-----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, TeZoiRhSMM6L55nNxYepo6GwyhMsacym4MCDHSK/sAxqDFOlguac2kChI0Me18OQ Ye11NdFeLcFIwKhEryr5+w== 0000950131-98-002084.txt : 19980330 0000950131-98-002084.hdr.sgml : 19980330 ACCESSION NUMBER: 0000950131-98-002084 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: CSX SROS: NYSE SROS: PCX 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-K405 SEC ACT: SEC FILE NUMBER: 001-00768 FILM NUMBER: 98576628 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-K405 1 ANNUAL REPORT ON 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, 1997 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 (State or other jurisdiction of incorporation) 1-768 37-0602744 (Commission File Number) (IRS Employer I.D. No.) 100 NE Adams Street, Peoria, Illinois 61629 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (309) 675-1000 ================================================================================ 1997 ================================================================================ 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 Exchange, Inc. Preferred Stock Purchase Rights Chicago Stock Exchange New York Stock Exchange Pacific Exchange, Inc. 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 6% Debentures due May 1, 2007 New York Stock Exchange 9 3/8% Debentures due August 15, 2011 New York Stock Exchange 9 3/4% Sinking Fund Debentures due June 1, 2019 New York Stock Exchange 9 3/8% Debentures due March 15, 2021 New York Stock Exchange 8% Debentures due February 15, 2023 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. [X] As of January 31, 1998, there were 366,854,972 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 $17,438,675,616. Documents Incorporated by Reference Portions of the documents listed below have been incorporated by reference into the indicated parts of this Form 10-K, as specified in the responses to the item numbers involved. . 1998 Annual Meeting Proxy Statement ("Proxy Statement") - Part III . Annual Report to Security Holders filed as an appendix to the 1998 Annual Meeting Proxy Statement ("Appendix") - Parts I, II, and IV ================================================================================ 1997 PART I Item 1. Business. Principal Business Segments - --------------------------- Caterpillar 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, mining shovels, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, telescopic handlers, 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. Reciprocating engines meet power needs ranging from 40 to 13,600 horsepower (30 to 10 150 kilowatts). Turbines range from 1,340 to 18,000 horsepower (1000 to 13 500 kilowatts). 3. Financial Products--provides financing alternatives for Caterpillar and noncompetitive related equipment, and extends loans to our customers and dealers. Also provides various forms of insurance to our dealers and customers to help support their purchase and financing of our equipment. This segment consists primarily of Caterpillar Financial Services Corporation and its subsidiaries, and Caterpillar Insurance Services Corporation. Additional information about our business and geographic segments is incorporated by reference from Note 20 of the Notes to Consolidated Financial Statements on pages A-17 through A-18 of the Appendix. Nature of Operations - -------------------- We conduct operations in our Machinery and Engines' segments under highly competitive conditions, including intense price competition. We place great emphasis upon the high quality and performance of our products and our dealers' service support. Although no one competitor is believed to produce all of the same types of machines and engines, there are numerous companies, large and small, which compete with us in the sale of each of our products. Machines are distributed principally through a worldwide organization of dealers, 65 located in the United States and 132 located outside the United States. Worldwide, these dealers have more than 1,400 places of business. Reciprocating engines are sold principally through the worldwide dealer organization and to other manufacturers for use in products manufactured by them. Our dealers do not deal exclusively with our products; however, in most cases sales and servicing of our products are our dealers' principal business. Turbines and large marine reciprocating engines are sold through sales forces employed by Solar Turbines Incorporated and associated companies and MaK Motoren GmbH & Co. KG, respectively. Occasionally, these employees are assisted by independent sales representatives. Page 3 The Financial Products' segment also conducts business under highly competitive conditions. Financing for users of Caterpillar products is available through a variety of competitive sources, principally commercial banks and finance and leasing companies. We emphasize prompt and responsive service to meet customer requirements and offer various financing plans designed to increase the opportunity for sales of our products and generate financing income for our company. On December 11, 1997, we announced an agreement with LucasVarity plc to acquire the assets of Perkins Engines, LucasVarity's diesel engine subsidiary. Perkins is a leading manufacturer of small to medium diesel engines, and its 1996 sales were approximately $1.1 billion. The addition of Perkins to our existing engine business will create a global full-line producer of reciprocating and turbine engines. A purchase price of $1.325 billion was agreed upon subject to closing date adjustments. We will pay for this acquisition using a combination of existing cash and new debt. The acquisition will be accounted for using the purchase method of accounting. Additional information about our operations in 1997 and outlook for 1998 are incorporated by reference from "Management's Discussion and Analysis" on pages A-20 through A-28 of the Appendix and are discussed under Item 7 to this Form 10-K. Patents and Trademarks - ---------------------- Our products are sold primarily under the marks "Caterpillar," "Cat," "Solar," "Barber-Greene," and "MaK". We own a number of patents and trademarks relating to the products we manufacture, which have been obtained over a period of years. These patents and trademarks have been of value in the growth of our business and may continue to be of value in the future. We do not regard any segment of our business as being dependent upon any single patent or group of patents. Research and Development - ------------------------ We have always placed strong emphasis on product-oriented research and engineering relating to the development of new or improved machines, engines and major components. In 1997, 1996, and 1995, we spent $700 million, $570 million, and $532 million, respectively, on our research and engineering programs. Of these amounts, $528 million in 1997, $410 million in 1996, and $375 million in 1995 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 1997 we announced several new products as well as improvements to existing products, including our anticipated entry into the compact construction machine market in 1998. We expect to continue the development of new products and improvements to existing products in the future, with a focus in the areas of power generation equipment, smaller machines, and agricultural products. Employment - ---------- At December 31, 1997, we employed 59,863 persons of whom 20,141 were located outside the United States. Sales - ----- Sales outside the United States were 51% of consolidated sales for 1997 and 1996, and 52% for 1995. Page 4 Environmental Matters - --------------------- The company is regulated by federal, state, and international environmental laws governing our use of substances and control of emissions. Compliance with these existing laws has not had a material impact on our capital expenditures, earnings, or competitive position. We are cleaning up hazardous waste at a number of locations, often with other companies, pursuant to federal and state laws. When it is likely we will pay clean-up costs at a site and those costs can be estimated, the costs are charged against our earnings. In doing that estimate, we do not consider amounts expected to be recovered from insurance companies and others. The amount set aside for environmental clean-up is not material and is included in "Accounts payable and accrued expenses" in Statement 3 of the Appendix. If a range of liability estimates is available on a particular site, we accrue the lower end of that range. We cannot estimate costs on sites in the very early stages of clean-up. Currently, we have five of these sites and there is no more than a remote chance that a material amount for clean-up will be required. A specific matter involving the United States Enviromental Protection Agency is discussed under Item 7 to this Form 10-K. Item 1a. Executive Officers of the Registrant as of December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------- Present Caterpillar Inc. Principal positions held during the Name and Age position and date of past five years other than initial election Caterpillar Inc. position currently held - ------------------------------------------------------------------------------------------------------------------------- Donald V. Fites (64) Chairman and Chief Executive Officer (1990) - ------------------------------------------------------------------------------------------------------------------------- Glen A. Barton (58) Group President (1990) - ------------------------------------------------------------------------------------------------------------------------- Gerald S. Flaherty (59) Group President (1990) - ------------------------------------------------------------------------------------------------------------------------- James W. Owens (51) Group President (1995) . Vice President (1990-1995) . President, Solar Turbines Incorporated (1990-1993) . Chief Financial Officer (1993-1995) - -------------------------------------------------------------------------------------------------------------------------- Richard L. Thompson (58) Group President (1995) . Vice President (1989-1995) - -------------------------------------------------------------------------------------------------------------------------- R. Rennie Atterbury III (60) Vice President, General Counsel and Secretary (1991) - -------------------------------------------------------------------------------------------------------------------------- James W. Baldwin (60) Vice President (1991) - -------------------------------------------------------------------------------------------------------------------------- Sidney C. Banwart (52) Vice President . Technical Resources Manager, Decatur (1991-1993) (effective 1/1/98) . Product Manager, Motor Graders, Decatur (1993-1995) . General Manager, Lafayette (1995-1997) - -------------------------------------------------------------------------------------------------------------------------- Vito H. Baumgartner (57) Vice President (1990) . Chairman, Caterpillar Overseas S.A. (1990-present) - -------------------------------------------------------------------------------------------------------------------------- James S. Beard (56) Vice President (1990) . President, Caterpillar Financial Services Corporation (1987-present) - -------------------------------------------------------------------------------------------------------------------------- Richard A. Benson (54) Vice President (1989) . President, Caterpillar Industrial Inc. (1989-present) - -------------------------------------------------------------------------------------------------------------------------- Ronald P. Bonati (58) Vice President (1990) - -------------------------------------------------------------------------------------------------------------------------- James E. Despain (60) Vice President (1990) - -------------------------------------------------------------------------------------------------------------------------- Roger E. Fischbach (56) Vice President (1989) - -------------------------------------------------------------------------------------------------------------------------- Michael A. Flexsenhar (58) Vice President (1995) . General Manager, Large Engines, Lafayette Plant (1991-1995) - -------------------------------------------------------------------------------------------------------------------------- Donald M. Ings (49) Vice President (1993) . Plant Manager, York (1989-1993) . President, Solar Turbines Incorporated (1993-present) - --------------------------------------------------------------------------------------------------------------------------
Page 5 - ------------------------------------------------------------------------------------------------------------------------------ Duane H. Livingston (56) Vice President (1995) . Director of Corporate Auditing, Corporate Services Division (1991-1995) - ------------------------------------------------------------------------------------------------------------------------------ Robert R. Macier (49) Vice President . Vice President, Engineering, Solar Turbines (1990-1994) (effective 1/1/98) . Business Unit Manager, Joliet (1994-1997) - ------------------------------------------------------------------------------------------------------------------------------ David A. McKie (53) Vice President . General Manager, Small Engines, Mossville Plant (1991-1995) (effective 1/1/98) . Managing Director, Caterpillar Belgium S.A. (1995-1997) - ------------------------------------------------------------------------------------------------------------------------------ Daniel M. Murphy (50) Vice President (1996) . Product Manager, Excavators, Aurora Plant (1990-1996) . General Manager, Mossville Engine Center (1996) - ------------------------------------------------------------------------------------------------------------------------------ Douglas R. Oberhelman (44) Vice President and Chief . Managing Director and Vice General Manager, Strategic Planning, Financial Officer (1995) Shin Caterpillar Mitsubishi Ltd. (1991-1995) - ------------------------------------------------------------------------------------------------------------------------------ Gerald Palmer (52) Vice President (1992) - ------------------------------------------------------------------------------------------------------------------------------ Robert C. Petterson (59) Vice President (1991) . Managing Director, Caterpillar Brasil S.A. (1992-1995) - ------------------------------------------------------------------------------------------------------------------------------ John E. Pfeffer (55) Vice President (1995) . President, CONEK S.A. de C.V. (1991-1993) . Business Unit Manager, York Plant (1993-1995) . Chairman, Shin Caterpillar Mitsubshi Ltd. (1995-present) - ------------------------------------------------------------------------------------------------------------------------------ Siegfried R. Ramseyer (60) Vice President (1992) - ------------------------------------------------------------------------------------------------------------------------------ Alan J. Rassi (57) Vice President (1992) - ------------------------------------------------------------------------------------------------------------------------------ Gerald L. Shaheen (53) Vice President (1995) . Regional Manager, Eastern Region, N.A. Commercial Division (1989-1993) . Managing Director, Caterpillar Overseas S.A.(1993-1995) - ------------------------------------------------------------------------------------------------------------------------------ Gary A. Stroup (48) Vice President (1992) . General Manager, Hauling Units and Motor Graders Business Unit (1992-1995) - ------------------------------------------------------------------------------------------------------------------------------ Sherril K. West (50) Vice President (1995) . Marketing Support Services Manager, Corporate Services Division (1991-1995) - ------------------------------------------------------------------------------------------------------------------------------ Donald G. Western (49) Vice President (1995) . Managing Director, Caterpillar Belgium S.A. (1990-1995) - ------------------------------------------------------------------------------------------------------------------------------ Wayne M. Zimmerman (62) Vice President (1989) (retiring April 1, 1998) - ------------------------------------------------------------------------------------------------------------------------------ Robert R. Gallagher (57) Controller (1990) - ------------------------------------------------------------------------------------------------------------------------------ F. Lynn Mc Pheeters (55) Treasurer (1996) . Executive Vice President, Caterpillar Financial Services Corporation (1990-1996) - ------------------------------------------------------------------------------------------------------------------------------
Item 2. Properties. General Information - ------------------- Caterpillar's operations are highly integrated. Although the majority of our plants are involved primarily in the production of either machines or engines, several plants are involved in the manufacture of both. In addition, several plants are involved in the manufacture of components which are used in the assembly of both machines and engines. Caterpillar'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. Properties we own are believed to be generally well maintained and adequate for present use. Through planned capital expenditures, we expect these properties to remain adequate for future needs. Properties we lease are covered by leases expiring over terms of generally 1 to 10 years. We anticipate no difficulty in retaining occupancy of any leased facilities, either by renewing leases prior to expiration or by replacing them with equivalent leased facilities. Page 6 Consolidations, Closures, and Sales - ----------------------------------- Over the last five years, in the ordinary course of business, we have consolidated operations and/or closed a number of facilities. In March 1996, we announced that the Precision Barstock Products business unit in York, Pennsylvania would be closed. We are currently in the process of closing the unit. Additional information regarding plant closing and consolidation costs is incorporated by reference from Note 19 of the Notes to Consolidated Financial Statements on page A-16 of the Appendix. Headquarters - ------------ Our corporate headquarters are in Peoria, Illinois. Additional marketing headquarters are located both inside and outside the United States. The Financial Products Division is headquartered in leased offices located in Nashville, Tennessee. Distribution - ------------ Distribution of our products is conducted from Distribution and Regional Distribution Centers inside and outside the United States. Caterpillar Logistics Services, Inc. distributes other companies' products utilizing certain of our distribution facilities as well as other non-Caterpillar facilities located both inside and outside the United States. We also own or lease other storage facilities which support distribution activities. Technical Center, Training/Demonstration Areas and Proving Grounds - ------------------------------------------------------------------ We own a Technical Center located in Mossville, Illinois and various other training/demonstration areas and proving grounds located both inside and outside the United States. Changes in Fixed Assets - ----------------------- During the five years ended December 31, 1997, changes in our investment in property, plant and equipment were as follows (stated in millions of dollars):
- --------------------------------------------------------------------------------------------------------------------------- Expenditures Acquisitions/1/ Disposals and Net Increase Year ------------------------------------------------------- Provisions for Other (Decrease) U.S. Outside U.S. U.S. Outside U.S. Depreciation Adjustments During Period - --------------------------------------------------------------------------------------------------------------------------- 1993 $508 $124 $0 $ 0 $(661) $ (98) $(127) - --------------------------------------------------------------------------------------------------------------------------- 1994 $508 $186 $0 $ 0 $(680) $ (65) $ (51) - --------------------------------------------------------------------------------------------------------------------------- 1995 $506 $173 $0 $ 0 $(679) $(132) $(132) - --------------------------------------------------------------------------------------------------------------------------- 1996 $513 $258 $0 $136 $(690) $ (94) $ 123 - --------------------------------------------------------------------------------------------------------------------------- 1997 $726 $380 $0 $ 2 $(710) $(107) $ 291 - --------------------------------------------------------------------------------------------------------------------------- /1/ Prior to 1996, Acquisition amounts, if any, are included with Expenditures. - ---------------------------------------------------------------------------------------------------------------------------
At December 31, 1997, the net book value of properties located outside the United States represented 26.9% of the net properties on the consolidated financial position. Additional information about our investment in plant, property and equipment is incorporated by reference from Notes 1D and 8 of the Notes to Consolidated Financial Statements on pages A-7 and A-12, respectively, of the Appendix. Page 7 Manufacturing, Remanufacturing, and Overhaul - -------------------------------------------- Manufacturing, remanufacturing, and overhaul of our products are conducted at the following locations. These facilities are believed to be suitable for their intended purposes with adequate capacities for current and projected needs for existing products. - ------------------------------------------------------------------------------------------- Manufacturing Inside the U.S. Michigan Outside the U.S. Germany - --------------- ---------------- California . Menominee Australia . Kiel . Gardena Minnesota . Burnie/1/ . Wackersdorf . San Diego . Minneapolis . Cowell/1/ . Zweibrucken Florida . New Ulm . Melbourne Hungary . Jacksonville Mississippi . Perth . Godollo/2/ Georgia . Oxford Belgium India . Jefferson Missouri . Gosselies . Bangalore/1/ . LaGrange . Boonville Brazil . Mumbai/1/ Illinois West Plains . Piracicaba Indonesia . Aurora North Carolina Canada . Jakarta/2/ . Champaign/1/ . Clayton . Montreal Italy . Decatur . Franklin China . Bazzano . DeKalb . Leland . Guangzhuo/1/ . Jesi . Dixon . Morganton . ErLiBan/1/ . Milan/1/ . East Peoria . Sanford . Tianjin/2/ Japan . Joliet Oregon . Xuzhou/2/ . Akashi/1/ . Mapleton . Dallas England . Sagamihara/1/ . Mossville Pennsylvania . Leicester Mexico . Peoria . York . Peterlee . Monterrey . Pontiac South Carolina . Skinningrove . Tijuana . Sterling . Greenville . Stockton Northern Ireland Indiana . Sumter . Wolverhampton . Larne/1/ . Lafayette Tennessee France Poland Kansas . Dyersburg . Grenoble . Janow Lubelski/2/ . Wamego . Rockwood . Rantigny Russia Kentucky Texas . St. Petersburg . Danville . Houston Sweden . Soderhamn /1/ Facility of affiliated company (50% or less owned) /2/ Facility of partially owned subsidiary (greater than 50%, less than 100%) - ------------------------------------------------------------------------------------------- Remanufacturing and Overhaul Inside the U.S. Outside the U. S. Indonesia - --------------- ----------------- Mississippi Australia . Bandung . Corinth . Melbourne Malaysia . Prentiss County Belgium . Kuala Lumpur Texas . Gosselies Mexico . De Soto Canada . Nuevo Laredo . Mabank . Edmonton . Tijuana . Veracruz - -------------------------------------------------------------------------------------------
Page 8 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Information required by Item 5 is incorporated by reference from "Common Stock Price Range" and "Number of Stockholders" on page A-29 and from "Dividends paid per share of common stock" on page A-25 of the Appendix. We have eleven employee stock purchase plans administered outside the United States for our foreign employees. These plans are not registered with the Securities and Exchange Commission and are exempt from such registration pursuant to Regulation S under the Securities Act. As of December 31, 1997, those plans had approximately 2,850 participants in the aggregate. During the Fourth Quarter of 1997, a total of 59,205 shares of Caterpillar common stock or foreign denominated equivalents were distributed under the plans. Item 6. Selected Financial Data. Information required by Item 6 is incorporated by reference from the "Five-year Financial Summary" on page A-19 of the Appendix. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Information required by Item 7 is incorporated by reference from the "Management's Discussion and Analysis" on pages A-20 through A-28 of the Appendix, except as modified and updated by the following: Environmental Matter - -------------------- The United States Environmental Protection Agency (EPA) has issued conditional certificates of conformity with the Clean Air Act for Caterpillar's 1998 model year heavy-duty diesel engines. The EPA has issued similar conditional certificates to other heavy-duty diesel engine manufacturers as well. The EPA is reviewing the impact of advanced electronic control technologies on the emissions compliance of heavy-duty trucks in certain operating conditions and whether the use of such technologies is consistent with the Clean Air Act's requirements. Caterpillar and the other manufacturers are responding to the EPA requests for information and are engaged in discussions with them and the United States Department of Justice in an effort to resolve this issue. We believe an amicable solution will be reached that will not have a material adverse impact on our financial position or results of operations. If we are unable to reach such an agreement and do not prevail on legal challenges to the government's position in that event, resolution of this matter could have a material adverse effect. Year 2000 - --------- We recognize customers and shareholders are concerned about product and service readiness leading up to and after the turn of the century. We define year 2000 readiness as having systems in place that will not be adversely affected by dates prior to, during or after the year 2000. We are taking the actions necessary to ensure our products and services will continue to operate on and after Jan. 1, 2000. Page 9 We have charged managers from each division with responsibility to identify, evaluate and implement changes to computer systems and applications necessary to achieve year 2000 readiness with the goal of having no effect on customers or disruption to business operations. Each division has identified major areas of potential business impact. These areas have been evaluated and conversion efforts are in process. Additionally, each division is responsible for communicating with suppliers, financial institutions and others it does business with to coordinate year 2000 readiness. These discussions and conversion efforts are also in process. Based on the steps we are taking to address this issue and our progress to date, as well as our estimated cost of remediation, we do not expect the financial impact of Year 2000 date conversion to be material to our financial position or results of operations. If, however, modifications and conversions by us, or those with which we do business, especially foreign and domestic governments and their agencies, are not made in a timely manner, this matter could have a material adverse impact on our financial position or results. Labor Agreement - --------------- On March 22, 1998, employees represented by the United Automobile, Aerospace and Agricultural Implement Workers of America ("UAW") ratified a new six-year labor agreement with Caterpillar. We believe the new contract preserves Caterpillar's right to manage key issues and remain globally competitive, while at the same time providing employees with an excellent compensation and benefits package. Item 7a. Quantitative and Qualitative Disclosures About Market Risk. Information required by Item 7a is incorporated by reference from Notes 1F, 2, 15, and 17 of the Notes to Consolidated Financial Statements on pages A-7, A-8, A-15, and A-16 of the Appendix and from "Derivative Financial Instruments" on pages A-25 through A-27 of the Appendix. Item 8. Financial Statements and Supplementary Data. 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-18 of the Appendix. PART III Item 10. Directors and Executive Officers of the Registrant. Information required by Item 10 relating to identification of directors is incorporated by reference from "Directors Nominated this Year for Terms Expiring in 2001," "Directors Up for Election in 2000," and "Directors Up for Election in 1999." on pages 2 through 4 of the Proxy Statement. Identification of executive officers appears in Item 1a of this Form 10-K. 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 by Item 405 of Regulation S-K is incorporated by reference from "Section 16(a) Beneficial Ownership Reporting Compliance" on page 23 of the Proxy Statement. Page 10 Item 11. Executive Compensation. Information required by Item 11 is incorporated by reference from "Director Compensation" on page 5, "Report of the Compensation Committee on Executive Compensation" on pages 8 through 14, "Performance Graph" on page 7, and "Executive Compensation Tables" on pages 14 through 17 of the Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management. Information required by Item 12 is incorporated by reference from "Caterpillar Stock Owned by Officers and Directors (as of January 31, 1998)" on page 6 of the Proxy Statement and from "Persons Owing More than Five Percent of Caterpillar Stock as of December 31, 1997" on page 7 of the Proxy Statement. Based on a Form 13G filing by Oppenheimer Capital ("Oppenheimer") on March 10, 1998, information contained on page 7 of our Proxy Statement is updated as follows.
- --------------------------------------------------------------------------------------------------------------------------------- Persons Owning More than Five Percent of Caterpillar Stock (As of December 31, 1997) - --------------------------------------------------------------------------------------------------------------------------------- Voting Authority Dispositive Authority Total Amount of Percent -------------------------------------------- Beneficial of Name and Address Sole Shared Sole Shared Ownership Class - ---------------------------------------------------------------------------------------------------------------------------- 0 30,326,983 0 30,326,983 30,326,983 8.2% Oppenheimer Capital Oppenheimer Tower World Financial Center New York, NY 10281 - ---------------------------------------------------------------------------------------------------------------------------- 924,650 0 23,411,650 0 23,411,650 6.3% Joint filing by The Capital Group Companies, Inc. and Capital Research and Management Company 333 South Hope Street Los Angeles, CA 90071 - ----------------------------------------------------------------------------------------------------------------------------
Item 13. Certain Relationships and Related Transactions. Information required by Item 13 is incorporated by reference from "Certain Related Transactions" on page 17 of the Proxy Statement. Page 11 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 (Incorporated by reference from the indicated Appendix pages): . Report of Independent Accountants (p. A-3) . Statement 1 - Consolidated Results of Operations (p.A-4) . Statement 2 - Changes in Consolidated Stockholders' Equity (p. A-4) . Statement 3 - Financial Position (p. A-5) . Statement 4 - Statement of Cash Flow (p. A-6) . Notes to Consolidated Financial Statements (pp. A-7 through A-18) 2. Financial Statement Schedule: . Report of Independent Accountants on Financial Statement Schedule . 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 four reports, dated October 15, November 3, December 1, December 11, filed on Form 8-K pursuant to Item 5 during the last quarter of 1997. No financial statements were filed as part of those reports. (c) Exhibits: 3 (i) (a) Restated Certificate of Incorporation (incorporated by reference from Exhibit 3(a)(i) to the 1994 Form 10-K). 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 2 to Form 8-A filed December 11, 1996). 3 (ii) Bylaws (incorporated by reference from Exhibit 3(ii) to Form 10-Q for the third quarter of 1995). 4 Rights Agreement dated as of December 11, 1996, between Caterpillar Inc. and First Chicago Trust Company of New York (incorporated by reference from Exhibit 1 to Form 8-A filed December 11, 1996). 10 (a) Caterpillar Inc. 1996 Stock Option and Long-Term Incentive Plan, as amended and restated (incorporated by reference from Exhibit 4.3 to Form S-3 (Reg. No. 333-43133) filed December 23, 1997).** 10 (b) Caterpillar Inc. 1987 Stock Option Plan, as amended and restated and Long Term Incentive Supplement (incorporated by reference from Exhibit 4.2 to Form S-3 (Reg. No. 333-43133) filed December 23, 1997).** Page 12 10 (c) Supplemental Pension Benefit Plan, as amended and restated (incorporated by reference from Exhibit 10(c) to the 1993 Form 10-K).** 10 (d) Supplemental Employees' Investment Plan, as amended and restated (incorporated by reference from Exhibit 10(d) to the 1996 Form 10-K).** 10 (e) Caterpillar Inc. 1997 Corporate Incentive Compensation Plan Management and Salaried Employees, as amended and restated.** 10 (f) Directors' Deferred Compensation Plan, as amended and restated (incorporated by reference from Exhibit 10(f) to the 1996 Form 10-K).** 10 (g) Directors' Charitable Award Program (incorporated by reference from Exhibit 10(h) to the 1993 Form 10-K).** 10 (h) Deferred Employees' Investment Plan, as amended and restated (incorporated by reference from Exhibit 10(h) to the 1996 Form 10-K).** 11 Statement re: Computation of per Share Earnings (incorporated by reference from Note 14 of the Notes to Consolidated Financial Statements appearing on page A-15 of the Appendix). 12 Statement Setting Forth Computation of Ratios of Profit to Fixed Charges. 13 Annual Report to Security Holders attached as an Appendix to the Company's 1998 Annual Meeting Proxy Statement. 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. ** Compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of this Form 10-K. Page 13 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 27, 1998 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 March 27, 1998 /s/DONALD V. FITES Chief Executive Officer - -------- ------------------------------------------- (Donald V. Fites) March 27, 1998 /s/GLEN A. BARTON Group President - -------- ------------------------------------------- (Glen A. Barton) March 27, 1998 /s/GERALD S. FLAHERTY Group President - -------- ------------------------------------------- (Gerald S. Flaherty) March 27, 1998 /s/JAMES W. OWENS Group President - -------- ------------------------------------------- (James W. Owens) March 27, 1998 /s/RICHARD L. THOMPSON Group President - -------- ------------------------------------------- (Richard L. Thompson) Vice President and March 27, 1998 /s/DOUGLAS R. OBERHELMAN Chief Financial Officer - -------- ------------------------------------------- (Douglas R. Oberhelman) Controller and March 27, 1998 /s/ROBERT R. GALLAGHER Chief Accounting Officer - -------- ------------------------------------------- (Robert R. Gallagher)
Page 14 March 27, 1998 /s/LILYAN H. AFFINITO Director - -------- ------------------------------------------- (Lilyan H. Affinito) March 27, 1998 /s/W. FRANK BLOUNT Director - -------- ------------------------------------------- (W. Frank Blount) March 27, 1998 /s/JOHN T. DILLON Director - -------- ------------------------------------------- (John T. Dillon) March 27, 1998 /s/DAVID R. GOODE Director - -------- ------------------------------------------- (David R. Goode) March 27, 1998 /s/JAMES P. GORTER Director - -------- ------------------------------------------- (James P. Gorter) March 27, 1998 /s/PETER A. MAGOWAN Director - -------- ------------------------------------------- (Peter A. Magowan) March 27, 1998 /s/GORDON R. PARKER Director - -------- ------------------------------------------- (Gordon R. Parker) March 27, 1998 /s/GEORGE A. SCHAEFER Director - -------- ------------------------------------------- (George A. Schaefer) March 27, 1998 /s/JOSHUA I. SMITH Director - -------- ------------------------------------------- (Joshua I. Smith) March 27, 1998 /s/CLAYTON K. YEUTTER Director - -------- ------------------------------------------- (Clayton K. Yeutter)
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 21, 1998 appearing on page A-3 of the Appendix to the 1998 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. PRICE WATERHOUSE LLP Peoria, Illinois January 21, 1998 Report of Accountants Page 1 of 1 EX-10.(E) 2 CATERPILLAR INC. 1997 CORP. INCENTIVE COMP. PLAN CATERPILLAR INC. 1997 CORPORATE INCENTIVE COMPENSATION PLAN MANAGEMENT AND SALARIED EMPLOYEES (AMENDED AND RESTATED THROUGH 10/14/97) Section 1. Type of Plan and Purpose 1.1 Type of Plan and Purpose. This Plan is an incentive compensation plan. The purpose of the Plan is to provide contingent benefits to Employees to reflect their efforts in contribution to the profitability of the Company; and to serve as an incentive for Employees further to contribute to the continued and future financial success of the Company and to its ability to provide continued employment opportunities to its Employees. This Plan has been adopted in accordance with rules and guidelines established by the Stock Option and Officers' Compensation Committee of the Board of Directors of the company. Those guidelines permit business and service units of Caterpillar Inc. or its subsidiaries to adopt separate incentive compensation plans within parameters established by that Committee based upon measurements approved by the company's internal Incentive Compensation Review Committee. Those guidelines (a) generally require that a portion of the award under any such unit plan be based upon the corporate return on assets measurement established under this Plan, and (b) permit such unit plan to adopt a shorter eligibility period. Those unit incentive compensation plans with such a corporate measurement form a part of the Plan. It is understood that the duty of the Employers, their Boards of Directors, and the management they select is to provide the Employers' shareholders protection of, and a maximum return on, their investment, consistent with retention in the business of such profits as the Board of Directors of the Company deems prudent, and with fair and competitive prices, wages, benefits and other terms of employment; no provision of this Plan or any unit incentive compensation plan shall be construed as altering that objective or in any way limiting management of such Board of Directors in the performance of their duties. 1.2 Supplements. The succeeding provisions of this Plan will be expanded and/or modified by Supplements. Such Supplements will set forth the particulars wherein the provisions of this Plan, as applied to any group of Employees are expanded and/or differ from those set forth in the succeeding provisions of this Plan exclusive of such Supplements. All provisions of this Plan are subject to any express provisions to the contrary contained in any such Supplements. 1 Section 2. Definitions 2.1 Annual Salary Rate for any year means (i) in the case of a Participant who is a management employee, his monthly salary rate as of December 31 of that year (or his last day on the management payroll during that year if earlier) multiplied by 12; or (ii) in the case of a Participant who is a salaried employee, his weekly salary rate as of December 31 of that year (or his last day on the salaried payroll during that year if earlier) multiplied by 52. The Annual Salary Rate shall include any salary amount deferred under Part 2 of the Employees' Investment Plan and contributed as a basic Employer contribution thereunder, and any salary amount deferred under the Flexible Spending Account, but excludes any (a) bonuses or special cash awards, (b) commissions, (c) international service allowances, (d) extra shift or overtime payments, (e) night shift premiums, (f) pay for vacation time not used and (g) payments under this plan or other payments or contributions (other than EIP 2 contributions) under any employee benefit plan. 2.2 Company means Caterpillar Inc. or any successor to it by merger, consolidation, reorganization or otherwise. 2.3 Company Service means all periods of full-time employment with the Company and its subsidiaries, including all periods of leave of absence and all periods of layoff. 2.4 Effective Date of this Plan means January 1, 1993. 2.5 Employee means, subject to Subsection 3.1, any person who is a resident or citizen of the United States of America or Canada and who on or after the Effective Date is in the regular full-time employ of an Employer (or a part-time or temporary employee included in a group for whom approval to include in the Plan has been obtained from the Incentive Compensation Review Committee) on its salaried or management payrolls and is employed for work on the prevailing schedules of the department to which he is assigned, and who is included in a group to whom the Plan has been made available by extension by an Employer and includes any such person while absent from work under circumstances which do not break continuity of service. 2.6 Employer means the Company or any subsidiary of the Company that has adopted or adopts the Plan with the Company's written consent. 2.7 Officer means those Employees who fill the following positions: Vice President, Group President, and Chairman/Vice Chairman. For purposes of this Plan, the Controller and Treasurer are not included in the definition of Officer. 2.8 Participant means any Employee who is eligible to be covered by the Plan pursuant to Subsection 3.1. 2.9 The first Plan Year will begin on the effective date and will end on the first December 31 thereafter. Each subsequent Plan Year will end on the next following December 31. 2 Section 3. Eligibility and Participation 3.1 Eligibility and Participation. Each Employee of the Employers shall be eligible to be covered by the Plan and become a Participant as of the latest to occur of (i) the Effective Date; (ii) the date he has completed 90 days of Company Service (does not include any time with ATS); and (iii) the date he is included in a group to which the Plan has been and continues to be extended by an Employer. Notwithstanding anything contained herein to the contrary, for all purposes of the Plan, any U.S. International Service Employee who is not an Employee of the Company or any of the other Employers shall be considered to be an eligible Employee if he then meets the requirements of Subparagraph (ii) above. As used herein, the term "U.S. International Service Employee" means an Employee who (i) on the direction or with the permission of an Employer is transferred to employment outside of the United States of America with a subsidiary (whether or not organized or incorporated within the United States of America) which has not adopted the Plan; and (ii) meets the definition of a U.S. International Service Employee contained in the Company's U.S. International Service Practices; and the term Employee shall also include such other persons as shall be designated by the Committee. A Participant in the Plan shall continue as such so long as he meets the definition of an Employee contained in Subsection 2.5 or considered to be an Employee pursuant to this Subsection 3.1. Notwithstanding the above, payment amounts shall not be duplicated under this Plan by amounts paid for the same period of service or corporate performance measurement under any other profit sharing plan, incentive compensation plan, gainsharing-type plan, or similar plan sponsored by Caterpillar Inc. or any of its subsidiaries, or would be paid except for any applicable waiting period expressed in such plan or except where specifically provided for in approved plan documentation. However, an Officer who is eligible to participate in an incentive compensation plan for a business or service unit under his control may participate in this Plan for that portion of his Annual Salary Rate not included in the calculation of his business or service unit incentive compensation payment. 3.2 Employment Requirements. Any Participant shall be eligible for an incentive compensation benefit under the Plan for any year, provided that he is actively employed by the Company and any of its subsidiaries on December 31 of that year or is on leave of absence or layoff from the Company or any of its subsidiaries on such December 31; except that any otherwise eligible Employee who died, retired, or received a separation payment in lieu of layoff during such year shall also be covered as if he were an active Employee on December 31 of that year. Section 4. Amount of Benefit 4.1 Salary Grade 23 and Below. The amount payable to a Participant at Salary Grade 23 and below (as of December 31 of that year) shall be determined by multiplying the Participant's Annual Salary Rate times 7%, times the applicable Corporate Performance Factor. 3 4.2 Salary Grade 24 and Above. The amount payable to a Participant at Salary Grade 24 and above (as of December 31 of that year) shall be determined by multiplying his Annual Salary Rate times the Team Award percentage (determined from Exhibit 1 for non-Officer Participants in Salary Grades 24 and above, and from Exhibit 2 for Officers), for his salary grade as of December 31, times the applicable Corporate Performance Factor, plus the amount of his Individual Award, if any. Designated Officers may participate in their units' incentive compensation plan and may be eligible for Team Awards based on their division results and the corporate performance of Caterpillar Inc. (each award to be prorated according to the approved weighting between the division results and corporate performance). Individual Awards may be made only from a discretionary pool. A separate Employee Discretionary Pool will be established for Participants (excluding Officers) for each Vice Presidential administrative area or for each group of Participants subject to a business or service unit incentive compensation plan. A separate discretionary pool will be established for Officers. The Individual Award, if any, for which only Participants in Salary Grades 24 and above are eligible, shall be determined solely at the discretion of the Participant's Unit Manager (or by the Compensation Committee of the Board of Directors for Officers) and shall not exceed the amount of the Employee's Team Award. In addition, the sum of the Individual Awards payable to all Participants in Salary Grade 24 and above shall not exceed the Employee Discretionary Pool Amount. The Employee Discretionary Pool Amount shall be 25% of the total amount of the Team Awards paid to Participants at Salary Grade 24 and above (excluding Officers). The sum of the Individual Awards payable to Participants who are Officers shall not exceed the Officer Discretionary Pool Amount. The Officer Discretionary Pool Amount shall be the sum of each Officer's percentage of annual salary rate (See Exhibit 1) adjusted by the Corporate Performance Factor defined in Section 4.4. The Officer Discretionary Pool will be calculated as if all officers participated wholly and exclusively in the Corporate Incentive Compensation Plan. 4.3 Individual Performance Level Less Than Five. Notwithstanding the provisions of Subparagraphs 4.1 or 4.2 to the contrary, Employees or Officers with a performance rating of Individual Performance Level 5 or those who have unsatisfactory/unacceptable performance in units not using specific performance ratings will not be eligible for a Team Award or an Individual Award, and contributions shall not be made to either the Participant Discretionary Pool Amount or the Officer Discretionary Pool Amount for such Employees or Officers. 4.4 Corporate Performance Factor. The Corporate Performance Factor will be determined each year in relation to minimum, target and maximum corporate return on asset (ROA) levels determined by the Company (see Exhibit 3). The actual performance factor will be determined by interpolation based on the actual ROA achieved at the end of the year compared to these levels, and the participants team incentive compensation amount, if any, will be calculated accordingly. The achieved ROA will be determined by dividing Profit by the Average Gross Assets rounded to the nearest third decimal. The Company must achieve the minimum ROA percentage specified before any amount shall be payable. 4 As used herein, the term "Average Gross Assets" means the total corporate assets averaged throughout the year. Total corporate assets excludes the assets of Financial Products but includes the investment in Financial Products and is reported in the Annual Report and the Quarterly Report to Stockholders under the column entitled Machinery and Engines as Supplemental Consolidating Data on the Statement of Financial Position. The average for the year will be calculated by adding together five points: the ending balance for the previous year and the ending balance for each of the four quarters during the year and dividing by five. The term "Profit" means the amount of profit for the year before income taxes reported in such Statement 1 (or any equivalent successor statement thereto which provides such amount of profit) in the subtotal immediately preceding the provision for income taxes line, but increased by the amount of accrual for that year for incentive compensation amounts payable under the Plan and any other similar incentive compensation plan or profit sharing plan of the Employers (excluding any investment plan of the Employers) and any awards granted under any bonus plan of the Employers. Such Profit before income taxes would exclude the effect of extraordinary gains or losses, if any, as defined by generally accepted accounting principles. Profit shall also exclude income from nonconsolidated operations. Consolidated Financial Statements which are prepared using generally accepted accounting principles and as audited by the Company's independent certified public accountants shall be final and conclusive. 4.5 Percentage Determination. The Employee's Team Award percentage, Individual Award percentage, Employee Discretionary Pool Amount percentage, Officer Discretionary Pool Amount percentage, the Corporate Performance Factors, the Company's ROA target percentage, and the minimum and maximum percentage will be determined for each year by the Committee on Stock Options and Officer's Compensation. 4.6 RIP, EIP, etc. Credit. 100% of the amount paid under the Plan to an Employee shall be counted as compensation for the month in which payment is made for purposes of the Retirement Income Plan or any other pension plan sponsored by Caterpillar Inc. or its subsidiaries, in which the Employee is a Participant. No incentive compensation amount shall be taken into account under the Employee's Investment Plan, the Group Insurance Plan, or any other employee benefit plan or payroll practice of Caterpillar Inc. or its subsidiaries. 4.7 Proration of Payment Amount. If an Employee is not a Participant or is not actively employed by an Employer for the entire year but is eligible for an incentive compensation amount for the year pursuant to the provisions of Subsection 3.2, his payment amount will be prorated based upon his days of active employment in that year on the management or salaried payrolls while a Participant. Days while on disability leave of absence will be counted as days of active employment in accordance with uniform rules established by the Committee with respect to the maximum number of such days to be counted during any period of disability leave of absence, but in no event shall any days occurring after the expiration of a continuous period of absence of six months be counted. No other leaves of absence will be counted for purposes of calculating the payment amount. 5 4.8 Participation in Another Incentive Compensation Plan. If an Employee, who otherwise met the eligibility requirements of Section 3, ceased to be a Participant during the Plan Year because he became a participant in another incentive compensation plan sponsored by Caterpillar Inc. or one of its subsidiaries, he shall be eligible for a Team Award and/or an Individual Award under this Plan for that period of time that he was a Participant in this Plan. Twenty five percent (25%) of the prorated Team Award paid under this Plan shall be included in the Employee Discretionary Pool Amount. 4.9 Transfer from Hourly Payroll. Notwithstanding anything contained herein to the contrary, if a Participant or former Participant is employed by the Employers on December 31 of any Plan Year and does not receive a payment for any period of employment in that Plan Year under either this Plan or the profit sharing plan or an incentive compensation plan covering employees on the hourly payroll of the Employers, he shall receive a payment under this Plan for such period of employment in the same amount which would otherwise have been payable to him under the terms of this Plan or under such hourly plan but for his ineligibility thereunder because he was not participating therein on said December 31. 4.10 Supplemental Employees. Notwithstanding anything contained herein to the contrary, if (a) a Participant ceases to be a full-time Employee of an Employer, and (b) on December 31 of the year in which said Participant ceases to be a full-time Employee, he is and has thereafter been continuously employed as a supplemental employee on either a part-time or temporary basis by an Employer, his payment amount shall be prorated based upon his days of active regular full-time employment in that year on the salaried or management payroll while a Participant. His Annual Salary Rate shall be the rate in effect when he ceased full-time employment. Section 5. Incentive Compensation Payment 5.1 Date and Method of Payment. Any amount which is payable for any year shall be paid to an eligible Participant not later than 3 months of the year following the year for which the amount is computed. The amount of such payment shall be paid by check less required withholding for federal, state, local and other taxes. Payments will be made in the same currency in which the Employee receives his base salary. 5.2 Beneficiaries. If a Participant is deceased at the time any payment is payable to him, the amount of such payment shall be payable to the same person or persons and in the same proportionate amount as shall be payable to the beneficiary or beneficiaries of his basic life insurance under the Group Insurance Plan of his Employer. 5.3 Lost Participants. If any payment becomes distributable pursuant to Subsection 5.1 and the whereabouts of a Participant (or any beneficiary pursuant to Subsection 5.2) is then unknown to the Employer and the Employer shall fail to receive a claim for such payment from the person entitled thereto (or from any other person validly acting on his behalf), then such payment shall be disposed of in an equitable manner as permitted by law under rules adopted by the Plan Administrator. 6 Section 6. Miscellaneous 6.1 Administration of the Plan. Except as otherwise expressly provided, the Plan shall be administered by the Incentive Compensation Review Committee ("the Committee"), appointed by the Chairman of the Board, who shall be the Plan Administrator and shall be authorized to (a) determine all questions arising in the administration of the Plan, (b) establish rules and procedures to carry out their duties and responsibilities, (c) delegate such duties and responsibilities to other employees of the Employers, and (d) do all other acts which in its judgment are necessary for the proper administration of this Plan. 6.2 Facility of Payment. If the Committee shall receive evidence satisfactory to it that any Participant or other person entitled to receive a benefit under this Plan is physically or mentally incompetent to receive such payment and to give a valid release therefor, the Committee at its discretion may make payment in one or more of the following ways: (a) directly to such Participant or person, (b) to his legal guardian or conservator, or (c) to his spouse or to any other person to be expended for his benefit. The decision of the Committee shall be in each case final and binding on all persons in interest. 6.3 Amendment and Termination of Plan. The Company shall have the power at any time and from time to time, by action of its Board of Directors, to amend or terminate this Plan; provided, however, that the Committee may also amend the Plan so long as such amendment does not change the duties and responsibilities of the Committee or the Stock Option and Officers' Compensation Committee of the Company's Board of Directors and so long as the cost of such amendment to the Employers does not exceed $100,000 per year. 6.4 Employment Rights. Participation in the Plan will not give any Employee or an Employer any right to be retained in the service of the Company or its subsidiaries, nor any right or claim to any payment under the Plan unless such right or claim has specifically accrued under the terms of the Plan. 6.5 Action by Employers. Any action required or permitted to be taken by any Employer hereunder may, except as otherwise expressly provided, be taken by the Group President or any Vice President of such Employer or by any other person designated by the Group President or any Vice President of the Employer to act for such Employer. 6.6 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. 7 EX-12 3 STATEMENT RE COMPUTATION OF RATIOS OF PROFIT EXHIBIT 12 CATERPILLAR INC., CONSOLIDATED SUBSIDIARY COMPANIES, AND 50%-OWNED UNCONSOLIDATED AFFILIATED COMPANIES STATEMENT SETTING FORTH COMPUTATION OF RATIOS OF PROFIT TO FIXED CHARGES (Millions of dollars) YEARS ENDED DECEMBER 31,
1997 1996 1995 ---- ---- ---- Profit...................................................... $ 1,665 $ 1,361 $ 1,136 Add: Provision for income taxes............................. 837 653 536 ---------- --------- ---------- Profit before taxes......................................... $ 2,502 $ 2,014 $ 1,672 Fixed charges: Interest and other costs related to borrowed funds(1).. $ 586 $ 519 $ 502 Rentals at computed interest factors(2)................ 60 54 51 ---------- --------- ---------- Total fixed charges......................................... $ 646 $ 573 $ 553 ---------- --------- ---------- Profit before provision for income taxes and fixed charges.. $ 3,148 $ 2,587 $ 2,225 ========== ========= ========== Ratio of profit to fixed charges............................ 4.9 4.5 4.0 ========== ========= ==========
- ----------- (1) Interest expense as reported in the Consolidated Results of Operations plus the Company's proportionate share of 50 percent-owned unconsolidated affiliated companies' interest expense. (2) Amounts represent those portions of rent expense that are reasonable approximations of interest costs. Exhibit 12 Page 1 of 1 EX-13 4 APPENDIX TO 1998 PROXY STATEMENT Exhibit 13 APPENDIX CATERPILLAR INC. GENERAL AND FINANCIAL INFORMATION 1997 A-1 TABLE OF CONTENTS
Page Report of Management....................................................... A-3 Report of Independent Accountants.......................................... A-3 Consolidated Financial Statements and Notes................................ A-4 Five-year Financial Summary................................................ A-19 Management's Discussion and Analysis (MD&A) Results of Operations - 1997 Compared with 1996............................................ A-20 - 1996 Compared with 1995............................................ A-24 Liquidity & Capital Resources............................................ A-24 Employment............................................................... A-25 Other Matters............................................................ A-25 1998 Economic and Industry Outlook....................................... A-27 1998 Company Outlook..................................................... A-27 Supplemental Stockholder Information....................................... A-29 Directors and Officers..................................................... A-30
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, 1997, 1996, and 1995, and is responsible for their integrity and objectivity. The statements were prepared in conformity with generally accepted accounting principles, applying certain estimates and judgments as required. 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 the initial incorporation of our 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 our 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, including 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 21, 1998 - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS Price Waterhouse [LOGO] TO THE STOCKHOLDERS OF CATERPILLAR INC.: In our opinion, the accompanying consolidated financial statements, in Statements 1 through 4, present fairly, in all material respects, the financial position of Caterpillar Inc. and subsidiaries at December 31, 1997, 1996, and 1995, and the consolidated results of their operations and their consolidated cash flow 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 21, 1998 A-3 STATEMENT 1 Consolidated Results of Operations for the Years Ended December 31 (Millions of dollars except per share data)
- -------------------------------------------------------------------------------------------------------------------------------- Supplemental consolidating data --------------------------------------------------- Consolidated Machinery and Engines/(1)/ Financial Products -------------------- -------------------------- -------------------- 1997 1996 1995 1997 1996 1995 1997 1996 1995 ---- ---- ---- ---- ---- ---- ---- ---- ---- Sales and revenues: Sales of Machinery and Engines (Note 1B)..... $18,110 $15,814 $15,451 $18,110 $15,814 $15,451 $ -- $ -- $ -- Revenues of Financial Products (Note 1B)..... 815 708 621 -- -- -- 839 732 644 ------- ------- ------- ------- ------- ------- ---- ---- ---- Total sales and revenues................. 18,925 16,522 16,072 18,110 15,814 15,451 839 732 644 Operating costs: Cost of goods sold........................... 13,374 11,832 12,000 13,374 11,832 12,000 -- -- -- Selling, general, and administrative expenses 2,232 1,993 1,723 1,932 1,715 1,483 324 302 263 Research and development expenses............ 528 410 375 528 410 375 -- -- -- Interest expense of Financial Products....... 361 295 290 -- -- -- 373 316 293 ------- ------- ------- ------- ------- ------- ---- ---- ---- Total operating costs.................... 16,495 14,530 14,388 15,834 13,957 13,858 697 618 556 ------- ------- ------- ------- ------- ------- ---- ---- ---- Operating profit................................ 2,430 1,992 1,684 2,276 1,857 1,593 142 114 88 Interest expense excluding Financial Products 219 194 191 219 194 191 -- -- -- Other income (expense) (Note 4).............. 202 143 122 153 127 92 61 37 33 ------- ------- ------- ------- ------- ------- ---- ---- ---- Consolidated profit before taxes................ 2,413 1,941 1,615 2,210 1,790 1,494 203 151 121 Provision for income taxes (Note 7).......... 796 613 501 724 558 456 72 55 45 ------- ------- ------- ------- ------- ------- ---- ---- ---- Profit of consolidated companies............. 1,617 1,328 1,114 1,486 1,232 1,038 131 96 76 Equity in profit of unconsolidated affiliated companies (Note 9)............................. 48 33 22 48 33 22 -- -- -- Equity in profit of Financial Products' subsidiaries................................... -- -- -- 131 96 76 -- -- -- ------- ------- ------- ------- ------- ------- ---- ---- ---- Profit.......................................... $ 1,665 $ 1,361 $ 1,136 $ 1,665 $ 1,361 $ 1,136 $131 $ 96 $ 76 ======= ======= ======= ======= ======= ======= ==== ==== ==== Profit per share of common stock (Note 14)...... $ 4.44 $ 3.54 $ 2.86 ======= ======= ======= Profit per share of common stock - assuming dilution (Note 14)............................. $ 4.37 $ 3.50 $ 2.84 ======= ======= ======= Dividends declared per share of common stock.... $ .95 $ .78 $ .65 ======= ======= =======
/(1)/ Represents Caterpillar Inc. and its subsidiaries except for Financial Products, which is accounted for on the equity basis. 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-7 for a definition of the groupings in these statements. Transactions between Machinery and Engines and Financial Products have been eliminated to arrive at the consolidated data. STATEMENT 2 Changes in Consolidated Stockholders' Equity for the Years Ended December 31 (Dollars in millions)
- -------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 ------ ------ ------ Common stock (Note 13): Balance at beginning of year.................................................................... $ 50 $ 333 $ 745 Common shares issued, including treasury shares reissued: 1997 -- 1,426,532; 1996 -- 1,487,992; 1995 -- 1,426,262..................................... 26 20 15 Treasury shares purchased: 1997 -- 14,118,412; 1996 -- 8,816,008; 1995 -- 14,280,200................................... (706) (303) (427) Issuance of common stock to effect 2-for-1 stock split.......................................... 188 -- -- ------ ------ ------ Balance at year-end............................................................................. (442) 50 333 ------ ------ ------ Profit employed in the business: Balance at beginning of year.................................................................... 3,904 2,840 1,961 Profit.......................................................................................... 1,665 1,361 1,136 Dividends declared.............................................................................. (355) (297) (257) Issuance of common stock to effect 2-for-1 stock split.......................................... (188) -- -- ------ ------ ------ Balance at year-end............................................................................. 5,026 3,904 2,840 ------ ------ ------ Foreign currency translation adjustment (Note 1E): Balance at beginning of year.................................................................... 162 215 205 Aggregate adjustment for year................................................................... (67) (53) 10 ------ ------ ------ Balance at year-end............................................................................. 95 162 215 ------ ------ ------ Stockholders' equity at year-end................................................................... $4,679 $4,116 $3,388 ====== ====== ======
See accompanying Notes to Consolidated Financial Statements. A-4 STATEMENT 3 Caterpillar Inc. Financial Position at December 31 (Dollars in millions)
- -------------------------------------------------------------------------------------------------------------------------------- Supplemental consolidating data --------------------------------------------------- Consolidated Machinery and Engines/(1)/ Financial Products -------------------- -------------------------- -------------------- 1997 1996 1995 1997 1996 1995 1997 1996 1995 ---- ---- ---- ---- ---- ---- ---- ---- ---- Assets Current assets: Cash and short-term investments.......... $ 292 $ 487 $ 638 $ 241 $ 445 $ 580 $ 51 $ 42 $ 58 Receivables - trade and other............ 3,331 2,956 2,531 3,346 2,960 2,910 285 175 132 Receivables - finance (Note 6)........... 2,660 2,266 1,754 - - - 2,660 2,266 1,754 Deferred income taxes and prepaid expenses (Note 7)....................... 928 852 803 935 876 834 9 15 13 Inventories (Notes 1C and 5)............. 2,603 2,222 1,921 2,603 2,222 1,921 - - - ------- ------- ------- ------- ------- ------- ------ ------ ------ Total current assets......................... 9,814 8,783 7,647 7,125 6,503 6,245 3,005 2,498 1,957 Property, plant, and equipment - net (Notes 1D and 8)................................... 4,058 3,767 3,644 3,483 3,242 3,199 575 525 445 Long-term receivables - trade and other...... 134 128 126 134 128 126 - - - Long-term receivables - finance (Note 6)..... 3,881 3,380 3,066 - - - 3,881 3,380 3,066 Investments in unconsolidated affiliated companies (Note 9).......................... 751 701 476 751 701 476 - - - Investments in Financial Products' subsidiaries................................ - - - 882 759 658 - - - Deferred income taxes (Note 7)............... 1,040 1,093 1,127 1,075 1,132 1,171 5 3 - Intangible assets (Note 1D).................. 228 233 170 228 233 170 - - - Other assets (Note 17)....................... 850 643 574 510 368 330 340 275 244 ------- ------- ------- ------- ------- ------- ------ ------ ------ Total assets.................................... $20,756 $18,728 $16,830 $14,188 $13,066 $12,375 $7,806 $6,681 $5,712 ======= ======= ======= ======= ======= ======= ====== ====== ====== Liabilities Current liabilities: Short-term borrowings (Note 11)......... $ 484 $ 1,192 $ 1,174 $ 53 $ 36 $ 14 $ 431 $1,156 $1,160 Accounts payable and accrued expenses... 3,358 2,858 2,579 3,020 2,556 2,358 654 520 776 Accrued wages, salaries, and employee benefits............................... 1,128 1,010 875 1,120 1,005 873 8 5 2 Dividends payable....................... 92 76 68 92 76 68 - - - Deferred and current income taxes payable (Note 7)....................... 175 142 91 46 70 40 129 72 51 Long-term debt due within one year (Note 12).................................... 1,142 1,180 1,262 54 122 156 1,088 1,058 1,106 ------- ------- ------- ------- ------- ------- ------ ------ ------ Total current liabilities................... 6,379 6,458 6,049 4,385 3,865 3,509 2,310 2,811 3,095 Long-term debt due after one year (Note 12). 6,942 5,087 3,964 2,367 2,018 2,049 4,575 3,069 1,915 Liability for postemployment benefits (Note 3)......................................... 2,698 3,019 3,393 2,698 3,019 3,393 - - - Deferred income taxes and other liabilities (Note 7)................................... 58 48 36 59 48 36 39 42 44 ------- ------- ------- ------- ------- ------- ------ ------ ------ Total liabilities............................... 16,077 14,612 13,442 9,509 8,950 8,987 6,924 5,922 5,054 ------- ------- ------- ------- ------- ------- ------ ------ ------ Contingencies (Notes 17 and 18) Stockholders' equity (Statement 2) Common stock of $1.00 par value (Note 13): Authorized shares: 450,000,000 Issued shares (1997, 1996, and 1995 - 407,447,312) at paid-in amount....... 1,071 881 901 1,071 881 901 403 353 333 Profit employed in the business............. 5,026 3,904 2,840 5,026 3,904 2,840 506 404 320 Foreign currency translation adjustment (Note 1E).................................. 95 162 215 95 162 215 (27) 2 5 Treasury stock (1997 - 39,436,972 shares; 1996--26,745,092 shares; and 1995 - 19,417,076 shares) at cost............... (1,513) (831) (568) (1,513) (831) (568) - - - ------- ------- ------- ------- ------- ------- ------ ------ ------ Total stockholders' equity...................... 4,679 4,116 3,388 4,679 4,116 3,388 882 759 658 ------- ------- ------- ------- ------- ------- ------ ------ ------ Total liabilities and stockholders' equity...... $20,756 $18,728 $16,830 $14,188 $13,066 $12,375 $7,806 $6,681 $5,712 ======= ======= ======= ======= ======= ======= ====== ====== ======
/(1)/ Represents Caterpillar Inc. and its subsidiaries except for Financial Products, which is accounted for on the equity basis. 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-7 for a definition of the groupings in these statements. Transactions between Machinery and Engines and Financial Products have been eliminated to arrive at the consolidated data. See accompanying Notes to Consolidated Financial Statements. A-5
STATEMENT 4 Statement of Cash Flow for the Years Ended December 31 (Millions of dollars) - ------------------------------------------------------------------------------------------------------------------------------- Supplemental consolidating data ------------------------------- Consolidated Machinery and Engines/(1)/ ------------------------------- ---------------------------- 1997 1996 1995 1997 1996 1995 ------- ------- -------- ------- ------- ------- Cash flow from operating activities: Profit........................................................ $ 1,665 $ 1,361 $ 1,136 $ 1,665 $ 1,361 $ 1,136 Adjustments for noncash items: Depreciation and amortization.............................. 738 696 682 599 575 580 Profit of Financial Products............................... - - - (131) (96) (75) Other...................................................... 23 158 324 (16) 118 233 Changes in assets and liabilities: Receivables - trade and other.............................. (396) (319) 461 (341) (298) 505 Inventories................................................ (375) (111) (77) (375) (111) (77) Accounts payable and accrued expenses...................... 562 134 (43) 529 57 (28) Other - net................................................ (121) (137) (293) (129) (143) (328) ------- ------- ------- ------- ------- ------- Net cash provided by operating activities....................... 2,096 1,782 2,190 1,801 1,463 1,946 ------- ------- ------- ------- ------- ------- Cash flow from investing activities: Capital expenditures - excluding equipment leased to others... (824) (506) (464) (819) (500) (460) Expenditures for equipment leased to others................... (282) (265) (215) (5) (8) (9) Proceeds from disposals of property, plant, and equipment..... 138 135 119 15 21 35 Additions to finance receivables.............................. (6,644) (5,802) (4,869) - - - Collections of finance receivables............................ 3,605 3,407 2,787 - - - Proceeds from sale of finance receivables..................... 1,833 1,425 1,262 - - - Net short-term loans to Financial Products.................... - - - (94) 325 (475) Investments and acquisitions.................................. (59) (612) (21) (59) (612) (21) Other - net................................................... (308) (166) (348) (290) (153) (338) ------- ------- ------- ------- ------- ------- Net cash used for investing activities.......................... (2,541) (2,384) (1,749) (1,252) (927) (1,268) ------- ------- ------- ------- ------- ------- Cash flow from financing activities: Dividends paid................................................ (338) (289) (239) (338) (289) (239) Common stock issued, including treasury shares reissued....... 11 10 11 11 10 11 Treasury shares purchased..................................... (706) (303) (427) (706) (303) (427) Net short-term loans from Machinery and Engines............... - - - - - - Proceeds from long-term debt issued........................... 2,284 1,088 1,414 462 37 270 Payments on long-term debt.................................... (1,237) (1,335) (997) (177) (166) (91) Short-term borrowings - net................................... 258 1,262 30 17 18 (3) ------- ------- ------- ------- ------- ------- Net cash provided by (used for) financing activities............ 272 433 (208) (731) (693) (479) ------- ------- ------- ------- ------- ------- Effect of exchange rate changes on cash......................... (22) 18 (14) (22) 22 (14) ------- ------- ------- ------- ------- ------- (Decrease) increase in cash and short-term investments.......... (195) (151) 219 (204) (135) 185 Cash and short-term investments at the beginning of the period.. 487 638 419 445 580 395 ------- ------- ------- ------- ------- ------- Cash and short-term investments at the end of the period........ $ 292 $ 487 $ 638 $ 241 $ 445 $ 580 ======= ======= ======= ======= ======= =======
Supplemental consolidating data -------------------------------- Financial Products ------------------------------- 1997 1996 1995 ------- ------ ------ Cash flow from operating activities: Profit........................................................ $ 131 $ 96 $ 75 Adjustments for noncash items: Depreciation and amortization.............................. 139 121 102 Profit of Financial Products............................... - - - Other...................................................... 41 43 91 Changes in assets and liabilities: Receivables - trade and other.............................. (82) (14) (36) Inventories................................................ - - - Accounts payable and accrued expenses...................... 37 65 (5) Other - net............................................... 57 20 17 ------- ------- ------- Net cash provided by operating activities....................... 323 331 244 ------- ------- ------- Cash flow from investing activities: Capital expenditures - excluding equipment leased to others... (5) (6) (4) Expenditures for equipment leased to others................... (277) (257) (206) Proceeds from disposals of property, plant, and equipment..... 123 114 84 Additions to finance receivables.............................. (6,644) (5,802) (4,869) Collections of finance receivables............................ 3,605 3,407 2,787 Proceeds from sale of finance receivables..................... 1,833 1,425 1,262 Net short-term loans to Financial Products.................... - - - Investments and acquisitions.................................. - - - Other - net................................................... (68) (33) (40) ------- ------- ------- Net cash used for investing activities.......................... (1,433) (1,152) (986) ------- ------- ------- Cash flow from financing activities: Dividends paid................................................ (28) (12) - Common stock issued, including treasury shares reissued....... 50 20 30 Treasury shares purchased..................................... - - - Net short-term loans from Machinery and Engines............... 94 (325) 475 Proceeds from long-term debt issued........................... 1,822 1,051 1,144 Payments on long-term debt.................................... (1,060) (1,169) (906) Short-term borrowings - net................................... 241 1,244 33 ------- ------- ------- Net cash provided by (used for) financing activities............ 1,119 809 776 ------- ------- ------- Effect of exchange rate changes on cash......................... - (4) - ------- ------- ------- (Decrease) increase in cash and short-term investments.......... 9 (16) 34 Cash and short-term investments at the beginning of the period.. 42 58 24 ------- ------- ------- Cash and short-term investments at the end of the period........ $ 51 $ 42 $ 58 ======= ======= =======
/(1)/ Represents Caterpillar Inc. and its subsidiaries except for Financial Products, which is accounted for on the equity basis. 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. 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-7 for a definition of the groupings in these statements. Transactions between Machinery and Engines and Financial Products have been eliminated to arrive at the consolidated data. See accompanying Notes to Consolidated Financial Statements. A-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Caterpillar Inc. (Dollars in millions except per share data) - -------------------------------------------------------------------------------- 1. Summary of significant accounting policies ================================================================================ A. Basis of consolidation The financial statements include the accounts of Caterpillar Inc. and its subsidiaries. Investments in companies that are owned 50% or less are accounted for by the equity method; see Note 9. The accompanying financial statements and supplemental consolidating data, where applicable, have been grouped as follows: Consolidated - Caterpillar Inc. and its subsidiaries. Machinery and Engines - primarily our manufacturing, marketing, and parts distribution operations, with the Financial Products' subsidiaries on an equity basis. Financial Products - our finance and insurance subsidiaries, primarily Caterpillar Financial Services Corporation (Cat Financial) 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 Cat Financial, a wholly owned subsidiary. Finance revenues are recognized over the term of the contract at a constant rate of return on the scheduled uncollected principal balance. 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 Inventories are valued principally by the LIFO (last-in, first-out) method. The value of inventories on the LIFO basis represented approximately 85% of total inventories at current cost value at December 31, 1997 and 1996, and 90% at December 31, 1995. If the FIFO (first-in, first-out) method had been in use, inventories would have been $2,067, $2,123, and $2,103 higher than reported at December 31, 1997, 1996, and 1995, respectively. D. Depreciation and amortization Depreciation of plant and equipment is computed principally using accelerated methods. Amortization of purchased intangibles is computed using the straight- line method, generally over a period of 15 years or less. E. Foreign currency translation The functional currency for most of our Machinery and Engines' consolidated companies is the U.S. dollar. The functional currency for most of our Financial Products' and equity basis companies is the respective local currency. Gains and losses resulting from the translation of foreign currency amounts to the functional currency are included in the results of operations. Gains and losses resulting from translating assets and liabilities from the functional currency to U.S. dollars are included in stockholders' equity. F. Derivative financial instruments We use derivative financial instruments (derivatives) to manage foreign currency, interest rate, and commodity price exposures that arise in the normal course of business. Derivatives that we use are primarily foreign currency contracts (forward and option), interest rate swaps, and commodity contracts (swap and option). Derivatives are not used for speculative purposes. Please refer to Note 2 below for more information on derivatives, including the methods used to account for them. G. Estimates in financial statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts. Examples of the more significant estimates include: accruals and reserves for warranty and product liability losses, postemployment benefits, environmental costs, income taxes, and plant closing and consolidation costs. 2. Derivative financial instruments and risk management ================================================================================ A. Foreign exchange derivative instruments - forward contracts and options Our Machinery and Engines' operations are subject to foreign exchange risk. Currency exchange rates impact the U.S. dollar amount of sales made and costs incurred in foreign currencies. Our Financial Products' operations are subject to foreign exchange risk when the currency of debt obligations does not match the currency of the receivables portfolio. Forward exchange contracts and certain foreign currency option contracts are used to hedge our foreign exchange risks. Other than the up-front premiums that we pay on foreign currency option contracts, all cash flow related to these contracts occurs when the contracts mature. Our accounting treatment of foreign currency contracts depends upon the nature of the contracts: 1. Forward contracts designated as hedges of firm future foreign currency commitments and purchased foreign currency option contracts designated as hedges of probable foreign currency transactions: . No gains or losses are reported until the hedged transaction occurs, even if the contracts are terminated or mature prior to the time of the hedged transaction. . Gains and losses are recognized and reported on the same financial statement line as the hedged transaction when the hedged transaction occurs. . Gains and losses are immediately recognized in current income ("Other income (expense)" in Statement 1) in those unusual instances when the hedged transaction is no longer expected to occur, or a foreign currency contract is no longer effective as a hedge. A-7 NOTES continued (Dollars in millions except per share data) - -------------------------------------------------------------------------------- 2. All other foreign currency contracts (those used to hedge net balance sheet exposures and anticipated net cash flow exposures for the next 12 months): . All gains or losses are recognized in current income ("Other income (expense)") as currency exchange rates change. . Net gains are reflected as an asset ("Receivables - trade and other" in Statement 3) until cash is actually received. Conversely, net losses are shown as a liability ("Accounts payable and accrued expenses" in Statement 3) until cash is actually paid. The notional amounts of outstanding contracts to buy and sell foreign currency were: December 31, 1997/(1)/ 1996/(1)/ 1995 --------- --------- ------ Hedges of firm commitments and/or probable foreign currency transactions......... $ 166 $ 27 $ 95 Hedges of balance sheet exposure and/or anticipated cash flow exposure for the next 12 months................................. $1,294 $911 $219 /(1/) In addition, we had outstanding cross-European currency contracts totaling $6 and $122 at December 31, 1997 and 1996, respectively, to hedge various European currencies against the Deutsche mark. We use the Deutsche mark to manage all of our continental European currency cash flows against the dollar, and then use cross-European currency contracts to manage the risk of exchange rate movement between the Deutsche mark and the specific European currency of the cash flow. The maturity dates for virtually all of the outstanding contracts, including the cross-European contracts, are less than six months. Please refer to Note 15 and Table V on Page A-15 for fair value information on foreign currency contracts. B. Interest rate derivative instruments We primarily use interest rate swap contracts to manage our exposure to interest rate changes and to lower the cost of borrowed funds. We only use interest rate contracts that qualify for hedge accounting. Interest rate swap contracts are linked to debt instruments and, in effect, change the characteristics of the debt (e.g., from fixed rate to floating rate). Interest rate swap contracts are not reflected in the financial statements at fair market value. The notional amounts of outstanding interest rate swap contracts were $2,595, $2,869, and $2,478 at December 31, 1997, 1996, and 1995, respectively. The difference between the interest payable and the interest receivable on each interest rate swap contract is recorded each reporting period as an adjustment to current income ("Interest expense excluding Financial Products" or "Interest expense of Financial Products" in Statement 1, as applicable). Interest rate swap contracts that are in a payable position are shown as interest payable ("Accounts payable and accrued expenses" in Statement 3); those in a receivable position are shown as an asset ("Other assets" in Statement 3). The actual cash settlement on these interest rate swap contracts occurs at times specified in the agreement. If an interest rate swap contract is terminated prior to its maturity, no immediate gain or loss is recognized in the financial statements, except in those cases where the debt instrument to which the contract is linked is also terminated. Please refer to Note 15 and Table V on Page A-15 for fair value information on interest rate swap contracts. C. Commodity related derivative instruments Our Machinery and Engines' operations are also subject to commodity price risk (i.e., potential price increases of our production material as a result of price increases in raw material). We make limited use of commodity swap and/or option contracts to manage the risk of unfavorable price movement. The use of these types of derivative financial instruments has not been material. 3. Postemployment benefit plans ================================================================================ A. Pension plans We have both U.S. and non-U.S. pension plans covering substantially all of our employees. The defined benefit plans provide a benefit based on years of service and/or the employee's average earnings near retirement. Our funding policy for these plans is to contribute tax deductible amounts which comply with applicable local laws and regulations. The plan assets consist principally of common stocks, corporate bonds, and U.S. government obligations. Please refer to Table I on Page A-9 for additional financial information. B. Other postretirement benefit plans We have defined-benefit retirement health care and life insurance plans for substantially all of our U.S. employees. Postretirement benefits are funded through our Voluntary Employees' Beneficiary Association (VEBA) trusts. This includes life insurance for hourly, salaried, and management employees, and medical expenses for employees not enrolled in health maintenance organizations. Our general policy is to make contributions to the VEBA trusts in amounts that cover the actual payments being made from these trusts (pay-as-you-go basis); however, voluntary contributions of $200 were made in both 1997 and 1996. Assets in the trusts consist principally of mutual funds, common stocks, corporate bonds, and U.S. government obligations. During 1992, we made several changes to our retiree health care plans. Included in those changes was the capping of the company's liability for substantially all retirees' health care costs at December 31, 1999 cost levels. Please refer to Table II on Page A-10 for additional financial information. C. Other postemployment benefit plans We offer long-term disability benefits, continued health care for disabled employees, survivor income benefits insurance, and supplemental unemployment benefits to substantially all eligible U.S. employees. D. Summary of long-term liability December 31, 1997 1996 1995 ------ ------ ------ Pensions........................................ $ 3 $ 3 $ 130 Postretirement benefits other than pensions..... 2,628 2,948 3,199 Other postemployment benefits................... 67 68 64 ------ ------ ------ $2,698 $3,019 $3,393 ====== ====== ====== A-8
Caterpillar Inc. - --------------------------------------------------------------------------------------------------------- ========================================================================================================= TABLE I - Financial Information Related to Pension Plans - --------------------------------------------------------------------------------------------------------- Actuarial assumptions used to determine the costs and benefit obligations for the pension plans: December 31, 1997 1996 1995 ------- ------- ------- Weighted average discount rate.................................... 7.0% 7.4% 7.4% Expected rate of compensation increase............................ 4.0% 4.2% 4.1% Expected long-term rate of return on plan assets.................. 9.5% 9.4% 9.4% Components of pension expense: Years ended December 31, 1997 1996 1995 ------- ------- ------- Service cost -- benefits earned during the period................. $ 114 $ 110 $ 95 Interest cost on projected benefit obligation..................... 434 417 409 Return on plan assets:/(1)/ Actual.......................................................... (1,188) (1,023) (1,167) Deferred........................................................ 608 491 685 ------- ------- ------- Recognized.................................................... (580) (532) (482) Amortization of: Net asset existing at adoption of SFAS 87....................... (23) (22) (23) Prior service cost/(2)/......................................... 62 63 63 Net actuarial (gain) loss....................................... (1) (1) (12) ------- ------- ------- Total pension expense............................................. $ 6 $ 35 $ 50 ======= ======= =======
/(1)/ Although the actual return on plan assets is shown, the expected long-term rate of return on plan assets was used in determining consolidated pension expense. 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. Reconciliation of the funded status of the pension plans with amounts recognized in the consolidated financial position:
Assets Exceed Accumulated Benefits Accumulated Benefits Exceed Assets --------------------------------- -------------------------- 1997 1996 1995 1997 1996 1995 ------- -------- ------- ----- ------- ------- Actuarial present value of: Vested benefit obligation.................................. $(5,768) $(3,114) $(2,844) $(45) $(2,095) $(2,124) Nonvested benefit obligation............................... (488) (146) (142) (24) (364) (383) ------- ------- ------- ---- ------- ------- Accumulated benefit obligation............................. $(6,256) $(3,260) $(2,986) $(69) $(2,459) $(2,507) ======= ======= ======= ==== ======= ======= Actuarial present value of projected benefit obligation.... $(6,621) $(3,603) $(3,310) $(92) $(2,479) $(2,533) Plan assets at market value................................ 7,677 4,500 3,917 41 2,430 2,282 ------- ------- ------- ---- ------- ------- Funded status at plan year-end............................. 1,056 897 607 (51) (49) (251) Unrecognized (net asset) net liability existing at adoption of SFAS 87...................................... (73) (75) (93) 14 (2) (5) Unrecognized prior service cost............................ 329 153 155 3 166 233 Unrecognized net actuarial (gain) loss..................... (1,057) (656) (418) (1) (238) (74) Adjustment required to recognize minimum liability......... -- -- -- (3) (3) (130) ------- ------- ------- ---- ------- ------- Prepaid pension cost (pension liability) at December 31.... $ 255 $ 319 $ 251 $(38) $ (126) $ (227) ======= ======= ======= ==== ======= ======= ==============================================================================================================================
A-9
NOTES continued (Dollars in millions except per share data) - -------------------------------------------------------------------------------- ================================================================================ TABLE II - Financial Information Related to Other Postretirement Benefit Plans - -------------------------------------------------------------------------------- Actuarial assumptions used to determine the costs and benefit obligations for postretirement benefits (other than pensions): December 31, 1997 1996 1995 ---- ---- ---- Weighted average discount rate.............. 7.0% 7.5% 7.5% Expected rate of compensation increase...... 4.0% 4.0% 4.0% Expected long-term rate of return on plan assets..................... 9.5% 9.5% 9.5% Assumed health care cost trend rate/(1)/.... 7.1%/(2)/ 7.9%/(2)/ 8.7%/(3)/
/(1)/ Rate used to measure the Accumulated Postretirement Benefit Obligation at December 31, 1997, 1996, and 1995, respectively, and the postretirement benefit expense for 1998, 1997, and 1996, respectively. /(2)/ Gradually declining to 4.5% in 2002. /(3)/ Gradually declining to 5.0% in 2001. Components of postretirement benefit expense (other than pensions):
Years ended December 31, 1997 1996 1995 ---- ---- ---- Service cost - benefits earned during the period................. $ 72 $ 81 $ 73 Interest cost on accumulated benefit obligation................ 249 226 232 Return on plan assets:/(4)/ Actual............................ (76) (74) (58) Deferred.......................... 29 48 34 ----- ----- ----- Recognized...................... (47) (26) (24) Amortization of: Prior service cost/(5)/........... (190) (190) (190) Net actuarial (gain) loss......... - (1) (3) ----- ----- ----- Total postretirement benefit expense $ 84 $ 90 $ 88 ===== ===== =====
/(4)/ Although the actual return on plan assets is shown, the expected long-term rate of return on plan assets was used in determining consolidated postretirement benefit expense. The difference between the actual return and the recognized return on plan assets is shown as deferred return on plan assets. /(5)/ Prior service costs are amortized using a straight-line method over the average remaining service period of employees impacted by the plan amendment. Components of the liability for postretirement benefits (other than pensions):
December 31, 1997 1996 1995 ---- ---- ---- Accumulated postretirement benefit obligation: Retirees..........................................$(2,400) $(2,253) $(2,149) Fully eligible active plan participants........... (563) (502) (397) Other active plan participants.................... (640) (591) (485) ------- ------ ------ (3,603) (3,346) (3,031) Plan assets at market value......................... 804 547 297 Unrecognized prior service cost..................... (98) (289) (479) Unrecognized net actuarial (gain) loss.............. 38 (49) (182) ------- ------ ------ Liability for postretirement benefits (other than pensions).............................$(2,859) $(3,137) $(3,395) ======= ======= =======
Effects of a 1% increase in the assumed health care cost trend rates for each future year:
December 31, 1997 1996 1995 ---- ---- ---- Approximate increase in the accumulated postretirement benefit obligation.................. $224 $210 $226 Approximate increase in the aggregate of the service and interest cost components of the postretirement benefit expense.............. $ 22 $ 22 $ 25
================================================================================ 4. Other income (expense) ================================================================================
Years ended December 31, 1997 1996 1995 ---- ---- ---- Investment and interest income $115 $ 90 $ 87 License fees 25 26 28 Foreign exchange (losses) gains (10) 1 (20) Miscellaneous income 72 26 27 ---- ---- ---- $202 $143 $122 ==== ==== ====
5. Inventories ================================================================================
December 31, 1997 1996 1995 ------ ------ ------ Raw materials and work-in-process.............. $1,033 $ 909 $ 710 Finished goods................................. 1,364 1,103 1,006 Supplies....................................... 206 210 205 ------ ------ ------ $2,603 $2,222 $1,921 ====== ====== ======
6. Finance receivables ================================================================================ Finance receivables are receivables of Cat Financial, which generally could be repaid or refinanced without penalty prior to contractual maturity. Total finance receivables reported in Statement 3 are net of an allowance for credit losses. Please refer to Table III on Page A-11 for additional finance receivables information and Note 15 and Table V on Page A-15 for fair value information. A-10
Caterpillar Inc. - -------------------------------------------------------------------------------- ================================================================================ TABLE III - Finance Receivables Information - -------------------------------------------------------------------------------- Contractual maturities of outstanding receivables: December 31, 1997 Installment Financing Amounts Due In Contracts Leases Notes Total - -------------- ----------- --------- ------- ------- 1998...................... $ 613 $ 1,047 $ 1,065 $ 2,725 1999...................... 418 774 411 1,603 2000...................... 267 503 404 1,174 2001...................... 131 256 178 565 2002...................... 44 96 84 224 Thereafter................ 12 108 151 271 ------- ------- ------- ------- 1,485 2,784 2,293 6,562 Residual value............ -- 725 -- 725 Less: Unearned income..... 165 478 19 662 ------- ------- ------- ------- Total..................... $ 1,320 $ 3,031 $ 2,274 $ 6,625 ======= ======= ======= =======
Impaired loans and leases: 1997 1996 1995 ------ ------ ------ Average recorded investment.................. $ 47 $ 43 $ 51 ====== ====== ====== At December 31: Recorded investment........................ $ 30 $ 33 $ 37 Less: Fair value of underlying collateral.. 18 21 25 ------ ------ ------ Potential loss............................... $ 12 $ 12 $ 12 ====== ====== ====== Allowance for credit loss activity: 1997 1996 1995 ------ ------ ------ Balance at beginning of year................. $ 74 $ 57 $ 50 Provision for credit losses.................. 39 41 43 Less: Net credit losses...................... 19 21 33 Less: Other-net.............................. 10 3 3 ------ ------ ------ Balance at end of year....................... $ 84 $ 74 $ 57 ====== ====== ====== Cat Financial's net investment in financing leases: December 31, 1997 1996 1995 ------ ------ ------ Total minimum lease payments receivable...... $2,784 $2,383 $1,858 Estimated residual value of leased assets: Guaranteed................................. 206 162 113 Unguaranteed............................... 519 402 297 ------ ------ ------ 3,509 2,947 2,268 Less: Unearned income........................ 478 430 363 ------ ------ ------ Net investment in financing leases........... $3,031 $2,517 $1,905 ====== ====== ======
7. Income taxes ================================================================================ The components of profit before taxes were: Years ended December 31, 1997 1996 1995 ------ ------ ------ Domestic..................................... $2,071 $1,565 $1,205 Foreign...................................... 342 376 410 ------ ------ ------ $2,413 $1,941 $1,615 ====== ====== ======
The components of the provision for income taxes were: Years ended December 31, 1997 1996 1995 ------ ------ ------ Current tax provision: Federal..................................... $ 571 $ 399 $ 244 Foreign..................................... 103 83 92 State....................................... 54 36 17 ------ ------ ------ $ 728 $ 518 $ 353 ------ ------ ------ Deferred tax provision (credit): Federal..................................... 60 86 147 Foreign..................................... 7 7 (6) State....................................... 1 2 7 ------ ------ ------ 68 95 148 ------ ------ ------ Total provision.............................. $ 796 $ 613 $ 501 ====== ====== ====== Reconciliation of the U.S. federal statutory rate to effective rate: Years ended December 31, 1997 1996 1995 ------ ------ ------ U.S statutory rate........................... 35.0% 35.0% 35.0% Increases (decreases) in taxes resulting from: Benefit of Foreign Sales Corporation....... (2.8)% (2.5)% (2.5)% Other - net................................ .8% (.9)% (1.5)% ------ ------ ------ Provision for income taxes................... 33.0% 31.6% 31.0% ====== ====== ======
We paid income taxes of $709, $452, and $327 in 1997, 1996, and 1995, respectively. During 1996, a settlement was reached with the U.S. Internal Revenue Service (IRS) covering tax years 1988 through 1991. The settlement had a slight favorable impact on our 1996 effective tax rate. We have recorded income tax expense at U.S. tax rates on all profits, except for undistributed foreign profits which are considered permanently invested. Determination of the amount of unrecognized deferred tax liability related to permanently invested profits is not feasible.
Deferred tax assets and liabilities: December 31, 1997 1996 1995 ------ ------ ------ Deferred tax assets: Postemployment benefits other than pensions....................... $1,107 $1,212 $1,309 Unrealized profit excluded from inventories. 201 176 170 Net operating loss carryforwards............ 76 105 154 Warranty reserves........................... 159 114 105 Other....................................... 275 296 256 ------ ------ ------ 1,818 1,903 1,994 ------ ------ ------ Deferred tax liabilities: Capital assets.............................. (177) (161) (151) Pension..................................... (79) (86) (91) ------ ------ ------ (256) (247) (242) ------ ------ ------ Valuation allowance for deferred tax assets.. (129) (153) (179) ------ ------ ------ Deferred taxes - net......................... $1,433 $1,503 $1,573 ====== ====== ======
A-11 NOTES continued (Dollars in millions except per share data) - ----------------------------------------------------------------------------- As of December 31, 1997, amounts and expiration dates of net operating loss carryforwards in various foreign taxing jurisdictions were: 2000 2001 2002 Unlimited Total ------------------------------------------ $13 $9 $23 $203 $248 Of our foreign subsidiaries that are in net operating loss carryforward positions, there is only sufficient evidence to substantiate recognition of net deferred tax assets in one foreign taxing jurisdiction. Accordingly, a valuation allowance has been recorded for the difference. It is possible that circumstances could change in the near term at one or more of these foreign subsidiaries which would allow us to reduce the valuation allowance and to record additional net deferred tax assets.
8. Property, plant, and equipment ================================================================================ December 31, 1997 1996 1995 -------- -------- -------- Land - at original cost........................ $ 121 $ 122 $ 102 Buildings...................................... 2,773 2,704 2,548 Machinery and equipment........................ 3,955 3,778 3,657 Patterns, dies, jigs, etc...................... 515 481 453 Furniture and fixtures......................... 248 212 203 Computers...................................... 519 512 455 Transportation equipment....................... 72 64 61 Equipment leased to others..................... 843 779 674 Construction-in-process........................ 357 165 150 -------- -------- -------- 9,403 8,817 8,303 Less: Accumulated depreciation................. 5,345 5,050 4,659 -------- -------- -------- Property, plant, and equipment - net........... $ 4,058 $ 3,767 $ 3,644 ======== ======== ========
We had commitments for the purchase or construction of capital assets of approximately $425 at December 31, 1997. Assets recorded under capital leases (included in above table): December 31, 1997 1996 1995 ------- ------- ------- Gross capital leases(1)........................ $ 717 $ 405 $ 395 Less: Accumulated depreciation................. 561 279 253 ------- ------- ------- Net capital leases............................. $ 156 $ 126 $ 142 ======= ======= =======
(1)Consists primarily of machinery and equipment. Equipment leased to others (primarily by Financial Products): December 31, 1997 1996 1995 -------- -------- ------- Equipment leased to others - at original cost.............................. $ 843 $ 779 $ 674 Less: Accumulated depreciation................. 272 251 220 -------- -------- ------- Equipment leased to others - net............... $ 571 $ 528 $ 454 ======== ======== =======
Scheduled minimum rental payments to be received for equipment leased to others: December 31, After 1998 1999 2000 2001 2002 2002 -------------------------------------------- $151 $101 $77 $42 $14 $2
9. Unconsolidated affiliated companies ================================================================================ Combined financial information of the unconsolidated affiliated companies was as follows: Years ended September 30, 1997 1996 1995 ------- ------- ------- Results of Operations Sales....................................... $ 3,613 $ 3,729 $ 3,789 ======= ======= ======= Profit...................................... $ 104 $ 75 $ 44 ======= ======= ======= September 30, 1997 1996 1995 ------- -------- ------- Financial Position Assets: Current assets............................. $ 1,949 $ 1,995 $ 1,872 Property, plant, and equipment - net....... 792 733 780 Other assets............................... 331 395 322 ------- -------- ------- 3,072 3,123 2,974 ------- -------- ------- Liabilities: Current liabilities......................... 1,610 1,683 1,676 Long-term debt due after one year........... 203 133 215 Other liabilities........................... 129 145 155 ------- -------- ------- 1,942 1,961 2,046 ------- -------- ------- Ownership..................................... $ 1,130 $ 1,162 $ 928 ======= ======== =======
At December 31, 1997, consolidated "Profit employed in the business" in Statement 2 included $172 representing undistributed profit of the unconsolidated affiliated companies. In 1997, 1996, and 1995, we received $36, $10, and $8, respectively, in dividends from unconsolidated affiliated companies.
10. Credit commitments ================================================================================ December 31, 1997 Machinery Financial Consolidated and Engines Products ------------ ----------- ----------- Credit lines available: U.S........................... $ 2,500(1) $ 2,500(1) $ 2,250(1) Non-U.S....................... 1,843 258 1,585 ---------- --------- --------- Total credit lines available.... 4,343 2,758 3,835 Utilized credit: Backup for outstanding commercial paper............ 2,536 -- 2,536 Backup for bank borrowings.... 198 53 145 ---------- --------- --------- Unused credit................... $ 1,609 $ 2,705 $ 1,154 ========== ========= =========
(1) The total U.S. line of credit of $2,500 is available to both Machinery and Engines and Financial Products (Cat Financial). Cat Financial may use up to 90% of the available line subject to a maximum debt to equity ratio. Machinery and Engines may use up to 100% of the available line subject to a minimum level of net worth. Based on these restrictions, and the allocating decisions of available credit made by management, the line of credit available to Cat Financial at December 31, 1997, was $2,250. Based on long-term credit agreements, $2,301, $1,522, and $294 of commercial paper outstanding at December 31, 1997, 1996, and 1995, respectively, were classified as long-term debt due after one year. A-12
Caterpillar Inc. - -------------------------------------------------------------------------------- 11. Short-term borrowings ================================================================================ December 31, 1997 1996 1995 -------- -------- ------- Machinery and Engines: Notes payable to banks...................... $ 53 $ 36 $ 14 Financial Products: Notes payable to banks...................... 145 257 712 Commercial paper............................ 235 859 416 Other....................................... 51 40 32 -------- -------- ------- 431 1,156 1,160 -------- -------- ------- Total short-term borrowings................... $ 484 $ 1,192 $ 1,174 ======== ======== =======
The weighted average interest rates on short-term borrowings outstanding were: December 31, 1997 1996 1995 -------- -------- ------- Notes payable to banks........................ 4.9% 3.7% 5.4% Commercial paper.............................. 5.2% 5.2% 5.9% Other......................................... 5.5% 5.5% 5.4% Please refer to Note 15 and Table V on Page A-15 for fair value information on short-term borrowings.
12. Long-term debt ================================================================================ December 31, 1997 1996 1995 -------- -------- ------- Machinery and Engines: Notes - 9 3/8% due 2000...................... $ 150 $ 149 $ 149 Notes - 9 3/8% due 2001...................... 184 183 183 Debentures - 9% due 2006..................... 202 202 202 Debentures - 6% due 2007..................... 141 136 131 Debentures - 9 3/8% due 2011................. 123 123 123 Debentures - 9 3/4% due 2000-2019............ 199 199 199 Debentures - 9 3/8% due 2021................. 236 236 236 Debentures - 8% due 2023..................... 199 199 199 Debentures - 7 3/8% due 2097................. 297 -- -- Medium-term notes............................ 153 185 300 Capital lease obligations.................... 438 281 257 Other........................................ 45 125 70 -------- -------- ------- 2,367 2,018 2,049 Financial Products: Commercial paper supported by revolving credit agreement (Note 10).................. 2,301 1,522 294 Medium-term notes............................ 2,241 1,505 1,553 Other........................................ 33 42 68 -------- -------- ------- Total Financial Products....................... 4,575 3,069 1,915 -------- -------- ------- Total long-term debt due after one year........ $ 6,942 $ 5,087 $ 3,964 ======== ======== =======
Other than the debt of the Financial Products' subsidiaries, all outstanding notes and debentures itemized above are unsecured direct obligations of Caterpillar Inc. The capital lease obligations are collateralized by leased manufacturing equipment and security deposits. The 6% debentures were sold at significant original issue discounts ($144). This issue is carried net of the unamortized portion of its discount, which is amortized as interest expense over the life of the issue. These debentures have a principal at maturity of $250 and an effective annual cost of 13.3%. We may redeem them, at our option, at an amount equal to the respective principal at maturity. We may redeem annually, at our option, 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. Also, we may 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%. The terms of other notes and debentures do not specify a redemption option prior to maturity. All medium-term notes are offered on a continuous basis through agents and are primarily at fixed rates. Machinery and Engines' medium-term notes have maturities from nine months to 30 years. At December 31, 1997, these notes had a weighted average interest rate of 7.7% with one month to six years remaining to maturity. Financial Products' medium-term notes have a weighted average interest rate of 6.1% with maturities up to 15 years at December 31, 1997. The aggregate amounts of maturities and sinking fund requirements of long-term debt during each of the years 1998 through 2002, including that due within one year and classified as current are: December 31, 1998 1999 2000 2001 2002 ------ ------ ------ ------ ------ Machinery and Engines......... $ 54 $ 66 $ 167 $ 204 $ 89 Financial Products............ 1,088 1,192 624 287 116 ------ ------ ------ ------ ------ $1,142 $1,258 $ 791 $ 491 $ 205 ====== ====== ====== ====== ======
Interest paid on short-term and long-term borrowings for 1997, 1996, and 1995 was $508, $474, and $475, respectively. Please refer to Note 15 and Table V on Page A-15 for fair value information on long-term debt. 13. Capital stock ================================================================================ A. Stock options In 1996, stockholders approved a plan providing for the granting of options to purchase common stock to officers and other key employees, as well as non- employee directors. This plan reserves 22,000,000 shares of common stock for issuance. Options vest at the rate of one-third per year over the three years following the date of grant, and have a maximum term of ten years. Common shares issued under stock options, including treasury shares reissued, totaled 1,264,539; 1,313,932; and 1,426,262 in 1997, 1996, and 1995, respectively. Our plan grants options which have exercise prices equal to the average market price on the date of grant. We account for our stock options in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Therefore, no compensation expense is incurred in association with these options. As required by Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," a summary of the pro forma net income and profit per share amounts are shown in Table IV on Page A-14. These pro forma amounts are not representative of the impact on future disclosures because they do not take into consideration compensation expense related to grants made prior to 1995. The fair value of each option grant is estimated at the date of grant using the Black-Scholes option-pricing model. Please refer to Table IV on Page A-14 for additional financial information on our stock options. A-13 NOTES continued (Dollars in millions except per share data) - -------------------------------------------------------------------------------- B. Restricted stock The 1996 Stock Option and Long-Term Incentive Plan permits the award of restricted stock to officers and other key employees, as well as non-employee directors. During 1997, 137,893 shares of restricted stock were awarded to officers and other key employees as Performance Awards, and 24,100 shares of restricted stock were granted to non-employee directors. C. Stockholders' rights plan We are 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 have been issued. Stockholders would receive certain preferred stock purchase rights if someone acquired or announced a tender offer to acquire 15% or more of outstanding Caterpillar stock. In essence, those rights would permit each holder (other than the acquiring person) to purchase one share of Caterpillar stock at a 50% discount for every share owned. The rights, designed to protect the interests of Caterpillar stockholders during a takeover attempt, expire December 11, 2006.
================================================================================================================= TABLE IV - Financial Information Related to Capital Stock - ----------------------------------------------------------------------------------------------------------------- SFAS 123 pro forma net income and earnings per share: Years ended December 31, 1997 1996 1995 -------- -------- -------- Net Income: As reported.............................. $ 1,665 $ 1,361 $ 1,136 Pro forma................................ $ 1,640 $ 1,352 $ 1,133 Profit per share of common stock: As reported: Basic................................. $ 4.44 $ 3.54 $ 2.86 Assuming dilution..................... $ 4.37 $ 3.50 $ 2.84 Pro forma: Basic................................. $ 4.37 $ 3.51 $ 2.85 Assuming dilution..................... $ 4.32 $ 3.48 $ 2.83
Weighted-average assumptions used in determining fair value of option grants:
Grant Year 1997 1996 1995 ------ ------- ------- Dividend yield........................ 1.94% 2.13% 1.66% Expected volatility................... 25.51% 24.19% 25.04% Risk-free interest rates.............. 6.42% 6.59% 5.88% Expected lives........................ 4 years 4 years 4 years
Changes in the status of common shares subject to issuance under options:
1997 1996 1995 ---------------------- --------------------- ---------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ----------- -------- ----------- -------- ----------- -------- Fixed Options Outstanding at beginning of year......... 13,874,114 $ 25.31 13,267,648 $ 21.96 13,106,742 $ 18.55 Granted to officers and key employees.... 3,491,650 $ 51.66 3,334,100 $ 32.91 3,205,280 $ 30.16 Granted to outside directors............. 40,000 $ 39.19 44,000 $ 33.47 40,000 $ 27.91 Exercised................................ (2,274,474) $ 22.16 (2,627,940) $ 18.03 (3,006,660) $ 15.85 Lapsed................................... (74,878) $ 32.61 (143,694) $ 28.23 (77,714) $ 24.85 ----------- ---------- ----------- Outstanding at end of year............... 15,056,412 $ 31.89 13,874,114 $ 25.31 13,267,648 $ 21.96 =========== =========== =========== Options exercisable at year-end 8,386,814 $ 23.58 7,544,270 $ 20.44 7,168,280 $ 17.35 Weighted-average fair value of options granted during the year................ $ 16.15 $ 8.12 $ 7.62
Stock options outstanding and exercisable:
Options Outstanding Options Exercisable --------------------------------------------------- --------------------------------- Weighted-Average Remaining # Outstanding Contractual Life Weighted-Average # Outstanding Weighted-Average Exercise Prices at 12/31/97 (Years) Exercise Price at 12/31/97 Exercise Price ---------------- ------------- ---------------- ---------------- ------------- ---------------- $11.78 to $18.77 3,598,990 4.0 $16.01 3,598,990 $16.01 $26.77 to $39.19 7,970,872 7.6 $30.42 4,787,824 $29.28 $51.66 3,486,550 9.4 $51.66 - - ---------- --------- 15,056,412 7.2 $31.89 8,386,814 $23.58 ========== ========= =================================================================================================================
A-14 Caterpillar Inc. - -------------------------------------------------------------------------------- 14. Profit per share ================================================================================ Years ended December 31, 1997 1996 1995 ---- ---- ---- Profit (A)........................ $ 1,665 $ 1,361 $ 1,136 ============ ============ ============ Determination of shares: Weighted average common shares outstanding (B)........ 375,124,745 384,960,440 396,858,256 Assumed conversion of stock options.............. 5,416,215 3,724,630 3,462,442 ------------ ------------ ------------ Weighted average common shares outstanding -- assuming dilution (C)......... 380,540,960 388,685,070 400,320,698 ============ ============ ============ Profit per share of common stock (A/B).............. $ 4.44 $ 3.54 $ 2.86 Profit per share of common stock -- assuming dilution (A/C).................. $ 4.37 $ 3.50 $ 2.84 Stock options to purchase 3,521,250 and 3,191,380 shares of common stock at $51.66 and $30.16 were outstanding during 1997 and 1995, respectively, but were not included in the computation of diluted profit per share, because the options' exercise price was greater than the average market price of the common shares. During 1996, there were no stock options excluded from the computation of diluted profit per share. 15. Fair values of financial instruments ================================================================================ We used the following methods and assumptions to estimate the fair value of our financial instruments: Cash and short-term investments - carrying amount approximated fair value. Long-term investments (other than investments in unconsolidated affiliated companies) - fair value was estimated based on quoted market prices. Foreign currency contracts (forwards and options) - fair value was estimated based on quoted market prices of comparable instruments. Finance receivables - fair value was estimated by discounting the future cash flow using current rates, representative of receivables with similar remaining maturities. Historical bad debt experience was also considered. Short-term borrowings - carrying amount approximated fair value. Long-term debt - for Machinery and Engines' notes and debentures, fair value was estimated based on quoted market prices. For Financial Products, fair value was estimated by discounting the future cash flow using our current borrowing rates for similar types and maturities of debt, except for floating rate notes for which the carrying amount was considered a reasonable estimate of fair value. Interest rate swaps - fair value was estimated based on the amount that we would receive or pay to terminate our agreements as of year end. Please refer to Table V below for the fair values of our financial instruments.
==================================================================================================================================== TABLE V - Fair Values of Financial Instruments - ------------------------------------------------------------------------------------------------------------------------------------ Asset (Liability) 1997 1996 1995 ------------------- ----------------- ------------------ At December 31 Carrying Fair Carrying Fair Carrying Fair Amount Value Amount Value Amount Value Reference # -------- ----- -------- ----- -------- ----- -------------------- Cash and short-term investments.... $ 292 $ 292 $ 487 $ 487 $ 638 $ 638 Statement 3, Note 17 Long-term investments.............. 701 701 508 508 449 449 Note 17 Foreign currency contracts......... 41 47 (3) (3) -- (1) Note 2 Finance receivables - net (excluding operating and finance type leases and currency swaps(1))............... 5,788 5,815 4,954 4,980 4,207 4,175 Note 6 Short-term borrowings.............. (484) (484) (1,192) (1,192) (1,174) (1,174) Note 11 Long-term debt (including amounts due within one year) Machinery and Engines............ (2,421) (2,785) (2,140) (2,377) (2,205) (2,550) Note 12 Financial Products............... (5,663) (5,721) (4,127) (4,176) (3,021) (3,083) Note 12 Interest rate swaps Machinery and Engines - in a net receivable position... 1 10 1 4 -- 9 Note 2 in a net payable position...... (3) (1) (1) (3) (2) (1) Note 2 Financial Products - in a net receivable position... -- 20 1 4 2 7 Note 2 in a net payable position...... (3) (12) (4) (16) (4) (17) Note 2 (1) Excluded items have a net carrying value at December 31, 1997, 1996 and 1995, of $753, $692, and $ 613, respectively. ====================================================================================================================================
A-15 NOTES continued (Dollars in millions except per share data) - -------------------------------------------------------------------------------- 16. Operating leases ================================================================================ We lease certain computer and communications equipment, transportation equipment, and other property through operating leases. Total rental expense for operating leases was $176, $151, and $139 for 1997, 1996, and 1995, respectively. Minimum payments for operating leases having initial or remaining non-cancelable terms in excess of one year are: Years ended December 31, After 1998 1999 2000 2001 2002 2002 Total ----------------------------------------------------- $109 $78 $43 $28 $25 $79 $362 17. Concentration of credit risk ================================================================================ Financial instruments with potential credit risk consist primarily of trade and finance receivables and short-term and long-term investments. Additionally, to a lesser extent, we have a potential 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. We perform regular credit evaluations of our dealers. Collateral is generally not required, and the majority of our trade receivables are unsecured. We do however, when deemed necessary, make use of various devices such as security agreements and letters of credit to protect our interests. No single dealer represents a significant concentration of credit risk. Finance receivables primarily represent receivables under installment sales contracts, receivables arising from leasing transactions and notes receivable. Receivables from customers in construction-related industries made up approximately one-third of total finance receivables at December 31, 1997, 1996, and 1995, respectively. We generally maintain a secured interest in the equipment financed. No single customer or region represents a significant concentration of credit risk. Short-term and long-term investments are held with high quality institutions and, by policy, the amount of credit exposure to any one institution is limited. Long-term investments are comprised of investments which collateralize capital lease obligations (note 12) and investments of Caterpillar Insurance Co. Ltd. supporting insurance reserve requirements. Long-term investments are a component of "Other Assets" in Statement 3. At December 31, 1997, 1996, and 1995, Cat Financial was contingently liable under guarantees for certain Caterpillar dealers' obligations totaling $261, $253, and $282, respectively, of which $109, $159, and $222, respectively, was outstanding. These guarantees have terms ranging up to two years and are fully secured by dealer assets. No loss has been experienced nor is any anticipated under these agreements. Outstanding derivative instruments, with notional amounts totaling $4,079 and terms generally ranging up to five years, were held at December 31, 1997. Collateral is not required of the counterparties or of our company. We do not anticipate nonperformance by any of the counterparties. Our exposure to credit loss in the event of nonperformance by the counterparties is limited to only those gains that we have recorded, but have not yet received cash payment. At December 31, 1997, the exposure to credit loss was $49. Please refer to Note 15 and Table V on Page A-15 for fair value information. 18. Environmental matters ================================================================================ The company is regulated by federal, state, and international environmental laws governing our use of substances and control of emissions. Compliance with these existing laws has not had a material impact on our capital expenditures, earnings, or competitive position. We are cleaning up hazardous waste at a number of locations, often with other companies, pursuant to federal and state laws. When it is likely we will pay clean-up costs at a site and those costs can be estimated, the costs are charged against our earnings. In doing that estimate, we do not consider amounts expected to be recovered from insurance companies and others. The amount set aside for environmental clean-up is not material and is included in "Accounts payable and accrued expenses" in Statement 3. If a range of liability estimates is available on a particular site, we accrue the lower end of that range. We cannot estimate costs on sites in the very early stages of clean-up. Currently, we have five of these sites and there is no more than a remote chance that a material amount for clean-up will be required. The United States Environmental Protection Agency (EPA) has issued conditional certificates of conformity with the Clean Air Act for Caterpillar's 1998 model year heavy-duty diesel engines. The EPA has issued similar conditional certificates to other heavy-duty diesel engine manufacturers as well. The EPA is reviewing the impact of advanced electronic control technologies on the emissions compliance of heavy-duty trucks in certain operating conditions and whether the use of such technologies is consistent with the Clean Air Act's requirements. Caterpillar and the other manufacturers are responding to the EPA requests for information and are engaged in discussions with them and the United States Department of Justice in an effort to resolve this issue. We do not expect the outcome of this matter to have a material impact on our financial position or results of operations.
19. Plant closing and consolidation costs ================================================================================ The reserve for plant closing and consolidation costs includes the following: December 31, 1997 1996 1995 ----- ----- ----- Write-down of property, plant, and equipment....... $ 103 $ 102 $ 99 Employee severance benefits........................ 95 103 115 Rearrangement, start-up costs, and other........... 47 54 55 ----- ----- ----- Total reserve...................................... $ 245 $ 259 $ 269 ===== ===== =====
The write-down of property, plant, and equipment establishes a new cost basis for assets that have been permanently impaired. Employee severance benefits (e.g., pension, medical, and supplemental unemployment benefits) are provided to employees affected by plant closings and consolidations. The reserve for such benefits is reduced as the benefits are provided. At December 31, 1997, the above reserve includes $153 of costs associated with the closure of the Component Products Division's Precision Barstock Products (PBP) operation located in York, Pennsylvania. The probable closing of the PBP manufacturing operation was announced in December 1991. In March 1996, it was announced that the facility would be closed. We are currently in the process of closing the unit. A-16 Caterpillar Inc. - -------------------------------------------------------------------------------- 20. Segment information ================================================================================ A. Nature of operations We operate 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, mining shovels, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, telescopic handlers, 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. Reciprocating engines meet power needs ranging from 40 to 13,600 horsepower (30 to 10 150 kilowatts). Turbines range from 1,340 to 18,000 horsepower (1000 to 13 500 kilowatts). 3. Financial Products -- provides financing alternatives for Caterpillar and noncompetitive related equipment, and extends loans to our customers and dealers. Also provides various forms of insurance to our dealers and customers to help support their purchase and financing of our equipment. This segment consists primarily of Cat Financial and its subsidiaries and Cat Insurance Services Corporation. Our products are sold primarily under the marks "Caterpillar," "Cat," "Solar," "Barber-Greene," and "MaK." We conduct operations in our Machinery and Engines' segments under highly competitive conditions, including intense price competition. We place great emphasis upon the high quality and performance of our products and our dealers' service support. Although no one competitor is believed to produce all of the same types of machines and engines, there are numerous companies, large and small, which compete with us in the sale of each of our products. Machines are distributed principally through a worldwide organization of dealers, 65 located in the United States and 132 located outside the United States. Worldwide, these dealers have more than 1,400 places of business. Reciprocating engines are sold principally through the worldwide dealer organization and to other manufacturers for use in products manufactured by them. Our dealers do not deal exclusively with our products; however, in most cases sales and servicing of our products are our dealers' principal business. Turbines and large marine reciprocating engines are sold through sales forces employed by Solar Turbines Incorporated and associated companies and MaK Motoren GmbH & Co. KG, respectively. Occasionally these employees are assisted by independent sales representatives. The Financial Products' segment also conducts business under highly competitive conditions. Financing for users of Caterpillar products is available through a variety of competitive sources, principally commercial banks and finance and leasing companies. We emphasize prompt and responsive service to meet customer requirements and offer various financing plans designed to increase the opportunity for sales of our products and generate financing income for our company. B. Business segments We use a substantial number of allocations to determine business segment information because our manufacturing operations are highly integrated. Intersegment sales, which primarily represent intersegment engine sales, are valued at prices comparable to those for unrelated parties.
Years ended December 31: 1997 1996 1995 -------- -------- -------- Sales: Machinery......................................... $ 13,350 $ 11,862 $ 11,336 Engines........................................... 5,922 4,879 4,920 Elimination of intersegment engine sales............ (1,162) (927) (805) -------- -------- -------- Consolidated sales.................................. 18,110 15,814 15,451 Financial Products revenues......................... 815 708 621 -------- -------- -------- Sales and revenues.................................. $ 18,925 $ 16,522 $ 16,072 ======== ======== ======== Operating profit: Machinery......................................... $ 1,889 $ 1,562 $ 1,210 Engines........................................... 497 395 462 Financial Products................................ 142 114 88 Elimination of intersegment expenses.............. 12 21 3 -------- -------- -------- 2,540 2,092 1,763 General corporate expenses.......................... (110) (100) (79) -------- -------- -------- Operating profit.................................... $ 2,430 $ 1,992 $ 1,684 ======== ======== ======== Capital expenditures -- including equipment leased to others: Machinery....................................... $ 452 $ 314 $ 256 Engines......................................... 329 152 179 Financial Products.............................. 282 263 210 General corporate............................... 43 42 34 -------- -------- -------- $ 1,106 $ 771 $ 679 ======== ======== ======== Depreciation and amortization: Machinery......................................... $ 370 $ 372 $ 375 Engines........................................... 196 171 172 Financial Products................................ 139 121 102 General corporate................................. 33 32 33 -------- -------- -------- $ 738 $ 696 $ 682 ======== ======== ======== December 31: Identifiable assets: Machinery......................................... $ 6,632 $ 6,010 $ 5,122 Engines........................................... 3,434 3,023 2,746 Financial Products................................ 7,755 6,572 5,592 -------- -------- -------- 17,821 15,605 13,460 General corporate assets............................ 2,184 2,422 2,894 Investments in unconsolidated affiliated companies.............................. 751 701 476 -------- -------- -------- Total assets........................................ $ 20,756 $ 18,728 $ 16,830 ======== ======== ========
C. Geographic segments Manufacturing activities of the Machinery and Engines' segments are conducted in 37 plants in the United States; five in the United Kingdom; three in China; two each in Australia, France, Germany, Italy, and Mexico; and one each in Belgium, Brazil, Canada, Hungary, Indonesia, Poland, Russia, and Sweden. Four major parts distribution centers are located in the United States and ten are located outside the United States. Financial Products' segment activity is primarily conducted in the United States, with additional business activity conducted in Asia, Australia, Canada, Chile, Europe, and Mexico. A-17 NOTES continued (Dollars in millions except per share data) - -------------------------------------------------------------------------------- We are a highly integrated company. The products of our manufacturing operations located outside the United States, in most instances, consist of components manufactured or purchased locally which are assembled with components transferred from other sources within our company. As a result, the profits of these operations do not bear any definite relationship to their assets. Therefore, financial information of the individual geographic segments cannot be viewed in isolation. Intersegment sales are valued at prices comparable to those for unrelated parties. Geographic segments are based on the location of the manufacturing operations, which either manufactures or purchases products, for Machinery and Engines.
Years ended December 31: 1997 1996 1995 ------ ------ ------ Sales: United States.......................... $14,468 $13,042 $12,191 Europe................................. 3,225 2,214 2,638 All other.............................. 1,287 1,138 1,200 Elimination of intersegment sales from: United States.......................... (459) (265) (308) Europe................................. (192) (135) (125) All other.............................. (219) (180) (145) ------- ------- ------- Consolidated sales....................... 18,110 15,814 15,451 Revenues: United States.......................... 612 534 482 All other.............................. 203 174 139 ------- ------- ------- Sales and revenues....................... $18,925 $16,522 $16,072 ======= ======= ======= Operating profit: Machinery and Engines: United States........................ $ 1,976 $ 1,708 $ 1,356 Europe............................... 310 166 206 All other............................ 100 83 110 ------- ------- ------- 2,386 1,957 1,672 ------- ------- ------- Financial Products: United States........................ 126 98 81 All other............................ 16 16 7 ------- ------- ------- Total Financial Products............... 142 114 88 ------- ------- ------- Elimination of intersegment expenses... 12 21 3 General corporate expenses............. (110) (100) (79) ------- ------- ------- Operating profit......................... $ 2,430 $ 1,992 $ 1,684 ======= ======= ======= December 31: Identifiable assets: Machinery and Engines: United States........................ $ 7,388 $ 6,495 $ 5,836 Europe............................... 1,668 1,702 1,229 All other............................ 1,010 836 803 ------- ------- ------- 10,066 9,033 7,868 ------- ------- ------- Financial Products: United States........................ 5,311 4,687 4,042 All other............................ 2,444 1,885 1,550 ------- ------- ------- Total Financial Products............... 7,755 6,572 5,592 ------- ------- ------- 17,821 15,605 13,460 General corporate assets............... 2,184 2,422 2,894 Investments in unconsolidated affiliated companies................... 751 701 476 ------- ------- ------- Total assets............................. $20,756 $18,728 $16,830 ======= ======= =======
D. Non-U.S. sales Sales outside the United States (based on dealer location) were 51% of consolidated sales for 1997 and 1996, and 52% for 1995.
Years ended December 31: 1997 1996 1995 ------ ------ ------ Sales of U.S. manufactured product: Asia/Pacific........................... $1,686 $1,743 $1,505 Latin America.......................... 1,101 913 829 Europe................................. 1,067 1,065 1,005 Canada................................. 1,048 748 852 Africa/Middle East..................... 757 767 644 ------ ------ ------ 5,659 5,236 4,835 ------ ------ ------ Sales of non-U.S. manufactured product: Asia/Pacific........................... 788 817 785 Latin America.......................... 601 325 354 Europe................................. 1,552 1,301 1,681 Canada................................. 158 75 104 Africa/Middle East..................... 426 384 270 ------ ------ ------ 3,525 2,902 3,194 ------ ------ ------ Total sales outside the United States: Asia/Pacific........................... 2,474 2,560 2,290 Latin America.......................... 1,702 1,238 1,183 Europe................................. 2,619 2,366 2,686 Canada................................. 1,206 823 956 Africa/Middle East..................... 1,183 1,151 914 ------ ------ ------ $9,184 $8,138 $8,029 ====== ====== ======
21. Acquisition of Perkins Engines ================================================================================ On December 11, 1997, we announced an agreement with LucasVarity plc to acquire the assets of Perkins Engines, LucasVarity's diesel engine subsidiary. Perkins is a leading manufacturer of small to medium diesel engines, and its 1996 sales were approximately $1,100. The addition of Perkins to our existing engine business will create a global full-line producer of reciprocating and turbine engines. A purchase price of $1,325 was agreed upon subject to closing date adjustments. We will pay for this acquisition using a combination of existing cash and new debt. The acquisition will be accounted for using the purchase method of accounting. It is anticipated that the acquisition will be finalized during the first quarter of 1998. 22. Selected quarterly financial results (unaudited) ================================================================================
1997 Quarter ---------------------------------------- 1st 2nd 3rd 4th ------- ------- ------- ------- Sales and revenues....................... $ 4,262 $ 4,870 $ 4,600 $ 5,193 Less: Revenues........................... 190 194 215 216 ------- ------- ------- ------- Sales.................................... 4,072 4,676 4,385 4,977 Cost of goods sold....................... 2,981 3,450 3,278 3,665 ------- ------- ------- ------- Gross margin............................. 1,091 1,226 1,107 1,312 Profit................................... 394 435 385 451 Profit per share of common stock......... $ 1.04 $ 1.15 $ 1.03 $ 1.22 Profit per share of common stock -- assuming dilution................... $ 1.03 $ 1.13 $ 1.01 $ 1.20 1996 Quarter ---------------------------------------- 1st 2nd 3rd 4th ------- ------- ------- ------- Sales and revenues....................... $ 3,844 $ 4,180 $ 4,033 $ 4,465 Less: Revenues........................... 162 172 184 190 ------- ------- ------- ------- Sales.................................... 3,682 4,008 3,849 4,275 Cost of goods sold....................... 2,780 2,976 2,905 3,171 ------- ------- ------- ------- Gross margin............................. 902 1,032 944 1,104 Profit................................... 296 374 310 381 Profit per share of common stock......... $ .76 $ .97 $ .81 $ 1.00 Profit per share of common stock -- assuming dilution................... $ .76 $ .96 $ .80 $ .98
A-18 Five-year Financial Summary Caterpillar Inc. (Dollars in millions except per share data) - --------------------------------------------------------------------------------
Years ended December 31, 1997 1996 1995 1994 1993 --------- ------ ------ ------ ------ Sales and revenues............................. $ 18,925 16,522 16,072 14,328 11,615 Sales........................................ $ 18,110 15,814 15,451 13,863 11,235 Percent inside the United States........... 49% 49% 48% 51% 51% Percent outside the United States.......... 51% 51% 52% 49% 49% Revenues..................................... $ 815 708 621 465 380 Profit(1)...................................... $ 1,665 1,361 1,136 955 652 Profit per share of common stock(1)(2)......... $ 4.44 3.54 2.86 2.35 1.61 Profit per share of common stock - assuming dilution(1)(2)................ $ 4.37 3.50 2.84 2.33 1.60 Dividends declared per share of common stock... $ .95 .78 .65 .32 .15 Return on average common stock equity.......... 37.9% 36.3% 36.1% 37.4% 34.6% Capital expenditures: Property, plant, and equipment............... $ 824 506 464 501 417 Equipment leased to others................... $ 282 265 215 193 215 Depreciation and amortization.................. $ 738 696 682 683 668 Research and engineering expenses.............. $ 700 570 532 435 455 As a percent of sales and revenues........... 3.7% 3.4% 3.3% 3.0% 3.9% Wages, salaries, and employee benefits......... $ 3,773 3,437 2,919 3,146 3,038 Average number of employees.................... 58,366 54,968 54,263 52,778 50,443 December 31, Total assets: Machinery and Engines........................ $ 13,001 12,156 11,238 11,582 11,131 Financial Products........................... $ 7,755 6,572 5,592 4,668 3,676 Long-term debt due after one year: Machinery and Engines........................ $ 2,367 2,018 2,049 1,934 2,030 Financial Products........................... $ 4,575 3,069 1,915 2,336 1,865 Total debt: Machinery and Engines........................ $ 2,474 2,176 2,219 2,037 2,387 Financial Products........................... $ 6,094 5,283 4,181 3,866 3,041 Percent of total debt to total debt and stockholders' equity (Machinery and Engines)...................... 34.6% 34.6% 39.6% 41.2% 52.1%
(1) 1993 profit was after extraordinary loss on early retirement of debt; profit before extraordinary loss was $681, $1.68 per share of common stock. (2) Computed on weighted-average number of shares outstanding. A-19 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 all its subsidiaries (affiliated companies that are more than 50% owned). 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 (Cat Financial) and Caterpillar Insurance Services Corporation. Cat Financial and its subsidiaries in the Americas, Australia, 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. Caterpillar Insurance Services Corporation provides insurance services to Caterpillar dealers and customers to help support their purchase and financing of Caterpillar equipment. RESULTS OF OPERATIONS 1997 COMPARED WITH 1996 Profit for 1997 was up 22% on a 15% increase in sales and revenues. Profit per share of common stock increased 25%, reflecting the impact of the higher profit and the ongoing share repurchase program. Profit of $1.67 billion or $4.44 per share was the best in our history, an improvement of $304 million over profit of $1.36 billion or $3.54 per share in 1996. Sales and revenues of $18.93 billion were $2.40 billion higher and also an all-time record. An increase in physical sales volume of 15% was the most significant factor contributing to the higher sales and revenues, and profit. Machinery and Engines Sales of Machinery and Engines were $18.11 billion, an increase of $2.30 billion or 15% from 1996. The higher sales resulted from a 15% increase in physical sales volume. Profit before tax was $2.21 billion, an improvement of $420 million or 23% from last year. The primary reason for the improved profit was the higher physical sales volume, which resulted from higher machine and engine sales inside and outside the United States. Price realization was about the same as price increases taken over the past year and a favorable change in geographic sales mix was more than offset by the effect of the stronger dollar on sales denominated in currencies other than the U.S. Margin (sales less cost of goods sold) of $4.74 billion increased $754 million or 19% over 1996. Margin as a percent of sales was 26.2%, up from 25.2%, primarily because of the favorable impact of higher physical sales volume and price increases taken over the past year. Partially offsetting these favorable items were increased fixed manufacturing costs and an unfavorable change in product sales mix. The increased fixed manufacturing costs were primarily in support of major growth initiatives and product line expansions that include electric power generation, agricultural products, mining systems, and compact machines. The unfavorable change in product sales mix was primarily the result of selling a higher percentage of mid-range truck engines, and a change in the mix of turbine products. Selling, general, and administrative (SG&A) expenses were $1.93 billion compared with $1.72 billion in 1996. The $217 million increase primarily reflects increased spending levels in support of major growth initiatives and product line expansions. The effect of inflation on costs also contributed to the increase. SG&A expenses, as a percent of sales, were 10.7%, down slightly from 10.8% in 1996. Research and development (R&D) expenses of $528 million were up $118 million from 1996. The increase reflects expected higher spending in support of new and improved products. R&D expenses, as a percent of sales, were 2.9%, up from 2.6% in 1996. Operating profit of $2.28 billion was $419 million or 23% higher than 1996. Operating profit, as a percent of sales, was 12.6% compared with 11.7% a year ago. Operating profit rates have continued to grow, a result of balancing favorable margin growth with controlled spending for SG&A and R&D to enhance longer-term growth. Interest expense of $219 million was $25 million higher than a year ago, mostly due to higher average debt levels. Other income/expense was income of $153 million compared with income of $127 million last year. The increase of $26 million is primarily due to several small favorable items, partially offset by an unfavorable change in foreign exchange gains and losses. Financial Products Financial Products' revenues of $839 million were a record, up $107 million or 15% compared with 1996, primarily the result of Cat Financial's larger portfolio. Selling, general, and administrative expenses were up $22 million, primarily due to Cat Financial's higher depreciation on leased equipment and other increases due to growth, partially offset by a favorable reserve adjustment at Caterpillar Insurance Co. Ltd. (Cat Insurance). Interest expense was up $57 million due to increased borrowings to support the larger portfolio. Other income/expense was income of $61 million, an increase of $24 million from a year ago. The increase in other income was primarily the result of higher gains on sales of used equipment, exchange gains, and increased use of securitization by Cat Financial, and higher investment income at Cat Insurance. Before-tax profit was a record $203 million, up $52 million or 34% from last year. The increase resulted primarily from the continued growth of Cat Financial and favorable reserve adjustments at Cat Insurance. Income Taxes The provision for income taxes was $796 million, compared with $613 million last year. The $183 million increase reflects the higher before-tax profit and a higher effective tax rate of 33% compared with 31.6% for 1996. The higher tax rate accounted for $34 million of the increase. A-20 Caterpillar Inc. - -------------------------------------------------------------------------------- Unconsolidated Affiliated Companies Our share of unconsolidated affiliated companies' results was $48 million, up $15 million from a year ago. Profits from F.G. Wilson, L.L.C., an affiliate acquired in 1996, along with higher profits at Shin Caterpillar Mitsubishi Ltd. were the primary reasons for the increase from 1996. 1997 SALES Caterpillar worldwide sales were a record $18.11 billion in 1997, a $2.30 billion or 15% increase over 1996, due to higher physical sales volume. Sales increases in the United States accounted for about half the total increase. Gains also were registered in Latin America, Canada, Europe/Commonwealth of Independent States (CIS), and Africa/Middle East. Sales declined slightly in the Asia/Pacific region. Sales by Business Segment 1997 1996 1995 -------------------- (Billions) Machinery.......... $13.35 $11.86 $11.33 Engines............ 4.76 3.95 4.12 ------ ------ ------ $18.11 $15.81 $15.45 ====== ====== ====== Worldwide sales for the Machinery segment increased 13% from 1996, setting another all-time record. Most of the improvement was due to higher physical sales volume resulting from higher dealer sales to end users. Company sales were higher in most key applications including construction, sand and quarry operations, and forestry. Engine segment sales increased 21% from 1996 levels after a decline in 1996. The improvement reflected higher end-user demand for reciprocating gas and diesel engines as well as turbines. Company sales were higher in all key applications including on-highway trucks, power generation, oil and gas, industrial, and marine. Sales were also higher due to the acquisition of MaK Motoren GmbH & Co. KG on December 31, 1996. Caterpillar Sales Inside the United States 1997 1996 1995 ---------------------- (Billions) Machinery............ $ 6.71 $ 5.89 $ 5.49 Engines.............. 2.22 1.78 1.93 ------ ------ ------ $ 8.93 $ 7.67 $ 7.42 ====== ====== ====== Caterpillar sales inside the United States were $8.93 billion, a $1.25 billion or 16% increase over 1996. Both machinery and engine segment sales exceeded last year's levels due primarily to higher physical sales volume as improved end-user demand more than offset a slowdown in machine inventory accumulation. Higher price realization in both segments also contributed to the increase in company sales. Sales inside the United States represented 49% of the worldwide total, unchanged from 1996. Dealer Machine Sales to End Users Inside the United States The United States economy registered very good growth in 1997 with Gross Domestic Product (GDP) increasing about 3.7%, considerably better than the 2.5% rate for 1996. This pickup in growth combined with higher construction and mining activity led to increased industry demand for construction and mining equipment. A healthy farm economy also boosted industry demand for agricultural equipment. With total industry demand up, dealer machine sales to end users increased in both the construction and commodity sectors. Sales of machines to end users rose in two of the three key construction sectors: . Highway sales increased in response to higher construction spending. . Sales to the housing sector also increased as housing starts remained strong. . Commercial, industrial, and government building sector sales remained near 1996 levels despite growth in private and public building construction. Sales to end users rose in all but one key commodity sector: . Coal mining sales rose reflecting higher mine production. . Sales to the sand and quarry sector of mining also were higher in response to higher construction activity. . Agricultural-related sales increased, reflecting a healthy farm economy and strong industry demand. . Sales to the forestry sector rose in response to higher lumber and pulp production. Lumber prices were higher while pulp prices were lower. . Metal mining-related sales declined reflecting lower metals prices. Sales to end users increased in industrial applications but declined in landfill applications. Deliveries to dealers' dedicated rental fleets increased in 1997 as in 1996 and constituted about one-third of all dollar deliveries to U.S. dealers. Engine Sales to End Users and OEMs Inside the United States Engine sales increased primarily as a result of better economic growth and higher industry demand. . On-highway truck engine sales to Original Equipment Manufacturers (OEMs) rose reflecting an increase in industrial production. . Reciprocating engine sales to users also increased with a large gain in oil and gas applications. Sales to marine, power generation, and industrial applications also rose. . Turbine sales increased due to a gain in deliveries to oil and gas applications. Sales into power generation remained near 1996 levels. A-21 MANAGEMENT'S DISCUSSION AND ANALYSIS continued - -------------------------------------------------------------------------------- Caterpillar Sales Outside the United States 1997 1996 1995 ---------------------- (Billions) Machinery............. $ 6.64 $ 5.97 $ 5.84 Engines............... 2.54 2.17 2.19 ______ ______ ______ $ 9.18 $ 8.14 $ 8.03 ====== ====== ====== - -------------------------------------------------------------------------------- Caterpillar sales outside the United States were $9.18 billion, a $1.05 billion or 13% increase from 1996. These sales represented 51% of worldwide sales, the same percentage as 1996. Sales were higher in Latin America, Canada, Europe/CIS, and Africa/Middle East. Sales declined slightly in the Asia/Pacific region. Machinery segment sales surpassed 1996 levels as higher sales volume more than offset a decline in price realization. The improvement in sales volume resulted from an increase in industry demand and higher dealer inventory levels. Engine segment sales also surpassed last year's levels due to higher physical sales volume. Sales of diesel and gas reciprocating engines rose with gains in on-highway truck, marine, power generation, and industrial applications. Sales of turbines also increased with gains in both power generation and oil and gas applications. Europe/CIS Sales rose 11% reflecting higher machine and engine sales. Sales were higher in Germany and Spain, lower in France, and about the same in Italy and the United Kingdom. Industry demand for machines declined slightly due to tight fiscal policies, but sales to end users remained near 1996 levels due to a higher share of industry sales. Company sales of machines rose primarily as a result of dealers replenishing their new machine inventory. Industry demand for engines, however, was higher leading to improved engine sales. Sales to Central Europe were lower primarily due to economic difficulties in the Czech Republic. Sales also declined in the CIS reflecting continued economic sluggishness and high levels of political uncertainty, particularly in Russia. Asia/Pacific Sales declined 3% for the year reflecting the impact of the currency crisis on the region's economy. Industry demand for machines declined sharply in the second half of the year in a number of Southeast Asia countries including Thailand, Indonesia, Malaysia, and the Philippines. As a result, sales to end users for the entire year slipped below 1996 levels. In China (including Hong Kong), both company sales and sales to end users declined reflecting slower economic growth. In Australia, both company sales and sales to end users fell as economic growth slowed and commodity prices declined. In Japan, sales of imported product were higher for the year due to a surge in demand during the first quarter in advance of the April 1 sales tax increase. After the first quarter, both the economy and sales of imported product weakened. Sales of turbines increased for the region in 1997, with especially strong sales in Australia and developing Asia. Sales of reciprocating engines remained near 1996 levels. Latin America Sales rose 38% due to a rebound in economic activity throughout most of the region. Sales of both machines and engines were higher with sizable gains in Brazil, Mexico, Peru, Chile, and Argentina, all of which registered good economic growth. End-user demand for machines was higher in all key construction sectors as well as metal and nonmetal mining. Lower demand was registered only in coal mining and agricultural applications. Canada Sales rose 46%, reflecting excellent economic growth and an increase in industry demand for both machines and engines. Sales of machines to end users rose in all applications except metal mining. Company engines sales were higher with gains in all key applications. Africa/Middle East Sales rose 3% for the region as a whole, despite slightly lower machine sales to end users. Large gains were registered in the Middle East, with most of the improvement coming from higher sales in Turkey and Saudi Arabia. Sales were lower in Africa, including the country of South Africa. Sales of reciprocating engines were higher, while sales of turbines declined. Dealer Inventories of Machines United States dealers' new machine inventories increased in 1997 in response to a good economy and strong industry demand. At year-end 1997, inventories were slightly above normal relative to current selling rates. Outside the United States, dealers' new machine inventories also increased and ended the year slightly above normal relative to current selling rates. FOURTH-QUARTER 1997 COMPARED WITH FOURTH-QUARTER 1996 Fourth-quarter sales and revenues increased 16% while profit rose 18%. Profit per share was up 22%, reflecting the impact of the higher profit and the ongoing share repurchase program. Profit of $451 million or $1.22 per share was $70 million or 22 cents per share higher than fourth-quarter 1996 profit of $381 million or $1.00 per share. Physical sales volume increased 17% and was the most significant factor contributing to the increased profit. Machinery and Engines Profit before tax of $600 million increased 24% or $115 million from last year's fourth quarter. Sales of Machinery and Engines of $4.98 billion rose 16%. The higher sales resulted from the 17% increase in physical sales volume, partially offset by 1% lower price realization. The increase in physical sales volume was primarily the result of higher machine and engine sales inside and outside the United States. Price realization was about 1% lower, as price increases taken over the past year were more than offset by the effect of the stronger dollar on sales denominated in currencies other than the U.S. and higher sales discounts. A-22 Caterpillar Inc. - -------------------------------------------------------------------------------- Margin of $1.31 billion increased $208 million from the fourth quarter a year ago. Margin as a percent of sales was 26.4%, up from 25.8% a year ago. The favorable impact of higher physical sales volume and price increases taken over the past year was partially offset by increased fixed manufacturing costs and higher sales discounts. The increased manufacturing costs were primarily in support of major growth initiatives and product line expansions. The net effect of the stronger dollar on the margin rate was minimal. Selling, general, and administrative expenses were $544 million, compared with $497 million during the fourth-quarter 1996. The $47 million increase primarily reflects increased spending levels in support of major growth initiatives and product line expansions, and the effect of inflation on costs. Partially offsetting these items were lower incentive pay expense compared with the fourth quarter a year ago and the favorable effect of the stronger dollar on costs. Research and development expenses of $144 million increased $33 million from fourth-quarter 1996. The increase reflects expected higher spending in support of new and improved products. Operating profit was $624 million, up $128 million from the fourth quarter a year ago. Operating profit, as a percent of sales, was 12.5% compared with 11.6% a year ago. Interest expense was $8 million higher than fourth quarter a year ago mostly due to higher average debt levels. Other income/expense was income of $32 million compared with income of $37 million last year. The change primarily reflects an unfavorable change in foreign exchange gains and losses. Financial Products Financial Products' fourth-quarter revenues were a record $222 million, up $26 million compared with fourth-quarter 1996, primarily due to Cat Financial's portfolio growth. Before-tax profit was $56 million, an improvement of $21 million from last year's fourth quarter. The increase resulted primarily from Cat Financial's continued portfolio growth and favorable reserve adjustments at Cat Insurance. Income Taxes The provision for income taxes was $217 million, compared with $151 million for the fourth quarter last year. The increase was primarily due to the higher before-tax profit. Fourth-quarter 1996 tax expense reflected an effective tax rate of 29% which included a favorable adjustment of $13 million to recognize the impact of a tax rate change from that used for the first three quarters of the year. Fourth-quarter 1997 tax expense reflects an effective tax rate of 33%. Unconsolidated Affiliated Companies Our share of unconsolidated affiliated companies' results was $12 million, the same as a year ago. FOURTH-QUARTER 1997 COMPARED WITH THIRD-QUARTER 1997 Fourth-quarter profit of $451 million or $1.22 per share was $66 million higher than third-quarter profit of $385 million or $1.03 per share. A 14% increase in physical sales volume was the most significant factor contributing to the higher profit. Machinery and Engines Profit before tax for Machinery and Engines was $600 million, a $108 million increase from the previous quarter. Sales of $4.98 billion increased $592 million primarily because of the 14% higher physical sales volume. Price realization was about 1% lower. The increase in physical sales volume was primarily the result of higher machine and engine sales outside the United States. Machine and engine sales inside the United States were also higher. Price realization was lower due to higher sales discounts. Margin was $205 million higher than the third quarter, primarily the result of higher physical sales volume. As a percent of sales, the margin rate was 26.4% compared with 25.2% last quarter. The higher margin rate was primarily due to the higher physical sales volume and a favorable product sales mix, partially offset by the higher sales discounts. The net effect of the dollar on the margin rate was minimal. Selling, general, and administrative expenses were $544 million, up $63 million from the third quarter. The increase was somewhat typical, as the fourth quarter is generally a higher cost quarter for these types of expenses. However, the increase is also reflective of increased spending levels in support of major growth initiatives and product line expansions. Research and development expenses of $144 million were up $12 million from the third quarter. The increase reflects continued higher spending in support of new and improved products. Operating profit of $624 million increased $130 million. As a percent of sales, operating profit was 12.5% compared with 11.3% in the third quarter. Interest expense of $56 million was about the same as the third quarter. Other income/expense was income of $32 million compared with $51 million last quarter. The change reflects the absence of several small favorable items recorded during the third quarter. Financial Products Financial Products' revenues of $222 million were up $1 million from the third quarter. Before-tax profit was $56 million, an increase of $6 million. The increase in profit resulted primarily from increased investment income at Cat Insurance. Income Taxes Income tax expense of $217 million increased $51 million from the previous quarter. The increase reflects the higher profit before tax and the absence of a favorable adjustment of $12 million in the third quarter to recognize the impact of the tax rate change for the first half of the year from 34% to 33%. Unconsolidated Affiliated Companies Our share of unconsolidated affiliated companies' results was $12 million, an increase of $3 million from the previous quarter. A-23 MANAGEMENT'S DISCUSSION AND ANALYSIS continued - -------------------------------------------------------------------------------- 1996 COMPARED WITH 1995 Profit for 1996 was $1.36 billion or $3.54 per share of common stock, an improvement of $225 million over profit of $1.14 billion or $2.86 per share for 1995. Sales and revenues of $16.52 billion were $450 million higher than last year. Machinery and Engines Sales were $15.81 billion, an increase of $363 million from 1995. Profit before tax was $1.79 billion, an improvement of $296 million. The primary reasons for the increase in profit were a 2% improvement in price realization and the effect of the stronger dollar as costs incurred in Japanese yen and European currencies translated into fewer U.S. dollars. Price realization improved primarily because of price increases taken over the past year and the absence of certain European currency hedges in place a year ago. (The adverse impact of currency hedges (forward contracts) that matured during 1995 was about $135 million. All such forward contracts had matured as of the end of 1995.) A favorable change in geographic sales mix also contributed to the improved price realization. These favorable factors were partially offset by higher sales discounts and the negative effect of the stronger dollar on sales in European and Asian currencies. Physical sales volume was about the same as in 1995. Margin (sales less cost of goods sold) increased $531 million or 15%. Margin as a percent of sales was 25.2%, up from 22.3%, primarily because of the better price realization and the effect of the stronger dollar as costs incurred in Japanese yen and European currencies translated into fewer U.S. dollars. In addition, margins have improved as a result of lower material costs (a result of our joint efforts with suppliers) and continued improvements in manufacturing efficiencies. These favorable items were partially offset by higher incentive pay expense. Selling, general, and administrative expenses were $1.72 billion, compared with $1.48 billion in 1995. The $232 million increase reflects higher spending levels in support of expanded operations and major initiatives to enhance long- term growth, the effect of inflation on costs and higher incentive pay expense. Research and development expenses were up $35 million from 1995. The increase primarily reflects continuing high levels of activity for new product introductions and higher incentive pay expense. Operating profit of $1.86 billion was $264 million higher than 1995. Operating profit as a percent of sales was 11.7% compared with 10.3% a year ago. Interest expense of $194 million was about the same as a year ago. Other income/expense was income of $127 million compared with income of $92 million last year. The increase of $35 million is primarily due to a favorable change in foreign exchange gains and losses, higher interest income, and several small favorable items recorded in 1996. Partially offsetting these favorable items was the absence of a $10 million reimbursement recorded in 1995 under the company's insurance coverage for the settlement of two class action complaints. Financial Products Before-tax profit for Financial Products was a record $151 million, up $30 million from 1995. The increase resulted primarily from a larger portfolio of earning assets at Cat Financial and gains recognized on the sale of securities at Cat Insurance. Partially offsetting these favorable items was the absence of an $11 million pre-tax gain recorded in 1995 for interest rate caps written by Cat Financial. (The caps were terminated during second-quarter 1995.) Revenues of $732 million were a record and were up $88 million, primarily the result of Cat Financial's larger portfolio. Selling, general, and administrative expenses were up $39 million, primarily due to Cat Financial's higher depreciation on leased equipment and other increases due to a larger portfolio. Interest expense was up $23 million due to increased borrowings to support the larger portfolio, partially offset by lower borrowing rates. Other income/expense was income of $37 million, an increase of $4 million from a year ago. Income Taxes Income tax expense was $613 million, $112 million higher than a year ago. The increase primarily reflects higher before-tax profit. The effective tax rate was 31.6% compared with 31.0% for 1995. Unconsolidated Affiliated Companies Our share of unconsolidated affiliated companies' results was $33 million, up $11 million from a year ago. Profits from new unconsolidated affiliates F.G. Wilson, L.L.C. and Caterpillar Elphinstone Pty. Ltd. along with higher profits at Shin Caterpillar Mitsubishi Ltd. were the primary reasons for the increase from 1995. LIQUIDITY & CAPITAL RESOURCES - ----------------------------- Consolidated operating cash flow totaled $2.10 billion for 1997, compared with $1.78 billion for 1996. Total debt at year-end 1997 was $8.57 billion, an increase of $1.11 billion from year-end 1996. Over this period, debt related to Machinery and Engines increased $298 million, to $2.47 billion, while debt related to Financial Products increased $811 million to $6.09 billion. During 1995, we announced a plan to repurchase up to 10% of our outstanding common stock over three to five years. From inception in June 1995 to the end of 1997, 36 million shares have been repurchased under the plan. The number of shares outstanding at December 31, 1997, was 368 million. When the 10% share repurchase program is complete, we will have approximately 360 million shares outstanding. We anticipate this program will be completed in 1998. Machinery and Engines Operating cash flow totaled $1.80 billion for 1997, compared with $1.46 billion for 1996. The increase in operating cash flow primarily results from the increase in profits over the same period a year ago. Capital expenditures, excluding equipment leased to others, totaled $819 million for 1997, compared with $500 million a year ago. A-24 Caterpillar Inc. - -------------------------------------------------------------------------------- During 1997, debt related to Machinery and Engines increased from the issuance of $300 million of 100-year debentures and a new $162 million capital lease obligation, collateralized by leased manufacturing equipment and a security deposit. We also retired $115 million of medium-term notes during 1997. The percent of debt to debt plus stockholders' equity was 35% at both December 31, 1997 and 1996. Financial Products Operating cash flow totaled $323 million for 1997, compared with $331 million for 1996. Cash used to purchase equipment leased to others totaled $277 million for 1997. In addition, 1997 net cash used for finance receivables was $1.21 billion, compared with $970 million for 1996. Financial Products' debt was $6.09 billion at December 31, 1997, an increase of $811 million from December 31, 1996, and was primarily comprised of $3.32 billion of medium-term notes, $145 million of notes payable to banks and $2.54 billion of commercial paper. At the end of 1997, finance receivables past due over 30 days were 1.7%, compared with 2.1% at the end of 1996. The ratio of debt to equity of Cat Financial was 7.8:1 at both December 31, 1997 and 1996. Financial Products had outstanding credit lines totaling $3.84 billion at December 31, 1997, which included $2.25 billion of shared revolving credit agreements with Machinery and Engines. 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. Reclassification During 1997, management reclassified $779 million of short-term borrowings to long-term debt due after one year. This reclassification reflects a change in management's intent to finance for periods greater than a year certain portions of debt under revolving credit agreements. For purposes of improving comparability, $555 million was reclassified at December 31, 1996, from short- term borrowings to long-term debt due after one year. This change impacted the Consolidated and Financial Products' portions of the financial position, but had no impact on the Machinery and Engines' portion. Furthermore, this change had no impact on the results of operations. All yearly comparisons for 1997 and 1996 are with the reclassified amounts. Dividends paid per share of common stock Quarter 1997 1996 1995 - ----------------------------------------------------- First.................... $ .20 $ .18 $ .13 Second................... .20 .17 .12 Third.................... .25 .20 .18 Fourth................... .25 .20 .17 ----- ----- ----- $ .90 $ .75 $ .60 ===== ===== ===== - ----------------------------------------------------- EMPLOYMENT - ---------- At year end, our worldwide employment was 59,863 compared with 57,026 one year ago. Hourly employment increased 1,208 to 34,248; salaried and management employment increased 1,629 to 25,615. Year-End Employment 1997 1996 - --------------------------------------------------------- Inside United States... 39,722 38,571 Outside United States Europe............... 12,627 11,953 Latin America........ 5,340 4,540 Asia/Pacific......... 1,843 1,746 Canada............... 219 127 Other................ 112 89 ------ ------ Total Outside.......... 20,141 18,455 ------ ------ Total Employment....... 59,863 57,026 ====== ====== - --------------------------------------------------------- OTHER MATTERS - ------------- ENVIRONMENTAL MATTERS The company is regulated by federal, state, and international environmental laws governing our use of substances and control of emissions. Compliance with these existing laws has not had a material impact on our capital expenditures, earnings, or competitive position. We are cleaning up hazardous waste at a number of locations, often with other companies, pursuant to federal and state laws. When it is likely we will pay clean-up costs at a site and those costs can be estimated, the costs are charged against our earnings. In doing that estimate, we do not consider amounts expected to be recovered from insurance companies and others. The amount set aside for environmental clean-up is not material and is included in "Accounts payable and accrued expenses" in Statement 3. If a range of liability estimates is available on a particular site, we accrue the lower end of that range. We cannot estimate costs on sites in the very early stages of clean-up. Currently, we have five of these sites and there is no more than a remote chance that a material amount for clean-up will be required. The United States Environmental Protection Agency (EPA) has issued conditional certificates of conformity with the Clean Air Act for Caterpillar's 1998 model year heavy-duty diesel engines. The EPA has issued similar conditional certificates to other heavy-duty diesel engine manufacturers as well. The EPA is reviewing the impact of advanced electronic control technologies on the emissions compliance of heavy-duty trucks in certain operating conditions and whether the use of such technologies is consistent with the Clean Air Act's requirements. Caterpillar and the other manufacturers are responding to the EPA requests for information and are engaged in discussions with them and the United States Department of Justice in an effort to resolve this issue. We do not expect the outcome of this matter to have a material impact on our financial position or results of operations. DERIVATIVE FINANCIAL INSTRUMENTS I. Market Risk and Risk Management Policies Our earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates, interest rates, and commodity prices. Our risk management policy includes the use of derivative financial instruments to manage foreign currency exchange rate, interest rate, and commodity price exposures. A-25 MANAGEMENT'S DISCUSSION AND ANALYSIS continued - -------------------------------------------------------------------------------- Foreign Currency Exchange Rate Foreign currency exchange rate movements create a degree of risk to our operations by affecting: . The U.S. dollar value of sales made in foreign currencies, and . The U.S. dollar value of costs incurred in foreign currencies. Foreign currency exchange rate movements also affect our competitive position, as exchange rate changes may affect business practices and/or pricing strategies of non-U.S. based competitors. Our general policy is to use foreign currency derivative instruments as needed to operate our business and protect our interests. We enter into foreign currency derivative instruments only to manage risk -- not as speculative instruments. We buy and sell currencies only to cover business needs and to protect our financial and competitive position. Our general approach is to manage future foreign currency cash flow for Machinery and Engines' operations and net foreign currency balance sheet exposures for Financial Products' operations. Our Machinery and Engines' operations manufacture products in, and purchase raw materials from, many locations around the world. Consequently, our cost base is well diversified over a number of European, Asia/Pacific, and Latin American currencies, as well as the U.S. dollar. This diversified cost base serves to counterbalance the cash flow and earnings impact of non-U.S. dollar revenues and, therefore, minimizes the effect of exchange rate movements on consolidated earnings. We use derivative financial instruments to manage the currency exchange risk that results when the cash inflows and outflows by currency are not completely matched. In managing foreign currency for Machinery and Engines' operations, our objective is to maximize consolidated after-tax U.S. dollar cash flow. To this end, our policy allows for actively managing: . Cash flow related to firmly committed foreign currency transactions; . Anticipated foreign currency cash flow for the future rolling twelve- month period; and . Any hedges (derivative instruments) that are outstanding. We limit the types of derivative instruments we use to forward exchange contracts and foreign currency option contracts (net purchased option contracts). When using forward exchange contracts, we are protected from unfavorable exchange rate movements, but have given up any potential benefit from favorable changes in exchange rates. Purchased option contracts, on the other hand, protect us from unfavorable rate movements while permitting us to benefit from the effect of favorable exchange rate fluctuations. We do not use historic rate rollovers or leveraged options, nor do we sell or write 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. The forward exchange or foreign currency option contracts that we use are not exchange traded. Each month, our financial officers approve the company's outlook for expected currency exchange rate movements, as well as the policy on desired future foreign currency cash flow positions (long, short, balanced) for those currencies in which we have 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. Foreign exchange management practices, including the use of derivative financial instruments, are presented to the Audit Committee of our Board of Directors at least annually. In managing foreign currency risk for our Financial Products' operations, our objective is to minimize earnings volatility resulting from the translation of net foreign currency balance sheet positions. We use forward exchange contracts to offset the risk when the currency of our receivable portfolio does not match the currency of our debt portfolio. Interest Rate We use various interest rate derivative instruments, including interest rate swap agreements, interest rate cap (option) agreements, and forward rate agreements to manage exposure to interest rate changes and lower the cost of borrowed funds. All interest rate derivative instruments are linked to debt instruments upon entry. We enter into such agreements only with those financial institutions with strong bond ratings which, in the opinion of management, virtually negates exposure to credit loss. Our Financial Products' operations have a "match funding" objective whereby the interest rate profile (fixed rate or floating rate) of their debt portfolio must match the interest rate profile of their receivable, or asset portfolio within specified boundaries. In connection with that objective, we use interest rate derivative instruments to modify the debt structure to match the receivable portfolio. This "match funding" reduces the risk of deteriorating margins between interest-bearing assets and interest-bearing liabilities, regardless of which direction interest rates move. We also use these instruments to gain an economic and/or competitive advantage through 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 Our Machinery and Engines' operations are subject to commodity price risk, as the price we must pay for raw materials changes with movements in underlying commodity prices. We use commodity swap and option agreements to reduce this risk. However, our use of these types of derivative financial instruments is not material. II. Sensitivity Exchange Rate Sensitivity Based on the anticipated and firmly committed cash inflows and outflows for our Machinery and Engines' operations for the next 12 months and the foreign currency derivative instruments in place at year end, a hypothetical 10% weakening of the U.S. dollar relative to all other currencies would adversely affect our expected 1998 cash flows for our Machinery and Engines' operations by $92 million. A-26 Caterpillar Inc. - -------------------------------------------------------------------------------- Since our policy for Financial Products' operations is to hedge the foreign exchange risk when the currency of our debt portfolio does not match the currency of our receivable portfolio, a 10% change in the value of the U.S. dollar relative to all other currencies would not have a material effect on our consolidated financial position, results of operations, or cash flow. The effect of the hypothetical change in exchange rates ignores the affect this movement may have on other variables including competitive risk. If it were possible to quantify this competitive impact, the results could well be different than the sensitivity effects shown above. In addition, it is unlikely that all currencies would uniformly strengthen or weaken relative to the U.S. dollar. In reality, some currencies may weaken while others may strengthen. Interest Rate Sensitivity For our Machinery and Engines' operations, we currently use interest rate swaps to lower the cost of borrowed funds by attaching fixed-to-floating interest rate swaps to fixed rate debt. A hypothetical 100 basis point adverse move (increase) in interest rates along the entire interest rate yield curve would adversely affect 1998 pretax earnings of Machinery and Engines by $9 million. For our Financial Products' operations, we use interest rate derivative instruments primarily to meet our "match funding" objectives and strategies. A hypothetical 100 basis point adverse move (increase) in interest rates along the entire interest rate yield curve would adversely affect the 1998 pretax earnings of Financial Products by $10 million. The effect of the hypothetical change in interest rates ignores the affect this movement may have on other variables including changes in actual sales volumes that could be indirectly attributed to changes in interest rates. The actions that management would take in response to such a change are also ignored. If it were possible to quantify this impact, the results could well be different than the sensitivity effects shown above. 1998 ECONOMIC AND INDUSTRY OUTLOOK - ---------------------------------- World economic growth in 1998 is forecast to be somewhat below the 1997 pace. Faster growth in Europe and the CIS will likely be more than offset by moderating growth in the United States and Latin America, and the significant slowdown in the Asia/Pacific region. Worldwide industry demand for machines is expected to decline slightly from 1997 levels as slightly higher demand in the United States, Canada, Europe, and CIS is more than offset by sharp declines in the Asia/Pacific region. Worldwide industry demand for reciprocating engines is expected to remain near 1997 levels, while demand for turbines should continue to grow. In the United States, Gross Domestic Product (GDP) growth is expected to slow from 3.7% in 1997 to 2.5% in 1998. Non-residential construction spending should continue to grow and housing starts should remain near 1997 levels because of low interest rates. Coal and aggregate production also should continue to increase, but metal mine production is likely to be flat or down slightly due to falling metals' prices. Overall, industry demand for machines is expected to be slightly higher due to strength in the construction sector. Industry demand for both commercial engines and turbines should continue to rise enough to offset anticipated lower on-highway truck demand. In Canada, economic growth is forecast to remain strong leading to an increase in both machine and engine industry demand. In Western Europe, economic activity should continue to improve with GDP accelerating from 2.5% in 1997 to about 3% in 1998. The major economies ended last year with considerable momentum. Industry demand is expected to increase slightly for machines and engines. In Central Europe, good economic growth should continue, resulting in improved industry demand for both machines and engines. In the Asia/Pacific region, sharp slowdowns have occurred in many countries. In response to declines in their currencies, many governments have raised interest rates, cut spending, and begun restructuring their economies. These restructurings will ultimately strengthen their economies, but the short-term effect is likely to be slower growth in Malaysia and the Philippines and recessions in Thailand, South Korea, and Indonesia. Slower growth also is forecast for China. GDP for developing Asia is now forecast to grow 3%, and industry demand for machines is likely to fall significantly. Demand for engines, though, is forecast to remain near 1997 levels. Japan slipped back into recession in 1997. Despite the temporary income tax reduction announced in December, recessionary conditions are likely to persist in 1998, and industry demand is forecast to decline further. The Australian economy also will be affected by a drop in exports to Asia as well as lower metals' prices. Consequently, industry machine demand is forecast to decline despite lower interest rates, moderate economic growth, and higher housing starts. Industry demand for turbines also is forecast to decline, however, demand for reciprocating engines should be higher. In Latin America, industry demand for machines and engines should continue to improve despite a slowdown in GDP growth from 5% in 1997 to 3% in 1998. In Africa/Middle East, industry demand for engines is forecast to rise, but lower commodity prices will likely keep industry demand for machines near 1997 levels. In CIS, economic recovery should lead to higher industry sales. 1998 COMPANY OUTLOOK - -------------------- Worldwide sales and revenues are expected to slightly surpass 1997's record levels. The acquisition of Perkins Engines is expected to be finalized during first-quarter 1998. Perkins Engines sales are not reflected in the above sales outlook. Investments in major initiatives to enhance long-term growth and shareholder returns will continue in 1998. These initiatives include electric power generation, agricultural products, compact machines, and further strengthening of our product support network to better link customer, dealer, and company operations. For Machinery and Engines, total capital expenditures, which were $819 million in 1997, are expected to be about the same in 1998. R&D and SG&A expenditures will increase in 1998 in support of expanded operations and the major growth initiatives; A-27 MANAGEMENT'S DISCUSSION AND ANALYSIS continued - -------------------------------------------------------------------------------- however, the rate of increase is expected to be less than in recent years. Despite these expenditures for major growth initiatives, profit for 1998 is expected to be near 1997's record. Profit per share will be favorably impacted by the share buy-back program announced in June 1995, which we anticipate will be completed during 1998. Cash flow from operations and our financial position are expected to remain strong. Events in Asia are dynamic and ultimate resolution will depend on many yet to be determined actions taken by Asian governments and world monetary authorities. A significant change in the Asian economic climate, or an extension of these events into other areas of the world, could impact Caterpillar. Plans are in place to respond to such changes if they develop. The situation is being reviewed carefully on an ongoing basis. The information included in the Outlook section is forward looking and involves risks and uncertainties that could significantly impact expected results. A discussion of these risks and uncertainties is contained in Form 8-K filed with the Securities and Exchange Commission on January 21, 1998. MANAGEMENT'S DISCUSSION AND ANALYSIS [ ] A-28 SUPPLEMENTAL STOCKHOLDER INFORMATION Annual Meeting On Wednesday, April 8, 1998, 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 February 27, 1998. Stock Transfer Agent First Chicago Trust Company of New York P.O. Box 2500 Jersey City, NJ 07303-2500 Telephone: (201) 324-0498 Hearing impaired: (201) 222-4955 Internet: http://www.fctc.com E-mail: fctc@em.fcnbd.com Stock Exchange Listings Caterpillar common stock is listed on the New York, Pacific, and Chicago stock exchanges in the United States and on stock exchanges in Belgium, France, Germany, Great Britain, and Switzerland. Number of Stockholders Stockholders of record at year end totaled 32,409, compared with 30,573 at the end of 1996. Approximately 65% of our shares are held by institutions and banks, 20% by individuals, and 15% by Caterpillar benefit plans and as treasury shares. Employees' investment and profit-sharing plans acquired 11,507,195 shares of Caterpillar stock in 1997, including 9,532,894 shares received through the stock split in the form of a 100% stock dividend. Investment plans, for which membership is voluntary, held 26,365,175 shares for employee accounts at 1997 year end. Profit-sharing plans, in which membership is automatic for most U.S. and Canadian employees in eligible categories, held 494,675 shares at 1997 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:
1997 1996 ------------------ ----------------- Quarter High Low High Low - ------- ---- --- ---- --- First........... 41 7/8 36 1/4 36 15/16 27 Second.......... 54 11/16 38 3/16 35 15/16 31 Third........... 61 1/2 52 1/4 37 15/16 31 3/8 Fourth.......... 60 15/16 44 40 1/2 34 1/8
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. On the Internet: http://www.fctc.com. E-mail:fctc@em.fcnbd.com. Hearing impaired: (201) 222-4955. Publications for Stockholders Single copies of the company's 1997 annual report on Securities and Exchange Commission Form 10-K (without exhibits) will be provided without charge to stockholders after March 31, 1998, 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 E-mail: CATir@CAT.e-mail.com Individual stockholders should contact: Laurie J. Huxtable Assistant Secretary Caterpillar Inc. 100 N.E. Adams Street Peoria, IL 61629-7310 Telephone: (309) 675-4619 Internet Access http://www.CAT.com A-29 DIRECTORS AND OFFICERS DIRECTORS Lilyan H. Affinito/2,4/ Former Vice Chairman, Maxxam Group Inc. W. Frank Blount/1,3/ Chief Executive Officer, Telstra Corporation Limited John T. Dillon/2,4/ Chairman and Chief Executive Officer, International Paper Donald V. Fites/3,4/ Chairman and Chief Executive Officer, Caterpillar Inc. Juan Gallardo T./5/ Chairman and Chief Executive Officer, Grupo Embotelladoras Unidas S.A. de C.V. David R. Goode/1,2/ Chairman and Chief Executive Officer, Norfolk Southern Corporation James P. Gorter/1,2/ Chairman, Baker, Fentress & Company Peter A. Magowan/2,4/ Chairman, Safeway Inc.; President and 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 and Chief Executive Officer, The MAXIMA Corporation Clayton K. Yeutter/2,4/ Of Counsel to Hogan & Hartson, Washington, D.C. /1/Member of Audit Committee (David R. Goode, chairman) /2/Member of Compensation Committee (James P. Gorter, chairman) /3/Member of Nominating Committee (Joshua I. Smith, chairman) /4/Member of Public Policy Committee (Clayton K. Yeutter, chairman) /5/Effective February 12, 1998 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 Sidney C. Banwart/6/ 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 Robert R. Macier/6/ Vice President David A. McKie/6/ Vice President Daniel M. Murphy 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/7/ Vice President Robert R. Gallagher Controller F. Lynn McPheeters 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, 1997, except as noted. /6/Effective January 1, 1998 /7/Retiring April 1, 1998 A-30 EX-21 5 SUBSIDIARIES AND AFFILIATES OF CATERPILLAR INC. EXHIBIT 21 SUBSIDIARIES AND AFFILIATES OF CATERPILLAR INC. (as of December 31, 1997)
Jurisdiction in Name of Company which Organized - --------------- --------------- Advanced Filtration Systems Inc. Delaware Amur Machinery & Services Company Russia Anchor Coupling Inc. Delaware Aquila Mining Systems Ltd. Canada Balderson Inc. Kansas Carter Machinery Company, Incorporated Delaware Caterpillar Agricultural Products Inc. Delaware Caterpillar Claas America LLC Delaware Claas Caterpillar Europe GmbH & Co KG Germany Claas Caterpillar Europe Verwaltungs GmbH Germany Caterpillar Americas Co. Delaware Caterpillar Americas Funding Inc. Delaware NOIL Participacoes e Comercio S.A. Brazil Lion S.A. Brazil Caterpillar Andes S.A. Chile Caterpillar Asia Pacific Holding Inc. Delaware Caterpillar (China) Investment Co., Ltd. China AsiaForge (Tianjin) Ltd. China AsiaTrak (Tianjin) Ltd. China Caterpillar Xuzhou Ltd. China Caterpillar (HK) Limited Hong Kong Shanxi International Casting Co.,Ltd. China Caterpillar Shanghai Engine Company Ltd. China V-Trac Holdings Limited Cook Islands V-Trac Infrastructure Development Company Vietnam Caterpillar Asia Pte. Ltd. Singapore Caterpillar Attachments Canada Ltd. Canada Caterpillar of Australia Ltd. Australia Caterpillar Brasil Ltda. Brazil Caterpillar Administracao e Participacoes S/C Ltda. Brazil Caterpillar Building Construction Products Ag Switzerland Caterpillar Commercial SARL Switzerland Caterpillar of Canada Ltd. Canada Caterpillar Commercial N.V. Belgium Caterpillar Group Services N.V. Belgium Hindustan Powerplus Limited India Caterpillar Commercial Services Ltd. Canada Caterpillar of Delaware, Inc. Delaware Caterpillar Industrial Products, Inc. Delaware Nexus International Inc. Delaware Nexus International S.r.L. Italy Caterpillar Elphinstone Pty. Ltd. Australia Elphinstone Commercial Services Ltd. Canada
Exhibit 21 Page 1 of 5 Caterpillar Energy Company S.A. Guatemala Caterpillar Export Limited US Virgin Islands Caterpillar Financial Services Corporation Delaware Bio-energy Partners Illinois Caterpillar Credit Services Asia Pte. Ltd. Singapore Caterpillar Finance France S.A. France Caterpillar Financial Asset Sales Corporation Nevada Caterpillar Financial Australia Limited Australia Caterpillar Financial Corporacion Financiera S.A., E.F.C. Spain Caterpillar Financial Funding Corporation Nevada Caterpillar Financial Member Company Delaware Caterpillar Financial Nordic Services A.B. Sweden Caterpillar Financial Renting, S.A. Spain Caterpillar Financial Services CR, s.r.o. Czechoslovakia Caterpillar Financial Services Limited Canada Caterpillar Financial Services Poland Sp.z.o.o. Poland Caterpillar Financial Services (U.K.) Limited England Caterpillar Holding Germany GmbH Germany Caterpillar Financial Services GmbH & Co KG Germany Caterpillar Leasing GmbH (Leipzig) Germany Caterpillar Vibra-Ram Verwaltungs GmbH Germany Caterpillar Vibra-Ram GmbH & Co. KG Germany EDC European Excavator Design Center GmbH & Co. KG Germany EDC European Excavator Design Center Verwaltungs GmbH Germany MaK Motoren GmbH & Co. KG Germany Germanischer Lloyd AG Germany Guangzhou MaK Diesel Engine Ltd. China Machinefabriek Bolier B.V. Netherlands Financieringsmaatschappij Boiler B.V. Netherlands Diesel Sales and Services Merwedehaven B.V. Netherlands Laminex V.o.F. Netherlands MaK Netherlands B.V. Netherlands MaK Americas (Canada) Inc. Canada MaK Scandinavia A/S Denmark MaK Wohnungsbaugesellschaft Germany Caterpillar International Finance plc Ireland Caterpillar International Services Corporation Nevada Caterpillar Leasing Chile, S.A. Chile Caterpillar Leasing (Thailand) Limited Thailand Grupo Financiero Caterpillar Mexico, S.A. de C.V. Mexico Caterpillar Arrendadora Financiera, S.A. de C.V. Mexico Caterpillar Credito, S.A. de C.V. Soc. Fin. de Obj. Lim. Mexico Caterpillar Factoraje Financiero, S.A. de C.V. Mexico GFCM Servicios, S.A. de C.V. Mexico MICA Energy Systems Michigan Caterpillar Financial Services N.V. Netherlands Antilles Caterpillar Forest Products Inc. Delaware Caterpillar Holding (France) S.A.R.L. France Caterpillar Logistics Services (France) SARL France MaK Mediterranee S.A.S. France
Exhibit 21 Page 2 of 5 Caterpillar Hungary Ltd. Hungary Caterpillar Impact Products Limited United Kingdom Caterpillar Industrial Inc. Ohio Mitsubishi Caterpillar Forklift America Inc. Delaware Material Handling Associates, Inc. Delaware Rapidparts Inc. Delaware Mitsubishi Caterpillar Forklift Asia Pte. Ltd. Singapore Mistubishi Caterpillar Forklift Europe B.V. Netherlands Caterpillar Insurance Co. Ltd. Bermuda Caterpillar Assurance Company Limited Grand Cayman Island Caterpillar Insurance Services Corporation Tennessee Caterpillar International Leasing L.L.C. Delaware Caterpillar Investment Management Ltd. Delaware Caterpillar Securities Inc. Delaware Caterpillar Logistics Services, Inc. Delaware Caterpillar Logistics Services Belgium N.V. Belgium Caterpillar Logistics N.V. Belgium Caterpillar Logistics Services Spain, S.A. Spain Caterpillar Mexico S.A. de C.V. Mexico Inmobiliaria Conek, S.A. Mexico Caterpillar Overseas Credit Corporation S.A. Switzerland Caterpillar Overseas S.A. Switzerland Caterpillar (Africa) (Proprietary) Limited South Africa Caterpillar Asia Limited Hong Kong Caterpillar Belgium S. A. Belgium Caterpillar China Limited Hong Kong Caterpillar Commercial S.A.R.L. France Caterpillar Commerciale S.r.L. Italy Caterpillar France S.A. France Caterpillar Logistics Services Limited England Caterpillar MHI Marketing Ltd. Japan Mec-Track S.r.L. Italy Mec-3 S.r.L. Italy P.T. Natra Raya Indonesia Shin Caterpillar Mitsubishi Ltd. Japan Aishin Co. Japan Akashi GS Co., Ltd. Japan Chubu Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan CM Custom Product Co., Ltd. Japan CM Human Services Co., Ltd. Japan CM Logistics Services Co., Ltd. Japan CMEC Co., Ltd. Japan Diamond Office Management Co., Ltd. Japan Earthmoving Resources Corporation Japan East Chugoku Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan Top Try Co., Ltd. Japan East Kanto Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan Clean World Co. Japan Tone Lease Co. Japan Hama-rental Co. Japan Hokkaido Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan Shin Hokken Ltd. Japan
Exhibit 21 Page 3 of 5 Hokken Service Co. Japan Hokuetsu Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan Akira Shoji Co., Ltd. Japan F. M. K. Co., Ltd. Japan Hokuriku Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan Dia Rental Hokuriku Co., Ltd. Japan Itoh Tekkosho Co., Ltd. Japan Kanagawa Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan Kansai Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan Space Attack Co., Ltd. Japan Kinki Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan Rental Sanwa Co., Ltd. Japan K-Lea Co., Ltd. Japan Koshin Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan Nagano Kouki Co., Ltd. Japan Sanko Rental Co. Japan Kyoei Co. Japan Machida Kiko Co., Ltd. Japan Nihon Kenki Lease Co., Ltd. Japan North Kanto Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan Takuma Co. Japan Rentec Co. Japan Sagakiko-shokai Co., Ltd. Japan Sagami GS Co., Ltd. Japan SCM Operator Training Co., Ltd. Japan SCM Shoji Co., Ltd. Japan SCM System Service Co., Ltd. Japan Shizuoka Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan Seiryo Co., Ltd. Japan Sowa System Co. Japan Tokuden Co. Japan Tokyo Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan Aiwa Co., Ltd. Japan Tokyo Rental Co., Ltd. Japan Tunnel Rental Co., Ltd. Japan West Chugoku Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan Rex World Co., Ltd. Japan Yeep Co. Japan Solar Turbines Canada Ltd. Canada Solar Turbines Europe S.A. Belgium Solar Turbines Overseas Pension Scheme Trustees Limited United Kingdom Tractor Engineers Limited India Caterpillar Paving Products Inc. Oklahoma Caterpillar Materiels Routiers S.A. France Caterpillar Poland Sp.zo.o. Poland Caterpillar Power Systems Inc. Delaware Caterpillar Power Ventures Corporation Delaware Caterpillar Power Ventures International, Ltd. Bermuda Caterpillar Redistribution Services Inc. Delaware DUECOSA Limited Channel Islands Caterpillar Redistribution Services S.A.R.L. Switzerland Caterpillar Rental Services Network Inc. Delaware Caterpillar Service Center Russia Caterpillar Services Limited Delaware
Exhibit 21 Page 4 of 5 Caterpillar (U.K.) Limited England All Wheel Drive (Sales) Limited England and Wales Brown Group Holdings Limited England and Wales Archer Components Limited England Artix Aviation Limited England Automotive Development Centre Limited England Caterpillar Peterlee Limited England Caterpillar Stockton Limited England and Wales D. J. Industries Limited England Caterpillar EPG Limited England and Wales Caterpillar Logistics Services (UK) Limited England and Wales Caterpillar Skinningrove Limited England and Wales MaK (London) Limited England Systemjoin Limited England and Wales Turner Powertrain Systems Limited England Caterpillar World Trading Corporation Delaware Cyclean, Inc. Delaware Depositary (Bermuda) Limited Bermuda F.G. Wilson, L.L.C. Delaware F.G. Wilson (Engineering) Limited Northern Ireland Everton Engineering (N.I.) Limited Northern Ireland F.G. Wilson Australia PTY Limited Australia F.G. Wilson Engineering (Dublin) Limited Ireland F.G. Wilson (Engineering) HK Limited Hong Kong F.G. Wilson Engineering Vertriebs-GmbH Germany F.G. Wilson Incorporated Delaware F.G. Wilson (Proprietary) Limited South Africa F.G. Wilson S.A. France F.G. Wilson Singapore Pte. Limited Singapore Genrent Limited Northern Ireland Hydropro S.r.l. Italy Leo, Inc. Washington Vanguard Hydraulic Pipelayer, Inc. Washington Lexington Real Estate Holding Corporation Delaware MaK Americas (USA) Inc. Illinois Mincom Pty Ltd. Australia Nevamash Russia Novotruck Russia Peoria Medical Research Corporation Illinois Rapisarda Industries SrL Italy Solar Turbines Incorporated Delaware OTSG, Inc. Delaware Solar Turbines International Company Delaware Energy Services International Group, Ltd. Delaware Energy Services International Limited Bermuda P. T. Solar Services Indonesia Indonesia Servtech Limited Ireland Turboservices SDN BHD Malaysia Solar Turbines Services Company California Turbinas Solar de Venezuela, C.A. Venezuela Turbinas Solar S.A. de C.V. Mexico Turbo Tecnologia de Reparaciones S.A. de C.V. Mexico STI Capital Company Delaware Tecnologia Modificada S.A. de C.V. Mexico UNOC Equipment and Supply, L.L.C. Delaware UNOC Equipment and Supply Russia
Exhibit 21 Page 5 of 5 EX-23 6 CONSENT OF PRICE WATERHOUSE LLP 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, 33-40598, 333-03609, 333- 32853, and 333-32851) of Caterpillar Inc. of our report dated January 21, 1998 related to the financial statements of Caterpillar Inc., appearing on page A-3 of the Appendix to the Company's 1998 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. We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Forms S-3 (Nos. 33-46194, 333-22041, 333-43133, and 333-43983) of Caterpillar Inc. of our report dated January 21, 1998 related to the financial statements of Caterpillar Inc., appearing on page A-3 of the Appendix to the Company's 1998 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. PRICE WATERHOUSE LLP Peoria, Illinois March 25, 1998 Exhibit 23 Page 1 of 1 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1997 DEC-31-1997 110 182 3,331 0 2,603 9,814 9,403 5,345 20,756 6,379 6,942 0 0 407 4,272 20,756 18,110 815 13,374 16,495 (202) 0 219 2,413 796 1,665 0 0 0 1,665 4.44 4.37 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) 8 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 December 31, 1997 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 -----END PRIVACY-ENHANCED MESSAGE-----