillar stock in 1995. Investment plans, for which membership is voluntary, held 13,180,250 shares for employee accounts at 1995 year-end. Profit-sharing plans, in which membership is automatic for most U.S. and Canadian employees in eligible categories, held 269,343 shares at 1995 year-end. Common Stock Price Range Quarterly price ranges of Caterpillar common stock on the New York Stock Exchange, the principal market in which the stock is traded, were:
1995 1994 ----------------- ----------------- Quarter High Low High Low - ------- ------ ------ ------ ------ First........ 58-7/8 48-1/4 60-3/4 44-1/2 Second....... 65-1/4 55 60-5/8 50 Third........ 75-1/4 56-1/8 58-1/4 50 Fourth....... 63-1/8 50-3/4 59-7/8 50-5/8
Market prices have been adjusted to give retroactive effect to a 2-for-1 stock split in 1994. Automatic Dividend Reinvestment Plan An Automatic Dividend Reinvestment Plan--administered by First Chicago Trust Company of New York--is available to stockholders. The plan provides a convenient, low-cost method for stockholders to increase their ownership in Caterpillar common stock. In addition, stockholders who elect to participate can make optional cash payments to purchase more Caterpillar shares. Participation may begin with any regularly scheduled dividend payment if an authorization form is completed and returned to the administrator prior to the dividend record date. Stockholders wishing further information may contact First Chicago Trust Company of New York, P.O. Box 13531, Newark, New Jersey 07188-0001. Publications for Stockholders Single copies of the company's 1995 annual report on Securities and Exchange Commission Form 10-K (without exhibits) will be provided without charge to stockholders after March 31, 1996, upon written request to: Secretary Caterpillar Inc. 100 N.E. Adams Street Peoria, IL 61629-7310 The company also makes available to stockholders copies of its Form 10-Q reports. 10-Q reports are available in May, August, and November. Investor Inquiries For those seeking additional information about the corporation-- Institutional analysts, portfolio managers, and representatives of financial institutions should contact: James F. Masterson Director of Investor Relations Caterpillar Inc. 100 N.E. Adams Street Peoria, IL 61629-5310 Telephone: (309) 675-4549 Facsimile: (309) 675-4457 Individual stockholders should contact: Laurie J. Huxtable Assistant Secretary Caterpillar Inc. 100 N.E. Adams Street Peoria, IL 61629-7310 Telephone: (309) 675-4619 A-37
DIRECTORS AND OFFICERS DIRECTORS Lilyan H. Affinito/1,3/ Former Vice Chairman, Maxxam Group Inc. W. Frank Blount/1,3/ Chief Executive Officer, Telstra Corporation Donald V. Fites/3,4/ Chairman and Chief Executive Officer, Caterpillar Inc. John W. Fondahl/2,4/ Former Professor of Civil Engineering, Stanford University David R. Goode/1,2/ Chairman, Chief Executive Officer & President, Norfolk Southern Corporation James P. Gorter/1,2/ Chairman, Baker, Fentress & Company Jerry R. Junkins/2,3/ Chairman, President, and Chief Executive Officer, Texas Instruments Incorporated Peter A. Magowan/2,4/ Chairman, Safeway, Inc.; President & Managing General Partner, San Francisco Giants Gordon R. Parker/1,3/ Former Chairman, Newmont Mining Corporation and Newmont Gold Company George A. Schaefer/1,3/ Former Chairman and Chief Executive Officer, Caterpillar Inc. Joshua I. Smith/3,4/ Chairman & Chief Executive Officer, The MAXIMA Corporation Clayton K. Yeutter/2,4/ Of Counsel to Hogan & Hartson, Washington, D.C. /1/Member of Audit Committee (Lilyan H. Affinito, chairman) /2/Member of Compensation Committee (James P. Gorter, chairman) /3/Member of Nominating Committee (Jerry R. Junkins, chairman) /4/Member of Public Policy Committee (Clayton K. Yeutter, chairman) OFFICERS Donald V. Fites Chairman Glen A. Barton Group President Gerald S. Flaherty Group President James W. Owens Group President Richard L. Thompson Group President R. Rennie Atterbury III Vice President, General Counsel, and Secretary James W. Baldwin Vice President Vito H. Baumgartner Vice President James S. Beard Vice President Richard A. Benson Vice President Ronald P. Bonati Vice President James E. Despain Vice President Roger E. Fischbach Vice President Michael A. Flexsenhar Vice President Donald M. Ings Vice President Duane H. Livingston Vice President Douglas R. Oberhelman Vice President Gerald Palmer Vice President Robert C. Petterson Vice President John E. Pfeffer Vice President Siegfried R. Ramseyer Vice President Alan J. Rassi Vice President Gerald L. Shaheen Vice President Gary A. Stroup Vice President Sherril K. West Vice President Donald G. Western Vice President Wayne M. Zimmerman Vice President Robert R. Gallagher Controller F. Lynn McPheeters/1/ Treasurer Robin D. Beran Assistant Treasurer Mary J. Callahan Assistant Secretary Laurie J. Huxtable Assistant Secretary
- ---------- Note: All director/officer information is as of December 31, 1995, except as noted below. /1/Effective January 19, 1996 A-38 NOTES - ------------------------------------------------------------------------------ A-39 NOTES - ------------------------------------------------------------------------------ A-40 NOTES - ------------------------------------------------------------------------------ A-41 -----END PRIVACY-ENHANCED MESSAGE-----