SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998 Commission File No. 0-13295
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to________________
CATERPILLAR FINANCIAL SERVICES CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 37-1105865
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3322 West End Avenue
Nashville, Tennessee 37203-0983
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (615) 386-5800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Exchange
6.19% Notes due April 2000 New York Stock Exchange
6.40% Notes due August 2001 New York Stock Exchange
8.96% Notes due March 2005 New York Stock Exchange
9.50% Notes due February 2007 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [ ] Not
Applicable.
At December 31, 1998, there was one share of common stock of the
Registrant outstanding, which is owned by Caterpillar Inc.
The Registrant complies with the conditions set forth in General
Instruction (I)(1)(a) and (b) of Form 10-K and is therefore filing
this Form with the reduced disclosure format
Documents Incorporated by Reference: None
CONTENTS
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 4
ITEM 3. LEGAL PROCEEDINGS 4
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS 4
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 4
1998 COMPARED WITH 1997 4
1997 COMPARED WITH 1996 5
CAPITAL RESOURCES AND LIQUIDITY 6
ITEM 7.A QUANTITATIVE AND QUALITATIVE MARKET RISK 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 9
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K 9
SIGNATURES 11
REPORT OF INDEPENDENT ACCOUNTANTS 12
CONSOLIDATED STATEMENT OF FINANCIAL POSITION 13
CONSOLIDATED STATEMENT OF PROFIT 14
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 15
CONSOLIDATED STATEMENT OF CASH FLOWS 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 17
NOTE 2 - RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES 18
NOTE 3 - INVESTMENT IN FINANCING LEASES 19
NOTE 4 - EQUIPMENT ON OPERATING LEASES 20
NOTE 5 - CONCENTRATION OF CREDIT RISK 20
NOTE 6 - CREDIT LINES 20
NOTE 7 - SHORT-TERM BORROWINGS 21
NOTE 8 - LONG-TERM BORROWINGS 22
NOTE 9 - DERIVATIVE FINANCIAL INSTRUMENTS AND RISK MANAGEMENT 22
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES 23
NOTE 11 - INCOME TAXES 24
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS 25
NOTE 13 - TRANSACTIONS WITH RELATED PARTIES 26
NOTE 14 - LEASES 27
NOTE 15 - SEGMENT INFORMATION 28
NOTE 16 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) 29
STATEMENT SETTING FORTH COMPUTATION OF RATIO OF PROFIT TO FIXED
CHARGES 30
CONSENT OF INDEPENDENT ACCOUNTANTS 31
PART I
ITEM 1. BUSINESS
Caterpillar Financial Services Corporation is a wholly owned
finance subsidiary of Caterpillar Inc. (together with its other
subsidiaries, "Caterpillar"). We provide retail financing
alternatives to customers and dealers around the world for
Caterpillar and non-competitive related equipment, provide
wholesale financing to Caterpillar dealers and purchase short-term
dealer receivables from Caterpillar. We emphasize prompt and
responsive service and offer various financing plans to meet
customer requirements, increase Caterpillar sales and generate
financing income.
Retail financial plans include:
Tax leases which are classified as either operating or finance
leases for financial accounting purposes, depending on the
characteristics of the lease. For tax purposes, we are considered
the owner of the equipment (15%*).
Finance (non-tax) leases where the lessee is considered the
owner of the equipment during the term of the contract and that
either require or allow the customer to purchase the equipment for a
fixed price at the end of the term (23%*).
Installment sale contracts which are equipment loans that enable
customers to purchase equipment with a down payment or trade-in and
structure payments over time (20%*).
Working capital loans that allow customers and dealers to use their
Caterpillar equipment as collateral to obtain financing for other
business needs (21%*).
Governmental lease-purchase plans in the U.S. that offer low interest
rates and flexible terms to qualified non-federal government
agencies(2%*).
Wholesale financial plans (19%*) include:
Inventory/rental programs which provide assistance to dealers by
financing their inventory, rental fleets and rental facilities.
Short-term dealer receivables we purchase from Caterpillar at a
discount.
* indicates the percentage of total portfolio at December 31,1998.
For more information, please refer to Note 5
The retail financing business is highly competitive, with
financing for users of Caterpillar equipment available through a
variety of sources, principally commercial banks and finance and
leasing companies. We are largely dependent upon Caterpillar
dealers' ability to sell equipment and customers' willingness to
enter into financing or leasing agreements with us. We also are
affected by the availability of funds from our financing sources
and general economic conditions such as inflation and market rates.
We provide financing only when acceptable criteria are met.
Credit decisions are based on, among other things, the customer's
credit history, financial strength and intended use of equipment.
We typically maintain a security interest in retail financed
equipment and require physical damage insurance coverage on all
financed equipment.
Our competitive position is improved by marketing programs,
subsidized by Caterpillar and/or Caterpillar dealers, which allow
us to offer below market interest rates. Under these programs,
Caterpillar, or the dealer, pays us an amount at the outset of the
transaction which we then recognize as income over the term of the
financing.
We also have agreements with Caterpillar which are significant
to our operation. These agreements provide for financial support,
certain funding, employee benefits and corporate services among
other things. For more information on these agreements please
refer to Note 13.
3
ITEM 2. PROPERTIES
Our principal executive offices are located in Nashville,
Tennessee. We have 37 offices, of which, 7 are located in the
United States, 19 are in Europe and 11 are in other countries. All
offices are leased with the exception of one office in Mexico City,
Mexico.
ITEM 3. LEGAL PROCEEDINGS
We are party to various legal proceedings. Although the
outcomes of these proceedings cannot be predicted with certainty,
we believe the final outcomes will not have a material adverse
effect on our financial position or results of operations.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS
Our stock is not publicly traded, Caterpillar is the owner of
our one outstanding share. We have not declared or paid any
dividends on our common stock.
Part II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
1998 COMPARED WITH 1997
PORTFOLIO
The net portfolio balance was $10,542.6 million at December 31,
1998, an increase of 47% or $3,353.3 million over December 31,
1997.
In January 1998, we entered into an agreement with Caterpillar
to purchase certain U.S. dealer receivables from Caterpillar at a
discount. Under this agreement, Caterpillar continues to service
the receivables. Under this program, we use a portion of
collections each week to purchase additional receivables in order
to maintain a consistent balance. At December 31, 1998, the
balance of receivables owned by us and serviced by Caterpillar was
$1,166.4 million, which is classified as wholesale notes
receivable.
We financed new retail business of $5,818.8 million during 1998
as compared to $4,375.7 million in 1997. This 33% increase
resulted primarily from financing more Caterpillar units at a
higher average financed amount per unit.
REVENUES
Total revenues for 1998 were a record $1,045.7 million. Of the
$254.2 million increase over 1997, primarily the result of the
larger portfolio, $82.9 million resulted from the revenue earned on
dealer receivables purchased from Caterpillar.
The average interest rate on finance receivables (computed by
dividing finance income by the average monthly finance receivable
balance net of unearned income) was 8.75% for 1998 compared with
8.69% for 1997. The tax benefits of governmental lease purchase
contracts and tax-oriented leases are not included in these
computed interest rates.
Other revenue was $75.1 million for 1998. The increase of $12.3
million from 1997 included increased securitization-related revenue
of $8.2 million, interest income on loans to Caterpillar of $4.1
million fees, and other miscellaneous revenue.
4
EXPENSES
Interest expense for 1998 increased $135.1 million over 1997.
This increase was primarily the result of increased borrowings to
support the larger portfolio. The average interest rate on
borrowed funds was 6.00% for 1998 as compared to 5.94% for 1997.
Depreciation expense increased $29.1 million over 1997 due to an
increase in new operating leases.
General, operating and administrative expenses increased $28.4
million during 1998 as compared to 1997. This increase is
primarily due to staff-related expenses and other expenses incurred
to increase new business, service the larger managed portfolio and
support geographic expansion. The number of full-time employees
was 821 at December 31, 1998, an increase of 137 from 1997.
The provision for credit losses increased $30.9 million over
1997 mainly due to the larger portfolio.
PROFIT
Profit for 1998 was $111.6 million, a $17.4 million increase
from 1997. This increase is primarily the result of a larger
portfolio, partially offset by a higher provision for credit
losses.
PAST DUE RECEIVABLES
Receivables that were past due over 30 days were 1.5% of the
total receivables at December 31, 1998 (1.7% excluding the dealer
receivables serviced by Caterpillar), as compared to 1.7% at
December 31, 1997. We continuously monitor the allowance for
credit losses to provide for an amount we believe is adequate,
after considering the value of any collateral, to cover
uncollectible receivables. See Note 2 for information on allowance
for credit losses.
1997 COMPARED WITH 1996
(has been changed to conform with 1998 presentation)
PORTFOLIO
The net portfolio balance was $7,189.3 million at December 31,
1997, compared to $6,212.3 million at December 31, 1996.
We financed new retail business transactions totaling $4,375.7
million during 1997 as compared to $3,619.2 million during 1996.
This increase resulted primarily from financing an increased
percentage of deliveries of Caterpillar product.
REVENUES
Total revenues for 1997 were $791.5 million. The increase of
$113.5 million over 1996 was primarily the result of portfolio
growth.
The average interest rate on finance receivables (computed by
dividing finance income by the average monthly finance receivable
balance net of unearned income) was 8.69% for 1997 compared with
8.90% for 1996. The tax benefits of governmental lease purchase
contracts and tax-oriented leases are not included in these
annualized interest rates.
Other revenue of $62.8 million for 1997 included securitization-
related revenue, fees and other miscellaneous revenue. The $16.3
million increase over 1996 resulted primarily from increases of:
$6.5 million on sales of used equipment
$5.6 million in servicing and other securitization related income
$3.6 million gain on sale of receivables
5
EXPENSES
Interest expense for 1997 was $366.7 million, an increase of
$51.3 million over 1996. This increase was primarily the result of
increased borrowings to support the larger portfolio, partially
offset by lower borrowing rates. The average interest rate on
borrowed funds was 5.94% for 1997 as compared to 6.08% for 1996.
Depreciation expense increased from $121.0 million in 1996 to
$139.3 million in 1997 due to an increase in new operating leases.
General, operating and administrative expenses increased $14.0
million over 1996. This increase is primarily due to staff-related
expenses and other expenses incurred due to increased new business
and geographic expansion. Full time employment increased from 576
in 1996 to 684 at December 31, 1997.
The provision for credit losses decreased from $41.3 million in
1996 to $39.2 million in 1997.
PROFIT
Profit for 1997 was $94.2 million, compared to $75.6 million in
1996, primarily the result of the larger portfolio.
PAST DUE RECEIVABLES
Receivables that were past due over 30 days were 1.7% of the
total receivables at December 31, 1997 compared to 2.1% at December
31, 1996. We continuously monitor the allowance for credit losses
to provide for an amount we believe is adequate, after considering
the value of any collateral, to cover uncollectible receivables.
See Note 2 for information on allowance for credit losses.
CAPITAL RESOURCES AND LIQUIDITY
Operations for 1998 were funded with a combination of bank
borrowings, commercial paper, equity capital invested by
Caterpillar, medium-term notes, sales of receivables and retained
earnings.
At December 31, 1998, we had the following credit lines
available:
Two syndicated revolving credit lines. Two revolving credit lines,
used to support our commercial paper and commercial paper
guarantees totaling $2,900.0 million, are shared with Caterpillar
under the following allocation:
Five-year 364-day
Facility Facility Total
Caterpillar $ 187.5 $ 102.5 $ 290.0
Caterpillar Financial Services Corp. 1,687.5 922.5 2,610.0
Total $1,875.0 $1,025.0 $2,900.0
The five year facility expires on Oct. 5, 2002; the 364-day
facility expires on Oct. 5, 1999.
At December 31, 1998, there were no borrowings under these lines.
European revolving credit line. This $1.0 billion credit line
supports our Euro-commercial paper and certificate of deposit
program. Under this program, commercial paper and certificates of
deposit are issued by us or by our Irish subsidiaries with our
guarantee. At December 31, 1998, there were no borrowings under
this credit line.
6
Short-term credit lines from banks. These credit lines total $628.5
million and will be eligible for renewal at various dates
throughout 1999. They are used for bank borrowings and as support
for our outstanding commercial paper and commercial paper
guarantees. We had $188.9 million outstanding against these credit
lines at December 31, 1998.
Variable amount lending agreements with Caterpillar. Under these
agreements, we may borrow up to $831.3 million from Caterpillar,
and Caterpillar may borrow up to $670.7 million from us. The
agreements are in effect for indefinite periods of time and may be
changed or terminated by either party with 30 days' notice. We had
borrowings of $211.7 million and loans receivable of $246.3 million
outstanding at December 31, 1998 under these agreements.
Total outstanding borrowings at December 31, 1998 were $9,561.7
million, an increase of $3,224.6 million over December 31, 1997.
Outstanding borrowings primarily include:
$6,201.4 million of medium-term notes
$2,849.7 million of commercial paper
$188.9 million of bank borrowings
In July 1998, we securitized $605.7 million of our receivables
consisting of $417.7 million of installment sale contracts and
$188.0 million of finance lease contracts and recognized a $6.9
million pre-tax gain. We will continue to receive fees in future
periods for servicing these sold receivables. In October 1998, we
increased the balance in our private-placement, revolving, asset-
backed securitization of wholesale receivables from $600.0 million
to $750.0 million and recognized a $0.8 million gain. We used the
proceeds from both of these transactions to reduce debt.
At December 31, 1998, we serviced $1,637.8 million of sold
receivables which consist of $750.0 million in wholesale
receivables under a revolving asset-backed securitization
agreement, $741.3 million of installment sale contracts and $146.5
million of finance leases. These receivables are not available to
pay our creditors.
Caterpillar contributed an additional $280.0 million of equity
capital during 1998. Our debt-to-equity ratio at December 31,
1998 was 8.0 to 1 as compared to 7.8 to 1 at December 31, 1997.
Please refer to Note 6 for information on debt covenants.
DERIVATIVES
We use interest rate derivative financial instruments and
currency derivative financial instruments to manage interest rate
and foreign currency exchange risks that we encounter as a part of
our normal business. We do not use these instruments for trading
purposes.
Interest rate derivatives. We use interest rate swap agreements to
manage the risk of changes in interest rates, allowing us to
maintain our interest rate spreads, regardless of the direction
interest rates move. At December 31, 1998, we had interest rate
swap contracts outstanding with notional amounts totaling $2,183.2
million and terms of up to ten years. These contracts change:
$1,373.2 million of floating rate debt to fixed rate debt
$656.5 million of fixed rate debt to floating rate debt
$153.5 million of floating rate debt to floating rate debt
having different characteristics
Foreign currency derivatives. We use foreign exchange contracts to
manage potential risk of fluctuating exchange rates. These
contracts have terms that generally range up to three months. At
December 31, 1998, we had foreign exchange contracts totaling
$1,267.9 million, $3.4 million of which were with Caterpillar.
They hedge foreign currency denominated receivables and debt of
international subsidiaries.
7
YEAR 2000 READINESS
The Year 2000 ("Y2K") issue relates to the inability of
computer applications to distinguish between years with the same
last two digits in different centuries such as 1900 and 2000. In
1997, we began to evaluate this ability in the systems we use. At
that time, we evaluated our exposure in key internal systems, key
external systems and non-critical systems. During 1998, we have
continued to increase our preparedness, or "compliance," in each
area.
Our key internal systems include software and hardware used to
track our contract, customer and financial information as well as
internal communications and quoting software. Most of these
systems are currently Y2K compliant. By the end of July 1999, we
will install software which will upgrade the remaining programs,
bringing them into compliance. The failure of systems which are
not currently compliant would cause only minor business disruption
as we would perform some tasks manually rather than electronically,
such as calculating quotes for customers manually instead of by
computer.
Our key external systems include utilities, banking, and
facility control hardware and software. In these areas, we have
contacted our key business partners and asked them to certify their
compliance. In situations where they are not compliant, we are
closely monitoring their plans to implement the changes necessary
to become compliant. If these business partners do not become
compliant, it could have a significant negative impact on our
ability to operate. However, in most cases, we have multiple
suppliers which could mitigate the adverse impact. We have
developed contingency plans that would allow at least a minimal
level of operation to continue in the event that certain key
suppliers, such as electric power or data communication systems, do
not become compliant by 2000.
We are also dependent on the dealers' ability to continue
selling equipment. Caterpillar has taken steps to assess the
dealers' readiness. Through their communications, we expect that
substantially all of our dealers will be in a position to service
customers without significant business disruption from Y2K by June
1999.
Our non-critical systems include business software used in non-
critical functions, such as spreadsheets used to report information
which could be manually reported and office support machines which
are not vital to daily operations. If these items failed to become
compliant, they would cause minimal disruption to particular
offices.
Our target is to have our critical internal systems Y2K
compliant by July 1999. We estimate the cost incurred to become
Y2K compliant to be less than $1.0 million and not material to our
financial position or results of operations. We will also continue
to communicate with our key business partners to assess their level
of compliance and adjust our contingency plans as needed.
ITEM 7.A QUANTITATIVE AND QUALITATIVE MARKET RISK
We use interest rate swap agreements to manage the effect of
fluctuating interest rates on our income. To estimate the impact
an interest rate change would have on our income, our
"sensitivity," we use a computer model. The model measures the re-
pricing characteristics of interest-sensitive assets, liabilities
and off-balance sheet derivatives. The model estimates our
unhedged interest expense for the next twelve months assuming the
only changes to our interest sensitive assets or liabilities are
contractual repayments and there are no changes to equity or market
rates. This provides us with a "baseline" interest expense. Then
using the same model, we shift the market interest rates 100 basis
points instantaneously and parallel across the rate curve to create
a "rate shocked" interest expense. Our sensitivity is measured as
the difference between the baseline and rate shocked interest
expense.
Using our computer modeling, and assuming no new fixed rate
loans or leases were extended and no action was taken to alter our
current interest rate sensitivity, the impact to interest expense
of an immediate hypothetical 100 basis point parallel rise in the
yield curve on January 1, 1999 would be an estimated $14.4 million
increase for the twelve months ending December 31, 1999. This
8
impact on interest expense primarily reflects our increased
borrowings and is not materially different from the potential $9.6
million increase reported last year. Although we believe that this
measure provides a meaningful estimate of our interest rate
sensitivity, it does not adjust for other dynamic factors that
impact our interest expense. Accordingly, no assurance can be
given that actual results would be consistent with the potential
outcome simulated by our computer modeling. Further, our computer
modeling does not necessarily represent our current view of future
market interest rate movements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by Item 8 is incorporated by reference from
pages 13 through 16.
Part IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this report.
1. Financial Statements
Report of Independent Accountants
Consolidated Statement of Financial Position
Consolidated Statement of Profit
Consolidated Statement of Changes in Equity
Consolidated Statement of Cash Flows
(b) Reports on Form 8-K
No current reports on form 8-K were filed during the fourth quarter.
(c) Exhibits
3.1Certificate of Incorporation of the Company (incorporated by
reference from Exhibit 3.1 to the Company's Form 10, as
amended, Commission File No. 0-13295).
3.2Bylaws of the Company (incorporated by reference from
Exhibit 3.2 to the Company's Annual Report on Form 10-K, for
the year ended December 31, 1990, Commission File No. 0-
13295).
4.1Indenture, dated as of April 15, 1985, between the Company
and Morgan Guaranty Trust Company of New York, as Trustee,
including form of Debt Security (see Table of Contents to
Indenture)(incorporated by reference from Exhibit 4.1 to the
Company's Registration Statement on Form S-3, Commission
File No. 33-2246).
4.2First Supplemental Indenture, dated as of May 22, 1986,
amending the Indenture dated as of April 15, 1985 between
the Company and Morgan Guaranty Trust Company of New York,
as Trustee (incorporated by reference from Exhibit 4.1 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 20, 1986, Commission File No. 0-13295).
4.3Second Supplemental Indenture, dated as of March 15, 1987,
amending the Indenture dated as of April 15, 1985 between
the Company and Morgan Guaranty Trust Company of New York,
as Trustee (incorporated by reference from Exhibit 4.3 to
the Company's Current Report on Form 8-K dated April 24,
1987, Commission File No. 0-13295).
9
4.4Third Supplemental Indenture, dated as of October 2, 1989,
amending the Indenture dated as of April 15, 1985, between
the Company and Morgan Guaranty Trust Company of New York,
as Trustee (incorporated by reference from Exhibit 4.3 to
the Company's Current Report on Form 8-K, dated October 16,
1989, Commission File No. 0-13295).
4.5Fourth Supplemental Indenture, dated as of October 1, 1990,
amending the Indenture dated April 15, 1985, between the
Company and Morgan Guaranty Trust Company of New York, as
Trustee (incorporated by reference from Exhibit 4.3 to the
Company's Current Report on Form 8-K, dated October 29,
1990, Commission File No. 0-13295).
4.6Indenture, dated as of July 15, 1991, between the Company
and Continental Bank, National Association, as Trustee
(incorporated by reference from Exhibit 4.1 to the Company's
Current Report on Form 8-K, dated July 25, 1991, Commission
File No. 0-13295).
4.7Support Agreement, dated as of December 21, 1984, between
the Company and Caterpillar (incorporated by reference from
Exhibit 4.2 to the Company's Form 10, as amended, Commission
File No. 0-13295).
4.8First Amendment to the Support Agreement dated June 14,
1995 between the Company and Caterpillar (incorporated by
reference from Exhibit 4 to the Company's Current Report on
Form 8-K dated June 14, 1995, Commission File No 0-13295).
10.1Tax Sharing Agreement, dated as of June 21, 1984,
between the Company and Caterpillar (incorporated by
reference from Exhibit 10.3 to the Company's Form 10, as
amended, Commission File No. 0-13295).
12 Statement Setting Forth Computation of Ratio of Profit to
Fixed Charges.
23 Consent of Independent Accountants.
10
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Caterpillar Financial Services
Corporation
(Registrant)
Dated: February 25, 1999 By /s/ Paul J. Gaeto
Paul J. Gaeto, Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Company and in the capacities and on the dates indicated.
Date Signature Title
President, Director
February 25, 1999 /s/ James S. Beard and Principal Executive Officer
James S. Beard
February 25, 1999 /s/ James R. English Executive Vice
James R. English President and Director
February 25, 1999 /s/ James W. Owens Director
James W. Owens
Controller and
February 25, 1999 /s/ Kenneth C. Springer Principal Accounting Officer
Kenneth C. Springer
Treasurer and
February 25, 1999 /s/ Edward J. Scott Principal Financial Officer
Edward J. Scott
11
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Caterpillar Financial Services Corporation
In our opinion, the consolidated financial statements listed in the
index appearing under Item 14(a)(1) on page 9 present fairly, in all
material respects, the financial position of Caterpillar Financial
Services Corporation and its subsidiaries at December 31, 1998, 1997
and 1996 and the results of their operations and their cash flows 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 audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
New York, New York
January 20, 1999
12
CATERPILLAR FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AT DECEMBER 31, (Millions of dollars, except share data)
1998 1997 1996
Assets:
Cash and cash equivalents $ 49.5 $ 41.5 $ 27.0
Finance receivables (Notes 2, 3 and 5):
Wholesale notes receivable 2,110.2 497.9 465.1
Retail notes receivable 2,283.0 1,852.1 1,535.9
Investment in finance
receivables 6,350.3 4,993.6 4,352.5
10,743.5 7,343.6 6,353.5
Less: Unearned income 851.6 661.8 604.3
Allowance for
credit losses 110.8 83.5 74.4
9,781.1 6,598.3 5,674.8
Equipment on operating leases,
less accumulated
depreciation (Note 4) 715.9 558.7 511.0
Deferred income taxes (Note 11) 7.8 4.6 2.9
Notes receivable from
Caterpillar (Note 13) 246.3 - -
Other assets 334.2 223.7 148.5
Total assets $11,134.8 $7,426.8 $6,364.2
Liabilities and stockholder's equity:
Payable to dealers and others $ 113.3 $ 84.9 $ 88.1
Payable to Caterpillar
- Borrowings (Note 13) 211.7 243.5 150.0
Payable to Caterpillar
- Other (Note 13) 4.6 4.1 3.1
Accrued interest payable 85.0 47.3 39.2
Income taxes payable (Note 11) 106.4 81.4 40.4
Other liabilities 31.7 22.2 23.5
Short-term borrowings (Note 7) 3,113.2 2,731.5 2,678.9
Current maturities of
long-term debt (Note 8) 2,178.9 1,087.9 1,057.8
Long-term debt (Note 8) 4,057.9 2,274.2 1,545.7
Deferred income taxes (Note 11) 31.5 38.7 42.2
Total liabilities 9,934.2 6,615.7 5,668.9
Commitments and contingent liabilities (Note 10)
Common stock - $1 par value
Authorized: 2,000 shares
Issued and outstanding:
one share 675.0 395.0 345.0
Retained earnings 554.3 442.7 348.5
Accumulated other comprehensive
income (28.7) (26.6) 1.8
Total stockholder's equity 1,200.6 811.1 695.3
Total liabilities and
stockholder's equity $11,134.8 $7,426.8 $6,364.2
See Notes to Consolidated Financial Statements
13
CATERPILLAR FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENT OF PROFIT
FOR THE YEARS ENDED DECEMBER 31, (Millions of dollars)
1998 1997 1996
Revenues:
Wholesale finance income $ 147.0 $ 49.5 $ 47.4
Retail finance income 609.7 499.3 427.2
Rental income 213.9 179.9 156.9
Other income 75.1 62.8 46.5
Total revenues 1,045.7 791.5 678.0
Expenses:
Interest (Notes 7 and 8) 501.8 366.7 315.4
Depreciation 168.4 139.3 121.0
General, operating, and
administrative 125.2 96.8 82.8
Provision for credit losses 70.1 39.2 41.3
Other expense 1.6 1.8 1.7
Total expenses 867.1 643.8 562.2
Profit before income taxes 178.6 147.7 115.8
Provision for income taxes (Note 11) 67.0 53.5 40.2
Net profit $ 111.6 $ 94.2 $ 75.6
See Notes to Consolidated Financial Statements
14
CATERPILLAR FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, (Millions of dollars)
1998 1997 1996
Retained earnings:
Balance at January 1 $ 442.7 $ 348.5 $ 272.9
Net profit 111.6 $111.6 94.2 $ 94.2 75.6 $75.6
Balance at December 31 554.3 442.7 348.5
Accumulated other
comprehensive income:
Balance at January 1 (26.6) 1.8 5.4
Foreign currency
translation adjustment (2.1) (2.1) (28.4) (28.4) (3.6) (3.6)
Comprehensive income $109.5 $ 65.8 $72.0
Balance at December 31 (28.7) (26.6) 1.8
Paid-in capital:
Balance at January 1 395.0 345.0 325.0
Equity capital from
Caterpillar 280.0 50.0 20.0
Balance at December 31 675.0 395.0 345.0
Total equity $1,200.6 $ 811.1 $ 695.3
See Notes to Consolidated Financial Statements
15
CATERPILLAR FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, (Millions of dollars)
1998 1997 1996
Cash flows from operating activities:
Net income $111.6 $ 94.2 $ 75.6
Adjustments for non-cash items:
Depreciation 168.4 139.3 121.0
Provision for credit losses 70.1 39.2 41.3
Other (28.6) (40.8) (6.3)
Change in assets and liabilities:
Receivables from customers
and others (157.2) (39.6) (2.0)
Deferred income taxes (11.4) (3.1) (5.5)
Payable to dealers and others 28.4 (0.9) 37.1
Payable to Caterpillar - Other (1.0) 1.5 (2.0)
Accrued interest payable 37.6 8.5 -
Income taxes payable 25.3 41.0 21.9
Other, net (2.7) (3.2) 5.5
Net cash provided by operating
activities 240.5 236.1 286.6
Cash flows from investing activities:
Additions to property and
equipment (342.5) (282.3) (264.2)
Disposals of equipment 123.7 122.5 105.4
Additions to finance
receivables (14,960.8) (6,643.7) (5,801.5)
Collections of finance
receivables 9,958.2 3,604.8 3,406.5
Proceeds from sales of
receivables 1,705.4 1,832.8 1,424.9
Notes receivable from Caterpillar (243.8) - -
Other, net (4.2) (2.7) 2.3
Net cash used for investing
activities (3,764.0) (1,368.6) (1,126.6)
Cash flows from financing activities:
Additional paid-in capital 280.0 50.0 20.0
Payable to Caterpillar
- Borrowings (28.8) 93.5 (325.5)
Proceeds from long-term debt 3,962.4 1,822.3 1,050.0
Payments on long-term debt (1,088.0) (1,059.9) (1,169.3)
Short-term borrowings, net 410.9 240.7 1,244.4
Net cash provided by financing
activities 3,536.5 1,146.6 819.6
Effect of exchange rate changes
on cash (5.0) 0.4 3.8
Net change in cash and cash
equivalents 8.0 14.5 (16.6)
Cash and cash equivalents at
beginning of year 41.5 27.0 43.6
Cash and cash equivalents at end
of year $ 49.5 $ 41.5 $ 27.0
See Notes to Consolidated Financial Statements
All short-term investments, which consist primarily of highly liquid
investments with original maturities of less than 3 months, are
considered to be cash equivalents
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Basis of consolidation
Caterpillar Financial Services Corporation is a wholly owned
finance subsidiary of Caterpillar Inc. (together with its other
subsidiaries, "Caterpillar"). We provide retail financing
alternatives to customers and dealers around the world for
Caterpillar and non-competitive related equipment, provide
wholesale financing to Caterpillar dealers and purchase short-term
dealer receivables from Caterpillar.
The financial statements include the accounts of Caterpillar
Financial Services Corporation and its subsidiaries. Investments
in companies that are owned 50% or less are accounted for by the
equity method. All material intercompany balances have been
eliminated. Certain amounts for prior periods have been
reclassified to conform to the 1998 presentation.
B. Recognition of earned income
Retail finance income on finance leases, tax leases, installment
sale contracts and governmental tax leases is recognized over the
term of the contract at a constant rate of return on the scheduled
outstanding principal balance.
Rental income on operating leases is recorded in the period
earned.
Wholesale finance income on dealer inventory, rental fleets,
rental stores, and on short-term dealer receivables is recognized
based on the daily balance of wholesale receivables outstanding and
the applicable effective interest rate.
Loan origination and commitment fees over five hundred dollars are
amortized to finance income using the interest method over the life of
the finance receivables.
Recognition of income is suspended when management determines
that collection of future income is not probable. Accrual is
resumed, and previously suspended income is recognized, when the
receivable becomes contractually current and collection doubts are
removed.
C. Depreciation
Depreciation on operating leases is recognized using the
straight-line method over the lease term. The depreciable basis is
the original cost of the equipment less the estimated residual
value of the equipment at the end of the lease term.
D. Derivative financial instruments
We use interest rate and currency derivative financial
instruments to manage risks encountered through the normal course
of business. We do not use any of these instruments for
speculative purposes. Please refer to Note 9 for more information
on derivative instruments, including the methods used to account
for them.
E. Allowance for credit losses
On a regular basis, we evaluate the collectibility of receivable
balances and maintain an allowance for credit losses, which we
believe is sufficient to cover uncollectible accounts.
Uncollectible receivable balances are written off against the
allowance for credit losses when the underlying collateral is
repossessed or when we determine that it is probable the receivable
balance is uncollectible.
F. Income taxes
We have tax sharing agreements with Caterpillar in the U.S. and
Australia under which we pay to or receive from Caterpillar our
allocated share of income taxes or credits.
17
G. Foreign currency translation
Assets and liabilities of foreign subsidiaries (the majority of
which use the local currency as their functional currency) are
translated at current exchange rates, and the effects of
translation adjustments are reported as a separate component of
stockholder's equity entitled "Foreign currency translation
adjustment."
H. Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires us to make
estimates and assumptions that affect the reported amounts.
Examples include accruals for income taxes and the allowance for
credit losses.
I. New accounting standard
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This Statement
requires that an entity recognize all derivatives as either assets
or liabilities in the statement of financial position and measure
those instruments at fair value. We will be required to adopt this
new accounting standard on or before January 1, 2000. We do not
anticipate early adoption. Due to the complexity of this new
standard, we have not completed an assessment of the impact it will
have on our financial position or results of operations.
NOTE 2 - RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
The contractual maturities of outstanding receivables at
December 31, 1998 were:
Installment Finance
Amounts Due in Contracts Leases Notes TOTAL
1999 $ 917.4 $1,220.1 $2,212.2 $4,349.7
2000 645.2 861.9 552.6 2,059.7
2001 417.1 581.2 435.7 1,434.0
2002 220.9 288.1 202.6 711.6
2003 78.3 114.6 177.6 370.5
Thereafter 14.3 95.5 812.5 922.3
2,293.2 3,161.4 4,393.2 9,847.8
Residual value 895.7 895.7
Less: Unearned
Income 248.6 529.1 73.9 851.6
Total $2,044.6 $3,528.0 $4,319.3 $9,891.9
Receivables generally may be repaid or refinanced without
penalty prior to contractual maturity. We also sell receivables.
Accordingly, this presentation should not be regarded as a forecast
of future cash collections.
In July 1998, we securitized $605.7 million of our receivables
consisting of $417.7 million of installment sale contracts and
$188.0 million of finance lease contracts. In October 1998, we
increased the balance in our private-placement, revolving, asset-
backed securitization of wholesale receivables from $600.0 million
to $750.0 million.
18
At December 31, 1998, we serviced $1,637.8 million of sold
receivables which consisted of $750.0 million of wholesale
receivables under a revolving asset-backed securitization
agreement, $741.3 million of installment sale contracts and $146.5
million of finance lease contracts. We receive fees for servicing
these receivables. These receivables are not available to pay our
creditors.
Impaired Loans or leases
A loan or lease is considered impaired when the investment in
the contract or equipment exceeds the expected proceeds.
1998 1997 1996
Total investment in impaired
loans/leases at December 31, $ 60.6 $ 30.4 $ 33.4
Less: Fair value of
underlying collateral 34.5 18.5 21.4
Potential loss on impaired
loans/leases $ 26.1 $ 11.9 $ 12.0
Average investment in
impaired loans/leases $ 73.5 $ 46.7 $ 42.8
Allowance for credit loss activity for the year ended December
31,:
1998 1997 1996
Balance at beginning of year $ 83.5 $ 74.4 $ 57.0
Provision for credit losses 70.1 39.2 41.3
Receivables written off, net of
recoveries (37.7) (19.6) (20.6)
Adjustment related to sale of
receivables (4.9) (6.6) (3.2)
Foreign currency translation
adjustment (0.2) (3.9) (0.1)
Balance at end of year $ 110.8 $ 83.5 $ 74.4
The increase in write-offs during 1998 is primarily
attributable to losses in southeast Asia, where the economic
outlook remains uncertain. We do not anticipate any additional
material write-offs in the region in the near term but continue to
monitor the situation very closely.
NOTE 3 - INVESTMENT IN FINANCING LEASES
The components of net investment in financing leases at
December 31, were as follows:
1998 1997 1996
Total minimum lease payments receivable $3,161.4 $2,783.5 $2,383.3
Estimated residual value of leased assets:
Guaranteed 229.3 206.0 162.5
Unguaranteed 666.4 518.9 401.8
4,057.1 3,508.4 2,947.6
Less: Unearned Income 529.1 477.6 429.8
Net investment in financing leases $3,528.0 $3,030.8 $2,517.8
19
NOTE 4 - EQUIPMENT ON OPERATING LEASES
Components of equipment on operating leases, less accumulated
depreciation, at December 31, were as follows:
1998 1997 1996
Equipment on operating leases, at cost $1,040.4 $827.3 $755.4
Less: Accumulated depreciation 324.5 268.6 244.4
Equipment on operating leases, net $ 715.9 $558.7 $511.0
At December 31, 1998, scheduled minimum rental payments for
operating leases were as follows:
1999 2000 2001 2002 2003 Thereafter Total
$311.0 $236.6 $141.7 $93.7 $13.6 $2.2 $798.8
NOTE 5 - CONCENTRATION OF CREDIT RISK
Our receivables are primarily comprised of receivables under
installment sale contracts, receivables arising from leasing
transactions and notes receivable. Percentages of the total value
of our portfolio represented by each financing plan at December 31,
were as follows:
1998 1997 1996
Retail Financing:
Finance (non-tax) leases 23% 29% 26%
Installment sale contracts 20% 19% 20%
Tax leases 15% 18% 19%
Customer loans 15% 18% 19%
Dealer loans 6% 7% 6%
Government lease-purchase contracts 2% 2% 3%
Wholesale Financing: 19% 7% 7%
The sharp increase in wholesale financing is primarily due to
dealer receivables purchased from Caterpillar. Please refer to
Note 13 for more information. Receivables from customers in
construction-related industries made up approximately one-third of
total finance receivables at December 31, 1998, 1997 and 1996.
Dealers guarantee approximately 3.4% of our retail financing
portfolio. No single customer or region represents a significant
concentration of credit risk.
NOTE 6 - CREDIT LINES
At December 31, 1998, we had the following credit lines available:
Two syndicated revolving credit lines. Two revolving credit lines,
used to support our commercial paper and commercial paper
guarantees totaling $2,900.0 million, are shared with Caterpillar
under the following allocation:
20
Five-year 364-day
Facility Facility Total
Caterpillar $ 187.5 $ 102.5 $ 290.0
Caterpillar Financial Services Corp. 1,687.5 922.5 2,610.0
Total $1,875.0 $1,025.0 $2,900.0
The five year facility expires on Oct. 5, 2002; the 364-day
facility expires on Oct. 5, 1999.
At December 31, 1998, there were no borrowings under these lines.
European revolving credit line. This $1.0 billion credit line
supports our Euro-commercial paper and certificate of deposit
program. Under this program, commercial paper and certificates of
deposit are issued by us or by our Irish subsidiaries with our
guarantee. At December 31, 1998, there were no borrowings under
this credit line.
Short-term credit lines from banks. These credit lines total $628.5
million and will be eligible for renewal at various dates
throughout 1999. They are used for bank borrowings and as support
for our outstanding commercial paper and commercial paper
guarantees. We had $188.9 million outstanding against these credit
lines at December 31, 1998.
Variable amount lending agreements with Caterpillar. Under these
agreements, we may borrow up to $831.3 million from Caterpillar,
and Caterpillar may borrow up to $670.7 million from us. The
agreements are in effect for indefinite periods of time and may be
changed or terminated by either party with 30 days' notice. We had
borrowings of $211.7 million and loans receivable of $246.3 million
outstanding at December 31, 1998. Please refer to Note 13 for more
information concerning activity under these lines.
The revolving credit facilities require us to maintain a
consolidated ratio of profit before taxes plus fixed charges to
fixed charges at no less than 1.15 to 1 for each quarter; total
debt to total stockholder's equity, as defined by agreement, may
not exceed 8.0 to 1 at year-end (8.5 to 1 moving six-month average
at other than year-end); and tangible net worth must be at least
$20.0 million. At December 31, 1998, we were in compliance with
these requirements.
NOTE 7 - SHORT-TERM BORROWINGS
At December 31, short-term borrowings were comprised of the following:
1998 1997 1996
Balance Avg. Rate Balance Avg.Rate Balance Avg. Rate
Commercial paper, net $2,849.7 5.2% $2,536.0 5.2% $2,382.1 5.2%
Payable to banks, net 188.9 4.8% 145.0 4.5% 257.2 3.7%
Other 74.6 5.2% 50.5 5.5% 39.6 5.5%
Total $3,113.2 $2,731.5 $2,678.9
21
Additional information about our short-term debt is as follows for
the years ended December 31,:
1998 1997 1996
Average short-term borrowings $2,874.6 $ 2,654.9 $ 2,240.3
Weighted average interest rate 5.3% 5.3% 5.3%
Cash paid for interest $183.1 $157.6 $160.4
NOTE 8 - LONG-TERM BORROWINGS
During 1998, we issued $3,959.8 million of medium-term notes, of
which $1,508.3 million were at fixed interest rates and $2,451.5
million were at floating interest rates, primarily indexed to
LIBOR. At December 31,1998, the average weighted interest rate on
outstanding medium-term notes was 5.5%, with maturities ranging
from 1 to 15 years. Cash paid for interest on long-term debt in
1998, 1997 and 1996 was $298.1 million, $198.2 million and $167.5
million, respectively.
Long-term debt outstanding at December 31, 1998 matures as
follows:
1999 $2,178.9
2000 2,371.1
2001 960.0
2002 289.0
2003 350.0
Thereafter 87.8
Total $6,236.8
NOTE 9 - DERIVATIVE FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
We use interest rate derivative financial instruments and
currency derivative financial instruments to manage interest rate
and foreign currency exchange risks that we encounter as a part of
our normal business. We do not use these instruments for trading
purposes.
Interest rate derivatives
We use interest rate swap agreements to manage the risk of
changes in interest rates. Under the terms of a swap agreement, we
exchange with the counterparty the difference between two interest
rates periodically over the life of the agreement. At December 31,
1998, we had interest rate swap contracts outstanding with notional
amounts totaling $2,183.2 million with terms up to ten years.
These contracts effectively change:
$1,373.2 million of floating rate debt to fixed rate debt
$656.5 million of fixed rate debt to floating rate debt
$153.5 million of floating rate debt to floating rate debt
having different characteristics
22
Net interest on interest rate swap agreements is recorded as
either Other assets or Accrued interest payable and recognized as
an adjustment to Interest expense. Gains and losses on termination
of these agreements are deferred and amortized over the remaining
original life of the agreement, unless the underlying debt to which
the agreement is designated is disposed of or the hedge is
terminated because of a loss of correlation, in which case the gain
or loss is recognized immediately in income.
Our current accounting loss exposure on interest rate swaps
related to credit risk is a net receivable of $11.7 million at
December 31, 1998. In addition, we may incur additional costs in
replacing at current market rates any contracts for which a
counterparty fails to perform. To reduce the risk of credit losses
being incurred, we enter into contracts only with counterparties
that have A- or better credit ratings and monitor the credit
standing of the counterparties. We do not anticipate
nonperformance by any of these counterparties.
Foreign currency derivatives
We use foreign exchange contracts to manage the risk of
fluctuating exchange rates. These contracts have terms that
generally range up to three months. At December 31, 1998, we had
foreign exchange contracts totaling $1,267.9 million, $3.4 million
of which were with Caterpillar. They hedge foreign currency
denominated receivables and debt of our international subsidiaries.
Deferred amounts relating to foreign exchange contracts are
recorded as either Other assets or Other liabilities, and the
premium/discount is recognized as an adjustment to Interest
expense. Exchange gains/losses on these contracts are recorded in
Other income.
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES
We are contingently liable under guarantees of securities of
certain parties, including Caterpillar. These guarantees have
terms ranging up to two years and are secured. The total guarantee
and amounts outstanding at December 31, are as follows:
1998 1997 1996
Guarantees with others $178.7 $210.9 $253.3
Guarantees with Caterpillar 75.0 50.0 -
Total guarantees $253.7 $260.9 $253.3
Outstanding with others $ 87.7 $104.6 $158.7
Outstanding with Caterpillar, 31.6 4.7 -
Total outstanding $119.3 $109.3 $158.7
We are party to agreements in the normal course of business with
selected customers and dealers in which we commit to provide a set
dollar amount of financing on a pre-approved basis. We also
provide lines of credit to selected customers and dealers, of which
a portion remains unused as of December 31, 1998. Commitments and
lines of credit generally have fixed expiration dates or other
termination clauses. It has been our experience that not all
commitments and lines of credit will be used. Management applies
the same credit policies when making commitments and granting lines
of credit as it does for any other financing. We do not require
collateral for these commitments/lines, but if credit is extended,
collateral may be required upon funding. The amount of the
commitments and lines of credit outstanding as of December 31, 1998
was $3.9 billion compared to $2.3 billion at December 31, 1997 and
$1.6 billion at December 31, 1996. The increase in 1998 is
partially related to the purchase of dealer receivables from
Caterpillar.
23
We are party to various litigation matters and claims, and,
while the results cannot be predicted with certainty, management
believes the final outcome of such matters and claims will not have
a material adverse effect on our consolidated financial position.
NOTE 11 - INCOME TAXES
The components of the provision for income taxes were as follows
for the years ended December 31,:
1998 1997 1996
Current tax provision:
U.S. federal taxes $ 54.4 $ 47.2 $ 32.8
Foreign taxes 17.5 8.8 8.2
U.S. state taxes 4.6 4.6 4.3
76.5 60.6 45.3
Deferred tax provision (credit):
U.S. federal taxes (7.4) (9.1) (7.7)
Foreign taxes (2.5) 1.6 2.1
U.S. state taxes 0.4 0.4 0.5
(9.5) (7.1) (5.1)
Total provision for income
taxes $ 67.0 $ 53.5 $ 40.2
Cash paid for taxes $ 52.4 $ 16.1 $ 23.9
Current tax provision (credit) is the amount of income taxes
reported or expected to be reported on our tax returns.
Differences between accounting rules and tax laws cause
differences between the bases of certain assets and liabilities for
financial reporting and tax purposes. The tax effects of these
differences, to the extent they are temporary, are recorded as
deferred tax assets and liabilities and consisted of the following
components at December 31,:
1998 1997 1996
Deferred tax assets:
Allowance for credit losses $ 29.9 $ 21.9 $ 20.0
Alternative fuel tax credit 1.3 1.3 0.7
Expected foreign tax credit 8.3 9.4 10.4
Net operating loss carryforwards 6.5 4.9 4.0
46.0 37.5 35.1
Deferred tax liabilities
- primarily depreciation (63.2) (66.7) (70.4)
Valuation allowance for deferred
tax assets (6.5) (4.9) (4.0)
(69.7) (71.6) (74.4)
Deferred taxes - net $(23.7) $(34.1) $(39.3)
Of our foreign subsidiaries that are in net operating loss carry
forward positions, there is not sufficient evidence to substantiate
recognition of deferred tax assets. Accordingly, a valuation
allowance has been recorded for this amount. It is possible that
circumstances could change in the near term at one or more of these
foreign subsidiaries which would allow us to reduce the valuation
allowance and to record additional net deferred tax assets.
24
The provision for income taxes was different than would result
from applying the U.S. statutory rate to Profit before income taxes
for the years ended December 31, for the reasons set forth in the
following reconciliation:
1998 1997 1996
Taxes computed at U.S. statutory rates $62.5 $51.7 $40.5
Increases (decreases) in taxes resulting from:
Finance income not subject to
federal taxation (3.5) (3.3) (3.0)
State income taxes, net of federal taxes 3.3 3.3 3.0
Subsidiaries' results subject to tax rates other than
U.S. statutory rates 4.7 1.2 (0.3)
Other, net - 0.6 -
Provision for income taxes $67.0 $53.5 $40.2
The domestic and foreign components of Profit before income
taxes for the years ended December 31, were as follows:
1998 1997 1996
Domestic $148.6 $121.2 $ 89.7
Foreign 30.0 26.5 26.1
Total $178.6 $147.7 $115.8
The foreign component of Profit before income taxes is comprised
of the profit of all consolidated subsidiaries located outside the
United States.
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS
We use the following methods and assumptions to estimate the
fair value of our financial instruments:
Assets and liabilities other than those listed below - carrying
amount is a reasonable estimate of fair value.
Finance receivables, net - fair value is estimated by discounting the
future cash flows using current rates for new receivables with
similar remaining maturities. Historical bad debts experience is
also considered.
Long-term debt - fair value is estimated by discounting the future
cash flows using our current borrowing rates for similar types and
maturities of debt, except for floating rate notes for which the
carrying amount is considered a reasonable estimate of fair value.
Interest rate swaps - fair value is estimated based upon the amount
we would receive or pay to terminate the agreements as of December
31.
Forward exchange contracts - carrying amount is a reasonable estimate
of fair value.
The estimated fair values of financial instruments at December 31,
are as follows:
25
1998 1997 1996
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
Finance
receivables -
net, $8,916.3 $8,977.7 $5,845.8 $5,872.9 $4,982.6 $5,008.8
(excluding operating and tax leases (1))
Long-term debt $(6,236.8)$(6,280.2) $(3,362.1) $(3,419.6) $(2,603.5)$(2,653.4)
Interest rate
swaps:
In a net receivable
position $14.0 $18.6 $0.4 $19.5 $0.8 $4.3
In a net payable
position $(2.3) $(24.1) $(3.3) $(12.1) $(4.1) $(15.5)
Forward exchange
contracts:
In a net gain
position $20.8 $20.8 $47.7 $47.7 $8.5 $8.5
In a net loss
position $(9.5) $(9.5) $(6.0) $(6.0) $(13.5) $(13.5)
(1) Excluded items have a net carrying value of $865 at December 31,
1998, $753 at December 31, 1997 and $692 at December 31, 1996.
NOTE 13 - TRANSACTIONS WITH RELATED PARTIES
We have a Support Agreement with Caterpillar which provides that
Caterpillar will remain, directly or indirectly, our sole owner,
cause us to maintain a net worth of at least $20.0 million and
ensure that we maintain a ratio of earnings and interest expense
(as defined) to interest expense of not less than 1.15 to 1. In
1998, Caterpillar made capital contributions of $280.0 million.
Although this agreement can be modified or terminated by either
party, any modification or termination which would adversely affect
holders of our debt is required to be approved by holders of 66-
2/3% of the aggregate principle of outstanding debt. Caterpillar's
obligation under this agreement is not directly enforceable by any
of our creditors and does not constitute a guarantee of any of our
obligations.
We have variable amount lending agreements with Caterpillar.
Under these agreements, we may borrow up to $831.3 million from
Caterpillar, and Caterpillar may borrow up to $670.7 million from
us. The agreements are in effect for indefinite periods of time
and may be changed or terminated by either party with 30 days'
notice. Information concerning these agreements is as follows:
1998 1997 1996
Loans payable at December 31, $211.7 $243.5 $150.0
Loans receivable at December 31, $246.3 - -
Interest paid $ 6.3 $ 11.5 $ 20.7
Interest earned $ 4.1 - -
We were contingently liable under guarantees of securities of
Caterpillar totaling $75.0 million at December 31, 1998 and $50.0
million at December 31, 1997. Of these guarantees, the amount
outstanding was $31.6 million at December 31, 1998 and $4.7 at
December 31, 1997.
We enter into forward exchange contracts with Caterpillar to
hedge our U.S. dollar denominated positions in Australia against
currency fluctuations. These contracts have terms generally
ranging up to three months. These contracts totaled $3.4 million
at December 31, 1998, $3.1 million at December 31, 1997 and $2.3
million at December 31, 1996.
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We have agreements with Caterpillar to purchase, at a discount,
certain receivables generated by sales of products to Caterpillar
dealers. Information pertaining to these purchases is as below:
1998 1997 1996
Purchases made $6,621.9 $444.3 $397.3
Discounts earned $ 88.5 $ 5.6 $ 5.4
Servicing fees paid $ 4.5 $ - $ -
Balance at December 31, $1,388.7 $139.0 $146.4
The marked increase in 1998 is primarily due to a new program
started in January 1998 to purchase receivables in the U.S. Under
this program, we use a portion of collections each week to purchase
additional receivables in order to maintain a consistent balance.
The effective interest rate on these receivables was 8.03% at
December 31, 1998.
We participate in certain marketing programs sponsored by
Caterpillar by providing financing to customers at rates below
standard rates. Under these programs, Caterpillar pays us an
amount at the outset of the transaction which we then recognize as
income over the term of the financing. During 1998, we billed
$220.5 million to Caterpillar relative to such programs, compared
with $151.0 million in 1997 and $106.2 million in 1996.
Caterpillar provides us with certain operational and
administrative support which is integral to the conduct of our
business. Our employees are covered by various benefit plans,
including pension/post-retirement plans, administered by
Caterpillar. We reimburse Caterpillar for these charges which
amounted to $5.6 million during 1998, $4.5 million during 1997 and
$3.7 million during 1996. We also reimburse Caterpillar for
certain other corporate services which amounted to $2.5 million for
the year ended December 31, 1998 and $2.3 million for the years
ended December 31, 1997 and 1996.
We have tax sharing agreements with Caterpillar, in the U.S. and
Australia, under which we pay to or receive from Caterpillar our
allocated share of income taxes or credits.
NOTE 14 - LEASES
We lease certain offices and other property through operating
leases. Rental expense is charged to operations as incurred. Total
rental expense for operating leases was $12.4 million, $9.7 million
and $7.6 million for 1998, 1997 and 1996, respectively. Minimum
payments for operating leases having initial non-cancelable terms
in excess of one year are (in millions):
1999 $ 6.1
2000 4.7
2001 3.7
2002 3.2
2003 0.6
Thereafter 2.8
Total $21.1
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NOTE 15 - SEGMENT INFORMATION
Basis for segment information
We have three geographic segments in which we offer primarily
the same types of services (see Note 1). We account for transactions
between segments in accordance with generally accepted accounting
principles. We segregate information based on where service is
provided:
United States: We have regional offices in the United States
which serve local dealers and customers. We also have offices in the
United States which provide cross-border financing around the world.
Europe: We have offices throughout Europe which serve European
dealers and customers.
All Other: Offices in North and Latin America and Asia which
are not classified elsewhere are included in this segment.
1998 U.S Europe All Other Total
Revenue from external customers $ 748.0 151.5 146.2 $ 1,045.7
Inter-segment revenue $ 26.2 3.8 - $ 30.0
Net profit $ 96.6 4.3 10.7 $ 111.6
Interest expense $ 396.3 54.2 81.3 $ 531.8
Depreciation expense $ 104.9 51.9 11.6 $ 168.4
Income tax expense $ 52.0 4.9 10.1 $ 67.0
Assets $8,927.5 1,812.2 1,660.9 $12,400.6
Expenditures for assets $ 232.1 93.1 74.3 $ 399.5
1997 U.S. Europe All Other Total
Revenue from external customers $ 581.0 120.5 90.0 $ 791.5
Inter-segment revenue $ 5.0 1.0 - $ 6.0
Net profit $ 78.1 8.6 7.5 $ 94.2
Interest expense $ 284.2 41.5 47.0 $ 372.7
Depreciation expense $ 95.6 38.1 5.6 $ 139.3
Income tax expense $ 43.1 3.4 7.0 $ 53.5
Assets $5,779.7 1,310.9 1,133.5 $ 8,224.1
Expenditures for assets $ 150.2 179.1 20.6 $ 349.9
1996 U.S. Europe All Other Total
Revenue from external customers $ 501.8 104.0 72.2 $ 678.0
Inter-segment revenue $ 4.9 - - $ 4.9
Net profit $ 59.8 7.6 8.2 $ 75.6
Interest expense $ 235.5 40.9 39.0 $ 315.4
Depreciation expense $ 93.5 23.5 4.0 $ 121.0
Income tax expense $ 29.9 4.1 6.2 $ 40.2
Assets $4,793.4 1,081.3 803.4 $ 6,678.1
Expenditures for assets $ 161.4 93.9 10.9 $ 266.2
Reconciliation:
Interest expense 1998 1997 1996
Interest expense from segments $531.8 $372.7 $315.4
Inter-segment interest expense 30.0 6.0 -
Total interest expense $501.8 $366.7 $315.4
Assets 1998 1997 1996
Assets from segments $12,400.6 $8,224.1 $6,678.1
Investment in subsidiaries 493.6 394.7 299.5
Inter-segment balances 772.2 402.6 14.4
Total assets $11,134.8 $7,426.8 $6,364.2
Inside and outside the United States:
Revenue 1998 1997 1996
Inside U.S. $ 748.0 $581.0 $501.8
Outside U.S. 297.7 210.5 176.2
$1,045.7 $791.5 $678.0
Property and Equipment, Net 1998 1997 1996
Inside U.S. $485.3 $402.0 $399.7
Outside U.S. 249.4 172.5 124.5
$734.7 $574.5 $524.2
NOTE 16 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1998 First quarter Second quarter Third quarter Fourth quarter
Total revenues $222.4 $255.1 $283.0 $285.2
Net profit $ 23.8 $ 25.5 $ 35.2 $ 27.1
1997 First quarter Second quarter Third quarter Fourth quarter
Total revenues $183.0 $189.4 $205.5 $213.6
Net profit $ 27.0 $ 21.9 $ 23.0 $ 22.3
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