1st Quarter Results
Caterpillar Inc
20 April 2005
Caterpillar Inc.
1Q Earnings Release
April 20, 2005
--------------------------------------------------------------------------------
FOR IMMEDIATE RELEASE
Caterpillar Achieves Record Profitability;
Company Raises Full-Year Outlook.
PEORIA, Ill. -- Caterpillar Inc. (NYSE: CAT) today reported first-quarter sales
and revenues of $8.34 billion and record profit of $581 million, or $1.63 per
share. Sales and revenues were up 29 percent and profit was up 38 percent
compared to the first quarter of 2004.
'These record results are further evidence of the strength of the many
global markets we serve and our ability to successfully meet this continuing
strong market demand,' said Chairman and Chief Executive Officer Jim
Owens. 'Thanks to the commitment of Team Caterpillar -- our employees,
dealers and suppliers around the world - we are working diligently to improve
our performance while meeting customer needs. Our operating margins in the first
quarter were the best since the first half of 2004 when material cost pressures
began to accelerate. We have an unwavering commitment to fulfilling customer
demand while improving operating margins through Price Realization, which more
than offsets material cost increases, and enhanced manufacturing
efficiencies.'
Sales and revenues of $8.34 billion were up $1.86 billion, or 29 percent,
compared to $6.48 billion in the first quarter of 2004. The increase in sales
and revenues was driven by $1.44 billion of higher Machinery and Engines volume,
$250 million of increased price realization, a $102 million favorable impact of
Currency on sales due primarily to the strengthening euro and British pound and
$72 million of higher Financial Products revenues.
Profit of $581 million or $1.63 per share was up $161 million, or 38 percent,
compared to $420 million or $1.19 per share in the first quarter of 2004. The
main contributors to the profit increase were higher Sales Volume of $521
million and higher price realization of $250 million. Partially offsetting these
favorable items were $489 million of higher Core Operating Costs and $48 million
of higher Retirement Benefits.
'We remain squarely focused on responding to customer needs and
improving operating performance, and we are on track to meet our long-term
financial targets,' Owens said. 'We're well positioned
for growth and will continue to build on our record results, utilizing the power
of 6 Sigma across the value chain to further increase supply chain efficiencies
and performance. While we still face selected industry-wide issues associated
with material availability, our suppliers have responded and material
availability is improving steadily.'
Page 1
--------------------------------------------------------------------------------
Outlook
We are raising our outlook for both sales and revenues and profit per share. We
now expect 2005 sales and revenues to be up 16 to 18 percent and profit per
share to be up 35 to 40 percent from 2004.
'As 2005 unfolds, we are encouraged by the fundamental strength of the
key markets we serve,' Owens said. 'Mining companies will continue to
add capacity to meet anticipated growth in demand for the next several years. In
addition, global demand for energy, including coal as well as oil and gas, and
large infrastructure projects are growing. Likewise, commercial construction and
housing in most countries will create even further demand for our products and
services. This positions Team Caterpillar to deliver results beyond our initial
expectations for the year.'
(Complete outlook begins on page 7.)
For 80 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 14-16; first occurrence of terms shown
in bold italics.
Page 2
--------------------------------------------------------------------------------
DETAILED ANALYSIS
First Quarter 2005 vs. First Quarter 2004
Sales and Revenues
Sales and revenues for the first quarter of 2005 were $8.339 billion, up $1.859
billion or 29 percent from first quarter 2004. The increase was due to higher
Machinery volume of $1.010 billion, higher Engines volume of $425 million,
improved price realization of $250 million, the favorable impact of currency on
sales of $102 million due primarily to the strengthening euro and British pound
and higher Financial Products revenues of $72 million.
Sales and Revenues by Geographic Region
------------------------------------------------------------------------------------------------------------------------
(Millions of Total % North % EAME % Latin % Asia/ %
dollars) Change America Change Change America Change Pacific
Change
------- ------ ------- ------ ------- ------ -------- ------ -------- -----
1st Quarter 2004
-------------------
Machinery $ 4,152 $ 2,283 $ 963 $ 295 $ 611
Engines1 1,850 870 559 195 226
Financial Products2 478 336 84 30 28
------ ------- ------- -------- --------
$ 6,480 $ 3,489 $ 1,606 $ 520 $ 865
------ ------- ------- -------- --------
1st Quarter 2005
-------------------
Machinery $ 5,400 30% $ 2,928 28% $ 1,355 41% $ 440 49% $ 677 11%
Engines1 2,389 29% 1,200 38% 743 33% 157 -19% 289 28%
Financial Products2 550 15% 390 16% 87 4% 31 3% 42 50%
------ ------- ------- -------- --------
$ 8,339 29% $ 4,518 29% $ 2,185 36% $ 628 21% $ 1,008 17%
------ ------- ------- -------- --------
1 Does not include internal engine transfers of $619 million and $484 million
in 2005 and 2004, 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 $62 million
and $39 million in 2005 and 2004, respectively.
--------------------------------------------------------------------------------
Page 3
--------------------------------------------------------------------------------
Machinery Sales
Machinery sales were $5.400 billion in first quarter 2005, a $1.248 billion or
30 percent increase over first quarter 2004, and a record for any quarter. Sales
volume was up about 24 percent. Improved price realization accounted for about 4
percent of the sales change, while the remainder of the sales change was due to
the favorable impact of currency. A portion of the higher volume was due to an
increase in dealer inventories, which was the result of more machines in transit
or dealer preparation to support future deliveries. Dealer inventories, relative
to dealer deliveries to end users, were marginally lower than a year earlier.
• North America sales were up 28 percent over first quarter 2004, with sales
volume up about 24 percent and the remainder due to improved price
realization. Sales volume benefited from strong demand in all applications.
Housing construction increased in response to low mortgage interest rates
and there is a large backlog of unused permits. Nonresidential construction
benefited from healthy business cash flows. Both coal and metals prices and
production increased, driving sizable increases into mining deliveries.
• EAME sales in first quarter 2005 were 41 percent higher than a year
earlier. Volume, up about 29 percent, was the biggest contributor. The
favorable impact of currency added about 6 percent and improved price
realization added the remainder. Low interest rates in Europe are beginning
to revive construction, and both Africa/Middle East (AME) and the CIS
continued to benefit from high energy and metals prices and production.
Both AME and the CIS are investing in new capacity and upgrading
infrastructure.
• Latin America first quarter sales were 49 percent higher than a year
earlier. Volume contributed about 41 percent, improved price realization
added about 7 percent and the remainder was due to currency. Mining
benefited from higher prices and production while low interest rates,
increased spending on infrastructure and better economic growth boosted
construction.
• Asia/Pacific sales were up 11 percent over first quarter 2004. Increased
volume contributed about 8 percent, improved price realization added about
2 percent and the remainder was due to currency. Volume in China declined,
but was largely offset by increases in Australia and Indonesia. Coal mining
increased sharply in Australia and Indonesia, benefiting from higher coal
prices.
Engines Sales
Engines sales were $2.389 billion in first quarter 2005, a $539 million or 29
percent increase over first quarter 2004. Sales volume was up about 23 percent,
improved price realization accounted for about 4 percent and the remainder was
due to the favorable impact of currency.
• North America sales were up 38 percent over first quarter 2004. Sales of
on-highway truck engines increased 33 percent, as truck manufacturers
successfully increased line rates to serve an ongoing expansion and
replacement cycle driven by high average fleet age, high freight demand,
and improved freight carrier profitability. Sales of engines to the
petroleum sector increased 54 percent compared to last year, with
widespread increases in sales of engines to gas compression, and Original
Equipment Manufacturer (OEM) equipment for drilling and well servicing,
supported by higher energy prices. Sales of engines to the marine sector
increased 59 percent, benefiting from strengthening workboat activity.
Sales of engines to the electric power sector gained 3 percent with
increased demand for critical standby generator sets to support
sustainability for telecommunications and financial service applications.
Sales of reciprocating engines were partially offset by reduced turbine
sales as fuel prices increased faster than electricity rates. Dealer
inventories of reciprocating engines increased above selling rates due to
higher levels of in-transit inventory with increasing volume.
Page 4
--------------------------------------------------------------------------------
• EAME sales were up 33 percent over first quarter 2004. Sales of engines
into the electric power sector increased 65 percent due to widespread
increased demand for prime, cogeneration and standby systems, ongoing
Middle East reconstruction demand, and sales resulting from the acquisition
of Turbomach. Sales of engines to the industrial sector increased 26
percent due to strong demand for various types of OEM equipment and the
favorable impact of currency. In addition, the comparison is with a reduced
first quarter 2004 base that was impacted by the fourth quarter 2003
pre-buy of engines prior to the implementation of European Tier II
emissions regulations. Sales of engines to the marine sector increased
73 percent, with increased demand for inland waterways workboats and larger
engines for oceangoing vessels, as well as the favorable effects of
currency. Dealer inventories increased above selling rates due to
increasing volume, increased installation time associated with more complex
applications, and some investment in inventory from previously reduced
levels to serve ongoing demand increases.
• Latin America sales decreased 19 percent versus first quarter 2004, with
decreases in most sectors. Sales of marine engines decreased 60 percent,
with all of the reduction due to the absence of a large marine project that
occurred in 2004. Sales of electric power engines in Latin America
decreased 9 percent, while sales of engines to the petroleum sector
decreased 4 percent. Dealer inventory increased above selling rates
primarily due to higher levels of in-transit inventory in the delivery
process.
• Asia/Pacific sales were up 28 percent over first quarter 2004 with
increases in all sectors, led by a 36 percent increase in sales of
petroleum engines, with all of the increase coming from turbines and
turbine related services to support increased exploration and production.
Sales of engines to the marine sector increased 49 percent with strong
demand for oceangoing, pleasure craft and offshore supply vessels, followed
by a 9 percent increase in sales of electric power engines. Current months
of sales of dealer inventory are above first quarter 2004 due to higher
levels of in-transit inventory in the delivery process.
Financial Products Revenues
Financial Products revenues were $550 million, an increase of $72 million or 15
percent from first quarter 2004. The increase in revenues was due primarily to a
$65 million favorable impact from continued growth of Earning Assets at Cat
Financial.
Page 5
--------------------------------------------------------------------------------
Operating Profit
Higher sales volume in all regions resulted in a favorable operating profit
impact of $521 million, and improved price realization favorably impacted
operating profit by $250 million, which more than offset increases in material
costs. Improved profitability of $13 million at Financial Products also
contributed to the increase in operating profit.
Partially offsetting the favorable items were $489 million in higher core
operating costs, $48 million of higher retirement benefits and a $37 million
unfavorable impact of currency on operating profit. Manufacturing costs
represented $439 million of the total increase in core operating costs. Roughly
two-thirds of the manufacturing cost increase was attributable to variable cost
increases - primarily material with some related supply chain inefficiencies.
The remaining amount represented normal and expected period manufacturing costs
to support the increase in volume.
We continued to satisfy our customers in 2005 by delivering record first-quarter
sales. The core operating cost increase reflected above was largely attributable
to increases in manufacturing costs to meet this demand. These additional
manufacturing costs included higher material costs resulting primarily from
steel-related increases, higher manufacturing costs to support increased volume,
inefficiencies due to supply constraints, a United Auto Workers (UAW) contract
ratification payment, and higher freight and expediting costs to ensure timely
delivery of material. The remainder of the core operating cost increase was
mainly due to planned spending on general support programs.
Operating Profit by Principal Line of Business
-------------------------------------------------------------------------------
(Millions of dollars) 1st Quarter 1st Quarter Change
2004 2005 $
------------- ------------ -----------
Machinery1 $ 441 $ 496 $ 55
Engines1 41 183 142
Financial Products 111 124 13
Consolidating Adjustments (25 ) (47 ) (22 )
------------- ------------ -----------
Consolidated Operating Profit $ 568 $ 756 $ 188
------------- ------------ -----------
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 $496 million was up $55 million, or 12
percent, from first quarter 2004. The favorable impact of higher sales
volume and improved price realization was partially offset by higher core
operating costs, higher retirement benefits and the unfavorable impact of
currency.
• Engines operating profit of $183 million was up $142 million, or 346
percent, from first quarter 2004. The favorable impact of higher sales
volume and improved price realization was partially offset by higher core
operating costs, higher retirement benefits and the unfavorable impact of
currency.
• Financial Products operating profit of $124 million was up $13 million, or
12 percent, from first quarter 2004. The increase was primarily due to a
$30 million impact from the growth of earning assets, partially offset by
an $11 million increase in operating expenses primarily related to growth,
at Cat Financial.
Page 6
--------------------------------------------------------------------------------
Other Profit/Loss Items
• Other income/expense was income of $108 million compared with income of
$61 million in first quarter 2004 for a favorable impact of $47 million.
The change was primarily due to the favorable impact of currency gains of
$41 million. This, combined with the $37 million unfavorable impact on
operating profit, created a net favorable impact of currency on profit
before tax of $4 million.
• The provision for income taxes in the first quarter reflects an estimated
annual tax rate of 29 percent for 2005. We are anticipating a 29 percent
rate for the full year compared to 27 percent in 2004 primarily due to the
impact of the phase-out provision of the American Jobs Creation Act
permitting only 80 percent of Extraterritorial Income Exclusion (ETI)
benefits in 2005 as well as a change in our geographic mix of profits.
• The equity in profit/loss of unconsolidated affiliated companies favorably
impacted profit by $8 million over first quarter 2004, primarily driven by
increased profitability at Shin Caterpillar Mitsubishi Ltd. (SCM).
Employment
At the end of the first quarter of 2005, Caterpillar's worldwide employment was
79,988 compared with 70,815 one year ago. The increase is primarily due to
approximately 3,500 hourly labor additions to support increased volume, the
conversion of approximately 2,000 supplemental employees to full-time employment
in our Midwestern U.S. facilities, and the addition of approximately 2,000
employees from acquisitions and growing Caterpillar Logistics operations.
Sales and Revenues Outlook
We project another record year in 2005. We expect company sales and revenues
will increase 16 to 18 percent, with Machinery and Engines volume increasing
about 8 to 10 percent. We expect improved price realization to add about 5.5
percent, the favorable impact of currency to add about 1.5 percent with the rest
coming from Financial Products revenues.
• Economic growth in most countries is moderate and key inflation measures
are well within target ranges. As a result, we expect central banks will
remain cautious about raising interest rates, allowing the current recovery
to continue throughout the year. We project the world economy will grow
about 3.5 percent.
• Investment sectors are generally faring better than consumer sectors this
recovery. Business profits in many countries are at, or near, record shares
of national incomes and companies are using profits to boost productivity.
Low interest rates are encouraging companies to upgrade and expand aged
capital equipment and, more recently, structures. Recoveries in
nonresidential construction should strengthen this year, increasing the
demand for reliable standby electrical power.
• Housing prices are increasing significantly in many countries and this has
begun to encourage construction to alleviate housing shortages. Low
interest rates and rising employment should benefit residential
construction in most regions.
• Most governments have not invested enough in infrastructure for years,
which is now creating inefficiencies, particularly in transportation.
Governments have started to allocate more of the revenues rising from
faster economic growth to infrastructure, and such construction should
improve throughout the year.
• Mining and energy companies underinvested in capacities for years due to
unfavorable prices and capacities are now insufficient. Last year, prices
surged above the minimums needed to make investment attractive and
companies increased spending. Prices are expected to remain above those
minimums this year and mining and energy companies should again increase
investments.
Page 7
--------------------------------------------------------------------------------
• Increased international trade and an aging ship fleet are driving strong
growth in shipbuilding. Demand for support vessels to cope with more port
congestion and increased offshore oil and gas production is also
increasing.
Sales and Revenues Outlook - Midpoint of Range
--------------------------------------------------------------------------------------------------------
(Millions of dollars) 2004 2005 %
Actual Outlook1 Change
-------------- -------------- --------------
Machinery and Engines
North America $ 14,521 $ 17,250 19 %
EAME 7,505 9,000 20 %
Latin America 2,372 2,750 16 %
Asia/Pacific 3,938 4,150 5 %
-------------- --------------
Total Machinery and Engines 28,336 33,150 17 %
-------------- --------------
Financial Products2 1,970 2,300 17 %
-------------- --------------
Total $ 30,306 $ 35,450 17 %
-------------- --------------
1 Based on the sales expectations by geographic region, the company forecasts
Consolidated Sales and Revenues to increase in the range of 16 to 18
percent versus 2004. For purposes of this chart, numbers are shown at the
middle of the outlook range (i.e., 17 percent).
2 Does not include revenues earned from Machinery and Engines of $200 million
and $199 million in 2005 Outlook and 2004, respectively.
North America (United States and Canada) Machinery and Engines sales are
expected to increase about 19 percent in 2005.
• The U.S. economy appeared to grow above a 4 percent rate in the first
quarter and employment is strengthening further. While inflation is gaining
more attention, most inflation measures do not indicate an immediate
problem. Consequently, we believe the Fed will continue gradually raising
the Federal funds rate to about 4 percent by the end of the year. Overall,
interest rates should continue to support growth, particularly in business
investment, and the economy should grow close to 4 percent in 2005.
• Housing activity continued to strengthen in the first quarter. The backlog
of unused permits, increases in new home prices and low mortgage rates
suggest another good year for housing.
• Nonresidential construction recovered from a steep 3-year decline last year
and a significant recovery is needed to bring the capacity of this sector
in line with the size of the economy. Improved financial conditions and
good business cash flows should drive a strong recovery this year.
• Prices for metals and coal are well above year-earlier prices and
production increased in the first quarter. Investment is increasing
rapidly.
• Trucking companies, which are experiencing improved profitability, should
significantly increase purchases to handle strong freight demand and
upgrade aging fleets.
• The Canadian economy, benefiting from low interest rates and high commodity
prices, should grow about 3 percent in 2005.
Page 8
--------------------------------------------------------------------------------
EAME Machinery and Engines sales are expected to increase about 20 percent in
2005.
• The Euro-zone economy slowed in the last half of 2004 and showed little
improvement in the first quarter of 2005. Weak growth is forcing the
European Central Bank to hold interest rates steady, and any rate hikes are
not likely before the fourth quarter. Low interest rates are beginning to
revive construction, particularly housing, and encourage some replacement
buying. The U. K. and Central European economies are performing better,
which should maintain overall European growth near 2 percent in 2005.
• Both AME and the CIS are major beneficiaries of favorable commodity prices
and increased production of metals and energy. We expect both regions will
continue using higher incomes to increase capacity and improve
infrastructures. The AME economy should grow over 5 percent in 2005 and the
CIS economy more than 6 percent, the third consecutive year of good growth
for both.
• A positive impact of currency on sales is expected to contribute about 4
percent of the increase.
Latin America Machinery and Engines sales are expected to increase about 16
percent in 2005.
• Latin American economies should grow about 4 percent in 2005, continuing
the recovery that started in late 2003. Projected positives include higher
commodity prices, low inflation and increased foreign direct investment.
• Our outlook assumes that mines will invest heavily in new capacity and
equipment. Better economic growth is causing some governments to increase
infrastructure spending to correct for years of underinvestment.
Asia/Pacific Machinery and Engines sales are expected to increase about 5
percent in 2005.
• We anticipate that interest rates will rise slightly this year and we
expect regional growth to slow to about 6 percent. Interest rates are
expected to support recoveries in consumer spending and business investment
while competitive exchange rates are expected to further boost exports. We
anticipate that continued economic growth will boost nonresidential
construction and demand for standby electrical power.
• Contract prices for coal, particularly coking coal, will increase
substantially this year and we expect coal mining will again be a major
contributor to sales. Metals mining should benefit from higher contract
prices for iron ore and favorable base metals prices.
Financial Products revenues are expected to increase about 17 percent in 2005.
• We expect continued growth in Financial Products, with revenues expected to
increase primarily due to higher average earning assets in 2005.
Page 9
--------------------------------------------------------------------------------
Profit Outlook
We expect profit per share to be up 35 to 40 percent from 2004. We expect 2005
operating profit to increase between $1.02 and $1.17 billion from 2004. The year
will benefit from increased price realization, including the effect of the
previously announced mid-year price action, as well as increased volume. We
expect our costs in the first half of 2005 will appear substantially higher than
costs in the first half of 2004 because this comparative period contains lower
material (primarily steel-related) costs. We anticipate continued pressure on
our core operating costs throughout the year, with some relief on material costs
in the last six months. As a result, we expect the last half of 2005 to be
stronger than the first half.
Supplemental Information
Information formerly located in this section is now included in tabular format
at http://www.cat.com/investor under the Quarterly Supplemental Information
section.
Page 10
--------------------------------------------------------------------------------
Question and Answer
General
Q1: Will your 2007 emissions solution be based on ACERT(R) technology?
A: Yes. Caterpillar will utilize the ACERT Technology to meet the 2007
on-highway emission requirements.
Caterpillar has shipped over 200,000 of the five engine models equipped with
ACERT Technology thus far. The current field population of engines featuring
ACERT Technology continues to exhibit strong reliability. Teardowns of higher
mileage engines display excellent longevity of the wear components.
Additionally, ACERT Technology serves as the platform for complying with
emissions regulations in off-highway applications. As of March 2005, over 20
different Cat machine models equipped with engines featuring ACERT Technology
have gone into production.
ACERT Technology reduces emissions via a 'building blocks'
systems approach to air management, electronics and fuel systems. For 2007
on-highway engines, Caterpillar will build on the ACERT Technology foundation by
utilizing a diesel particulate filter (DPF) to trap particulates and by
introducing Clean Gas Induction (CGI). A differentiated approach, CGI will draw
cool, clean filtered gas from downstream of the DPF and then put it into the
engine's intake air system to achieve additional NOx reduction. With ACERT for
2007, Caterpillar on-highway engine customers can expect the same reliability,
fuel economy, service intervals and durability that they have come to expect
from Caterpillar.
Caterpillar currently has built engines to 2007 standards. A truck with 2007
technology has been demonstrated to the Department of Energy and was recently
exhibited at the March 2005 Mid-America Truck Show in Louisville, Kentucky.
Moreover, units have been provided to OEMs for summer-cooling tests, and
additional field evaluation units are planned to ship to fleet customers
beginning in mid-2005.
First Quarter 2005 vs. First Quarter 2004
Q2: Are you achieving price realization associated with the announced price
increases in 2004 and 2005?
A: Yes. In general, the price increases are holding in the marketplace. However,
as we have discussed over the last few quarters, there is a delay between
announced price increases and price realization due to price protection. Price
protection means that for most products, if there is a firm customer order
before a price increase is announced, we won't harm customers by raising the
price on that order already on hand. With recent long lead times for product
delivery attributable to the increase in customer demand, the lag between the
announced effective date and the actual realization date has been even longer
than usual.
Page 11
--------------------------------------------------------------------------------
Q3: Can you please provide more detail on your increases in Core Operating Costs
in first quarter 2005 vs. first quarter 2004?
A: The following table summarizes the increase in core operating costs in first
quarter 2005 vs. first quarter 2004:
Core Operating Cost Change
------------------------------------------------------------------------------------------------------
1st Quarter 2005
vs.
1st Quarter 2004
--------------------
Manufacturing Costs $ (439 )
SG&A (46 )
R&D (4 )
Total $ (489 )
--------------------
Roughly two-thirds of the manufacturing cost increase is attributable to
variable cost increases - primarily material with some related supply chain
inefficiencies. Material costs, particularly steel, and volume related
manufacturing and supply chain inefficiencies began accelerating more rapidly in
the second half of 2004. As a result, first quarter of 2005 vs. the first
quarter of 2004 is a tough comparison. We expect the second quarter comparison
will also be difficult.
Manufacturing costs also include period costs associated with building our
products. Period manufacturing costs increased 15 percent or approximately $100
million to support a 30 percent increase in Machinery and Engines sales. In
addition, we made a UAW contract ratification payment.
Machinery and Engines SG&A declined as a percentage of sales from 9.8 percent in
first quarter 2004 to 8.3 percent in first quarter 2005 but was up $46 million
vs. 2004 excluding the impact of currency and retirement benefits.
Machinery and Engines operating margins are improving compared with the second
half of 2004.
Machinery and Engines
------------------------------------------------------------------------------------------------------------
Operating Profit as a % of Sales
Q1 '04 Q2 '04 Q3 '04 Q4 '04 Q1 '05
---------------- ---------- ------------- ------------ --------------
8.0% 9.7% 7.9% 7.6% 8.7%
Q4: Are you seeing any evidence yet of improvement in supply chain conditions?
A: Yes. As the plants strive to further ramp-up production in 2005 from record
2004 levels to meet continued strong growth in demand, availability of tires,
castings, and several other critical components remains tight. However, the
plants are reporting that material flow continues to improve, and they have been
able to raise production levels.
Page 12
--------------------------------------------------------------------------------
Outlook
Q5: Are the industries you serve approaching a peak after seeing sales and
revenue growth in 2003, 2004 and 2005?
A: We don't think so. This recovery follows a four-year period of industry
weakness, with flat company sales from 1999 to 2002. Extended weak periods in
the early 1980s and 1990s were followed by lengthy recoveries, with company
sales doubling over a five to six-year period.
In addition, many industries we serve still have growth potential.
• In the United States, non-residential construction and mining have not yet
regained prior peaks. Passage of a new highway bill should support further
growth in highway construction.
• In the Euro countries, economic recovery has not really started, even after
four years of weak growth. However, low interest rates are boosting housing
construction.
• AME, Latin America and the CIS are seeing gains from better commodity
prices. Their economies, along with construction, are recovering from years
of weak growth.
• Asian economies have demonstrated a long-term ability to grow rapidly,
which requires more construction. We expect that to continue.
• Finally, capacities in mining and energy are inadequate to meet today's
requirements. Rebuilding adequate capacity and meeting future growth in
demand for metals and energy will require significant further investment.
Q6: What is the basis of the volume increase in this outlook compared with the
January outlook for 2005?
A: First-quarter sales were stronger than expected and accounted for some of the
increase. The first-quarter increase, which was related to even more robust
economic conditions than expected, prompted us to conclude sales were on a
stronger path for the rest of the year. In particular, housing starts in the
United States are better than expected and the recovery in non-residential
construction appears to be gaining momentum. Metals and energy prices have been
higher than expected, which is benefiting sales to mining and into the
developing countries.
Q7: What is your current view on material costs? Do you believe there will be
some relief in the second half and can you provide more detail on steel and
tires?
A: The 2005 materials environment continues to be challenging, as steel prices
continued to rise in the first quarter. In the United States, foundry and forge
shop product prices were up 3.2 percent compared to fourth quarter 2004 and the
World Bank's steel price index was up 3.3 percent versus the fourth
quarter 2004. We now expect material costs to be slightly higher than originally
expected. We don't expect steel prices to decline overall until the
second half of 2005 at the earliest.
Material availability is increasing as supplier confidence and willingness to
invest in capacity continues to improve. We are beginning to see improved
delivery performances from the second half of 2004.
Steel casting and special bar quality steel availability continues to improve.
This has allowed us to improve the flow of steel to the forge shops, machine
shops and into our facilities.
Tires continue to be a challenge, although availability is improving. We are
working with dealers, customers, and suppliers and are exercising a variety of
alternatives including bias-for-radial substitutions, adding new suppliers,
adding capacity and considering retreads in some applications.
Page 13
--------------------------------------------------------------------------------
Q8: Do you still expect price realization to more than offset material cost
increases?
A: Yes.
Q9: Is incentive compensation a factor in the increase in core operating costs
for 2005?
A: Based on our latest outlook, incentive compensation is expected to be
approximately 15 to 20 percent lower than in 2004.
Q10: What impact does Caterpillar expect from the American Jobs Creation Act of
2004?
A: The American Jobs Creation Act of 2004 signed by President Bush on October
22, 2004 repeals Extraterritorial Income Exclusion (ETI) benefits, which are
phased out over 2005 and 2006. Caterpillar will receive 80 percent of the 2005
ETI benefit and 60 percent of the 2006 ETI benefit. After 2006, Caterpillar will
receive no ETI benefit. The benefit of ETI was a reduction of approximately 5
percentage points on Caterpillar's tax rate in 2003 and 2004. The
anticipated impact of the ETI phase-out is reflected in the first quarter
effective tax rate and our outlook.
We are currently studying the dividend repatriation provisions of the American
Jobs Creation Act of 2004 and our cash needs around the world. We will make a
decision on repatriation of non-U.S. earnings in the second quarter, and the
potential impact has not been included in our first-quarter effective tax rate
or our outlook.
Q11: Can you comment on Caterpillar's financial strength and cash flow?
A: Caterpillar's financial position is very strong. Our pension plans
are well funded and stockholders are benefiting from both higher dividends and
the share repurchase program. In the first quarter of 2005, we repurchased
almost 3.9 million shares. We expect 2005 operating cash flow from the Machinery
and Engines line of business to exceed 2004 levels even though inventories have
risen because of higher sales volume and supply chain inefficiencies.
Q12: Are margins improving in this outlook?
A: Yes. Overall we expect consolidated operating profit as a percent of sales
and revenues to improve to 10.7 percent. The improvements from volume and price
realization are expected to more than offset changes in core operating costs.
GLOSSARY OF TERMS
1. Consolidating Adjustments - Eliminations of transactions between Machinery
and Engines and Financial Products.
2. Core Operating Costs - Machinery and Engines operating cost change adjusted
for volume. It excludes the impact of currency and retirement benefits.
Page 14
--------------------------------------------------------------------------------
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. With respect to profit before tax, currency represents the net
translation impact on sales, operating costs and other income/expense
resulting from changes in foreign currency exchange rates versus the U.S.
dollar. Also included in the currency impact on other income/expense are
the effects of currency 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. 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.
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 net finance
receivables plus retained interests in securitized trade 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.
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 over 22,000
horsepower (4 to over 16 200 kilowatts). Turbines range from 1,200 to
20,500 horsepower (900 to 15 000 kilowatts).
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, telescopic handlers, skid steer loaders and related parts.
Also includes logistics services for other companies.
10. 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.
11. Price Realization - The impact of net price changes excluding currency.
12. Retirement Benefits - Cost of defined benefit pension plans, defined
contribution plans and retirement healthcare and life insurance.
Page 15
--------------------------------------------------------------------------------
13. 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.
14. 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 20-23 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 20, 2005. 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:
Ben Cordani
Corporate Public Affairs
(309) 675-5786
Cordani_Benjamin_S@CAT.com
Page 16
--------------------------------------------------------------------------------
Caterpillar Inc.
Condensed Consolidated Statement of Results of Operations
(Unaudited)
(Dollars in millions except per share data)
Three Months Ended
March 31,
2005 2004
--------------- ----------------
Sales and revenues:
Sales of Machinery and Engines $ 7,789 $ 6,002
Revenues of Financial Products 550 478
--------------- ----------------
Total sales and revenues 8,339 6,480
Operating costs:
Cost of goods sold 6,215 4,701
Selling, general and administrative expenses 744 673
Research and development expenses 241 231
Interest expense of Financial Products 170 119
Other operating expenses 213 188
--------------- ----------------
Total operating costs 7,583 5,912
--------------- ----------------
Operating profit 756 568
Interest expense excluding Financial Products 65 57
Other income (expense) 108 61
--------------- ----------------
Consolidated profit before taxes 799 572
Provision for income taxes 232 158
--------------- ----------------
Profit of consolidated companies 567 414
Equity in profit (loss) of unconsolidated affiliated companies 14 6
--------------- ----------------
Profit $ 581 $ 420
--------------- ----------------
------------------------------------------------------------------------------------------------------------------
Profit per common share $ 1.70 $ 1.23
Profit per common share - diluted 1 $ 1.63 $ 1.19
Weighted average common shares outstanding (millions)
- Basic 342.1 342.6
- Diluted 1 356.6 355.7
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 17
--------------------------------------------------------------------------------
Caterpillar Inc.
Condensed Consolidated Statement of Financial Position
(Unaudited)
(Millions of dollars)
Mar. 31, Dec. 31,
2005 2004
------------------ ------------------
Assets
Current assets:
Cash and short-term investments $ 517 $ 445
Receivables - trade and other 7,517 7,459
Receivables - finance 5,188 5,182
Deferred and refundable income taxes 443 398
Prepaid expenses 1,329 1,369
Inventories 5,230 4,675
----------------- ------------------
Total current assets 20,224 19,528
Property, plant and equipment - net 7,551 7,682
Long-term receivables - trade and other 780 764
Long-term receivables - finance 10,300 9,903
Investments in unconsolidated affiliated companies 558 517
Deferred income taxes 665 674
Intangible assets 310 315
Goodwill 1,450 1,450
Other assets 2,321 2,258
----------------- ------------------
Total assets $ 44,159 $ 43,091
----------------- ------------------
Liabilities
Current liabilities:
Short-term borrowings:
-- Machinery and Engines $ 101 $ 93
-- Financial Products 3,164 4,064
Accounts payable 3,978 3,990
Accrued expenses 1,800 1,847
Accrued wages, salaries and employee benefits 1,437 1,730
Customer advances 631 555
Dividends payable - 141
Deferred and current income taxes payable 416 259
Long-term debt due within one year:
-- Machinery and Engines 29 6
-- Financial Products 3,231 3,525
----------------- ------------------
Total current liabilities 14,787 16,210
Long-term debt due after one year:
-- Machinery and Engines 3,819 3,663
-- Financial Products 14,090 12,174
Liability for postemployment benefits 2,984 2,986
Deferred income taxes and other liabilities 687 591
----------------- ------------------
Total liabilities 36,367 35,624
----------------- ------------------
Stockholders' equity
Common stock 1,308 1,231
Treasury stock (3,554 ) (3,277 )
Profit employed in the business 10,518 9,937
Accumulated other comprehensive income (480 ) (424 )
----------------- ------------------
Total stockholders' equity 7,792 7,467
----------------- ------------------
Total liabilities and stockholders' equity $ 44,159 $ 43,091
----------------- ------------------
Certain amounts from prior periods have been reclassified to conform to current
financial statement presentation.
Page 18
--------------------------------------------------------------------------------
Caterpillar Inc.
Condensed Consolidated Statement of Cash Flow
(Unaudited)
(Millions of dollars)
Three Months Ended
March 31,
------------------------------------------
Cash flow from operating activities: 2005 2004
---------------- ------------------
Profit $ 581 $ 420
Adjustments for non-cash items:
Depreciation and amortization 372 350
Other (68 ) (37 )
Changes in assets and liabilities:
Receivables - trade and other (228 ) (2,498 )
Inventories (555 ) (631 )
Accounts payable and accrued expenses 96 243
Other - net (19 ) (50 )
--------------- ------------------
Net cash provided by (used for) operating activities 179 (2,203 )
--------------- ------------------
Cash flow from investing activities:
Capital expenditures -- excluding equipment leased to others (165 ) (106 )
Expenditures for equipment leased to others (238 ) (240 )
Proceeds from disposals of property, plant and equipment 131 147
Additions to finance receivables (2,251 ) (1,866 )
Collections of finance receivables 1,597 1,472
Proceeds from the sale of finance receivables 10 -
Collections of retained interests in securitized trade - 2,001
receivables
Investments and acquisitions (net of cash acquired) 1 (13 )
Other - net (28 ) (6 )
--------------- ------------------
Net cash provided by (used for) investing activities (943 ) 1,389
--------------- ------------------
Cash flow from financing activities:
Dividends paid (141 ) (127 )
Common stock issued, including treasury shares reissued 154 69
Treasury shares purchased (357 ) (250 )
Proceeds from long-term debt issued 2,513 1,808
Payments on long-term debt (1,359 ) (913 )
Short-term borrowings - net (3 ) 220
--------------- ------------------
Net cash provided by financing activities 807 807
--------------- ------------------
Effect of exchange rate changes on cash 29 33
--------------- ------------------
Increase (decrease) in cash and short-term investments 72 26
Cash and short-term investments at beginning of period 445 342
--------------- ------------------
Cash and short-term investments at end of period $ 517 $ 368
--------------- ------------------
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.
Non-cash operating and investing activities:
Trade receivables of $0 and $2,346 million were exchanged for retained interest
in securitized trade receivables during the three months ended March 31, 2005
and 2004, respectively.
Certain amounts from prior periods have been reclassified to conform to current
financial statement presentation.
Page 19
--------------------------------------------------------------------------------
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 * Products Adjustments
---------------- -------------- ------------- -------------------
Sales and revenues:
Sales of Machinery and Engines $ 7,789 $ 7,789 $ - $ -
Revenues of Financial Products 550 - 612 (62 ) **
---------------- -------------- ------------- -------------------
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 ) ***
expenses
Research and development expenses 241 241 - -
Interest expense of Financial 170 - 173 (3 ) ****
Products
Other operating expenses 213 6 208 (1 ) ***
---------------- -------------- ------------- -------------------
Total operating costs 7,583 7,110 488 (15 )
---------------- -------------- ------------- -------------------
Operating profit 756 679 124 (47 )
Interest expense excluding Financial 65 66 - (1 ) ****
Products
Other income (expense) 108 54 8 46 *****
---------------- -------------- ------------- -------------------
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 )******
Products' subsidiaries
---------------- -------------- ------------- -------------------
Profit $ 581 $ 581 $ 88 $ (88 )
---------------- -------------- ------------- -------------------
* Represents Caterpillar Inc. and its subsidiaries with Financial Products
accounted for on the equity basis.
** Elimination of Financial Products revenues earned from Machinery and Engines.
*** Elimination of net expenses recorded by Machinery and Engines paid to
Financial Products.
**** Elimination of interest expense recorded between Financial Products and
Machinery and Engines.
***** 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.
****** Elimination of Financial Products profit due to equity method of accounting.
Page 20
--------------------------------------------------------------------------------
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
---------------- --------------- -------------- -----------------
Sales and revenues:
Sales of Machinery and Engines $ 6,002 $ 6,002 $ - $ -
Revenues of Financial Products 478 - 517 (39 ) **
---------------- -------------- -------------- -------------------
Total sales and revenues 6,480 6,002 517 (39 )
Operating costs:
Cost of goods sold 4,701 4,701 - -
Selling, general and 673 586 99 (12 ) ***
administrative expenses
Research and development expenses 231 231 - -
Interest expense of Financial 119 - 122 (3 ) ****
Products
Other operating expenses 188 2 185 1 ***
---------------- -------------- -------------- -------------------
Total operating costs 5,912 5,520 406 (14 )
---------------- -------------- -------------- -------------------
Operating profit 568 482 111 (25 )
Interest expense excluding 57 58 - (1 ) ****
Financial Products
Other income (expense) 61 34 3 24 *****
---------------- -------------- -------------- -------------------
Consolidated profit before taxes 572 458 114 -
Provision for income taxes 158 119 39 -
---------------- -------------- -------------- -------------------
Profit of consolidated companies 414 339 75 -
Equity in profit (loss) of 6 5 1 -
unconsolidated affiliated
companies
Equity in profit of Financial - 76 - (76 )******
Products' subsidiaries
---------------- -------------- -------------- -------------------
Profit $ 420 $ 420 $ 76 $ (76 )
---------------- -------------- -------------- -------------------
* Represents Caterpillar Inc. and its subsidiaries with Financial Products
accounted for on the equity basis.
** Elimination of Financial Products revenues earned from Machinery and Engines.
*** Elimination of net expenses recorded by Machinery and Engines paid to
Financial Products.
**** Elimination of interest expense recorded between Financial Products and
Machinery and Engines.
***** 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.
****** Elimination of Financial Products profit due to equity method of accounting.
Certain amounts from prior periods have been reclassified to conform to 2005
financial statement presentation.
Page 21
--------------------------------------------------------------------------------
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 Engines* Products Adjustments
------------- --------------- ------------ ----------------
Cash flow from operating activities:
Profit $ 581 $ 581 $ 88 $ (88 ) **
Adjustments for non-cash items:
Depreciation and amortization 372 213 159 -
Undistributed profit of Financial - (88 ) - 88 ***
Products
Other (68 ) (69 ) (46 ) 47 ****
Changes in assets and liabilities:
Receivables - trade and other (228 ) (216 ) 24 (36 )****/
*****
Inventories (555 ) (555 ) - -
Accounts payable and accrued expenses 96 48 79 (31 )****
Other - net (19 ) (28 ) 9 -
------------- --------------- ------------ ----------------
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 (238 ) - (238 ) -
others
Proceeds from disposals of property, plant 131 4 127 -
and equipment
Additions to finance receivables (2,251 ) - (7,090 ) 4,839 *****
Collections of finance receivables 1,597 - 6,414 (4,817 )*****
Proceeds from the sale of finance 10 - 10 -
receivables
Net intercompany borrowings - (109 ) (569 ) 678 ******
Investments and acquisitions (net of cash 1 1 - -
acquired)
Other - net (28 ) (8 ) (20 ) -
------------- --------------- ------------ ----------------
Net cash used for investing activities (943 ) (270 ) (1,373 ) 700
------------- --------------- ------------ ----------------
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 )******
Proceeds from long-term debt issued 2,513 194 2,319
Payments on long-term debt (1,359 ) - (1,359 ) -
Short-term borrowings - net (3 ) 8 (11 ) -
------------- --------------- ------------ ----------------
Net cash provided by financing activities 807 427 1,058 (678 )
------------- --------------- ------------ ----------------
Effect of exchange rate changes on cash 29 33 (2 ) (2)*******
------------- --------------- ------------ ----------------
Increase (decrease) in cash and short-term 72 76 (4 ) -
investments
Cash and short-term investments at beginning 445 270 175 -
of period
------------- --------------- ------------ ----------------
Cash and short-term investments at end of $ 517 $ 346 $ 171 $ -
period
------------- --------------- ------------ ----------------
* Represents Caterpillar Inc. and its subsidiaries with Financial Products
accounted for on the equity basis.
** Elimination of Financial Products profit after tax due to equity method of
accounting.
*** Non-cash adjustment for the undistributed earnings from Financial Products.
**** Elimination of non-cash adjustments and changes in assets and liabilities
related to consolidated reporting.
***** Reclassification of Cat Financial's cash flow activity from investing to
operating for receivables that arose from the sale of inventory.
****** Net proceeds and payments to/from Machinery and Engines and Financial
Products.
******* Elimination of the effect of exchange on intercompany balances.
Page 22
--------------------------------------------------------------------------------
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 Engines* Products Adjustments
------------- -------------- -------------- ----------------
Cash flow from operating activities:
Profit $ 420 $ 420 $ 76 $ (76 )**
Adjustments for non-cash items:
Depreciation and amortization 350 202 148
Undistributed profit of Financial - (76 ) - 76 ***
Products
Other (37 ) (25 ) (34 ) 22 ****
Changes in assets and liabilities:
Receivables - trade and other (2,498 ) (143 ) 96 (2,451 )****/
*****
Inventories (631 ) (631 ) - -
Accounts payable and accrued expenses 243 211 (39 ) 71 ****
Other - net (50 ) (107 ) 30 27 ****
------------- -------------- -------------- ----------------
Net cash provided by (used for) operating (2,203 ) (149) 277 (2,331 )
activities
------------- -------------- -------------- ----------------
Cash flow from investing activities:
Capital expenditures - excluding equipment (106 ) (101 ) (5 ) -
leased to others
Expenditures for equipment leased to (240 ) - (240 ) -
others
Proceeds from disposals of property, plant 147 7 140 -
and equipment
Additions to finance receivables (1,866 ) - (3,394 ) 1,528 *****
Collections of finance receivables 1,472 - 2,731 (1,259 )*****
Proceeds from the sale of finance - - 264 (264 )*****
receivables
Additions to retained interests in - - (2,322 ) 2,322 ******
securitized trade receivables
Collections of retained interests in 2,001 - 2,001 -
securitized trade receivables
Net intercompany borrowings - 209 (6 ) (203)*******
Investments and acquisitions (net of cash (13 ) (13 ) - -
acquired)
Other - net (6 ) (5 ) (1 ) -
------------- -------------- -------------- ----------------
Net cash provided by (used for) investing 1,389 97 (832 ) 2,124
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 *******
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 financing activities 807 19 585 203
------------- -------------- -------------- ----------------
Effect of exchange rate changes on cash 33 33 (4 ) 4 ********
------------- -------------- -------------- ----------------
Increase (decrease) in cash and short-term 26 - 26 -
investments
Cash and short-term investments at beginning 342 220 122 -
of period
------------- -------------- -------------- ----------------
Cash and short-term investments at end of $ 368 $ 220 $ 148 $ -
period
------------- -------------- -------------- ----------------
* Represents Caterpillar Inc. and its subsidiaries with Financial Products
accounted for on the equity basis.
** Elimination of Financial Products profit after tax due to equity method of
accounting.
*** Non-cash adjustment for the undistributed earnings from Financial Products.
**** Elimination of non-cash adjustments and changes in assets and liabilities
related to consolidated reporting. Receivables amounts include adjustment
for consolidated non-cash receipt of retained interests in securitized trade
receivables.
***** Reclassification of Cat Financial's cash flow activity from investing to
operating for receivables that arose from the sale of inventory.
****** Elimination of Cat Financial's additions to retained interests in
securitized trade receivables that arose from an intercompany purchase of
receivables.
******* Net proceeds and payments to/from Machinery and Engines and Financial
Products.
******** Elimination of the effect of exchange on intercompany balances.
Certain amounts have been reclassified to conform to the 2005 financial
statement presentation.
Page 23
--------------------------------------------------------------------------------
SAFE HARBOR STATEMENT UNDER THE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in our Management's Discussion and Analysis 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 about 3.5 percent growth in the world economy assumes central
banks will cautiously raise interest rates so as not to slow growth too much.
Low interest rates, and continued good economic growth, should encourage further
growth in construction and mining. Should central banks raise interest rates
aggressively, both the world economic recovery and our Machinery and Engines
sales likely would be weaker.
The U.S. economy is growing near a three percent rate, which up to now has not
created an inflation problem. While the Federal Reserve has raised interest
rates, we assume the continuation of moderate growth and low inflation will
result in interest rates of about 4 percent by the end of 2005. Long-term
interest rates are expected to rise less than short-term rates. That environment
should support further growth in construction and manufacturing, helping to keep
commodity prices favorable. Should financial conditions tighten noticeably,
causing economic growth to slow below 3 percent, 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) assumes that low interest rates will allow slightly faster
economic growth in Europe and that favorable commodity prices will extend
healthy recoveries in both Africa and Middle East (AME) and the CIS. Key risks
are that strong currencies or interest rate increases could push the European
economy into recession or that commodity prices collapse. Those developments
would negatively impact our results.
Favorable commodity prices, increased capital inflows and an improved foreign
debt situation are expected to contribute to about 4 percent growth in Latin
America. As a result, we project that both mining production and construction
spending will increase, supporting an increase in Machinery and Engines sales.
This forecast is vulnerable to a significant weakening in commodity prices,
slowing in world economic growth, widespread increases in interest rates or
political disruptions.
In Asia/Pacific, we project sales growth in Australia, India and the developing
Asian economies will offset a further decline in China. Critical assumptions are
continued growth in coal demand, low domestic interest rates in most countries,
further gains in exports and continued good economic growth in China. Some
developments that could lower expected results include reduced demand for
thermal and coking coal, significant revaluations of regional currencies,
restrictions on regional exports and sharp interest rate hikes, particularly in
China.
Commodity Prices
Commodities represent a significant sales opportunity, with prices and
production as key drivers. Prices have improved sharply over the past two years
and our outlook assumes continued growth in world industrial production will
cause metals prices to remain high enough in 2005 to encourage further mine
investment. Any unexpected weakening in world industrial production or
construction, however, could cause prices to drop sharply to the detriment of
our results.
Coal production and prices improved last year and our sales have benefited. We
expect these trends to continue in 2005. 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 two 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 and we
expect increased production in 2005 will constrain price increases. 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.
Page 24
--------------------------------------------------------------------------------
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 developed countries
have started raising interest rates from the lowest rates in decades. Our
outlook assumes that central banks will take great care to ensure that economic
recoveries continue and that interest rates will remain low throughout the
forecast period. Should central banks raise interest rates more aggressively
than anticipated, 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 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 (ETI) as enacted by
the American Jobs Creation Act of 2004 (the Act). However, our outlook does not
include any impact from the provision of the Act allowing preferential tax
treatment of the repatriation of non-U.S. earnings in 2005. Further, our outlook
assumes any other tax law changes will not negatively impact our provision for
income taxes.
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
changes in currency values from current rates. Should currency rates change
sharply, 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 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
increase inventories in line with higher deliveries. Should dealers control
inventories more tightly, our sales would be lower.
Page 25
--------------------------------------------------------------------------------
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 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.
Other Factors
The rate of infrastructure spending, housing starts, commercial construction and
mining plays 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.
The International Association of Machinists (IAM) represents 1,999 employees
under labor agreements expiring on April 30, 2005, and May 29, 2005. Based on
our historical experience during periods when labor unrest or work stoppage by
union-represented employees has occurred, we do not expect that the occurrence
of such events, if any, arising in connection with the expiration of these
agreements will have a material impact on our operations or results.
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 2005 sales
outlook assumes that the company will be successful in implementing worldwide
machine price increases communicated to dealers with effective dates of January
3, 2005 and May 2, 2005. While we expect that the environment will absorb these
price actions, delays in the marketplace acceptance would negatively impact our
results. Moreover, additional price discounting to maintain our competitive
position could result in lower than anticipated price realization.
Page 26
--------------------------------------------------------------------------------
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.
Page 27
--------------------------------------------------------------------------------
This information is provided by RNS
The company news service from the London Stock Exchange