1st Quarter Results
Caterpillar Inc
22 April 2004
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Caterpillar Inc.
April 22, 2004
FOR IMMEDIATE RELEASE
Caterpillar first-quarter sales and revenues up 34 percent; profit more than
triples;
Company raises full-year profit outlook
PEORIA, Ill. -- Caterpillar Inc. (NYSE: CAT) today reported record first-quarter
2004 sales and revenues of $6.47 billion and record first-quarter profit per
share of $1.16.
Sales and revenues of $6.47 billion were up 34 percent compared to $4.82 billion
in the first quarter of 2003. The increase was primarily due to higher Machinery
and Engines volume of $1.33 billion, a favorable Currency impact on sales of
$176 million (due mainly to the stronger euro), favorable Price Realization of
$74 million and higher Financial Products revenues of $68 million.
Profit of $412 million or $1.16 per share was up $283 million compared to $129
million or $0.37 per share in the first quarter of 2003. The profit increase was
due primarily to a $405 million favorable profit impact of higher Sales Volume,
higher price realization of $74 million and the absence of $49 million in
Non-Conformance Penalties (NCPs) recorded in the first quarter 2003. These
favorable items were partially offset by higher Core Operating Costs of $77
million, higher Retirement Benefits of $55 million and the net unfavorable
impact of currency of $50 million.
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'We have made tremendous productivity gains in the last few years, and we
continue to benefit from a lean and efficient workforce. While there were some
higher costs related to surging volume, we leveraged 6 Sigma disciplines to help
overcome supply chain bottlenecks and meet stronger than expected demand. Our
record first-quarter results show that people are making a positive difference
across the entire value chain,' said Caterpillar Chairman and CEO Jim Owens.
'We remain focused on managing our cost structure as the economy recovers,
ensuring we deliver outstanding results over the business cycle. We will
continue to rely on our 6 Sigma culture to ensure we are growing profitably. We
now have more than 2,700 trained Black Belts, who are launching thousands of new
projects this year as we continue to demonstrate the value of 6 Sigma in
achieving our business strategy. Virtually all of our employees are involved in
6 Sigma and engaged in making continuous improvement a way of life,' continued
Owens.
'It appears the world economy will have one of the strongest, broadest
recoveries in years. Economic stimulus in the United States is producing strong
growth and the Asian economies are improving on last year's outstanding
performance. Low interest rates throughout the world and higher commodity prices
are encouraging much needed construction spending and investments in the mining
industry. Sales opportunities are increasing and we are exceptionally well
positioned to benefit with our broad product offerings and strong global dealer
network. We anticipate that keeping pace with volume growth will require
additional hiring through the remainder of the year,' Owens said.
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2004 Outlook
In our previous outlook, we expected sales and revenues to increase about 12
percent and profit per share to be up about 40 percent compared to 2003. We now
expect sales and revenues to increase about 20 percent and profit per share to
be up 65 to 70 percent compared to 2003.
Included in this outlook are worldwide machine price increases of 2 to 3 percent
that have been communicated to dealers with an effective date of July 1, 2004.
Our outlook also factors in a timely ratification of a new 6-year labor
agreement between Caterpillar and the United Auto Workers, which will enable our
mid-western U.S. facilities to remain competitive and succeed long-term. 'We
have made solid progress in our negotiations with representatives of the United
Auto Workers, resulting in a contract offer that is fair to all employees. Our
priority, as it always has been, is to continue to supply and support our
customers and dealers,' said Owens.
We expect to deliver 6.5 to 7 percent Return on Sales and Revenues in 2004 as
compared to 4.8 percent in 2003 despite an increase in retirement benefits of
about $250 million and pressure on core operating costs associated with
supporting higher than anticipated volumes.
(Complete outlook begins on page 8.)
For more than 75 years, Caterpillar has been building the world's infrastructure
and, in partnership with our independent dealers, is driving positive and
sustainable change on every continent. Caterpillar is a technology leader and
the world's largest maker of construction and mining equipment, diesel and
natural gas engines and industrial gas turbines. More information is available
at http://www.CAT.com/.
Note: Glossary of terms included on pages 11-13; first occurrence of terms shown
in bold italics.
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DETAILED ANALYSIS
FIRST QUARTER 2004 COMPARED WITH FIRST QUARTER 2003
SALES AND REVENUES
Sales and Revenues
(Millions of dollars) Total North EAME Latin Asia/
America America Pacific
First Quarter 2004
Machinery $ 4,152 $ 2,283 $ 963 $ 295 $ 611
Engines1 1,850 870 559 195 226
Financial Products2 465 334 83 21 27
$ 6,467 $ 3,487 $ 1,605 $ 511 $ 864
First Quarter 2003
Machinery $ 2,935 $ 1,532 $ 787 $ 183 $ 433
Engines1 1,489 676 494 123 196
Financial Products2 397 285 70 24 18
$ 4,821 $ 2,493 $ 1,351 $ 330 $ 647
1 Does not include internal engine transfers of $374 million and $321
million in first quarter 2004 and first quarter 2003, respectively. Internal
engine transfers are valued at prices comparable to those for unrelated parties.
2 Does not include revenues earned from Machinery and Engines of $37
million and $43 million in first quarter 2004 and first quarter 2003,
respectively.
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Machinery sales were $4.15 billion, an increase of $1.22 billion or 41 percent
from first quarter 2003. Sales volume was up about 36 percent while the
favorable impact of currency accounted for about 4 percent and improved price
realization added about 1 percent. Sales in North America increased 49 percent
from first quarter 2003, 45 percent due to higher volume and the remainder due
to improved price realization. Volume benefited from higher dealer deliveries
into construction and mining, the result of improved economic conditions in
those sectors. In addition, dealers added more to inventories than they did last
year to support higher deliveries. Sales in EAME increased 22 percent,
benefiting from both the favorable currency impact of a stronger euro and higher
sales volume. Major contributors to the volume gain were increased dealer
deliveries into the construction sectors of oil-producing countries in Africa/
Middle East and increased replacement demand particularly from rental fleets in
Europe. In Latin America, sales were 61 percent higher than last year, resulting
almost entirely from increased deliveries into mining. In Asia/Pacific, sales
rose 41 percent from last year as dealer deliveries increased in many countries
and dealers built inventories to support anticipated higher demand.
Engines sales were $1.85 billion, an increase of $361 million or 24 percent from
first quarter 2003. Sales volume was up about 18 percent, the favorable impact
of currency accounted for about 4 percent and improved price realization added
about 2 percent. Stronger economic and investment growth bolstered sales in all
geographic regions. The North American sales gain of 29 percent was led by a 41
percent increase in sales of on-highway truck engines compared to last year's
first quarter which was negatively impacted by truck manufacturers buying
engines before the October 2002 engine emission regulations became effective.
North American sales to the electric power sector increased 40 percent while
sales to the petroleum sector rose 7 percent. Sales in EAME rose 13 percent
mostly due to 39 percent growth in engine sales in the petroleum sector and 37
percent stronger demand for engines sold into the electric power sector which
more than offset lower sales into the marine and industrial sectors. Sales rose
59 percent in Latin America with 70 percent growth in engine sales into the
electric power sector and 47 percent growth in engine sales in the petroleum
sector. Widespread economic growth contributed to the 15 percent sales increase
in Asia/Pacific where engine sales into the electric power sector more than
doubled helped by surging investment. Globally, engine sales into the electric
power sector rose 51 percent, aided by widespread industry growth and the
favorable effects of currency. Engine sales into the global on-highway truck and
bus sector rose 43 percent due to stronger industry demand and improved price
realization. Sales into the petroleum sector were up 15 percent. Global sales of
industrial engines were up 4 percent due to favorable effects of currency which
more than offset lower volume as key customers bought engines in fourth quarter
2003 before the final European Tier II emissions law went into effect in January
2004. Global sales of marine engines were 3 percent below last year as customers
moved some orders for large reciprocating engines from first quarter 2004 into
the second quarter.
Financial Products revenues were $465 million, an increase of $68 million or 17
percent from first quarter 2003. The increase was due primarily to the favorable
impact of $57 million from continued growth of Earning Assets at Cat Financial
and an $11 million increase in earned premiums and fees on extended service
contracts at Cat Insurance. These favorable items were partially offset by a $19
million impact of lower interest rates on new and existing finance receivables
at Cat Financial.
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OPERATING PROFIT
Higher sales volume in all regions and most industries positively impacted
operating profit by $405 million. Improved price realization of $74 million
reflected the favorable impact of modest price increases taken on most machines,
parts and engines. Operating profit was also favorably impacted by $49 million
due to the absence of NCPs that were recorded in the first quarter 2003.
Partially offsetting the favorable items were $77 million in higher core
operating costs, a $68 million unfavorable impact of currency on operating
profit due primarily to the continued weakening of the dollar compared with the
British pound and the Japanese yen and $55 million of higher retirement
benefits.
The increase in core operating costs reflects higher spending to support volume
growth including higher steel prices, production ramp-up, material expediting
costs and general support costs to meet current demand. In addition, higher
incentive compensation due to increasing our outlook above what was originally
anticipated and increased spending on product development programs also
contributed to higher core operating costs. These unfavorable items were
partially offset by the positive impact of continued material cost reductions.
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Operating Profit
(Millions of dollars) First Quarter First Quarter
2003 2004
Machinery1 $ 218 $ 452
Engines1 (54) 40
Financial Products 77 105
Consolidating Adjustments (19) (23)
$ 222 $ 574
1 Caterpillar operations are highly integrated; therefore, the company uses a
number of allocations to determine lines of business operating profit for
Machinery and Engines.
Machinery operating profit was up $234 million, or 107 percent, from first
quarter 2003. The favorable impact of higher sales volume and improved price
realization were partially offset by higher core operating costs (as outlined
above), the unfavorable impact of currency and higher retirement benefits.
Engines operating profit was up $94 million from first quarter 2003. The
favorable impact of the absence of NCPs, higher sales volume and improved price
realization were partially offset by higher retirement benefits.
Financial Products operating profit was up $28 million, or 36 percent from first
quarter 2003. The increase was primarily due to a $20 million impact from the
growth of earning assets and a favorable change in gain/loss on sale of
equipment returned from lease of $8 million at Cat Financial.
OTHER PROFIT/LOSS ITEMS
Interest expense excluding Financial Products was $9 million lower compared to
first quarter 2003 primarily due to lower borrowing rates.
Other income/expense was income of $47 million compared with income of $18
million in first quarter 2003. The favorable change was mostly due to the
favorable impact of Machinery and Engines currency gains and the favorable
impact of commodity hedges.
Caterpillar's profit and cash flows are subject to fluctuation due to changes in
foreign exchange rates and the company uses currency forward and option
contracts to reduce the risk of fluctuations in exchange rates. The impact of
currency in the first quarter on Machinery and Engines other income/expense was
favorable $18 million reducing the net unfavorable profit before tax impact of
currency to $50 million.
The provision for income taxes in the first quarter reflects an estimated annual
tax rate of 28 percent for 2004. We are anticipating a 28 percent rate for the
full year compared to 27 percent in 2003 primarily due to a change in our
geographic mix of profits. This annual tax rate is based on currently enacted
legislation and therefore includes existing Extraterritorial Income Exclusion
(ETI) provisions for 2004.
The equity in profit/loss of unconsolidated affiliated companies favorably
impacted profit $2 million over first quarter a year ago.
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EMPLOYMENT
At the end of first quarter 2004, Caterpillar's worldwide employment was 70,815
compared with 67,063 one year ago. The higher employment is necessary to support
our increased volume and growing Caterpillar Logistics operations in addition to
the impact of acquiring a controlling interest in Hindustan Powerplus Ltd.
OTHER SIGNIFICANT EVENTS
On April 8, 2004, the company made a cash contribution of almost $500 million
into its U.S. pension plans in support of retirement benefit obligations. Robust
cash flow due to improved profit, excellent performance by its pension fund
managers and a strong financial position have allowed Caterpillar to improve the
funded position of its pension plans.
OUTLOOK
SALES AND REVENUES OUTLOOK
We project company sales and revenues will increase about 20 percent from 2003,
up from the previous forecast of 12 percent growth. Machinery and Engines volume
is expected to increase about 16 percent and the favorable impact of currency is
expected to contribute about 2 percent with the remainder coming from improved
price realization and Financial Products revenues. Included in this outlook are
worldwide machine price increases of 2 to 3 percent that have been communicated
to dealers with an effective date of July 1, 2004. The outlook factors in a
timely ratification of a new 6-year labor agreement between Caterpillar and the
United Auto Workers, which will enable our mid-western U.S. facilities to remain
competitive and succeed long-term.
The world economy is in a vigorous recovery and global economic growth should be
about 4 percent this year, up from 2.5 percent last year. All regions are
improving but the recovery in the Euro-zone economy is still weak. Industrial
production in many developing countries increased significantly over the past
year, often at double-digit rates.
Interest rates are the lowest in decades in many countries and we anticipate
little change through the rest of the year. Despite increases in commodity and
some asset prices, broad inflation measures are within Central Bank targets. As
a result, we expect that Central Banks will be cautious about tightening
policies and that any increases in interest rates would be modest and not
significant enough to undermine economic recoveries that are underway.
The world economy should provide a favorable climate for our businesses. We
expect continued low interest rates will encourage more replacement buying as
well as drive recoveries in housing and nonresidential construction. Rising
personal incomes and corporate profits should also benefit construction.
Recent increases in coal and metals prices have prompted mining sectors in most
countries to increase investments. Further increases in industrial production in
addition to tight supplies should help to maintain prices at favorable levels.
We expect the mining recovery to strengthen further.
We expect company sales and revenues to continue to be strong in future quarters
but year-over-year comparisons should reflect smaller increases than in the
first quarter. Sales and revenues strengthened significantly over the course of
2003 and we do not expect sales and revenues in the remaining quarters of 2004
to improve as rapidly as they did last year.
North America (United States and Canada)
U.S. economic data were often weaker than expected at the beginning of the year
but improved as the quarter progressed. We believe first quarter growth was
around 4 percent and growth should improve further in subsequent quarters
resulting in full year growth of about 4.5 to 5 percent. Canada, which has had
to reverse recent interest rate hikes, should have economic growth near 3
percent this year.
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We estimate that Machinery and Engines sales will increase about 32 percent in
2004. Positives include continued strong demand for housing, a recovery in
commercial construction and increased funding for highways. Coal mining should
benefit from stronger demand and increases in spot prices. We expect the North
American on-highway truck and bus industry will benefit from low financing
costs, higher freight-handling requirements and improved fleet operating
profits. Stronger economic growth is expected to support increases in all North
American engine industries.
EAME
While Euro-zone economies were weaker than expected in the first quarter, we
expect some improvement in coming quarters. In addition, other European
economies are experiencing stronger recoveries, which should keep overall
European economic growth near 2 percent this year. Economies in both Africa/
Middle East and the CIS should benefit from high commodity prices.
We estimate that Machinery and Engines sales in EAME should rise about 9 percent
in 2004. In Europe, economic recovery and low interest rates should support
increased replacement buying and the expansion of rental fleets. We anticipate
that sales in both Africa/Middle East and the CIS will benefit from the positive
impact that high commodity prices are having on economic growth. Finally, the
ongoing favorable impact of the strong euro is expected to contribute 2 percent
to sales.
Latin America
Economies recovered late last year and we expect economic growth will improve to
about 4 percent this year - the highest since 2000. The stronger world economy
is boosting regional exports, higher metals prices should encourage more
investment in mining and foreign investors are returning. As a result of the
economic recovery, we project that sales of Machinery and Engines should be up
about 15 percent in 2004.
Asia/Pacific
The region should remain the fastest growing in the world this year with about
6.5 percent growth. China's economy could slow a bit in response to modest
tightening in economic policies but faster growth in most other countries should
more than offset this slowing. Exports should benefit from the worldwide
economic recovery and low local interest rates should encourage more domestic
spending.
We expect sales of Machinery and Engines to increase around 16 percent in 2004.
The sizable mining sector, which had a strong first quarter, should continue to
do well. Low interest rates and higher standards of living should benefit
housing and commercial construction. Strong economic growth in China has
resulted in widespread electric power shortages and we expect sales into this
sector should benefit.
Financial Products
We expect continued growth in Financial Products for the remainder of 2004, with
revenues expected to increase approximately 10 percent versus 2003 primarily due
to higher average earning assets in 2004. New financing activity growth is
primarily due to expected improvement in Machinery and Engines sales and other
growth initiatives.
PROFIT OUTLOOK
We now expect profit per share to be up 65 to 70 percent from 2003, compared to
about 40 percent in the previous outlook. We expect to deliver 6.5 to 7 percent
Return on Sales and Revenues in 2004 as compared to 4.8 percent in 2003 despite
an increase in retirement benefits of about $250 million and pressure on core
operating costs associated with supporting higher than anticipated volumes. Due
to this improved profitability and our solid financial position, we expect
strong operating cash flow in 2004.
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SUPPLEMENTAL INFORMATION
We are providing supplemental information including deliveries to users and
dealer inventory levels. We sell the majority of our machines and engines to
independently owned and operated dealers and original equipment manufacturers
(OEMs) to meet the demands of their customers, the end users. Due to time lags
between our sales and the deliveries to end users we believe this information
will help readers better understand our business and the industries we serve.
All information provided in the supplemental section is in Constant Dollars.
Dealer New Machine Deliveries
Worldwide dealer deliveries of new machines to end users in first quarter 2004
were 37 percent higher than the same quarter last year and 19 percent above the
previous first quarter high in 1998. Gains were widespread, occurring in all
regions and in most industries. In particular, deliveries into mining had a
broad, strong recovery.
Dealers in North America increased machine deliveries 43 percent, the biggest
year-over-year gain since the current recovery in deliveries started in first
quarter 2003. Factors which supported growth in 2003 such as replacement buying,
upgrading of rental fleets and increased construction activity continued this
quarter. In addition, the depressed coal mining sector showed improvement.
Deliveries into North American general construction were up 56 percent from last
year. Low mortgage interest rates and higher prices for new homes caused housing
starts to increase 12 percent while nonresidential building construction
appeared to bottom. Dealer deliveries into heavy construction were up 53
percent, driven by continued strong highway and sewer and water construction.
Increased production and prices for quarry and aggregates caused dealer
deliveries into that industry to rise 5 percent. A robust housing industry
boosted lumber prices leading to a 60 percent increase in dealer deliveries into
forestry. Mining, buoyed by rebounds in both coal production and prices, had a
52 percent increase in dealer deliveries compared to last year. Deliveries into
industrial applications increased 23 percent, the result of higher industrial
production.
EAME dealer deliveries of new machines in first quarter 2004 rose 19 percent
from last year. Europe, despite a slow recovery, had a 19 percent increase which
was heavily weighted toward deliveries into rental fleets. Deliveries into
Africa/Middle East surged 33 percent, largely into those countries with sizable
energy and commodity sectors as higher prices generated the income needed to
finance investments. Partially offsetting those two increases were deliveries
into the CIS, which tend to be volatile fell 28 percent from a strong first
quarter last year.
In Latin America, new machine deliveries increased 49 percent. The mining
sector, responding to significant increases in output prices, accounted for all
the gain. Recoveries in most countries started fairly recently and have not yet
progressed sufficiently to allow recoveries in construction.
In Asia/Pacific, dealer deliveries to end users improved 39 percent from a
strong first quarter 2003. Strength in the region was pervasive as most
countries and industries showed improvement. China continues to do well and many
of the other large economies in the region had double-digit gains in dealer
deliveries. Low interest rates and fast economic growth are boosting
construction activity and deliveries into mining rose sharply due to higher
output prices.
Dealer Inventories of New Machines
Worldwide dealer inventories at the end of first quarter 2004 were higher than a
year earlier in all regions. However, increases in inventories failed to keep
pace with deliveries, causing inventory to delivery ratios to decline in all
regions.
Engine Deliveries to End Users and OEMs
Worldwide engine deliveries to end users and OEMs in the first quarter of 2004
rose 20 percent compared to deliveries in first quarter 2003. Stronger economic
growth, higher corporate profits and rising business and investor confidence
supported improving global investment and industry conditions. Increased engine
deliveries to the electric power, on-highway truck and petroleum sectors more
than offset lower deliveries of engines to the industrial and marine sectors.
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Worldwide engine deliveries to end users in the electric power sector rose 37
percent with stronger sales in all geographic regions. Truck engine deliveries
rose 28 percent with all of the gain occurring in the Americas where industry
demand strengthened. Worldwide deliveries to end users in the petroleum sector
rose 17 percent due to stronger industry demand caused by very favorable energy
prices. Global deliveries of industrial engines declined 8 percent partially due
to a fourth quarter 2003 pre-buy and a shift in product mix to smaller engines.
Worldwide marine engine deliveries were down 3 percent due to delayed demand for
large reciprocating engines used in ocean-going vessels.
In North America, engine deliveries to end users and OEMs were up 20 percent
from first quarter 2003. Engine deliveries to the electric power, industrial,
petroleum and on-highway truck sectors all rose. Engines delivered to North
American truck and bus manufacturers rose 27 percent with all of the growth
caused by stronger industry demand associated with higher fleet operating
profits and more confidence in new engine emissions technologies. Caterpillar
maintained its leadership position in the North American on-highway truck and
bus industry. Engine deliveries to end users and OEMs in the industrial sector
increased 19 percent helped by stronger industry demand as corporate profits and
business investment continued to strengthen. Deliveries of engines to the
electric power sector rose 11 percent as most of the gain came from robust
demand for turbines sold to industrial cogeneration applications. Deliveries of
engines to the petroleum sector rose 10 percent, positively impacted by robust
industry profits caused by favorable energy prices. Deliveries of engines to the
marine sector declined 3 percent due to lower demand for large reciprocating
engines used in ocean-going vessels.
In EAME, overall engine deliveries to end users and OEMs rose 6 percent with
higher deliveries to the petroleum and electric power sectors accounting for all
of the overall sales gain. Petroleum deliveries rose 46 percent and deliveries
to the electric power sector rose 16 percent. EAME deliveries of large engines
gained from particular strength in the Middle East. Deliveries to the Middle
East remained strong due to favorable oil prices and revenues and continuing
reconstruction efforts. EAME deliveries of engines to the industrial sector fell
15 percent resulting from weak economic growth in Western Europe and a fourth
quarter 2003 pre-buy prior to the final European Tier II emissions laws going
into effect in January 2004. Engine deliveries to the marine sector fell 17
percent due to lower demand for large engines used in ocean-going vessels.
Deliveries to end users and OEMs in Latin America rose 80 percent as economic
and investment growth strengthened. Engine deliveries to the electric power,
on-highway truck and industrial sectors more than doubled from deliveries in
first quarter 2003 when Latin American economic growth was sluggish. Deliveries
into the petroleum sector were up 42 percent and deliveries to the marine sector
were up 19 percent. Deliveries of turbines to the electric power and petroleum
sectors accounted for over half of the Latin American quarterly growth.
Deliveries of turbines and turbine services to the Latin American electric power
sector increased primarily in Venezuela where investments were made to reduce
shortages of electrical capacity. Turbine services sales increased in the Latin
American petroleum sector driven primarily by strong production demand for
turbine aftermarket products.
Deliveries to end users and OEMs in Asia/Pacific were up 24 percent compared to
last year with engine deliveries to the electric power sector more than
doubling, 25 percent growth in marine primarily due to deliveries of large
marine engines and 17 percent lower deliveries to the petroleum sector. Asia/
Pacific demand for turbines used in the petroleum sector weakened from last
year's strong levels due to shipment timing.
Dealer Inventories of Engines
Worldwide dealer engine inventories at the end of the first quarter were 4
percent above last year and were at normal levels compared to selling rates.
North American and Latin American dealers have continued to reduce their
inventories and their respective inventories are at normal levels. EAME dealer
inventories rose as dealers pre-positioned inventory to support expected Middle
Eastern reconstruction efforts. Dealer inventories in Asia/Pacific rose as
dealers ordered engines to cover expected sales.
GLOSSARY OF TERMS
1. Consolidating Adjustments - Eliminations of transactions between Machinery
and Engines and Financial Products.
2. Constant Dollars - The dollar value of machine and engine deliveries
adjusted for changes in price and currency.
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3. Core Operating Costs - Machinery and Engines operating cost change adjusted
for volume. It excludes the impact of currency, Non-Conformance Penalties
and retirement benefits.
4. Currency - With respect to sales and revenues, currency represents the
translation impact on sales resulting from changes in foreign currency
exchange rates versus the U.S. dollar. With respect to operating profit,
currency represents the net translation impact on sales and operating costs
resulting from changes in foreign currency exchange rates versus the U.S.
dollar. With respect to other income/expense, currency represents the period
over period change in the translation of monetary assets and liabilities not
denominated in the functional currency and the change in hedging gains/
losses from foreign currency forward and option contracts. Currency includes
the impacts on sales and operating profit for the Machinery and Engines
lines of business only; currency impacts on the Financial Products line of
business are included in the Financial Products portions of the respective
analyses.
5. EAME - Geographic region including Europe, Africa, the Middle East and the
Commonwealth of Independent States (CIS).
6. Earning Assets - These assets consist primarily of total net finance
receivables plus equipment on operating leases, less accumulated
depreciation at Cat Financial. Net finance receivables represent the gross
receivables amount less unearned income and the allowance for credit losses.
7. Engines - A principal line of business including the design, manufacture and
marketing of engines for Caterpillar machinery, electric power generation
systems; on-highway vehicles and locomotives; marine, petroleum,
construction, industrial, agricultural and other applications; and related
parts. Reciprocating engines meet power needs ranging from 5 to over 22,000
horsepower (4 to over 16 200 kilowatts). Turbines range from 1,600 to 19,500
horsepower
(1 000 to 14 500 kilowatts).
8. Financial Products - A principal line of business consisting primarily of
Caterpillar Financial Services Corporation (Cat Financial), Caterpillar
Insurance Holdings, Inc. (Cat Insurance) and their subsidiaries. Cat
Financial provides a wide range of financing alternatives for Caterpillar
machinery and engines, Solar gas turbines, as well as other equipment and
marine vessels. Cat Financial also extends loans to customers and dealers.
Cat Insurance provides various forms of insurance to customers and dealers
to help support the purchase and lease of our equipment.
9. Latin America - Geographic region including the Central and South American
countries and Mexico.
10. Machinery - A principal line of business which includes the design,
manufacture and marketing of construction, mining, agricultural and forestry
machinery - track and wheel tractors, track and wheel loaders, pipelayers,
motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe
loaders, mining shovels, log skidders, log loaders, off-highway trucks,
articulated trucks, paving products, telescopic handlers, skid steer loaders
and related parts. Also includes logistics services for other companies.
11. Machinery and Engines - Due to the highly integrated nature of operations,
represents the aggregate total of the Machinery and Engines lines of
business and includes primarily our manufacturing, marketing and parts
distribution operations.
12. Non-Conformance Penalties (NCPs) - Pursuant to a consent decree Caterpillar
and other engine manufacturers entered into with the United States
Environmental Protection Agency (EPA), the company was required to meet
certain emission standards by October 2002 for engines manufactured for
on-highway use. Under the consent decree, an engine manufacturer was
required to pay a non-conformance penalty (NCP) to the EPA for each engine
manufactured after October 1, 2002 that did not meet the standards. The
amount of the NCP was based on how close to meeting the standards the engine
came - the more the engine was out of compliance, the higher the penalty per
engine.
13. Price Realization - The impact of net price changes excluding currency.
14. Retirement Benefits - Cost of defined benefit pension plans, defined
contribution plans and retirement healthcare and life insurance.
15. Return on Sales and Revenues - Profit divided by Sales and Revenues.
16. Sales Volume - With respect to sales and revenues, sales volume represents
the impact of changes in the quantities sold for machines, engines and
parts. With respect to operating profit, sales volume represents the impact
of changes in the quantities sold for machines, engines and parts combined
with the net operating profit impact of changes in the relative weighting of
machines, engines and parts sales with respect to total sales.
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17. 6 Sigma - On a technical level, 6 Sigma represents a measure of variation
that achieves 3.4 defects per million opportunities. At Caterpillar, 6 Sigma
represents a much broader cultural philosophy to drive continuous
improvement throughout the value chain. It is a fact-based, data-driven
methodology that we are using to improve processes, enhance quality, cut
costs, grow our business and deliver greater value to our customers through
Black Belt-led project teams. At Caterpillar, 6 Sigma goes beyond mere
process improvement; it has become the way we work as teams to process
business information, solve problems and manage our business successfully.
NON-GAAP FINANCIAL MEASURES
The following definition is provided for 'non-GAAP financial measures' in
connection with Regulation G issued by the Securities and Exchange Commission.
This non-GAAP financial measure has no standardized meaning prescribed by U.S.
GAAP, and therefore, is unlikely to be comparable to the calculation of similar
measures for other companies. Management does not intend this item to be
considered in isolation or as a substitute for the related GAAP measure.
Machinery and Engines
Caterpillar defines Machinery and Engines as it is presented in the supplemental
data as Caterpillar Inc. and its subsidiaries with Financial Products accounted
for on the equity basis. Machinery and Engines information relates to the
design, manufacture and marketing of our products. Financial Products
information relates to the financing to customers and dealers for the purchase
and lease of Caterpillar and other equipment. The nature of these businesses is
different especially with regard to the financial position and cash flow items.
Caterpillar management utilizes this presentation internally to highlight these
differences. We also believe this presentation will assist readers in
understanding our business. Pages 17-20 reconciles Machinery and Engines with
Financial Products on the Equity Basis to Caterpillar Inc. Consolidated
financial information.
* * *
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 (SEC) on April 22, 2004. This filing is
available on our website at http://www.CAT.com/sec_filings.
Caterpillar's latest financial results and current outlook are also available
via:
Telephone:
(800) 228-7717 (Inside the United States and Canada)
(858) 244-2080 (Outside the United States and Canada)
Internet:
http://www.CAT.com/investor
http://www.CAT.com/irwebcast (live broadcast/replays of quarterly conference
call)
Caterpillar contact:
Kelly Wojda
Corporate Public Affairs
(309) 675-1307
wojda_kelly_g@CAT.com
Page 13
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Caterpillar Inc.
Condensed Consolidated Statement of Results of Operations
(Unaudited)
(Dollars in millions except per share data)
-------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
-----------------------------------
2004 2003
----------- -----------
Sales and revenues:
Sales of Machinery and Engines $ 6,002 $ 4,424
Revenues of Financial Products 465 397
Total sales and revenues 6,467 4,821
Operating costs:
Cost of goods sold 4,699 3,630
Selling, general and administrative expenses 724 570
Research and development expenses 214 152
Interest expense of Financial Products 118 120
Other operating expenses 138 127
Total operating costs 5,893 4,599
Operating profit 574 222
Interest expense excluding Financial Products 57 66
Other income (expense) 47 18
Consolidated profit before taxes 564 174
Provision for income taxes 158 49
Profit of consolidated companies 406 125
Equity in profit (loss) of unconsolidated affiliated companies 6 4
Profit $ 412 $ 129
Profit per common share $ 1.20 $ 0.37
Profit per common share - diluted 1 $ 1.16 $ 0.37
Weighted average common shares outstanding (thousands)
- Basic 342,612 344,316
- Diluted 1 355,736 346,826
Cash dividends declared per common share $ - $ -
1 Diluted by assumed exercise of stock options, using the treasury stock method.
Certain amounts from prior periods have been reclassified to conform to current
financial statement presentation.
Page 14
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Caterpillar Inc.
Condensed Consolidated Statement of Financial Position
(Unaudited)
(Millions of dollars)
---------------------------------------------------------------------------------------------------------------------
Mar. 31, Dec. 31, Mar. 31,
2004 2003 2003
---------- ---------- -----------
Assets
Current assets
Cash and short-term investments $ 368 $ 342 $ 327
Receivables - trade and other 3,751 3,666 2,896
Receivables - finance 7,989 7,605 6,741
Deferred and refundable income taxes 729 707 748
Prepaid expenses 1,351 1,424 1,237
Inventories 3,678 3,047 3,064
Total current assets 17,866 16,791 15,013
Property, plant and equipment - net 7,153 7,290 6,998
Long-term receivables - trade and other 109 82 71
Long-term receivables - finance 7,972 7,822 6,862
Investments in unconsolidated affiliated companies 817 800 792
Deferred income taxes 585 616 809
Intangible assets 234 239 279
Goodwill 1,400 1,398 1,402
Other assets 1,722 1,427 1,206
Total assets $ 37,858 $ 36,465 $ 33,432
Liabilities
Current liabilities:
Short-term borrowings:
-- Machinery and Engines $ 163 $ 72 $ 72
-- Financial Products 2,773 2,685 1,565
Accounts payable 3,309 3,100 2,375
Accrued expenses 1,636 1,638 1,597
Accrued wages, salaries and employee benefits 1,644 1,802 1,151
Dividends payable - 127 -
Deferred and current income taxes payable 271 216 111
Long-term debt due within one year:
-- Machinery and Engines 6 32 33
-- Financial Products 3,398 2,949 3,842
Total current liabilities 13,200 12,621 10,746
Long-term debt due after one year:
-- Machinery and Engines 3,660 3,367 3,449
-- Financial Products 10,910 10,711 9,295
Liability for postemployment benefits 3,222 3,172 3,874
Deferred income taxes and other liabilities 532 516 429
Total liabilities 31,524 30,387 27,793
Stockholders' equity
Common stock 1,101 1,059 1,033
Treasury stock (3,129) (2,914) (2,664)
Profit employed in the business 8,862 8,450 7,978
Accumulated other comprehensive income (500) (517) (708)
Total stockholders' equity 6,334 6,078 5,639
Total liabilities and stockholders' equity $ 37,858 $ 36,465 $ 33,432
Page 15
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Caterpillar Inc.
Condensed Consolidated Statement of Cash Flow
(Unaudited)
(Millions of dollars)
---------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
---------------------------------
2004 2003
----------- ----------
Cash flow from operating activities:
Profit $ 412 $ 129
Adjustments for non-cash items:
Depreciation and amortization 350 332
Other (37) 17
Changes in assets and liabilities:
Receivables - trade and other (197) (115)
Inventories (631) (301)
Accounts payable and accrued expenses 260 248
Other - net (59) (92)
Net cash provided by operating activities 98 218
Cash flow from investing activities:
Capital expenditures -- excluding equipment leased to others (106) (86)
Expenditures for equipment leased to others (240) (261)
Proceeds from disposals of property, plant and equipment 206 160
Additions to finance receivables (4,812) (3,386)
Collection of finance receivables 3,854 2,995
Proceeds from the sale of finance receivables 264 269
Investments and acquisitions (net of cash acquired) (13) (17)
Other - net (65) (40)
Net cash used for investing activities (912) (366)
Cash flow from financing activities:
Dividends paid (127) (120)
Common stock issued, including treasury shares reissued 69 -
Treasury shares purchased (250) -
Proceeds from long-term debt issued 1,808 2,053
Payments on long-term debt (913) (985)
Short-term borrowings - net 220 (773)
Net cash provided by financing activities 807 175
Effect of exchange rate changes on cash 33 (9)
Increase (decrease) in cash and short-term investments 26 18
Cash and short-term investments at beginning of period 342 309
Cash and short-term investments at end of period $ 368 $ 327
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.
Page 16
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Caterpillar Inc.
Supplemental Data for Results of Operations
For The Three Months Ended March 31, 2004
(Unaudited)
(Millions of dollars)
----------------------------------------------------------------------------------------------------------------------
Supplemental Consolidating Data
----------------------------------------------
Consolidated Machinery Financial Consolidating
------------ and Engines Products Adjustments
1 ---------- --------------
------------
Sales and revenues:
Sales of Machinery and Engines $ 6,002 $ 6,002 $ - $ -
Revenues of Financial Products 465 - 502 (37)2
Total sales and revenues 6,467 6,002 502 (37)
Operating costs:
Cost of goods sold 4,699 4,699 - -
Selling, general and administrative expenses 724 595 140 (11)3
Research and development expenses 214 214 - -
Interest expense of Financial Products 118 - 121 (3)4
Other operating expenses 138 2 136 -
Total operating costs 5,893 5,510 397 (14)
Operating profit 574 492 105 (23)
Interest expense excluding Financial Products 57 58 - (1)4
Other income (expense) 47 16 9 22 5
Consolidated profit before taxes 564 450 114 -
Provision for income taxes 158 119 39 -
Profit of consolidated companies 406 331 75 -
Equity in profit (loss) of unconsolidated 6 5 1 -
affiliated companies
Equity in profit of Financial Products' - 76 - (76)6
subsidiaries
Profit $ 412 $ 412 $ 76 $ (76)
1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.
2 Elimination of Financial Products revenues earned from Machinery and Engines.
3 Elimination of expenses recorded by Machinery and Engines paid to Financial Products.
4 Elimination of interest expense recorded between Financial Products and Machinery and Engines.
5 Elimination of discount recorded by Machinery and Engines on receivables sold to Financial Products and of interest
earned by Machinery and Engines from Financial Products.
6 Elimination of Financial Products profit due to equity method of consolidation.
Page 17
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Caterpillar Inc.
Supplemental Data for Results of Operations
For The Three Months Ended March 31, 2003
(Unaudited)
(Millions of dollars)
----------------------------------------------------------------------------------------------------------------------
Supplemental Consolidating Data
---------------------------------------------------
Consolidated Machinery Financial Consolidating
------------- and Engines 1 Products Adjustments
------------- ------------ --------------
Sales and revenues:
Sales of Machinery and Engines $ 4,424 $ 4,424 $ - $ -
Revenues of Financial Products 397 - 440 (43)2
Total sales and revenues 4,821 4,424 440 (43)
Operating costs:
Cost of goods sold 3,630 3,630 - -
Selling, general and administrative expenses 570 476 114 (20)3
Research and development expenses 152 152 - -
Interest expense of Financial Products 120 - 124 (4)4
Other operating expenses 127 2 125 -
Total operating costs 4,599 4,260 363 (24)
Operating profit 222 164 77 (19)
Interest expense excluding Financial Products 66 66 - -
Other income (expense) 18 (4) 3 19 5
Consolidated profit before taxes 174 94 80 -
Provision for income taxes 49 20 29 -
Profit of consolidated companies 125 74 51 -
Equity in profit (loss) of unconsolidated 4 2 2 -
affiliated companies
Equity in profit of Financial Products' - 53 - (53)6
subsidiaries
Profit $ 129 $ 129 $ 53 $ (53)
1 Represents Caterpillar Inc. and its subsidiaries with Financial Products
accounted for on the equity basis.
2 Elimination of Financial Products revenues earned from Machinery and Engines.
3 Elimination of expenses recorded by Machinery and Engines paid to Financial
Products.
4 Elimination of interest expense recorded by Financial Products paid to
Machinery and Engines.
5 Elimination of discount recorded by Machinery and Engines on receivables sold
to Financial Products and of interest earned by Machinery and Engines from
Financial Products.
6 Elimination of Financial Products profit due to equity method of consolidation.
Page 18
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Caterpillar Inc.
Supplemental Data for Cash Flow
For the Three Months Ended March 31, 2004
(Unaudited)
(Millions of dollars)
-----------------------------------------------------------------------------------------------------------------------
Supplemental Consolidating Data
-------------------------------------------------
Consolidated Machinery Financial Consolidating
----------------- and Engines1 Products Adjustments
------------- ------------- -------------
Cash flow from operating activities:
Profit $ 412 $ 412 $ 76 $ (76)2
Adjustments for non-cash items:
Depreciation and amortization 350 202 148 -
Undistributed profit of Financial Products - (76) - 76 3
Other (37) (25) (3) (9)4
Changes in assets and liabilities:
Receivables - trade and other (197) (143) 39 (93)4
Inventories (631) (631) - -
Accounts payable and accrued expenses 260 228 (39) 71 4
Other - net (59) (116) 30 27 4
Net cash provided by (used for) operating 98 (149) 251 (4)
activities
Cash flow from investing activities:
Capital expenditures -- excluding equipment (106) (101) (5) -
leased to others
Expenditures for equipment leased to others (240) - (240) -
Proceeds from disposals of property, 206 7 199 -
plant and equipment
Additions to finance receivables (4,812) - (4,812) -
Collection of finance receivables 3,854 - 3,854 -
Proceeds from the sale of finance receivables 264 - 264 -
Net intercompany borrowings - 209 (6) (203)5
Investments and acquisitions (net of cash (13) (13) - -
acquired)
Other - net (65) (5) (60) -
Net cash provided by (used for) investing (912) 97 (806) (203)
activities
Cash flow from financing activities:
Dividends paid (127) (127) - -
Common stock issued, including treasury 69 69 - -
shares reissued
Treasury shares purchased (250) (250) - -
Net intercompany borrowings - 6 (209) 203 5
Proceeds from long-term debt issued 1,808 255 1,553 -
Payments on long-term debt (913) (25) (888) -
Short-term borrowings - net 220 91 129 -
Net cash provided by (used for) financing 807 19 585 203
activities
Effect of exchange rate changes on cash 33 33 (4) 4 6
Increase (decrease) in cash and 26 - 26 -
short-term investments
Cash and short-term investments 342 220 122 -
at beginning of period
Cash and short-term investments at end of $ 368 $ 220 $ 148 $ -
period
1 Represents Caterpillar Inc. and its subsidiaries with Financial Products
accounted for on the equity basis.
2 Elimination of Financial Products profit after tax due to equity method of
consolidation.
3 Non-cash adjustment for the undistributed earnings from Financial Products.
4 Elimination of non-cash adjustments and changes in assets and liabilities
related to consolidated reporting.
5 Net proceeds and payments to/from Machinery and Engines and Financial
Products.
6 Elimination of the effect of exchange on intercompany balances.
Page 19
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Caterpillar Inc.
Supplemental Data for Cash Flow
For the Three Months Ended March 31, 2003
(Unaudited)
(Millions of dollars)
------------------------------------------------------------------------------------------------------------------------
Supplemental Consolidating Data
------------------------------------------------
Consolidated Machinery Financial Consolidating
------------- and Engines1 Products Adjustments
-------------- ---------- -------------
Cash flow from operating activities:
Profit $ 129 $ 129 $ 53 $ (53)2
Adjustments for non-cash items:
Depreciation and amortization 332 205 127 -
Undistributed profit of Financial Products - (53) - 53 3
Other 17 11 1 5 4
Changes in assets and liabilities:
Receivables - trade and other (115) (53) (35) (27)4
Inventories (301) (301) - -
Accounts payable and accrued expenses 248 43 170 35 4
Other - net (92) (62) (7) (23)4
Net cash provided by (used for) operating activities 218 (81) 309 (10)
Cash flow from investing activities:
Capital expenditures - excluding equipment (86) (81) (5) -
leased to others
Expenditures for equipment leased to others (261) - (261) -
Proceeds from disposals of property, plant 160 - 160 -
and equipment
Additions to finance receivables (3,386) - (3,386) -
Collection of finance receivables 2,995 - 2,995 -
Proceeds from sale of finance receivables 269 - 269 -
Net intercompany borrowings - 522 10 (532)5
Investments and acquisitions (net of cash acquired) (17) (7) (10) -
Other - net (40) (13) (40) 13 6
Net cash provided by (used for) investing activities (366) 421 (268) (519)
Cash flow from financing activities:
Dividends paid (120) (120) - -
Common stock issued, including treasury - - 13 (13)6
shares reissued
Net intercompany borrowings - (10) (522) 532 5
Proceeds from long-term debt issued 2,053 79 1,974 -
Payments on long-term debt (985) (250) (735) -
Short-term borrowings - net (773) 8 (781) -
Net cash provided by (used for) financing activities 175 (293) (51) 519
Effect of exchange rate changes on cash (9) (14) (5) 10 7
Increase (decrease) in cash and short-term 18 33 (15) -
investments
Cash and short-term investments at beginning of 309 146 163 -
period
Cash and short-term investments at end of period $ 327 $ 179 $ 148 $ -
1 Represents Caterpillar Inc. and its subsidiaries with Financial Products
accounted for on the equity basis.
2 Elimination of Financial Products profit after tax due to equity method of
consolidation.
3 Non-cash adjustment for the undistributed earnings from Financial Products.
4 Elimination of non-cash adjustments and changes in assets and liabilities
related to consolidated reporting.
5 Net proceeds and payments to/from Machinery and Engines and Financial
Products.
6 Change in investment and common stock related to Financial Products.
7 Elimination of the effect of exchange on intercompany balances.
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Safe Harbor Statement under the Securities Litigation Reform Act of 1995
Certain statements contained in our first-quarter 2004 results release and
prepared statements from the related results webcast are forward-looking and
involve uncertainties that could significantly impact results. The words
'believes,' 'expects,' 'estimates,' 'anticipates,' 'will be', 'should' and
similar words or expressions identify forward-looking statements made on behalf
of Caterpillar. Uncertainties include factors that affect international
businesses, as well as matters specific to the company and the markets it
serves.
World Economic Factors
A vigorous worldwide economic recovery is now underway and global economic
growth is expected to be about 4 percent in 2004, or about 1 and one half
percentage points more than in 2003. All regions are improving, although the
recovery in the Euro-zone economy is still weak. Industrial production in many
developing countries increased sharply over the past year, often at double-digit
rates.
Low interest rates initiated economic recoveries and low inflation rates likely
will encourage central bankers to be cautious about implementing any interest
rate hikes. Modest interest rate hikes (less than 100 basis points) probably
would not much affect the 2004 outlook. If, however, central bankers decide to
raise interest rates significantly, the recovery would be less robust than
assumed, likely weakening machinery and engine sales.
Recent increases in coal and metals prices have prompted mining sectors in most
countries to increase investments. Further increases in industrial production,
plus tight supplies, should maintain prices at favorable levels and cause the
mining recovery to strengthen further. An unexpected, sharp decline in prices
would harm the recovery.
U.S. economic data were often weaker than expected at the start of the year but
improved as the quarter progressed. First quarter growth was probably 4 percent
or more and growth should improve further, allowing full year growth between 4.5
and 5 percent. Canada, which has had to reverse recent interest rate hikes,
should have economic growth near 3 percent this year. Positives for Machinery
and Engines sales include continued strong demand for housing, a recovery in
commercial construction, increased funding for highways and favorable metals and
energy prices. Coal mining, benefiting from stronger demand and sharp increases
in spot prices, should increase significantly. Should any of these factors
change substantially, our sales probably would be weaker than assumed.
While Euro-zone economies were weaker than expected in the first quarter, we
expect some improvement in coming quarters. In addition, other European
economies are experiencing stronger recoveries, which should keep overall
European economic growth near 2 percent this year, enough to help our sales.
Economies in both Africa/Middle East and the CIS should benefit from another
year of high commodity prices. As a result, we project some growth in Machinery
and Engines sales in EAME in 2004. However, the European economy is still
fragile and any slowing in economic growth could adversely impact sales. Growth
in sales in both Africa/Middle East and CIS are highly dependent upon a
continued high level of energy and other commodity prices.
The Japanese economy has been in recovery for eight consecutive quarters and our
outlook assumes that measures employed by the Bank of Japan - zero interest
rates, the maintenance of high levels of reserves in the banking system and the
purchase of long-term government bonds - will allow this recovery to continue.
We project economic growth of 3 percent in 2004, somewhat better than in 2003
and the best year since 1996. The economy remains vulnerable to any tightening
in financial conditions and should that occur, the recovery could stall. Slower
economic growth would adversely affect our sales in that country and could have
a negative impact on other economies, particularly those in the region.
Latin American economies recovered sharply late last year and we expect economic
growth will improve to about 4 percent this year - the best year since 2000. The
stronger world economy is boosting regional exports, higher metals prices should
encourage more investment in mining and foreign investors are returning. As a
result of the economic recovery, we project significant improvement in Machinery
and Engines sales in 2004. Any slowing in world growth, collapse in commodity
prices or sharp increases in interest rates would jeopardize the expected sales
recovery.
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The Asia/Pacific region should remain the fastest growing economic bloc in the
world this year, with about 6.5 percent growth. China's economy could slow a bit
in response to modest tightening in economic policies but faster growth in most
other countries will more than compensate. Exports will benefit from the
worldwide economic recovery and low local interest rates will encourage more
domestic spending. We expect sales of Machinery and Engines to increase again in
2004. Either a rapid slowdown in the Chinese economy or intensified trade
frictions is a sizable risk to the sales improvement expected.
Commodity Prices
Commodities represent a significant sales opportunity, with prices and
production as key drivers. Prices have improved sharply over the past year and
our outlook assumes continued growth in the world economy will cause metals
prices to hold at or above recent prices in 2004. Any unexpected weakening in
world industrial production, however, could cause prices to drop sharply to the
detriment of our results.
Coal production and prices have improved this year and our sales have benefited.
We expect these trends to continue. Should coal prices soften, due to a slowing
in world economic growth, the ongoing sales recovery would be vulnerable.
Oil and natural gas prices have continued fairly high into 2004 due to strong
demand and tight inventories. Our outlook assumes that increased production will
ease shortages in both oil and natural gas, allowing prices to ease some. We do
not yet view higher energy prices as a threat to economies since it is strong
demand that is boosting prices and world production is still increasing.
However, should significant supply cuts occur, such as from OPEC production cuts
or political unrest in a major producing country, the resulting price spikes
likely would slow economies, potentially with a depressing impact on our sales.
Monetary and Fiscal Policies
For most companies operating in a global economy, monetary and fiscal policies
implemented in the U.S. and abroad could have a significant impact on economic
growth, and accordingly, demand for a product. In general, higher than expected
interest rates, reductions in government spending, higher taxes, significant
currency devaluations, and uncertainty over key policies are some factors likely
to lead to slower economic growth and lower industry demand.
While economic data are looking more favorable, central banks in most developed
countries are still holding interest rates steady. Two (Reserve Bank of
Australia and Bank of England) have implemented modest interest rate increases.
Our outlook assumes that central banks will take great care to ensure that
economic recoveries continue and that interest rates will remain low throughout
2004. Should central banks raise interest rates too aggressively, both economic
growth and our sales could suffer.
Budget deficits in many countries have increased, which has limited the ability
of governments to boost economies with tax cuts and more spending. Our outlook
assumes that governments will not aggressively raise taxes and slash spending to
deal with their budget imbalances. Such actions could disrupt growth and
negatively affect sales to public construction.
Political Factors
Political factors in the United States and abroad have a major impact on global
companies.
Our outlook assumes that there will be no major wars in either North Korea or
the Middle East in the forecast period. Such military conflicts could severely
disrupt sales into countries affected, as well as nearby countries.
Our outlook also assumes that there will be no major terrorist attacks. If there
is a major terrorist attack, confidence could be undermined, causing a sharp
drop in economic activities and our sales. Attacks in major developed economies
would be the most disruptive.
Our outlook further assumes that efforts by countries to increase their exports
will not result in retaliatory countermeasures by other countries to block such
exports, particularly in the Asia/Pacific region.
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Currency Fluctuations
The company has costs and revenues in many currencies and is therefore exposed
to risks arising from currency fluctuations. Many currency positions are fairly
closely balanced, which, along with the diversity of currency positions, helps
diminish exchange rate risks.
The company's largest manufacturing presence is in the United States. So any
unexpected strengthening of the dollar tends to raise the foreign currency value
of costs and reduce our global competitiveness.
The stronger euro had a favorable impact on translating European sales into U.
S. dollars in the third quarter. The outlook assumes similar benefits in the
future. Should the euro collapse, our results could be negatively impacted.
Dealer Practices
The company sells primarily through an independent dealer network. Dealers carry
inventories of both new and rental equipment and adjust those inventories based
on their assessments of future needs. Such adjustments can impact our results
either positively or negatively. The current outlook assumes dealers will reduce
inventories slightly in 2004; more drastic reductions would adversely affect
sales.
Other Factors
The rate of infrastructure spending, housing starts, commercial construction and
mining play a significant role in the company's results. Our products are an
integral component of these activities and as these activities increase or
decrease in the United States or abroad, demand for our products may be
significantly impacted.
Projected cost savings or synergies from alliances with new partners could also
be negatively impacted by a variety of factors. These factors could include,
among other things, higher than expected wages, energy and/or material costs,
and/or higher than expected financing costs due to unforeseen changes in tax,
trade, environmental, labor, safety, payroll or pension policies in any of the
jurisdictions where the alliances conduct their operations.
Our outlook assumes that there will be no significant work stoppages at any of
our facilities worldwide. In particular, our outlook assumes the timely
ratification of a new 6-year labor agreement between Caterpillar and the United
Auto Workers. If, for whatever reason, such an agreement is not ratified on a
timely basis, our sales and revenues and profit results would likely be
negatively impacted, particularly in the event of a subsequent union employee
work stoppage.
Results may be impacted positively or negatively by changes in the sales mix.
Our outlook assumes a certain geographic mix of sales as well as a product mix
of sales. If actual results vary from this projected geographic and product mix
of sales, our results could be negatively impacted.
The company operates in a highly competitive environment and our outlook depends
on a forecast of the company's share of industry sales. An unexpected reduction
in that share could result from pricing or product strategies pursued by
competitors, unanticipated product or manufacturing difficulties, a failure to
price the product competitively, or an unexpected buildup in competitors' new
machine or dealer owned rental fleets, leading to severe downward pressure on
machine rental rates and/or used equipment prices.
Page 23
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The environment also remains very competitive from a pricing standpoint. Our
outlook assumes that the company is successful in implementing worldwide machine
price increases communicated to dealers with an effective date of July 1, 2004.
If for whatever reason the price increases are not accepted in the marketplace,
our results will be negatively impacted. Moreover, additional price discounting
would result in lower than anticipated realization.
Inherent in the operation of the Financial Products Division is the credit risk
associated with its customers. The creditworthiness of each customer, and the
rate of delinquencies, repossessions and net losses on customer obligations are
directly impacted by several factors, including, but not limited to, relevant
industry and economic conditions, the availability of capital, the experience
and expertise of the customer's management team, commodity prices, political
events, and the sustained value of the underlying collateral. Additionally,
interest rate movements create a degree of risk to our operations by affecting
the amount of our interest payments and the value of our fixed rate debt. Our
match funding policy manages interest rate risk by matching the interest rate
profile (fixed rate or floating rate) of our debt portfolio with the interest
rate profile of our receivables portfolio within certain parameters. To achieve
our match funding objectives, we issue debt with similar interest rate profile
to our receivables and also use interest rate swap agreements to manage our
interest rate risk exposure to interest rate changes and in some cases to lower
our cost of borrowed funds. If interest rates move upward more sharply than
anticipated, our financial results could be negatively impacted. With respect to
our insurance and investment management operations, changes in the equity and
bond markets could cause an impairment of the value of our investment portfolio,
thus requiring a negative adjustment to earnings.
In general, our results are sensitive to changes in economic growth,
particularly those originating in construction, mining and energy. Developments
reducing such activities also tend to lower our sales. In addition to the
factors mentioned above, our results could be negatively impacted by any of the
following:
• Any sudden drop in consumer or business confidence
• Delays in legislation needed to fund public construction
• Regulatory or legislative changes that slow activity in key industries;
and/or
• Unexpected collapses in stock markets.
This discussion of uncertainties is by no means exhaustive but is designed to
highlight important factors that may impact our outlook. Obvious factors such as
general economic conditions throughout the world do not warrant further
discussion, but are noted to further emphasize the myriad of contingencies that
may cause the company's actual results to differ from those currently
anticipated.
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This information is provided by RNS
The company news service from the London Stock Exchange