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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, 1994 Commission File No. 0-13295
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
CATERPILLAR FINANCIAL SERVICES CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 37-1105865
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3322 West End Avenue
Nashville, Tennessee 37203-0983
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (615) 386-5800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of class)
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. [ ] Not Applicable.
At December 31, 1994, there was (1) share of common stock of the
Registrant outstanding, which is owned by Caterpillar Inc.
The Registrant complies with the conditions set forth in General
Instruction (J)(1)(a) and (b) of Form 10-K and is therefore filing this Form
with the reduced disclosure format.
Documents Incorporated by Reference
1994 None
PART I.
Item 1. Business
General
Caterpillar Financial Services Corporation (the "Company") is a wholly
owned finance subsidiary of Caterpillar Inc. ("Caterpillar"). The Company and
its wholly owned subsidiaries in North America, Australia, and Europe are
principally engaged in the business of financing sales and leases of
Caterpillar products and non-competitive related equipment through Caterpillar
dealers and are also engaged in extending loans to Caterpillar customers and
dealers. Unless the context otherwise requires, the term "Company" includes
subsidiary companies.
The Company's business is largely dependent upon the ability of
Caterpillar dealers to generate sales and leasing activity, the willingness of
the customers and the dealers to enter into financing transactions with the
Company, and the availability of funds to the Company to finance such
transactions. Additionally, the Company's business is affected by changes in
market interest rates, which, in turn, are related to general economic
conditions, demand for credit, inflation, governmental policies, and other
factors.
The Company's retail financing business is highly competitive. Financing
for users of Caterpillar products is available through a variety of
competitive sources, principally commercial banks and finance and leasing
companies. The Company emphasizes prompt and responsive service to meet
customer requirements and offers various financing plans designed to increase
the opportunity for sales of Caterpillar products and generate financing
income for the Company. In addition, the Company's competitive position is
improved by merchandising programs of Caterpillar, its subsidiaries, and/or
Caterpillar dealers.
The following types of retail financing plans are currently offered:
Installment sale contracts. The Company finances retail sales of
equipment under installment sale contracts with terms generally
from one to five years. Such contracts may be entered into (i) by
dealers with their customers and assigned to the Company, or (ii)
by the Company directly with equipment users.
Tax-oriented leases. Under these leases, the Company is
considered to be the owner of the equipment for tax purposes
during the term of the lease (generally from two to seven years,
except for special engine or turbine applications which may range
up to 20 years). For financial accounting purposes, these leases
are classified as either financing or operating leases depending
upon the specific characteristics of the lease. The Company
establishes a specific residual value on each product leased based
on various factors including the use and application, price,
product type, and lease term. Generally, the lessee, at the end
of the lease term, may continue to lease the product or purchase
the product for its fair market value. The profitability of these
leases is affected by the Company's ability to realize estimated
residual values upon selling or re-leasing the equipment at the
termination of the leases.
Non-tax (financing) leases. Under these leases, the lessee is
considered to be the owner of the equipment for tax and financial
accounting purposes during the term of the lease (generally from
one to six years). For financial accounting purposes, these leases
are classified as financing leases. The lessee customarily has a
fixed price purchase option exercisable upon expiration of the
lease term or will be required to purchase the equipment at the
end of the lease term.
Customer and dealer loans. The Company offers loans for working
capital and other business purposes to Caterpillar customers and
dealers meeting the Company's credit requirements. The loans may
be secured or unsecured and are for terms generally ranging from
two to ten years.
Governmental lease-purchase contracts. The Company finances sales
of products to cities, counties, states, and other qualified
governmental bodies for terms generally from two to seven years.
In general, this form of financing is subject to termination if
the governmental body does not appropriate funds for future
payments. The reduced interest rate in these transactions
reflects the fact that interest income is not subject to federal
income tax.
The Company also provides wholesale financing of Caterpillar dealer
inventory in Germany, Austria, and the Czech Republic and Caterpillar dealer
rental fleets in the United States and Canada. The product being financed is
fully insured against physical damage. The amount of credit extended by the
Company for each machine is generally limited to the invoice price of the new
equipment. Maturities in Germany generally range from one to three months.
In the United States and Canada the stated maturity of these rental fleet
financings is generally 36 months, however, the Company's experience has been
that most terminate within six months.
The percentages of the total value of the Company's portfolio represented
by these financing plans at December 31 of the past three years were as
follows:
1994 1993 1992
Retail Financing:
Installment sale contracts 23% 25% 25%
Non-tax (financing) leases 20% 19% 19%
Tax-oriented leases 19% 20% 20%
Customer loans 18% 19% 18%
Dealer loans 6% 10% 12%
Governmental lease-purchase
contracts 3% 3% 4%
Wholesale Financing 11% 4% 2%
The Company periodically offers below-market-rate financing to customers
which is subsidized by Caterpillar, its subsidiaries, and/or Caterpillar
dealers. In all such cases, the cost of such subsidies is borne totally by
Caterpillar, its subsidiaries, and/or the dealer (and not by the Company) and
is settled at the time each transaction is executed.
Tax-oriented leases and governmental lease-purchase contracts are
currently offered at fixed interest rates and fixed rental payments. Non-tax
(financing) leases, installment sale contracts, and customer and dealer loans
are offered at either fixed or floating interest rates. Approximately 77% of
the Company's portfolio involves financing with fixed interest rates and fixed
payments. In order to reduce the impact of interest rate fluctuations on its
operations, the Company has a match funding policy of structuring the
maturities of a substantial percentage of its borrowed funds over periods
which closely correspond to the maturities of its portfolio.
The Company provides financing only when acceptable credit standards and
criteria are met. Decisions regarding credit applications are based upon the
customer's credit history and financial strength, the intended use of the
equipment being financed, and other considerations. In general, the Company
obtains a security interest in the equipment being financed. Additionally,
approximately seven percent of the total value of the Company's portfolio
(excluding loans to dealers) has recourse to a dealer.
Management closely monitors past due accounts and regularly evaluates the
collectibility of receivable balances. The Company maintains an allowance for
credit losses which it believes is sufficient to cover uncollectible accounts.
Once it has been determined by management that a portion of the receivable is
not considered to be collectible, company policy is to write off against such
allowance that portion of the outstanding receivable which cannot be recovered
by leasing or selling the related equipment. Management believes the
allowance for credit losses at December 31, 1994, is sufficient to provide for
any losses which may be sustained on outstanding receivables. For more
information on receivables and the allowance for credit losses, see Note 2 of
the Notes to the Consolidated Financial Statements.
The following table summarizes the Company's delinquency experience
showing past-due receivables as a percentage of total receivables:
Delinquency Experience
December 31,
1994 1993 1992
Past due 31 to 60 days ..................... .5% 0.7% 0.6%
Past due over 60 days ..................... 1.7% 1.2% 1.9%
At December 31, 1994, the largest single customer/dealer account
represented 3.9% of the Company's portfolio and the five largest such
customer/dealer accounts represented 10.4% of the portfolio. With respect to
dealer financing, at December 31, 1994, the largest single dealer account
represented 3.9% of the Company's portfolio and the five largest such dealer
accounts collectively represented 9.1% of the portfolio. In the opinion of
the Company, the loss of the business represented by any one of these accounts
would not have a material adverse effect on the Company's overall business.
The Company also has collateralized U.S. dollar denominated cross-border
accounts with customers/dealers in Mexico. The Company does not anticipate
losses from nonperformance by these accounts due to the Mexican economy.
Relationship with Caterpillar
Caterpillar provides the Company with certain operational and financial
support which is integral to the conduct of the Company's business. The
employees of the Company are covered by various benefit plans, including
pension/post-retirement plans, administered by Caterpillar. The Company also
reimburses Caterpillar for certain corporate services. For more information
on payments for services, see Note 10 of the Notes to the Consolidated
Financial Statements.
The Company, in conjunction with Caterpillar and its
subsidiaries, periodically offers below-market-rate financing to customers
under merchandising programs. Caterpillar, at the outset of the transaction,
remits to the Company an amount equal to the present value of the interest
differential which is recognized as income over the term of the contracts.
For more information on the interest differential payments, see Note 10 of the
Notes to the Consolidated Financial Statements.
The Company has agreements with a subsidiary of Caterpillar to purchase,
at a discount, some or all of this subsidiary's receivables generated by sales
of products to Caterpillar dealers in Germany, Austria, and the Czech
Republic. These purchases (dealer floor planning) in 1994, 1993, and 1992
totaled $190.9 million, $210.2 million, and $201.7 million, respectively.
Through December 31, 1994, Caterpillar had invested a total of $295.0
million in the equity of the Company. The Company and Caterpillar also have
an agreement (the "Support Agreement") which provides, among other things,
that Caterpillar will (i) remain, directly or indirectly, the sole owner of
the Company, (ii) ensure that the Company will maintain a tangible net worth
of at least $20.0 million, and (iii) permit the Company to use (and the
Company is required to use) the name "Caterpillar" in the conduct of its
business. The Support Agreement provides that it may be modified, amended, or
terminated by either party. However, no such modification or amendment, which
adversely affects the holders of any debt outstanding at the execution
thereof, is binding on or in any manner becomes effective with respect to (i)
any then outstanding commercial paper, or (ii) any other debt then outstanding
unless such modification or amendment is approved in writing by the holders of
66-2/3% of the aggregate principal amount of such other debt. The obligations
of Caterpillar under the Support Agreement are to the Company only and are not
directly enforceable by any creditor of the Company, nor do such obligations
constitute a guarantee by Caterpillar of the payment of any debt or obligation
of the Company.
To supplement external debt financing sources, the Company has variable
amount lending agreements with Caterpillar (including one of its
subsidiaries). Under these agreements, which may be amended from time to
time, the Company may borrow up to $88.8 million from Caterpillar, and
Caterpillar may borrow up to $88.8 million from the Company. All of the
variable amount lending agreements are effective for indefinite terms and may
be terminated by either party upon 30 days' notice. At December 31, 1994,
1993, and 1992, the Company had no outstanding borrowings or loans receivable
under these agreements.
To hedge the U.S. dollar denominated borrowings in Australia against
currency fluctuations, the Company has forward exchange contracts with
Caterpillar. All of these contracts generally have maturities not exceeding
90 days. At December 31, 1994, 1993, and 1992, the Company had contracts with
Caterpillar totaling $172.6 million, $143.1 million, and $116.4 million,
respectively.
The Company has a tax sharing agreement with Caterpillar in which
Caterpillar collects from or pays to the Company its allocated share of any
consolidated U.S. income tax liability or credit applicable to any period for
which the Company is included as a member of the consolidated group. Similar
agreements exist between Caterpillar Financial Australia Limited and
Caterpillar of Australia Ltd. with respect to taxes payable in Australia, and
between the Company and Caterpillar with respect to taxes payable in Germany.
Item 2. Properties
The Company does not own any real estate. Its principal executive
offices are comprised of approximately 63,000 square feet of office space at
3322 West End Avenue, Nashville, Tennessee.
As of December 31, 1994, the Company had additional offices in or near
Phoenix, Arizona; Dallas, Texas; Atlanta, Georgia; Baltimore, Maryland;
Chicago, Illinois; Melbourne, Australia; Calgary, Alberta; Toronto, Ontario;
Munich, Germany; Leipzig, Germany; Stockholm, Sweden; Oslo, Norway; Arhus,
Denmark; Paris, France; London, England; and Madrid, Spain. For more
information on leases, see Note 11 of the Notes to the Consolidated Financial
Statements.
Item 3. Legal Proceedings
The Company is a party to various litigation matters and claims, and,
while the results of litigation and claims cannot be predicted with certainty,
management believes the final outcome of such matters and claims will not have
a material adverse effect on the consolidated financial position.
Item 4. Submission of Matters to a Vote of Security Holders
Information for this Item 4 is not required. See General
Instruction J.
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is owned entirely by Caterpillar and is not
publicly traded. In its three most recent fiscal years, the Company has not
declared or paid cash dividends on its common stock.
Item 6. Selected Financial Data
Information on this Item 6 is not required. See General
Instruction J.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The Company derives its earnings primarily from financing sales and
leases of Caterpillar products and from loans extended to Caterpillar
customers and dealers.
New retail financing during 1994 totaled $2,183.4 million, a 14% increase
over the $1,916.9 million financed in 1993 and a 43% increase over the 1992
new business of $1,531.8 million. These increases were due primarily to
increased dealer deliveries of Caterpillar construction machines in the
markets served by the Company. The Company had wholesale financing during
1994 of $821.5 million compared with $228.2 million for 1993. The increase
was due to the introduction of a new program supporting Caterpillar dealer
rental fleets in North America.
New retail financing in 1995 is expected to slightly exceed 1994 levels.
Wholesale financing in 1995 is expected to exceed 1994 levels due to expansion
of the Caterpillar dealer rental fleet financing program in North America.
Revenues from operations in the United States were more than 75% of total
revenues in 1994, 1993, and 1992. Net income from operations in the United
States was more than 90% of total net income in 1994, 1993, and 1992.
For more geographic segment information, see Note 12 of the Notes to the
Consolidated Financial Statements.
Past due percentages increased slightly in 1994. The allowance for
credit losses will continue to be monitored to provide for an amount which, in
management's judgement, will be adequate to cover uncollectible receivables.
The introduction of a financing program supporting Cat dealer rental
fleets in North America resulted in increased wholesale financing activity in
1994 compared to 1993. For more information on the composition of the
Company's portfolio by financing plan, see "Item 1. Business."
1994 Compared With 1993
Total revenues for 1994 were $447.0 million, a 23% increase over 1993
revenues of $364.6 million. The increase in revenues was primarily the result
of earnings from the larger portfolio which increased to $4,437.6 million at
December 31, 1994 from $3,522.1 million at December 31, 1993.
The annualized interest rate on finance receivables (computed by dividing
finance income by the average monthly finance receivable balances) was 8.6%
for 1994 compared with 9.1% for 1993. Tax benefits associated with
governmental lease-purchase contracts and a portion of tax benefits associated
with long-term tax-oriented leases are not reflected in such annualized
interest rates.
Other income of $22.3 million for 1994 included fees, gains on sales of
equipment returned from lease, income from and gain on sale of receivables,
and other miscellaneous income. The increase of $5.6 million for 1994 was
primarily due to servicing fees and other income related to receivables sold
in the second quarter of 1994 and the gain on sale of these receivables, and a
higher amount of fees related to guarantees of securities of certain
Caterpillar dealers.
Interest expense for 1994 was $212.1 million, $39.0 million higher than
1993 due to increased borrowings to support the larger portfolio. This
increase was partially offset by lower borrowing rates as the average cost of
borrowed funds was 6.2% in 1994 compared with 6.5% in 1993.
Depreciation expense increased from $69.6 million in 1993 to $94.4
million in 1994 due to the increase in equipment on operating leases which,
computed as a monthly average balance, increased 23%.
General, operating, and administrative expenses increased $5.5 million
over 1993 primarily due to staff-related and other expenses required for
expansion into Europe and to service the larger portfolio. The Company's
full-time employment increased from 361 at the end of 1993 to 414 at
December 31, 1994.
Provision for credit losses during 1994 increased from $20.8 million in
1993 to $23.2 million in 1994. This increase reflected increased levels of
new retail business for 1994. Receivables, net of recoveries, of $13.2
million were written off against the allowance for credit losses during 1994
compared with $18.8 million during 1993. Receivables past due over 30 days
increased slightly to 2.2% of total receivables at December 31, 1994 compared
with 1.9% at December 31, 1993. The allowance for credit losses is monitored
to provide for an amount which, in management's judgment, will be adequate to
cover uncollectible receivables. At December 31, 1994, the allowance for
credit losses was $49.5 million which was 1.2% of finance receivables, net of
unearned income(1.4% excluding wholesale receivables), compared with $41.5
million and 1.3% (1.4% excluding wholesale receivables) at December 31, 1993,
respectively.
Other expense of $19.3 million for 1994 primarily resulted
from recording $18.0 million of unrealized losses on interest rate caps and
swaptions written by the Company. The Company has marked to market the
written cap agreements. The Company is continuing to manage the written caps
on an economic basis. This will lead to future mark-to-market gains or
losses.
The effective income tax rate for 1994 was 38% compared with 36% for
1993. For information on this change, see Note 8 of the Notes to the
Consolidated Financial Statements.
Net income in 1994 was $32.2 million, compared with $37.8 million in
1993. The decrease in net income resulted primarily from an $11.5 million
mark-to-market after-tax unrealized charge for interest rate caps and
swaptions written by the Company. This decrease was partially offset by
increased earnings from a larger portfolio.
1993 Compared With 1992
Total revenues for 1993 were $364.6 million, a 6% increase over 1992
revenues of $343.5 million. The increase in revenues, limited by a low
interest rate environment, was primarily the result of earnings from the
larger portfolio which increased to $3,522.1 million at December 31, 1993 from
$2,812.7 million at December 31, 1992.
The annualized interest rate on finance receivables (computed by dividing
finance income by the average monthly finance receivable balances) was 9.1%
for 1993 compared with 10.3% for 1992. Tax benefits associated with
governmental lease-purchase contracts and a portion of tax benefits associated
with long-term tax-oriented leases are not reflected in such annualized
interest rates. The decrease in the annualized interest rate reflected a
decrease in the interest rates charged to customers.
Other income, net, of $16.7 million for 1993 included fees, gains on
sales of equipment returned from lease, and other miscellaneous income. The
increase of $1.2 million for 1993 was primarily due to a higher amount of fees
collected and earned.
Interest expense for 1993 was $173.1 million, $1.3 million less than
1992. Although there were increased borrowings to support the larger
portfolio, interest expense decreased due to lower borrowing rates as the
average cost of borrowed funds was 6.5% in 1993 compared with 7.8% in 1992.
Depreciation expense increased from $63.1 million in 1992 to $69.6
million in 1993 due to the increase in equipment on operating leases which,
computed as a monthly average balance, increased 9%.
General, operating, and administrative expenses increased $8.8 million
over 1992 primarily due to staff-related and other expenses required to
service the larger portfolio and expansion into Europe. The Company's full-
time employment increased from 324 at the end of 1992 to 361 at
December 31, 1993.
Provision for credit losses during 1993 increased from $20.4 million in
1992 to $20.8 million in 1993. This increase, partially offset by a higher
provision taken in 1992 for the U.S., Australian, and Canadian companies,
reflected increased levels of new business for 1993. Receivables, net of
recoveries, of $18.8 million were written off against the allowance for credit
losses during 1993 compared with $14.3 million during 1992 due to an
acceleration of write-offs from point of sale to point of repossession.
Receivables past due over 30 days were 1.9% of total receivables at
December 31, 1993 compared with 2.5% at December 31, 1992. Past due
percentages decreased primarily as a result of an improving U.S. economy and
collection efforts. The allowance for credit losses is monitored to provide
for an amount which, in management's judgment, will be adequate to cover
uncollectible receivables. At December 31, 1993, the allowance for credit
losses was $41.5 million which was 1.3% of finance receivables, net of
unearned income, compared with $36.5 million and 1.4% at December 31, 1992,
respectively.
The effective income tax rate for 1993 was 36% compared with 34% for
1992. For information on this change, see Note 8 of the Notes to the
Consolidated Financial Statements.
Net income in 1993 was $37.8 million, compared with $34.0 million,
excluding the cumulative effect of the change in accounting for income taxes
in 1992. The increase in net income generally reflected the increased
revenues from a larger portfolio and lower cost of borrowed funds, partially
offset by increased costs to support the larger portfolio and European
expansion.
Capital Resources and Liquidity
The Company's operations during the year were primarily funded with a
combination of medium-term notes, commercial paper, bank borrowings, retained
earnings, and additional equity capital of $45.0 million invested by
Caterpillar. Additional short-term funding was available from Caterpillar
(see Note 10 of the Notes to the Consolidated Financial Statements); however,
no intercompany borrowings were outstanding at December 31, 1994.
On June 30, 1994, the Company completed its first asset-backed
securitization which was comprised of $242.5 million of fixed-rate installment
sale contracts. The proceeds were used to reduce existing debt. The Company
recognized a $1.3 million gain on this transaction in the second quarter of
1994 and receives fees on a monthly basis for servicing these sold
receivables.
Total debt outstanding as of December 31, 1994, was $3,866.4 million, an
increase of $825.3 million over that at December 31, 1993, and was primarily
comprised of $2,412.2 million of medium-term notes, $841.2 million of
commercial paper, and $532.0 million of notes payable to banks. Interest rate
swaps were contracted in the United States, Australia, Canada, Germany and the
United Kingdom to manage the exposure to interest rate fluctuations. See
Note 6 of the Notes to the Consolidated Financial Statements for more
information on short-term and long-term debt.
At December 31, 1994, the Company had available a total of $1,020.7
million of short-term credit lines which expire at various dates in 1995, and
$34.2 million of long-term credit lines which expire at various dates from
March 1996 to May 1997. 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
at various interest rates. At December 31, 1994, there were $522.7 million of
these lines utilized for bank borrowings in Australia and Europe.
The Company also participates with Caterpillar in two syndicated
revolving credit facilities aggregating $1.8 billion, consisting of a $1.2
billion five-year facility and a $600.0 million 364-day revolving facility.
The Company's initial allocation is $990.0 million, consisting of a $660.0
million five-year revolving credit and a $330.0 million 364-day revolving
credit. The Company has the ability to request a change in its allocation and
will do so to maintain the required amount of support for the Company's
outstanding commercial paper and commercial paper guarantees. These
facilities provide for borrowings at interest rates which vary according to
LIBOR or money market rates. At December 31, 1994, there were no borrowings
under these facilities.
The revolving credit facilities require the Company to maintain its
consolidated ratio of profit before taxes plus fixed charges to fixed charges
at no less than 1.1 to 1 for each quarter; the Company's total debt to total
stockholder's equity may not exceed 8.0 to 1; and the Company's tangible net
worth must be at least $20.0 million. During 1994, the Company was in
compliance with these requirements.
The Company's funding requirements were met primarily through the sale of
commercial paper and medium-term notes, discounting of bank and trade bills,
and through bank borrowings. During 1994, the average outstanding commercial
paper balance, net of discount, was $838.7 million at an average interest rate
of 4.6%. At year-end 1994, the face value of commercial paper outstanding was
$844.8 million. During 1994, $576.3 million of fixed-rate medium-term notes
were sold at an average interest rate of 6.9%, and $471.8 million of floating-
rate medium-term notes were sold at rates primarily indexed to LIBOR or
treasury bill rates swapped to LIBOR. Medium-term notes outstanding at year-
end 1994 were $2,412.2 million. During the year, the average outstanding bank
borrowings were $472.5 million at an average interest rate of 5.6%.
In connection with its match funding objectives, the Company utilizes a
variety of interest rate contracts including swap, cap, and forward rate
agreements. All of these interest rate agreements are held or issued for
purposes other than trading. The agreements are entered into with major
financial institutions and are utilized for two principal reasons: 1) To
modify the Company's debt structure in order to match fund its receivable
portfolio which reduces the risk of deteriorating margins between its
interest-earning assets and interest-bearing liabilities, and 2) To gain an
economic/competitive advantage through lowering the cost of borrowed funds by
either changing the characteristics of existing debt instruments or entering
into agreements in combination with the issuance of debt. Notional amounts of
interest rate swap agreements totaled $1,747.5 million, future dated swap
agreements totaled $57.7 million, sold (written) cap agreements totaled $235.7
million, and forward rate agreements totaled $2.9 million at year-end 1994.
The Company hedges all of its foreign exchange exposure except for net
investments in its foreign subsidiaries. Exchange gains/losses on these net
investments are reflected in "Foreign currency translation adjustment" (See
Note 1H of the Notes to the Consolidated Financial Statements). The Company
has forward exchange contracts to hedge its U.S. dollar denominated
obligations in Australia against currency fluctuations. At December 31, 1994,
the outstanding forward exchange contracts totaled $172.6 million.
Equity capital at the end of 1994 was $503.1 million, an increase of
$85.1 million during the year. This increase included $45.0 million of
additional equity investment made by Caterpillar and $32.2 million of retained
earnings from operations. The increase in debt and the funds provided by
operations and by Caterpillar were used to finance the increase in the
portfolio. The ratio of debt to equity at December 31, 1994 was 7.7 to 1,
compared with 7.3 to 1 for 1993 and 6.8 to 1 for 1992. In February 1995,
Caterpillar made an additional capital contribution to the Company of $30.0
million.
Item 8. Financial Statements and Supplementary Data
The information required by Item 8 is included as a part of this report
on pages 15 through 30.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III.
Item 10. Directors and Executive Officers of the Registrant
Information for Item 10 is not required. See General Instruction J.
Item 11. Executive Compensation
Information for Item 11 is not required. See General Instruction J.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information for Item 12 is not required. See General Instruction J.
Item 13. Certain Relationships and Related Transactions
Information for Item 13 is not required. See General Instruction J.
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
Report of Independent Accountants
Consolidated Statement of Financial Position at December 31,
1994, 1993, and 1992
Consolidated Statement of Income and Retained Earnings for
the Years Ended December 31, 1994, 1993, and 1992
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1994, 1993, and 1992
Notes to Consolidated Financial Statements
(b) Reports on Form 8-K
None
(c) Exhibits
3.1 Certificate of Incorporation of the Company (incorporated by
reference from Exhibit 3.1 to the Company's Form 10, as
amended, Commission File No. 0-13295).
3.2 Bylaws of the Company (incorporated by reference from
Exhibit 3.2 to the Company's Annual Report on Form 10-K, for
the year ended December 31, 1990, Commission File No.
0-13295).
4.1 Indenture, dated as of April 15, 1985, between the Company
and Morgan Guaranty Trust Company of New York, as Trustee,
including form of Debt Security (see Table of Contents to
Indenture)(incorporated by reference from Exhibit 4.1 to the
Company's Registration Statement on Form S-3, Commission
File No. 33-2246).
4.2 First Supplemental Indenture, dated as of May 22, 1986,
amending the Indenture dated as of April 15, 1985 between
the Company and Morgan Guaranty Trust Company of New York,
as Trustee (incorporated by reference from Exhibit 4.1 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 20, 1986, Commission File No. 0-13295).
4.3 Second Supplemental Indenture, dated as of March 15, 1987,
amending the Indenture dated as of April 15, 1985 between
the Company and Morgan Guaranty Trust Company of New York,
as Trustee (incorporated by reference from Exhibit 4.3 to
the Company's Current Report on Form 8-K dated April 24,
1987, Commission File No. 0-13295).
4.4 Third Supplemental Indenture, dated as of October 2, 1989,
amending the Indenture dated as of April 15, 1985, between
the Company and Morgan Guaranty Trust Company of New York,
as Trustee (incorporated by reference from Exhibit 4.3 to
the Company's Current Report on Form 8-K, dated
October 16, 1989, Commission File No. 0-13295).
4.5 Fourth Supplemental Indenture, dated as of October 1, 1990,
amending the Indenture dated April 15, 1985, between the
Company and Morgan Guaranty Trust Company of New York, as
Trustee (incorporated by reference from Exhibit 4.3 to the
Company's Current Report on Form 8-K, dated
October 29, 1990, Commission File No. 0-13295).
4.6 Indenture, dated as of July 15, 1991, between the Company
and Continental Bank, National Association, as Trustee
(incorporated by reference from Exhibit 4.1 to the Company's
Current Report on Form 8-K, dated July 25, 1991, Commission
File No. 0-13295).
4.7 Tri Party Agreement dated as of August 23, 1994 among the
Company, BankAmerica National Trust Company and Morgan
Guaranty Trust Company of New York.
4.8 Support Agreement, dated as of December 21, 1984, between
the Company and Caterpillar (incorporated by reference from
Exhibit 4.2 to the Company's Form 10, as amended, Commission
File No. 0-13295).
10.1 Tax Sharing Agreement, dated as of June 21, 1984, between
the Company and Caterpillar (incorporated by reference from
Exhibit 10.3 to the Company's Form 10, as amended,
Commission File No. 0-13295).
12 Statement Setting Forth Computation of Ratio of Profit to
Fixed Charges.
(The ratios of profit to fixed charges for the years ending
December 31, 1994, 1993, and 1992 were 1.23, 1.33, and 1.28,
respectively.)
23 Consent of Price Waterhouse LLP
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Caterpillar Financial Services Corporation
(Registrant)
Dated: March 17, 1995 By: /s/ Nancy L. Snowden
Nancy L. Snowden, 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.
Date Signature Title
March 17, 1995 /s/ James S. Beard President, Director and
(James S. Beard) Principal Executive
Officer
March 17, 1995 /S/ F. Lynn McPheeters Executive Vice President
(F. Lynn McPheeters) and Director
March 17, 1995 /s/ James W. Owens Director
(James W. Owens)
March 17, 1995 /s/ Kenneth C. Springer Controller and Principal
(Kenneth C. Springer) Accounting Officer
March 17, 1995 /s/ Frank C. Carder Treasurer and Principal
(Frank C. Carder) Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Caterpillar Financial Services Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 11 present fairly, in all material
respects, the financial position of Caterpillar Financial Services Corporation
and its subsidiaries at December 31, 1994, 1993, and 1992, and the results of
their operations and their cash flows for each of the three 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 audit 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.
As discussed in Note 8 to the consolidated financial statements, in 1992 the
Company adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes."
PRICE WATERHOUSE LLP
Chicago, Illinois
January 19, 1995
CATERPILLAR FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Millions of dollars)
December 31,
1994 1993 1992
Assets:
Cash and cash equivalents $ 16.3 $ 15.6 $ 11.5
Finance receivables (Notes 2,3, and 5):
Wholesale notes receivable 516.0 142.8 49.3
Retail notes receivable 1,105.9 1,035.5 858.5
Investment in finance receivables 2,831.4 2,350.8 1,970.1
4,453.3 3,529.1 2,877.9
Less: Unearned income 415.5 348.2 315.8
Allowance for credit losses 49.5 41.5 36.5
3,988.3 3,139.4 2,525.6
Equipment on operating leases,
less accumulated depreciation (Note 4) 425.0 364.6 276.7
Other assets 81.6 45.1 29.5
Total assets $4,511.2 $3,564.7 $2,843.3
Liabilities and stockholder's equity:
Payable to dealers and others $ 42.9 $ 13.7 $ 11.1
Payable to Caterpillar Inc. (Note 10) 3.2 3.9 2.9
Accrued interest payable 37.8 33.6 28.0
Income tax payable (Note 8) 21.6 36.0 30.0
Other liabilities 25.5 5.4 3.2
Short-term borrowings (Note 6) 1,383.1 1,138.2 913.1
Current maturities of long-term debt
(Note 6) 807.6 492.5 492.4
Long-term debt (Note 6) 1,675.7 1,410.4 995.9
Deferred income taxes (Note 8) 10.7 13.0 12.7
Total liabilities 4,008.1 3,146.7 2,489.3
Commitments and contingent liabilities
(Note 7)
Common stock - $1 par value
Authorized: 2,000 shares
Issued and outstanding: one share 295.0 250.0 220.0
Profit employed in the business 207.7 175.5 137.7
Foreign currency translation
adjustment .4 (7.5) (3.7)
Total stockholder's equity 503.1 418.0 354.0
Total liabilities and stockholder's equity $4,511.2 $3,564.7 $2,843.3
(See Notes to Consolidated Financial Statements)
CATERPILLAR FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31,
(Millions of dollars)
1994 1993 1992
Revenues:
Wholesale finance income $ 25.3 $ 5.8 $ 4.1
Retail finance income 275.2 246.4 235.2
Rental income 124.2 95.7 88.7
Other income 22.3 16.7 15.5
Total revenues 447.0 364.6 343.5
Expenses:
Interest (Note 6) 212.1 173.1 174.4
Depreciation 94.4 69.6 63.1
General, operating, and administrative 47.2 41.7 32.9
Provision for credit losses 23.2 20.8 20.4
Other expense 19.3 1.0 1.1
Total expenses 396.2 306.2 291.9
Income before income taxes, minority
interest, and cumulative effect of
change in accounting for income
taxes 50.8 58.4 51.6
Provision for income taxes (Note 8) 19.3 21.3 17.6
Minority interest in losses of
subsidiary .7 .7 -
Income before cumulative effect of change
in accounting for income taxes 32.2 37.8 34.0
Cumulative effect of change in accounting
for income taxes - - 2.6
Net income 32.2 37.8 36.6
Retained earnings - beginning of year 175.5 137.7 101.1
Retained earnings - end of year $207.7 $175.5 $137.7
(See Notes to Consolidated Financial Statements)
CATERPILLAR FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(Millions of dollars)
1994 1993 1992
Cash flows from operating activities:
Net income $ 32.2 $ 37.8 $ 36.6
Adjustments for noncash items:
Depreciation 94.4 69.6 63.1
Provision for credit losses 23.2 20.8 20.4
Unrealized mark-to-market losses 18.0 - -
Other (6.1) (4.4) (6.1)
Change in assets and liabilities:
Receivables from customers and others (25.3) (15.3) 14.9
Deferred income taxes (3.2) - (9.5)
Payable to dealers and others 27.1 2.8 10.1
Payable to Caterpillar Inc. (.7) 1.0 (.6)
Accrued interest payable 3.6 5.5 .7
Income tax payable (14.3) 6.0 21.4
Other, net 1.4 2.1 2.1
Net cash provided by operating
activities 150.3 125.9 153.1
Cash flows from investing activities:
Additions to equipment (186.4) (204.1) (121.2)
Disposals of equipment 73.0 32.6 31.2
Additions to finance receivables (2,934.2) (2,023.0) (1,601.5)
Collections of finance receivables 1,850.2 1,388.8 1,197.8
Proceeds from sale of receivables, net 241.4 - -
Other, net (1.4) .2 (.3)
Net cash used for investing
activities (957.4) (805.5) (494.0)
Cash flows from financing activities:
Additional paid in capital 45.0 30.0 10.0
Proceeds from long-term debt issues 1,082.0 918.4 617.0
Payments on long-term debt (505.2) (517.4) (567.7)
Short-term borrowings, net 186.2 253.5 275.0
Net cash provided by financing
activities 808.0 684.5 334.3
Effect of exchange rate changes on cash (.2) (.8) (2.3)
Net change in cash and cash equivalents .7 4.1 (8.9)
Cash and cash equivalents at beginning
of year 15.6 11.5 20.4
Cash and cash equivalents at end of year $ 16.3 $ 15.6 $ 11.5
(See Notes to Consolidated Financial Statements)
CATERPILLAR FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Operations and basis of consolidation
Caterpillar Financial Services Corporation (the "Company") is a wholly
owned finance subsidiary of Caterpillar Inc. ("Caterpillar"). The Company
provides financing of earthmoving, construction, and materials handling
machinery and engines sold by Caterpillar dealers, and turbine engines sold by
Solar Turbines Incorporated through offices located in North America,
Australia, and Europe. The Company also provides customer and dealer loans
for various business purposes.
The accompanying financial statements include the accounts of
Caterpillar Financial Services Corporation and its subsidiaries.
Certain amounts in the prior period financial statements have been
reclassified to conform to the 1994 presentation.
B. Recognition of earned income
Retail finance income - Income on retail finance receivables (financing
leases, installment sale contracts, and customer and dealer loans) is
recognized over the term of the contract at a constant rate of return on the
scheduled uncollected principal balance.
Wholesale finance income - Income on wholesale finance receivables
(dealer floor planning for the German operations and rental fleet financing in
North America) is recognized based on the daily balance of wholesale
receivables outstanding and the applicable effective interest rate.
Rental income - Income on operating leases is reported over the life of
the operating lease in the period earned.
Fee income - Loan origination and commitment fees in excess of $500 are
amortized to finance income using the interest method over the contractual
lives of the finance receivables.
Recognition of income on loans and leases (Finance receivables, which
includes notes,and operating leases) is suspended when management determines
that collection of future income is not probable. Accrual is resumed if the
receivable becomes contractually current and collection doubts are removed;
previously suspended income is recognized at that time.
C. Depreciation
Depreciation on operating leases is recognized using the straight-line
method over the lease term. The depreciable basis is the original cost of the
equipment less the estimated residual value of the equipment at the end of the
lease term. Depreciation on property and equipment, other than equipment on
operating leases, that the Company owns, was less than $1.3 million for 1994.
D. Derivative financial instruments
Note 6 contains information about the accounting for interest rate and
foreign currency derivative contracts.
E. Cash and cash equivalents
Cash and cash equivalents include cash on hand or on deposit with banks
and highly liquid short-term investments with maturities of three months or
less at the time of purchase.
F. Allowance for credit losses
Management regularly evaluates factors affecting the collectibility of
receivable balances and maintains an allowance for credit losses, which it
believes is sufficient to cover uncollectible accounts. Uncollectible
receivable balances are written off against the allowance for credit losses
when the underlying collateral is repossessed. Prior to 1993, uncollectible
receivable balances were written off when the underlying collateral was sold.
G. Income taxes
The Company has a tax sharing agreement with Caterpillar in which the
Company consents to the filing of consolidated income tax returns with
Caterpillar, and Caterpillar collects from or pays to the Company its
allocated share of any consolidated income tax liability or credit applicable
to any period for which the Company is included as a member of the
consolidated group in a manner determined as if each company in the
consolidated group had computed its tax on a separate return basis. Similar
agreements exist between Caterpillar Financial Australia Limited and
Caterpillar of Australia Ltd. with respect to taxes payable in Australia, and
between the Company and Caterpillar with respect to taxes payable in Germany.
H. Foreign currency translation
Assets and liabilities of foreign subsidiaries are translated at current
exchange rates, and the effects of translation adjustments are reported as a
separate component of stockholder's equity entitled "Foreign currency
translation adjustment".
NOTE 2 - RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
The contractual maturities of outstanding receivables at
December 31, 1994 were:
Installment Financing
Amounts due in contracts leases Notes Total
1995 $ 468.0 $ 493.0 $ 573.2 $1,534.2
1996 350.8 371.3 333.5 1,055.6
1997 220.1 255.4 364.0 839.5
1998 90.2 135.8 167.4 393.4
1999 21.3 54.5 106.5 182.3
Thereafter 2.1 77.2 77.3 156.6
1,152.5 1,387.2 1,621.9 4,161.6
Residual Value - 291.7 - 291.7
Total $1,152.5 $1,678.9 $1,621.9 $4,453.3
Receivables generally may be repaid or refinanced without penalty prior
to contractual maturity. Accordingly, this presentation should not be
regarded as a forecast of future cash collections.
The average recorded investment in impaired loans and leases (those for
which management does not expect to collect all amounts due according to the
contractual terms of the agreement) during 1994 was $48.9 million. The total
recorded investment in impaired loans and leases at December 31, 1994 of $47.3
million less the fair value of the underlying collateral of $32.0 million
represents a $15.3 million projected loss on impaired loans and leases for
which there is a related allowance for credit losses. At December 31, 1994,
the recognition of finance income had been suspended on $46.7 million of
finance receivables compared with $20.1 million at December 31, 1993 and $23.4
million at December 31, 1992.
Activity relating to the allowance for credit losses, including the
portion related to impaired loans and leases, is shown below:
1994 1993 1992
Balance at beginning of year $41.5 $36.5 $31.0
Provision for credit losses 23.2 20.8 20.4
Acquisition of Spanish subsidiary - 3.5 -
Receivables written off, net of recoveries (13.2) (18.8) (14.3)
Adjustment related to sale of receivables (3.0) - -
Foreign currency translation adjustment 1.0 (.5) (.6)
Balance at end of year $49.5 $41.5 $36.5
NOTE 3 - INVESTMENT IN FINANCING LEASES
1994 1993 1992
Total minimum lease payments receivable $1,387.2 $1,135.4 $ 982.3
Estimated residual value of leased assets:
Guaranteed 83.5 71.4 55.1
Unguaranteed 208.2 148.5 123.7
1,678.9 1,355.3 1,161.1
Less: Unearned income 264.0 229.5 212.2
Net investment in financing leases $1,414.9 $1,125.8 $ 948.9
NOTE 4 - EQUIPMENT ON OPERATING LEASES
Components of the Company's investment in equipment on operating leases,
less accumulated depreciation, at December 31 were as follows:
1994 1993 1992
Equipment on operating leases, at cost $607.2 $503.5 $402.0
Less:
Accumulated depreciation 182.2 138.9 125.2
Unearned investment tax credits - - .1
Equipment on operating leases, net $425.0 $364.6 $276.7
At December 31, 1994, scheduled minimum rental payments for operating
leases were as follows:
Amounts due in:
1995 $129.3
1996 99.6
1997 62.0
1998 37.6
1999 15.3
Thereafter 9.5
Total $353.3
NOTE 5 - CONCENTRATION OF CREDIT RISK
The Company's receivables are primarily comprised of receivables under
installment sale contracts, receivables arising from leasing transactions, and
notes receivable. The Company generally maintains a secured interest in
equipment financed, and a substantial portion of its business activity is with
customers located within the United States. Receivables from customers in
construction-related industries made up approximately one-third of total
finance receivables as of December 31, 1994, 1993, and 1992, respectively.
However, no single customer or region represents a significant concentration
of credit risk.
NOTE 6 - BORROWINGS
Short-Term Borrowings
Total average short-term borrowings during 1994, 1993, and 1992 were
$1,317.6 million, $1,038.3 million, and $776.9 million, respectively.
Commercial paper and bank borrowings outstanding at December 31, 1994
generally had maturities not exceeding 90 days with average discount rates of
6.1% and 5.8%, respectively. The approximate weighted average interest rate
on short-term borrowings was 5.0%, 4.8%, and 5.2% for 1994, 1993, and 1992,
respectively. Interest paid on short-term borrowings was $89.6 million in
1994, $58.3 million in 1993, and $60.3 million in 1992.
Short-term borrowings at December 31 consisted of the following:
1994 1993 1992
Notes payable to banks, net $ 532.0 $ 336.0 $195.5
Commercial paper, net 841.2 796.9 714.0
Other 9.9 5.3 3.6
Total $1,383.1 $1,138.2 $913.1
At December 31, 1994, the Company had available a total of $1,020.7
million of short-term credit lines which expire at various dates in 1995, and
$34.2 million of long-term credit lines which expire at various dates from
March 1996 to May 1997. 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
at various interest rates. At December 31, 1994, there were $522.7 million of
these lines utilized for bank borrowings in Australia and Europe.
The Company also participates with Caterpillar in two syndicated
revolving credit facilities aggregating $1.8 billion, consisting of a $1.2
billion five-year facility and a $600.0 million 364-day revolving facility.
The Company's initial allocation is $990.0 million, consisting of a $660.0
million five-year revolving credit and a $330.0 million 364-day revolving
credit. The Company has the ability to request a change in its allocation and
will do so to maintain the required amount of support for the Company's
outstanding commercial paper and commercial paper guarantees. These
facilities provide for borrowings at interest rates which vary according to
LIBOR or money market rates. At December 31, 1994, there were no borrowings
under these facilities.
The revolving credit facilities require the Company to maintain its
consolidated ratio of profit before taxes plus fixed charges to fixed charges
at no less than 1.1 to 1 for each quarter; the Company's total debt to total
stockholder's equity may not exceed 8.0 to 1; and the Company's tangible net
worth must be at least $20.0 million. During 1994, the Company was in
compliance with these requirements.
Long-Term Borrowings
During 1994, the Company publicly issued $1,048.1 million of medium-term
notes, of which $576.3 million were at fixed interest rates and $471.8 million
were at floating interest rates primarily indexed to LIBOR or treasury bill
rates swapped to LIBOR. Interest rates on fixed-rate medium-term notes are
established by the Company as of the date of issuance. The notes are offered
on a continuous basis through agents and have maturities ranging from nine
months to 15 years. The weighted average interest rate on all outstanding
medium-term notes was 6.3% at December 31, 1994. Interest paid on long-term
debt in 1994, 1993, and 1992 was $123.6 million, $102.1 million, and $107.8
million, respectively.
Long-term debt outstanding at December 31, 1994, matures as follows:
1995 $ 807.6
1996 575.3
1997 396.7
1998 368.2
1999 154.9
Thereafter 180.6
Total $2,483.3
In January 1995, the Company had an early extinguishment of one of its
notes with a principal amount of $50.0 million and a related interest rate
swap with a notional amount of $50.0 million. There was a net gain of $0.1
million from this transaction.
Derivative Financial Instruments
In connection with its match funding objectives, the Company utilizes a
variety of interest rate contracts including swap, cap, and forward rate
agreements. All of these agreements are held or issued for purposes other
than trading. The agreements are entered into with major financial
institutions and are utilized for two principal reasons: 1) To modify the
Company's debt structure in order to match fund its receivable portfolio which
reduces the risk of deteriorating margins between its interest-earning assets
and interest-bearing liabilities, and 2) To gain an economic/competitive
advantage through lowering the cost of borrowed funds by either changing the
characteristics of existing debt instruments or entering into agreements in
combination with the issuance of debt.
In addition to meeting the Company's funding objectives, it also has two
currency swaps to reduce its currency risk exposure on two yen financing
agreements. These currency swaps exchange the yen cash flows on the financing
agreements with a fixed U.S. dollar cash flow.
Net interest on the Company's interest rate swap agreements are accrued
to either Other assets or Accrued interest payable and recognized as
adjustments to Interest expense. Net interest on the Company's currency swap
agreements is accrued and recognized as Finance income. Payments on forward
rate agreements are deferred as Other assets and amortized to Interest expense
over the term of the agreement. Gains and loses on termination of these
agreements are deferred and amortized over the remaining original life of the
agreement, unless the underlying debt to which the agreement is designated is
disposed of or the hedge is terminated because of a loss of correlation, in
which case the gain or loss is recognized immediately into income.
The Company has marked to market its sold (written) interest rate cap
agreements. Gains/losses on these agreements are recorded as adjustments to
Other liabilities and Other income/Other expense as incurred.
As of December 31, 1994, the Company had outstanding interest rate swap
contracts with notional amounts totaling $1,747.5 million that are either
designated as hedges of specific debt issuances or of commercial paper. These
swap agreements have terms generally ranging up to five years, which
effectively change $951.3 million of floating rate debt to fixed rate debt,
$304.0 million of fixed rate debt to floating rate debt, and $492.2 million of
floating rate debt to floating rate debt having different characteristics.
The interest rate swaps designated to commercial paper provide the ability to
obtain fixed rate term debt utilizing short-term debt markets. The Company
also had swaps having future effective dates with a total notional amount of
$57.7 million, which will effectively change $9.7 million of floating rate
debt to fixed rate debt and $48.0 million of fixed rate debt to floating rate
debt. The effective dates of the future dated swaps range from 1995 through
1998, and the terms of these swaps generally range up to four years.
As of December 31, 1994, the Company had outstanding sold (written)
interest rate cap agreements with notional amounts totaling $235.7 million.
To the extent that rates decrease, the notional amount may decrease and/or the
term of the written cap agreements may shorten based on the index amortizing
feature of the caps. These cap agreements have remaining maturities through
October 1997.
The table below summarizes by notional amounts the activity for each
major category of interest rate swap agreements (excluding future swaps and
caps):
Floating Fixed to Floating
to Fixed Floating to Floating Total
Balance at beginning of year $ 850.6 $ 329.1 $ 867.6 $2,047.3
Additions 363.5 89.0 287.0 739.5
Maturities/amortizations (220.2) (95.5) (240.8) (556.5)
Terminations (54.1) (18.3) (421.6) (494.0)
Foreign currency translation
adjustment 11.5 (.3) - 11.2
Balance at end of year $ 951.3 $ 304.0 $ 492.2 $1,747.5
The table below summarizes expected maturities and weighted average
interest rates to be received and paid on the interest rate swap portfolio
(excluding future swaps and caps) at December 31, 1994. A key assumption in
the preparation of the table is that rates remain constant at December 31,
1994 levels. Floating rates paid by the Company are primarily LIBOR based.
1995 1996 1997 1998 1999 Thereafter TOTAL
FLOATING TO FIXED SWAPS:
Notional Amount $269.6 $366.7 $166.8 $107.2 $ 5.2 $35.8 $951.3
Weighted Average:
Receive Rate 6.0% 5.7% 6.0% 6.0% 5.6% 5.9% 5.9%
Pay Rate 6.2% 5.8% 6.1% 5.7% 5.1% 6.9% 6.0%
FIXED TO FLOATING SWAPS:
Notional Amount $ 63.0 $176.0 $ 45.0 $ 20.0 $ - $ - $304.0
Weighted Average:
Receive Rate 7.8% 4.6%* 6.2% 5.2% -% -% 5.5%
Pay Rate 7.2% 5.8% 6.3% 5.7% -% -% 6.2%
FLOATING TO FLOATING SWAPS:
Notional Amount $245.2 $ 37.0 $ 50.0 $100.0 $ 60.0 $ - $492.2
Weighted Average:
Receive Rate 5.1% 3.5%* .1%* 6.9% 6.4% -% 5.0%
Pay Rate 5.8% 5.5% 5.7% 6.1% 5.5% -% 5.8%
*Low rate offset by low pay rate on related structured medium-term notes.
The Company's current accounting loss exposure on interest rate swaps
related to credit risks is limited to the accrued receivable of $2.7 million
at December 31, 1994. In addition, the Company may incur additional costs in
replacing at current market rates any contracts for which a counterparty fails
to perform. The market value of interest rate swap agreements in a favorable
position to the Company was $46.1 million at December 31, 1994. To minimize
the risk of credit losses being incurred, the Company deals only with
counterparties that have A- or better credit ratings and monitors the credit
standing of the counterparties. The Company does not anticipate
nonperformance by any of these counterparties.
The Company has forward exchange contracts to hedge its U.S. dollar
denominated obligations in Australia against currency fluctuations. These
contracts have terms generally ranging up to three months and do not subject
the Company to risk due to exchange rate movements, because the gains and
losses on the contracts offset the losses and gains on the liabilities being
hedged. At December 31, 1994, the Company had forward exchange contracts
totaling $172.6 million, all with Caterpillar.
The Company's outstanding forward rate agreements, which are utilized to
hedge short-term borrowings, totaled $2.9 million at year end. These
agreements have terms generally ranging up to six months.
NOTE 7 - COMMITMENTS AND CONTINGENT LIABILITIES
At December 31, 1994, the Company was contingently liable under
guarantees of securities of certain Caterpillar dealers totaling $258.0
million of which $164.5 million was outstanding compared to $249.6 million and
$173.5 million, respectively, at December 31, 1993. These guarantees have
terms ranging up to two years. At December 31, 1992, the Company was
contingently liable for $48.1 million. These guarantees are fully secured by
dealer assets. No loss has been experienced nor is any anticipated under
these guarantees.
The Company is a party to agreements in the normal course of business
with selected customers and dealers in which the Company commits to provide a
set dollar amount of financing on a preapproved basis. The Company also
provides lines of credit to selected customers and dealers, of which a portion
remains unutilized as of the reporting date. Commitments and lines of credit
generally have fixed expiration dates or other termination clauses. It has
been the Company's experience that not all commitments and lines of credit
will be utilized. Management uses its same credit policies in making
commitments and granting lines of credit as it does for any other financing.
The Company does not require collateral for these commitments/lines, but if
credit is extended, collateral may be required upon funding.
NOTE 8 - INCOME TAXES
Effective January 1, 1992, the Company adopted SFAS 109, "Accounting for
Income Taxes." For years prior to 1992, income taxes were computed based on
Accounting Principles Board Opinion (APB) 11. Net deferred tax liabilities as
of January 1, 1992, were reduced by $2.6 million as a result of the adoption
of SFAS 109. The 1992 tax provision was not materially different from the
amount which would have resulted from applying APB 11.
The components of the provision for income taxes were as follows for the
years ended December 31:
1994 1993 1992
Current tax provision (credit):
U.S. federal taxes $20.7 $17.4 $13.6
Foreign taxes 2.1 2.9 4.8
U.S. state taxes 2.9 2.5 2.8
25.7 22.8 21.2
Deferred tax provision (credit):
U.S. federal taxes (7.4) (1.2) (.1)
Foreign taxes .8 (.6) (3.8)
U.S. state taxes .2 .3 .3
(6.4) (1.5) (3.6)
Total provision for income taxes $19.3 $21.3 $17.6
Current tax provision (credit) is the amount of income taxes reported or
expected to be reported on the Company's tax returns. Income taxes paid in
1994, 1993, and 1992 totaled $35.6 million, $14.8 million, and $2.2 million,
respectively.
In August 1993, the U.S. federal income tax rate for corporations was
increased from 34% to 35% effective January 1, 1993. As a result of the rate
increase, net U.S. deferred tax liabilities and the 1993 provision for income
taxes were increased $0.9 million.
Differences between accounting rules and tax laws cause differences
between the bases of certain assets and liabilities for financial reporting
and tax purposes. The tax effects of these differences, to the extent they
are temporary, are recorded as deferred tax assets and liabilities under SFAS
109 and consisted of the following components at December 31:
1994 1993 1992
U.S. federal, U.S. state, and foreign taxes:
Deferred tax assets:
Minimum tax credit carryforwards $ 21.9 $ 22.0 $ 24.7
Other credit carryforwards 2.0 - .2
23.9 22.0 24.9
Deferred tax liabilities - primarily
capital assets (34.6) (35.0) (37.6)
Valuation allowance for deferred tax assets - - -
Deferred taxes - net $(10.7) $(13.0) $(12.7)
No valuation allowance for the Company's deferred tax assets was
necessary at December 31, 1994, 1993, and 1992. The Company's tax credit
carryforwards may be carried forward indefinitely.
The provision for income taxes was different than would result from
applying the U.S. statutory rate to income before income taxes and minority
interest for the reasons set forth in the following reconciliation:
1994 1993 1992
Taxes computed at U.S. statutory rates $17.8 $20.4 $17.5
Increases (decreases) in taxes
resulting from:
Finance income not subject to federal
taxation (2.4) (2.5) (2.7)
State income taxes - net of federal taxes 2.1 1.8 2.0
Subsidiaries' results subject to tax
rates other than U.S. statutory rates 2.1 .9 .8
Change in U.S. federal tax rate - .9 -
Other, net (.3) (.2) -
Provision for income taxes $19.3 $21.3 $17.6
The domestic and foreign components of income before income taxes and
minority interest of consolidated companies were as follows:
1994 1993 1992
Domestic $47.7 $54.4 $51.0
Foreign 3.1 4.0 .6
Total $50.8 $58.4 $51.6
The foreign component of income before taxes and minority interest is
comprised of the profit of all consolidated subsidiaries located outside the
United States.
NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Cash and cash equivalents; Other assets, excluding accrued receivable on
swaps; Liabilities, excluding mark-to-market liability on written caps,
accrued interest payable on swaps, long-term debt, and deferred income taxes;
and forward exchange contracts. For these items, the carrying amount is a
reasonable estimate of fair value.
Finance receivables - net. Fair value of the outstanding receivables
(excluding tax-oriented leases with a net carrying amount at December 31,
1994, 1993, and 1992 of $391.1 million, $333.2 million, and $272.5 million,
respectively and the effect of yen currency swaps*) is estimated by
discounting the future cash flows using the Company's current rates for new
receivables with similar remaining maturities. Historical experience of bad
debts is also factored into the calculation.
Long-term debt. Fair value is estimated by discounting the future cash
flows using the Company's current borrowing rates for similar types and
maturities of debt, except for floating rate notes which are considered to be
at market.
Interest rate swaps, written caps, and yen currency swaps. Fair value
is estimated based upon the amount that the Company would receive or pay to
terminate the agreements as of the reporting date. The carrying value for the
Company's written caps and yen currency swaps is the fair value.
The estimated fair values of the Company's financial instruments are as
follows:
1994 1993 1992
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
Cash and cash
equivalents $ 16.3 $ 16.3 $ 15.6 $ 15.6 $ 11.5 $ 11.5
Finance receivables -
net (excluding tax-
oriented leases and
the effect of yen
currency swaps*) 3,603.0 3,581.9 2,806.2 2,821.5 2,253.1 2,275.4
Other assets (excluding
accrued receivable on
swaps and forward
exchange contracts) 78.9 78.9 42.3 42.3 28.2 28.2
Liabilities, excluding
mark-to-market liability
on written caps, accrued
interest payable on
swaps and forward
exchange contracts,
long-term debt, and
deferred income
taxes (1,486.9)(1,486.9)(1,222.0)(1,222.0) (981.7) (981.7)
Written caps (19.2) (19.2) - - - -
Long-term debt (2,483.3)(2,448.2)(1,902.9)(1,941.6)(1,488.3)(1,520.3)
Off-balance-sheet financial
instruments**:
Interest rate swaps:
In a net receivable
position 2.7 46.1 2.8 7.9 1.2 2.7
In a net payable
position (4.6) (43.9) (7.3) (24.1) (6.6) (22.4)
Forward exchange
contracts (3.4) (3.4) (1.5) (1.5) .1 .1
Yen currency swaps (5.8) (5.8) * * * *
*These prior year amounts are included in Finance receivables - net.
**The amounts shown under "Carrying amount" represent accruals or deferred
income (fees) arising from these off-balance-sheet financial instruments.
All derivative financial instruments are held or issued for purposes other
than trading. The 1993 amounts in the Interest rate swaps category include
caps and options.
NOTE 10 - TRANSACTIONS WITH RELATED PARTIES
Caterpillar has made capital contributions to the Company of $295.0
million. In February 1995, Caterpillar made an additional capital
contribution of $30.0 million. The Company has also entered into a support
agreement with Caterpillar whereby the parent will cause the Company to have
at all times a net worth of at least $20.0 million.
To supplement external debt financing sources, the Company has variable
amount lending agreements with Caterpillar (including one of its
subsidiaries). Under these agreements, which may be amended from time to
time, the Company may borrow up to $88.8 million from Caterpillar, and
Caterpillar may borrow up to $88.8 million from the Company. All of the
variable amount lending agreements are effective for indefinite terms and may
be terminated by either party upon 30 days' notice. In 1994, the Company
incurred $.2 million in interest expense related to borrowings from
Caterpillar. At December 31, 1994, 1993, and 1992, the Company had no
outstanding borrowings or loans receivable under these agreements.
The Company also has forward exchange contracts with Caterpillar to
hedge the U.S. dollar denominated borrowings in Australia against currency
fluctuations. All of these contracts generally have maturities not exceeding
90 days. At December 31, 1994, 1993, and 1992, the Company had contracts with
Caterpillar totaling $172.6 million, $143.1 million, and $116.4 million,
respectively.
The Company has agreements with a subsidiary of Caterpillar to purchase,
at a discount, some or all of this subsidiary's receivables generated by sales
of products to Caterpillar dealers in Germany, Austria, and the Czech
Republic. These purchases (dealer floor planning) in 1994, 1993, and 1992
totaled $190.9 million, $210.2 million, and $201.7 million, respectively. The
cash discount earned in 1994, 1993, and 1992 was $3.0 million, $4.4 million,
and $3.4 million, respectively. At December 31, 1994, 1993, and 1992,
wholesale notes receivable balances related to floor planning were $160.1
million, $124.1 million, and $49.3 million, respectively.
Periodically, the Company offers below-market-rate financing to
customers under merchandising programs. When such terms provide less than the
Company's standard interest rates, Caterpillar and its subsidiaries remit an
amount equal to the interest differential to the Company which is recognized
as income over the term of the contract. During 1994, the Company recorded
receivables of $37.2 million from Caterpillar and its subsidiaries relative to
such programs, compared with $7.9 million in 1993 and $5.7 million in 1992.
The significant increase for 1994 was due to interest subsidies related to the
new program supporting Caterpillar dealer rental fleets in North America.
Caterpillar provides the Company with certain operational and financial
support which is integral to the conduct of the Company's business. The
employees of the Company are covered by various benefit plans, including
pension/post-retirement plans, administered by Caterpillar. The amount of
such charges was $2.2 million, $2.1 million, and $1.9 million for the years
ended December 31, 1994, 1993, and 1992, respectively. The Company also
reimburses Caterpillar for certain corporate services which amounted to
$1.7 million, $2.1 million , and $2.0 million for the years ended December 31,
1994, 1993, and 1992, respectively.
NOTE 11 - LEASES
The Company leases certain offices and other property through operating
leases. Lease expense on these leases is charged to operations as incurred.
Total rental expense for operating leases was $4.5 million, $3.7 million, and
$3.1 million for 1994, 1993, and 1992, respectively. Minimum payments for
operating leases having initial or remaining noncancelable terms in excess of
one year are:
1995 $ 2.2
1996 2.0
1997 2.0
1998 1.7
1999 1.6
Thereafter 2.7
Total $12.2
NOTE 12 - SEGMENT INFORMATION
Although the majority of its business is done in the United States, the
Company also conducts its operations through foreign subsidiaries in
Australia, Canada, and Europe. Total assets, revenues, and net income
applicable to operations by geographic segments were as follows:
1994 1993 1992
Assets:
Domestic $3,518.7 $2,878.1 $2,401.4
Foreign 1,111.1 779.9 507.9
4,629.8 3,658.0 2,909.3
Less: Investment in subsidiaries 118.1 93.1 63.0
Intercompany balances .5 .2 3.0
Total assets $4,511.2 $3,564.7 $2,843.3
Revenues:
Domestic $ 343.6 $ 293.6 $ 287.2
Foreign 103.4 71.1 56.3
447.0 364.7 343.5
Less intercompany interest - .1 -
Total revenues $ 447.0 $ 364.6 $ 343.5
Net income:
Domestic $ 31.3 $ 35.4 $ 36.9
Foreign .9 2.4 (.3)
Total net income $ 32.2 $ 37.8 $ 36.6*
*After restatement for the cumulative effect of $2.6 million ($2.5 million
domestic) which resulted from the change in accounting for income taxes.
NOTE 13 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Financial data for the interim periods were as follows:
QUARTERS
FIRST SECOND THIRD FOURTH
1994 1993 1994 1993 1994 1993 1994 1993
Total revenues $102.2 $86.6 $108.9 $90.4 $113.2 $91.7 $122.7 $95.9
Income before
income taxes,
minority interest,
and cumulative
effect of change
in accounting
for income taxes 9.7 15.3 13.0 14.6 17.2 15.9 10.9 12.6
Net income 6.4 10.1 8.5 9.4 10.9 9.0 6.4 9.3