1st Quarter Results
Caterpillar Inc
24 April 2006
Caterpillar Inc.
1Q 2006 Earnings Release
For distribution on April 24, 2006
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FOR IMMEDIATE RELEASE
Caterpillar Profit Per Share 48 Percent Higher than First Quarter 2005;
Full-Year Profit Outlook Increased
First-quarter sales and revenues and profit were the highest for any first
quarter in Caterpillar's history
Strong demand continues in key industries
PEORIA, Ill. - Caterpillar Inc. (NYSE: CAT) today reported record first quarter
2006 sales and revenues of $9.392 billion and record first-quarter profit of
$840 million, or $1.20 per share. Sales and revenues increased 13 percent, and
profit per share was up 48 percent compared with the first quarter of 2005.
'I'm very pleased with our performance in the first quarter; it's a
great beginning to the year,' said Caterpillar Chairman and
Chief Executive Officer Jim Owens. 'Our operating profit continues to
improve as material costs were relatively flat, and we're realizing the
cumulative benefit of price actions implemented over the last 18 months.
Further, we are working to improve our production capability with better
material flow from suppliers and a steady reduction in supply chain bottlenecks.
Collectively, Caterpillar people are focused on execution in the areas of
safety, product quality and inventory turns, and we're leveraging 6
Sigma in order to realize significant gains in these areas.'
Sales and revenues increased $1.053 billion from the first quarter a year ago.
Of the increase, $587 million was from improved price realization, $511 million
was due to higher sales volume and $99 million was from higher Financial
Products revenues. The effect of currency on sales was negative $144 million,
primarily due to a weaker Euro.
First-quarter profit increased $259 million, or $0.39 per share, from first
quarter 2005. The increase was largely due to improved price realization and
higher sales volume, partially offset by an increase in core operating costs.
Caterpillar's first-quarter operating cash flow was $527 million, an
increase of $348 million compared with the first quarter of 2005.
'Underlying business conditions and demand for our products continue to
be strong,' said Owens. 'The fundamental strength of the
industries we serve - notably global mining, infrastructure construction,
oil and gas, and energy - continued to improve. These favorable market
conditions, combined with Caterpillar people and dealers, allow us to serve
customers with unparalleled product support and compete successfully in the
global economy.'
(A more complete review of first-quarter results begins on page 4.)
Page 1
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Outlook
We are raising our 2006 profit outlook to a range of $4.85 to $5.20 per share,
up from $4.04 per share in 2005. The previous outlook forecasted 2006 profit in
a range of $4.65 to $5.00 per share. The forecast for sales and revenues in 2006
is about $40 billion - unchanged from the prior outlook and up from
$36.339 billion in 2005.
'Strong underlying fundamentals are in place, and we believe this is a
business cycle that has staying power,' Owens said. 'With our
enterprise strategy and 2010 goals in place, Team Caterpillar is fully prepared
to take advantage of the continued robust demand in the markets we serve.'
(Complete outlook begins on page 9.)
For more than 80 years, Caterpillar Inc. has been making progress possible and
driving positive and sustainable change on every continent. With 2005 sales and
revenues of $36.339 billion, Caterpillar is the world's leading
manufacturer 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 19-21; first occurrence of terms shown
in bold italics.
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Key Points
First Quarter
• First-quarter sales and revenues of $9.392 billion were the highest in
company history for a first quarter and were 13 percent higher than first
quarter 2005.
• Machinery sales increased 13 percent, Engines sales increased 10 percent
and Financial Products revenues rose 18 percent from a year ago.
• First-quarter profit was the highest in company history for a first
quarter - $840 million, or $1.20 per share - 48 percent higher than first
quarter 2005.
• First-quarter profit per share of $1.20 equaled the fourth quarter of 2005
as the best quarter in company history.
• Machinery and Engines operating profit as a percent of sales increased
substantially - from 9 percent in first quarter 2005 to 13 percent in first
quarter 2006. The increase was a result of improved price realization and
higher sales volume, partially offset by an increase in core operating
costs.
• Machinery and Engines 'operating profit pull through' - the change in
operating profit, divided by the change in sales - was over 47 percent.
Cash Flow
• First-quarter operating cash flow was $527 million.
• Shares repurchased totaled 10.5 million during the quarter. With shares
issued to cover options exercised, the net reduction of basic shares
outstanding was 1.3 million.
Outlook
• We expect 2006 sales and revenues to be about $40 billion, unchanged from
the previous outlook, and profit per share in the range of $4.85 to $5.20,
up from the previous outlook of $4.65 to $5.00. The complete outlook begins
on page 9.
A question and answer section has been included in this release starting on page
13.
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DETAILED ANALYSIS
First Quarter 2006 vs. First Quarter 2005
Sales and Revenues
Sales and revenues for first quarter 2006 were $9.392 billion, up $1.053
billion, or 13 percent, from first quarter 2005. Machinery volume was up $324
million, Engines volume was up $187 million, price realization improved $587
million and currency had a negative impact on sales of $144 million, primarily
due to a weaker Euro. In addition, Financial Products revenues increased $99
million.
Sales and Revenues by Geographic Region
% North % % Latin % Asia/ %
(Millions of Total Change America Change EAME Change America Change Pacific Change
dollars)
------- ------ ------- ------ -------- ------ -------- ------ -------- -------
First Quarter 2005
Machinery $ 5,400 $ 2,928 $ 1,355 $ 440 $ 677
Engines (1) 2,389 1,200 743 157 289
Financial Products 550 390 87 31 42
(2)
------- ------- -------- -------- --------
$ 8,339 $ 4,518 $ 2,185 $ 628 $ 1,008
------- ------- -------- -------- --------
First Quarter 2006
Machinery $ 6,112 13% $ 3,528 20% $ 1,280 (6%) $ 582 32% $ 722 7%
Engines (1) 2,631 10% 1,282 7% 795 7% 236 50% 318 10%
Financial Products 649 18% 455 17% 90 3% 45 45% 59 40%
(2)
------- ------- -------- -------- --------
$ 9,392 13% $ 5,265 17% $ 2,165 (1%) $ 863 37% $ 1,099 9%
------- ------- -------- -------- --------
1 Does not include internal engines transfers of $570 million and $510 million in first quarter 2006 and 2005,
respectively. Internal engines transfers are valued at prices comparable to those for unrelated parties.
2 Does not include revenues earned from Machinery and Engines of $97 million and $62 million in first quarter 2006
and 2005, respectively.
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Machinery Sales - Sales were $6.112 billion, an increase of $712 million,
or 13 percent, from first quarter 2005.
• Price realization increased $474 million
• Sales volume increased $324 million
• Currency impact reduced sales $86 million
• For all geographic regions, dealer reported inventories adjusted for price
were up
• Worldwide, and for most geographic regions, dealer reported inventories in
months of supply were down
The volume increase resulted from continued growth in sales through our dealer
network, reflecting increased investment in infrastructure construction, mining
and nonresidential building. The improvement in price realization in all regions
was largely a result of price increases in the second quarter of 2005 and the
first quarter of 2006.
North America - Sales increased $600 million, or 20 percent.
• Price realization increased $310 million
• Sales volume increased $290 million
U.S. economic growth rebounded from the slowdown in the fourth quarter of 2005,
and most key industries the company serves continued to enjoy rising demand and
favorable prices. The value of contracts for commercial construction surged
during the quarter, causing nonresidential building construction to strengthen.
Funding as a result of the Federal Highway Bill has increased new contracts and
construction. Sharply higher metals prices and a sizable increase in coal
production supported mining investment. Housing starts improved in the first
quarter and were up slightly from those of a year earlier.
EAME - Sales decreased $75 million, or 6 percent.
• Price realization increased $57 million
• Sales volume decreased $42 million
• Currency impact reduced sales $90 million
The volume decline occurred in Europe and resulted from slow shipments due to a
large number of models undergoing new product introduction. For many remaining
models, volume increased in response to improving economic conditions in Europe.
Africa/Middle East and the Commonwealth of Independent States (CIS) continued
strong growth, benefiting from higher energy and metals prices and increased
infrastructure investment.
Latin America - Sales increased $142 million, or 32 percent.
• Price realization increased $55 million
• Sales volume increased $79 million
• Currency impact increased sales $8 million
Low interest rates and higher capital inflows led to good economic growth, which
increased construction spending. High metals prices have encouraged rapid growth
in mining investment, benefiting larger machine sales.
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Asia/Pacific - Sales increased $45 million, or 7 percent.
• Price realization increased $52 million
• Sales volume decreased $3 million
• Currency impact reduced sales $4 million
The decline in sales volume occurred largely in Indonesia as the dealer reduced
inventory in response to lower deliveries in the last half of 2005. Largely
offsetting the decline in Indonesia, China continued to recover from a collapse
in late 2004, and mining growth continued in India and Australia.
Engines Sales - Sales were $2.631 billion in first quarter - up 10
percent from first quarter 2005.
• Price realization increased $113 million
• Sales volume increased $187 million
• Currency impact reduced sales $58 million
• Dealer reported inventories adjusted for price were up
• Dealer reported inventories in months of supply were down
The improvement in price realization was largely a result of price increases in
the second quarter of 2005 and the first quarter of 2006.
North America - Sales increased $82 million, or 7 percent.
• Sales into petroleum applications increased 46 percent from surging demand
for gas drilling, gas compression and well servicing applications.
• Sales into industrial applications increased 18 percent as a result of
higher demand for auxiliary power unit engines for on-highway trucks.
• Sales into electric power increased 8 percent with continued demand growth
for data, communications and standby generator set applications.
• Sales for marine applications increased 9 percent with ongoing growth in
demand for workboat engines.
• Sales into on-highway applications increased 1 percent. While the
on-highway truck industry remained strong, engine sales were impacted by
some continued reduction in finished engine inventory at truck Original
Equipment Manufacturers (OEMs).
EAME - Sales increased $52 million, or 7 percent.
• Sales into electric power increased 10 percent, primarily due to
improvement in demand for standby generator sets.
• Sales into marine applications increased 16 percent as a result of higher
deliveries for oceangoing vessels.
• Sales for industrial applications declined 11 percent primarily due to
reduced demand for agricultural equipment.
• Sales into petroleum applications declined 13 percent, reflecting reduced
sales for turbines and turbine-related services.
Latin America - Sales increased $79 million, or 50 percent.
• Sales for petroleum applications increased 58 percent. Sales of turbines
and turbine-related services were strong as a result of increased
investment in oil production, particularly in Mexico.
• Sales for electric power increased 30 percent with strong demand in the
Caribbean for generator sets to support business contingency planning as
well as communications applications.
• Sales for marine applications doubled in support of increased workboat
activity.
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• Sales for on-highway applications increased 24 percent with increased
investment in trucks and strong market acceptance of Caterpillar engines in
Mexico.
Asia/Pacific - Sales increased $29 million, or 10 percent.
• Sales for marine applications increased 77 percent, primarily from
increased deliveries for oceangoing vessels.
• Sales for industrial applications increased 15 percent.
• Sales for petroleum applications increased 3 percent. Increased sales of
reciprocating engines for drill rigs were partially offset by reduced sales
of turbines and turbine-related services.
• Sales into electric power declined 18 percent with reduction in demand for
small to mid-sized generator sets.
Financial Products Revenues - Revenues were $649 million in the first
quarter, an increase of $99 million, or 18 percent, from first quarter 2005.
• Growth in earning assets increased revenues $43 million.
• The impact of higher interest rates on new and existing finance receivables
at Cat Financial added $33 million.
• Cat Insurance and Cat Power Ventures revenues increased $17 million.
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Operating Profit
Operating profit in first quarter 2006 improved $462 million, or 61 percent,
from last year, driven by higher price realization and sales volume, partially
offset by higher core operating costs.
Core operating costs rose $303 million from first quarter 2005, primarily due to
a $170 million increase in manufacturing costs. About two-thirds of the
manufacturing cost increase was attributable to higher period manufacturing
costs, with the remainder a result of higher variable costs. Non-manufacturing
core operating costs were up $133 million as a result of higher Selling, General
and Administrative (SG&A) and Research and Development (R&D) expenses to support
significant new product programs and growth.
Operating Profit by Principal Line of Business
(Millions of dollars) $ %
First Quarter First Quarter Change Change
2005 2006
----------------- ----------------- ----------------- ----------
Machinery (1) $ 496 $ 837 $ 341 69%
Engines (1) 183 294 111 61%
Financial Products 124 170 46 37%
Consolidating Adjustments (47) (83) (36)
----------------- ----------------- -----------------
Consolidated Operating Profit $ 756 $ 1,218 $ 462 61%
----------------- ----------------- -----------------
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.
Operating Profit by Principal Line of Business
• Machinery operating profit of $837 million was up $341 million, or 69
percent, from first quarter 2005. The favorable impact of improved price
realization and higher sales volume was partially offset by higher core
operating costs and stock-based compensation expense.
• Engines operating profit of $294 million was up $111 million, or 61
percent, from first quarter 2005. The favorable impact of improved price
realization and higher sales volume was partially offset by higher core
operating costs and stock-based compensation expense.
• Financial Products operating profit of $170 million was up $46 million, or
37 percent, from first quarter 2005. The increase was primarily due to a
$20 million impact from the continued growth of earning assets and a $15
million impact from improved net yield on earning assets at Cat Financial.
In addition, Cat Financial had $7 million higher net gain on returned or
repossessed equipment.
Other Profit/Loss Items
• Other income/expense was income of $43 million compared with income of $108
million in first quarter 2005. The decrease was due primarily to the
absence of $49 million in gains from foreign currency hedges recognized in
the first quarter of 2005.
• The provision for income taxes in the first quarter reflects an estimated
annual tax rate of 31 percent for 2006 compared to 29 percent for the first
quarter 2005 and 29.5 percent (excluding discrete items) for the full-year
2005. The increase is primarily due to a change in our geographic mix of
profits as well as the impact of the phase-out provision of the American
Jobs Creation Act permitting only 60 percent of Extraterritorial Income
Exclusion (ETI) benefits in 2006.
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Employment
Caterpillar's worldwide employment was 86,984 in first quarter 2006
compared with 79,988 in first quarter 2005. The increase was primarily due to
about 3,500 hourly labor additions to support higher volume, 2,100 salaried and
management additions to support higher volume, new product introductions and
growth of our services businesses and about 1,400 employee additions through
acquisitions, mainly in our Caterpillar Logistics operations.
2006 Sales Outlook
We are maintaining our forecast of about 10 percent growth in company sales and
revenues this year, setting a new record of $40 billion.
• Most central banks have begun raising interest rates, and further increases
this year are likely. However, we expect banks will remain cautious, and
both short-term and long-term interest rates will remain lower than those
prevailing in the upturns of the late 1990s.
• Available data suggest most economies started the year strong, and we
forecast worldwide economic growth of more than 3.5 percent in 2006,
marginally better than in 2005. An improvement in Europe and further
strengthening in Japan will offset slower growth in the United States.
Developing countries, benefiting from favorable commodity prices, low
interest rates and growing world trade, should turn in the fourth
consecutive year of strong growth.
• The current recovery, characterized by record corporate profits, positive
stock markets and inadequate capacity in many basic industries, has favored
investment over consumer spending. We anticipate those conditions will
remain in place and that investment sectors will outperform overall
economies.
• Base metals prices increased further during the first quarter, the result
of continued good demand, low inventories and mine production difficulties.
Price increases over the past four years were so large that some fallback
is likely. However, we do not anticipate a price decline severe enough to
cause mining companies to scale back investments.
• Inadequate capacity and periodic political tensions are keeping upward
pressure on crude oil prices; prices in 2006 should average slightly higher
than in 2005. As a result, we expect further growth in exploration,
drilling, pipeline expenditures and oil sands development, benefiting both
machine and engine sales.
• Housing construction is expected to decline in the United States due to
higher mortgage interest rates. Elsewhere, housing construction should
benefit from low interest rates, rising incomes and higher home prices.
• Nonresidential building construction spending and investments in standby
electric power should increase in 2006 to support growing economies.
Positives include low long-term interest rates, good corporate profits and
higher office rental rates.
• Infrastructure spending should also increase, the result of increased
federal highway funding in the United States and income gains from higher
commodity prices in the developing countries.
• Increases in both oceangoing freight and offshore petroleum activity have
led to healthy order backlogs at oceangoing and support vessel shipyards, a
boost to marine engine sales.
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North America (United States and Canada)
• The U.S. Federal Reserve raised interest rates on March 28 and indicated at
least one more increase is coming. We believe the Fed Funds rate will peak
at 5.25 percent this year.
• We estimate interest rates are too high to keep the economy growing at its
potential and that economic growth will slow. A strong first quarter should
allow full-year growth of slightly over 3 percent.
• In the last three years, U.S. production of capital goods increased much
faster than did production of consumer goods, the result of good corporate
profits, low interest rates and aged capital stocks. We expect those
favorable factors will largely remain in place this year, and investment
goods industries should continue to perform well.
• Housing starts probably peaked in the first quarter, and we anticipate that
higher mortgage interest rates will reduce 2006 starts to about 1.9 million
units. A high rate of household formations and strong demand for second
homes should partially offset higher mortgage rates.
• Contracts for commercial construction, net of inflation, surged 28 percent
in the first quarter of this year, and construction spending rose 11
percent in the first two months. Investment in nonresidential structures
should increase at least 5 percent this year, driven by favorable financing
conditions, rising prices for commercial properties and the need to upgrade
existing capacity.
• Passage of the highway bill last year led to a higher flow of federal
funds, and the real value of highway contracts awarded increased 12 percent
in the first quarter of 2006. We expect highway contracting to increase
about 7 percent in 2006.
• Mine production of base metals in the United States dropped 6 percent in
the first quarter. The need to improve production capabilities should drive
another large increase in exploration and development spending this year.
• Coal production increased more than 4 percent in the first quarter of 2006,
reversing last year's decline. We expect coal production should increase
about 4 percent this year as a result of favorable coal prices, depleted
utility coal stockpiles and increased electricity production.
• Warmer than normal winter weather allowed natural gas prices to decline
below year-earlier prices in March, even though the recovery from last
year's hurricanes is not complete. High oil prices and concerns about
another hurricane season likely will keep pressure on gas prices and
encourage exploration and development, a boost to engine sales.
• Production of on-highway trucks should be up slightly this year, primarily
due to growth in heavy-duty truck sales. Truck demand should benefit from
growth in freight movements, better trucking company profits and ordering
in advance of 2007 emission standards.
• The Bank of Canada completed its seventh interest rate hike, but with
inflation below target for the past two years the hikes should be about
finished. We forecast the Canadian economy will grow more than 3 percent
this year, an improvement over last year. Construction and tar sands
development should continue to do well, and mine production should rebound
from last year's decline.
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EAME
• Signs of a long-awaited recovery in the Euro-zone economy are emerging.
Industrial production rose 2.5 percent in January, and industrial orders
are up even more. Surveys show businesses are much more optimistic.
• The European Central Bank reacted quickly to signs of recovery and raised
interest rates twice since early December. The bank signaled more rate
increases are coming, despite few signs of inflation. While these increases
entail some risk, we believe the economy has sufficient momentum to grow
about 2 percent this year - the fastest since 2000.
• The economic environment in Europe should favor investment and
construction. Corporate profits are up, stock markets are booming and
long-term interest rates are lower than a year earlier. Housing
construction should increase again in 2006, and both nonresidential
building and infrastructure construction orders started to rise last year.
• We project the Africa/Middle East region will have economic growth of over
5 percent in 2006, about the same as in 2005. Good economic growth, along
with the income generated from higher energy and metals prices, should
benefit construction and investment.
• Economic growth in the CIS has benefited from low interest rates, increased
exports and growth in oil production. Those factors remain in place and
should support 6 percent economic growth this year. Investment grew faster
than the overall economy the past three years and should continue doing so
this year.
Latin America
• Both Mexico and Brazil reduced interest rates in the first quarter, and we
expect additional decreases. Other countries raised interest rates but from
some of the lowest rates in years.
• Major economies started the year strong; low interest rates, increased
capital inflows and favorable commodity prices should support over 4
percent economic growth in 2006.
• Significant mine development is underway, and the surge in metals and
energy prices this year likely will support further development. Increased
mining investment has required more infrastructure development, and
commercial construction has increased in response to better economic
growth. We expect both trends will continue this year.
Asia/Pacific Machinery
• Many key countries raised interest rates several times, and the outlook is
for only limited increases the rest of this year. Some of the more
aggressive in raising interest rates - Indonesia and New Zealand - probably
will cut interest rates before the end of the year. Overall, interest rates
should remain low enough to support about 6.5 percent economic growth in
2006.
• Exchange rates changed little over the past year, and the region's trade
surplus with the rest of the world increased more than 50 percent. Trade
frictions have increased, but we do not anticipate any actions leading to
significant currency appreciations or trade disruptions. With world trade
increasing, exports should again support economic growth in 2006.
• Asian contract prices for thermal coal are settling about 5 percent lower
than last year; coking coal contract prices, about 10 percent lower.
However, both contract prices will remain well above 2004 prices, which
should encourage increased production and investment.
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• Expenditures for metals exploration increased 21 percent last year but were
well below the 1997 peak. Higher metals prices and growth in output should
encourage more investment in mine capacity.
• Low interest rates, increased property prices in some countries and
continued good economic growth should keep construction spending growing.
Financial Products Revenues
• We expect continued growth in Financial Products for 2006. Revenues are
expected to increase approximately 18 percent versus 2005, primarily due to
higher average earning assets in 2006.
Sales and Revenues Outlook
2005 2006 %
(Millions of dollars) Actual Outlook Change
---------------- ------------------ ---------------
Machinery and Engines
North America $ 17,709 $ 19,850 12 %
EAME 8,860 9,300 5 %
Latin America 3,024 3,200 6 %
Asia/Pacific 4,413 4,900 11 %
---------------- ------------------
Total Machinery and Engines 34,006 37,250 10 %
---------------- ------------------
Financial Products (1) 2,333 2,750 18 %
---------------- ------------------
Total $ 36,339 $ 40,000 10 %
---------------- ------------------
1 Does not include revenues earned from Machinery and Engines of $350 million and $317 million in 2006 and 2005,
respectively.
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2006 Outlook - Profit
We expect profit per share to be in the range of $4.85 to $5.20, up between 20
percent to 29 percent from 2005. The year is expected to benefit from improved
price realization and higher sales volume, partially offset by core operating
cost increases and stock-based compensation expense.
About half of the expected core operating cost increase is from manufacturing
costs and about half from SG&A and R&D. Manufacturing costs are expected to be
higher due to an increase of about 1 percent in material costs and an increase
in period manufacturing costs.
SG&A and R&D are expected to be higher in support of growth and new product
programs to support the growth envisioned by Caterpillar's long-term
strategy.
QUESTION AND ANSWER
Price Realization
Q1: Price realization in the first quarter was higher than might have been expected based on your full-year
outlook. Based on the new outlook, the rate of improvement will decline over the remainder of the year. Can
you explain why?
A: Price realization in the first quarter was a strong start to the year and benefited from price increases
taken in the second quarter of 2005 and in January of 2006. The full-year outlook issued today reflects the
strong performance in the first quarter, and price realization is higher than the previous outlook.
With respect to the rate of improvement being lower in the remainder of the year - the timing of last
year's second-quarter price increases will reduce the year-over-year comparison beginning in the
second quarter of 2006. In addition, the industries we serve are very competitive, and we intend to defend
our market position.
Q2: Have you announced price increases for 2007 truck engines?
A: We have discussed preliminary pricing for 2007 engine configurations with OEM customers. Communication
continues with vehicle manufacturers to develop specific pricing on individual engine arrangements and
accessories.
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Demand
Q3: What are you assuming the U.S. Federal Reserve will do with interest rates, and what's the likely
impact of higher interest rates on Caterpillar?
A: We are assuming two more rate hikes this year, from the current 4.75 percent to 5.25 percent. Higher rates
will likely begin to slow the U.S. economy. Higher mortgage interest rates should reduce housing starts.
Beyond that, we see limited impact on Caterpillar sales since Gross Domestic Product growth will still be
high enough to benefit key industries. Federal highway funding is on the rise, nonresidential building
contracts are increasing, coal production is rising to rebuild depleted utility stocks and metals prices
are high. These factors create a forward momentum that should carry through the year.
Q4: Do you expect housing construction to collapse?
A: No. Housing has increased steadily since the early 1990s and benefits from powerful underlying factors. We
expect starts will ease to about 1.9 million units in 2006, compared with 2.06 million in 2005. Household
formations have been increasing, demand for second homes is growing, mobile home shipments remain low and
replacement demand for housing appears strong.
Q5: Commodity prices have continued to increase. This has had a positive impact on demand for many of your
machines and engines. How long can high commodity prices continue?
A: Commodity prices are high because demand is strong, inventories are quite low and producers are struggling
to maintain output. Investment has increased for three years but in the case of metals has just returned to
the previous peak. More investment in metals and energy is still needed. That said, prices could drop from
current highs and still be at levels attractive for investment.
Q6: Many who follow the Class 8 truck industry expect a significant drop in demand in 2007 as a result of new
emissions requirements. Do you agree, and what are your expectations?
A: We are seeing indications that fleets may be engaging in a pre-buy prior to the 2007 regulations. We are
anticipating the 2007 Class 8 North American truck industry to drop from about 315,000 units in 2006 to
about 190,000 to 220,000 units in 2007. We are expecting the industry drop to be more concentrated in the
first half of the year, with demand increasing somewhat in the second half of 2007 as freight demand is
expected to continue to be strong.
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Q7: Are dealer reported inventories for machines and engines at levels you think are appropriate overall?
A: While low by historic standards, in terms of months of supply, we think dealer reported machine and engine
inventories are about right.
Q8: Oil prices have been over $70 per barrel. Do you think high oil prices will begin depressing economic growth
and Caterpillar sales?
A: Oil prices have roughly tripled since the U.S. recession ended in late 2001. The increase in prices has
resulted from growing demand shrinking the world's spare capacity. High prices will persist until
producers are able to raise production and refining capacity into a better balance with the steady growth in
demand. High prices should benefit our sales in well drilling and servicing, exploration and pipelines, and
indirectly as countries that export oil will likely continue investing in infrastructure.
Product Availability
Q9: We've heard from dealers and end customers that delivery times for large engines for marine,
petroleum and electric power applications are very long. What are the production constraints? What are you
doing to improve the situation? Are your competitors gaining ground?
A: Demand for our larger 3500 and 3600 families of engines has grown substantially since 2004 in most of our
markets and continues to run at record levels. Since early 2004, we have roughly doubled 3500 engine
deliveries and increased 3600 engine output by over 50 percent. 6 Sigma and lean initiatives continue to be
applied to constraints across the supply chain to further increase output.
Large engine capacity constraints are common to the industry and are being faced by both Caterpillar and
our competitors. We believe that our availability, while extended, is better than the competition in most
cases. Major increases in large engine capacity involve substantial lead time, and we are continuing to
approach capacity expansion with a balanced long-term view of growth, cost and profitability.
Q10: How many machine models do you have on managed distribution?
A: There are 69 machine models currently on managed distribution - the same number of models as year-end
2005. Medium and large machines are expected to remain 'tight' and will likely be on managed distribution
throughout 2006.
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Q11: How will your 2007 Class 8 on-highway engine compare with your current on-highway product?
A: Building on our current 2004 ACERT(R) Technology engines, we will add clean gas induction (CGI) and a diesel
particulate filter (DPF) to meet the 2007 on-highway regulations. Our 2007 engines will deliver equal fuel
economy, durability and reliability as today's industry-leading product. The DPF will require a periodic
maintenance procedure to clean the ash out of the device. All OEMs will have a similar maintenance
procedure, but the Caterpillar process should be much quicker due to a unique cleaning procedure.
Q12: Do you expect that ultra low sulfur diesel fuel (ULSDF) will be widely available in time for 2007?
A: Refiners are currently on track to initiate production of ULSDF starting June 1, 2006 with the level of
ULSDF projected to exceed 80 percent of the total on-highway diesel fuel production required by law in the
U.S. The EPA has provided a 45-day extension for the transition to ULSDF with the implementation date for
retailers extended from September 1, 2006 to October 15, 2006. We expect the oil industry and distributors
to meet these dates. If ULSDF is not available, achieving the 2007 emissions levels will not be technically
feasible, and we would request the EPA delay implementation of the 2007 emissions regulation. Production of
engines compliant with the current emissions standard would need to continue pending availability of ULSDF.
Q13: Are Caterpillar machines with emissions-compliant ACERT engines at year-end being released as you had
expected, and will all machines that need to meet new regulations be ready?
A: Seven more models of Cat machines powered by ACERT Technology began shipping in the first quarter of 2006.
Since launch in October 2004, the total is now 52 machine models using 300 to 700 horsepower engines. An
additional 25 models using 100 to 300 horsepower engines will go into production in 2006. We have met
production dates for all machine models that require the ACERT Tier 3 engines and are on track to continue
to meet schedules.
We are also in production with a variety of marine and industrial engine models that are provided to a wide
range of customers.
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Costs
Q14: Can you break down your core operating costs in more detail?
A: The following table summarizes the increase in core operating costs in first quarter 2006 versus first
quarter 2005:
Core Operating Cost Change 1st Quarter 2006
vs.
(millions of dollars) 1st Quarter 2005
------------------------------------------------------------------------------ -------------------------
Manufacturing Costs $ 170
SG&A 71
R&D 62
-------------------------
Total $ 303
-------------------------
Approximately two-thirds of the manufacturing cost increase is due to period manufacturing costs, and the
remaining one-third is due to variable costs. The variable cost increases resulted from volume-related
inefficiencies due to operating at near capacity levels in many of our facilities.
Manufacturing costs also include period manufacturing costs associated with building our products. Period
manufacturing costs increased approximately $110 million. The majority of the increase resulted from costs
incurred to support 12 percent higher sales. These items include costs to support increased capacity,
inflation on labor costs, ongoing repairs and maintenance, depreciation and energy costs. Machinery and
Engines operating margins have improved from 8.7 percent in the first quarter of 2005 to 12.9 percent in the
first quarter of 2006.
Machinery and Engines Operating Profit as a Percent of Sales
--------------------------------------------------------------------------------------------------------
Q1 '05 Q2 '05 Q3 '05 Q4 '05 Q1 '06
------------ ------------- ------------- ------------- -------------
8.7 % 10.7 % 10.5 % 11.1 % 12.9 %
Q15: Many industrial companies are reporting higher material costs. Steel scrap, copper and iron ore have
continued to rise during the first quarter. Can you comment on what happened to Caterpillar's
material costs in the first quarter and the full-year expectation in your outlook?
A: Material costs in the first quarter were relatively flat versus 2005. As reflected in our 2006 outlook, we
expect material costs to be up about 1 percent compared with 2005.
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Q16: Can you update your expectations for stock-based compensation for 2006?
A: We expect 2006 stock-based compensation expense to be about $140 million. We estimate the distribution of
the expense will be as follows:
Stock-Based Compensation Expense
---------------------------------------------------------------------------------------------------------
(Millions of dollars)
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 2006
Full Year
----------- ----------- ----------- ----------- -------------
$ 34 $ 60 $ 32 $ 14 $ 140
The distribution by quarter is the result of our policy to immediately vest awards upon retirement for
employees who are 55 years old or older, have 10 or more years of service and who have completed six months
of service after the grant date (i.e. the fair value of awards for employees who have met these age/years of
service requirements is expensed over six months rather than the normal three year vesting period). As the
2006 award was granted on February 17, the impact is higher expense in the second and third quarters.
In addition, expense for the third and fourth quarters is lower because expense for the final months of
vesting for the 2003 grant was included in the first two quarters. As a result of prior decisions which
resulted in full vesting of the 2004 and 2005 awards prior to 2006, a full complement of stock-based
compensation expense will not be recognized until 2009.
Q17: What are your expectations for incentive compensation for 2006?
A: At the midpoint of our revised 2006 outlook, we now expect expense related to incentive compensation to be
about $470 million compared to $505 million in 2005.
Q18: In your operating income waterfall chart, operating income is increasing about 32 percent from 2005, but the
midpoint of your profit per share outlook, at $5.03, is up about 25 percent from 2005. Why the difference?
A: In 2004 and 2005, we recognized approximately $170 million of gains from Machinery and Engines long-term
hedges in Other Income/Expense, which are below operating profit on our income statement. The amount was
split about evenly between the two periods. These hedges expired at the end of 2005, and we do not expect
similar gains in 2006. We also expect our 2006 effective tax rate to be up about 1.5 percentage points from
the full-year 2005 rate excluding discrete items because of a change in geographic mix of profits and the
continued phase-out of ETI. The American Jobs Creation Act provides for the phase-out of ETI with 80 percent
of benefits in 2005, 60 percent of benefits in 2006 and complete phase-out in 2007.
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Cash Flow
Q19: Can you comment on first-quarter cash flow?
A: The first quarter of 2006 was very positive for operating cash flow. For Machinery and Engines, operating
cash flow was $538 million. The strong cash flow in Machinery and Engines was primarily used for:
• Capital Expenditures - $226 million - primarily to support new product programs and add capacity.
• Dividends - $168 million - the quarterly dividend is currently 25 cents per share.
• Share repurchase - $738 million - 10.5 million shares were repurchased.
GLOSSARY OF TERMS
1. Consolidating Adjustments - Eliminations of transactions between Machinery and Engines and Financial
Products.
2. Core Operating Costs - Machinery and Engines variable manufacturing cost change adjusted for volume and
change in period costs. Excludes the impact of currency and stock-based compensation.
3. 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. Currency includes the impacts on sales and operating profit
for the Machinery and Engines lines of business only; currency impacts on Financial Products revenues and
operating profit are included in the Financial Products portions of the respective analyses. With respect to
other income/expense, currency represents the effects of forward and option contracts entered into by the
company to reduce the risk of fluctuations in exchange rates and the net effect of changes in foreign
currency exchange rates on our foreign currency assets and liabilities for consolidated results.
4. EAME - Geographic region including Europe, Africa, the Middle East and the Commonwealth of Independent States
(CIS).
5. Earning Assets - These assets consist primarily of total finance receivables net of unearned income, plus
equipment on operating leases, less accumulated depreciation at Cat Financial.
6. Engines - A principal line of business including the design, manufacture, marketing and sales 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 21,500 horsepower (4 to over 16 000 kilowatts). Turbines range
from 1,600 to 20,500 horsepower (1 200 to 15 000 kilowatts).
Page 19
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7. Financial Products - A principal line of business consisting primarily of Caterpillar Financial Services
Corporation (Cat Financial), Caterpillar Insurance Holdings, Inc. (Cat Insurance), Caterpillar Power Ventures
Corporation (Cat Power Ventures) and their respective subsidiaries. Cat Financial provides a wide range of
financing alternatives to customers and dealers 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. Cat Power Ventures is an active investor in independent power projects using Caterpillar
power generation equipment and services.
8. Latin America - Geographic region including the Central and South American countries and Mexico.
9. Machinery - A principal line of business which includes the design, manufacture, marketing and sales of
construction, mining and forestry machinery-track and wheel tractors, track and wheel loaders, pipelayers,
motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, log skidders, log
loaders, off-highway trucks, articulated trucks, paving products, telehandlers, skid steer loaders and
related parts. Also includes logistics services for other companies.
10. Machinery and Engines (M&E) - 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.
11. Managed Distribution - The process to provide a fair and equitable allocation of available machine and engine
production positions to worldwide dealers on models where demand exceeds factory supply.
12. Manufacturing Costs - Manufacturing costs represent the volume-adjusted change for variable costs and the
absolute dollar change for period manufacturing costs. Variable manufacturing costs are defined as having a
direct relationship with the volume of production. This includes material costs, direct labor and other costs
that vary directly with production volume such as freight, power to operate machines and supplies that are
consumed in the manufacturing process. Period manufacturing costs support production but are defined as
generally not having a direct relationship to short-term changes in volume. Examples include machine and
equipment repair, depreciation on manufacturing assets, facility support, procurement, factory scheduling,
manufacturing planning and operations management. Excludes the impact of currency and stock-based
compensation.
Page 20
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13. M&E Other Operating Expenses - Comprised primarily of gains (losses) on disposal of long-lived assets,
long-lived asset impairment charges and impairment of goodwill.
14. Period Costs - Comprised of Machinery and Engines period manufacturing costs, SG&A expense and R&D expense.
Excludes the impact of currency and stock-based compensation.
15. Price Realization - The impact of net price changes excluding currency. Includes the impact of changes in the
relative weighting of sales between geographic regions.
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.
17. Stock-Based Compensation - As required by Statement of Financial Accounting Standards 123R, we began
expensing stock-based compensation awards in 2006. Compensation cost is based on the fair value of the award
on the date of grant. Our awards consist of stock options and stock-settled stock appreciation rights (SARs).
18. 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.
19. 2010 Goals - The company's 2010 goals are a part of its enterprise strategy to achieve its '
Vision 2020,' which was made public on October 31, 2005. The 2010 goals are grouped under the
'3Ps' of people, performance, and profitable growth. The people goals include a highly
engaged workforce and world-class safety. The performance goals are related to quality and market leadership
and product and service parts availability. Profitable growth goals include the 2010 sales and revenues
target and a goal for earnings per share growth. More information on Vision 2020 and the 2010 goals can be
found in the company's 8-K filing with the SEC from October 31, 2005. A copy is available on
Caterpillar's website under the SEC Filings section at http://www.cat.com/investor.
Page 21
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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 23-29 reconcile 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 24, 2006. 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:
Rusty Dunn
Corporate Public Affairs
(309) 675-4803
Dunn_Rusty_L@cat.com
Page 22
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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,
2006 2005 (2)
------------------ -------------------
Sales and revenues:
Sales of Machinery and Engines $ 8,743 $ 7,789
Revenues of Financial Products 649 550
------------------ -------------------
Total sales and revenues 9,392 8,339
Operating costs:
Cost of goods sold 6,552 6,215
Selling, general and administrative expenses 821 744
Research and development expenses 307 241
Interest expense of Financial Products 232 170
Other operating expenses 262 213
------------------ -------------------
Total operating costs 8,174 7,583
------------------ -------------------
Operating profit 1,218 756
Interest expense excluding Financial Products 68 65
Other income (expense) 43 108
------------------ -------------------
Consolidated profit before taxes 1,193 799
Provision for income taxes 370 232
------------------ -------------------
Profit of consolidated companies 823 567
Equity in profit (loss) of unconsolidated affiliated companies 17 14
------------------ -------------------
Profit $ 840 $ 581
------------------ -------------------
--------------------------------------------------------------------------------------------------------------------
Profit per common share $ 1.25 $ .85
Profit per common share - diluted (1) $ 1.20 $ .81
Weighted average common shares outstanding (millions)
- Basic 672.0 684.1
- Diluted (1) 699.1 713.3
Cash dividends declared per common share $ - $ -
1 Diluted by assumed exercise of stock options and SARS, using the treasury stock method.
2 The per share data reflects the 2005 2-for-1 stock split, applied retroactively.
Page 23
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Caterpillar Inc.
Condensed Consolidated Statement of Financial Position
(Unaudited)
(Millions of dollars)
Mar. 31, Dec. 31,
2006 2005
------------------ ------------------
Assets
Current assets:
Cash and short-term investments $ 806 $ 1,108
Receivables - trade and other 8,124 7,526
Receivables - finance 6,351 6,442
Deferred and refundable income taxes 345 344
Prepaid expenses 2,150 2,146
Inventories 5,858 5,224
------------------ ------------------
Total current assets 23,634 22,790
Property, plant and equipment - net 7,884 7,988
Long-term receivables - trade and other 965 1,037
Long-term receivables - finance 10,550 10,301
Investments in unconsolidated affiliated companies 546 565
Deferred income taxes 760 768
Intangible assets 431 424
Goodwill 1,433 1,451
Other assets 1,754 1,745
------------------ ------------------
Total assets $ 47,957 $ 47,069
------------------ ------------------
Liabilities
Current liabilities:
Short-term borrowings:
-- Machinery and Engines $ 728 $ 871
-- Financial Products 5,045 4,698
Accounts payable 3,661 3,471
Accrued expenses 2,685 2,617
Accrued wages, salaries and employee benefits 1,613 1,845
Customer advances 520 395
Dividends payable - 168
Deferred and current income taxes payable 722 528
Long-term debt due within one year:
-- Machinery and Engines 387 340
-- Financial Products 4,338 4,159
------------------ ------------------
Total current liabilities 19,699 19,092
Long-term debt due after one year:
-- Machinery and Engines 2,679 2,717
-- Financial Products 12,691 12,960
Liability for postemployment benefits 3,011 2,991
Deferred income taxes and other liabilities 915 877
------------------ ------------------
Total liabilities 38,995 38,637
------------------ ------------------
Stockholders' equity
Common stock 2,063 1,859
Treasury stock (5,193 ) (4,637)
Profit employed in the business 12,648 11,808
Accumulated other comprehensive income (556 ) (598)
------------------ ------------------
Total stockholders' equity 8,962 8,432
------------------ ------------------
Total liabilities and stockholders' equity $ 47,957 $ 47,069
------------------ ------------------
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Caterpillar Inc.
Condensed Consolidated Statement of Cash Flow
(Unaudited)
(Millions of dollars)
Three Months Ended
March 31,
2006 2005
---------------- ----------------
Cash flow from operating activities:
Profit $ 840 $ 581
Adjustments for non-cash items:
Depreciation and amortization 400 372
Other 10 (68)
Changes in assets and liabilities:
Receivables - trade and other (463) (228)
Inventories (618) (555)
Accounts payable and accrued expenses 216 96
Other assets - net (4) 21
Other liabilities - net 146 (40)
---------------- ----------------
Net cash provided by operating activities 527 179
---------------- ----------------
Cash flow from investing activities:
Capital expenditures - excluding equipment leased to others (233) (165)
Expenditures for equipment leased to others (252) (238)
Proceeds from disposals of property, plant and equipment 208 131
Additions to finance receivables (2,346) (2,251)
Collections of finance receivables 2,220 1,597
Proceeds from the sale of finance receivables 17 10
Investments and acquisitions (net of cash acquired) (4) 1
Proceeds from sale of available-for-sale securities 76 62
Investments in available-for-sale securities (118) (133)
Other - net 117 43
---------------- ----------------
Net cash (used for) investing activities (315) (943)
---------------- ----------------
Cash flow from financing activities:
Dividends paid (168) (141)
Common stock issued, including treasury shares reissued 253 154
Treasury shares purchased (738) (357)
Excess tax benefit from stock-based compensation 81 -
Proceeds from debt issued (original maturities greater than three 2,084 3,675
months)
Payments on debt (original maturities greater than three months) (2,830) (2,707)
Short-term borrowings (original maturities three months or less) 806 183
--net
---------------- ----------------
Net cash provided by (used for) financing activities (512) 807
---------------- ----------------
Effect of exchange rate changes on cash (2) 29
---------------- ----------------
Increase in cash and short-term investments (302) 72
Cash and short-term investments at beginning of period 1,108 445
---------------- ----------------
Cash and short-term investments at end of period $ 806 $ 517
---------------- ----------------
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 25
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Caterpillar Inc.
Supplemental Data for Results of Operations
For The Three Months Ended March 31, 2006
(Unaudited)
(Millions of dollars)
Supplemental Consolidating Data
----------------------------------------------------
Consolidated Machinery Financial Consolidating
and Engines (1) Products Adjustments
---------------- --------------- ------------ ---------------
Sales and revenues:
Sales of Machinery and Engines $ 8,743 $ 8,743 $ - $ -
Revenues of Financial Products 649 - 746 (97)2
---------------- --------------- ------------ ---------------
Total sales and revenues 9,392 8,743 746 (97)
Operating costs:
Cost of goods sold 6,552 6,552 - -
Selling, general and administrative 821 724 103 (6)3
expenses
Research and development expenses 307 307 - -
Interest expense of Financial 232 - 233 (1)4
Products
Other operating expenses 262 29 240 (7)3
---------------- --------------- ------------ ---------------
Total operating costs 8,174 7,612 576 (14)
---------------- --------------- ------------ ---------------
Operating profit 1,218 1,131 170 (83)
Interest expense excluding Financial 68 68 - -
Products
Other income (expense) 43 (51) 11 83 5
---------------- --------------- ------------ ---------------
Consolidated profit before taxes 1,193 1,012 181 -
Provision for income taxes 370 309 61 -
---------------- --------------- ------------ ---------------
Profit of consolidated companies 823 703 120 -
Equity in profit (loss) of 17 16 1 -
unconsolidated affiliated companies
Equity in profit of Financial - 121 - (121)6
Products' subsidiaries
---------------- --------------- ------------ ---------------
Profit $ 840 $ 840 $ 121 $ (121)
---------------- --------------- ------------ ---------------
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 net 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 between Machinery and Engines and Financial Products.
6 Elimination of Financial Products profit due to equity method of accounting.
Page 26
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Caterpillar Inc.
Supplemental Data for Results of Operations
For The Three Months Ended March 31, 2005
(Unaudited)
(Millions of dollars)
Supplemental Consolidating Data
----------------------------------------------------
Consolidated Machinery Financial Consolidating
and Engines (1) Products Adjustments
---------------- --------------- ------------- --------------
Sales and revenues:
Sales of Machinery and Engines $ 7,789 $ 7,789 $ - $ -
Revenues of Financial Products 550 - 612 (62)2
---------------- --------------- ------------- --------------
Total sales and revenues 8,339 7,789 612 (62)
Operating costs:
Cost of goods sold 6,215 6,215 - -
Selling, general and administrative 744 648 107 (11)3
expenses
Research and development expenses 241 241 - -
Interest expense of Financial 170 - 173 (3)4
Products
Other operating expenses 213 6 208 (1)3
---------------- --------------- ------------- --------------
Total operating costs 7,583 7,110 488 (15)
---------------- --------------- ------------- --------------
Operating profit 756 679 124 (47)
Interest expense excluding Financial 65 66 - (1)4
Products
Other income (expense) 108 54 8 46 5
---------------- --------------- ------------- --------------
Consolidated profit before taxes 799 667 132 -
Provision for income taxes 232 186 46 -
---------------- --------------- ------------- --------------
Profit of consolidated companies 567 481 86 -
Equity in profit (loss) of 14 12 2 -
unconsolidated affiliated companies
Equity in profit of Financial - 88 - (88)6
Products' subsidiaries
---------------- --------------- ------------- --------------
Profit $ 581 $ 581 $ 88 $ (88)
---------------- --------------- ------------- --------------
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 net 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 betweenMachinery and Engines and Financial Products.
6 Elimination of Financial Products profit due to equity method of accounting.
Page 27
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Caterpillar Inc.
Supplemental Data for Cash Flow
For The Three Months Ended March 31, 2006
(Unaudited)
(Millions of dollars)
Supplemental Consolidating Data
---------------------------------------------------
Consolidated Machinery Financial Consolidating
and Engines (1) Products Adjustments
--------------- --------------- ------------ --------------
Cash flow from operating activities:
Profit $ 840 $ 840 $ 121 $ (121)2
Adjustments for non-cash items:
Depreciation and amortization 400 235 165 -
Undistributed profit of Financial - (121) - 121 3
Products
Other 10 7 (84) 87 4
Changes in assets and liabilities:
Receivables - trade and other (463) (175) 50 (338)4/5
Inventories (618) (618) - -
Accounts payable and accrued 216 225 (14) 5 4
expenses
Other assets - net (4) (7) (7) 10 4
Other liabilities - net 146 152 5 (11)4
--------------- --------------- ------------ --------------
Net cash provided by (used for) operating 527 538 236 (247)
activities
--------------- --------------- ------------ --------------
Cash flow from investing activities:
Capital expenditures - excluding (233) (226) (7) -
equipment leased to others
Expenditures for equipment leased to (252) - (257) 5 4
others
Proceeds from disposals of property, 208 3 205 -
plant and equipment
Additions to finance receivables (2,346) - (8,566) 6,220 5
Collections of finance receivables 2,220 - 7,946 (5,726)5
Proceeds from the sale of finance 17 - 272 (255)5
receivables
Net intercompany borrowings - 102 3 (105)6
Investments and acquisitions (net of (4) (4) - -
cash acquired)
Proceeds from sale of 76 4 72 -
available-for-sale securities
Investments in available-for-sale (118) (14) (104) -
securities
Other - net 117 14 115 (12)7
--------------- --------------- ------------ --------------
Net cash provided by (used for) investing (315) (121) (321) 127
activities
--------------- --------------- ------------ --------------
Cash flow from financing activities:
Dividends paid (168) (168) - -
Common stock issued, including treasury 253 253 (12) 12 7
shares reissued
Treasury shares purchased (738) (738) - -
Excess tax benefit from stock-based 81 81 - -
compensation
Net intercompany borrowings - (3) (102) 105 6
Proceeds from debt issued (original 2,084 29 2,055 -
maturities greater than three months)
Payments on debt (original maturities (2,830) (7) (2,823) -
greater than three months)
Short-term borrowings (original 806 (174) 980 -
maturities three months or less)--net
--------------- --------------- ------------ --------------
Net cash provided by (used for) financing (512) (727) 98 117
activities
--------------- --------------- ------------ --------------
Effect of exchange rate changes on cash (2) 7 (12) 3 8
--------------- --------------- ------------ --------------
Increase (decrease) in cash and short-term (302) (303) 1 -
investments
Cash and short-term investments at 1,108 951 157 -
beginning of period
--------------- --------------- ------------ --------------
Cash and short-term investments at end of $ 806 $ 648 $ 158 $ -
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 accounting.
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 Reclassification of Cat Financial's cash flow activity from investing to operating for receivables that
arose from the sale of inventory.
6 Net proceeds and payments to/from Machinery and Engines and Financial Products.
7 Change in investment and common stock related to Financial Products.
8 Elimination of the effect of exchange on intercompany balances.
Page 28
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Caterpillar Inc.
Supplemental Data for Cash Flow
For The Three Months Ended March 31, 2005
(Unaudited)
(Millions of dollars)
Supplemental Consolidating Data
---------------------------------------------------
Consolidated Machinery Financial Consolidating
and Products Adjustments
Engines (1)
------------- ------------- ------------ ----------------
Cash flow from operating activities:
Profit $ 581 $ 581 $ 88 $ (88)2
Adjustments for non-cash items:
Depreciation and amortization 372 213 159 -
Undistributed profit of Financial - (88) - 88 3
Products
Other (68) (69) (46) 47 4
Changes in assets and liabilities:
Receivables - trade and other (228) (216) 24 (36)4/5
Inventories (555) (555) - -
Accounts payable and accrued expenses 96 48 79 (31)4
Other assets - net 21 (23) (7) 51 4
Other liabilities - net (40) (5) 16 (51)4
------------- ------------- ------------ ----------------
Net cash provided by (used for) operating 179 (114) 313 (20)
activities
------------- ------------- ------------ ----------------
Cash flow from investing activities:
Capital expenditures - excluding equipment (165) (158) (7) -
leased to others
Expenditures for equipment leased to others (238) - (238) -
Proceeds from disposals of property, plant 131 4 127 -
and equip.
Additions to finance receivables (2,251) - (7,090) 4,839 5
Collections of finance receivables 1,597 - 6,414 (4,817)5
Proceeds from the sale of finance 10 - 10 -
receivables
Net intercompany borrowings - (109) (569) 678 6
Investments and acquisitions (net of cash 1 1 - -
acquired)
Proceeds from sale of available-for-sale 62 5 57 -
securities
Investments in available-for-sale securities (133) (5) (128) -
Other - net 43 (8) 51 -
------------- ------------- ------------ ----------------
Net cash provided by (used for) investing (943) (270) (1,373) 700
activities
------------- ------------- ------------ ----------------
Cash flow from financing activities:
Dividends paid (141) (141) - -
Common stock issued, including treasury 154 154 - -
shares reissued
Treasury shares purchased (357) (357) - -
Net intercompany borrowings - 569 109 (678)6
Proceeds from debt issued (original 3,675 207 3,468 -
maturities greater than three months)
Payments on debt (original maturities (2,707) (16) (2,691) -
greater than three months)
Short-term borrowings (original maturities 183 11 172 -
three months or less)--net
------------- ------------- ------------ ----------------
Net cash provided by (used for) financing 807 427 1,058 (678)
activities
------------- ------------- ------------ ----------------
Effect of exchange rate changes on cash 29 33 (2) (2)7
------------- ------------- ------------ ----------------
Increase in cash and short-term investments 72 76 (4) -
Cash and short-term investments at beginning of 445 270 175 -
period
------------- ------------- ------------ ----------------
Cash and short-term investments at end of period $ 517 $ 346 $ 171 $ -
------------- ------------- ------------ ----------------
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 accounting.
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 Reclassification of Cat Financial's cash flow activity from investing to operating for receivables that
arose from the sale of inventory.
6 Net proceeds and payments to/from Machinery and Engines and 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 2006 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
Our projection for over 3.5 percent growth in the world economy in 2006 assumes
central banks will cautiously raise interest rates so as not to slow growth too
much. Low interest rates, good economic growth and favorable commodity prices
should encourage further growth in both construction and mining. Should central
banks raise interest rates aggressively and slow world economic growth, our
Machinery and Engines sales likely would be weaker.
We expect the U. S. Federal Reserve will raise the Federal Funds rate to 5.25
percent this year, causing economic growth later in the year to slow below its
potential. However, good corporate profits, lower interest rates than in the
past cycle and a need to replace aged capital stocks should support continued
good growth in investment. Should financial conditions tighten sufficiently to
slow economic growth below three percent or corporate profits weaken, expected
improvements in Machinery and Engines sales likely would be lower than
projected.
Our projection of increased sales of Machinery and Engines in Europe, Africa,
Middle East (EAME) in 2006 assumes economic conditions in Europe - rising
corporate profits, booming stock markets and low interest rates - will benefit
investment and construction. In both Africa and Middle East (AME) and the
Commonwealth of Independent States (CIS), good economic growth and high
commodity prices will support growth in construction and mining. Key risks are
significant interest rate increases in the Eurozone that would slow the European
economy or a worldwide collapse in commodity prices. Those developments would
likely negatively impact our results.
We expect that low interest rates, increased capital inflows, and favorable
commodity prices will maintain Latin American economic growth at over four
percent, benefiting both Machinery and Engines sales. This forecast is
vulnerable to a significant weakening in commodity prices, widespread increases
in interest rates or political disruptions.
In Asia/Pacific, we project economic growth will be about 6.5 percent in 2006,
the result of low interest rates, competitive exchange rates and growing world
trade. Fast economic growth and increased property prices should support
construction and favorable coal and metals prices should encourage increased
mining investment. The projected increase in Machinery and Engines sales is
vulnerable to reduced demand for coal and iron ore, significant revaluations of
regional currencies, restrictions on regional exports and sharp interest rate
hikes.
Commodity Prices
Commodities represent a significant sales opportunity, with prices and
production as key drivers. Prices have improved sharply over the past three
years and our outlook assumes that continued growth in world industrial
production, low inventories and some difficulties in increasing production will
cause metals prices to remain high enough in 2006 to encourage further mine
investment. Any unexpected weakening in world industrial production, however,
could cause prices to drop sharply to the detriment of our results.
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Coal prices showed softness in some regions late in 2005 but remained well above
prices that make mine investment attractive. We expect that the need to rebuild
some coal stocks as well as increased electricity generation will support demand
for coal in 2006 and prices will remain favorable. Should coal prices soften,
due to a slowing in world economic growth or otherwise, the ongoing sales
recovery would be vulnerable.
Oil and natural gas prices increased sharply over the past three years due to
strong demand and high capacity usage. Higher energy prices have not halted
economic recoveries since strong demand boosted prices and world production
increased. High prices are encouraging more exploration and development.
However, should significant supply cuts occur, such as from OPEC production cuts
or political unrest in a major producing country, the resulting oil shortages
and price spikes could 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 United States and abroad could have a significant impact on
economic growth, and accordingly, demand for our product. In general, higher
than expected interest rates, reductions in government spending, higher taxes,
excessive currency movements and uncertainty over key policies are some factors
likely to lead to slower economic growth and lower industry demand.
With economic data looking more favorable, central banks in several developed
countries have raised interest rates from the lowest rates in decades, with the
U. S. Federal Reserve Bank being the most aggressive. Our outlook assumes that
central banks will try to avoid increasing rates so much that economic
recoveries stall. Should central banks raise interest rates more aggressively
than anticipated, both economic growth and our sales could suffer.
Budget deficits in many countries remain higher than governments would like. 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 our sales.
Political Factors
Political factors in the United States and abroad can impact global companies.
Our outlook assumes that no major disruptive changes in economic policies occur
in either the United States or other major economies. Significant changes in
either taxing or spending policies could reduce activities in sectors important
to our businesses, thereby reducing sales.
Our outlook assumes that there will be no additional significant military
conflicts 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, potentially causing
a sharp drop in economic activities and our sales. Attacks in major developed
economies would be the most disruptive.
Our outlook 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. Our outlook includes a negative impact
from the phase-out of the Extraterritorial Income Exclusion as enacted by the
American Jobs Creation Act of 2004. Our outlook assumes any other tax law
changes will not negatively impact our provision for income taxes.
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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. Our outlook assumes no significant
currency crises occur that could disrupt international trade or the
competitiveness of our facilities. Should any crisis develop, economic activity
and our results could be negatively impacted.
The company's largest manufacturing presence is in the United States, so any
unexpected strengthening of the dollar tends to raise the foreign currency costs
to our end users and reduce our global competitiveness.
Dealer/Original Equipment Manufacturers Inventory Practices
The company sells finished products through an independent dealer network or
directly to Original Equipment Manufacturers (OEM). Both carry inventories of
finished products as part of ongoing operations 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 no major
changes in either dealer or OEM inventory practices. Should dealers or OEMs
decide to control inventories more tightly, our sales would be lower.
Financial Products Division Factors
Inherent in the operation of Cat Financial 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 addresses interest rate risk by aligning the interest rate
profile (fixed or floating rate) of our debt portfolio with the interest rate
profile of our receivables portfolio (loans and leases with customers and
dealers) within pre-determined ranges on an ongoing basis. To achieve our match
funding objectives, we issue debt with a 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. Cat Financial's results are
also dependent upon the demand for Caterpillar machinery and engines; our
marketing, operational and administrative support; and competition from other
finance companies. 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.
Other Factors
The rates 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 in which the alliances conduct their operations.
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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.
The environment remains competitive from a pricing standpoint. Our 2006 sales
outlook assumes that the company is successful in implementing worldwide machine
price actions communicated to dealers with an effective date of January 2006.
While we expect that the environment will continue to absorb these price
actions, changes in the marketplace acceptance would negatively impact our
results. Moreover, additional price discounting to maintain our competitive
position could result in lower than anticipated realization.
Our sales and results are generally 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 sales and 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