FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _______________
Commission File No. 1-768
CATERPILLAR INC.
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
37-0602744
(I.R.S. Employer Identification No.)
100 NE Adams Street, Peoria, Illinois
(Address of principal executive offices)
61629
(Zip Code)
(309) 675-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No __.
At September 30, 1998, 358,688,189 shares of common stock of the
Registrant were outstanding.
This summary highlights selected information from this document and
may not contain all of the information that is important to you. For
a detailed analysis of the company's results for the third quarter,
you should read this entire document carefully.
SUMMARY OF RESULTS
- ------------------
On October 16, 1998 Caterpillar Inc. reported its best third quarter
ever for sales and revenues. Profit and profit per share were the
second highest for a third quarter. Sales and revenues of
$5.17 billion, rose 12% (including 5% from Perkins) from third-
quarter 1997. Profit of $336 million was down 13% from the
third-quarter record set in 1997 as the additional margin from
higher sales and revenues was more than offset by continued higher
spending for growth initiatives, including the first-quarter
acquisition of Perkins. Profit per share of $.92 assuming dilution
was down 9% and benefited from the share repurchase program which
was completed during the quarter. Additionally, the company announced
a new share repurchase program to reduce the number of outstanding
shares to 320 million.
Commenting on the announcements, Caterpillar Chairman and CEO
Donald V. Fites said, "Our organization continues to deliver solid
financial results, despite current global economic uncertainties,
severe economic conditions in Southeast Asia and Japan, and our
ongoing investments for long-term growth. Our strategy is to
maintain a balance which will allow us to continue delivering strong
financial performance, and at the same time remain focused on achieving
our aggressive growth targets. The new stock repurchase initiative
sends a strong signal regarding the company's future cash flows and
directors' confidence that Caterpillar stock is an excellent long-term
investment."
HIGHLIGHTS - THIRD-QUARTER 1998 COMPARED WITH THIRD-QUARTER 1997
- ----------------------------------------------------------------
* Sales and revenues of $5.17 billion, the highest ever for a
third quarter, rose 12% (5% from Perkins).
* Profit of $336 million, the second best ever for a third quarter,
was down 13%.
* Profit per share of $.92 assuming dilution, also the second best
ever for a third quarter, was down 9%.
* Physical sales volume rose 13%, with Perkins adding 6%.
* Sales, excluding Perkins, were up 19% inside the United States
and down 5% outside the United States.
* Revenues from Financial Products increased 34%.
SHARE REPURCHASES
- -----------------
The 10% share repurchase program initiated in 1995 was completed
during the quarter. The number of shares outstanding at
September 30, 1998, was 358.7 million. The Board of Directors
has authorized another share repurchase program to reduce the number
of outstanding shares to 320 million within the next three to
five years.
OUTLOOK
- --------
The company's outlook for 1998 worldwide sales and revenues remains
unchanged from that issued with our third-quarter 1997 results that
called for sales and revenues (excluding Perkins) to slightly
surpass 1997's record levels. The company's profit outlook for 1998
remains unchanged from the one issued in January 1998, which called
for profit to be near 1997's record. Our preliminary 1999 outlook
is for company sales and revenues to be near 1998 record levels.
(Complete outlook begins on page 21.)
Page 1
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CATERPILLAR INC.
Statement of Results of Operations
(Unaudited)
(Millions of dollars except per share data)
CONSOLIDATED
Three Months Ended Nine Months Ended
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
1998 1997 1998 1997
SALES AND REVENUES:
Sales of Machinery and Engines ....... $4,906 $ 4,385 $14,836 $13,133
Revenues of Financial Products ....... 267 215 735 599
------ ------ ------ ------
Total sales and revenues ............. 5,173 4,600 15,571 13,732
OPERATING COSTS:
Cost of goods sold ................... 3,748 3,278 11,060 9,709
Selling, general and
administrative expenses ............ 631 561 1,852 1,606
Research and development expenses .... 163 132 483 384
Interest expense of
Financial Products ................. 135 96 357 260
------ ------ ------ ------
Total operating costs ................ 4,677 4,067 13,752 11,959
------ ------ ------ ------
OPERATING PROFIT ....................... 496 533 1,819 1,773
Interest expense excluding
Financial Products ................. 68 53 198 163
Other income (expense) ............... 43 62 145 147
------ ------ ------ ------
CONSOLIDATED PROFIT BEFORE TAXES 471 542 1,766 1,757
Provision for income taxes ........... 138 166 565 579
------ ------ ------ ------
Profit of consolidated companies ..... 333 376 1,201 1,178
Equity in profit of unconsolidated
affiliated companies (Note 4) ...... 3 9 11 36
Equity in profit of Financial
Products subsidiaries .............. - - - -
------ ------ ------ ------
PROFIT ................................. $ 336 $ 385 $1,212 $1,214
====== ====== ====== ======
PROFIT PER SHARE OF COMMON STOCK
(NOTE 6) ............................ $ 0.93 $ 1.03 $ 3.32 $ 3.22
====== ====== ====== ======
PROFIT PER SHARE OF COMMON STOCK -
ASSUMING DILUTION(NOTE 6) ........... $ 0.92 $ 1.01 $ 3.28 $ 3.17
====== ====== ====== ======
Cash dividends paid per share of
common stock ........................ $ .30 $ .25 $ .80 $ .65
See accompanying notes to Consolidated Financial Statements.
Page 2
CATERPILLAR INC.
Statement of Results of Operations
(Unaudited)
(Millions of dollars except per share data)
SUPPLEMENTAL CONSOLIDATING DATA
MACHINERY AND ENGINES (1)
Three Months Ended Nine Months Ended
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
1998 1997 1998 1997
SALES AND REVENUES:
Sales of Machinery and Engines ....... $4,906 $ 4,385 $14,836 $13,133
Revenues of Financial Products ....... - - - -
------ ------ ------ ------
Total sales and revenues ............. 4,906 4,385 14,836 13,133
OPERATING COSTS:
Cost of goods sold ................... 3,748 3,278 11,060 9,709
Selling, general and
administrative expenses ............ 545 481 1,605 1,388
Research and development expenses .... 163 132 483 384
Interest expense of
Financial Products ................. - - - -
------ ------ ------ ------
Total operating costs ................ 4,456 3,891 13,148 11,481
------ ------ ------ ------
OPERATING PROFIT ....................... 450 494 1,688 1,652
Interest expense excluding
Financial Products ................. 68 53 198 163
Other income (expense) ............... 10 51 52 121
------ ------ ------ ------
CONSOLIDATED PROFIT BEFORE TAXES 392 492 1,542 1,610
Provision for income taxes ........... 108 147 482 524
------ ------ ------ ------
Profit of consolidated companies ..... 284 345 1,060 1,086
Equity in profit of unconsolidated
affiliated companies (Note 4) ...... 3 9 11 36
Equity in profit of Financial
Products subsidiaries .............. 49 31 141 92
------ ------ ------ ------
PROFIT ................................. $ 336 $ 385 $1,212 $1,214
====== ====== ====== ======
(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. Transactions between
Machinery and Engines and Financial Products have been eliminated to arrive
at the consolidated data.
See accompanying notes to Consolidated Financial Statements.
Page 3
CATERPILLAR INC.
Statement of Results of Operations
(Unaudited)
(Millions of dollars except per share data)
SUPPLEMENTAL CONSOLIDATING DATA
FINANCIAL PRODUCTS
Three Months Ended Nine Months Ended
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
1998 1997 1998 1997
SALES AND REVENUES:
Sales of Machinery and Engines ....... $ - $ - $ - $ -
Revenues of Financial Products ....... 296 221 812 617
------ ------ ------ ------
Total sales and revenues ............. 296 221 812 617
OPERATING COSTS:
Cost of goods sold ................... - - - -
Selling, general and
administrative expenses ............ 94 86 267 236
Research and development expenses .... - - - -
Interest expense of
Financial Products ................. 136 99 365 269
------ ------ ------ ------
Total operating costs ................ 230 185 632 505
------ ------ ------ ------
OPERATING PROFIT ....................... 66 36 180 112
Interest expense excluding
Financial Products ................. - - - -
Other income (expense) ............... 13 14 44 35
------ ------ ------ ------
CONSOLIDATED PROFIT BEFORE TAXES 79 50 224 147
Provision for income taxes ........... 30 19 83 55
------ ------ ------ ------
Profit of consolidated companies ..... 49 31 141 92
Equity in profit of unconsolidated
affiliated companies (Note 4) ...... - - - -
Equity in profit of Financial
Products subsidiaries .............. - - - -
------ ------ ------ ------
PROFIT ................................. $ 49 $ 31 $ 141 $ 92
====== ====== ====== ======
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. Transactions between
Machinery and Engines and Financial Products have been eliminated to arrive
at the consolidated data.
See accompanying notes to Consolidated Financial Statements.
Page 4
CATERPILLAR INC.
Statement of Changes in Stockholders' Equity
For Nine Months Ended
(Unaudited)
(Dollars in millions)
CONSOLIDATED
Sep. 30, Sep. 30,
1998 1997
------------ ------------
Common Stock:
Balance at beginning of period ............... $ (442) $ 50
Common shares issued, including treasury
shares reissued:(Sep. 30, 1998 -- 673,647
shares; Sep. 30, 1997 -- 1,312,389 shares) .. 14 24
Treasury shares purchased:
Sep. 30, 1998 -- 9,983,300;
Sep. 30, 1997 -- 9,725,712 .................... (491) (470)
Issuance of common stock to effect 2-for-1
stock split ................................... - 188
----- -----
Balance at end of period ...................... (919) (208)
----- -----
Profit employed in the business:
Balance at beginning of period ................ 5,026 3,904
Profit ........................................ 1,212 $1,212 1,214 $1,214
Dividends declared ............................ (201) (171)
Issuance of common stock to effect 2-for-1
stock split ................................... - (188)
----- -----
Balance at end of period ...................... 6,037 4,759
----- -----
Accumulated other comprehensive income:
Foreign currency translation adjustment (1):
Balance at beginning of period .............. 95 162
Aggregate adjustment for period ............. (43) (43) (27) (27)
----- ----- ----- ----
Balance at end of period .................... 52 135
----- -----
Comprehensive income .......................... $1,169 $1,187
====== ======
Stockholders' equity at end of period ........... $5,170 $4,686
====== ======
(1) No reclassification adjustments or tax effects to report.
See accompanying notes to Consolidated Financial Statements.
Page 5
CATERPILLAR INC.
Statement of Financial Position *
(Dollars in millions)
CONSOLIDATED
Sep. 30, Dec. 31,
1998 1997
ASSETS
Current assets:
Cash and short-term investments ................. $ 235 $ 292
Receivables -- trade and other .................. 3,605 3,331
Receivables -- finance .......................... 3,862 2,660
Deferred income taxes and prepaid expenses ...... 968 928
Inventories (Note 5) ............................ 3,116 2,603
------- -------
Total current assets .............................. 11,786 9,814
Property, plant, and equipment -- net ............. 4,517 4,058
Long-term receivables -- trade and other .......... 124 134
Long-term receivables -- finance .................. 4,755 3,881
Investments in unconsolidated
affiliated companies (Note 4) .................. 769 751
Investments in Financial Products subsidiaries .... - -
Deferred income taxes ............................. 1,002 1,040
Intangible assets ................................. 1,236 228
Other assets ...................................... 945 850
------- -------
TOTAL ASSETS ........................................ $25,134 $20,756
======= =======
LIABILITIES
Current liabilities:
Short-term borrowings ........................... $ 583 $ 484
Accounts payable and accrued expenses ........... 3,678 3,358
Accrued wages, salaries, and employee benefits .. 1,125 1,128
Dividends payable ............................... - 92
Deferred and current income taxes payable ....... 97 175
Deferred liability .............................. - -
Long-term debt due within one year .............. 1,922 1,142
------- -------
Total current liabilities ......................... 7,405 6,379
Long-term debt due after one year ................. 9,726 6,942
Liability for postemployment benefits ............. 2,714 2,698
Deferred income taxes and other liabilities ....... 119 58
------- -------
TOTAL LIABILITIES ................................... 19,964 16,077
------- -------
STOCKHOLDERS' EQUITY
Common stock of $1.00 par value:
Authorized shares: 900,000,000
Issued shares (Sep. 30, 1998 -- 407,447,312;
Dec. 31, 1997 -- 407,447,312) at paid in amount . 1,066 1,071
Profit employed in the business ................... 6,037 5,026
Accumulated other comprehensive income ............ 52 95
Treasury stock (Sep. 30, 1998 -- 48,759,123
shares; Dec. 31, 1997 -- 39,436,972 shares)
at cost.......................................... (1,985) (1,513)
------- -------
TOTAL STOCKHOLDERS' EQUITY .......................... 5,170 4,679
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......... $25,134 $20,756
======= =======
See accompanying notes to Consolidated Financial Statements.
* Unaudited except for Consolidated December 31, 1997 amounts.
Page 6
CATERPILLAR INC.
Statement of Financial Position *
(Dollars in millions)
SUPPLEMENTAL CONSOLIDATING DATA
MACHINERY AND ENGINES (1)
Sep. 30, Dec. 31,
1998 1997
ASSETS
Current assets:
Cash and short-term investments ................. $ 162 $ 241
Receivables -- trade and other .................. 2,456 3,346
Receivables -- finance .......................... - -
Deferred income taxes and prepaid expenses ...... 952 935
Inventories (Note 5) ............................ 3,116 2,603
------- -------
Total current assets .............................. 6,686 7,125
Property, plant, and equipment -- net ............. 3,867 3,483
Long-term receivables -- trade and other .......... 124 134
Long-term receivables -- finance .................. - -
Investments in unconsolidated
affiliated companies (Note 4) .................. 769 751
Investments in Financial Products subsidiaries .... 1,203 882
Deferred income taxes ............................. 1,023 1,075
Intangible assets ................................. 1,236 228
Other assets ...................................... 584 510
------- -------
TOTAL ASSETS ........................................ $15,492 $14,188
======= =======
LIABILITIES
Current liabilities:
Short-term borrowings ........................... $ 47 $ 53
Accounts payable and accrued expenses ........... 3,242 3,020
Accrued wages, salaries, and employee benefits .. 1,117 1,120
Dividends payable ............................... - 92
Deferred and current income taxes payable ....... 47 46
Deferred liability .............................. - -
Long-term debt due within one year .............. 69 54
------- -------
Total current liabilities ......................... 4,522 4,385
Long-term debt due after one year ................. 2,967 2,367
Liability for postemployment benefits ............. 2,714 2,698
Deferred income taxes and other liabilities ....... 119 59
------- -------
TOTAL LIABILITIES ................................... 10,322 9,509
------- -------
STOCKHOLDERS' EQUITY
Common stock of $1.00 par value:
Authorized shares: 900,000,000
Issued shares (Sep. 30, 1998 -- 407,447,312;
Dec. 31, 1997 -- 407,447,312) at paid in amount . 1,066 1,071
Profit employed in the business ................... 6,037 5,026
Accumulated other comprehensive income ............ 52 95
Treasury stock (Sep. 30, 1998 -- 48,759,123
shares; Dec. 31, 1997 -- 39,436,972 shares)
at cost.......................................... (1,985) (1,513)
------- -------
TOTAL STOCKHOLDERS' EQUITY .......................... 5,170 4,679
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......... $15,492 $14,188
======= =======
(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. Transactions
between Machinery and Engines and Financial Products have been eliminated to
arrive at the consolidated data.
See accompanying notes to Consolidated Financial Statements.
* Unaudited except for Consolidated December 31, 1997 amounts.
Page 7
CATERPILLAR INC.
Statement of Financial Position *
(Dollars in millions)
SUPPLEMENTAL CONSOLIDATING DATA
FINANCIAL PRODUCTS
Sep. 30, Dec. 31,
1998 1997
ASSETS
Current assets:
Cash and short-term investments ................. $ 73 $ 51
Receivables -- trade and other .................. 1,471 285
Receivables -- finance .......................... 3,862 2,660
Deferred income taxes and prepaid expenses ...... 27 9
Inventories (Note 5) ............................ - -
------- -------
Total current assets .............................. 5,433 3,005
Property, plant, and equipment -- net ............. 650 575
Long-term receivables -- trade and other .......... - -
Long-term receivables -- finance .................. 4,755 3,881
Investments in unconsolidated
affiliated companies (Note 4) .................. - -
Investments in Financial Products subsidiaries .... - -
Deferred income taxes ............................. 6 5
Intangible assets ................................. - -
Other assets ...................................... 361 340
------- -------
TOTAL ASSETS ........................................ $11,205 $ 7,806
======= =======
LIABILITIES
Current liabilities:
Short-term borrowings ........................... $ 536 $ 431
Accounts payable and accrued expenses ........... 627 654
Accrued wages, salaries, and employee benefits .. 8 8
Dividends payable ............................... - -
Deferred and current income taxes payable ....... 50 129
Deferred liability .............................. 142 -
Long-term debt due within one year .............. 1,853 1,088
------- -------
Total current liabilities ......................... 3,216 2,310
Long-term debt due after one year ................. 6,759 4,575
Liability for postemployment benefits ............. - -
Deferred income taxes and other liabilities ....... 27 39
------- -------
TOTAL LIABILITIES ................................... 10,002 6,924
------- -------
STOCKHOLDERS' EQUITY
Common stock of $1.00 par value:
Authorized shares: 900,000,000
Issued shares (Sep. 30, 1998 -- 407,447,312;
Dec. 31, 1997 -- 407,447,312) at paid in amount . 633 403
Profit employed in the business ................... 599 506
Accumulated other comprehensive income ............ (29) (27)
Treasury stock (Sep. 30, 1998 -- 48,759,123
shares; Dec. 31, 1997 -- 39,436,972 shares)
at cost.......................................... - -
------- -------
TOTAL STOCKHOLDERS' EQUITY .......................... 1,203 882
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......... $11,205 $ 7,806
======= =======
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. Transactions
between Machinery and Engines and Financial Products have been eliminated to
arrive at the consolidated data.
See accompanying notes to Consolidated Financial Statements.
* Unaudited except for Consolidated December 31, 1997 amounts.
Page 8
CATERPILLAR INC.
Statement of Cash Flow for Nine Months Ended
(Unaudited)
(Millions of dollars)
CONSOLIDATED
Sep. 30, Sep. 30,
1998 1997
CASH FLOW FROM OPERATING ACTIVITIES:
Profit ............................................ $ 1,212 $ 1,214
Adjustments for noncash items:
Depreciation and amortization ..................... 652 565
Profit of Financial Products ...................... - -
Other ............................................. (10) 22
Changes in assets and liabilities:
Receivables -- trade and other .................. (53) (43)
Inventories ..................................... (378) (393)
Accounts payable and accrued expenses ........... 22 396
Other -- net .................................... (101) (99)
------- -------
Net cash provided by operating activities ........... 1,344 1,662
------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures -- excluding equipment
leased to others ................................ (520) (419)
Expenditures for equipment leased to others ....... (239) (216)
Proceeds from disposals of property, plant,
and equipment ................................... 89 100
Additions to finance receivables .................. (6,348) (4,900)
Collections of finance receivables ................ 2,848 2,454
Proceeds from sale of finance receivables.......... 1,332 1,119
Net short-term loans to Financial Products......... - -
Investments and acquisitions(net of cash acquired). (1,326) (25)
Other -- net ...................................... (35) (280)
------- -------
Net cash used for investing activities .............. (4,199) (2,167)
------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Dividends paid .................................... (293) (245)
Common stock issued, including treasury
shares reissued ................................. 5 10
Treasury shares purchased.......................... (491) (470)
Net short-term loans from Machinery and Engines.... - -
Proceeds from long-term debt issued ............... 4,181 2,280
Payments on long-term debt ........................ (835) (887)
Short-term borrowings -- net ...................... 247 133
------- -------
Net cash provided by financing activities ........... 2,814 821
------- -------
Effect of exchange rate changes on cash ............. (16) (16)
------- -------
(Decrease) increase in cash and
short-term investments ............................ (57) 300
Cash and short-term investments at the
beginning of the period ........................... 292 487
------- -------
Cash and short-term investments at the
end of the period ................................. $ 235 $ 787
======= =======
All short-term investments, which consist primarily of highly liquid
investments with original maturities of three months or less, are considered
to be cash equivalents.
See accompanying notes to Consolidated Financial Statements.
Page 9
CATERPILLAR INC.
Statement of Cash Flow for Nine Months Ended
(Unaudited)
(Millions of dollars)
SUPPLEMENTAL CONSOLIDATING DATA
MACHINERY AND ENGINES (1)
Sep. 30, Sep. 30,
1998 1997
CASH FLOW FROM OPERATING ACTIVITIES:
Profit ............................................ $ 1,212 $ 1,214
Adjustments for noncash items:
Depreciation and amortization ................... 532 462
Profit of Financial Products .................... (141) (92)
Other ........................................... 16 27
Changes in assets and liabilities:
Receivables -- trade and other .................. 958 (36)
Inventories ..................................... (378) (393)
Accounts payable and accrued expenses ........... (91) 305
Other -- net .................................... 3 (118)
------- -------
Net cash provided by operating activities ........... 2,111 1,369
------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures -- excluding equipment
leased to others ................................ (516) (416)
Expenditures for equipment leased to others ....... (7) (4)
Proceeds from disposals of property, plant,
and equipment ................................... 13 10
Additions to finance receivables .................. - -
Collections of finance receivables ................ - -
Proceeds from sale of finance receivables.......... - -
Net short-term loans to Financial Products......... 195 (50)
Investments and acquisitions(net of cash acquired). (1,326) (25)
Other -- net ...................................... (269) (248)
------- -------
Net cash used for investing activities .............. (1,910) (733)
------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Dividends paid .................................... (293) (245)
Common stock issued, including treasury
shares reissued ................................. 5 10
Treasury shares purchased.......................... (491) (470)
Net short-term loans from Machinery and Engines.... - -
Proceeds from long-term debt issued ............... 580 461
Payments on long-term debt ........................ (46) (116)
Short-term borrowings -- net ...................... (25) 37
------- -------
Net cash used for financing activities .............. (270) (323)
------- -------
Effect of exchange rate changes on cash ............. (10) (19)
------- -------
(Decrease) increase in cash and
short-term investments ............................ (79) 294
Cash and short-term investments at the
beginning of the period ........................... 241 445
------- -------
Cash and short-term investments at the
end of the period ................................. $ 162 $ 739
======= =======
(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. Transactions
between Machinery and Engines and Financial Products have been eliminated
to arrive at the consolidated data.
See accompanying notes to Consolidated Financial Statements.
Page 10
CATERPILLAR INC.
Statement of Cash Flow for Nine Months Ended
(Unaudited)
(Millions of dollars)
SUPPLEMENTAL CONSOLIDATING DATA
FINANCIAL PRODUCTS
Sep. 30, Sep. 30,
1998 1997
CASH FLOW FROM OPERATING ACTIVITIES:
Profit ............................................ $ 141 $ 92
Adjustments for noncash items:
Depreciation and amortization ................... 120 103
Profit of Financial Products .................... - -
Other ........................................... (24) (3)
Changes in assets and liabilities:
Receivables -- trade and other .................. (1,086) 13
Inventories ..................................... - -
Accounts payable and accrued expenses ........... 183 46
Other -- net .................................... (52) 42
------- -------
Net cash (used for) provided by operating activities (718) 293
------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures -- excluding equipment
leased to others ................................ (4) (3)
Expenditures for equipment leased to others ....... (232) (212)
Proceeds from disposals of property, plant,
and equipment ................................... 76 90
Additions to finance receivables .................. (6,348) (4,900)
Collections of finance receivables ................ 2,848 2,454
Proceeds from sale of finance receivables.......... 1,332 1,119
Net short-term loans to Financial Products......... - -
Investments and acquisitions(net of cash acquired). - -
Other -- net ...................................... 4 (62)
------- -------
Net cash used for investing activities .............. (2,324) (1,514)
------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Dividends paid .................................... (49) -
Common stock issued, including treasury
shares reissued ................................. 230 30
Treasury shares purchased.......................... - -
Net short-term loans from Machinery and Engines.... (195) 50
Proceeds from long-term debt issued ............... 3,601 1,819
Payments on long-term debt ........................ (789) (771)
Short-term borrowings -- net ...................... 272 96
------- -------
Net cash provided by financing activities ........... 3,070 1,224
------- -------
Effect of exchange rate changes on cash ............. (6) 3
------- -------
Increase in cash and
short-term investments ............................ 22 6
Cash and short-term investments at the
beginning of the period ........................... 51 42
------- -------
Cash and short-term investments at the
end of the period ................................. $ 73 $ 48
======= =======
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. Transactions
between Machinery and Engines and Financial Products have been eliminated
to arrive at the consolidated data.
See accompanying notes to Consolidated Financial Statements.
Page 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions except per share data)
1. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments necessary for a fair presentation
of (a) the consolidated results of operations for the three-
and nine-month periods ended September 30, 1998 and 1997,
(b) the changes in consolidated stockholders' equity for the
nine-month periods ended September 30, 1998 and 1997, (c) the
consolidated financial position at September 30, 1998 and
December 31, 1997, and (d) the consolidated statement of cash
flow for the nine-month periods ended September 30, 1998 and
1997 have been made. Certain amounts for prior periods have
been reclassified to conform with the current period financial
statement presentation.
2. The results for the three- and nine-month periods ended
September 30, 1998 are not necessarily indicative of the
results for the entire year 1998.
3. The company has reviewed the status of its environmental and legal
contingencies and believes there are no material changes from that
disclosed in Form 10-K for the year ended December 31, 1997, except
as provided in Part II, Item 1 of this Form 10-Q.
4. Unconsolidated Affiliated Companies
Combined financial information of the unconsolidated affiliated
companies was as follows:
Three Months Ended Nine Months Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
RESULTS OF OPERATIONS
(Unaudited)
Sales ..................... $1,225 $ 835 $2,785 $3,587
====== ====== ====== ======
Profit .................... $ 5 $ 21 $ 21 $ 80
====== ====== ====== ======
June 30, Sep. 30,
1998 1997
(Unaudited)
FINANCIAL POSITION
Assets:
Current assets ................................. $1,572 $1,949
Property, plant, and equipment - net............ 750 792
Other assets ................................... 392 331
------ ------
2,714 3,072
------ ------
Liabilities:
Current liabilities ............................ 1,345 1,610
Long-term debt due after one year .............. 232 203
Other liabilities .............................. 74 129
------ ------
1,651 1,942
------ ------
Ownership ........................................ $1,063 $1,130
====== ======
Page 12
5. Inventories (principally "last-in, first-out" method) comprised the
following:
Sep. 30, Dec. 31,
1998 1997
(Unaudited)
Raw materials and work-in-process ................ $1,264 $1,033
Finished goods ................................... 1,648 1,364
Supplies ......................................... 204 206
------ ------
$3,116 $2,603
====== ======
6. Following is a computation of profit per share:
Three Months Ended Nine Months Ended
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
1998 1997 1998 1997
(Unaudited)
I. Profit - consolidated (A) ....... $ 336 $ 385 $ 1,212 $ 1,214
====== ====== ====== =======
II. Determination of shares (millions):
Weighted average common
shares outstanding (B) ......... 361.9 374.7 364.8 377.0
Assumed conversion of stock
options ........................ 4.9 6.7 5.2 5.3
------ ------ ------ -------
Weighted average common
shares outstanding - assuming
dilution (C) ................... 366.8 381.4 370.0 382.3
====== ====== ====== =======
III. Profit per share of common
stock (A/B) ..................... $0.93 $1.03 $3.32 $3.22
Profit per share of common
stock - assuming dilution (A/C).. $0.92 $1.01 $3.28 $3.17
Page 13
7. The reserve for plant closing and consolidation costs includes the
following:
Sep. 30, Dec. 31,
1998 1997
(Unaudited)
Write down of property, plant, and equipment ..... $ 103 $ 103
Employee severance benefits ...................... 53 95
Rearrangement, start-up costs, and other ......... 7 47
------ ------
Total reserve .................................... $ 163 $ 245
======= ======
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 September. 30, 1998 and December 31, 1997, the above reserve includes
$84 and $153 million, respectively, 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.
8. In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 requires that
an entity record all derivatives in the statement of financial position
at their fair value. It also requires changes in fair value to be
recorded each period in current earnings or other comprehensive income
depending upon the purpose for using the derivative and/or its
qualification, designation, and effectiveness as a hedging transaction.
We are required to adopt this new accounting standard for the fiscal year
beginning January 1, 2000. We are currently analyzing the impact of
SFAS 133. Due to the inherent complexities of this standard, we have
not yet determined the full impact that the adoption of SFAS 133
will have on our financial position, results of operations, or cash
flows. However, at this time, we do not believe that the impact
will be material.
Page 14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND LIQUIDITY AND CAPITAL RESOURCES
A. Consolidated Results of Operations
THREE MONTHS ENDED SEPTEMBER 30, 1998 VS. THREE MONTHS ENDED SEPTEMBER 30, 1997
Third-quarter sales and revenues of $5.17 billion were a third-quarter
record, increasing $573 million or 12% due to higher physical sales volume.
Profit of $336 million and profit per share of common stock of $.92 assuming
dilution were the second highest ever for a third quarter but declined 13%
and 9%, respectively, from the third-quarter record set in 1997. Planned
higher spending for growth initiatives and the Perkins acquisition more than
offset additional margin from higher sales and revenues.
Machinery and Engines
Sales of Machinery and Engines were $4.91 billion, an increase of
$521 million or 12% from third-quarter 1997. The higher sales were due to a
13% increase (6% from Perkins) in physical sales volume. Price realization
was about 1% lower as price increases taken over the past year were more than
offset by higher sales discounts and the effect of the stronger dollar on
sales denominated in currencies other than U.S. dollars.
Profit before tax was $392 million, $100 million lower than the
third-quarter record set a year ago. The primary reason for the lower profit
was planned higher spending for growth initiatives as higher costs more than
offset the additional margin from higher sales.
Margin (sales less cost of goods sold) of $1.16 billion increased
$51 million or 5% over third-quarter 1997. Margin as a percent of sales was
23.6% (24.1% excluding Perkins), compared with 25.2% a year ago as the
favorable impact of price increases and higher manufacturing efficiency were
more than offset by higher sales discounts, higher fixed manufacturing costs,
and an unfavorable change in product sales mix.
Selling, general, and administrative expenses (SG&A) were $545 million,
compared with $481 million in third-quarter 1997. The $64 million increase
(about one-third from Perkins) primarily reflects increased spending levels
in support of major growth initiatives. Cost inflation also contributed to
the increase. SG&A expenses as a percent of sales were 11.1%, compared with
11.0% for the third quarter a year ago.
Research and development expenses (R&D) of $163 million rose $31 million
(about one-third from Perkins) from third-quarter 1997. The increase
reflects higher spending in support of new and improved products. R&D
expenses as a percent of sales were 3.3%, compared with 3.0% a year ago.
Operating profit of $450 million was $44 million or 9% lower than
third-quarter 1997. Operating profit as a percent of sales was 9.2%,
compared with 11.3% a year ago.
Interest expense of $68 million was $15 million higher than a year ago,
mostly due to higher average debt levels to finance the Perkins acquisition
in the first quarter.
Page 15
Other income/expense reflects a net decrease in income of $41 million
from third-quarter 1997, primarily due to discounts taken on the sale of
trade receivables to Caterpillar Financial Services Corporation
(Cat Financial) to partially finance the purchase of Perkins earlier this
year, and an unfavorable change in foreign exchange gains and losses.
Discounts taken on this revolving sale of receivables to Cat Financial are
reflected in Machinery and Engines as other expense. Revenues offsetting
these discounts and related borrowing costs are reflected in Financial
Products.
Financial Products
Financial Products' third-quarter revenues were a record $296 million,
up $75 million or 34% compared with third-quarter 1997. The increase
resulted primarily from continued growth in Cat Financial's portfolio. The
portfolio rose $3.0 billion or 41% from the same period last year, the result
of new business and the program started in the first quarter this year to
purchase trade receivables from Caterpillar Inc.
Before-tax profit was $79 million, an increase of $29 million or 58%
from third-quarter 1997. The increase resulted primarily from the portfolio
growth and gain on sale of receivables at Cat Financial plus favorable
insurance reserve adjustments at Caterpillar Insurance Co. Ltd. (Cat
Insurance), partially offset by lower investment income at Cat Insurance.
Selling, general, and administrative expenses were $94 million, up
$8 million from a year ago, principally the result of provisions for credit
losses and increased depreciation on leased equipment due to Cat Financial's
record new business, as well as other increases related to growth.
Interest expense was up $37 million, a result of increased borrowings to
support the larger portfolio which includes the trade receivables purchased
from Caterpillar Inc.
Other income and expense was income of $13 million, a decrease of
$1 million from a year ago.
Income Taxes
The provision for income taxes was $138 million, compared with
$166 million last year. Third-quarter 1998 tax expense reflects an effective
annual tax rate of 32% and a favorable adjustment of $13 million to recognize
the impact of a tax rate change from 33% used for the first six months of the
year. Third-quarter 1997 tax expense reflected an effective annual tax rate
of 33% and a favorable adjustment of $12 million to recognize the impact of a
change from 34% used for the first six months of the year.
Unconsolidated Affiliated Companies
Our share of unconsolidated affiliated companies' results decreased
$6 million from the third quarter a year ago. The major factor was less
favorable results at Shin Caterpillar Mitsubishi Ltd. due primarily to lower
sales volume resulting from the severe economic conditions in Japan and
Southeast Asia.
SALES
Following are summaries of third-quarter company sales and dealer
deliveries, compared with the same quarter in 1997.
Page 16
Caterpillar Sales Inside the United States
- ------------------------------------------
Caterpillar sales inside the United States were $2.49 billion, a
$410 million or 20% increase over third quarter last year. Both machine and
engine sales benefited from continued strong industry demand. End-user
demand rose in most applications reflecting good economic growth, low
inflation, lower interest rates, and high levels of consumer and business
confidence. Price realization was unchanged from a year earlier.
Sales inside the United States during the third quarter were 51% of
worldwide sales compared with 47% a year ago.
U.S. Dealer Machine Sales to End Users
U.S. dealer machine sales to end users increased due to higher industry
demand. Sales into all key construction sectors rose, reflecting the robust
construction activity over the past year. Sales also were higher in
commodity-related applications with increases in petroleum and coal mining
more than offsetting declines in metals mining and forestry. Sales into the
non-metals sector were unchanged from a year earlier. Sales to industrial
users increased.
Deliveries to U.S. Dealer Dedicated Rental Fleets
Deliveries to U.S. dealer dedicated rental fleets increased from
third-quarter 1997. At the end of third-quarter 1998, U.S. dealer dedicated
rental units were higher than year-earlier levels, and up from the end of the
second quarter.
U.S. Dealer New Machine Inventories
U.S. dealer new machine inventories fell from the end of the second
quarter. At the end of the third quarter, dealer inventories were above
year-ago levels and about normal relative to current selling rates.
Company Engine Sales Inside the United States
Company engine sales inside the United States were above year-earlier
levels reflecting good economic growth and strong industry demand. Sales
were higher for on-highway trucks, power generation, petroleum and industrial
applications.
Caterpillar Sales Outside the United States
- -------------------------------------------
Caterpillar sales outside the United States were $2.42 billion, a
$111 million or 5% increase over third-quarter 1997. All of the increase was
due to the acquisition of Perkins in the first quarter of 1998. Without
Perkins, sales would have been $115 million or 5% below year-earlier levels
as lower machine sales more than offset higher engine sales. Geographically,
lower sales in the Asia/Pacific region and Latin America more than offset
higher sales in Europe and Africa/Middle East. Price realization was lower
than a year ago.
Sales outside the United States represented 49% of worldwide sales,
compared with 53% a year ago.
Dealer Machine Sales to End-Users Outside the United States
Dealer machine sales to end-users outside the United States declined
from year-earlier levels as lower sales in Asia and Latin America more than
offset gains elsewhere.
- Europe: Sales for the region were higher, reflecting continued
improvement in economic activity and business confidence. Sales rose
in Spain, France, Italy, and Germany but were lower in the United
Kingdom.
- Africa/Middle East: Sales increased despite low commodity prices.
Sales were higher in the United Arab Emirates and Turkey but lower in
South Africa.
- Latin America: Sales declined due to lower commodity prices and
slower growth. Lower sales in Colombia, Peru, Chile, and Argentina
more than offset increases in Brazil and Mexico.
Page 17
- Canada: Sales were higher reflecting gains in equipment services and
non-metal mining applications.
- Asia (excluding Japan): Sales declined sharply in response to the
severe recession in Southeast Asia and South Korea. In China,
economic growth has slowed from a year ago but demand is still rising.
- Australia: Sales increased due primarily to higher demand in coal
mining.
- Japan: Sales of imported product increased slightly despite the
ongoing, severe recession.
- Commonwealth of Independent States (CIS): Sales also increased in
Russia despite the severe recession.
Dealer New Machine Inventories Outside the United States
Dealer new machine inventories outside the United States were down from
the end of the second quarter due almost entirely to a large reduction in
Asia. Dealer new machine inventories were about flat with year-earlier
levels as increases in Latin America, Canada, Europe, and Africa/Middle East
offset the decreases in Asia and Australia. At the end of the third quarter,
dealer inventories outside the United States were about normal relative to
current selling rates.
Company Engine Sales Outside the United States
Company engine sales outside the United States exceeded year-earlier
levels due to the first quarter acquisition of Perkins and higher turbine
engine sales. Without Perkins, sales of reciprocating engines would have
been flat as higher demand in Canada and Europe offset lower demand in Asia,
Latin America, and Australia. Sales of turbine engines were higher with
increases in Latin America, Africa/Middle East, Asia, and Australia more than
offsetting a decline in Europe. Higher engine sales for oil and gas
applications and on-highway trucks more than offset lower sales for power
generation, industrial, and marine.
THREE MONTHS ENDED SEPTEMBER 30, 1998 VS. THREE MONTHS ENDED JUNE 30, 1998
Third-quarter profit of $336 million or $.92 per share assuming dilution
was $110 million lower than second-quarter profit of $446 million or $1.20
per share assuming dilution. A 7% decrease in physical sales volume and
lower price realization were the most significant factors contributing to the
lower profit.
Machinery and Engines
Profit before tax for Machinery and Engines was $392 million, a
$205 million decrease from the previous quarter. Sales of $4.91 billion
decreased $451 million or 8%, primarily because of the decrease in physical
sales volume and lower price realization. Price realization was lower due to
higher sales discounts.
Margin was $221 million lower than the second quarter, primarily the
result of the decrease in physical sales volume. As a percent of sales, the
margin rate was 23.6%, compared with 25.7% last quarter. The decrease in
margin rate was primarily due to higher sales discounts and lower production
volumes, partially offset by improved manufacturing efficiency.
Selling, general, and administrative expenses were $545 million, down
$3 million from the second quarter.
Research and development expenses of $163 million were down $2 million
from the second quarter.
Page 18
Operating profit of $450 million decreased $216 million. As a percent
of sales, operating profit was 9.2%, compared with 12.4% in the second
quarter.
Interest expense of $68 million was $1 million lower than the second
quarter.
Other income/expense reflects a net increase in income of $10 million
from last quarter.
Financial Products
Financial Products' revenues of $296 million were up $20 million from
the second quarter, primarily due to Cat Financial's portfolio growth.
Before-tax profit was $79 million, an increase of $10 million, primarily
the result of higher earnings from Cat Financial's larger portfolio and a
$7 million gain on sale of receivables.
Income Taxes
Income tax expense of $138 million decreased $82 million from the
previous quarter. The decrease reflects the lower profit before tax, a
change in the effective annual tax rate from 33% to 32%, and a favorable
adjustment of $13 million to recognize the impact of the tax rate change for
the first six months.
Unconsolidated Affiliated Companies
Our share of unconsolidated affiliated companies' results increased
$3 million from the previous quarter, primarily due to improved results at
Shin Caterpillar Mitsubishi Ltd.
NINE MONTHS ENDED SEPTEMBER 30, 1998 VS. NINE MONTHS ENDED SEPTEMBER 30, 1997
Profit for the nine months ended September 30, 1998 was $1.21 billion or
$3.28 per share of common stock assuming dilution, compared to profit of
$1.21 billion or $3.17 per share assuming dilution for the first nine
months of 1997. Sales and revenues of $15.57 billion were $1.84 billion
higher than last year.
Machinery and Engines
Sales were $14.84 billion, an increase of $1.70 billion (about
one-third from Perkins) from the same period last year. Profit before
tax was $1.54 billion, a decrease of $68 million. The primary reason
for the lower profit was planned higher spending for growth initiatives
as higher costs more than offset the additional margin from higher sales.
Margin increased $352 million primarily because of higher physical
sales volume. Margin as a percent of sales was 25.5% (26.0% excluding
Perkins), compared to 26.1% a year ago as the favorable impact of price
increases taken over the past year were more than offset by higher fixed
manufacturing costs, higher discounts, and an unfavorable change in
product sales mix.
Selling, general, and administrative expenses were $1.61 billion,
compared with $1.39 billion during the first nine months of 1997. The
$217 million increase (about one-fourth from Perkins) primarily
reflects increased spending levels in support of major growth
initiatives. The effects of inflation on costs also contributed to
the increase.
Page 19
Research and development expenses were $483 million, compared with
$384 million during the first nine months of 1997. The $99 million
increase (about one-third from Perkins) primarily reflects higher
spending in support of new and improved products.
Operating profit of $1.69 billion was $36 million higher than the first
nine months of 1997. Operating profit as a percent of sales was 11.4%,
compared with 12.6% a year ago.
Interest expense of $198 million was $35 million higher than a year ago,
mostly due to higher average debt levels to finance the acquisition of
Perkins.
Other income/expense was income of $52 million compared with income of
$121 million last year. The decrease of $69 million is mostly due to the
discount taken on the sale of trade receivables to Cat Financial. Discounts
taken on this revolving sale of receivables to Cat Financial are reflected in
Machinery and Engines as other expense. Revenues offsetting these discounts
and related borrowing costs are reflected in Financial Products.
Financial Products
Financial Products' revenues for the nine months ended
September 30, 1998, were $812 million, up $195 million from the same period a
year ago. The increase was primarily due to Cat Financial's portfolio
growth, the result of new business and the program started in the first
quarter this year to purchase trade receivables from Caterpillar Inc..
Before-tax profit for Financial Products was $224 million, an increase
of $77 million from the first nine months of 1997. The increase resulted
primarily from more favorable reserve adjustments and higher investment
income at Cat Insurance plus higher profit at Cat Financial.
Selling, general, and administrative expenses were up $31 million,
principally the result of provisions for credit losses and increased
depreciation on leased equipment due to Cat Financial's record new
business, as well as other increases due to growth, partially offset
by more favorable reserve adjustments at Cat Insurance.
Interest expense was $96 million higher due to increased borrowings
to support the larger portfolio.
Income Taxes
Tax expense was $565 million, $14 million lower than a year ago. The
decrease reflects higher before-tax profit more than offset by the impact of
a lower effective tax rate of 32%, compared with 33% a year ago.
Unconsolidated Affiliated Companies
The company's share of unconsolidated affiliated companies' profit was
$11 million, down $25 million from a year ago. The major factor for the
decrease was less favorable results at Shin Caterpillar Mitsubishi Ltd.
EMPLOYMENT
At the end of the third quarter, Caterpillar's worldwide employment was
66,223 compared with 59,246 one year ago. Hourly employment increased 3,351
to 37,349; salaried and management employment increased 3,626 to 28,874. The
increases were largely the result of acquisitions.
Page 20
ECONOMIC AND INDUSTRY OUTLOOK FOR 1998
World economic growth has slowed in 1998 as severe recessions in Asia,
Japan, and Russia more than offset improvement in Europe and continued
strength in the United States. Worldwide industry demand for machines will
decline slightly as steep declines in Japan and much of Asia will more than
offset increases in North America, Europe, and Latin America. Industry
demand for agricultural machines also is expected to be lower due to the drop
in commodity prices. Industry demand for engines, however, should exceed
1997 levels due to the strength in North America.
COMPANY OUTLOOK
Our outlook for 1998 worldwide sales and revenues remains unchanged from
that issued with our third-quarter 1997 results, which called for sales and
revenues (excluding Perkins, which was acquired during the first quarter) to
slightly surpass 1997's record levels.
Investments to enhance long-term growth and shareholder value continue
in 1998. Major initiatives include electric power generation, agricultural
products, compact machines, Perkins, and further strengthening of our product
support network to better link customer, dealer, and company operations. For
Machinery and Engines (excluding Perkins), total capital expenditures, which
were $819 million in 1997, are expected to be slightly higher in 1998. R&D
and SG&A expenditures will increase in 1998 in support of the growth
initiatives; however, the rate of increase is still expected to be less than
in recent years.
Our current growth initiatives are expected to unfavorably affect profit
by about 10% in 1998, about one-fourth of which is due to Perkins. The
effect on profit of these current growth initiatives is expected to be less
dilutive in 1999, and then accretive in 2000. Perkins, which was earlier
expected to have a neutral impact on profit in 1998 and 1999, is now expected
to have a negative impact in 1998 and 1999, largely due to softening
agricultural demand.
Despite the impact of the growth initiatives, our outlook for profit in
1998 remains unchanged from that issued with our fourth-quarter 1997 results,
and is expected to be near 1997's record. Profit per share has been and will
continue to be favorably affected by share repurchases. Cash flow from
operations and our financial position are expected to remain strong.
PRELIMINARY ECONOMIC AND SALES OUTLOOK FOR 1999
The current turmoil in worldwide financial markets makes it very
difficult to forecast sales for 1999. The U.S. and Europe, which will
account for almost 70% of company sales in 1998, should continue to provide
solid industry demand. U.S. economic growth is forecast to slow
considerably, but further easing by the Federal Reserve and the new highway
spending bill should allow industry demand for machines to about match 1998
record levels. In Europe, continued good economic growth should lead to
higher industry demand.
In Canada, Latin America, and Australia, slower growth is likely to
result in lower industry demand while demand in Africa/Middle East should
remain near current levels. Little improvement is expected for Japan and
most of developing Asia next year, therefore, industry demand is forecast to
decline further. In China, a large stimulus program should help the economy
and boost our industry while in Russia severe recession is likely to continue
resulting in lower demand.
Page 21
In total, industry demand for machines and engines is likely to be down
slightly due to weakness in Asia/Pacific and Latin American regions, weaker
North American demand for on-highway trucks and the worldwide impact of low
commodity prices. In this challenging environment, our preliminary 1999
outlook is for company sales and revenues to be near 1998 record levels.
The information included in the Outlook section is forward looking and
involves risks and uncertainties that could significantly affect expected
results. A discussion of these risks and uncertainties is contained in
Form 8-K filed with the Securities & Exchange Commission on October 16, 1998.
B. Liquidity & Capital Resources
Consolidated operating cash flow totaled $1.34 billion through the third
quarter of 1998, compared with $1.66 billion during the first nine months of
1997. This decrease is largely attributed to a smaller increase in accounts
payable and accrued expenses over the same period a year ago.
Total debt at the end of the first nine months was $12.23 billion, an
increase of $3.66 billion from year-end 1997. Over this period, debt related
to Machinery and Engines increased $609 million, to $3.08 billion, while
debt related to Financial Products increased $3.05 billion to $9.15 billion.
During 1995, the company announced a plan to repurchase up to 10% of its
outstanding common stock over a three to five year period. This share
repurchase program was completed in the third quarter of 1998. From
inception in June 1995 through September 30, 1998, 46.0 million shares
have been repurchased under the plan. The number of shares outstanding
at September 30, 1998, was 358.7 million. The Board of Directors has
authorized another share repurchase program to reduce the number of
outstanding shares to 320 million within the next three to five years.
Machinery and Engines
Operating cash flow totaled $2.11 billion through the third quarter of
1998, compared with $1.37 billion for the same period a year ago. The
increase in operating cash flow is primarily a result of a $994 million
decrease in accounts receivable compared to the same period a year ago.
This decrease is largely attributed to the $1.11 billion sale of
receivables to Cat Financial. Partially offsetting this decrease in
receivables was a $396 million decrease in accounts payable and accrued
expenses compared to the same period a year ago.
Capital expenditures, excluding equipment leased to others, totaled
$516 million through third-quarter 1998 compared with $416 million for the
same period a year ago. Total debt increased by $609 million. As part of the
company's long-term funding strategy, $250 million of Eurobond notes and
$300 million of debentures were issued during the first and third quarter of
1998, respectively. The $300 million of 30-year debentures were issued at a
discount. These bonds are due July 15, 2028 and were priced to yield 6.649%
semi-annually with a coupon of 6.625%. The company intends to utilize our
additional funds for general corporate purposes, including the acquisition of
Perkins. Our additional debt has increased the percent of debt to debt
plus stockholders equity from 35% at December 31, 1997, to 37% at
September 30, 1998.
Page 22
Financial Products
Operating cash flow totaled ($718) million through the third quarter of
1998, compared with $293 million for the same period a year ago. This
decrease resulted from the purchasing of $1.11 billion of Machinery and
Engines trade receivables. Cash used to purchase equipment leased to others
totaled $232 million through the first nine months of 1998. In addition, net
cash used for finance receivables was $2.17 billion through third quarter
1998, compared with $1.33 billion for the same period a year ago.
Financial Products' debt was $9.15 billion at September 30, 1998, an
increase of $3.05 billion from December 31, 1997 and was primarily comprised
of $6.14 billion of medium term notes, $161 million of notes payable to banks
and $2.75 billion of commercial paper. At the end of the third quarter,
finance receivables past due over 30 days were 1.3%, compared with 1.6% at
the end of the same period one year ago. The ratio of debt to equity of
Cat Financial was 8.2:1 at September 30, 1998, compared with 7.8:1 at
December 31, 1997.
Financial Products had outstanding credit lines totaling $3.80 billion
at September 30, 1998, 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed in our Form 10-K for 1997 and Form 10Q
for the first quarter of 1998, Caterpillar and other diesel engine
manufacturers had been in discussions with the United States
Environmental Protection Agency ("EPA") and the United States
Department of Justice regarding diesel engine emissions and Clean
Air Act compliance. The EPA was 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 was consistent with the Clean Air Act's
requirements.
On October 22, 1998, we entered into a consent decree with the EPA
to get this matter behind us and avoid potential significant costs of
protracted litigation. Although we strongly disagree with the EPA's
conclusion that we violated the Clean Air Act, we have agreed to pay
a civil penalty of $25 million and accelerate planned investment of
$35 million over the next six years to develop technologies for
emissions reductions. These amounts are not material to our financial
position or results of operations.
We firmly believe our electronically controlled engines have always
satisfied EPA emissions standards and are fully consistent with the
environmental laws of the United States. In our opinion, the EPA's
effort was designed to change emissions standards through coercion
rather than through the Clean Air Act's rulemaking requirements and
due process of law.
Page 23
ITEM 2. CHANGES IN SECURITIES
We have twelve employee stock purchase plans administered outside
the United States for our foreign employees. These plans are not
registered with the Securities and Exchange Commission and are exempt
from such registration pursuant to Regulation S under the Securities
Act. As of December 31, 1997, those plans had approximately 2,850
participants in the aggregate. During the third quarter of 1998, a
total of 23,861 shares of Caterpillar common stock or foreign
denominated equivalents were distributed under the plans.
ITEM 5. OTHER INFORMATION
YEAR 2000 CHALLENGE
Our Approach
Caterpillar has a comprehensive plan to address the Year 2000
challenge. A Year 2000 Steering Committee, chaired by a member of our
Executive Office, is charged with monitoring remediation efforts of
our business units and reporting remediation status to our Executive
Office and Board of Directors. Although this team has monitoring
responsibility, Vice Presidents in charge of each unit are responsible
for identifying, evaluating, and implementing changes necessary to
achieve readiness within their units.
Remediation History and Status
Caterpillar began addressing the Year 2000 challenge as part
of plant modernization and corporate restructuring initiatives in the
late 1980s and early 1990s. New systems developed to support these
initiatives incorporated Year 2000 compliance by design. In 1994,
Caterpillar's information systems division initiated a formal plan to
address the Year 2000 issue. Today, all Caterpillar business units are
engaged in a comprehensive, coordinated effort to meet the Year 2000
challenge as it impacts their internal and external customers.
We have established five Year 2000 remediation phases under which
units measure their progress:
* Inventory - identifying key business areas and related products
and services potentially impacted by the Year 2000 issue;
* Analysis - determining how a product or service is impacted by the
Year 2000 issue and preparing a plan to address the issue;
* Remediation - making the necessary changes to bring the product or
service into compliance;
* Validation - testing the product or service prior to implementation
to ensure it is Year 2000 compliant; and
* Implementation - installing necessary changes in a production
environment.
Page 24
Internal Systems
- ----------------
As of October 31, 1998, substantially all Caterpillar business
units have completed an inventory of internal systems, both within
and outside their control, having potential Year 2000 issues. By
internal systems, we mean both information technology and non-information
technology systems. Analysis to address Year 2000 issues has been
completed on about 90% of critical systems within the control of our
units. Of those critical systems, about 70% have been remediated and
65% validated. For half of all systems within our control, Year 2000
fixes have been implemented. About three-fourths of our business units
report that mission-critical systems within their control will be fixed,
tested, and in production by June 1, 1999. Approximately all units
(over 95%) report that mission-critical systems will attain that status
by October 1, 1999, with the remaining few units completed prior to
year-end 1999.
Caterpillar Products
- --------------------
For some time, we have been assessing the potential impact of
the Year 2000 challenge on the operation of products sold by Caterpillar.
Our Electrical and Electronics business unit has substantially completed
its review, evaluation, and testing of electronic components and service
tools used on Caterpillar products for Year 2000 related problems.
This review included all electronic control modules (ECMs), display
and monitoring systems, generator set control systems and electronic
service tools under the design control of that business unit.
As a result of this assessment and others completed by Caterpillar,
it is our position at this time that the Year 2000 challenge should not
have any significant impact on the performance of previous, present,
or future Caterpillar product. We note that our assessment of the
Year 2000 impact across our product line is an ongoing process and
subject to further review. We are committed to delivering the highest
quality products and services to our customers currently and beyond
the Year 2000.
Third-Party Suppliers and Caterpillar Dealers
We are actively assessing the Year 2000 readiness of our
significant third-party suppliers. Those efforts include survey
mailings, presentations, review of supplier Year 2000 statements
and audits, and follow-up activities with suppliers that have not
responded to requests for information. For suppliers that have
not responded, we are following up to ultimately achieve an
acceptable comfort level with our supply chain. For suppliers
posing a significant risk, contingency plans are being developed.
We are also assessing the readiness of our dealers. Efforts in
the U.S. and outside the U.S., include mailings requesting
information on remediation plans and status, periodic regional
meetings with dealers and their information systems managers,
and on-site assessments by Caterpillar managers responsible
for specific dealer regions. Based on these communications, we expect
that by June of 1999 substantially all of our dealers will be in a
position to service customers without any significant business
disruption related to the Year 2000 issue. We will continually monitor
dealer progress against this timeframe.
Page 25
Costs
Costs approximating the following estimates, which are as of
October 31, 1998, would not have a material impact on Caterpillar's
results, financial position, or cash flow. We anticipate incurring
about two-thirds of these estimated costs by year-end 1998. As
necessary, we will refine these estimates.
We anticipate incurring about $100-130 million in Year 2000-related
costs. Additional capital costs for the replacement of systems,
hardware or equipment are currently estimated to be approximately
$20-30 million.
These budgeted costs do not include the cost of implementing
contingency plans, which are in the process of being developed. These
estimates also do not include litigation or warranty costs related to
the Year 2000 issue, which at this time cannot be reasonably estimated.
Risks
Our estimates on cost, remediation time frame for internal systems
and Caterpillar products, and potential financial impact are based on
information we have currently. There can be no assurance these
estimates will prove accurate and actual results could differ materially
from those currently anticipated.
Factors that could cause actual results to differ include
unanticipated supplier or dealer failures; utilities, transportation,
or telecommunications breakdowns; foreign or domestic government
failures; and unanticipated failures on our part to address
Year 2000-related issues.
The most reasonably likely worst case scenario in light of
these risks would involve a potential loss in sales resulting
from production and shipping delays caused by Year 2000-related
disruptions. The degree of sales loss impact would depend on
the severity of the disruption, the time required to correct it,
whether the sales loss was temporary or permanent, and the
degree to which our primary competitors were also impacted by
the disruption.
To minimize the potential impact of the most reasonably
likely worst case scenario, each Caterpillar business unit is
developing contingency plans. Finalized contingency plans
could involve manual procedures for machine operation, manual
procedures for collecting and reporting data, inventory
adjustments for major supplied components, and alternative
sources of supply. We estimate that contingency plans will be
finalized by mid-1999.
Page 26
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
---------- -----------
3.1 Bylaws, as amended and restated
27 Financial Data Schedule for Third Quarter 1998
(b) Four reports on Form 8-K, dated July 15, 1998, were filed
pursuant to Item 5 during the quarter ended September 30, 1998.
Three additional reports on Form 8-K were filed pursuant to
Item 5 on October 15 and October 16, 1998. No financial
statements were filed as part of those reports.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CATERPILLAR INC.
Date: November 12, 1998 By: /s/ F. L. McPheeters
----------------------
F. L. McPheeters, Vice President
and Chief Financial Officer
Date: November 12, 1998 By: /s/ R. R. Atterbury III
-------------------------
R. R. Atterbury III, Secretary
Page 27
EXHIBIT INDEX
Exhibit
Number Description
3.1 Bylaws, as amended and restated
27 Financial Data Schedule for Third Quarter 1998.