Back to GetFilings.com
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 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:
Title of each class Exchange
6.19% Notes due April 2000 New York Stock Exchange
6.40% Notes due August 2001 New York Stock Exchange
8.96% Notes due March 2005 New York Stock Exchange
9.50% Notes due February New York Stock Exchange
2007
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, 1997, there was one 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
1997 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 subsidiaries 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
around the world. 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, competition, 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 six 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 seven 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 rental fleets and inventory. The product being financed is
required to be 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 for inventory
financing generally range from one to six months. The stated
maturity of 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:
1997 1996 1995
Retail Financing:
Non-tax (financing) 29% 26% 22%
leases
Installment sale 19% 20% 20%
contracts
Tax-oriented leases 18% 19% 20%
Customer loans 18% 19% 19%
Dealer loans 7% 6% 6%
Government lease-purchase 2% 3% 3%
contracts
Wholesale Financing: 7% 7% 10%
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 generally 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 80% of the Company's portfolio
involves financing with fixed interest rates. In order to reduce the
impact of interest rate and maturities mismatches 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 under retail financing. Additionally,
approximately four percent of the total value of the Company's
portfolio (excluding loans to dealers) includes 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 it is probable 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 is estimated to not be recoverable. Management
believes the allowance for credit losses at December 31, 1997 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 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,
1997 1996 1995
Past due 31 to 60 days 1.0% 0.7% 0.6%
Past due over 60 days 0.7% 1.4% 1.4%
At December 31, 1997, the largest single customer (non-dealer)
account represented 1.0% of the Company's portfolio and the five
largest such customer (non-dealer) accounts represented 4.3% of the
portfolio. With respect to dealer financing, at December 31, 1997,
the largest single dealer account represented 2.3% of the Company's
portfolio and the five largest such dealer accounts collectively
represented 7.9% 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.
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 reimburses Caterpillar for these and
certain other corporate services. For more information on payments
for services, see Note 10 to the Consolidated Financial Statements.
The Company, in conjunction with Caterpillar and its
subsidiaries, offers below-market-rate financing to customers under
certain 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 to the Consolidated Financial
Statements.
The Company has agreements with subsidiaries of Caterpillar to
purchase, at a discount, some or all of the subsidiaries' receivables
generated by sales of products to Caterpillar dealers. See Note 10
to the consolidated Financial Statements. In January 1998, the
Company also established a special purpose corporation to purchase
trade receivables from Caterpillar. The Company expects this
receivables pool to maintain a balance between $700.0 and $900.0
million. See Note 14 to the Consolidated Financial Statements.
Through December 31, 1997, Caterpillar had invested a total of
$395.0 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 maintains a tangible net worth of at least $20.0
million, (iii) permit the Company to use (and the Company is required
to use) the name "Caterpillar" in the conduct of its business, and
(iv) ensure that the Company maintains a ratio of earnings and
interest expense (as defined) to interest expense of not less than
1.15 to 1. 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 two of
its subsidiaries). As of January 1998, the Company may borrow up to
$732.7 million from Caterpillar, and Caterpillar may borrow up to
$532.7 million from the Company. All of the variable amount lending
agreements are effective for indefinite terms, may be amended from
time to time, and may be terminated by either party upon 30 days
notice. At December 31, 1997, 1996, and 1995 the Company had
borrowings with Caterpillar totaling $243.5 million, $150.0 million,
and $475.5 million respectively,(see Note 6 to the Consolidated
Financial Statements), but had no loans receivable under these
agreements.
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. A similar agreement exists between
Caterpillar Financial Australia Limited and Caterpillar of Australia
Ltd. with respect to taxes payable in Australia.
Item 2. Properties
The Company's principal executive offices are located in
Nashville, Tennessee, and it has 27 additional full-service offices.
Of these, 7 are in the United States, 14 are in Europe, and 6 are in
other countries. All offices are leased with the exception of one in
Mexico City, Mexico. For more information on leases, see Note 11 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 its
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 1997 totaled $4,375.7 million, a 21%
increase over the $3,619.2 million financed in 1996 and a 45%
increase over the $3,024.0 million financed in 1995. These increases
were primarily the result of financing an increased percentage of
dealer deliveries of Caterpillar product assisted by an increase in
use of below-market-rate merchandising programs. Wholesale financing
activity during 1997 was $2,551.5 million, a 16% increase over the
$2,191.5 million financed in 1996, and a 24% increase over the
$2,054.4 million financed in 1995. The increase resulted primarily
from expansion of the rental fleet program in North America. The
maturity for these contracts is generally 36 months, however, the
Company's experience has been that most terminate within six months.
Revenues from operations in the United States were 74% of total
revenues in 1997, and 1996, and were 77% in 1995. Net income from
operations in the United States was 82%, 79%, and 89% of total net
income in 1997, 1996, and 1995, respectively. For more geographic
segment information, see Note 12 to the Consolidated Financial
Statements.
Past due percentages over 30 days decreased in 1997 to 1.7%
compared to 2.1% in 1996. The allowance for credit losses will
continue to be monitored to provide for an amount which, in
management's judgment, will be adequate to cover uncollectible
receivables after considering the value of any collateral.
The Company has evaluated the impact of preparing its systems
for the year 2000. It has identified areas of potential impact and
is implementing conversion efforts. The Company's target is to have
all systems ready for the year 2000 by December 31, 1998. The
financial impact of making the required systems changes is not
expected to be material to the Company's financial position or
results of operations.
For more information on the composition of the Company's
portfolio by financing plan, see "Item 1. Business."
1997 Compared With 1996
Total revenues for 1997 were $791.5 million, a 17% increase over
1996 revenues of $678.0 million. The increase in revenues resulted
primarily from increased financing volume (the portfolio value
increased to $7,189.3 million at December 31, 1997 from $6,212.3
million at December 31, 1996), partially offset by a lower yield.
The annualized interest rate on finance receivables (computed by
dividing annualized finance income by the average monthly finance
receivable balances, net of unearned income) was 8.7% for 1997
compared with 8.9% for 1996. Tax benefits associated with
governmental lease purchase contracts and tax-oriented leases are not
reflected in such annualized interest rates.
Other income of $62.8 million for 1997 included servicing and
other securitization-related income, fees, gains on sales of
receivables, and other miscellaneous income. The increase of $16.3
million for 1997 resulted primarily from an increase of $6.5 million
from sales of used equipment, an increase of $5.6 million in
servicing and other securitization-related income and increased gains
on sales of receivables of $3.6 million.
Interest expense for 1997 was $366.7 million, $51.3 million
higher than 1996 due to increased borrowings to support the larger
portfolio, partially offset by lower borrowing rates, as the average
cost of borrowed funds was 5.9% in 1997 compared with 6.0% in 1996.
Depreciation expense increased from $121.0 million in 1996 to
$139.3 million in 1997 due to new operating lease business.
General, operating, and administrative expenses increased $14.0
million over 1996 primarily due to staff-related and other expenses
required to increase new business, service the larger managed
portfolio and support international expansion. The Company's full-
time employment increased from 576 at the end of 1996 to 684 at
December 31, 1997.
Provision for credit losses decreased from $41.3 million in 1996
to $39.2 million in 1997. Receivables, net of recoveries, of $19.6
million were written off against the allowance for credit losses
during 1997 compared with $20.6 million during 1996. Receivables
past due over 30 days were 1.7% of total receivables at December 31,
1997 compared with 2.1% at December 31, 1996. The allowance for
credit losses will continue to be monitored to provide for an amount
which, in management's judgment, is adequate to cover uncollectible
receivables after considering the value of any collateral. At
December 31, 1997, the allowance for credit losses was $83.5 million
which was 1.3% of finance receivables, net of unearned income (1.4%
excluding wholesale receivables), compared with $74.4 million and
1.3% (1.4% excluding wholesale receivables), respectively, at
December 31, 1996.
The effective income tax rate for 1997 was 36% compared with 35%
for 1996. For more information on this change, see Note 8 to the
Consolidated Financial Statements.
Net income in 1997 was $94.2 million, compared with $75.6
million in 1996. The increase resulted primarily from a larger
portfolio.
1996 Compared With 1995
Total revenues for 1996 were $678.0 million, an 11% increase
over 1995 revenues of $611.8 million. The increase in revenues
resulted primarily from increased financing volume (the portfolio
value increased to $6,212.3 million at December 31, 1996 from
$5,288.3 million at December 31, 1995), partially offset by the
decrease in Other income described below.
The annualized interest rate on finance receivables (computed by
dividing annualized finance income by the average monthly finance
receivable balances, net of unearned income) was 8.9% for 1996
compared with 9.2% for 1995. Tax benefits associated with
governmental lease purchase contracts and tax-oriented leases are not
reflected in such annualized interest rates.
Other income of $46.5 million for 1996 included servicing and
other securitization-related income, fees, gains on sales of
receivables, and other miscellaneous income. The decrease of $6.4
million for 1996 resulted primarily from recording gains of $10.9
million in the first half of 1995 on interest rate caps written by
the Company, partially offset by an increase of $6.3 million in
servicing and other securitization-related income.
Interest expense for 1996 was $315.4 million, $17.0 million
higher than 1995 due to increased borrowings to support the larger
portfolio, substantially offset by lower borrowing rates, as the
average cost of borrowed funds was 6.0% in 1996 compared with 6.6% in
1995.
Depreciation expense increased from $101.2 million in 1995 to
$121.0 million in 1996 due to new operating lease business.
General, operating, and administrative expenses increased $20.9
million over 1995 primarily due to staff-related and other expenses
required to increase new business and service the larger managed
portfolio. The Company's full-time employment increased from 461 at
the end of 1995 to 576 at December 31, 1996.
Provision for credit losses decreased from $42.8 million in 1995
to $41.3 million in 1996. Receivables, net of recoveries, of $20.6
million were written off against the allowance for credit losses
during 1996 compared with $33.2 million during 1995. The decreased
write-offs were primarily attributable to a loss with one customer in
1995. Receivables past due over 30 days were 2.1% of total
receivables at December 31, 1996 compared with 2.0% at December 31,
1995. The allowance for credit losses will continue to be monitored
to provide for an amount which, in management's judgment, is adequate
to cover uncollectible receivables after considering the value of any
collateral. At
December 31, 1996, the allowance for credit losses was $74.4 million
which was 1.3% of finance receivables, net of unearned income (1.4%
excluding wholesale receivables), compared with $57.0 million and
1.2% (1.3% excluding wholesale receivables), respectively, at
December 31, 1995.
The effective income tax rate for 1996 was 35% compared with 37%
for 1995. For more information on this change, see Note 8 to the
Consolidated Financial Statements.
Net income in 1996 was $75.6 million, compared with $65.2
million in 1995. The increase resulted primarily from a larger
portfolio and improving results from operations outside the United
States, partially offset by a $6.8 million mark-to-market after tax
gain in the first half of 1995 for interest rate caps written by the
Company.
Capital Resources and Liquidity
The Company's operations during the year were primarily funded
with a combination of commercial paper, proceeds from sales (via
securitizations) of receivables, medium-term notes, bank borrowings,
retained earnings, and additional equity capital of $50.0 million
invested by Caterpillar.
The Company securitized $346.6 million of its installment sale
contracts in May 1997 and $314.4 million of its installment sale
contracts in
November 1997. The Company's private-placement, revolving, asset-
backed securitization of wholesale receivables was increased from
$500.0 million to $600.0 million in September 1997. These
installment sale contracts and wholesale receivables were sold to
Caterpillar Financial Funding Corporation and Caterpillar Financial
Asset Sales Corporation, respectively. The assets of Caterpillar
Financial Funding Corporation and Caterpillar Financial Asset Sales
Corporation, including such installment sale contracts and wholesale
receivables are not available to pay creditors of the Company. The
proceeds from these securitizations and the equity capital provided
by Caterpillar were used to reduce debt. The Company recognized a
$2.3 million pre-tax gain on the May transaction, a $.6 million pre-
tax gain on the September transaction and a $4.8 million pre-tax gain
on the November transaction.
The net amount of sold receivables serviced by the Company was
$1,409.3 million at December 31, 1997, which consisted of $600.0
million of wholesale receivables, under a revolving asset-backed
securitization agreement, and $809.3 million of installment sale
contracts. The Company receives fees for servicing these receivables.
Total debt outstanding as of December 31, 1997, was $6,337.1
million, an increase of $904.7 million over that at December 31, 1996
and was primarily comprised of $3,322.2 million of medium-term notes,
$2,536.0 million of commercial paper, and $145.0 million of bank
borrowings. Interest rate swaps were contracted to hedge against
interest rate fluctuations. See Note 6 to the Consolidated Financial
Statements for more information on debt and swaps.
At December 31, 1997, the Company had available, from a number
of banks, a total of $585.2 million of short-term credit lines which
expire at various dates in 1998. These credit lines support the
Company's outstanding commercial paper and commercial paper
guarantees and are utilized for bank borrowings. At December 31,
1997, there were $145.0 million of these lines utilized for bank
borrowings.
The Company also participates with Caterpillar in two syndicated
revolving credit facilities aggregating $2,500.0 million, consisting
of a $1,875.0 million five-year facility and a $625.0 million 364-day
revolving facility. The Company's allocation is $2,250.0 million,
consisting of a $1,687.5 million five-year revolving credit and a
$562.5 million 364-day revolving credit. The Company has the ability
to request a change in its allocation 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, 1997, there were no borrowings under these facilities.
The Company has a $1.0 billion five year revolving credit
facility in the United Kingdom to support its $1.0 billion Euro-
commercial paper. The commercial paper is issued by Caterpillar
International Finance plc, an Irish subsidiary of the Company, with
the guarantee of the Company. Proceeds from the issuance of
commercial paper have been used to replace bank borrowings of certain
of the Company's subsidiaries. At December 31, 1997, there were no
borrowings under this facility.
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 1.15 to 1 for each quarter, and the
Company's total debt to total stockholder's equity, as defined by the
agreements, may not exceed 8.0 to 1 at year-end (8.5 to 1 moving six
month average at other than year-end); and the Company's tangible net
worth must be at least $20.0 million. At
December 31, 1997, 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 and through bank
borrowings. During 1997, the average outstanding commercial paper
balance, net of discount, was $2,426.6 million at an average interest
rate of 5.4%. At December 31, 1997, the face value of commercial
paper outstanding was $2,536.0 million. During 1997, $849.0 million
of fixed-rate medium-term notes were sold at an average interest rate
of 6.5%, and $967.7 million of floating rate medium-term notes were
sold at rates primarily indexed to LIBOR. Medium-term notes
outstanding at
December 31, 1997 were $3,322.2 million. During the year, the
average outstanding bank borrowings were $179.3 million at an average
interest rate of 4.8%.
Through the course of normal business, the Company is exposed to
market risk from fluctuations in interest rates and foreign currency
exchange rates. To manage these exposures, the Company uses interest
rate and currency derivative financial instruments. The Company does
not use any of these instruments for trading purposes.
Interest rate swap agreements are used to manage the risk due to
fluctuations in interest rates. These agreements reduce the risk of
deteriorating margins between interest-earning assets and interest-
bearing liabilities and allow the Company to gain competitive and
economic advantages by minimizing funding costs regardless of the
direction interest rates move. At December 31, 1997, notional amounts
of interest rate swap agreements totaled $1,742.9 million.
The Company's degree of interest rate sensitivity has been
simulated through computer modeling by measuring the re-pricing
characteristics of interest-sensitive assets, liabilities and off-
balance sheet derivatives. The interest rate sensitivity modeling
technique includes the creation of prospective twelve month
"baseline" and "rate shocked" net interest expense simulations. At
the date that the interest rate sensitivity is modeled, "baseline"
net interest expense is derived considering the current level of
interest-sensitive assets and related income (based on contractual
repayment), the current level of interest-sensitive liabilities and
related maturities, equity and the current level of off-balance sheet
derivatives. The "baseline" simulation also assumes that, over the
next successive twelve months, market interest rates (as of the date
of the simulation) are held constant and that no new loans are
extended. Once the "baseline" net interest expense is known, market
interest rates, previously held constant, are raised 100 basis points
instantaneously and parallel across the entire curve, and a "rate
shocked" simulation is run. Interest rate sensitivity is then
measured as the difference between calculated "baseline" and "rate
shocked" net interest expense.
Utilizing the Company's computer modeling, if no new fixed rate
loans or leases were extended and no new actions to alter existing
interest rate sensitivity were taken after December 31, 1997, the
impact to interest expense of an immediate hypothetical 100 basis
points parallel rise in the yield curve on January 1, 1998 would be
an estimated $9.6 million increase over the twelve months ending
December 31, 1998. Although management believes that this measure
provides a meaningful estimate of the Company's interest rate
sensitivity, it does not adjust for potential changes in the credit
quality, size and composition of the balance sheet and other business
developments that could affect net interest income or expense.
Accordingly, no assurance can be given that actual results would not
differ materially from the potential outcome simulated by the
Company's computer modeling. Further, the Company's computer
modeling does not necessarily represent management's current view of
future market interest rate movements.
Foreign exchange contracts are used to minimize the risk
associated with fluctuations in exchange rates. The Company has
forward exchange contracts to hedge its U.S. dollar denominated
obligations in Spain, its U.S. dollar denominated customer
receivables in Australia, its foreign currency denominated short-term
intercompany loans, and its net investment in Thailand against
currency fluctuations. The Company only enters into foreign currency
related derivative instruments to neutralize risk - not as
speculative instruments. These contracts have terms generally
ranging up to three months. At December 31, 1997, the Company had
forward exchange contracts totaling $1,055.3 million, of which $3.1
million were with Caterpillar.
The exchange gains/losses associated with exposure for net
investments in foreign subsidiaries other than Thailand are not
hedged and are reflected in "Foreign currency translation adjustment"
(see Note 1 H to the Consolidated Financial Statements). $9.8
million of the Company's $16.3 million net investment in Thailand is
hedged by foreign exchange contracts described above.
Equity capital at the end of 1997 was $811.1 million, an
increase of $115.8 million during the year. This increase included
$94.2 million of retained earnings from operations and $50.0 million
of additional equity investment made by Caterpillar. 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, 1997 and 1996 was 7.8 to 1, compared with
7.7 to 1 for 1995. Included in the debt to equity ratio are short-
term borrowings from Caterpillar.
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 29.
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, 1997, 1996, and 1995
Consolidated Statement of Income and
Retained Earnings for the Years Ended December
31, 1997, 1996, and 1995
Consolidated Statement of Cash Flows for the
Years Ended December 31, 1997, 1996, and 1995
Notes to Consolidated Financial Statements
(b) Reports on Form 8-K
A report on form 8-K dated December 17, 1997, was
filed by the Company, containing a press release which
announced the signing of a $1.5 billion European
medium-term note program.
(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 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).
4.8 First Amendment to the Support Agreement dated
June 14, 1995 between the Company and Caterpillar
(incorporated by reference from Exhibit 4 to the
Company's Current Report on Form 8-K dated June 14,
1995, 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.
23 Consent of Independent Accountants.
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: February 27, 1998 By: /s/ Paul J. Gaeto
Paul J. Gaeto, 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
February 27, 1998 /s/ James S. Beard President,
Director and
(James S. Beard) Principal Executive
Officer
February 27, 1998 /S/ James R. English Executive Vice
President
(James R. English) and Director
February 27, 1998 /s/ James W. Owens Director
(James W. Owens)
February 27, 1998 /s/ Kenneth C. Springer Controller and
Principal
(Kenneth C. Springer) Accounting Officer
February 27, 1998 /s/ Edward J. Scott Treasurer and
Principal
(Edward J. Scott) Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder 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, 1997, 1996,
and 1995, 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.
PRICE WATERHOUSE LLP
New York, New York
January 30, 1998
CATERPILLAR FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Millions of dollars, except share data)
December 31,
1997 1996 1995
Assets:
Cash and cash equivalents $ $ $
41.5 27.0 43.6
Finance receivables (Notes 2,
3, and 5):
Wholesale notes receivable 497.9 465.1 538.3
Retail notes receivable 1,852.1 1,535.9 1,382.1
Investment in finance 4,993.6 4,352.5 3,471.7
receivables
7,343.6 6,353.5 5,392.1
Less: Unearned income 661.8 604.3 515.6
Allowance for credit 83.5 74.4 57.0
losses
6,598.3 5,674.8 4,819.5
Equipment on operating
leases,
less accumulated 558.7 511.0 437.3
depreciation (Note 4)
Deferred income taxes (Note 4.6 2.9 -
8)
Other assets 223.7 148.5 121.7
Total assets $7,426. $6,364. $5,422.
8 2 1
Liabilities and stockholder's
equity:
Payable to dealers and others $84.9 $88.1 $51.0
Payable to Caterpillar Inc. - 243.5 150.0 475.5
Borrowings (Note 10)
Payable to Caterpillar Inc. - 4.1 3.1 5.1
Other (Note 10)
Accrued interest payable 47.3 39.2 39.2
Income taxes payable (Note 8) 81.4 40.4 18.5
Other liabilities 22.2 23.5 4.5
Short-term borrowings (Note 6) 2,731.5 2,678.9 1,453.1
Current maturities of long- 1,087.9 1,057.8 1,105.8
term debt (Note 6)
Long-term debt (Note 6) 2,274.2 1,545.7 1,621.3
Deferred income taxes (Note 8) 38.7 42.2 44.8
Total liabilities 6,615.7 5,668.9 4,818.8
Commitments and contingent
liabilities
(Note 7)
Common stock - $1 par value
Authorized: 2,000 shares
Issued and outstanding: one 395.0 345.0 325.0
share
Retained earnings 442.7 348.5 272.9
Foreign currency translation (26.6) 1.8 5.4
adjustment
Total stockholder's equity 811.1 695.3 603.3
Total liabilities and $7,426.8 $6,364.2 $5,422.1
stockholder's equity
(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)
1997 1996 1995
Revenues:
Wholesale finance income $49.5 $47.4 $64.2
Retail finance income 499.3 427.2 361.1
Rental income 179.9 156.9 133.6
Other income 62.8 46.5 52.9
Total revenues 791.5 678.0 611.8
Expenses:
Interest (Note 6) 366.7 315.4 298.4
Depreciation 139.3 121.0 101.2
General, operating, and 96.8 82.8 61.9
administrative
Provision for credit losses 39.2 41.3 42.8
Other expense 1.8 1.7 3.8
Total expenses 643.8 562.2 508.1
Income before income taxes 147.7 115.8 103.7
Provision for income taxes (Note 8) 53.5 40.2 38.5
Net income 94.2 75.6 65.2
Retained earnings - beginning of 348.5 272.9 207.7
year
Retained earnings - end of year $442.7 $348.5 $272.9
(See Notes to Consolidated Financial Statements)
CATERPILLAR FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(Millions of dollars)
1997 1996 1995
Cash flows from operating
activities:
Net income $ 94.2 $ 75.6 $ 65.2
Adjustments for non-cash items:
Depreciation 139.3 121.0 101.2
Provision for credit losses 39.2 41.3 42.8
Mark-to-market adjustment - - (10.9)
Other (40.8) (6.3) (1.3)
Change in assets and liabilities:
Receivables from customers and (39.6) (2.0) (30.5)
others
Deferred income taxes (3.1) (5.5) 34.2
Payable to dealers and others (0.9) 37.1 3.2
Payable to Caterpillar Inc. - 1.5 (2.0) 1.9
Other
Accrued interest payable 8.5 - 1.1
Income taxes payable 41.0 21.9 (3.1)
Other, net (3.2) 5.5 (10.7)
Net cash provided by operating
activities 236.1 286.6 193.1
Cash flows from investing
activities:
Additions to property and (282.3) (264.2) (209.9)
equipment
Disposals of equipment 122.5 105.4 84.1
Additions to finance receivables (6,643.7) (5,801.5) (4,868.6)
Collections of finance receivables 3,604.8 3,406.5 2,786.8
Proceeds from sales of receivables 1,832.8 1,424.9 1,261.5
Other, net (2.7) 2.3 2.4
Net cash used for investing
activities (1,368.6) (1,126.6) (943.7)
Cash flows from financing
activities:
Additional paid-in capital 50.0 20.0 30.0
Payable to Caterpillar Inc. - 93.5 (325.5) 475.5
Borrowings
Proceeds from long-term debt 1,822.3 1,050.0 1,145.0
Payments on long-term debt (1,059.9) (1,169.3) (905.9)
Short-term borrowings, net 240.7 1,244.4 33.2
Net cash provided by financing
activities 1,146.6 819.6 777.8
Effect of exchange rate changes on .4 3.8 .1
cash
Net change in cash and cash 14.5 (16.6) 27.3
equivalents
Cash and cash equivalents at
beginning
of year 27.0 43.6 16.3
Cash and cash equivalents at end of $ 41.5 $ 27.0 $ 43.6
year
(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 earth-moving, construction, and
materials handling machinery and engines sold by Caterpillar dealers,
and turbine engines sold by Solar Turbines Incorporated through
offices located in the Americas, Australia, Europe, and Asia. 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. All
material intercompany balances have been eliminated.
Certain amounts in the prior period financial statements have
been reclassified to conform to the 1997 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 and rental fleet financing) 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
five hundred dollars 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.
D. Derivative financial instruments
The Company uses interest rate and currency derivative financial
instruments to manage risks encountered through the normal course of
business. The Company does not use any of these instruments for
trading purposes. Net interest on the Company's interest rate swap
agreements is recorded as either Other assets or Accrued interest
payable and recognized as an adjustment to Interest expense. Gains
and losses 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 in income.
Deferred amounts relating to foreign exchange contracts are
recorded as either Other assets or Other liabilities, and the
premium/discount is recognized as an adjustment to Interest expense.
Exchange gains/losses on these contracts are recorded in General,
operating, and administrative expense. Note 6 contains additional
information about 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 or when management has determined that it is probable the
receivable balance is uncollectible.
G. Income taxes
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. A similar agreement exists between
Caterpillar Financial Australia Limited and Caterpillar of Australia
Ltd. with respect to taxes payable in Australia.
H. Foreign currency translation
Assets and liabilities of foreign subsidiaries (the majority of
whom use the local currency as their functional currency) 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."
I. Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses, and disclosure of contingent
liabilities. Actual results could differ from those estimates.
NOTE 2 - RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
The contractual maturities of outstanding receivables at
December 31, 1997 were:
Installment Financing
Amounts due Contracts leases Notes Total
in
1998 $ 612.9 $ 1046.9 $ 1,122.4 $ 2,782.2
1999 418.4 773.7 411.2 1,603.3
2000 266.8 503.0 403.9 1,173.7
2001 130.5 255.9 178.4 564.8
2002 44.5 96.0 83.3 223.8
Thereafter 12.1 108.0 150.8 270.9
1,485.2 2,783.5 2,350.0 6,618.7
Residual 724.9 724.9
value
Total $ 1,485.2 $ 3,508.4 $ 2,350.0 $ 7,343.6
Receivables generally may be repaid or refinanced without
penalty prior to contractual maturity. The Company, from time to
time, also sells receivables. 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 1997
was $46.7 million compared with $42.8 million during 1996 and $50.5
million during 1995. The total recorded investment in impaired loans
and leases at December 31, 1997 of $30.4 million ($33.4 million at
December 31, 1996 and $36.8 million at December 31, 1995) less the
fair value of the underlying collateral of $18.5 million ($21.4
million at December 31, 1996 and $25.2 million at December 31, 1995)
represents a $11.9 million ($12.0 million for 1996 and $11.6 million
for 1995) potential loss on currently impaired loans and leases for
which there is a related allowance for credit losses. At December
31, 1997, the recognition of finance income had been suspended on
$20.0 million of finance receivables compared with $23.3 million at
December 31, 1996 and $44.1 million at December 31, 1995.
Activity relating to the allowance for credit losses, including
the portion related to impaired loans and leases, is shown below for
the year ended December 31:
1997 1996 1995
Balance at beginning of year $ 74.4 $ 57.0 $ 49.5
Provision for credit losses 39.2 41.3 42.8
Receivables written off, net of (19.6) (20.6) (33.2)
recoveries
Adjustment related to sale of (6.6) (3.2) (2.7)
receivables
Foreign currency translation (3.9) (.1) .6
adjustment
Balance at end of year $ 83.5 $ 74.4 $ 57.0
The Company securitized $346.6 million of its installment sale
contracts in May 1997 and $314.4 million of its installment sale
contracts in
November 1997. The Company's private-placement, revolving, asset-
backed securitization of wholesale receivables was increased from
$500.0 million to $600.0 million in September 1997. These
installment sale contracts and wholesale receivables were sold to
Caterpillar Financial Funding Corporation and Caterpillar Financial
Asset Sales Corporation, respectively. The assets of Caterpillar
Financial Funding Corporation and Caterpillar Financial Asset Sales
Corporation, including such installment sale contracts and wholesale
receivables are not available to pay creditors of the Company. The
proceeds from these securitizations were used to reduce debt. The
Company recognized a $2.3 million pre-tax gain on the May
transaction, a $.6 million pre-tax gain on the September transaction
and a $4.8 million pre-tax gain on the November transaction.
The net amount of sold receivables serviced by the Company was
$1,409.3 million at December 31, 1997, which consisted of $600.0
million of wholesale receivables under a revolving asset-backed
securitization agreement, and $809.3 million of installment sale
contracts. The Company receives fees for servicing these receivables.
NOTE 3 - INVESTMENT IN FINANCING LEASES
The components of the Company's net investment in financing
leases at December 31 were as follows:
1997 1996 1995
Total minimum lease payments $2,783.5 $2,383.3 $1,857.5
receivable
Estimated residual value of leased
assets:
Guaranteed 206.0 162.5 113.3
Unguaranteed 518.9 401.8 296.8
3,508.4 2,947.6 2,267.6
Less: Unearned Income 477.6 429.8 362.7
Net investment in financing leases $3,030.8 $2,517.8 $1,904.9
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:
1997 1996 1995
Equipment on operating leases, at $827.3 $755.4 $ 650.6
cost
Less: Accumulated depreciation 268.6 244.4 213.3
Equipment on operating leases, net $558.7 $511.0 $ 437.3
At December 31, 1997, scheduled minimum rental payments for
operating leases were as follows:
1998 $148.4
1999 98.5
2000 75.3
2001 40.3
2002 12.3
Thereafter 1.2
Total $376.0
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, 1997, 1996, and 1995. 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 1997, 1996, and 1995
were $2,654.9 million, $2,240.3 million, and $1,963.4 million,
respectively. The approximate weighted average interest rate on short-
term borrowings was 5.3% during 1997 and 1996 and 5.8% during 1995.
Cash paid for interest on external short-term borrowings was $146.1
million in 1997, $139.7 million in 1996, and $121.2 million in 1995.
Commercial paper and bank borrowings outstanding at
December 31, 1997 generally had maturities not exceeding 90 days with
average interest rates of 5.2% and 4.5%, respectively.
Short-term borrowings at December 31 consisted of the following:
1997 1996 1995
Commercial paper, net $2,536.0 $2,382.1 $710.3
Notes payable to banks, net 145.0 257.2 712.1
Other 50.5 39.6 30.7
Total $2,731.5 $2,678.9 $1,453.1
At December 31, 1997, the Company had available, from a number
of banks, a total of $585.2 million of short-term credit lines which
expire at various dates in 1998. These credit lines support the
Company's outstanding commercial paper and commercial paper
guarantees and are utilized for bank borrowings. At December 31,
1997, there were $145.0 million of these lines utilized for bank
borrowings.
The Company also participates with Caterpillar in two syndicated
revolving credit facilities aggregating $2,500.0 million, consisting
of a $1,875.0 million five-year facility and a $625.0 million 364-day
revolving facility. The Company's allocation is $2,250.0 million,
consisting of a $1,687.5 million five-year revolving credit and a
$562.5 million 364-day revolving credit. The Company has the ability
to request a change in its allocation 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, 1997, there were no borrowings under these facilities.
The Company has a $1.0 billion five year revolving credit
facility in the United Kingdom to support its $1.0 billion Euro-
commercial paper. The commercial paper is issued by Caterpillar
International Finance plc, an Irish subsidiary of the Company, with
the guarantee of the Company. Proceeds from the issuance of
commercial paper have been used to replace bank borrowings of certain
of the Company's subsidiaries. At December 31, 1997, there were no
borrowings under this facility.
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 1.15 to 1 for each quarter, the
Company's total debt to total stockholder's equity, as defined by
agreement, may not exceed 8.0 to 1 at year-end (8.5 to 1 moving six
month average at other than year end effective
October 7, 1996); and the Company's tangible net worth must be at
least $20.0 million. At December 31, 1997, the Company was in
compliance with these requirements.
Long-Term Borrowings
During 1997, the Company publicly issued $1,816.7 million of
medium-term notes, of which $849.0 million were at fixed interest
rates and $967.7 million were at floating interest rates primarily
indexed 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 6.1% at December 31,
1997. Cash paid for interest on long-term debt in 1997, 1996, and
1995 was $198.2 million, $167.5 million, and $174.9 million,
respectively.
Long-term debt outstanding at December 31, 1997, matures as follows:
1998 $1,087.9
1999 1,192.2
2000 623.8
2001 287.0
2002 116.0
Thereafter 55.2
Total $3,362.1
Derivative Financial Instruments
Interest rate swap agreements are used to manage the risk due to
fluctuations in interest rates and are entered into with major
financial institutions. These agreements reduce the risk of
deteriorating margins between interest-earning assets and interest-
bearing liabilities and allow the Company to gain competitive and
economic advantages by minimizing funding costs regardless of the
direction interest rates move. The Company and the other party agree
to exchange the difference between two interest rates periodically
over the life of the agreement.
As of December 31, 1997, the Company had outstanding interest
rate swap contracts with notional amounts totaling $1,742.9 million,
all of which are either designated as hedges of debt issuances or of
commercial paper. These swap agreements have terms generally ranging
up to five years, which effectively change $1,517.1 million of
floating rate debt to fixed rate debt, $107.5 million of fixed rate
debt to floating rate debt, and $118.3 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's current accounting loss exposure on interest rate
swaps related to credit risk is limited to the accrued receivable of
$.4 million at December 31, 1997. 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 $19.5 million at December 31, 1997. To minimize the risk of
credit losses being incurred, the Company transacts new 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.
Foreign exchange contracts are used to minimize the risk
associated with fluctuations in exchange rates. The Company has
forward exchange contracts to hedge its U.S. dollar denominated
obligations in Spain, its U.S. dollar denominated customer
receivables in Australia, its foreign currency denominated short-term
intercompany loans, and $9.8 million of its $16.3 million net
investment in Thailand against currency fluctuations. These
contracts have terms generally ranging up to three months. At
December 31, 1997, the Company had forward exchange contracts
totaling $1,055.3 million, of which $3.1 million were with
Caterpillar.
NOTE 7 - COMMITMENTS AND CONTINGENT LIABILITIES
At December 31, 1997, the Company was contingently liable under
guarantees of securities of certain Caterpillar dealers totaling
$260.9 million of which $109.3 million was outstanding compared to
$253.3 million and $158.7 million, respectively, at December 31, 1996
and compared to $282.2 million and $222.1 million, respectively, at
December 31, 1995. 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 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
December 31, 1997. 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. The amount of the commitments and lines of
credit outstanding as of December 31, 1997 was $2.3 billion compared
to $1.6 billion at December 31, 1996 and $1.1 billion at December 31,
1995.
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 its
consolidated financial position.
NOTE 8 - INCOME TAXES
The components of the provision for income taxes were as follows
for the years ended December 31:
1997 1996 1995
Current tax provision
(credit):
U.S. federal taxes $ 47.2 $ 32.8 $ (5.7)
Foreign taxes 8.8 8.2 6.1
U.S. state taxes 4.6 4.3 3.7
60.6 45.3 4.1
Deferred tax provision
(credit):
U.S. federal taxes (9.1) (7.7) 31.9
Foreign taxes 1.6 2.1 1.2
U.S. state taxes .4 .5 1.3
(7.1) (5.1) 34.4
Total provision for income $ 53.5 $ 40.2 $ 38.5
taxes
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 1997, 1996, and 1995 totaled $13.8 million,
$22.4 million, and $5.4 million, respectively.
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 and consisted of the following
components at December 31:
1997 1996 1995
U.S. federal, foreign taxes, and U.S.
state:
Deferred tax assets:
Allowance for credit losses $ 21.9 $ 20.0 $ 18.1
Alternative fuel tax credit 1.3 .7 .5
Expected foreign tax credit 9.4 10.4 4.4
Net operating loss carryforwards 4.9 4.0 3.9
37.5 35.1 26.9
Deferred tax liabilities - primarily
depreciation (66.7) (70.4) (67.8)
Valuation allowance for deferred tax (4.9) (4.0) (3.9)
assets
(71.6) (74.4) (71.7)
Deferred taxes - net $(34.1) $(39.3) $(44.8)
Of the Company's foreign subsidiaries that are in net operating
loss carry forward positions, there is not sufficient evidence to
substantiate recognition of deferred tax assets. Accordingly, a
valuation allowance has been recorded for this amount. It is
possible that circumstances could change in the near term at one or
more of these foreign subsidiaries which would allow the Company to
reduce the valuation allowance and to record additional net deferred
tax assets.
The provision for income taxes was different than would result
from applying the U.S. statutory rate to Income before income taxes
for the years ended December 31, for the reasons set forth in the
following reconciliation:
1997 1996 1995
Taxes computed at U.S. statutory $51.7 $40.5 $36.3
rates
Increases (decreases) in taxes
resulting
from:
Finance income not subject to
federal (3.3) (3.0) (2.7)
taxation
State income taxes, net of federal 3.3 3.0 3.2
taxes
Subsidiaries' results subject to
tax rates 1.2 (.3) 1.7
other than U.S. statutory rates
Other, net .6 - -
Provision for income taxes $53.5 $40.2 $38.5
The domestic and foreign components of Income before income
taxes for the years ended December 31, were as follows:
1997 1996 1995
Domestic $121.2 $ 89.7 $ 89.8
Foreign 26.5 26.1 13.9
Total $147.7 $115.8 $103.7
The foreign component of Income before income taxes 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:
1) Cash and cash equivalents, and other receivables, excluding
accrued receivable on swaps and foreign exchange contracts in a
receivable position; 2) Liabilities, excluding accrued interest
payable on swaps, long-term debt, and deferred income taxes, 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, 1997, 1996, and 1995 of $752.5 million, $692.2
million, and $613.1 million, respectively, and the effect of yen
currency swaps terminated in 1995) is estimated by discounting the
future cash flows using the Company's current rates for new
receivables with similar remaining maturities, except for wholesale
financing with expected remaining maturities of less than one year,
for which the carrying amount is considered a reasonable estimate of
fair value. 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
for which the carrying amount is considered a reasonable estimate of
fair value.
Interest rate swaps, and forward exchange contracts. Fair value
is estimated based upon the amount that the Company would receive or
pay to terminate the agreements as of December 31. The carrying
value for the Company's forward exchange contracts is the fair value.
The estimated fair values of the Company's financial instruments
at December 31, are as follows:
1997 1996 1995
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
Finance receivables
- - net, excluding
tax- oriented $5,845.8 $5,872.9 $4,982.6 $5,008.8 $4,206.4 $4,174.8
leases
Long-term debt (3,362.1)(3,419.6)(2,603.5)(2,653.4)(2,727.1)(2,789.7)
Off-balance-sheet
financial instruments
*:
Interest rate
swaps:
In a net
receivable .4 19.5 .8 4.3 1.7 6.5
position
In a net payable
position (3.3) (12.1) (4.1) (15.5) (3.6) (17.1)
Forward exchange
contracts:
In a net gain
position 47.7 47.7 8.5 8.5
In a net loss
position (6.0) (6.0) (13.5) (13.5) (.7) (.7)
*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.
NOTE 10 - TRANSACTIONS WITH RELATED PARTIES
Caterpillar has made capital contributions to the Company of
$395.0 million. The Company and Caterpillar also have an agreement
(the "Support Agreement") whereby Caterpillar will cause the Company
to have at all times a net worth of at least $20.0 million and ensure
that the Company maintains a ratio of earnings and interest expense
(as defined) to interest expense of not less than 1.15 to 1.
To supplement external debt financing sources, the Company has
variable amount lending agreements with Caterpillar. Under these
agreements, which may be amended from time to time, the Company may
borrow up to $732.7 million from Caterpillar, and Caterpillar may
borrow up to $282.7 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 1997, 1996 and
1995, the Company incurred $11.5 million, $20.7 million, and $2.5
million, respectively, in interest expense related to borrowings from
Caterpillar. At December 31, 1997, 1996, and 1995 the Company had
outstanding borrowings with Caterpillar totaling $243.5 million,
$150.0 million, and $475.5 million, respectively, but had no loans
receivable under these agreements.
The Company has forward exchange contracts with Caterpillar to hedge
its U.S. dollar denominated positions in Australia against currency
fluctuations. These contracts have terms generally ranging up to
three months. The Company had contracts with Caterpillar totaling
$3.1 million, $2.3 million, and $96.6 million at December 31, 1997,
1996, and 1995, respectively.
The Company has agreements with subsidiaries of Caterpillar to
purchase, at a discount, some or all of the subsidiaries' receivables
generated by sales of products to certain Caterpillar dealers. These
purchases in 1997, 1996, and 1995 totaled $444.3 million, $397.3
million, and $330.7 million, respectively. The cash discount earned
in 1997, 1996, and 1995 was $5.6 million, $5.4 million, and $5.3
million, respectively. At December 31, 1997, 1996, and 1995,
wholesale notes receivable balances related to these contracts were
$139.0 million, $146.4 million, and $189.7 million, respectively.
The Company participates in certain marketing programs sponsored by
Caterpillar and its subsidiaries by providing financing at rates
below standard rates. Under these programs, Caterpillar compensates
the Company at the outset of the transaction which the Company then
recognizes as income over the term of the financing. During 1997,
the Company billed $151.0 million to Caterpillar and its subsidiaries
relative to such programs, compared with $106.2 million in 1996 and
$86.8 million in 1995.
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 reimburses Caterpillar for these charges
which amounted to $4.5 million, $3.7 million, and $2.9 million for
the years ended December 31, 1997, 1996, and 1995, respectively. The
Company also reimburses Caterpillar for certain other corporate
services which amounted to $2.3 million for the years ended
December 31, 1997 and 1996 and $1.8 million for the year ended
December 31, 1995.
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 $9.7 million, $7.6
million, and
$5.1 million for 1997, 1996, and 1995, respectively. Minimum
payments for
operating leases having initial or remaining noncancelable terms in
excess of one year are (in millions):
1998 $ 5.6
1999 5.1
2000 3.6
2001 2.8
2002 2.5
Total $19.6
NOTE 12 - SEGMENT INFORMATION
Although the majority of its business (including cross-border
financing) is done in the United States, the Company also conducts
operations in Europe and other geographic segments. Total assets,
revenues, and net income applicable to operations by geographic
segments were as follows as of and for the year ended December 31:
1997 1996 1995
Assets:
United States $5,779.7 $4,793.4 $4,054.7
Europe 1,310.9 1,081.3 941.5
All other 1,133.5 803.4 608.8
8,224.1 6,678.1 5,605.0
Less: Investment in 394.7 299.5 182.5
subsidiaries
Intercompany balances 402.6 14.4 .4
Total assets $7,426.8 $6,364.2 $5,422.1
Revenues:
United States $586.0 $501.8 $ 468.8
Europe 121.5 104.0 81.6
All other 90.0 72.2 61.4
797.5 678.0 611.8
Less: Intercompany Revenue 6.0 - -
Total revenues $791.5 $678.0 $ 611.8
Net income:
United States 78.1 59.8 58.6
Europe 8.6 7.6 (.3)
All other 7.5 8.2 6.9
Total net income $ 94.2 $75.6 $ 65.2
NOTE 13 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Financial data for the interim periods were as follows:
QUARTERS
FIRST SECOND THIRD FOURTH
1997 1996 1997 1996 1997 1996 1997 1996
Total $183.0 $154.2 $189.4 $166.1 $205.5 $175.3 $213.6 $182.4
revenues
Income before
income taxes 41.6 26.5 34.3 31.3 36.2 33.7 35.6 24.3
Net income 27.0 16.3 21.9 20.1 23.0 22.1 22.3 17.1
NOTE 14 - SUBSEQUENT EVENT
In January 1998, the Company established a new special purpose
corporation, Caterpillar Financial Receivables Corporation ("CFRC"),
to purchase receivables from Caterpillar. On January 23, 1998, CFRC
entered into a receivables purchase agreement with Caterpillar.
These receivables consist of trade receivables and have an average
term of 70 days. Collections from these receivables will be used by
CFRC primarily to purchase additional receivables from Caterpillar on
a weekly basis. The Company expects the purchased receivables pool
to maintain a balance between $700.0 and $900.0 million. Caterpillar
will continue to service the receivables, and the Company will pay a
fee to Caterpillar for this servicing. This transaction was funded
primarily by the issuance of medium-term notes and $100.0 million
equity capital invested by Caterpillar.