<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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Check the appropriate box:
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COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Caterpillar Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
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(1) Title of each class of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
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Notes:
<PAGE>
[LOGO OF CATERPILLAR]
100 NE Adams Street
Peoria, Illinois 61629
Notice of Annual Meeting of Stockholders
Wednesday, April 8, 1998
10:30 a.m., Mountain Standard Time
Loews Ventana Canyon Hotel
7000 North Resort Drive
Tucson, Arizona
February 27, 1998
Fellow stockholder:
On behalf of the Board of Directors, you are cordially invited to attend the
1998 Caterpillar Inc. Annual Meeting of Stockholders to:
. elect directors;
. approve an amendment to our Articles of Incorporation;
. approve appointment of Price Waterhouse LLP as independent auditors for
1998;
. act on stockholder proposals to be presented; and
. conduct other business properly brought before the meeting.
You must have an admission ticket to attend, and procedures for requesting that
ticket are enclosed with your proxy materials. Attendance and voting is limited
to stockholders of record at the close of business on February 9, 1998.
Your vote is important. Whether you plan to attend or not, please sign, date,
and return the enclosed proxy card in the envelope provided. If you attend the
meeting and prefer to vote in person, you may do so.
I look forward to seeing you at the meeting.
Sincerely yours,
/s/ Donald V. Fites
-------------------
Donald V. Fites
Chairman
<PAGE>
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Table of Contents
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Notice of Annual Meeting.................................................. Cover
Attendance and Voting Matters................................................ 1
The Caterpillar Board of Directors........................................... 2
Caterpillar Stock Owned by Officers and Directors............................ 6
Persons Owning More than Five Percent of Caterpillar Stock................... 7
Performance Graph............................................................ 7
Report of the Compensation Committee on Executive Compensation............... 8
Executive Compensation Tables................................................ 14
Certain Related Transactions................................................. 17
Amendment to Articles of Incorporation....................................... 17
Appointment of Price Waterhouse LLP.......................................... 18
Stockholder Proposals and Caterpillar Responses.............................. 19
Other Matters................................................................ 23
. Section 16(a) Beneficial Ownership Reporting Compliance.............. 23
. Stockholder Proposals for the 1999 Annual Meeting.................... 23
. Solicitation......................................................... 23
. Stockholder List..................................................... 23
. Revocability of Proxy................................................ 23
Appendix - General and Financial Information - 1997......................... A-1
i
<PAGE>
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Attendance and Voting Matters
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Admission Ticket Required
Anyone wishing to attend the Annual Meeting must have an admission ticket issued
in their name. Admission is limited to stockholders of record on the record date
and one guest, or a stockholder's authorized proxy holder. The requirements for
obtaining an admission ticket are specified in the "Admission Ticket Request
Procedure" enclosed with your proxy card. Share ownership through our Employee
Investment Plan is not record ownership, as the Plan Trustee is the owner of
record for all Plan shares.
Voting Methods
You can vote on matters to come before the meeting in two ways:
. You can come to the Annual Meeting and cast your vote there; or
. You can vote by signing and returning the enclosed proxy card. If you do
so, the individuals named on the card will vote your shares in the
manner you indicate.
Each share of Caterpillar stock you own entitles you to one vote. As of February
9, 1998, there were 366,789,375 shares of Caterpillar common stock outstanding.
Giving your Proxy to Someone Other than Individuals Designated on the Card
If you want to give your proxy to someone other than individuals named on the
proxy card:
. cross out individuals named and insert the name of the individual you
are authorizing to vote; or
. provide a written authorization to the individual you are authorizing to
vote along with your proxy card.
To obtain an admission ticket for your authorized proxy representative, see the
requirements specified in the "Admission Ticket Request Procedure" enclosed
with your proxy card.
The Quorum Requirement
A quorum of stockholders is necessary to hold a valid meeting. If at least one-
third of Caterpillar stockholders are present in person or by proxy, a quorum
will exist. Abstentions and broker non-votes are counted as present for
establishing a quorum. A broker non-vote occurs when a broker votes on some
matters on the proxy card but not on others, because he does not have the
authority to do so.
1
<PAGE>
Vote Necessary for Action
Directors are elected by a plurality vote of shares present at the meeting,
meaning that the director nominee with the most affirmative votes for a
particular slot is elected for that slot. In an uncontested election for
directors, the plurality requirement is not a factor.
Other action, except for consideration of the proposed amendment to our Articles
of Incorporation, is by an affirmative vote of the majority of shares present
at the meeting. To be approved, the proposed amendment to our Articles of
Incorporation must receive a majority vote of outstanding shares. Abstentions
and non-votes have the effect of a no vote on matters other than director
elections.
Matters Raised at the Meeting not Included in this Statement
We do not know of any matters to be acted upon at the meeting other than those
discussed in this statement. If any other matter is presented, proxy holders
will vote on the matter in their discretion.
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The Caterpillar Board of Directors
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Structure
Our Board of Directors is divided into three classes for purposes of election.
One class is elected at each annual meeting of stockholders to serve for a
three-year term.
Directors elected at the 1998 Annual Meeting of Stockholders will hold office
for a three-year term expiring in 2001. Other directors are not up for election
this year and will continue in office for the remainder of their terms.
If a nominee is unavailable for election, proxy holders will vote for another
nominee proposed by the Board or, as an alternative, the Board may reduce the
number of directors to be elected at the meeting.
Directors Nominated This Year for Terms Expiring in 2001
JOHN T. DILLON, 59, Chairman and Chief Executive Officer of International Paper
(paper and forest products) since 1996. Prior to his current position, Mr.
Dillon was President and Chief Operation Officer from 1995 to 1996 and Executive
Vice President - Packaging from 1987 to 1995. Other directorships: IP
Timberlands, Ltd. Mr. Dillon has been a director of the Company since 1997.
2
<PAGE>
JUAN GALLARDO T., 50, Chairman and Chief Executive Officer of Grupo
Embotelladoras Unidas S.A. de C.V. (bottling) since 1986; Chairman and Chief
Executive Officer of Grupo Azucarero Mexico, S.A. de C.V. (sugar mills) since
1990; and Vice Chairman of Home Mart de Mexico, S.A. de C.V. (retail trade)
since 1993. Other directorships: Nacional de Drogas; Bufete Industrial, S.A. de
C.V.; Grupo Industrial Minera Mexico, S.A. de C.V.; and Mexico Fund Inc. Mr.
Gallardo was elected a director of the Company in February, 1998.
GORDON R. PARKER, 62, retired in 1994 as Chairman of Newmont Mining Corporation
and Newmont Gold Company (production, worldwide exploration for, and
acquisition of gold properties). Other directorships: The Williams Companies,
Inc.; Gold Fields of South Africa Ltd.; and Phelps Dodge Corporation. Mr. Parker
has been a director of the Company since 1995.
GEORGE A. SCHAEFER, 69, retired in 1990 as Chairman and Chief Executive Officer
of Caterpillar Inc. Other directorships: Aon Corporation; Autoliv ASP, Inc.;
Helmerich & Payne, Inc.; and Morton International, Inc. Mr. Schaefer has been a
director of the Company since 1983.
Your Board of Directors recommends a vote FOR these nominees.
Directors up for Election in 2000
LILYAN H. AFFINITO, 66, retired in 1991 as Vice Chairman of Maxxam Group Inc.
(forest products operations). Other directorships: Chrysler Corporation;
Jostens Inc.; and Kmart Corporation. Ms. Affinito has been a director of the
Company since 1980.
DONALD V. FITES, 64, Chairman and Chief Executive Officer of Caterpillar Inc.
(manufacture of construction, mining and agricultural machinery and engines)
since 1990. Other directorships: AT&T Corporation; Georgia-Pacific Corporation;
and Mobil Corporation. Mr. Fites has been a director of the Company since 1986.
DAVID R. GOODE, 57, Chairman and Chief Executive Officer of Norfolk Southern
Corporation (holding company engaged principally in surface transportation)
since 1992. Other directorships: Aeroquip-Vickers, Inc. (formerly TRINOVA
Corporation); Georgia-Pacific Corporation; and Texas Instruments Incorporated.
Mr. Goode has been a director of the Company since 1993.
JOSHUA I. SMITH, 56, Chairman and Chief Executive Officer of The MAXIMA
Corporation (computer systems and management information products and services)
since 1978. Other directorships: Federal Express Corporation; Inland Steel
Corporation; and The Allstate Corporation. Mr. Smith has been a director of the
Company since 1993.
Directors up for Election in 1999
W. FRANK BLOUNT, 59, Chief Executive Officer of Telstra Corporation Limited
(telecommunications) since 1992. Other directorships: Entergy Corporation;
First Union National Bank of Georgia; and LXE Inc. Mr. Blount has been a
director of the Company since 1995.
3
<PAGE>
JAMES P. GORTER, 68, Chairman of the Board of Baker, Fentress & Company (mutual
fund) since 1987 and Limited Partner of Goldman, Sachs & Co. (investment
bankers) since 1988. Other directorships: Consolidated-Tomoka Land Co. Mr.
Gorter has been a director of the Company since 1990.
PETER A. MAGOWAN, 55, Chairman of Safeway Inc. (supermarket chain) since 1980
and Chief Executive Officer from 1980 to 1993. Mr. Magowan is also President
and Managing General Partner of the San Francisco Giants (baseball team). Other
directorships: Chrysler Corporation. Mr. Magowan has been a director of the
Company since 1993.
CLAYTON K. YEUTTER, 67, Of Counsel to Hogan & Hartson (a Washington, D.C. law
firm) since 1993. Other directorships: B.A.T. Industries, ConAgra, Inc., FMC
Corporation, Oppenheimer Funds, and Texas Instruments Incorporated. Mr. Yeutter
has been a director of the Company since 1991.
Board Meetings and Committees
In 1997, our full Board met six times. In addition to meetings of the full
Board, directors attended meetings of individual Board committees. For our
incumbent Board as a whole, attendance in 1997 at full Board and committee
meetings exceeded 93%. All incumbent directors, except Mr. Blount, attended at
least 75% of such meetings.
Our Board has four standing committees.
The Audit Committee reviews management's independent accountant selection and
makes recommendations to the Board based on that review. The Committee also
questions management, including Caterpillar's internal audit staff, and
independent accountants on the application of accounting and reporting
standards to Caterpillar. Present members of the Committee are Messrs. David R.
Goode (chairman), W. Frank Blount, James P. Gorter, Gordon R. Parker, and George
A. Schaefer. During 1997, the Committee held three meetings.
The Compensation Committee reviews Caterpillar's compensation practices and
approves its compensation programs and plans. Present members of the Committee
are Ms. Lilyan H. Affinito and Messrs. James P. Gorter (chairman), John T.
Dillon, David R. Goode, Peter A. Magowan, and Clayton K. Yeutter. During 1997,
the Committee held three meetings.
The Nominating Committee recommends candidates to fill Board vacancies and for
the slate to be proposed by the Board at the Annual Meeting of Stockholders.
The Nominating Committee also advises the Board on nominees for Chairman of the
Board, Chief Executive Officer, and other executive officer positions at
Caterpillar. The Committee considers director nominees from stockholders for
election at the annual stockholders' meeting if a written nomination is
received by Caterpillar's Corporate Secretary not later than ninety days in
advance of the meeting (nomination procedures are discussed in greater detail in
our bylaws which will be provided upon written request). Present members of the
Committee are Messrs. Joshua I. Smith (chairman), W. Frank Blount, Donald V.
Fites, Gordon R. Parker, and George A. Schaefer. During 1997, the Committee held
two meetings.
4
<PAGE>
The Public Policy Committee makes recommendations to the Board on public and
social policy issues impacting Caterpillar. The Committee also oversees
Caterpillar's compliance programs and reviews major litigation, legislation and
stockholder matters not within the responsibilities of another Board committee.
Present members of the Committee are Ms. Lilyan H. Affinito and Messrs. Clayton
K. Yeutter, (chairman), John T. Dillon, Donald V. Fites, Peter A. Magowan, and
Joshua I. Smith. During 1997, the Committee held three meetings.
Director Compensation
Of our current Board members, only one, Mr. Fites, is a salaried employee of
Caterpillar. Board members that are not salaried employees of Caterpillar
receive separate compensation for Board service. That compensation includes:
<TABLE>
<S> <C>
Annual Retainer: $30,000
Attendance Fees: $1,000 for each Board meeting
$1,000 for each Board Committee meeting
Expenses related to attendance
Committee Chairman Stipend: $5,000 annually
Stock Options: 4,000 shares annually
Restricted Stock: 750 shares annually (400 shares have a
restricted period of three years, while 350
shares are restricted until the director
terminates service)
</TABLE>
Under Caterpillar's Directors' Deferred Compensation Plan, directors may defer
fifty percent or more of their annual compensation in an interest bearing
account or an account representing shares of Caterpillar stock.
Our directors also participate in a Charitable Award Program. Beginning in the
year of a director's death, an amount is paid proportionately in ten annual
installments to charities selected by the director and to the Caterpillar
Charitable Foundation. The maximum amount payable under the program is $1
million and is based on the director's length of service. The program is
financed through the purchase of life insurance policies, and directors derive
no financial benefit from the program.
5
<PAGE>
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Caterpillar Stock Owned by Officers and Directors
(As of January 31, 1998)
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<TABLE>
<CAPTION>
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Shares
Beneficially
Owned
- --------------------------------------------------------------------------------
<S> <C>
Lilyan H. Affinito 37,090/1/
Glen A. Barton 154,780/2/
W. Frank Blount 4,934/3/
John T. Dillon 1,750
Donald V. Fites 818,344/4/
Gerald S. Flaherty 249,540/5/
David R. Goode 13,300/6/
James P. Gorter 34,950/7/
Peter A. Magowan 16,500/8/
James W. Owens 143,324/9/
Gordon R. Parker 9,300/10/
George A. Schaefer 72,708/11/
Joshua I. Smith 11,400/12/
Richard L. Thompson 48,106/13/
Clayton K. Yeutter 20,000/14/
All directors and executive officers as a group 3,549,230/15/
</TABLE>
/1/ Includes 24,000 shares subject to outside director stock options
exercisable within 60 days. In addition to the shares listed above, Ms.
Affinito has deferred a portion of her director compensation pursuant to
the Directors' Deferred Compensation Plan representing an equivalent value
as if such compensation had been invested on January 31, 1998 in 7,389
shares of Common Stock.
/2/ Includes 87,508 shares subject to employee stock options exercisable within
60 days. In addition to the shares listed above, Mr. Barton has deferred a
portion of his compensation pursuant to supplemental employees' investment
plans representing an equivalent value as if such compensation had been
invested on January 31, 1998 in 4,072 shares of Common Stock.
/3/ Includes 1,334 shares subject to outside director stock options exercisable
within 60 days.
/4/ Includes 654,000 shares subject to employee stock options exercisable
within 60 days. In addition to the shares listed above, Mr. Fites has
deferred a portion of his compensation pursuant to supplemental employees'
investment plans representing an equivalent value as if such compensation
had been invested on January 31, 1998 in 11,467 shares of Common Stock.
/5/ Includes 151,198 shares subject to employee stock options exercisable
within 60 days. In addition to the shares list ed above, Mr. Flaherty has
deferred a portion of his compensation pursuant to supplemental employees'
investment plans representing an equivalent value as if such compensation
had been invested on January 31, 1998 in 6,147 shares of Common Stock.
/6/ Includes 8,000 shares subject to outside director stock options exercisable
within 60 days. In addition to the shares listed above, Mr. Goode has
deferred a portion of his director compensation pursuant to the Directors'
Deferred Compensation Plan representing an equivalent value as if such
compensation had been invested on January 31, 1998 in 4,133 shares of
Common Stock.
/7/ Includes 24,000 shares subject to outside director stock options
exercisable within 60 days. In addition to the shares listed above, Mr.
Gorter has deferred a portion of his director compensation pursuant to the
Directors' Deferred Compensation Plan representing an equivalent value as
if such compensation had been invested on January 31, 1998 in 3,868 shares
of Common Stock.
/8/ Includes 8,000 shares subject to outside director stock options exercisable
within 60 days and 1,400 shares for which beneficial ownership has been
disclaimed.
/9/ Includes 88,398 shares subject to employee stock options exercisable within
60 days. In addition to the shares listed above, Mr. Owens has deferred a
portion of his compensation pursuant to supplemental employees' investment
plans representing an equivalent value as if such compensation had been
invested on January 31, 1998 in 2,650 shares of Common Stock.
/10/ Includes 4,000 shares subject to outside director stock options exercisable
within 60 days.
/11/ Includes 20,000 shares subject to outside director stock options
exercisable within 60 days.
/12/ Includes 8,000 shares subject to outside director stock options exercisable
within 60 days.
/13/ In addition to the shares listed above, Mr. Thompson has deferred a portion
of his compensation pursuant to supplemental employees' investment plans
representing an equivalent value as if such compensation had been invested
on January 31, 1998 in 2,763 shares of Common Stock.
/14/ Includes 12,000 shares subject to outside director stock options
exercisable within 60 days. In addition to the shares listed above, Mr.
Yeutter has deferred a portion of his director compensation pursuant to the
Directors' Deferred Compensation Plan representing an equivalent value as
if such compensation had been invested on January 31, 1998 in 3,080 shares
of Common Stock.
/15/ Includes 2,195,674 shares subject to employee and outside director stock
options exercisable within 60 days. Also includes 29,986 shares for which
voting and investment power is shared and 1,400 shares for which beneficial
ownership has been disclaimed. All directors and executive officers as a
group beneficially own less than one percent of outstanding Common Stock.
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6
<PAGE>
<TABLE>
<CAPTION>
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Persons Owning More than Five Percent of Caterpillar Stock
(As of December 31, 1997)
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Voting Dispositive
Authority Authority Total Amount Percent
---------------------------------------- of Beneficial of
Name and Address Sole Shared Sole Shared Ownership Class
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Joint filing by PIMCO Advisors L.P. and 0 17,768,952 23,422,532 0 23,422,532 6.3%
Oppenheimer Capital
800 Newport Center Drive
Newport Beach, CA 92660
Joint filing by The Capital Group Companies, Inc. 924,650 0 23,411,650 0 23,411,650 6.3%
and Capital Research and Management Company
333 South Hope Street
Los Angeles, CA 90071
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</TABLE>
Comparison of Five Year Cumulative Total Stockholder
Return Among Caterpillar Inc., S&P Machinery (Diversified) Index,
and S&P 500 Composite Index
[GRAPH APPEARS HERE]
Fiscal Year Ended December 31,
<TABLE>
<CAPTION>
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December 31, 1992 1993 1994 1995 1996 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Caterpillar 100 167.38 209.07 227.36 297.38 390.53
- ---------------------------------------------------------------------------------------------
S&P Machinery
(Diversified) 100 148.05 144.14 177.84 221.54 293.35
- ---------------------------------------------------------------------------------------------
S&P 500 100 110.03 111.53 153.29 188.39 251.49
- ---------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
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Report of the Compensation Committee
on Executive Compensation
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Compensation Policies
The Compensation Committee ("Committee") establishes compensation guidelines and
targets based upon the performance of Caterpillar, business units within
Caterpillar, and individual executive officers. The Committee's goal is to
establish a compensation program that:
. links the interests of management and stockholders;
. links executive compensation with long-term Caterpillar performance; and
. attracts and retains executives of high caliber and ability.
For 1997, that program consisted of base salary, short-term incentive
compensation, stock options, and long-term incentive compensation.
The Committee believes this compensation program was a significant factor
contributing to Caterpillar's success this past year, including record profit
of $1.67 billion or $4.44 per share. As the performance graph on page 7
demonstrates, Caterpillar stock has provided holders with a cumulative return
for the past five years that significantly exceeds the S&P 500 Composite Index
and Caterpillar's peer group, the S&P Machinery (Diversified) Index.
Special Recognition
We believe the following financial press recognition this past year is a
testament to the effectiveness of our compensation programs.
In October of 1997, Fortune named Caterpillar as one of the "World's Most
Admired Companies." The rating was based on innovativeness, overall quality of
management, value as a long-term investment, responsibility to the community and
the environment, ability to attract and keep talented people, quality of
products or services, financial soundness, wise use of corporate assets, and
effectiveness in doing business globally.
In September of 1997, Industry Week selected Caterpillar as one of the "World's
100 Best Managed Companies." The selection was based on financial performance,
corporate governance, accounting and finance, sales and marketing, human
resources, information services, manufacturing operations, supply-chain
management, distribution and logistics, global strategy, and research and
development.
In June of 1997, Worth Financial selected Caterpillar as one of the "World's 50
Best Stocks to Own." They stated that companies selected "dominate their
markets by building superior brand names, developing proprietary technologies,
and erecting vast marketing and distribution networks." Strong management,
access to capital, and a savvy manufacturing process were also important
ingredients.
8
<PAGE>
Base Salary
Executive Officers
- ------------------
Each year the Committee reviews base salaries of individual executive officers
and their salary ranges. In determining adjustments to base salary and salary
ranges for a particular year, the Committee relies on consultant surveys
regarding salaries and other short-term compensation ("total short-term
compensation") at comparable companies. In making salary adjustments, the
Committee also makes subjective determinations regarding the performance of
individual officers.
In setting 1997 base salaries and salary ranges for all executive officers,
including Mr. Fites, the Committee referred to the Hewitt Survey of Core Group I
Companies ("Survey"). The Survey included 25 companies, all of which are in the
S&P 500 Composite Index and none of which are in the S&P Machinery (Diversified)
Index. According to the Survey, total short-term compensation of Caterpillar
executive officers was below market average.
Based on Survey results, the Committee increased the salary ranges for 1997 by
5% for the Group President level and by 10% for the Vice President level. The
Committee also approved increases in the base salary of all executive officers
for 1997 based upon a subjective analysis of each officer's individual
performance. After these adjustments, the total short-term compensation of
executive officers as a group remained below average according to the Survey.
Chief Executive Officer
- -----------------------
For 1997 Mr. Fites' base salary was increased to $1.25 million. In determining
his base salary, the Committee used the Hewitt Survey as a benchmark. With the
increase, Mr. Fites' base salary for 1997 was slightly higher than the average
of CEOs included in the Survey, but his total short-term compensation was
slightly lower.
In setting Mr. Fites' 1997 salary, the Committee also evaluated his performance
as an executive in the prior year. Determinative factors included his
contributions to Caterpillar, his home community, and a variety of national and
international business organizations. Some of the significant achievements
considered include:
. Caterpillar continued to achieve record profits and sales;
. reengineered business processes continued to result in significant
reductions in product development time, necessary physical testing, and
product development costs;
. strategic alliances and acquisitions designed to enhance Caterpillar's
competitive position were pursued and completed; and
. Mr. Fites continued his active participation in initiatives and
organizations designed to benefit not only Caterpillar but industry as a
whole.
9
<PAGE>
Short-Term Incentive Compensation
Executive Officers
- ------------------
In 1997, executive officers, together with most management and salaried
employees, participated in Caterpillar's Corporate Incentive Compensation Plan
("Corporate Plan"). Payouts under the Corporate Plan for 1997 were based on a
team award incorporating Caterpillar's pre-tax return on assets ("ROA") for the
year and an individual award based on a subjective determination of individual
performance. For 1997, a total of approximately $223 million was earned by about
46,000 Caterpillar employees under the corporate and business unit incentive
plans.
For 1997, the team award portion of the payout was calculated by multiplying:
. annual base salary;
. a specific percentage of base salary, which increases for higher
positions within Caterpillar, placing a greater percentage of
compensation at risk for those with greater opportunity to affect
Caterpillar's performance; and
. a performance factor based upon Caterpillar's achievement of specific
levels of ROA.
Before any amount could be awarded under the Corporate Plan for 1997, a minimum
Caterpillar ROA level had to be achieved. Increasing amounts are awarded for
Caterpillar achievement up to a maximum ROA. Minimum, target, and maximum ROA
levels to be achieved for 1997 were increased from 1996. For 1997, the target
ROA level under the Corporate Plan was exceeded (although the maximum was not
achieved) and all executive officers received a team award.
In addition to a team award, all executive officers received an individual award
under the Corporate Plan for 1997 based on a subjective determination of
individual performance. The aggregate of individual awards to all officers
cannot exceed the amount available in a discretionary pool established for such
awards. The discretionary pool amount is a specific percentage of team awards
paid to all executive officers.
In 1997, nineteen executive officers participated in incentive plans applicable
to their business units. Caterpillar has 297 incentive plans applicable to
business units and divisions within those units. Each business unit within
Caterpillar has its own criteria for determining incentive compensation for its
employees. With the exception of seven incentive plans, for 1997, at least 25%
of the payout under a business unit plan had to be based on Caterpillar
achievement of ROA levels applicable to the Corporate Plan. Other factors
determining business unit payout in 1997 included return on sales ("ROS") for
the particular unit, unit ROA, unit accountable profit, operating expenses,
percentage of industry sales, and customer satisfaction. The two most widely
used factors determining payouts under the business unit plans in 1997 were unit
ROA and unit accountable profit.
10
<PAGE>
In 1997, executive officers participating in their respective business unit
incentive plans were eligible to receive fifty percent of the team award amount
that would have been awarded if he or she had participated solely in the
business unit plans, and fifty percent of the amount that would have been
awarded had the officer participated solely in the Corporate Plan. All
participating officers received payments based on 1997 performance of their
business units.
Chief Executive Officer
- -----------------------
Because Caterpillar exceeded its target ROA level under the Corporate Plan for
1997, Mr. Fites received a team award under the Corporate Plan. Mr. Fites also
received an individual award under the Corporate Plan for 1997.
At the beginning of 1997, Mr. Fites discussed with the Committee his goals and
expectations for the year. As discussed more fully below, Mr. Fites met those
goals with the type of leadership that resulted in him being named one of the
"Top 25 Managers of the Year" by Business Week magazine.
Mr. Fites' Goals and Results
. Caterpillar Results Mr. Fites set benchmarks for Caterpillar profit
before tax and return on assets. Those goals were exceeded in 1997 by a
significant margin, and Caterpillar once again set records for sales and
profits.
. Growth Initiatives Mr. Fites established a goal of carefully managing
Caterpillar's growth initiatives in terms of timing and cost. These
initiatives include electric power generation, agricultural products,
mining systems, compact machines and further strengthening of the
Company's product support network to better link customer, dealer, and
Caterpillar operations. This goal has been met for 1997, in that on
balance all growth initiatives are on time and currently are being
implemented at below estimated cost.
. Successful Implementation of Acquisitions Mr. Fites set a goal of
successfully implementing acquisitions completed in 1996. Mr. Fites'
success in meeting this goal in 1997 is exemplified in progress made
with our largest 1996 acquisition, MaK Motoren GmbH & Co. KG. With
excellent leadership from Caterpillar's officer team, the design,
manufacturing, and marketing strengths of MaK have been successfully
merged with Caterpillar's Large Engine Center. In addition, expansion of
MaK into the electric power generation business is underway.
. Pursuit of Additional Acquisitions Mr. Fites established a goal of
pursuing additional acquisitions in 1997 designed to improve
Caterpillar's competitive position and enhance shareholder value.
Caterpillar's pending acquisition of Perkins Engines is a prime example
of Mr. Fites' accomplishment of this goal. This combination enhances
Caterpillar's strategic position in the worldwide engine business,
ensures the Company's ability to leverage critical engine technologies
for leadership in the future, and allows Caterpillar to compete with
other full-line engine producers.
11
<PAGE>
. Contact with Core Constituencies Mr. Fites expressed his commitment to
maintain regular contact in 1997 with financial analysts, stockholders,
dealers, customers, and employees. Mr. Fites met that goal. He met with
approximately 100 financial analysts in Boston in July and 34 analysts
in London in October. Mr. Fites also met with representatives from
Caterpillar dealers and large stockholders during the year, and visited
several major Caterpillar customers. In addition, Mr. Fites personally
visited over 15 Caterpillar facilities outside the Peoria, Illinois
area in 1997, including six overseas.
. Industry-Wide Efforts In 1997, Mr. Fites continued his participation in
initiatives designed to benefit industry as a whole. He served as
Chairman of the Business Roundtable, providing excellent leadership to
that important group by energetically promoting public policies that
create jobs, ensure a climate for growth, and foster export strength. He
also remained active on the U.S.-Japan Business Council and the Advisory
Committee for Trade Policy and Negotiations.
. Commitment to Charities and Peoria Community Areas of accomplishment in
which Mr. Fites should be particularly proud include his commitment to
charitable organizations and his dedication to the Peoria, Illinois
community. In 1997, Mr. Fites continued his service as Vice Chairman of
the Salvation Army National Advisory Board and was Chairman of the
Central Illinois Capital Campaign for the National Easter Seal Society,
an organization which awarded Caterpillar its Corporate Leadership Award
in 1997. Mr. Fites also continued to be very active in fund-raising for
Bradley University, serving as the national chairman of its Centennial
Campaign.
Stock Options
Executive Officers
- ------------------
In 1997, all executive officers, as well as other key employees, were granted
incentive and non-qualified stock options under Caterpillar's 1996 Stock Option
and Long-Term Incentive Plan. Incentive stock options were granted up to the
maximum number of shares which may be issued in accordance with U.S. tax law to
an individual. The portion of any option grant not issued as an incentive stock
option was issued as a non-qualified stock option. The number of options
granted to a particular officer in 1997 depended upon that officer's position
and a subjective assessment of that officer's individual performance.
To ensure executive officers retain significant stockholdings in Caterpillar,
the Committee encourages them to own a number of shares at least equal to the
average number of shares for which they received options in their last three
option grants. For 1997, if one-hundred percent of the minimum ownership
guideline was not met, significant progress had not been made to achieve the
desired ownership level, or a satisfactory explanation for failure to meet the
guideline had not been presented, the Committee would have reduced the number
of shares included in the officer's grant. For 1997, no officer was penalized
for low share ownership.
12
<PAGE>
Chief Executive Officer
- -----------------------
In 1997, Mr. Fites received an option grant covering 150,000 shares of
Caterpillar stock, as reflected in the Summary Compensation Table and Option
Grants Table. Like other executive officers, Mr. Fites received this grant based
upon his position at Caterpillar and an assessment of his individual
performance. Individual performance factors considered by the Committee are
those discussed above with respect to Mr. Fites' individual Corporate Plan
award.
Long-Term Incentive Compensation
Executive Officers
- ------------------
Under the long-term incentive portion of the Option Plan ("LTIP"), a three-year
performance period ("cycle") is established each year, with participants
receiving a payout (50% in cash and 50% in restricted stock) if certain minimum,
target or maximum performance thresholds are achieved at the end of the cycle.
The Committee has discretion to apply different performance criteria for
different cycles. The Committee also has discretion during a cycle to adjust
performance measures set for that period to reflect changes in accounting
principles and practices; mergers, acquisitions or divestitures; major technical
innovations; or extraordinary, nonrecurring or unusual items.
A cycle under the LTIP's predecessor (i.e., a long-term incentive supplement to
Caterpillar's 1987 Stock Option Plan) was established at the beginning of 1995
for the years 1995-1997, with a payout to occur in 1998. Amounts that could be
paid at the end of that cycle depended upon an executive's base salary at the
end of the period, a predetermined percentage of that salary that varied based
on an executive's position, and whether certain after-tax ROA thresholds had
been achieved. For an executive to receive any payout under the cycle
established in 1995, Caterpillar had to achieve a threshold ROA level for the
cycle. If a target ROA level was achieved, a larger amount would be received,
while attaining a certain maximum ROA level would yield the maximum amount
payable under the cycle. For the cycle established in 1995, the maximum ROA
level was exceeded and all participants, including those named in the Summary
Compensation Table, received a payout in early 1998 under that cycle. The total
value of cash and restricted stock received by 147 LTIP participants under the
cycle established in 1995 was approximately $12.1 million.
Cycles were also established under the LTIP's predecessor in 1996 and under the
LTIP in 1997 for the periods 1996-1998 and 1997-1999, with payouts to occur, if
at all, in 1999 and 2000. Like the 1995 cycle discussed above, a payout under
these cycles will depend upon an executive's base salary at the end of the
period, a predetermined percentage of that salary that varies based on the
executive's position, and whether certain after-tax ROA levels (minimum, target,
and maximum levels) have been achieved.
13
<PAGE>
Chief Executive Officer
- -----------------------
Mr. Fites received a payout in 1998 under the 1995 LTIP cycle based on the
criteria discussed above. The amount received by Mr. Fites is disclosed in the
LTIP Payouts column of the Summary Compensation Table.
Mr. Fites also has the potential to receive in 1999 and 2000 a payout under the
LTIP for the 1996-1998 and 1997-1999 cycles based on the criteria discussed
above. Minimum, target, and maximum amounts that could be received by Mr. Fites,
as well as other named executive officers, are referenced in the Long-Term
Incentive Plans/Awards Table.
By the Compensation Committee consisting of:
James P. Gorter (Chairman) John T. Dillon Peter A. Magowan
Lilyan H. Affinito David R. Goode Clayton K. Yeutter
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Executive Compensation Tables
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Summary Compensation Table
- -------------------------------------------------------------------------------------------------------------------------
Long-Term
Compensation
----------------------
Annual Awards Payouts
Compensation ----------------------
------------------------------------------------- Securities LTIP
Name and Other Annual Underlying Payouts All Other
Principal Position Year Salary Bonus/2/ Compensation Options/3/ ($) Compensation/1/
e-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
D. V. Fites 1997 $1,250,000 $1,280,000 $-0- 150,000 $1,125,000/4/ $56,700
Chairman 1996 1,150,000 1,151,150 -0- 150,000 1,000,500 55,200
and CEO 1995 1,000,000 564,000 -0- 150,000 900,000 48,000
- -------------------------------------------------------------------------------------------------------------------------
G. A. Barton 1997 500,000 384,000 -0- 50,000 375,000/4/ 24,000
Group President 1996 450,000 321,750 -0- 50,000 326,250 18,299
1995 400,000 188,000 -0- 50,000 300,000 16,000
- -------------------------------------------------------------------------------------------------------------------------
G. S. Flaherty 1997 500,000 384,000 -0- 50,000 375,000/4/ 20,700
Group President 1996 450,000 321,750 -0- 50,000 326,250 21,600
1995 400,000 188,000 -0- 50,000 300,000 19,200
- -------------------------------------------------------------------------------------------------------------------------
J. W. Owens 1997 430,000 330,240 -0- 50,000 322,500/4/ 12,041
Group President 1996 380,000 271,700 -0- 50,000 257,133 11,400
1995 330,000 155,100 -0- 50,000 214,500 9,900
- -------------------------------------------------------------------------------------------------------------------------
R. L. Thompson 1997 430,000 330,240 -0- 50,000 322,500/4/ 12,900
Group President 1996 380,000 271,700 -0- 50,000 257,133 11,400
1995 330,000 155,100 -0- 50,000 214,500 9,901
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ Consists of matching Company contributions, respectively, for the Employees'
Investment Plan (EIP) and Supplemental Employees' Investment Plans of
Messrs. Fites ($7,300/$49,400), Barton ($7,400/$16,600), Flaherty
($7,100/$13,600), Owens ($4,841/$7,200), and Thompson ($4,625/$8,275).
/2/ Consists of cash payments made pursuant to the Corporate Incentive
Compensation Plan in 1998 with respect to 1997 performance, in 1997 with
respect to 1996 performance, and in 1996 with respect to 1995 performance.
/3/ Numbers for 1995, 1996, and 1997 have been adjusted to reflect a two-for-one
stock split effective after the 1997 grant. No options have been granted at
an option price below fair market value on the date of the grant. Although
no outstanding options have been repriced, an exercise price adjustment was
made to such options to reflect the two-for-one stock split.
/4/ This payout was made in early 1998. Fifty percent of it was in cash and
fifty percent in restricted stock. Caterpillar's average stock price on
December 31, 1997 ($48.1563 per share) was used to determine the restricted
stock portion of the payout. As of December 31, 1997, the number and value
of restricted stock held by Messrs. Fites, Barton, Flaherty, Owens, and
Thompson was, respectively, 28,546 ($1,374,670), 9,418 ($453,536), 9,418
($453,536), 7,048 ($339,406), and 7,048 ($339,406). Dividends are paid on
this restricted stock.
14
<PAGE>
- --------------------------------------------------------------------------------
Option Grants in 1997
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Individual Grants
- ------------------------------------------------------------------------------
% of Total Potential Realizable Value
Number of Options at Assumed Annual Rates
Securities Granted to of Stock Price Appreciation
Underlying Employees Exercise for Option Term/1/
Options In Fiscal Price Expiration ---------------------------------------
Name Granted/2/ Year 1997/3/ Per Share Date 5% 10%
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
D. V. Fites 150,000 4.25 $51.6562 6/10/2007 $ 4,872,945 $ 12,349,005
G. A. Barton 50,000 1.42 51.6562 6/10/2007 1,624,315 4,116,335
G. S. Flaherty 50,000 1.42 51.6562 6/10/2007 1,624,315 4,116,335
J. W. Owens 50,000 1.42 51.6562 6/10/2007 1,624,315 4,116,335
R. L. Thompson 50,000 1.42 51.6562 6/10/2007 1,624,315 4,116,335
Executive Group 833,000 23.6 51.6562 6/10/2007 27,061,088 68,578,141
All Stockholders/4/ N/A N/A N/A N/A 12,235,882,705 31,008,143,268
Executive Group
Gain as % of all
Stockholder Gain N/A N/A N/A N/A 22.1% 22.0%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ The dollar amounts under these columns reflect the 5% and 10% rates of
appreciation prescribed by the Securities and Exchange Commission. The 5%
and 10% rates of appreciation would result in per share prices of $84.1425
and $133.9829, respectively. Caterpillar expresses no opinion regarding
whether this level of appreciation will be realized and expressly disclaims
any representation to that effect.
/2/ Options are exercisable upon completion of one full year of employment
following the grant date (except in the case of death or retirement) and
vest at the rate of one-third per year over the three years following the
grant. Upon exercise, option holders may surrender shares to pay the option
exercise price and satisfy tax withholding requirements. Numbers have been
adjusted to reflect a two-for-one stock split effective after the date of
the grant.
/3/ In 1997, options for 833,000 shares were granted to all executive officers
as a group; options for 40,000 shares were granted to all directors who are
not executive officers as a group; and options for 2,658,650 shares were
granted to all employees other than executive officers as a group.
/4/ For "All Stockholders" the potential realizable value is calculated from
$51.6562, the price of Common Stock on June 10, 1997, based on the
outstanding shares of Common Stock on that date. Numbers have been adjusted
to reflect a two-for-one stock split effective after the date of the grant.
- --------------------------------------------------------------------------------
Aggregated Option/SAR Exercises in 1997,
and 1997 Year-End Option/SAR Values
<TABLE>
<CAPTION>
--------------------------------------------------------------
Number of Securities
Underlying Unexercised Value of Unexercised
Options/SARs at In-the-Money Options/
1997 Year-End SARs at 1997 Year-End/2/
Shares Acquired Value --------------------------------------------------------------
Name On Exercise/1/ Realized/2/ Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
D. V. Fites -0- $ -0- 654,000 300,000 $17,786,086 $2,485,945
G. A. Barton 9,980 497,441 87,508 100,002 1,692,048 828,683
G. S. Flaherty -0- -0- 151,198 100,002 3,641,133 828,683
J. W. Owens 2,380 110,745 88,398 100,002 1,855,448 828,683
R. L. Thompson 28,466 1,047,579 -0- 100,002 -0- 828,683
</TABLE>
/1/ Upon exercise, option holders may surrender shares to pay the option
exercise price and satisfy tax withholding requirements. The amounts
provided are gross amounts absent netting for shares surrendered. Numbers
have been adjusted to reflect a two-for-one stock split effective after the
date of the grant.
/2/ Calculated on the basis of the fair market value of the underlying
securities at the exercise date or year-end, as the case may be, minus the
exercise price.
- --------------------------------------------------------------------------------
15
<PAGE>
- --------------------------------------------------------------------------------
Long-Term Incentive
Plans/Awards in 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Estimated future payouts under
Performance or non-stock price-based plans
Other Period Until ------------------------------------
Name Maturation or Payout Threshold Target Maximum
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
D. V. Fites 1997-1999 375,000 750,000 1,125,000
------------------------------------------------------------
Chairman and CEO 1996-1998 375,000 750,000 1,125,000
- -------------------------------------------------------------------------------
G. A. Barton 1997-1999 125,000 250,000 375,000
------------------------------------------------------------
Group President 1996-1998 125,000 250,000 375,000
- -------------------------------------------------------------------------------
G. S. Flaherty 1997-1999 125,000 250,000 375,000
------------------------------------------------------------
Group President 1996-1998 125,000 250,000 375,000
- -------------------------------------------------------------------------------
J. W. Owens 1997-1999 107,500 215,000 322,500
------------------------------------------------------------
Group President 1996-1998 107,500 215,000 322,500
- -------------------------------------------------------------------------------
R. L. Thompson 1997-1999 107,500 215,000 322,500
------------------------------------------------------------
Group President 1996-1998 107,500 215,000 322,500
- -------------------------------------------------------------------------------
</TABLE>
Payout is based upon an executive's base salary at the end of the three-year
cycle, a predetermined percentage of that salary, and Caterpillar's
achievement of specified levels of after-tax return on assets ("ROA") over the
three-year period. The target amount will be earned if 100% of targeted ROA is
achieved. The threshold amount will be earned if 50% of targeted ROA is
achieved, and the maximum award amount will be earned at 150% of targeted ROA.
Base salary levels for 1997 were used to calculate the estimated dollar value of
future payments under both cycles.
- --------------------------------------------------------------------------------
Pension Plan Table
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Remuneration Years of Service
----------------------------------------------------------------------
15 20 25 30 35
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 100,000 $ 22,500 $ 30,000 $ 37,500 $ 45,000 $ 52,500
$ 150,000 33,750 45,000 56,250 67,500 78,750
$ 200,000 45,000 60,000 75,000 90,000 105,000
$ 250,000 56,250 75,000 93,750 112,500 131,250
$ 300,000 67,500 90,000 112,500 135,000 157,500
$ 350,000 78,750 105,000 131,250 157,500 183,750
$ 400,000 90,000 120,000 150,000 180,000 210,000
$ 450,000 101,250 135,000 168,750 202,500 236,250
$ 500,000 112,500 150,000 187,500 225,000 262,500
$ 550,000 123,750 165,000 206,250 247,500 288,750
$ 650,000 146,250 195,000 243,750 292,500 341,250
$ 750,000 168,750 225,000 281,250 337,500 393,750
$ 850,000 191,250 255,000 318,750 382,500 446,250
$ 950,000 213,750 285,000 356,250 427,500 498,750
$1,100,000 247,500 330,000 412,500 495,000 577,500
$1,400,000 315,000 420,000 525,000 630,000 735,000
$1,600,000 360,000 480,000 600,000 720,000 840,000
$1,950,000 438,750 585,000 731,250 877,500 1,023,750
$2,500,000 562,500 750,000 937,500 1,125,000 1,312,500
$3,000,000 675,000 900,000 1,125,000 1,350,000 1,575,000
$3,500,000 787,500 1,050,000 1,312,500 1,575,000 1,837,500
$4,000,000 900,000 1,200,000 1,500,000 1,800,000 2,100,000
$4,500,000 1,012,500 1,350,000 1,687,500 2,025,000 2,362,500
$5,000,000 1,125,000 1,500,000 1,875,000 2,250,000 2,625,000
- ---------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
The compensation covered by the pension program is based on an employee's annual
salary and bonus. Amounts payable pursuant to a defined benefit supplementary
pension plan are included. As of December 31, 1997, the persons named in the
Summary Compensation Table had the following estimated credited years of benefit
service for purposes of the pension program: D. V. Fites - 35 years*; G. A.
Barton - 35 years*; G. S. Flaherty - 35 years*; J. W. Owens - 25 years; and
R. L. Thompson - 15 years. The amounts payable under the pension program are
computed on the basis of an ordinary life annuity and are not subject to
deductions for Social Security benefits or other amounts.
- -----------------
* Although having served more than 35 years with the Company, amounts payable
under the plan are based on a maximum of 35 years of service.
- --------------------------------------------------------------------------------
Certain Related Transactions
- --------------------------------------------------------------------------------
Mr. Siegfried R. Ramseyer, a Vice President of the Company, was Managing
Director of Caterpillar Overseas S.A. ("Subsidiary") until December 31, 1992,
and is indebted to that Subsidiary in the amount of approximately $302,826. The
interest-free loan is for a home purchased by Mr. Ramseyer in Switzerland and
is collateralized by a mortgage on the property. The primary purpose of the
transaction was to permit Mr. Ramseyer to retain his home in Switzerland and to
purchase a home in the United States where he had been assigned. In connection
with his relocation from the United States to Hong Kong in 1998, the loan will
be repaid by Mr. Ramseyer at the end of February, 1998.
- --------------------------------------------------------------------------------
Amendment to Articles of Incorporation
- --------------------------------------------------------------------------------
Article FOURTH of Caterpillar's Restated Certificate of Incorporation currently
fixes our authorized capital stock at 450,000,000 shares of common stock, $1.00
par value, and 5,000,000 shares of preferred stock, $1.00 par value. The Board
recommends an amendment to increase the number of authorized shares of common
stock to 900,000,000. No change is being proposed to the par value of the common
stock or the number of authorized shares of preferred stock.
If the amendment is approved by the stockholders, the first paragraph of Article
FOURTH of the Restated Certificate of Incorporation would be restated to read as
follows:
"FOURTH: (a) The corporation is authorized to issue two classes of
shares to be designated, respectively, "common stock" and "preferred
stock." The total number of such shares shall be nine hundred and five
million (905,000,000), all of which shares shall have a par value of $1.00
per share. The total number of shares of common stock authorized to be
issued shall be nine hundred million (900,000,000) and the total number of
shares of preferred stock authorized to be issued shall be five million
(5,000,000)."
17
<PAGE>
The rights of additional authorized shares would be identical to shares now
authorized. Although the authorization would not, in itself, have any effect on
your rights as a stockholder, issuance of additional shares of common stock for
other than a stock split or dividend could have a dilutive effect on earnings
per share. If approved, the amendment would allow the Board to authorize the
issuance of additional shares up to the new maximum without further shareholder
approval, unless that approval was required under applicable law or stock
exchange regulations. This proposal is not in response to any known effort to
accumulate Caterpillar common stock or obtain control of Caterpillar.
As of December 31, 1997, we had 450,000,000 shares of authorized common stock,
of which 368,010,340 shares were issued and outstanding. While we do not have
any current plans to issue additional shares of common stock, other than under
previously authorized benefit and compensation plans, the amendment would
enhance the Board's flexibility in possible future actions, such as stock
splits, stock dividends, acquisitions, and other corporate activities involving
the common stock.
Your Board of Directors recommends a vote FOR this proposal.
- --------------------------------------------------------------------------------
Appointment of Price Waterhouse LLP
- --------------------------------------------------------------------------------
The Board of Directors seeks from the stockholders an indication of their
approval or disapproval of the Board's appointment of Price Waterhouse LLP
("Price Waterhouse") as independent auditors for 1998.
Price Waterhouse has been our independent auditor since 1925, and no
relationship exists other than the usual relationship between independent
public accountant and client.
If the appointment of Price Waterhouse as independent auditors for 1998 is not
approved by the stockholders, the adverse vote will be considered a direction to
the Board of Directors to consider other auditors for next year. However,
because of the difficulty in making any substitution of auditors so long after
the beginning of the current year, the appointment for the year 1998 will stand,
unless the Board finds other good reason for making a change.
Representatives of Price Waterhouse will be available at the annual meeting of
stockholders to respond to questions.
Your Board of Directors recommends a vote FOR this proposal.
18
<PAGE>
- --------------------------------------------------------------------------------
Stockholder Proposal re: Human Rights
and Caterpillar Response
- --------------------------------------------------------------------------------
Mr. Seamus P. Finn, O.M.I., advises that, on behalf of The Missionary Oblates of
Mary Immaculate, the "Society of Oblate Fathers for Missions among the Poor"
("Oblate Fathers") (owners of 1,600 shares of Company stock), he or another
representative intends to present for consideration and action at the annual
meeting the following resolution. Co-sponsors of this proposal are Ms. Nancy
Finnernan, on behalf of the Sisters of Loretto (Loretto Literary and Benevolent
Institution) (owners of 600 shares of Company stock) and Rev. Joseph P. LaMar,
MM, on behalf of the Catholic Foreign Mission Society of America, Inc. (owners
of 8,000 shares of Company stock).
Resolution Proposed by Stockholder
BE IT RESOLVED: the shareholders request the Board to review and develop
guidelines for country selection and report these guidelines to shareholders and
employees by October 1998. In its review, the Board shall develop guidelines on
maintaining investments in or withdrawing from countries where:
. there is a pattern of ongoing and systematic violation of human rights
. a government is illegitimate
. there is a call by human rights advocates, pro-democracy organizations or
legitimately elected representatives for economic sanctions against their
country
Supporting Statement of Proponent
WHEREAS: Levi Strauss & Co. bases its decision on whether to do business in
certain countries based on criteria that include whether:
"Brand image would be adversely affected by a country's perception or image
among our customers and/or consumers"
"Human rights environment would prevent us from conducting business activities
in a manner that is consistent with the Global Sourcing Guidelines and other
Company policies"
"Political, economic and social environment would threaten the Company's
reputation and/or commercial interests"
Nobel Peace Prize Laureate and Burmese democracy movement leader Aung San Suu
Kyi has called for economic sanctions on Burma, stating that corporations that
do business in Burma "do create jobs for some people but what they're mainly
going to do is make an already wealthy elite wealthier, and increase its greed
and strong desire to hang on to power ... these companies harm the
democratic process a great deal."
Because of the Burmese military junta's large-scale repression of the democracy
movement, on May 20, 1997, President Clinton signed an executive order banning
new US investment in Burma;
19
<PAGE>
Several cities, including New York and San Francisco, and the Commonwealth of
Massachusetts have enacted laws that effectively prohibit contracts with
companies that do business in Burma;
The Oil, Chemical and Atomic Workers Union (OCAW) and the AFL-CIO support
economic sanctions on Burma;
Media such as Businessweek, CNN, Economist, Los Angeles Times, New York Times
and Washington Post have published articles about the growing pressure on
companies that do business in Burma;
The New Light of Myanmar reported that a delegation led by a Burmese military
junta minister visited Caterpillar plants in the US in April, 1996;
The Delhi Financial Express reported on October 5, 1996, that Myanmar Tractors &
Trading Co Ltd, a dealer for Caterpillar in Burma, secured orders worth $40
million from the Burmese Defense Ministry;
In its June 1996 "Foreign Economic Trends" report, the US Embassy in Burma
stated that: "In mid-1996, representatives of a U.S.-based manufacturer
indicated that their firm had recently sold US $30 million of dual-use heavy
construction equipment to the Defense Ministry's Directorate of Procurement."
(The term "dual-use" indicates equipment that can be used for either civilian or
military purposes.);
Caterpillar is active in two corporate groups, the National Association of
Manufacturers and USA*ENGAGE, both of which have taken positions opposing to
federal economic sanctions on Burma and Burma selective purchasing laws at the
municipal and state level;
Caterpillar also does business in other countries with controversial human
rights records: China and Indonesia.
Statement in Opposition to Proposal
As a company that manufactures and distributes on a global scale, Caterpillar
competes in a world composed of differing races, religions, cultures, customs,
political philosophies, languages, economic resources, and geography. We respect
these differences and realize that neither we nor the United States should or
can impose its values on the world.
The standards suggested by the proponent for determining whether business should
be conducted in a particular country would put Caterpillar in the business of
making political decisions. We are being asked to investigate and determine
whether there is a "systematic violation of human rights" and to decide whether
"a government is illegitimate." We believe these are decisions to be made by
international entities such as the United Nations and perhaps, governmental
authorities, not individual persons or companies.
Too often, a well-intentioned effort to deny a foreign country access to
products costs American workers their jobs without depriving the targeted
country of the product. Foreign-based competitors willingly step in to replace
America as the primary source of supply.
20
<PAGE>
A study released earlier this year by the Institute for International Economics
found that in 1995 alone, between 200,000 and 250,000 U.S. jobs were lost due to
unilateral U.S. trade sanctions that reduced U.S. exports to 26 target countries
by an estimated $15 billion to $20 billion. A 1994 Council on Competitiveness
report found that just eight unilateral sanctions cost the U.S. economy $6
billion in annual sales and 120,000 export-related jobs. These figures do not
take into account the additional negatives arising from lost U.S. investment
opportunities.
We firmly believe that unilateral sanctions or country selection criteria such
as those suggested by the proponent hurt American business and American workers
by undermining our nation's competitiveness in today's global market. As a
company with more than half of its sales overseas (anticipated to be 75% by
2010) and nearly three quarters of its assets based in the United States,
Caterpillar's future is particularly tied to its competitiveness abroad.
Unilateral sanctions and country selection criteria also have an impact contrary
to their intention. They limit our opportunity to communicate American ideals
to people in other parts of the world; communication that may bring about
positive, lasting economic and social change.
Your Board of Directors recommends a vote AGAINST this proposal.
- --------------------------------------------------------------------------------
Stockholder Proposal to Declassify Board
and Caterpillar Response
- --------------------------------------------------------------------------------
Mr. Richard Shoemaker advises that, on behalf of the International Union, United
Automobile, Aerospace & Agricultural Implement Workers of America ("UAW")
(owner of 72 shares of Company stock), he or another representative of the UAW
intends to present for consideration and action at the annual meeting the
following resolution:
Resolution Proposed by Stockholder
BE IT RESOLVED: That the shareholders of Caterpillar Inc. ("Company") urge that
the Board of Directors take the necessary steps, in compliance with Delaware
state law, to declassify the Board of Directors for the purpose of director
elections. The Board declassification shall be done in a manner that does not
affect the unexpired terms of directors previously elected.
Supporting Statement of Proponent
The election of corporate directors is the primary avenue in the American
corporate governance system for shareholders to influence corporate affairs and
exert accountability on management. We strongly believe that our Company's
financial performance is closely linked to its corporate governance policies and
procedures, and the level of management accountability they impose. Therefore,
as shareholders concerned about the value of our investment, we are very
disturbed by our Company's current system of electing only one-third of the
board of directors each year.
21
<PAGE>
We believe this staggering of director terms prevents shareholders from annually
registering their views on the performance of the board collectively and each
director individually.
Concerns that the annual election of all directors would leave our Company
without experienced Board members in the event that all incumbents are voted
out is unfounded. If the owners should choose to replace the entire board, it
would be obvious that the incumbent directors' contributions were not valued.
Additionally, concerns that the annual election of all directors would expose
shareholders to takeover attempts at below full value is also unfounded in view
of the various anti-takeover mechanisms available to the company.
Most alarming is that the staggered Board can help insulate directors and senior
executives from the consequences of poor performance by denying shareholders the
opportunity to replace an entire Board which, in the opinion of shareholders, is
pursuing failed policies. We believe that allowing shareholders to annually
register their views on the performance of the Board collectively and each
director individually is one of the best methods to insure that our Company will
be managed in the best interests of the shareholders.
Statement in Opposition to Proposal
The proponent "strongly believe[s] that our Company's financial performance is
closely linked to its corporate governance policies and procedure..."
We could not agree more. In 1997, Caterpillar posted record sales, revenues, and
profits for the fourth consecutive year. For the past five years cumulatively,
the proponent has seen its investment in Caterpillar significantly exceed return
on the S&P 500 and S&P Machinery (Diversified). The proponent has also
experienced two stock splits in the last four years.
We received significant recognition in the financial press this past year for
our performance and management team quality.
. In October of 1997, Fortune named Caterpillar as one of the "World's Most
Admired Companies," focusing on, among other things, our effectiveness
in doing business globally, quality of management, and value as a long-
term investment.
. In September of 1997, Industry Week selected Caterpillar as one of the
"World's 100 Best Managed Companies," based on several factors, including
financial performance and corporate governance.
. In June of 1997, Worth Financial selected Caterpillar as one of the
"World's 50 Best Stocks to Own."
. Finally, and most recently, our Chief Executive Officer, Mr. Fites, was
named one of the "Top 25 Managers of the Year" by Business Week
magazine.
22
<PAGE>
Our performance over the past five years, as well as accolades from independent
third parties regarding that performance, solidly demonstrates that our current
corporate governance structure is working. One of the primary components of that
structure, in addition to the talent and foresight of our individual Board
members, is the continuity and stability our classified Board structure
provides.
The Board of Directors recommends a vote AGAINST the proposal.
- --------------------------------------------------------------------------------
Other Matters
- --------------------------------------------------------------------------------
Section 16(a) Beneficial Ownership Reporting Compliance
Based upon a review of our records, all reports required to be filed pursuant to
Section 16(a) of the Exchange Act were filed on a timely basis.
Stockholder Proposals for the 1999 Annual Meeting
If you want to submit a proposal for possible inclusion in the Company's 1999
Proxy Statement, we must receive it on or before October 30, 1998.
Solicitation
Caterpillar is soliciting this proxy on behalf of its Board of Directors. This
solicitation is being made by mail but also may be made by telephone or in
person. We have hired Georgeson & Co. for $20,000, plus out-of-pocket expenses,
to assist in the solicitation.
Stockholder List
A stockholder list will be available for your examination during normal business
hours at the Loews Ventana Canyon Hotel, 7000 North Resort Drive, Tucson,
Arizona, at least ten days prior to the annual meeting.
Revocability of Proxy
You may revoke the enclosed proxy by filing a written notice of revocation with
us or by providing a later executed proxy.
23
<PAGE>
APPENDIX
CATERPILLAR INC.
GENERAL AND FINANCIAL INFORMATION
1997
A-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Management....................................................... A-3
Report of Independent Accountants.......................................... A-3
Consolidated Financial Statements and Notes................................ A-4
Five-year Financial Summary................................................ A-19
Management's Discussion and Analysis (MD&A)
Results of Operations
- 1997 Compared with 1996............................................ A-20
- 1996 Compared with 1995............................................ A-24
Liquidity & Capital Resources............................................ A-24
Employment............................................................... A-25
Other Matters............................................................ A-25
1998 Economic and Industry Outlook....................................... A-27
1998 Company Outlook..................................................... A-27
Supplemental Stockholder Information....................................... A-29
Directors and Officers..................................................... A-30
</TABLE>
A-2
<PAGE>
REPORT OF MANAGEMENT Caterpillar Inc.
- --------------------------------------------------------------------------------
The management of Caterpillar Inc. has prepared the accompanying consolidated
financial statements for the years ended December 31, 1997, 1996, and 1995, and
is responsible for their integrity and objectivity. The statements were prepared
in conformity with generally accepted accounting principles, applying certain
estimates and judgments as required.
Management maintains a system of internal accounting controls which has
been designed to provide reasonable assurance that: transactions are executed in
accordance with proper authorization, transactions are properly recorded and
summarized to produce reliable financial records and reports, assets are
safeguarded, and the accountability for assets is maintained.
The system of internal controls includes statements of policies and
business practices, widely communicated to employees, which are designed to
require them to maintain high ethical standards in their conduct of company
affairs. The internal controls are augmented by careful selection and training
of supervisory and other management personnel, by organizational arrangements
that provide for appropriate delegation of authority and division of
responsibility and by an extensive program of internal audit with management
follow-up.
The financial statements have been audited by Price Waterhouse LLP,
independent accountants, in accordance with generally accepted auditing
standards. They have made similar annual audits since the initial incorporation
of our company. Their role is to render an objective, independent opinion on
management's financial statements. Their report appears below.
Through its Audit Committee, the Board of Directors reviews our financial
and accounting policies, practices, and reports. The Audit Committee consists
exclusively of five directors who are not salaried employees and who are, in the
opinion of the Board of Directors, free from any relationship that would
interfere with the exercise of independent judgment as a committee member. The
Audit Committee meets several times each year with representatives of
management, including the internal auditing department, and the independent
accountants to review the activities of each and satisfy itself that each is
properly discharging its responsibilities. Both the independent accountants and
the internal auditors have free access to the Audit Committee and meet with it
periodically, with and without management representatives in attendance, to
discuss, among other things, their opinions as to the adequacy of internal
controls and to review the quality of financial reporting.
/s/ Donald V. Fites
Chairman of the Board
/s/ Douglas R. Oberhelman
Chief Financial Officer
January 21, 1998
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
Price Waterhouse [LOGO]
TO THE STOCKHOLDERS OF CATERPILLAR INC.:
In our opinion, the accompanying consolidated financial statements, in
Statements 1 through 4, present fairly, in all material respects, the financial
position of Caterpillar Inc. and subsidiaries at December 31, 1997, 1996, and
1995, and the consolidated results of their operations and their consolidated
cash flow for the years then ended in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Peoria, Illinois
January 21, 1998
A-3
<PAGE>
STATEMENT 1
Consolidated Results of Operations for the Years Ended December 31
(Millions of dollars except per share data)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Supplemental consolidating data
---------------------------------------------------
Consolidated Machinery and Engines/(1)/ Financial Products
-------------------- -------------------------- --------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales and revenues:
Sales of Machinery and Engines (Note 1B)..... $18,110 $15,814 $15,451 $18,110 $15,814 $15,451 $ -- $ -- $ --
Revenues of Financial Products (Note 1B)..... 815 708 621 -- -- -- 839 732 644
------- ------- ------- ------- ------- ------- ---- ---- ----
Total sales and revenues................. 18,925 16,522 16,072 18,110 15,814 15,451 839 732 644
Operating costs:
Cost of goods sold........................... 13,374 11,832 12,000 13,374 11,832 12,000 -- -- --
Selling, general, and administrative expenses 2,232 1,993 1,723 1,932 1,715 1,483 324 302 263
Research and development expenses............ 528 410 375 528 410 375 -- -- --
Interest expense of Financial Products....... 361 295 290 -- -- -- 373 316 293
------- ------- ------- ------- ------- ------- ---- ---- ----
Total operating costs.................... 16,495 14,530 14,388 15,834 13,957 13,858 697 618 556
------- ------- ------- ------- ------- ------- ---- ---- ----
Operating profit................................ 2,430 1,992 1,684 2,276 1,857 1,593 142 114 88
Interest expense excluding Financial Products 219 194 191 219 194 191 -- -- --
Other income (expense) (Note 4).............. 202 143 122 153 127 92 61 37 33
------- ------- ------- ------- ------- ------- ---- ---- ----
Consolidated profit before taxes................ 2,413 1,941 1,615 2,210 1,790 1,494 203 151 121
Provision for income taxes (Note 7).......... 796 613 501 724 558 456 72 55 45
------- ------- ------- ------- ------- ------- ---- ---- ----
Profit of consolidated companies............. 1,617 1,328 1,114 1,486 1,232 1,038 131 96 76
Equity in profit of unconsolidated affiliated
companies (Note 9)............................. 48 33 22 48 33 22 -- -- --
Equity in profit of Financial Products'
subsidiaries................................... -- -- -- 131 96 76 -- -- --
------- ------- ------- ------- ------- ------- ---- ---- ----
Profit.......................................... $ 1,665 $ 1,361 $ 1,136 $ 1,665 $ 1,361 $ 1,136 $131 $ 96 $ 76
======= ======= ======= ======= ======= ======= ==== ==== ====
Profit per share of common stock (Note 14)...... $ 4.44 $ 3.54 $ 2.86
======= ======= =======
Profit per share of common stock - assuming
dilution (Note 14)............................. $ 4.37 $ 3.50 $ 2.84
======= ======= =======
Dividends declared per share of common stock.... $ .95 $ .78 $ .65
======= ======= =======
</TABLE>
/(1)/ Represents Caterpillar Inc. and its subsidiaries except for Financial
Products, which is accounted for on the equity basis.
The supplemental consolidating data is presented for the purpose of additional
analysis and to provide required supplemental disclosure of information about
the Financial Products' subsidiaries. See Note 1A on Page A-7 for a definition
of the groupings in these statements. Transactions between Machinery and Engines
and Financial Products have been eliminated to arrive at the consolidated data.
STATEMENT 2
Changes in Consolidated Stockholders' Equity for the Years Ended December 31
(Dollars in millions)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Common stock (Note 13):
Balance at beginning of year.................................................................... $ 50 $ 333 $ 745
Common shares issued, including treasury shares reissued:
1997 -- 1,426,532; 1996 -- 1,487,992; 1995 -- 1,426,262..................................... 26 20 15
Treasury shares purchased:
1997 -- 14,118,412; 1996 -- 8,816,008; 1995 -- 14,280,200................................... (706) (303) (427)
Issuance of common stock to effect 2-for-1 stock split.......................................... 188 -- --
------ ------ ------
Balance at year-end............................................................................. (442) 50 333
------ ------ ------
Profit employed in the business:
Balance at beginning of year.................................................................... 3,904 2,840 1,961
Profit.......................................................................................... 1,665 1,361 1,136
Dividends declared.............................................................................. (355) (297) (257)
Issuance of common stock to effect 2-for-1 stock split.......................................... (188) -- --
------ ------ ------
Balance at year-end............................................................................. 5,026 3,904 2,840
------ ------ ------
Foreign currency translation adjustment (Note 1E):
Balance at beginning of year.................................................................... 162 215 205
Aggregate adjustment for year................................................................... (67) (53) 10
------ ------ ------
Balance at year-end............................................................................. 95 162 215
------ ------ ------
Stockholders' equity at year-end................................................................... $4,679 $4,116 $3,388
====== ====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
A-4
<PAGE>
STATEMENT 3 Caterpillar Inc.
Financial Position at December 31
(Dollars in millions)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Supplemental consolidating data
---------------------------------------------------
Consolidated Machinery and Engines/(1)/ Financial Products
-------------------- -------------------------- --------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and short-term investments.......... $ 292 $ 487 $ 638 $ 241 $ 445 $ 580 $ 51 $ 42 $ 58
Receivables - trade and other............ 3,331 2,956 2,531 3,346 2,960 2,910 285 175 132
Receivables - finance (Note 6)........... 2,660 2,266 1,754 - - - 2,660 2,266 1,754
Deferred income taxes and prepaid
expenses (Note 7)....................... 928 852 803 935 876 834 9 15 13
Inventories (Notes 1C and 5)............. 2,603 2,222 1,921 2,603 2,222 1,921 - - -
------- ------- ------- ------- ------- ------- ------ ------ ------
Total current assets......................... 9,814 8,783 7,647 7,125 6,503 6,245 3,005 2,498 1,957
Property, plant, and equipment - net (Notes
1D and 8)................................... 4,058 3,767 3,644 3,483 3,242 3,199 575 525 445
Long-term receivables - trade and other...... 134 128 126 134 128 126 - - -
Long-term receivables - finance (Note 6)..... 3,881 3,380 3,066 - - - 3,881 3,380 3,066
Investments in unconsolidated affiliated
companies (Note 9).......................... 751 701 476 751 701 476 - - -
Investments in Financial Products'
subsidiaries................................ - - - 882 759 658 - - -
Deferred income taxes (Note 7)............... 1,040 1,093 1,127 1,075 1,132 1,171 5 3 -
Intangible assets (Note 1D).................. 228 233 170 228 233 170 - - -
Other assets (Note 17)....................... 850 643 574 510 368 330 340 275 244
------- ------- ------- ------- ------- ------- ------ ------ ------
Total assets.................................... $20,756 $18,728 $16,830 $14,188 $13,066 $12,375 $7,806 $6,681 $5,712
======= ======= ======= ======= ======= ======= ====== ====== ======
Liabilities
Current liabilities:
Short-term borrowings (Note 11)......... $ 484 $ 1,192 $ 1,174 $ 53 $ 36 $ 14 $ 431 $1,156 $1,160
Accounts payable and accrued expenses... 3,358 2,858 2,579 3,020 2,556 2,358 654 520 776
Accrued wages, salaries, and employee
benefits............................... 1,128 1,010 875 1,120 1,005 873 8 5 2
Dividends payable....................... 92 76 68 92 76 68 - - -
Deferred and current income taxes
payable (Note 7)....................... 175 142 91 46 70 40 129 72 51
Long-term debt due within one year (Note
12).................................... 1,142 1,180 1,262 54 122 156 1,088 1,058 1,106
------- ------- ------- ------- ------- ------- ------ ------ ------
Total current liabilities................... 6,379 6,458 6,049 4,385 3,865 3,509 2,310 2,811 3,095
Long-term debt due after one year (Note 12). 6,942 5,087 3,964 2,367 2,018 2,049 4,575 3,069 1,915
Liability for postemployment benefits (Note
3)......................................... 2,698 3,019 3,393 2,698 3,019 3,393 - - -
Deferred income taxes and other liabilities
(Note 7)................................... 58 48 36 59 48 36 39 42 44
------- ------- ------- ------- ------- ------- ------ ------ ------
Total liabilities............................... 16,077 14,612 13,442 9,509 8,950 8,987 6,924 5,922 5,054
------- ------- ------- ------- ------- ------- ------ ------ ------
Contingencies (Notes 17 and 18)
Stockholders' equity (Statement 2)
Common stock of $1.00 par value (Note 13):
Authorized shares: 450,000,000
Issued shares (1997, 1996, and 1995 -
407,447,312) at paid-in amount....... 1,071 881 901 1,071 881 901 403 353 333
Profit employed in the business............. 5,026 3,904 2,840 5,026 3,904 2,840 506 404 320
Foreign currency translation adjustment
(Note 1E).................................. 95 162 215 95 162 215 (27) 2 5
Treasury stock (1997 - 39,436,972 shares;
1996--26,745,092 shares; and 1995 -
19,417,076 shares) at cost............... (1,513) (831) (568) (1,513) (831) (568) - - -
------- ------- ------- ------- ------- ------- ------ ------ ------
Total stockholders' equity...................... 4,679 4,116 3,388 4,679 4,116 3,388 882 759 658
------- ------- ------- ------- ------- ------- ------ ------ ------
Total liabilities and stockholders' equity...... $20,756 $18,728 $16,830 $14,188 $13,066 $12,375 $7,806 $6,681 $5,712
======= ======= ======= ======= ======= ======= ====== ====== ======
</TABLE>
/(1)/ Represents Caterpillar Inc. and its subsidiaries except for Financial
Products, which is accounted for on the equity basis.
The supplemental consolidating data is presented for the purpose of additional
analysis and to provide required supplemental disclosure of information about
the Financial Products' subsidiaries. See Note 1A on Page A-7 for a definition
of the groupings in these statements. Transactions between Machinery and
Engines and Financial Products have been eliminated to arrive at the
consolidated data.
See accompanying Notes to Consolidated Financial Statements.
A-5
<PAGE>
<TABLE>
<CAPTION>
STATEMENT 4
Statement of Cash Flow for the Years Ended December 31
(Millions of dollars)
- -------------------------------------------------------------------------------------------------------------------------------
Supplemental consolidating data
-------------------------------
Consolidated Machinery and Engines/(1)/
------------------------------- ----------------------------
1997 1996 1995 1997 1996 1995
------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Cash flow from operating activities:
Profit........................................................ $ 1,665 $ 1,361 $ 1,136 $ 1,665 $ 1,361 $ 1,136
Adjustments for noncash items:
Depreciation and amortization.............................. 738 696 682 599 575 580
Profit of Financial Products............................... - - - (131) (96) (75)
Other...................................................... 23 158 324 (16) 118 233
Changes in assets and liabilities:
Receivables - trade and other.............................. (396) (319) 461 (341) (298) 505
Inventories................................................ (375) (111) (77) (375) (111) (77)
Accounts payable and accrued expenses...................... 562 134 (43) 529 57 (28)
Other - net................................................ (121) (137) (293) (129) (143) (328)
------- ------- ------- ------- ------- -------
Net cash provided by operating activities....................... 2,096 1,782 2,190 1,801 1,463 1,946
------- ------- ------- ------- ------- -------
Cash flow from investing activities:
Capital expenditures - excluding equipment leased to others... (824) (506) (464) (819) (500) (460)
Expenditures for equipment leased to others................... (282) (265) (215) (5) (8) (9)
Proceeds from disposals of property, plant, and equipment..... 138 135 119 15 21 35
Additions to finance receivables.............................. (6,644) (5,802) (4,869) - - -
Collections of finance receivables............................ 3,605 3,407 2,787 - - -
Proceeds from sale of finance receivables..................... 1,833 1,425 1,262 - - -
Net short-term loans to Financial Products.................... - - - (94) 325 (475)
Investments and acquisitions.................................. (59) (612) (21) (59) (612) (21)
Other - net................................................... (308) (166) (348) (290) (153) (338)
------- ------- ------- ------- ------- -------
Net cash used for investing activities.......................... (2,541) (2,384) (1,749) (1,252) (927) (1,268)
------- ------- ------- ------- ------- -------
Cash flow from financing activities:
Dividends paid................................................ (338) (289) (239) (338) (289) (239)
Common stock issued, including treasury shares reissued....... 11 10 11 11 10 11
Treasury shares purchased..................................... (706) (303) (427) (706) (303) (427)
Net short-term loans from Machinery and Engines............... - - - - - -
Proceeds from long-term debt issued........................... 2,284 1,088 1,414 462 37 270
Payments on long-term debt.................................... (1,237) (1,335) (997) (177) (166) (91)
Short-term borrowings - net................................... 258 1,262 30 17 18 (3)
------- ------- ------- ------- ------- -------
Net cash provided by (used for) financing activities............ 272 433 (208) (731) (693) (479)
------- ------- ------- ------- ------- -------
Effect of exchange rate changes on cash......................... (22) 18 (14) (22) 22 (14)
------- ------- ------- ------- ------- -------
(Decrease) increase in cash and short-term investments.......... (195) (151) 219 (204) (135) 185
Cash and short-term investments at the beginning of the period.. 487 638 419 445 580 395
------- ------- ------- ------- ------- -------
Cash and short-term investments at the end of the period........ $ 292 $ 487 $ 638 $ 241 $ 445 $ 580
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Supplemental consolidating data
--------------------------------
Financial Products
-------------------------------
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Cash flow from operating activities:
Profit........................................................ $ 131 $ 96 $ 75
Adjustments for noncash items:
Depreciation and amortization.............................. 139 121 102
Profit of Financial Products............................... - - -
Other...................................................... 41 43 91
Changes in assets and liabilities:
Receivables - trade and other.............................. (82) (14) (36)
Inventories................................................ - - -
Accounts payable and accrued expenses...................... 37 65 (5)
Other - net............................................... 57 20 17
------- ------- -------
Net cash provided by operating activities....................... 323 331 244
------- ------- -------
Cash flow from investing activities:
Capital expenditures - excluding equipment leased to others... (5) (6) (4)
Expenditures for equipment leased to others................... (277) (257) (206)
Proceeds from disposals of property, plant, and equipment..... 123 114 84
Additions to finance receivables.............................. (6,644) (5,802) (4,869)
Collections of finance receivables............................ 3,605 3,407 2,787
Proceeds from sale of finance receivables..................... 1,833 1,425 1,262
Net short-term loans to Financial Products.................... - - -
Investments and acquisitions.................................. - - -
Other - net................................................... (68) (33) (40)
------- ------- -------
Net cash used for investing activities.......................... (1,433) (1,152) (986)
------- ------- -------
Cash flow from financing activities:
Dividends paid................................................ (28) (12) -
Common stock issued, including treasury shares reissued....... 50 20 30
Treasury shares purchased..................................... - - -
Net short-term loans from Machinery and Engines............... 94 (325) 475
Proceeds from long-term debt issued........................... 1,822 1,051 1,144
Payments on long-term debt.................................... (1,060) (1,169) (906)
Short-term borrowings - net................................... 241 1,244 33
------- ------- -------
Net cash provided by (used for) financing activities............ 1,119 809 776
------- ------- -------
Effect of exchange rate changes on cash......................... - (4) -
------- ------- -------
(Decrease) increase in cash and short-term investments.......... 9 (16) 34
Cash and short-term investments at the beginning of the period.. 42 58 24
------- ------- -------
Cash and short-term investments at the end of the period........ $ 51 $ 42 $ 58
======= ======= =======
</TABLE>
/(1)/ Represents Caterpillar Inc. and its subsidiaries except for Financial
Products, which is accounted for on the equity basis.
All short-term investments, which consist primarily of highly liquid investments
with original maturities of three months or less, are considered to be cash
equivalents.
The supplemental consolidating data is presented for the purpose of additional
analysis and to provide required supplemental disclosure of information about
the Financial Products' subsidiaries. See Note 1A on Page A-7 for a definition
of the groupings in these statements. Transactions between Machinery and
Engines and Financial Products have been eliminated to arrive at the
consolidated data.
See accompanying Notes to Consolidated Financial Statements.
A-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Caterpillar Inc.
(Dollars in millions except per share data)
- --------------------------------------------------------------------------------
1. Summary of significant accounting policies
================================================================================
A. Basis of consolidation
The financial statements include the accounts of Caterpillar Inc. and its
subsidiaries. Investments in companies that are owned 50% or less are accounted
for by the equity method; see Note 9.
The accompanying financial statements and supplemental consolidating data,
where applicable, have been grouped as follows:
Consolidated - Caterpillar Inc. and its subsidiaries.
Machinery and Engines - primarily our manufacturing, marketing, and parts
distribution operations, with the Financial Products' subsidiaries on an equity
basis.
Financial Products - our finance and insurance subsidiaries, primarily
Caterpillar Financial Services Corporation (Cat Financial) and Caterpillar
Insurance Services Corporation.
Certain amounts for prior years have been reclassified to conform with the
current-year financial statement presentation.
B. Sales and revenue recognition
Sales of machines and engines are generally unconditional sales that are
recorded when product is shipped and invoiced to independently owned and
operated dealers or customers.
Revenues primarily represent finance and rental revenues of Cat Financial, a
wholly owned subsidiary. Finance revenues are recognized over the term of the
contract at a constant rate of return on the scheduled uncollected principal
balance. Rental revenues are recognized in the period earned. Recognition of
income is suspended when collection of future income is not probable. Income
recognition is resumed if the receivable becomes contractually current and
collection doubts are removed; previously suspended income is recognized at
that time.
C. Inventories
Inventories are valued principally by the LIFO (last-in, first-out) method. The
value of inventories on the LIFO basis represented approximately 85% of total
inventories at current cost value at December 31, 1997 and 1996, and 90% at
December 31, 1995.
If the FIFO (first-in, first-out) method had been in use, inventories would
have been $2,067, $2,123, and $2,103 higher than reported at December 31, 1997,
1996, and 1995, respectively.
D. Depreciation and amortization
Depreciation of plant and equipment is computed principally using accelerated
methods. Amortization of purchased intangibles is computed using the straight-
line method, generally over a period of 15 years or less.
E. Foreign currency translation
The functional currency for most of our Machinery and Engines' consolidated
companies is the U.S. dollar. The functional currency for most of our Financial
Products' and equity basis companies is the respective local currency. Gains and
losses resulting from the translation of foreign currency amounts to the
functional currency are included in the results of operations. Gains and losses
resulting from translating assets and liabilities from the functional currency
to U.S. dollars are included in stockholders' equity.
F. Derivative financial instruments
We use derivative financial instruments (derivatives) to manage foreign
currency, interest rate, and commodity price exposures that arise in the normal
course of business. Derivatives that we use are primarily foreign currency
contracts (forward and option), interest rate swaps, and commodity contracts
(swap and option). Derivatives are not used for speculative purposes.
Please refer to Note 2 below for more information on derivatives, including
the methods used to account for them.
G. Estimates in financial statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect reported amounts. Examples of the more significant estimates
include: accruals and reserves for warranty and product liability losses,
postemployment benefits, environmental costs, income taxes, and plant closing
and consolidation costs.
2. Derivative financial instruments and risk management
================================================================================
A. Foreign exchange derivative instruments - forward contracts and options
Our Machinery and Engines' operations are subject to foreign exchange risk.
Currency exchange rates impact the U.S. dollar amount of sales made and costs
incurred in foreign currencies. Our Financial Products' operations are subject
to foreign exchange risk when the currency of debt obligations does not match
the currency of the receivables portfolio.
Forward exchange contracts and certain foreign currency option contracts are
used to hedge our foreign exchange risks. Other than the up-front premiums that
we pay on foreign currency option contracts, all cash flow related to these
contracts occurs when the contracts mature.
Our accounting treatment of foreign currency contracts depends upon the nature
of the contracts:
1. Forward contracts designated as hedges of firm future foreign currency
commitments and purchased foreign currency option contracts designated as
hedges of probable foreign currency transactions:
. No gains or losses are reported until the hedged transaction occurs, even
if the contracts are terminated or mature prior to the time of the hedged
transaction.
. Gains and losses are recognized and reported on the same financial
statement line as the hedged transaction when the hedged transaction
occurs.
. Gains and losses are immediately recognized in current income ("Other
income (expense)" in Statement 1) in those unusual instances when the
hedged transaction is no longer expected to occur, or a foreign currency
contract is no longer effective as a hedge.
A-7
<PAGE>
NOTES continued
(Dollars in millions except per share data)
- --------------------------------------------------------------------------------
2. All other foreign currency contracts (those used to hedge net balance sheet
exposures and anticipated net cash flow exposures for the next 12 months):
. All gains or losses are recognized in current income ("Other income
(expense)") as currency exchange rates change.
. Net gains are reflected as an asset ("Receivables - trade and other" in
Statement 3) until cash is actually received. Conversely, net losses are
shown as a liability ("Accounts payable and accrued expenses" in Statement
3) until cash is actually paid.
The notional amounts of outstanding contracts to buy and sell foreign
currency were:
December 31,
1997/(1)/ 1996/(1)/ 1995
--------- --------- ------
Hedges of firm commitments and/or
probable foreign currency transactions......... $ 166 $ 27 $ 95
Hedges of balance sheet exposure and/or
anticipated cash flow exposure for the
next 12 months................................. $1,294 $911 $219
/(1/) In addition, we had outstanding cross-European currency contracts totaling
$6 and $122 at December 31, 1997 and 1996, respectively, to hedge various
European currencies against the Deutsche mark. We use the Deutsche mark to
manage all of our continental European currency cash flows against the
dollar, and then use cross-European currency contracts to manage the risk
of exchange rate movement between the Deutsche mark and the specific
European currency of the cash flow.
The maturity dates for virtually all of the outstanding contracts, including
the cross-European contracts, are less than six months.
Please refer to Note 15 and Table V on Page A-15 for fair value information
on foreign currency contracts.
B. Interest rate derivative instruments
We primarily use interest rate swap contracts to manage our exposure to interest
rate changes and to lower the cost of borrowed funds. We only use interest rate
contracts that qualify for hedge accounting.
Interest rate swap contracts are linked to debt instruments and, in effect,
change the characteristics of the debt (e.g., from fixed rate to floating rate).
Interest rate swap contracts are not reflected in the financial statements at
fair market value. The notional amounts of outstanding interest rate swap
contracts were $2,595, $2,869, and $2,478 at December 31, 1997, 1996, and 1995,
respectively.
The difference between the interest payable and the interest receivable on
each interest rate swap contract is recorded each reporting period as an
adjustment to current income ("Interest expense excluding Financial Products" or
"Interest expense of Financial Products" in Statement 1, as applicable).
Interest rate swap contracts that are in a payable position are shown as
interest payable ("Accounts payable and accrued expenses" in Statement 3);
those in a receivable position are shown as an asset ("Other assets" in
Statement 3). The actual cash settlement on these interest rate swap contracts
occurs at times specified in the agreement. If an interest rate swap contract
is terminated prior to its maturity, no immediate gain or loss is recognized in
the financial statements, except in those cases where the debt instrument to
which the contract is linked is also terminated.
Please refer to Note 15 and Table V on Page A-15 for fair value information on
interest rate swap contracts.
C. Commodity related derivative instruments
Our Machinery and Engines' operations are also subject to commodity price risk
(i.e., potential price increases of our production material as a result of
price increases in raw material). We make limited use of commodity swap and/or
option contracts to manage the risk of unfavorable price movement. The use of
these types of derivative financial instruments has not been material.
3. Postemployment benefit plans
================================================================================
A. Pension plans
We have both U.S. and non-U.S. pension plans covering substantially all of our
employees. The defined benefit plans provide a benefit based on years of service
and/or the employee's average earnings near retirement. Our funding policy for
these plans is to contribute tax deductible amounts which comply with applicable
local laws and regulations. The plan assets consist principally of common
stocks, corporate bonds, and U.S. government obligations.
Please refer to Table I on Page A-9 for additional financial information.
B. Other postretirement benefit plans
We have defined-benefit retirement health care and life insurance plans for
substantially all of our U.S. employees.
Postretirement benefits are funded through our Voluntary Employees'
Beneficiary Association (VEBA) trusts. This includes life insurance for hourly,
salaried, and management employees, and medical expenses for employees not
enrolled in health maintenance organizations. Our general policy is to make
contributions to the VEBA trusts in amounts that cover the actual payments being
made from these trusts (pay-as-you-go basis); however, voluntary contributions
of $200 were made in both 1997 and 1996. Assets in the trusts consist
principally of mutual funds, common stocks, corporate bonds, and U.S. government
obligations.
During 1992, we made several changes to our retiree health care plans.
Included in those changes was the capping of the company's liability for
substantially all retirees' health care costs at December 31, 1999 cost levels.
Please refer to Table II on Page A-10 for additional financial information.
C. Other postemployment benefit plans
We offer long-term disability benefits, continued health care for disabled
employees, survivor income benefits insurance, and supplemental unemployment
benefits to substantially all eligible U.S. employees.
D. Summary of long-term liability
December 31,
1997 1996 1995
------ ------ ------
Pensions........................................ $ 3 $ 3 $ 130
Postretirement benefits other than pensions..... 2,628 2,948 3,199
Other postemployment benefits................... 67 68 64
------ ------ ------
$2,698 $3,019 $3,393
====== ====== ======
A-8
<PAGE>
<TABLE>
<CAPTION>
Caterpillar Inc.
- ---------------------------------------------------------------------------------------------------------
=========================================================================================================
TABLE I - Financial Information Related to Pension Plans
- ---------------------------------------------------------------------------------------------------------
Actuarial assumptions used to determine the costs and benefit obligations for the pension plans:
December 31,
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Weighted average discount rate.................................... 7.0% 7.4% 7.4%
Expected rate of compensation increase............................ 4.0% 4.2% 4.1%
Expected long-term rate of return on plan assets.................. 9.5% 9.4% 9.4%
Components of pension expense:
Years ended December 31,
1997 1996 1995
------- ------- -------
Service cost -- benefits earned during the period................. $ 114 $ 110 $ 95
Interest cost on projected benefit obligation..................... 434 417 409
Return on plan assets:/(1)/
Actual.......................................................... (1,188) (1,023) (1,167)
Deferred........................................................ 608 491 685
------- ------- -------
Recognized.................................................... (580) (532) (482)
Amortization of:
Net asset existing at adoption of SFAS 87....................... (23) (22) (23)
Prior service cost/(2)/......................................... 62 63 63
Net actuarial (gain) loss....................................... (1) (1) (12)
------- ------- -------
Total pension expense............................................. $ 6 $ 35 $ 50
======= ======= =======
</TABLE>
/(1)/ Although the actual return on plan assets is shown, the expected long-term
rate of return on plan assets was used in determining consolidated
pension expense. The difference between the actual return and the
recognized return on plan assets is shown as deferred return on plan
assets.
/(2)/ Prior service costs are amortized using a straight-line method over the
average remaining service period of employees expected to receive
benefits from the plan amendment.
Reconciliation of the funded status of the pension plans with amounts recognized
in the consolidated financial position:
<TABLE>
<CAPTION>
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
--------------------------------- --------------------------
1997 1996 1995 1997 1996 1995
------- -------- ------- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Actuarial present value of:
Vested benefit obligation.................................. $(5,768) $(3,114) $(2,844) $(45) $(2,095) $(2,124)
Nonvested benefit obligation............................... (488) (146) (142) (24) (364) (383)
------- ------- ------- ---- ------- -------
Accumulated benefit obligation............................. $(6,256) $(3,260) $(2,986) $(69) $(2,459) $(2,507)
======= ======= ======= ==== ======= =======
Actuarial present value of projected benefit obligation.... $(6,621) $(3,603) $(3,310) $(92) $(2,479) $(2,533)
Plan assets at market value................................ 7,677 4,500 3,917 41 2,430 2,282
------- ------- ------- ---- ------- -------
Funded status at plan year-end............................. 1,056 897 607 (51) (49) (251)
Unrecognized (net asset) net liability existing at
adoption of SFAS 87...................................... (73) (75) (93) 14 (2) (5)
Unrecognized prior service cost............................ 329 153 155 3 166 233
Unrecognized net actuarial (gain) loss..................... (1,057) (656) (418) (1) (238) (74)
Adjustment required to recognize minimum liability......... -- -- -- (3) (3) (130)
------- ------- ------- ---- ------- -------
Prepaid pension cost (pension liability) at December 31.... $ 255 $ 319 $ 251 $(38) $ (126) $ (227)
======= ======= ======= ==== ======= =======
==============================================================================================================================
</TABLE>
A-9
<PAGE>
<TABLE>
<CAPTION>
NOTES continued
(Dollars in millions except per share data)
- --------------------------------------------------------------------------------
================================================================================
TABLE II - Financial Information Related to Other Postretirement Benefit Plans
- --------------------------------------------------------------------------------
Actuarial assumptions used to determine the costs and benefit obligations for
postretirement benefits (other than pensions):
December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate.............. 7.0% 7.5% 7.5%
Expected rate of compensation increase...... 4.0% 4.0% 4.0%
Expected long-term rate of
return on plan assets..................... 9.5% 9.5% 9.5%
Assumed health care cost trend rate/(1)/.... 7.1%/(2)/ 7.9%/(2)/ 8.7%/(3)/
</TABLE>
/(1)/ Rate used to measure the Accumulated Postretirement Benefit Obligation at
December 31, 1997, 1996, and 1995, respectively, and the postretirement
benefit expense for 1998, 1997, and 1996, respectively.
/(2)/ Gradually declining to 4.5% in 2002.
/(3)/ Gradually declining to 5.0% in 2001.
Components of postretirement benefit expense (other than pensions):
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Service cost - benefits earned
during the period................. $ 72 $ 81 $ 73
Interest cost on accumulated
benefit obligation................ 249 226 232
Return on plan assets:/(4)/
Actual............................ (76) (74) (58)
Deferred.......................... 29 48 34
----- ----- -----
Recognized...................... (47) (26) (24)
Amortization of:
Prior service cost/(5)/........... (190) (190) (190)
Net actuarial (gain) loss......... - (1) (3)
----- ----- -----
Total postretirement benefit expense $ 84 $ 90 $ 88
===== ===== =====
</TABLE>
/(4)/ Although the actual return on plan assets is shown, the expected long-term
rate of return on plan assets was used in determining consolidated
postretirement benefit expense. The difference between the actual return
and the recognized return on plan assets is shown as deferred return on
plan assets.
/(5)/ Prior service costs are amortized using a straight-line method over the
average remaining service period of employees impacted by the plan
amendment.
Components of the liability for postretirement benefits (other than pensions):
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees..........................................$(2,400) $(2,253) $(2,149)
Fully eligible active plan participants........... (563) (502) (397)
Other active plan participants.................... (640) (591) (485)
------- ------ ------
(3,603) (3,346) (3,031)
Plan assets at market value......................... 804 547 297
Unrecognized prior service cost..................... (98) (289) (479)
Unrecognized net actuarial (gain) loss.............. 38 (49) (182)
------- ------ ------
Liability for postretirement benefits
(other than pensions).............................$(2,859) $(3,137) $(3,395)
======= ======= =======
</TABLE>
Effects of a 1% increase in the assumed health care cost trend rates for each
future year:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Approximate increase in the accumulated
postretirement benefit obligation.................. $224 $210 $226
Approximate increase in the aggregate
of the service and interest cost components
of the postretirement benefit expense.............. $ 22 $ 22 $ 25
</TABLE>
================================================================================
4. Other income (expense)
================================================================================
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Investment and interest income $115 $ 90 $ 87
License fees 25 26 28
Foreign exchange (losses) gains (10) 1 (20)
Miscellaneous income 72 26 27
---- ---- ----
$202 $143 $122
==== ==== ====
</TABLE>
5. Inventories
================================================================================
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Raw materials and work-in-process.............. $1,033 $ 909 $ 710
Finished goods................................. 1,364 1,103 1,006
Supplies....................................... 206 210 205
------ ------ ------
$2,603 $2,222 $1,921
====== ====== ======
</TABLE>
6. Finance receivables
================================================================================
Finance receivables are receivables of Cat Financial, which generally could be
repaid or refinanced without penalty prior to contractual maturity. Total
finance receivables reported in Statement 3 are net of an allowance for credit
losses.
Please refer to Table III on Page A-11 for additional finance receivables
information and Note 15 and Table V on Page A-15 for fair value information.
A-10
<PAGE>
<TABLE>
<CAPTION>
Caterpillar Inc.
- --------------------------------------------------------------------------------
================================================================================
TABLE III - Finance Receivables Information
- --------------------------------------------------------------------------------
Contractual maturities of outstanding receivables:
December 31, 1997
Installment Financing
Amounts Due In Contracts Leases Notes Total
- -------------- ----------- --------- ------- -------
<S> <C> <C> <C> <C>
1998...................... $ 613 $ 1,047 $ 1,065 $ 2,725
1999...................... 418 774 411 1,603
2000...................... 267 503 404 1,174
2001...................... 131 256 178 565
2002...................... 44 96 84 224
Thereafter................ 12 108 151 271
------- ------- ------- -------
1,485 2,784 2,293 6,562
Residual value............ -- 725 -- 725
Less: Unearned income..... 165 478 19 662
------- ------- ------- -------
Total..................... $ 1,320 $ 3,031 $ 2,274 $ 6,625
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Impaired loans and leases:
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Average recorded investment.................. $ 47 $ 43 $ 51
====== ====== ======
At December 31:
Recorded investment........................ $ 30 $ 33 $ 37
Less: Fair value of underlying collateral.. 18 21 25
------ ------ ------
Potential loss............................... $ 12 $ 12 $ 12
====== ====== ======
Allowance for credit loss activity:
1997 1996 1995
------ ------ ------
Balance at beginning of year................. $ 74 $ 57 $ 50
Provision for credit losses.................. 39 41 43
Less: Net credit losses...................... 19 21 33
Less: Other-net.............................. 10 3 3
------ ------ ------
Balance at end of year....................... $ 84 $ 74 $ 57
====== ====== ======
Cat Financial's net investment in financing leases:
December 31,
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Total minimum lease payments receivable...... $2,784 $2,383 $1,858
Estimated residual value of leased assets:
Guaranteed................................. 206 162 113
Unguaranteed............................... 519 402 297
------ ------ ------
3,509 2,947 2,268
Less: Unearned income........................ 478 430 363
------ ------ ------
Net investment in financing leases........... $3,031 $2,517 $1,905
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
7. Income taxes
================================================================================
The components of profit before taxes were:
Years ended December 31,
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Domestic..................................... $2,071 $1,565 $1,205
Foreign...................................... 342 376 410
------ ------ ------
$2,413 $1,941 $1,615
====== ====== ======
</TABLE>
The components of the provision for income taxes were:
<TABLE>
Years ended December 31,
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Current tax provision:
Federal..................................... $ 571 $ 399 $ 244
Foreign..................................... 103 83 92
State....................................... 54 36 17
------ ------ ------
$ 728 $ 518 $ 353
------ ------ ------
Deferred tax provision (credit):
Federal..................................... 60 86 147
Foreign..................................... 7 7 (6)
State....................................... 1 2 7
------ ------ ------
68 95 148
------ ------ ------
Total provision.............................. $ 796 $ 613 $ 501
====== ====== ======
Reconciliation of the U.S. federal statutory rate to effective rate:
Years ended December 31,
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
U.S statutory rate........................... 35.0% 35.0% 35.0%
Increases (decreases) in taxes resulting from:
Benefit of Foreign Sales Corporation....... (2.8)% (2.5)% (2.5)%
Other - net................................ .8% (.9)% (1.5)%
------ ------ ------
Provision for income taxes................... 33.0% 31.6% 31.0%
====== ====== ======
</TABLE>
We paid income taxes of $709, $452, and $327 in 1997, 1996, and 1995,
respectively.
During 1996, a settlement was reached with the U.S. Internal Revenue Service
(IRS) covering tax years 1988 through 1991. The settlement had a slight
favorable impact on our 1996 effective tax rate.
We have recorded income tax expense at U.S. tax rates on all profits, except
for undistributed foreign profits which are considered permanently invested.
Determination of the amount of unrecognized deferred tax liability related to
permanently invested profits is not feasible.
<TABLE>
<CAPTION>
Deferred tax assets and liabilities:
December 31,
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Deferred tax assets:
Postemployment benefits
other than pensions....................... $1,107 $1,212 $1,309
Unrealized profit excluded from inventories. 201 176 170
Net operating loss carryforwards............ 76 105 154
Warranty reserves........................... 159 114 105
Other....................................... 275 296 256
------ ------ ------
1,818 1,903 1,994
------ ------ ------
Deferred tax liabilities:
Capital assets.............................. (177) (161) (151)
Pension..................................... (79) (86) (91)
------ ------ ------
(256) (247) (242)
------ ------ ------
Valuation allowance for deferred tax assets.. (129) (153) (179)
------ ------ ------
Deferred taxes - net......................... $1,433 $1,503 $1,573
====== ====== ======
</TABLE>
A-11
<PAGE>
NOTES continued
(Dollars in millions except per share data)
- -----------------------------------------------------------------------------
As of December 31, 1997, amounts and expiration dates of net operating loss
carryforwards in various foreign taxing jurisdictions were:
2000 2001 2002 Unlimited Total
------------------------------------------
$13 $9 $23 $203 $248
Of our foreign subsidiaries that are in net operating loss carryforward
positions, there is only sufficient evidence to substantiate recognition of net
deferred tax assets in one foreign taxing jurisdiction. Accordingly, a
valuation allowance has been recorded for the difference. It is possible that
circumstances could change in the near term at one or more of these foreign
subsidiaries which would allow us to reduce the valuation allowance and to
record additional net deferred tax assets.
<TABLE>
<CAPTION>
8. Property, plant, and equipment
================================================================================
December 31,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Land - at original cost........................ $ 121 $ 122 $ 102
Buildings...................................... 2,773 2,704 2,548
Machinery and equipment........................ 3,955 3,778 3,657
Patterns, dies, jigs, etc...................... 515 481 453
Furniture and fixtures......................... 248 212 203
Computers...................................... 519 512 455
Transportation equipment....................... 72 64 61
Equipment leased to others..................... 843 779 674
Construction-in-process........................ 357 165 150
-------- -------- --------
9,403 8,817 8,303
Less: Accumulated depreciation................. 5,345 5,050 4,659
-------- -------- --------
Property, plant, and equipment - net........... $ 4,058 $ 3,767 $ 3,644
======== ======== ========
</TABLE>
We had commitments for the purchase or construction of capital assets of
approximately $425 at December 31, 1997.
<TABLE>
Assets recorded under capital leases (included in above table):
December 31,
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Gross capital leases(1)........................ $ 717 $ 405 $ 395
Less: Accumulated depreciation................. 561 279 253
------- ------- -------
Net capital leases............................. $ 156 $ 126 $ 142
======= ======= =======
</TABLE>
(1)Consists primarily of machinery and equipment.
<TABLE>
Equipment leased to others (primarily by Financial Products):
December 31,
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Equipment leased to others -
at original cost.............................. $ 843 $ 779 $ 674
Less: Accumulated depreciation................. 272 251 220
-------- -------- -------
Equipment leased to others - net............... $ 571 $ 528 $ 454
======== ======== =======
</TABLE>
Scheduled minimum rental payments to be received for equipment leased to
others:
December 31,
After
1998 1999 2000 2001 2002 2002
--------------------------------------------
$151 $101 $77 $42 $14 $2
<TABLE>
<CAPTION>
9. Unconsolidated affiliated companies
================================================================================
Combined financial information of the unconsolidated affiliated companies was as
follows:
Years ended September 30,
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Results of Operations
Sales....................................... $ 3,613 $ 3,729 $ 3,789
======= ======= =======
Profit...................................... $ 104 $ 75 $ 44
======= ======= =======
September 30,
1997 1996 1995
------- -------- -------
Financial Position
Assets:
Current assets............................. $ 1,949 $ 1,995 $ 1,872
Property, plant, and equipment - net....... 792 733 780
Other assets............................... 331 395 322
------- -------- -------
3,072 3,123 2,974
------- -------- -------
Liabilities:
Current liabilities......................... 1,610 1,683 1,676
Long-term debt due after one year........... 203 133 215
Other liabilities........................... 129 145 155
------- -------- -------
1,942 1,961 2,046
------- -------- -------
Ownership..................................... $ 1,130 $ 1,162 $ 928
======= ======== =======
</TABLE>
At December 31, 1997, consolidated "Profit employed in the business" in
Statement 2 included $172 representing undistributed profit of the
unconsolidated affiliated companies. In 1997, 1996, and 1995, we received $36,
$10, and $8, respectively, in dividends from unconsolidated affiliated
companies.
<TABLE>
<CAPTION>
10. Credit commitments
================================================================================
December 31, 1997
Machinery Financial
Consolidated and Engines Products
------------ ----------- -----------
<S> <C> <C> <C>
Credit lines available:
U.S........................... $ 2,500(1) $ 2,500(1) $ 2,250(1)
Non-U.S....................... 1,843 258 1,585
---------- --------- ---------
Total credit lines available.... 4,343 2,758 3,835
Utilized credit:
Backup for outstanding
commercial paper............ 2,536 -- 2,536
Backup for bank borrowings.... 198 53 145
---------- --------- ---------
Unused credit................... $ 1,609 $ 2,705 $ 1,154
========== ========= =========
</TABLE>
(1) The total U.S. line of credit of $2,500 is available to both Machinery and
Engines and Financial Products (Cat Financial). Cat Financial may use up to 90%
of the available line subject to a maximum debt to equity ratio. Machinery and
Engines may use up to 100% of the available line subject to a minimum level of
net worth. Based on these restrictions, and the allocating decisions of
available credit made by management, the line of credit available to Cat
Financial at December 31, 1997, was $2,250.
Based on long-term credit agreements, $2,301, $1,522, and $294 of commercial
paper outstanding at December 31, 1997, 1996, and 1995, respectively, were
classified as long-term debt due after one year.
A-12
<PAGE>
<TABLE>
<CAPTION>
Caterpillar Inc.
- --------------------------------------------------------------------------------
11. Short-term borrowings
================================================================================
December 31,
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Machinery and Engines:
Notes payable to banks...................... $ 53 $ 36 $ 14
Financial Products:
Notes payable to banks...................... 145 257 712
Commercial paper............................ 235 859 416
Other....................................... 51 40 32
-------- -------- -------
431 1,156 1,160
-------- -------- -------
Total short-term borrowings................... $ 484 $ 1,192 $ 1,174
======== ======== =======
</TABLE>
<TABLE>
The weighted average interest rates on short-term borrowings outstanding were:
December 31,
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Notes payable to banks........................ 4.9% 3.7% 5.4%
Commercial paper.............................. 5.2% 5.2% 5.9%
Other......................................... 5.5% 5.5% 5.4%
Please refer to Note 15 and Table V on Page A-15 for fair value information on
short-term borrowings.
</TABLE>
<TABLE>
<CAPTION>
12. Long-term debt
================================================================================
December 31,
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Machinery and Engines:
Notes - 9 3/8% due 2000...................... $ 150 $ 149 $ 149
Notes - 9 3/8% due 2001...................... 184 183 183
Debentures - 9% due 2006..................... 202 202 202
Debentures - 6% due 2007..................... 141 136 131
Debentures - 9 3/8% due 2011................. 123 123 123
Debentures - 9 3/4% due 2000-2019............ 199 199 199
Debentures - 9 3/8% due 2021................. 236 236 236
Debentures - 8% due 2023..................... 199 199 199
Debentures - 7 3/8% due 2097................. 297 -- --
Medium-term notes............................ 153 185 300
Capital lease obligations.................... 438 281 257
Other........................................ 45 125 70
-------- -------- -------
2,367 2,018 2,049
Financial Products:
Commercial paper supported by revolving
credit agreement (Note 10).................. 2,301 1,522 294
Medium-term notes............................ 2,241 1,505 1,553
Other........................................ 33 42 68
-------- -------- -------
Total Financial Products....................... 4,575 3,069 1,915
-------- -------- -------
Total long-term debt due after one year........ $ 6,942 $ 5,087 $ 3,964
======== ======== =======
</TABLE>
Other than the debt of the Financial Products' subsidiaries, all outstanding
notes and debentures itemized above are unsecured direct obligations of
Caterpillar Inc. The capital lease obligations are collateralized by leased
manufacturing equipment and security deposits.
The 6% debentures were sold at significant original issue discounts ($144).
This issue is carried net of the unamortized portion of its discount, which is
amortized as interest expense over the life of the issue. These debentures have
a principal at maturity of $250 and an effective annual cost of 13.3%. We may
redeem them, at our option, at an amount equal to the respective principal at
maturity.
We may redeem annually, at our option, an additional amount for the 9 3/4%
sinking fund debenture issue, without premium, equal to 200% of the amount of
the sinking fund requirement. Also, we may redeem additional portions of the
sinking fund debentures by the payment of premiums which, starting in 1999,
decrease periodically. The premium at the first redemption date of June 1,
1999, is 4.875%.
The terms of other notes and debentures do not specify a redemption option
prior to maturity.
All medium-term notes are offered on a continuous basis through agents and are
primarily at fixed rates. Machinery and Engines' medium-term notes have
maturities from nine months to 30 years. At December 31, 1997, these notes had a
weighted average interest rate of 7.7% with one month to six years remaining to
maturity. Financial Products' medium-term notes have a weighted average interest
rate of 6.1% with maturities up to 15 years at December 31, 1997.
The aggregate amounts of maturities and sinking fund requirements of long-term
debt during each of the years 1998 through 2002, including that due within one
year and classified as current are:
<TABLE>
December 31,
1998 1999 2000 2001 2002
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Machinery and Engines......... $ 54 $ 66 $ 167 $ 204 $ 89
Financial Products............ 1,088 1,192 624 287 116
------ ------ ------ ------ ------
$1,142 $1,258 $ 791 $ 491 $ 205
====== ====== ====== ====== ======
</TABLE>
Interest paid on short-term and long-term borrowings for 1997, 1996, and 1995
was $508, $474, and $475, respectively.
Please refer to Note 15 and Table V on Page A-15 for fair value information on
long-term debt.
13. Capital stock
================================================================================
A. Stock options
In 1996, stockholders approved a plan providing for the granting of options to
purchase common stock to officers and other key employees, as well as non-
employee directors. This plan reserves 22,000,000 shares of common stock for
issuance. Options vest at the rate of one-third per year over the three years
following the date of grant, and have a maximum term of ten years. Common shares
issued under stock options, including treasury shares reissued, totaled
1,264,539; 1,313,932; and 1,426,262 in 1997, 1996, and 1995, respectively.
Our plan grants options which have exercise prices equal to the average market
price on the date of grant. We account for our stock options in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Therefore, no compensation expense is incurred in association with
these options. As required by Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation," a summary of the pro forma
net income and profit per share amounts are shown in Table IV on Page A-14.
These pro forma amounts are not representative of the impact on future
disclosures because they do not take into consideration compensation expense
related to grants made prior to 1995. The fair value of each option grant is
estimated at the date of grant using the Black-Scholes option-pricing model.
Please refer to Table IV on Page A-14 for additional financial information on
our stock options.
A-13
<PAGE>
NOTES continued
(Dollars in millions except per share data)
- --------------------------------------------------------------------------------
B. Restricted stock
The 1996 Stock Option and Long-Term Incentive Plan permits the award of
restricted stock to officers and other key employees, as well as non-employee
directors. During 1997, 137,893 shares of restricted stock were awarded to
officers and other key employees as Performance Awards, and 24,100 shares of
restricted stock were granted to non-employee directors.
C. Stockholders' rights plan
We are authorized to issue 5,000,000 shares of preferred stock, of which
2,000,000 shares have been designated as Series A Junior Participating
Preferred Stock of $1.00 par value. None of the preferred shares have been
issued.
Stockholders would receive certain preferred stock purchase rights if someone
acquired or announced a tender offer to acquire 15% or more of outstanding
Caterpillar stock. In essence, those rights would permit each holder (other than
the acquiring person) to purchase one share of Caterpillar stock at a 50%
discount for every share owned. The rights, designed to protect the interests of
Caterpillar stockholders during a takeover attempt, expire December 11, 2006.
<TABLE>
<CAPTION>
=================================================================================================================
TABLE IV - Financial Information Related to Capital Stock
- -----------------------------------------------------------------------------------------------------------------
SFAS 123 pro forma net income and earnings per share:
Years ended December 31,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net Income:
As reported.............................. $ 1,665 $ 1,361 $ 1,136
Pro forma................................ $ 1,640 $ 1,352 $ 1,133
Profit per share of common stock:
As reported:
Basic................................. $ 4.44 $ 3.54 $ 2.86
Assuming dilution..................... $ 4.37 $ 3.50 $ 2.84
Pro forma:
Basic................................. $ 4.37 $ 3.51 $ 2.85
Assuming dilution..................... $ 4.32 $ 3.48 $ 2.83
</TABLE>
Weighted-average assumptions used in determining fair value of option grants:
<TABLE>
<CAPTION>
Grant Year
1997 1996 1995
------ ------- -------
<S> <C> <C> <C>
Dividend yield........................ 1.94% 2.13% 1.66%
Expected volatility................... 25.51% 24.19% 25.04%
Risk-free interest rates.............. 6.42% 6.59% 5.88%
Expected lives........................ 4 years 4 years 4 years
</TABLE>
Changes in the status of common shares subject to issuance under options:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- --------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Fixed Options
Outstanding at beginning of year......... 13,874,114 $ 25.31 13,267,648 $ 21.96 13,106,742 $ 18.55
Granted to officers and key employees.... 3,491,650 $ 51.66 3,334,100 $ 32.91 3,205,280 $ 30.16
Granted to outside directors............. 40,000 $ 39.19 44,000 $ 33.47 40,000 $ 27.91
Exercised................................ (2,274,474) $ 22.16 (2,627,940) $ 18.03 (3,006,660) $ 15.85
Lapsed................................... (74,878) $ 32.61 (143,694) $ 28.23 (77,714) $ 24.85
----------- ---------- -----------
Outstanding at end of year............... 15,056,412 $ 31.89 13,874,114 $ 25.31 13,267,648 $ 21.96
=========== =========== ===========
Options exercisable at year-end 8,386,814 $ 23.58 7,544,270 $ 20.44 7,168,280 $ 17.35
Weighted-average fair value of options
granted during the year................ $ 16.15 $ 8.12 $ 7.62
</TABLE>
Stock options outstanding and exercisable:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- ---------------------------------
Weighted-Average
Remaining
# Outstanding Contractual Life Weighted-Average # Outstanding Weighted-Average
Exercise Prices at 12/31/97 (Years) Exercise Price at 12/31/97 Exercise Price
---------------- ------------- ---------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
$11.78 to $18.77 3,598,990 4.0 $16.01 3,598,990 $16.01
$26.77 to $39.19 7,970,872 7.6 $30.42 4,787,824 $29.28
$51.66 3,486,550 9.4 $51.66 - -
---------- ---------
15,056,412 7.2 $31.89 8,386,814 $23.58
========== =========
=================================================================================================================
</TABLE>
A-14
<PAGE>
Caterpillar Inc.
- --------------------------------------------------------------------------------
14. Profit per share
================================================================================
Years ended December 31,
1997 1996 1995
---- ---- ----
Profit (A)........................ $ 1,665 $ 1,361 $ 1,136
============ ============ ============
Determination of shares:
Weighted average common
shares outstanding (B)........ 375,124,745 384,960,440 396,858,256
Assumed conversion
of stock options.............. 5,416,215 3,724,630 3,462,442
------------ ------------ ------------
Weighted average common
shares outstanding --
assuming dilution (C)......... 380,540,960 388,685,070 400,320,698
============ ============ ============
Profit per share of
common stock (A/B).............. $ 4.44 $ 3.54 $ 2.86
Profit per share of common
stock -- assuming
dilution (A/C).................. $ 4.37 $ 3.50 $ 2.84
Stock options to purchase 3,521,250 and 3,191,380 shares of common stock at
$51.66 and $30.16 were outstanding during 1997 and 1995, respectively, but were
not included in the computation of diluted profit per share, because the
options' exercise price was greater than the average market price of the common
shares. During 1996, there were no stock options excluded from the computation
of diluted profit per share.
15. Fair values of financial instruments
================================================================================
We used the following methods and assumptions to estimate the fair value of our
financial instruments:
Cash and short-term investments - carrying amount approximated fair value.
Long-term investments (other than investments in unconsolidated affiliated
companies) - fair value was estimated based on quoted market prices.
Foreign currency contracts (forwards and options) - fair value was estimated
based on quoted market prices of comparable instruments.
Finance receivables - fair value was estimated by discounting the future cash
flow using current rates, representative of receivables with similar remaining
maturities. Historical bad debt experience was also considered.
Short-term borrowings - carrying amount approximated fair value.
Long-term debt - for Machinery and Engines' notes and debentures, fair value
was estimated based on quoted market prices. For Financial Products, fair value
was estimated by discounting the future cash flow using our current borrowing
rates for similar types and maturities of debt, except for floating rate notes
for which the carrying amount was considered a reasonable estimate of fair
value.
Interest rate swaps - fair value was estimated based on the amount that we
would receive or pay to terminate our agreements as of year end.
Please refer to Table V below for the fair values of our financial
instruments.
<TABLE>
<CAPTION>
====================================================================================================================================
TABLE V - Fair Values of Financial Instruments
- ------------------------------------------------------------------------------------------------------------------------------------
Asset (Liability) 1997 1996 1995
------------------- ----------------- ------------------
At December 31 Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value Reference #
-------- ----- -------- ----- -------- ----- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and short-term investments.... $ 292 $ 292 $ 487 $ 487 $ 638 $ 638 Statement 3, Note 17
Long-term investments.............. 701 701 508 508 449 449 Note 17
Foreign currency contracts......... 41 47 (3) (3) -- (1) Note 2
Finance receivables - net
(excluding operating and
finance type leases and
currency swaps(1))............... 5,788 5,815 4,954 4,980 4,207 4,175 Note 6
Short-term borrowings.............. (484) (484) (1,192) (1,192) (1,174) (1,174) Note 11
Long-term debt
(including amounts due within
one year)
Machinery and Engines............ (2,421) (2,785) (2,140) (2,377) (2,205) (2,550) Note 12
Financial Products............... (5,663) (5,721) (4,127) (4,176) (3,021) (3,083) Note 12
Interest rate swaps
Machinery and Engines -
in a net receivable position... 1 10 1 4 -- 9 Note 2
in a net payable position...... (3) (1) (1) (3) (2) (1) Note 2
Financial Products -
in a net receivable position... -- 20 1 4 2 7 Note 2
in a net payable position...... (3) (12) (4) (16) (4) (17) Note 2
(1) Excluded items have a net carrying value at December 31, 1997, 1996 and 1995, of $753, $692, and $ 613, respectively.
====================================================================================================================================
</TABLE>
A-15
<PAGE>
NOTES continued
(Dollars in millions except per share data)
- --------------------------------------------------------------------------------
16. Operating leases
================================================================================
We lease certain computer and communications equipment, transportation
equipment, and other property through operating leases. Total rental expense for
operating leases was $176, $151, and $139 for 1997, 1996, and 1995,
respectively.
Minimum payments for operating leases having initial or remaining non-cancelable
terms in excess of one year are:
Years ended December 31,
After
1998 1999 2000 2001 2002 2002 Total
-----------------------------------------------------
$109 $78 $43 $28 $25 $79 $362
17. Concentration of credit risk
================================================================================
Financial instruments with potential credit risk consist primarily of trade and
finance receivables and short-term and long-term investments. Additionally, to
a lesser extent, we have a potential credit risk associated with counterparties
to derivative contracts.
Trade receivables are primarily short-term receivables from independently
owned and operated dealers which arise in the normal course of business. We
perform regular credit evaluations of our dealers. Collateral is generally not
required, and the majority of our trade receivables are unsecured. We do
however, when deemed necessary, make use of various devices such as security
agreements and letters of credit to protect our interests. No single dealer
represents a significant concentration of credit risk.
Finance receivables primarily represent receivables under installment sales
contracts, receivables arising from leasing transactions and notes receivable.
Receivables from customers in construction-related industries made up
approximately one-third of total finance receivables at December 31, 1997,
1996, and 1995, respectively. We generally maintain a secured interest in the
equipment financed. No single customer or region represents a significant
concentration of credit risk.
Short-term and long-term investments are held with high quality institutions
and, by policy, the amount of credit exposure to any one institution is limited.
Long-term investments are comprised of investments which collateralize capital
lease obligations (note 12) and investments of Caterpillar Insurance Co. Ltd.
supporting insurance reserve requirements. Long-term investments are a component
of "Other Assets" in Statement 3.
At December 31, 1997, 1996, and 1995, Cat Financial was contingently liable
under guarantees for certain Caterpillar dealers' obligations totaling $261,
$253, and $282, respectively, of which $109, $159, and $222, respectively, was
outstanding. These guarantees have terms ranging up to two years and are fully
secured by dealer assets. No loss has been experienced nor is any anticipated
under these agreements.
Outstanding derivative instruments, with notional amounts totaling $4,079 and
terms generally ranging up to five years, were held at December 31, 1997.
Collateral is not required of the counterparties or of our company. We do not
anticipate nonperformance by any of the counterparties. Our exposure to credit
loss in the event of nonperformance by the counterparties is limited to only
those gains that we have recorded, but have not yet received cash payment. At
December 31, 1997, the exposure to credit loss was $49.
Please refer to Note 15 and Table V on Page A-15 for fair value information.
18. Environmental matters
================================================================================
The company is regulated by federal, state, and international environmental laws
governing our use of substances and control of emissions. Compliance with these
existing laws has not had a material impact on our capital expenditures,
earnings, or competitive position.
We are cleaning up hazardous waste at a number of locations, often with other
companies, pursuant to federal and state laws. When it is likely we will pay
clean-up costs at a site and those costs can be estimated, the costs are charged
against our earnings. In doing that estimate, we do not consider amounts
expected to be recovered from insurance companies and others.
The amount set aside for environmental clean-up is not material and is
included in "Accounts payable and accrued expenses" in Statement 3. If a range
of liability estimates is available on a particular site, we accrue the lower
end of that range.
We cannot estimate costs on sites in the very early stages of clean-up.
Currently, we have five of these sites and there is no more than a remote chance
that a material amount for clean-up will be required.
The United States Environmental Protection Agency (EPA) has issued conditional
certificates of conformity with the Clean Air Act for Caterpillar's 1998 model
year heavy-duty diesel engines. The EPA has issued similar conditional
certificates to other heavy-duty diesel engine manufacturers as well. The EPA
is reviewing the impact of advanced electronic control technologies on the
emissions compliance of heavy-duty trucks in certain operating conditions and
whether the use of such technologies is consistent with the Clean Air Act's
requirements. Caterpillar and the other manufacturers are responding to the EPA
requests for information and are engaged in discussions with them and the
United States Department of Justice in an effort to resolve this issue. We do
not expect the outcome of this matter to have a material impact on our
financial position or results of operations.
<TABLE>
<CAPTION>
19. Plant closing and consolidation costs
================================================================================
The reserve for plant closing and consolidation costs includes the following:
December 31,
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Write-down of property, plant, and equipment....... $ 103 $ 102 $ 99
Employee severance benefits........................ 95 103 115
Rearrangement, start-up costs, and other........... 47 54 55
----- ----- -----
Total reserve...................................... $ 245 $ 259 $ 269
===== ===== =====
</TABLE>
The write-down of property, plant, and equipment establishes a new cost basis
for assets that have been permanently impaired.
Employee severance benefits (e.g., pension, medical, and supplemental
unemployment benefits) are provided to employees affected by plant closings and
consolidations. The reserve for such benefits is reduced as the benefits are
provided.
At December 31, 1997, the above reserve includes $153 of costs associated with
the closure of the Component Products Division's Precision Barstock Products
(PBP) operation located in York, Pennsylvania. The probable closing of the PBP
manufacturing operation was announced in December 1991. In March 1996, it was
announced that the facility would be closed. We are currently in the process of
closing the unit.
A-16
<PAGE>
Caterpillar Inc.
- --------------------------------------------------------------------------------
20. Segment information
================================================================================
A. Nature of operations
We operate in three principal business segments:
1. Machinery -- design, manufacture, and marketing of construction, mining,
and agricultural machinery -- track and wheel tractors, track and wheel
loaders, pipelayers, motor graders, wheel tractor-scrapers, track and wheel
excavators, backhoe loaders, mining shovels, log skidders, log loaders,
off-highway trucks, articulated trucks, paving products, telescopic
handlers, and related parts.
2. Engines -- design, manufacture, and marketing of engines for earthmoving
and construction machines, on-highway trucks, and locomotives; marine,
petroleum, agricultural, industrial, and other applications; electric
power generation systems; and related parts. Reciprocating engines meet
power needs ranging from 40 to 13,600 horsepower (30 to 10 150 kilowatts).
Turbines range from 1,340 to 18,000 horsepower (1000 to 13 500 kilowatts).
3. Financial Products -- provides financing alternatives for Caterpillar and
noncompetitive related equipment, and extends loans to our customers and
dealers. Also provides various forms of insurance to our dealers and
customers to help support their purchase and financing of our equipment.
This segment consists primarily of Cat Financial and its subsidiaries and
Cat Insurance Services Corporation.
Our products are sold primarily under the marks "Caterpillar," "Cat," "Solar,"
"Barber-Greene," and "MaK."
We conduct operations in our Machinery and Engines' segments under highly
competitive conditions, including intense price competition. We place great
emphasis upon the high quality and performance of our products and our dealers'
service support. Although no one competitor is believed to produce all of the
same types of machines and engines, there are numerous companies, large and
small, which compete with us in the sale of each of our products.
Machines are distributed principally through a worldwide organization of
dealers, 65 located in the United States and 132 located outside the United
States. Worldwide, these dealers have more than 1,400 places of business.
Reciprocating engines are sold principally through the worldwide dealer
organization and to other manufacturers for use in products manufactured by
them. Our dealers do not deal exclusively with our products; however, in most
cases sales and servicing of our products are our dealers' principal business.
Turbines and large marine reciprocating engines are sold through sales forces
employed by Solar Turbines Incorporated and associated companies and MaK
Motoren GmbH & Co. KG, respectively. Occasionally these employees are assisted
by independent sales representatives.
The Financial Products' segment also conducts business under highly
competitive conditions. Financing for users of Caterpillar products is
available through a variety of competitive sources, principally commercial banks
and finance and leasing companies. We emphasize prompt and responsive service
to meet customer requirements and offer various financing plans designed to
increase the opportunity for sales of our products and generate financing income
for our company.
B. Business segments
We use a substantial number of allocations to determine business segment
information because our manufacturing operations are highly integrated.
Intersegment sales, which primarily represent intersegment engine sales, are
valued at prices comparable to those for unrelated parties.
<TABLE>
<CAPTION>
Years ended December 31: 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Sales:
Machinery......................................... $ 13,350 $ 11,862 $ 11,336
Engines........................................... 5,922 4,879 4,920
Elimination of intersegment engine sales............ (1,162) (927) (805)
-------- -------- --------
Consolidated sales.................................. 18,110 15,814 15,451
Financial Products revenues......................... 815 708 621
-------- -------- --------
Sales and revenues.................................. $ 18,925 $ 16,522 $ 16,072
======== ======== ========
Operating profit:
Machinery......................................... $ 1,889 $ 1,562 $ 1,210
Engines........................................... 497 395 462
Financial Products................................ 142 114 88
Elimination of intersegment expenses.............. 12 21 3
-------- -------- --------
2,540 2,092 1,763
General corporate expenses.......................... (110) (100) (79)
-------- -------- --------
Operating profit.................................... $ 2,430 $ 1,992 $ 1,684
======== ======== ========
Capital expenditures -- including
equipment leased to others:
Machinery....................................... $ 452 $ 314 $ 256
Engines......................................... 329 152 179
Financial Products.............................. 282 263 210
General corporate............................... 43 42 34
-------- -------- --------
$ 1,106 $ 771 $ 679
======== ======== ========
Depreciation and amortization:
Machinery......................................... $ 370 $ 372 $ 375
Engines........................................... 196 171 172
Financial Products................................ 139 121 102
General corporate................................. 33 32 33
-------- -------- --------
$ 738 $ 696 $ 682
======== ======== ========
December 31:
Identifiable assets:
Machinery......................................... $ 6,632 $ 6,010 $ 5,122
Engines........................................... 3,434 3,023 2,746
Financial Products................................ 7,755 6,572 5,592
-------- -------- --------
17,821 15,605 13,460
General corporate assets............................ 2,184 2,422 2,894
Investments in unconsolidated
affiliated companies.............................. 751 701 476
-------- -------- --------
Total assets........................................ $ 20,756 $ 18,728 $ 16,830
======== ======== ========
</TABLE>
C. Geographic segments
Manufacturing activities of the Machinery and Engines' segments are conducted in
37 plants in the United States; five in the United Kingdom; three in China; two
each in Australia, France, Germany, Italy, and Mexico; and one each in Belgium,
Brazil, Canada, Hungary, Indonesia, Poland, Russia, and Sweden. Four major parts
distribution centers are located in the United States and ten are located
outside the United States. Financial Products' segment activity is primarily
conducted in the United States, with additional business activity conducted in
Asia, Australia, Canada, Chile, Europe, and Mexico.
A-17
<PAGE>
NOTES continued
(Dollars in millions except per share data)
- --------------------------------------------------------------------------------
We are a highly integrated company. The products of our manufacturing
operations located outside the United States, in most instances, consist of
components manufactured or purchased locally which are assembled with components
transferred from other sources within our company. As a result, the profits of
these operations do not bear any definite relationship to their assets.
Therefore, financial information of the individual geographic segments cannot
be viewed in isolation. Intersegment sales are valued at prices comparable to
those for unrelated parties.
Geographic segments are based on the location of the manufacturing
operations, which either manufactures or purchases products, for Machinery and
Engines.
<TABLE>
<CAPTION>
Years ended December 31: 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Sales:
United States.......................... $14,468 $13,042 $12,191
Europe................................. 3,225 2,214 2,638
All other.............................. 1,287 1,138 1,200
Elimination of intersegment sales from:
United States.......................... (459) (265) (308)
Europe................................. (192) (135) (125)
All other.............................. (219) (180) (145)
------- ------- -------
Consolidated sales....................... 18,110 15,814 15,451
Revenues:
United States.......................... 612 534 482
All other.............................. 203 174 139
------- ------- -------
Sales and revenues....................... $18,925 $16,522 $16,072
======= ======= =======
Operating profit:
Machinery and Engines:
United States........................ $ 1,976 $ 1,708 $ 1,356
Europe............................... 310 166 206
All other............................ 100 83 110
------- ------- -------
2,386 1,957 1,672
------- ------- -------
Financial Products:
United States........................ 126 98 81
All other............................ 16 16 7
------- ------- -------
Total Financial Products............... 142 114 88
------- ------- -------
Elimination of intersegment expenses... 12 21 3
General corporate expenses............. (110) (100) (79)
------- ------- -------
Operating profit......................... $ 2,430 $ 1,992 $ 1,684
======= ======= =======
December 31:
Identifiable assets:
Machinery and Engines:
United States........................ $ 7,388 $ 6,495 $ 5,836
Europe............................... 1,668 1,702 1,229
All other............................ 1,010 836 803
------- ------- -------
10,066 9,033 7,868
------- ------- -------
Financial Products:
United States........................ 5,311 4,687 4,042
All other............................ 2,444 1,885 1,550
------- ------- -------
Total Financial Products............... 7,755 6,572 5,592
------- ------- -------
17,821 15,605 13,460
General corporate assets............... 2,184 2,422 2,894
Investments in unconsolidated
affiliated companies................... 751 701 476
------- ------- -------
Total assets............................. $20,756 $18,728 $16,830
======= ======= =======
</TABLE>
D. Non-U.S. sales
Sales outside the United States (based on dealer location) were 51% of
consolidated sales for 1997 and 1996, and 52% for 1995.
<TABLE>
<CAPTION>
Years ended December 31: 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Sales of U.S. manufactured product:
Asia/Pacific........................... $1,686 $1,743 $1,505
Latin America.......................... 1,101 913 829
Europe................................. 1,067 1,065 1,005
Canada................................. 1,048 748 852
Africa/Middle East..................... 757 767 644
------ ------ ------
5,659 5,236 4,835
------ ------ ------
Sales of non-U.S. manufactured product:
Asia/Pacific........................... 788 817 785
Latin America.......................... 601 325 354
Europe................................. 1,552 1,301 1,681
Canada................................. 158 75 104
Africa/Middle East..................... 426 384 270
------ ------ ------
3,525 2,902 3,194
------ ------ ------
Total sales outside the United States:
Asia/Pacific........................... 2,474 2,560 2,290
Latin America.......................... 1,702 1,238 1,183
Europe................................. 2,619 2,366 2,686
Canada................................. 1,206 823 956
Africa/Middle East..................... 1,183 1,151 914
------ ------ ------
$9,184 $8,138 $8,029
====== ====== ======
</TABLE>
21. Acquisition of Perkins Engines
================================================================================
On December 11, 1997, we announced an agreement with LucasVarity plc to acquire
the assets of Perkins Engines, LucasVarity's diesel engine subsidiary. Perkins
is a leading manufacturer of small to medium diesel engines, and its 1996 sales
were approximately $1,100. The addition of Perkins to our existing engine
business will create a global full-line producer of reciprocating and turbine
engines. A purchase price of $1,325 was agreed upon subject to closing date
adjustments. We will pay for this acquisition using a combination of existing
cash and new debt. The acquisition will be accounted for using the purchase
method of accounting. It is anticipated that the acquisition will be finalized
during the first quarter of 1998.
22. Selected quarterly financial results (unaudited)
================================================================================
<TABLE>
<CAPTION>
1997 Quarter
----------------------------------------
1st 2nd 3rd 4th
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales and revenues....................... $ 4,262 $ 4,870 $ 4,600 $ 5,193
Less: Revenues........................... 190 194 215 216
------- ------- ------- -------
Sales.................................... 4,072 4,676 4,385 4,977
Cost of goods sold....................... 2,981 3,450 3,278 3,665
------- ------- ------- -------
Gross margin............................. 1,091 1,226 1,107 1,312
Profit................................... 394 435 385 451
Profit per share of common stock......... $ 1.04 $ 1.15 $ 1.03 $ 1.22
Profit per share of common stock
-- assuming dilution................... $ 1.03 $ 1.13 $ 1.01 $ 1.20
<CAPTION>
1996 Quarter
----------------------------------------
1st 2nd 3rd 4th
------- ------- ------- -------
Sales and revenues....................... $ 3,844 $ 4,180 $ 4,033 $ 4,465
Less: Revenues........................... 162 172 184 190
------- ------- ------- -------
Sales.................................... 3,682 4,008 3,849 4,275
Cost of goods sold....................... 2,780 2,976 2,905 3,171
------- ------- ------- -------
Gross margin............................. 902 1,032 944 1,104
Profit................................... 296 374 310 381
Profit per share of common stock......... $ .76 $ .97 $ .81 $ 1.00
Profit per share of common stock
-- assuming dilution................... $ .76 $ .96 $ .80 $ .98
</TABLE>
A-18
<PAGE>
Five-year Financial Summary Caterpillar Inc.
(Dollars in millions except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995 1994 1993
--------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Sales and revenues............................. $ 18,925 16,522 16,072 14,328 11,615
Sales........................................ $ 18,110 15,814 15,451 13,863 11,235
Percent inside the United States........... 49% 49% 48% 51% 51%
Percent outside the United States.......... 51% 51% 52% 49% 49%
Revenues..................................... $ 815 708 621 465 380
Profit(1)...................................... $ 1,665 1,361 1,136 955 652
Profit per share of common stock(1)(2)......... $ 4.44 3.54 2.86 2.35 1.61
Profit per share of common stock -
assuming dilution(1)(2)................ $ 4.37 3.50 2.84 2.33 1.60
Dividends declared per share of common stock... $ .95 .78 .65 .32 .15
Return on average common stock equity.......... 37.9% 36.3% 36.1% 37.4% 34.6%
Capital expenditures:
Property, plant, and equipment............... $ 824 506 464 501 417
Equipment leased to others................... $ 282 265 215 193 215
Depreciation and amortization.................. $ 738 696 682 683 668
Research and engineering expenses.............. $ 700 570 532 435 455
As a percent of sales and revenues........... 3.7% 3.4% 3.3% 3.0% 3.9%
Wages, salaries, and employee benefits......... $ 3,773 3,437 2,919 3,146 3,038
Average number of employees.................... 58,366 54,968 54,263 52,778 50,443
December 31,
Total assets:
Machinery and Engines........................ $ 13,001 12,156 11,238 11,582 11,131
Financial Products........................... $ 7,755 6,572 5,592 4,668 3,676
Long-term debt due after one year:
Machinery and Engines........................ $ 2,367 2,018 2,049 1,934 2,030
Financial Products........................... $ 4,575 3,069 1,915 2,336 1,865
Total debt:
Machinery and Engines........................ $ 2,474 2,176 2,219 2,037 2,387
Financial Products........................... $ 6,094 5,283 4,181 3,866 3,041
Percent of total debt to total debt
and stockholders' equity
(Machinery and Engines)...................... 34.6% 34.6% 39.6% 41.2% 52.1%
</TABLE>
(1) 1993 profit was after extraordinary loss on early retirement of debt; profit
before extraordinary loss was $681, $1.68 per share of common stock.
(2) Computed on weighted-average number of shares outstanding.
A-19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The discussions of Results of Operations and Liquidity and Capital Resources are
grouped as follows:
Consolidated - represents the consolidated data of Caterpillar Inc. and all
its subsidiaries (affiliated companies that are more than 50% owned).
Machinery and Engines - company operations excluding the Financial Products
subsidiaries. This category consists primarily of the company's manufacturing,
marketing, and parts distribution operations, which are highly integrated.
Unless attributed to a particular subsidiary, items discussed in Management's
Discussion and Analysis reflect the consolidated effect of contributions by
worldwide operations.
Financial Products - the company's Financial Products subsidiaries, primarily
Caterpillar Financial Services Corporation (Cat Financial) and Caterpillar
Insurance Services Corporation. Cat Financial and its subsidiaries in the
Americas, Australia, and Europe derive earnings from financing sales and leases
of Caterpillar products and noncompetitive related equipment and from loans
extended to Caterpillar customers and dealers. Caterpillar Insurance Services
Corporation provides insurance services to Caterpillar dealers and customers to
help support their purchase and financing of Caterpillar equipment.
RESULTS OF OPERATIONS
1997 COMPARED WITH 1996
Profit for 1997 was up 22% on a 15% increase in sales and revenues. Profit per
share of common stock increased 25%, reflecting the impact of the higher profit
and the ongoing share repurchase program. Profit of $1.67 billion or $4.44 per
share was the best in our history, an improvement of $304 million over profit
of $1.36 billion or $3.54 per share in 1996. Sales and revenues of $18.93
billion were $2.40 billion higher and also an all-time record. An increase in
physical sales volume of 15% was the most significant factor contributing to the
higher sales and revenues, and profit.
Machinery and Engines
Sales of Machinery and Engines were $18.11 billion, an increase of $2.30 billion
or 15% from 1996. The higher sales resulted from a 15% increase in physical
sales volume. Profit before tax was $2.21 billion, an improvement of $420
million or 23% from last year. The primary reason for the improved profit was
the higher physical sales volume, which resulted from higher machine and engine
sales inside and outside the United States.
Price realization was about the same as price increases taken over the past
year and a favorable change in geographic sales mix was more than offset by the
effect of the stronger dollar on sales denominated in currencies other than the
U.S.
Margin (sales less cost of goods sold) of $4.74 billion increased $754 million
or 19% over 1996. Margin as a percent of sales was 26.2%, up from 25.2%,
primarily because of the favorable impact of higher physical sales volume and
price increases taken over the past year. Partially offsetting these favorable
items were increased fixed manufacturing costs and an unfavorable change in
product sales mix.
The increased fixed manufacturing costs were primarily in support of major
growth initiatives and product line expansions that include electric power
generation, agricultural products, mining systems, and compact machines.
The unfavorable change in product sales mix was primarily the result of
selling a higher percentage of mid-range truck engines, and a change in the mix
of turbine products.
Selling, general, and administrative (SG&A) expenses were $1.93 billion
compared with $1.72 billion in 1996. The $217 million increase primarily
reflects increased spending levels in support of major growth initiatives and
product line expansions. The effect of inflation on costs also contributed to
the increase. SG&A expenses, as a percent of sales, were 10.7%, down slightly
from 10.8% in 1996.
Research and development (R&D) expenses of $528 million were up $118 million
from 1996. The increase reflects expected higher spending in support of new and
improved products. R&D expenses, as a percent of sales, were 2.9%, up from 2.6%
in 1996.
Operating profit of $2.28 billion was $419 million or 23% higher than 1996.
Operating profit, as a percent of sales, was 12.6% compared with 11.7% a year
ago. Operating profit rates have continued to grow, a result of balancing
favorable margin growth with controlled spending for SG&A and R&D to enhance
longer-term growth.
Interest expense of $219 million was $25 million higher than a year ago,
mostly due to higher average debt levels.
Other income/expense was income of $153 million compared with income of $127
million last year. The increase of $26 million is primarily due to several
small favorable items, partially offset by an unfavorable change in foreign
exchange gains and losses.
Financial Products
Financial Products' revenues of $839 million were a record, up $107 million or
15% compared with 1996, primarily the result of Cat Financial's larger
portfolio.
Selling, general, and administrative expenses were up $22 million, primarily
due to Cat Financial's higher depreciation on leased equipment and other
increases due to growth, partially offset by a favorable reserve adjustment at
Caterpillar Insurance Co. Ltd. (Cat Insurance). Interest expense was up $57
million due to increased borrowings to support the larger portfolio. Other
income/expense was income of $61 million, an increase of $24 million from a year
ago. The increase in other income was primarily the result of higher gains on
sales of used equipment, exchange gains, and increased use of securitization by
Cat Financial, and higher investment income at Cat Insurance.
Before-tax profit was a record $203 million, up $52 million or 34% from last
year. The increase resulted primarily from the continued growth of Cat Financial
and favorable reserve adjustments at Cat Insurance.
Income Taxes
The provision for income taxes was $796 million, compared with $613 million last
year. The $183 million increase reflects the higher before-tax profit and a
higher effective tax rate of 33% compared with 31.6% for 1996. The higher tax
rate accounted for $34 million of the increase.
A-20
<PAGE>
Caterpillar Inc.
- --------------------------------------------------------------------------------
Unconsolidated Affiliated Companies
Our share of unconsolidated affiliated companies' results was $48 million, up
$15 million from a year ago. Profits from F.G. Wilson, L.L.C., an affiliate
acquired in 1996, along with higher profits at Shin Caterpillar Mitsubishi Ltd.
were the primary reasons for the increase from 1996.
1997 SALES
Caterpillar worldwide sales were a record $18.11 billion in 1997, a $2.30
billion or 15% increase over 1996, due to higher physical sales volume. Sales
increases in the United States accounted for about half the total increase.
Gains also were registered in Latin America, Canada, Europe/Commonwealth of
Independent States (CIS), and Africa/Middle East. Sales declined slightly in the
Asia/Pacific region.
Sales by Business Segment
1997 1996 1995
--------------------
(Billions)
Machinery.......... $13.35 $11.86 $11.33
Engines............ 4.76 3.95 4.12
------ ------ ------
$18.11 $15.81 $15.45
====== ====== ======
Worldwide sales for the Machinery segment increased 13% from 1996, setting
another all-time record. Most of the improvement was due to higher physical
sales volume resulting from higher dealer sales to end users. Company sales were
higher in most key applications including construction, sand and quarry
operations, and forestry.
Engine segment sales increased 21% from 1996 levels after a decline in 1996.
The improvement reflected higher end-user demand for reciprocating gas and
diesel engines as well as turbines. Company sales were higher in all key
applications including on-highway trucks, power generation, oil and gas,
industrial, and marine. Sales were also higher due to the acquisition of MaK
Motoren GmbH & Co. KG on December 31, 1996.
Caterpillar Sales Inside the United States
1997 1996 1995
----------------------
(Billions)
Machinery............ $ 6.71 $ 5.89 $ 5.49
Engines.............. 2.22 1.78 1.93
------ ------ ------
$ 8.93 $ 7.67 $ 7.42
====== ====== ======
Caterpillar sales inside the United States were $8.93 billion, a $1.25 billion
or 16% increase over 1996. Both machinery and engine segment sales exceeded
last year's levels due primarily to higher physical sales volume as improved
end-user demand more than offset a slowdown in machine inventory accumulation.
Higher price realization in both segments also contributed to the increase in
company sales.
Sales inside the United States represented 49% of the worldwide total,
unchanged from 1996.
Dealer Machine Sales to End Users
Inside the United States
The United States economy registered very good growth in 1997 with Gross
Domestic Product (GDP) increasing about 3.7%, considerably better than the 2.5%
rate for 1996. This pickup in growth combined with higher construction and
mining activity led to increased industry demand for construction and mining
equipment. A healthy farm economy also boosted industry demand for agricultural
equipment. With total industry demand up, dealer machine sales to end users
increased in both the construction and commodity sectors.
Sales of machines to end users rose in two of the three key construction
sectors:
. Highway sales increased in response to higher construction spending.
. Sales to the housing sector also increased as housing starts remained
strong.
. Commercial, industrial, and government building sector sales remained
near 1996 levels despite growth in private and public building
construction.
Sales to end users rose in all but one key commodity sector:
. Coal mining sales rose reflecting higher mine production.
. Sales to the sand and quarry sector of mining also were higher in
response to higher construction activity.
. Agricultural-related sales increased, reflecting a healthy farm
economy and strong industry demand.
. Sales to the forestry sector rose in response to higher lumber and
pulp production. Lumber prices were higher while pulp prices were
lower.
. Metal mining-related sales declined reflecting lower metals prices.
Sales to end users increased in industrial applications but declined in
landfill applications.
Deliveries to dealers' dedicated rental fleets increased in 1997 as in 1996
and constituted about one-third of all dollar deliveries to U.S. dealers.
Engine Sales to End Users and
OEMs Inside the United States
Engine sales increased primarily as a result of better economic growth and
higher industry demand.
. On-highway truck engine sales to Original Equipment Manufacturers
(OEMs) rose reflecting an increase in industrial production.
. Reciprocating engine sales to users also increased with a large gain
in oil and gas applications. Sales to marine, power generation, and
industrial applications also rose.
. Turbine sales increased due to a gain in deliveries to oil and gas
applications. Sales into power generation remained near 1996 levels.
A-21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
- --------------------------------------------------------------------------------
Caterpillar Sales Outside the United States
1997 1996 1995
----------------------
(Billions)
Machinery............. $ 6.64 $ 5.97 $ 5.84
Engines............... 2.54 2.17 2.19
______ ______ ______
$ 9.18 $ 8.14 $ 8.03
====== ====== ======
- --------------------------------------------------------------------------------
Caterpillar sales outside the United States were $9.18 billion, a $1.05 billion
or 13% increase from 1996. These sales represented 51% of worldwide sales, the
same percentage as 1996. Sales were higher in Latin America, Canada, Europe/CIS,
and Africa/Middle East. Sales declined slightly in the Asia/Pacific region.
Machinery segment sales surpassed 1996 levels as higher sales volume more than
offset a decline in price realization. The improvement in sales volume
resulted from an increase in industry demand and higher dealer inventory levels.
Engine segment sales also surpassed last year's levels due to higher physical
sales volume. Sales of diesel and gas reciprocating engines rose with gains in
on-highway truck, marine, power generation, and industrial applications. Sales
of turbines also increased with gains in both power generation and oil and gas
applications.
Europe/CIS
Sales rose 11% reflecting higher machine and engine sales. Sales were higher in
Germany and Spain, lower in France, and about the same in Italy and the United
Kingdom. Industry demand for machines declined slightly due to tight fiscal
policies, but sales to end users remained near 1996 levels due to a higher
share of industry sales. Company sales of machines rose primarily as a result of
dealers replenishing their new machine inventory. Industry demand for engines,
however, was higher leading to improved engine sales.
Sales to Central Europe were lower primarily due to economic difficulties in
the Czech Republic. Sales also declined in the CIS reflecting continued
economic sluggishness and high levels of political uncertainty, particularly in
Russia.
Asia/Pacific
Sales declined 3% for the year reflecting the impact of the currency crisis on
the region's economy. Industry demand for machines declined sharply in the
second half of the year in a number of Southeast Asia countries including
Thailand, Indonesia, Malaysia, and the Philippines. As a result, sales to end
users for the entire year slipped below 1996 levels.
In China (including Hong Kong), both company sales and sales to end users
declined reflecting slower economic growth.
In Australia, both company sales and sales to end users fell as economic
growth slowed and commodity prices declined.
In Japan, sales of imported product were higher for the year due to a surge in
demand during the first quarter in advance of the April 1 sales tax increase.
After the first quarter, both the economy and sales of imported product
weakened.
Sales of turbines increased for the region in 1997, with especially strong
sales in Australia and developing Asia. Sales of reciprocating engines remained
near 1996 levels.
Latin America
Sales rose 38% due to a rebound in economic activity throughout most of the
region. Sales of both machines and engines were higher with sizable gains in
Brazil, Mexico, Peru, Chile, and Argentina, all of which registered good
economic growth. End-user demand for machines was higher in all key
construction sectors as well as metal and nonmetal mining. Lower demand was
registered only in coal mining and agricultural applications.
Canada
Sales rose 46%, reflecting excellent economic growth and an increase in industry
demand for both machines and engines. Sales of machines to end users rose in
all applications except metal mining. Company engines sales were higher with
gains in all key applications.
Africa/Middle East
Sales rose 3% for the region as a whole, despite slightly lower machine sales to
end users. Large gains were registered in the Middle East, with most of the
improvement coming from higher sales in Turkey and Saudi Arabia. Sales were
lower in Africa, including the country of South Africa. Sales of reciprocating
engines were higher, while sales of turbines declined.
Dealer Inventories of Machines
United States dealers' new machine inventories increased in 1997 in response to
a good economy and strong industry demand. At year-end 1997, inventories were
slightly above normal relative to current selling rates. Outside the United
States, dealers' new machine inventories also increased and ended the year
slightly above normal relative to current selling rates.
FOURTH-QUARTER 1997
COMPARED WITH FOURTH-QUARTER 1996
Fourth-quarter sales and revenues increased 16% while profit rose 18%. Profit
per share was up 22%, reflecting the impact of the higher profit and the
ongoing share repurchase program. Profit of $451 million or $1.22 per share was
$70 million or 22 cents per share higher than fourth-quarter 1996 profit of
$381 million or $1.00 per share. Physical sales volume increased 17% and was the
most significant factor contributing to the increased profit.
Machinery and Engines
Profit before tax of $600 million increased 24% or $115 million from last year's
fourth quarter. Sales of Machinery and Engines of $4.98 billion rose 16%. The
higher sales resulted from the 17% increase in physical sales volume, partially
offset by 1% lower price realization.
The increase in physical sales volume was primarily the result of higher machine
and engine sales inside and outside the United States. Price realization was
about 1% lower, as price increases taken over the past year were more than
offset by the effect of the stronger dollar on sales denominated in currencies
other than the U.S. and higher sales discounts.
A-22
<PAGE>
Caterpillar Inc.
- --------------------------------------------------------------------------------
Margin of $1.31 billion increased $208 million from the fourth quarter a year
ago. Margin as a percent of sales was 26.4%, up from 25.8% a year ago. The
favorable impact of higher physical sales volume and price increases taken over
the past year was partially offset by increased fixed manufacturing costs and
higher sales discounts. The increased manufacturing costs were primarily in
support of major growth initiatives and product line expansions. The net effect
of the stronger dollar on the margin rate was minimal.
Selling, general, and administrative expenses were $544 million, compared with
$497 million during the fourth-quarter 1996. The $47 million increase primarily
reflects increased spending levels in support of major growth initiatives and
product line expansions, and the effect of inflation on costs. Partially
offsetting these items were lower incentive pay expense compared with the fourth
quarter a year ago and the favorable effect of the stronger dollar on costs.
Research and development expenses of $144 million increased $33 million from
fourth-quarter 1996. The increase reflects expected higher spending in support
of new and improved products.
Operating profit was $624 million, up $128 million from the fourth quarter a
year ago. Operating profit, as a percent of sales, was 12.5% compared with
11.6% a year ago.
Interest expense was $8 million higher than fourth quarter a year ago mostly
due to higher average debt levels.
Other income/expense was income of $32 million compared with income of $37
million last year. The change primarily reflects an unfavorable change in
foreign exchange gains and losses.
Financial Products
Financial Products' fourth-quarter revenues were a record $222 million, up $26
million compared with fourth-quarter 1996, primarily due to Cat Financial's
portfolio growth.
Before-tax profit was $56 million, an improvement of $21 million from last
year's fourth quarter. The increase resulted primarily from Cat Financial's
continued portfolio growth and favorable reserve adjustments at Cat Insurance.
Income Taxes
The provision for income taxes was $217 million, compared with $151 million for
the fourth quarter last year. The increase was primarily due to the higher
before-tax profit. Fourth-quarter 1996 tax expense reflected an effective tax
rate of 29% which included a favorable adjustment of $13 million to recognize
the impact of a tax rate change from that used for the first three quarters of
the year. Fourth-quarter 1997 tax expense reflects an effective tax rate of 33%.
Unconsolidated Affiliated Companies
Our share of unconsolidated affiliated companies' results was $12 million, the
same as a year ago.
FOURTH-QUARTER 1997
COMPARED WITH THIRD-QUARTER 1997
Fourth-quarter profit of $451 million or $1.22 per share was $66 million higher
than third-quarter profit of $385 million or $1.03 per share. A 14% increase in
physical sales volume was the most significant factor contributing to the higher
profit.
Machinery and Engines
Profit before tax for Machinery and Engines was $600 million, a $108 million
increase from the previous quarter. Sales of $4.98 billion increased $592
million primarily because of the 14% higher physical sales volume. Price
realization was about 1% lower.
The increase in physical sales volume was primarily the result of higher machine
and engine sales outside the United States. Machine and engine sales inside the
United States were also higher. Price realization was lower due to higher sales
discounts.
Margin was $205 million higher than the third quarter, primarily the result of
higher physical sales volume. As a percent of sales, the margin rate was 26.4%
compared with 25.2% last quarter. The higher margin rate was primarily due to
the higher physical sales volume and a favorable product sales mix, partially
offset by the higher sales discounts.
The net effect of the dollar on the margin rate was minimal.
Selling, general, and administrative expenses were $544 million, up $63 million
from the third quarter. The increase was somewhat typical, as the fourth
quarter is generally a higher cost quarter for these types of expenses. However,
the increase is also reflective of increased spending levels in support of major
growth initiatives and product line expansions.
Research and development expenses of $144 million were up $12 million from the
third quarter. The increase reflects continued higher spending in support of new
and improved products.
Operating profit of $624 million increased $130 million. As a percent of sales,
operating profit was 12.5% compared with 11.3% in the third quarter.
Interest expense of $56 million was about the same as the third quarter.
Other income/expense was income of $32 million compared with $51 million last
quarter. The change reflects the absence of several small favorable items
recorded during the third quarter.
Financial Products
Financial Products' revenues of $222 million were up $1 million from the third
quarter. Before-tax profit was $56 million, an increase of $6 million. The
increase in profit resulted primarily from increased investment income at Cat
Insurance.
Income Taxes
Income tax expense of $217 million increased $51 million from the previous
quarter. The increase reflects the higher profit before tax and the absence of
a favorable adjustment of $12 million in the third quarter to recognize the
impact of the tax rate change for the first half of the year from 34% to 33%.
Unconsolidated Affiliated Companies
Our share of unconsolidated affiliated companies' results was $12 million, an
increase of $3 million from the previous quarter.
A-23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
- --------------------------------------------------------------------------------
1996 COMPARED WITH 1995
Profit for 1996 was $1.36 billion or $3.54 per share of common stock, an
improvement of $225 million over profit of $1.14 billion or $2.86 per share for
1995. Sales and revenues of $16.52 billion were $450 million higher than last
year.
Machinery and Engines
Sales were $15.81 billion, an increase of $363 million from 1995. Profit before
tax was $1.79 billion, an improvement of $296 million. The primary reasons for
the increase in profit were a 2% improvement in price realization and the effect
of the stronger dollar as costs incurred in Japanese yen and European currencies
translated into fewer U.S. dollars.
Price realization improved primarily because of price increases taken over the
past year and the absence of certain European currency hedges in place a year
ago. (The adverse impact of currency hedges (forward contracts) that matured
during 1995 was about $135 million. All such forward contracts had matured as
of the end of 1995.) A favorable change in geographic sales mix also contributed
to the improved price realization. These favorable factors were partially offset
by higher sales discounts and the negative effect of the stronger dollar on
sales in European and Asian currencies.
Physical sales volume was about the same as in 1995.
Margin (sales less cost of goods sold) increased $531 million or 15%. Margin
as a percent of sales was 25.2%, up from 22.3%, primarily because of the better
price realization and the effect of the stronger dollar as costs incurred in
Japanese yen and European currencies translated into fewer U.S. dollars. In
addition, margins have improved as a result of lower material costs (a result of
our joint efforts with suppliers) and continued improvements in manufacturing
efficiencies.
These favorable items were partially offset by higher incentive pay expense.
Selling, general, and administrative expenses were $1.72 billion, compared
with $1.48 billion in 1995. The $232 million increase reflects higher spending
levels in support of expanded operations and major initiatives to enhance long-
term growth, the effect of inflation on costs and higher incentive pay expense.
Research and development expenses were up $35 million from 1995. The increase
primarily reflects continuing high levels of activity for new product
introductions and higher incentive pay expense.
Operating profit of $1.86 billion was $264 million higher than 1995. Operating
profit as a percent of sales was 11.7% compared with 10.3% a year ago.
Interest expense of $194 million was about the same as a year ago.
Other income/expense was income of $127 million compared with income of $92
million last year. The increase of $35 million is primarily due to a favorable
change in foreign exchange gains and losses, higher interest income, and several
small favorable items recorded in 1996. Partially offsetting these favorable
items was the absence of a $10 million reimbursement recorded in 1995 under the
company's insurance coverage for the settlement of two class action complaints.
Financial Products
Before-tax profit for Financial Products was a record $151 million, up $30
million from 1995. The increase resulted primarily from a larger portfolio of
earning assets at Cat Financial and gains recognized on the sale of securities
at Cat Insurance. Partially offsetting these favorable items was the absence of
an $11 million pre-tax gain recorded in 1995 for interest rate caps written by
Cat Financial. (The caps were terminated during second-quarter 1995.)
Revenues of $732 million were a record and were up $88 million, primarily the
result of Cat Financial's larger portfolio. Selling, general, and
administrative expenses were up $39 million, primarily due to Cat Financial's
higher depreciation on leased equipment and other increases due to a larger
portfolio. Interest expense was up $23 million due to increased borrowings to
support the larger portfolio, partially offset by lower borrowing rates. Other
income/expense was income of $37 million, an increase of $4 million from a year
ago.
Income Taxes
Income tax expense was $613 million, $112 million higher than a year ago. The
increase primarily reflects higher before-tax profit. The effective tax rate
was 31.6% compared with 31.0% for 1995.
Unconsolidated Affiliated Companies
Our share of unconsolidated affiliated companies' results was $33 million, up
$11 million from a year ago. Profits from new unconsolidated affiliates F.G.
Wilson, L.L.C. and Caterpillar Elphinstone Pty. Ltd. along with higher profits
at Shin Caterpillar Mitsubishi Ltd. were the primary reasons for the increase
from 1995.
LIQUIDITY & CAPITAL RESOURCES
- -----------------------------
Consolidated operating cash flow totaled $2.10 billion for 1997, compared with
$1.78 billion for 1996.
Total debt at year-end 1997 was $8.57 billion, an increase of $1.11 billion
from year-end 1996. Over this period, debt related to Machinery and Engines
increased $298 million, to $2.47 billion, while debt related to Financial
Products increased $811 million to $6.09 billion.
During 1995, we announced a plan to repurchase up to 10% of our outstanding
common stock over three to five years. From inception in June 1995 to the end of
1997, 36 million shares have been repurchased under the plan. The number of
shares outstanding at December 31, 1997, was 368 million. When the 10% share
repurchase program is complete, we will have approximately 360 million shares
outstanding. We anticipate this program will be completed in 1998.
Machinery and Engines
Operating cash flow totaled $1.80 billion for 1997, compared with $1.46 billion
for 1996. The increase in operating cash flow primarily results from the
increase in profits over the same period a year ago.
Capital expenditures, excluding equipment leased to others, totaled $819
million for 1997, compared with $500 million a year ago.
A-24
<PAGE>
Caterpillar Inc.
- --------------------------------------------------------------------------------
During 1997, debt related to Machinery and Engines increased from the issuance
of $300 million of 100-year debentures and a new $162 million capital lease
obligation, collateralized by leased manufacturing equipment and a security
deposit. We also retired $115 million of medium-term notes during 1997. The
percent of debt to debt plus stockholders' equity was 35% at both December 31,
1997 and 1996.
Financial Products
Operating cash flow totaled $323 million for 1997, compared with $331 million
for 1996. Cash used to purchase equipment leased to others totaled $277 million
for 1997. In addition, 1997 net cash used for finance receivables was $1.21
billion, compared with $970 million for 1996.
Financial Products' debt was $6.09 billion at December 31, 1997, an increase
of $811 million from December 31, 1996, and was primarily comprised of $3.32
billion of medium-term notes, $145 million of notes payable to banks and $2.54
billion of commercial paper. At the end of 1997, finance receivables past due
over 30 days were 1.7%, compared with 2.1% at the end of 1996. The ratio of debt
to equity of Cat Financial was 7.8:1 at both December 31, 1997 and 1996.
Financial Products had outstanding credit lines totaling $3.84 billion at
December 31, 1997, which included $2.25 billion of shared revolving credit
agreements with Machinery and Engines. These credit lines are with a number of
banks and are considered support for the company's outstanding commercial paper,
commercial paper guarantees, the discounting of bank and trade bills, and bank
borrowings.
Reclassification
During 1997, management reclassified $779 million of short-term borrowings to
long-term debt due after one year. This reclassification reflects a change in
management's intent to finance for periods greater than a year certain portions
of debt under revolving credit agreements. For purposes of improving
comparability, $555 million was reclassified at December 31, 1996, from short-
term borrowings to long-term debt due after one year. This change impacted the
Consolidated and Financial Products' portions of the financial position, but
had no impact on the Machinery and Engines' portion. Furthermore, this change
had no impact on the results of operations. All yearly comparisons for 1997 and
1996 are with the reclassified amounts.
Dividends paid per share of common stock
Quarter 1997 1996 1995
- -----------------------------------------------------
First.................... $ .20 $ .18 $ .13
Second................... .20 .17 .12
Third.................... .25 .20 .18
Fourth................... .25 .20 .17
----- ----- -----
$ .90 $ .75 $ .60
===== ===== =====
- -----------------------------------------------------
EMPLOYMENT
- ----------
At year end, our worldwide employment was 59,863 compared with 57,026 one year
ago. Hourly employment increased 1,208 to 34,248; salaried and management
employment increased 1,629 to 25,615.
Year-End Employment 1997 1996
- ---------------------------------------------------------
Inside United States... 39,722 38,571
Outside United States
Europe............... 12,627 11,953
Latin America........ 5,340 4,540
Asia/Pacific......... 1,843 1,746
Canada............... 219 127
Other................ 112 89
------ ------
Total Outside.......... 20,141 18,455
------ ------
Total Employment....... 59,863 57,026
====== ======
- ---------------------------------------------------------
OTHER MATTERS
- -------------
ENVIRONMENTAL MATTERS
The company is regulated by federal, state, and international environmental laws
governing our use of substances and control of emissions. Compliance with these
existing laws has not had a material impact on our capital expenditures,
earnings, or competitive position.
We are cleaning up hazardous waste at a number of locations, often with other
companies, pursuant to federal and state laws. When it is likely we will pay
clean-up costs at a site and those costs can be estimated, the costs are charged
against our earnings. In doing that estimate, we do not consider amounts
expected to be recovered from insurance companies and others.
The amount set aside for environmental clean-up is not material and is
included in "Accounts payable and accrued expenses" in Statement 3. If a range
of liability estimates is available on a particular site, we accrue the lower
end of that range.
We cannot estimate costs on sites in the very early stages of clean-up.
Currently, we have five of these sites and there is no more than a remote
chance that a material amount for clean-up will be required.
The United States Environmental Protection Agency (EPA) has issued conditional
certificates of conformity with the Clean Air Act for Caterpillar's 1998 model
year heavy-duty diesel engines. The EPA has issued similar conditional
certificates to other heavy-duty diesel engine manufacturers as well. The EPA
is reviewing the impact of advanced electronic control technologies on the
emissions compliance of heavy-duty trucks in certain operating conditions and
whether the use of such technologies is consistent with the Clean Air Act's
requirements. Caterpillar and the other manufacturers are responding to the EPA
requests for information and are engaged in discussions with them and the
United States Department of Justice in an effort to resolve this issue. We do
not expect the outcome of this matter to have a material impact on our
financial position or results of operations.
DERIVATIVE FINANCIAL INSTRUMENTS
I. Market Risk and Risk Management Policies
Our earnings and cash flow are subject to fluctuations due to changes in foreign
currency exchange rates, interest rates, and commodity prices. Our risk
management policy includes the use of derivative financial instruments to manage
foreign currency exchange rate, interest rate, and commodity price exposures.
A-25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
- --------------------------------------------------------------------------------
Foreign Currency Exchange Rate
Foreign currency exchange rate movements create a degree of risk to our
operations by affecting:
. The U.S. dollar value of sales made in foreign currencies, and
. The U.S. dollar value of costs incurred in foreign currencies.
Foreign currency exchange rate movements also affect our competitive position,
as exchange rate changes may affect business practices and/or pricing strategies
of non-U.S. based competitors.
Our general policy is to use foreign currency derivative instruments as needed
to operate our business and protect our interests. We enter into foreign
currency derivative instruments only to manage risk -- not as speculative
instruments. We buy and sell currencies only to cover business needs and to
protect our financial and competitive position. Our general approach is to
manage future foreign currency cash flow for Machinery and Engines' operations
and net foreign currency balance sheet exposures for Financial Products'
operations.
Our Machinery and Engines' operations manufacture products in, and purchase
raw materials from, many locations around the world. Consequently, our cost
base is well diversified over a number of European, Asia/Pacific, and Latin
American currencies, as well as the U.S. dollar. This diversified cost base
serves to counterbalance the cash flow and earnings impact of non-U.S. dollar
revenues and, therefore, minimizes the effect of exchange rate movements on
consolidated earnings. We use derivative financial instruments to manage the
currency exchange risk that results when the cash inflows and outflows by
currency are not completely matched.
In managing foreign currency for Machinery and Engines' operations, our
objective is to maximize consolidated after-tax U.S. dollar cash flow. To this
end, our policy allows for actively managing:
. Cash flow related to firmly committed foreign currency transactions;
. Anticipated foreign currency cash flow for the future rolling twelve-
month period; and
. Any hedges (derivative instruments) that are outstanding.
We limit the types of derivative instruments we use to forward exchange
contracts and foreign currency option contracts (net purchased option
contracts). When using forward exchange contracts, we are protected from
unfavorable exchange rate movements, but have given up any potential benefit
from favorable changes in exchange rates. Purchased option contracts, on the
other hand, protect us from unfavorable rate movements while permitting us to
benefit from the effect of favorable exchange rate fluctuations. We do not use
historic rate rollovers or leveraged options, nor do we sell or write foreign
currency options, except in the case of combination option contracts that limit
the unfavorable effect of exchange rate movements, while allowing a limited
potential benefit from favorable exchange rate movements. The forward exchange
or foreign currency option contracts that we use are not exchange traded.
Each month, our financial officers approve the company's outlook for expected
currency exchange rate movements, as well as the policy on desired future
foreign currency cash flow positions (long, short, balanced) for those
currencies in which we have significant activity. Financial officers receive a
daily report on currency exchange rates, cash flow exposure, and open foreign
currency hedges. Expected future cash flow positions and strategies are
continuously monitored. Foreign exchange management practices, including the use
of derivative financial instruments, are presented to the Audit Committee of our
Board of Directors at least annually.
In managing foreign currency risk for our Financial Products' operations, our
objective is to minimize earnings volatility resulting from the translation of
net foreign currency balance sheet positions. We use forward exchange contracts
to offset the risk when the currency of our receivable portfolio does not match
the currency of our debt portfolio.
Interest Rate
We use various interest rate derivative instruments, including interest rate
swap agreements, interest rate cap (option) agreements, and forward rate
agreements to manage exposure to interest rate changes and lower the cost of
borrowed funds. All interest rate derivative instruments are linked to debt
instruments upon entry. We enter into such agreements only with those financial
institutions with strong bond ratings which, in the opinion of management,
virtually negates exposure to credit loss.
Our Financial Products' operations have a "match funding" objective whereby
the interest rate profile (fixed rate or floating rate) of their debt portfolio
must match the interest rate profile of their receivable, or asset portfolio
within specified boundaries. In connection with that objective, we use interest
rate derivative instruments to modify the debt structure to match the receivable
portfolio. This "match funding" reduces the risk of deteriorating margins
between interest-bearing assets and interest-bearing liabilities, regardless of
which direction interest rates move. We also use these instruments to gain an
economic and/or competitive advantage through lower cost of borrowed funds. This
is accomplished by changing the characteristics of existing debt instruments or
entering into new agreements in combination with the issuance of new debt.
Commodity Prices
Our Machinery and Engines' operations are subject to commodity price risk, as
the price we must pay for raw materials changes with movements in underlying
commodity prices. We use commodity swap and option agreements to reduce this
risk. However, our use of these types of derivative financial instruments is
not material.
II. Sensitivity
Exchange Rate Sensitivity
Based on the anticipated and firmly committed cash inflows and outflows for our
Machinery and Engines' operations for the next 12 months and the foreign
currency derivative instruments in place at year end, a hypothetical 10%
weakening of the U.S. dollar relative to all other currencies would adversely
affect our expected 1998 cash flows for our Machinery and Engines' operations
by $92 million.
A-26
<PAGE>
Caterpillar Inc.
- --------------------------------------------------------------------------------
Since our policy for Financial Products' operations is to hedge the foreign
exchange risk when the currency of our debt portfolio does not match the
currency of our receivable portfolio, a 10% change in the value of the U.S.
dollar relative to all other currencies would not have a material effect on our
consolidated financial position, results of operations, or cash flow.
The effect of the hypothetical change in exchange rates ignores the affect
this movement may have on other variables including competitive risk. If it
were possible to quantify this competitive impact, the results could well be
different than the sensitivity effects shown above. In addition, it is unlikely
that all currencies would uniformly strengthen or weaken relative to the U.S.
dollar. In reality, some currencies may weaken while others may strengthen.
Interest Rate Sensitivity
For our Machinery and Engines' operations, we currently use interest rate swaps
to lower the cost of borrowed funds by attaching fixed-to-floating interest
rate swaps to fixed rate debt. A hypothetical 100 basis point adverse move
(increase) in interest rates along the entire interest rate yield curve would
adversely affect 1998 pretax earnings of Machinery and Engines by $9 million.
For our Financial Products' operations, we use interest rate derivative
instruments primarily to meet our "match funding" objectives and strategies. A
hypothetical 100 basis point adverse move (increase) in interest rates along the
entire interest rate yield curve would adversely affect the 1998 pretax
earnings of Financial Products by $10 million.
The effect of the hypothetical change in interest rates ignores the affect
this movement may have on other variables including changes in actual sales
volumes that could be indirectly attributed to changes in interest rates. The
actions that management would take in response to such a change are also
ignored. If it were possible to quantify this impact, the results could well be
different than the sensitivity effects shown above.
1998 ECONOMIC AND INDUSTRY OUTLOOK
- ----------------------------------
World economic growth in 1998 is forecast to be somewhat below the 1997 pace.
Faster growth in Europe and the CIS will likely be more than offset by
moderating growth in the United States and Latin America, and the significant
slowdown in the Asia/Pacific region.
Worldwide industry demand for machines is expected to decline slightly from
1997 levels as slightly higher demand in the United States, Canada, Europe, and
CIS is more than offset by sharp declines in the Asia/Pacific region. Worldwide
industry demand for reciprocating engines is expected to remain near 1997
levels, while demand for turbines should continue to grow.
In the United States, Gross Domestic Product (GDP) growth is expected to slow
from 3.7% in 1997 to 2.5% in 1998. Non-residential construction spending should
continue to grow and housing starts should remain near 1997 levels because of
low interest rates. Coal and aggregate production also should continue to
increase, but metal mine production is likely to be flat or down slightly due to
falling metals' prices. Overall, industry demand for machines is expected to be
slightly higher due to strength in the construction sector. Industry demand for
both commercial engines and turbines should continue to rise enough to offset
anticipated lower on-highway truck demand.
In Canada, economic growth is forecast to remain strong leading to an increase
in both machine and engine industry demand.
In Western Europe, economic activity should continue to improve with GDP
accelerating from 2.5% in 1997 to about 3% in 1998. The major economies ended
last year with considerable momentum. Industry demand is expected to increase
slightly for machines and engines.
In Central Europe, good economic growth should continue, resulting in improved
industry demand for both machines and engines.
In the Asia/Pacific region, sharp slowdowns have occurred in many countries.
In response to declines in their currencies, many governments have raised
interest rates, cut spending, and begun restructuring their economies. These
restructurings will ultimately strengthen their economies, but the short-term
effect is likely to be slower growth in Malaysia and the Philippines and
recessions in Thailand, South Korea, and Indonesia. Slower growth also is
forecast for China. GDP for developing Asia is now forecast to grow 3%, and
industry demand for machines is likely to fall significantly. Demand for
engines, though, is forecast to remain near 1997 levels.
Japan slipped back into recession in 1997. Despite the temporary income tax
reduction announced in December, recessionary conditions are likely to persist
in 1998, and industry demand is forecast to decline further. The Australian
economy also will be affected by a drop in exports to Asia as well as lower
metals' prices. Consequently, industry machine demand is forecast to decline
despite lower interest rates, moderate economic growth, and higher housing
starts. Industry demand for turbines also is forecast to decline, however,
demand for reciprocating engines should be higher.
In Latin America, industry demand for machines and engines should continue to
improve despite a slowdown in GDP growth from 5% in 1997 to 3% in 1998.
In Africa/Middle East, industry demand for engines is forecast to rise, but
lower commodity prices will likely keep industry demand for machines near 1997
levels.
In CIS, economic recovery should lead to higher industry sales.
1998 COMPANY OUTLOOK
- --------------------
Worldwide sales and revenues are expected to slightly surpass 1997's record
levels. The acquisition of Perkins Engines is expected to be finalized during
first-quarter 1998. Perkins Engines sales are not reflected in the above sales
outlook.
Investments in major initiatives to enhance long-term growth and shareholder
returns will continue in 1998. These initiatives include electric power
generation, agricultural products, compact machines, and further strengthening
of our product support network to better link customer, dealer, and company
operations. For Machinery and Engines, total capital expenditures, which were
$819 million in 1997, are expected to be about the same in 1998. R&D and SG&A
expenditures will increase in 1998 in support of expanded operations and the
major growth initiatives;
A-27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
- --------------------------------------------------------------------------------
however, the rate of increase is expected to be less than in recent years.
Despite these expenditures for major growth initiatives, profit for 1998 is
expected to be near 1997's record. Profit per share will be favorably impacted
by the share buy-back program announced in June 1995, which we anticipate will
be completed during 1998. Cash flow from operations and our financial position
are expected to remain strong.
Events in Asia are dynamic and ultimate resolution will depend on many yet to
be determined actions taken by Asian governments and world monetary authorities.
A significant change in the Asian economic climate, or an extension of these
events into other areas of the world, could impact Caterpillar. Plans are in
place to respond to such changes if they develop. The situation is being
reviewed carefully on an ongoing basis.
The information included in the Outlook section is forward looking and
involves risks and uncertainties that could significantly impact expected
results. A discussion of these risks and uncertainties is contained in Form 8-K
filed with the Securities and Exchange Commission on January 21, 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS [ ]
A-28
<PAGE>
SUPPLEMENTAL STOCKHOLDER INFORMATION
Annual Meeting
On Wednesday, April 8, 1998, at 10:30 a.m., MST, the annual meeting of
stockholders will be held at the Loews Ventana Canyon Hotel, Tucson, Arizona.
Requests for proxies are being sent to stockholders with this report mailed on
or about February 27, 1998.
Stock Transfer Agent
First Chicago Trust Company of New York
P.O. Box 2500
Jersey City, NJ 07303-2500
Telephone: (201) 324-0498
Hearing impaired: (201) 222-4955
Internet: http://www.fctc.com
E-mail: [email protected]
Stock Exchange Listings
Caterpillar common stock is listed on the New York, Pacific, and Chicago stock
exchanges in the United States and on stock exchanges in Belgium, France,
Germany, Great Britain, and Switzerland.
Number of Stockholders
Stockholders of record at year end totaled 32,409, compared with 30,573 at the
end of 1996. Approximately 65% of our shares are held by institutions and banks,
20% by individuals, and 15% by Caterpillar benefit plans and as treasury shares.
Employees' investment and profit-sharing plans acquired 11,507,195 shares of
Caterpillar stock in 1997, including 9,532,894 shares received through the
stock split in the form of a 100% stock dividend. Investment plans, for which
membership is voluntary, held 26,365,175 shares for employee accounts at 1997
year end. Profit-sharing plans, in which membership is automatic for most U.S.
and Canadian employees in eligible categories, held 494,675 shares at 1997 year
end.
Common Stock Price Range
Quarterly price ranges of Caterpillar common stock on the New York Stock
Exchange, the principal market in which the stock is traded, were:
<TABLE>
<CAPTION>
1997 1996
------------------ -----------------
Quarter High Low High Low
- ------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First........... 41 7/8 36 1/4 36 15/16 27
Second.......... 54 11/16 38 3/16 35 15/16 31
Third........... 61 1/2 52 1/4 37 15/16 31 3/8
Fourth.......... 60 15/16 44 40 1/2 34 1/8
</TABLE>
Automatic Dividend Reinvestment Plan
An Automatic Dividend Reinvestment Plan - administered by First Chicago Trust
Company of New York - is available to stockholders. The plan provides a
convenient, low-cost method for stockholders to increase their ownership in
Caterpillar common stock. In addition, stockholders who elect to participate
can make optional cash payments to purchase more Caterpillar shares.
Participation may begin with any regularly scheduled dividend payment if an
authorization form is completed and returned to the administrator prior to the
dividend record date. Stockholders wishing further information may contact
First Chicago Trust Company of New York, P.O. Box 13531, Newark, New Jersey
07188-0001. On the Internet: http://www.fctc.com. E-mail:[email protected].
Hearing impaired: (201) 222-4955.
Publications for Stockholders
Single copies of the company's 1997 annual report on Securities and Exchange
Commission Form 10-K (without exhibits) will be provided without charge to
stockholders after March 31, 1998, upon written request to:
Secretary
Caterpillar Inc.
100 N.E. Adams Street
Peoria, IL 61629-7310
The company also makes available to stockholders copies of its Form 10-Q
reports. 10-Q reports are available in May, August, and November.
Investor Inquiries
For those seeking additional information about the corporation -
Institutional analysts, portfolio managers, and representatives of financial
institutions should contact:
James F. Masterson
Director of Investor Relations
Caterpillar Inc.
100 N.E. Adams Street
Peoria, IL 61629-5310
Telephone: (309) 675-4549
Facsimile: (309) 675-4457
E-mail: [email protected]
Individual stockholders should contact:
Laurie J. Huxtable
Assistant Secretary
Caterpillar Inc.
100 N.E. Adams Street
Peoria, IL 61629-7310
Telephone: (309) 675-4619
Internet Access
http://www.CAT.com
A-29
<PAGE>
DIRECTORS AND OFFICERS
DIRECTORS
Lilyan H. Affinito/2,4/ Former Vice Chairman, Maxxam Group Inc.
W. Frank Blount/1,3/ Chief Executive Officer, Telstra Corporation Limited
John T. Dillon/2,4/ Chairman and Chief Executive Officer, International
Paper
Donald V. Fites/3,4/ Chairman and Chief Executive Officer, Caterpillar Inc.
Juan Gallardo T./5/ Chairman and Chief Executive Officer, Grupo
Embotelladoras Unidas S.A. de C.V.
David R. Goode/1,2/ Chairman and Chief Executive Officer, Norfolk Southern
Corporation
James P. Gorter/1,2/ Chairman, Baker, Fentress & Company
Peter A. Magowan/2,4/ Chairman, Safeway Inc.; President and Managing General
Partner, San Francisco Giants
Gordon R. Parker/1,3/ Former Chairman, Newmont Mining Corporation and
Newmont Gold Company
George A. Schaefer/1,3/ Former Chairman and Chief Executive Officer,
Caterpillar Inc.
Joshua I. Smith/3,4/ Chairman and Chief Executive Officer, The MAXIMA
Corporation
Clayton K. Yeutter/2,4/ Of Counsel to Hogan & Hartson, Washington, D.C.
/1/Member of Audit Committee (David R. Goode, chairman)
/2/Member of Compensation Committee (James P. Gorter, chairman)
/3/Member of Nominating Committee (Joshua I. Smith, chairman)
/4/Member of Public Policy Committee (Clayton K. Yeutter, chairman)
/5/Effective February 12, 1998
OFFICERS
Donald V. Fites Chairman
Glen A. Barton Group President
Gerald S. Flaherty Group President
James W. Owens Group President
Richard L. Thompson Group President
R. Rennie Atterbury III Vice President, General Counsel and Secretary
James W. Baldwin Vice President
Sidney C. Banwart/6/ Vice President
Vito H. Baumgartner Vice President
James S. Beard Vice President
Richard A. Benson Vice President
Ronald P. Bonati Vice President
James E. Despain Vice President
Roger E. Fischbach Vice President
Michael A. Flexsenhar Vice President
Donald M. Ings Vice President
Duane H. Livingston Vice President
Robert R. Macier/6/ Vice President
David A. McKie/6/ Vice President
Daniel M. Murphy Vice President
Douglas R. Oberhelman Vice President
Gerald Palmer Vice President
Robert C. Petterson Vice President
John E. Pfeffer Vice President
Siegfried R. Ramseyer Vice President
Alan J. Rassi Vice President
Gerald L. Shaheen Vice President
Gary A. Stroup Vice President
Sherril K. West Vice President
Donald G. Western Vice President
Wayne M. Zimmerman/7/ Vice President
Robert R. Gallagher Controller
F. Lynn McPheeters Treasurer
Robin D. Beran Assistant Treasurer
Mary J. Callahan Assistant Secretary
Laurie J. Huxtable Assistant Secretary
__________
Note: All director/officer information is as of December 31, 1997, except as
noted.
/6/Effective January 1, 1998
/7/Retiring April 1, 1998
A-30
<PAGE>
[LOGO OF CATERPILLAR]
YELA0611
<PAGE>
- --------------------------------------------------------------------------------
[X] Please mark your votes as in this example. 1433
Unless otherwise specified, proxies will be voted FOR the election of the
nominees for directors listed, FOR proposals 2 and 3 and AGAINST proposals 4 and
5.
- --------------------------------------------------------------------------------
The Board of Directors recommends a vote FOR election of directors and proposals
2 and 3.
- --------------------------------------------------------------------------------
1. Election of Directors (See Reverse)
FOR WITHHELD
[_] [_]
For, except vote withheld from the following nominee(s):
___________________________________________________________
2. Amendment to Articles of Incorporation
FOR AGAINST ABSTAIN
[_] [_] [_]
3. Appointment of Independent Auditors
FOR AGAINST ABSTAIN
[_] [_] [_]
- --------------------------------------------------------------------------------
The Board of Directors recommends a vote AGAINST stockholder proposals 4 and 5.
- --------------------------------------------------------------------------------
4. Stockholder proposal
FOR AGAINST ABSTAIN
[_] [_] [_]
5. Stockholder proposal
FOR AGAINST ABSTAIN
[_] [_] [_]
NOTE: Please sign exactly as name appears hereon. Joint owners should each sign.
When signing as attorney, executor, administrator, trustee or guardian, please
give full title as such.
___________________________________________________________________
___________________________________________________________________
SIGNATURE(S) DATE
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
PROXY AND VOTING INSTRUCTION
[LOGO OF CATERPILLAR]
ANNUAL MEETING OF STOCKHOLDERS - APRIL 8, 1998
This Proxy is solicited on behalf of the Board of Directors
At the Annual Meeting of Stockholders of the Company on April 8, 1998, or at
any adjournments thereof, the undersigned hereby appoints (i) L.H. AFFINITO and
J.I. SMITH, and each of them, proxies with power of substitution to vote the
common stock of the undersigned and (ii) THE NORTHERN TRUST COMPANY, as Trustee,
to appoint L.H. AFFINITO and J.I. SMITH, and each or either of them, with power
of substitution, proxies to vote all shares of the Company's stock credited to
the accounts of the undersigned under the Employees' Investment Plan Trust
and/or the Caterpillar Inc. Investment Trust at the close of business on
February 9, 1998, as directed hereon on the following matters, and, in their
discretion, on any other matters that may come before the meeting.
Election of Directors. Nominees: J.T. Dillon, J. Gallardo T., G.R. Parker, G.A.
Schaefer
You are encouraged to specify your choices by marking the appropriate boxes, SEE
REVERSE SIDE, but you need not mark any boxes if you wish to vote in accordance
with the Board of Directors' recommendations. THIS CARD ALSO CONSTITUTES VOTING
INSTRUCTIONS FOR ANY SHARES HELD BY THE UNDERSIGNED IN ANY COMPANY EMPLOYEE
INVESTMENT PLANS.
Please mark, sign, date and return this Proxy and Voting Instruction card
- -------------------------------------------------------------------------
promptly using the enclosed envelope.
- -------------------------------------
-------------
SEE REVERSE
SIDE
-------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
[X] Please mark your votes as in this example. 1433
Unless otherwise specified, proxies will be voted FOR the election of the
nominees for directors listed, FOR proposals 2 and 3 and AGAINST proposals 4 and
5.
- --------------------------------------------------------------------------------
The Board of Directors recommends a vote FOR election of directors and proposals
2 and 3.
- --------------------------------------------------------------------------------
1. Election of Directors (See Reverse)
FOR WITHHELD
[_] [_]
For, except vote withheld from the following nominee(s):
___________________________________________________________
2. Amendment to Articles of Incorporation
FOR AGAINST ABSTAIN
[_] [_] [_]
3. Appointment of Independent Auditors
FOR AGAINST ABSTAIN
[_] [_] [_]
- --------------------------------------------------------------------------------
The Board of Directors recommends a vote AGAINST stockholder proposals 4 and 5.
- --------------------------------------------------------------------------------
4. Stockholder proposal
FOR AGAINST ABSTAIN
[_] [_] [_]
5. Stockholder proposal
FOR AGAINST ABSTAIN
[_] [_] [_]
NOTE: Please sign exactly as name appears hereon. Joint owners should each sign.
When signing as attorney, executor, administrator, trustee or guardian, please
give full title as such.
___________________________________________________________________
___________________________________________________________________
SIGNATURE(S) DATE
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
PROXY
[LOGO OF CATERPILLAR]
ANNUAL MEETING OF STOCKHOLDERS - APRIL 8, 1998
This Proxy is solicited on behalf of the Board of Directors
At the Annual Meeting of Stockholders of the Company on April 8, 1998, or at
any adjournments thereof, the undersigned hereby appoints L.H. AFFINITO and J.I.
SMITH, and each of them, proxies with power of substitution to vote the stock of
the undersigned on the following matters, and, in their discretion, on any other
matters that may come before the meeting.
Election of Directors. Nominees: J.T. Dillon, J. Gallardo T., G.R. Parker, G.A.
Schaefer
You are encouraged to specify your choices by marking the appropriate boxes, SEE
REVERSE SIDE, but you need not mark any boxes if you wish to vote in accordance
with the Board of Directors' recommendations. Please mark, sign, date and return
this Proxy promptly using the enclosed envelope.
-------------
SEE REVERSE
SIDE
-------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
[X] Please mark your votes as in this example. 1433
Unless otherwise specified, proxies will be voted FOR the election of the
nominees for directors listed, FOR proposals 2 and 3 and AGAINST proposals 4 and
5.
- --------------------------------------------------------------------------------
The Board of Directors recommends a vote FOR election of directors and proposals
2 and 3.
- --------------------------------------------------------------------------------
1. Election of Directors (See Reverse)
FOR WITHHELD
[_] [_]
For, except vote withheld from the following nominee(s):
___________________________________________________________
2. Amendment to Articles of Incorporation
FOR AGAINST ABSTAIN
[_] [_] [_]
3. Appointment of Independent Auditors
FOR AGAINST ABSTAIN
[_] [_] [_]
- --------------------------------------------------------------------------------
The Board of Directors recommends a vote AGAINST stockholder proposals 4 and 5.
- --------------------------------------------------------------------------------
4. Stockholder proposal
FOR AGAINST ABSTAIN
[_] [_] [_]
5. Stockholder proposal
FOR AGAINST ABSTAIN
[_] [_] [_]
NOTE: Please sign exactly as name appears hereon. Joint owners should each sign.
When signing as attorney, executor, administrator, trustee or guardian, please
give full title as such.
___________________________________________________________________
___________________________________________________________________
SIGNATURE(S) DATE
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
VOTING INSTRUCTION
[LOGO OF CATERPILLAR]
ANNUAL MEETING - APRIL 8, 1998
This voting instruction is solicited on behalf of the Board of Directors
At the Annual Meeting of Stockholders of the Company on April 8, 1998, or at
any adjournments thereof, the undersigned hereby authorizes THE NORTHERN TRUST
COMPANY, as Trustee, to appoint L.H. AFFINITO and J.I. SMITH, and each or either
of them, with power of substitution, proxies to vote all shares of the Company's
stock credited to the accounts of the undersigned under the Employees'
Investment Plan Trust at the close of business on February 9, 1998, as directed
hereon on the following matters, and, in their discretion, on any other matters
that may come before the meeting.
Election of Directors. Nominees: J.T. Dillon, J. Gallardo T., G.R. Parker, G.A.
Schaefer
- --------------------------------------------------------------------------------
