3rd Quarter Results
Caterpillar Inc
16 October 2002
Caterpillar Inc.
October 16, 2002
FOR IMMEDIATE RELEASE
Caterpillar achieves profit of 61 cents per share and
reaffirms full-year outlook
PEORIA, Ill. - Caterpillar Inc. (NYSE: CAT) today reported sales and revenues of
$5.08 billion and profit of $213 million or 61 cents per share for the third
quarter 2002. Through the third quarter of the year, sales and revenues were
$14.78 billion and profit was $493 million or $1.42 per share.
Sales and revenues for the quarter were $19 million above third quarter 2001,
primarily due to a 2 percent increase in Financial Products revenues. Profit for
the third quarter was $8 million higher than last year primarily due to lower
income taxes. Profit before tax was down $12 million, as the favorable impact of
improved price realization was more than offset by lower volume, particularly in
large reciprocating engines and coal mining equipment.
'We have been putting into place the building blocks that will allow us to
remain profitable at the bottom of the business cycle. And it is working. There
is no doubt we are in an extended downturn and uncertainty about a recovery
continues, yet we are delivering a solid profit. Intense focus has resulted in
significantly improved machinery and engines cash flow, especially through lower
capital expenditures. We have also benefited from cost reduction including lower
employment levels while continuing to invest in new technologies,' said Chairman
and CEO Glen Barton.
Machinery and engine sales overall were about the same as last year. Sales were
significantly higher in Asia/Pacific in the third quarter, with very strong
growth in China. Sales in Europe, Africa and the Middle East were also higher
mainly due to a sharp increase in sales of large engines. These increases offset
declines in North America and Latin America. Sharply higher truck and bus engine
sales, as well as higher sales in the heavy construction and quarry and
aggregates industries offset declines in electric power generation, coal mining
and general construction.
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'Our outlook for the year remains unchanged. However, near-term political and
economic uncertainty could impact our fourth quarter results,' continued Barton.
'We are performing substantially better than we did during the early nineties.
Our strategies are serving us well.'
Caterpillar continues to focus on its ongoing strategy for cost reduction and
improved cash flow, while investing in critical projects for future growth. For
example, the company continues to invest in ACERT technology, which will allow
Caterpillar to meet current emission standards while providing a line of sight
to achieving future standards for both on-highway and off-highway applications.
In all cases the company is leveraging the discipline of 6 Sigma to deliver
bottom line benefits.
Outlook
The company still expects sales and revenues for the year to be down slightly
with full-year profit down about 15 percent from last year, excluding
nonrecurring charges recorded in 2001. However, uncertain near-term political
and economic conditions make the remainder of the year more difficult than
normal to predict. Our full-year projections include the impact of a sharp drop
in on-highway truck engine sales in the fourth quarter of 2002 following
artificially strong third quarter truck engine demand caused by truck fleets
pre-buying ahead of the October emissions deadline. North American heavy-duty
truck manufacturers have experienced a sharp drop in incoming orders that will
impact demand for our engines in the fourth quarter. (Complete outlook begins on
page 9.)
For more than 75 years, Caterpillar has been building the world's infrastructure
and, in partnership with our independent dealers, is driving positive and
sustainable change on every continent. Caterpillar is a technology leader and
the world's largest maker of construction and mining equipment, diesel and
natural gas engines and industrial gas turbines. More information is available
at http://www.CAT.com/.
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DETAILED ANALYSIS
THIRD QUARTER 2002 COMPARED WITH THIRD QUARTER 2001
Third quarter 2002 sales and revenues were $5.08 billion with profit of $213
million or 61 cents per share. This compares with sales and revenues of $5.06
billion and profit of $205 million or 59 cents per share in third quarter 2001.
Profit for the third quarter was $8 million higher than last year due primarily
to lower income taxes. Profit before tax was down $12 million, as the favorable
impact of improved price realization was more than offset by lower volume,
particularly in large reciprocating engines and coal mining equipment.
MACHINERY AND ENGINES
Sales
---------------------------------------------------------------------------------------------
(Millions of dollars) Total North EAME * Latin Asia/
America America Pacific
--------- -------- --------- ------- -------
Third Quarter 2002
Machinery $ 2,905 $ 1,531 $ 802 $ 193 $ 379
Engines ** 1,795 873 530 180 212
$ 4,700 $ 2,404 $ 1,332 $ 373 $ 591
Third Quarter 2001
Machinery $ 2,979 $ 1,674 $ 778 $ 218 $ 309
Engines ** 1,720 888 452 174 206
$ 4,699 $ 2,562 $ 1,230 $ 392 $ 515
* Europe, Africa & Middle East and Commonwealth of Independent States
** Does not include internal engine transfers of $329 million and $303 million in third
quarter 2002 and third quarter 2001, respectively. Internal engine transfers are valued at
prices comparable to those for unrelated parties.
Machinery sales were $2.91 billion, a decrease of $74 million or 2 percent from
third quarter 2001. Physical sales volume decreased 6 percent from a year ago,
and was partially offset by favorable price realization (including the impact of
currency) outside North America. Strong sales gains in Asia/Pacific were more
than offset by moderately lower sales in North America and Latin America. Sales
in EAME were up slightly as the favorable impact of translation of non-U.S.
dollar denominated sales offset lower physical volume. Sales in Asia/Pacific
benefited from improved mining industry demand and strong retail sales growth in
China. In North America, higher sales into the quarry and aggregates industry
and flat sales into the heavy construction industry were more than offset by
declines into the coal mining, general construction, waste and industrial
sectors. Sales in Latin America declined as inventory cutbacks by dealers more
than offset higher retail sales.
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Engine sales were $1.80 billion, up $75 million from third quarter 2001.
Physical sales volume rose slightly, up 3 percent. Moderately higher sales in
EAME and slightly higher sales in Asia/Pacific and Latin America more than
offset slightly lower sales in North America.
Operating Profit
-----------------------------------------------------------------------------------------
(Millions of dollars) Third Quarter Third Quarter
2002 2001
--------------------- ----------------------
Machinery $ 207 $ 173
Engines 77 133
$ 284 $ 306
Caterpillar operations are highly integrated; therefore, the company uses a number of
allocations to determine lines of business operating profit.
Machinery operating profit increased $34 million, or 20 percent from third
quarter 2001 despite a $74 million decrease in sales. The favorable profit
impact was primarily due to improved price realization outside North America
partially offset by lower physical sales volume of large machines.
Engine operating profit decreased $56 million, or 42 percent from third quarter
2001 primarily due to lower physical volume of large reciprocating engines,
adverse mix and manufacturing inefficiencies related to sharp changes in
production levels.
Interest expense was $3 million lower than a year ago.
Other income/expense was favorable by $23 million compared to third quarter a
year ago mostly due to lower cost of financing trade receivables.
FINANCIAL PRODUCTS
Revenues for the third quarter were $426 million, up $9 million or 2 percent
compared with third quarter 2001. The favorable impact of continued portfolio
growth at Caterpillar Financial Services Corporation (Cat Financial) was
partially offset by the impact of generally lower interest rates on Cat
Financial revenues.
Before tax profit was $96 million, down $16 million or 14 percent from the third
quarter a year ago. A larger portfolio at Cat Financial favorably impacted
profit, but was more than offset by lower gains on the securitization of
receivables.
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INCOME TAXES
Third quarter 2002 tax expense reflects an estimated annual tax rate of 28
percent compared to 32 percent a year ago. Third quarter 2002 tax expense also
reflects an adjustment resulting from a decrease in the estimated annual tax
rate from 30 percent to 28 percent for the first six months of 2002 due to a
change in the geographic mix of profits.
UNCONSOLIDATED AFFILIATED COMPANIES
The company's share of unconsolidated affiliated companies' results decreased $3
million from third quarter a year ago, primarily due to losses at Shin
Caterpillar Mitsubishi Ltd.
SUPPLEMENTAL INFORMATION
Dealer Machine Sales to End Users and Deliveries to Dealer Rental Operations
Worldwide dealer sales (including both sales to end users and deliveries to
dealer rental operations) were lower compared to third quarter 2001. Gains in
Asia/Pacific and Latin America were more than offset by declines in North
America and EAME.
Dealer sales in North America were lower compared to third quarter 2001. Sales
to the heavy construction industry remain strong at near year-earlier levels.
Higher sales to quarry & aggregates and forestry industries were more than
offset by declines in mining, general construction, agriculture, waste and
industrial sectors.
Dealer sales in EAME declined. Sales increases in heavy construction were more
than offset by declines in the mining, general construction, forestry,
industrial and waste sectors. Sales to the quarry & aggregates industry remained
near year-earlier levels.
In Asia/Pacific, dealer sales increased in the mining, heavy construction and
quarry & aggregates sectors. Sales to general construction, forestry and
industrial sectors remained near year-earlier levels.
Dealer sales in Latin America increased in the general construction, heavy
construction, and industrial sectors. Sales to the mining industry remained near
year-earlier levels.
Dealer Inventories of New Machines
Worldwide dealer new machine inventories at the end of the third quarter were
lower than a year ago. Inventories declined in North America, EAME and Latin
America. Dealer inventory in Asia/Pacific remained near year-earlier levels.
Inventories compared to current selling rates were lower than year-earlier
levels in all regions.
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Engine Sales to End Users and OEMs
Worldwide engine sales to end users and OEMs rose slightly compared to the third
quarter of 2001. Sales were slightly higher in all geographic regions with the
largest gains in Latin America and EAME.
North American demand for engines used in on-highway applications almost doubled
in the third quarter of 2002 compared to a year ago, as major truck
manufacturers raised their third quarter production schedules. Overall North
American engine sales rose slightly as the higher truck engine sales more than
offset sharply lower demand in the electric power and petroleum sectors, which
were impacted by weak business investment compared to third quarter 2001.
In EAME, overall sales rose slightly with a sharp increase in demand for larger
engines used in petroleum, a moderate increase in overall marine engine sales
with particular strength in large engine demand and a slight increase in sales
in the industrial sector. Sales of engines used in electric power applications
were moderately lower than third quarter 2001.
In Asia/Pacific, sales rose slightly. Sharply higher sales of large engines used
in the marine sector more than offset lower sales from electric power, petroleum
and industrial sectors.
Sales also rose slightly in Latin America with moderate gains in petroleum
primarily associated with strong demand for large engines and a surge in
on-highway truck engine demand; these sales gains more than offset lower demand
from the electric power and marine sectors.
EMPLOYMENT
The company has reduced employment by 2,076 excluding the impact of
acquisitions. At the end of third quarter 2002, Caterpillar's worldwide
employment was 70,379 compared with 71,927 one year ago.
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LIQUIDITY AND CAPITAL RESOURCES
FREE CASH FLOW
Net free cash flow (operating cash flow adjusted for noncash items, capital
expenditures, and dividends) for Machinery and Engines was favorable $100
million for the nine months ended September 30, 2002, an improvement of $175
million compared to the same period a year ago. The unfavorable impact of lower
profit was more than offset by lower capital expenditures and lower growth in
working capital.
For the Nine Months Ended Consolidated Machinery & Financial Products
(Millions of dollars) Engines *
Sept. 30, Sept. 30, Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2002 2001 2002 2001 2002 2001
Profit after tax $493 $638 $493 $638 $145 $170
Depreciation and amortization 910 872 596 636 314 236
Change in working capital;
and other (43) (7) (198) (328) (6) 172
Capital expenditures excluding
equipment leased to others (498) (686) (473) (668) (25) (18)
Expenditures for equipment
leased to others, net of (402) (344) 43 1 (445) (345)
disposals
Dividends paid (361) (354) (361) (354) - (5)
----------- --------- ----------- ----------- --------- -----------
Net Free Cash Flow 99 119 100 (75) (17) 210
----------- --------- ----------- ----------- --------- -----------
Other significant cash flow items:
Treasury shares purchased - (43) - (43) - -
Net (increase) decrease in
long-term finance (676) (768) - - (676) (768)
receivables
Net increase (decrease) in debt 918 1,051 (100) 134 1,018 917
Investments and acquisitions -
(net of cash acquired) (290) (396) (23) (109) (267) (287)
Other (6) (65) (3) (10) 13 (71)
----------- --------- ----------- ----------- --------- -----------
Change in cash and short-term
investments $45 $(102) $(26) $(103) $71 $1
----------- --------- ----------- ----------- --------- -----------
* Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.
PENSION FUNDING
ue to continued poor performance of the equity markets, the value of our pension
fund assets has declined during 2002. SFAS 87 requires recognition of an
Additional Minimum Liability if the market value of plan assets is less than the
accumulated benefit obligation at the end of the plan year. Based on quarter-end
plan asset values, we would be required to increase the Additional Minimum
Liability by approximately $2.8 billion at December 31, 2002. This would result
in a decrease in Accumulated Other Comprehensive Income (a component of
Shareholders' Equity on the financial position) of approximately $1.8 billion
after-tax. These amounts fluctuate and have increased from those disclosed in
the second quarter 10-Q as a result of further deterioration in the equity
markets. Final determination will only be known at the end of the plan year,
which is November 30, 2002. The company has adequate liquidity resources to fund
plans, as it deems necessary.
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OUTLOOK
Update for Remainder of 2002
Global industrial production moved up about 5 percent in the first six months of
2002, but lost momentum in the third quarter as rising geopolitical
uncertainties caused oil prices to move up sharply and world equity prices to
decline. Business and consumer confidence, which had moved up sharply in the
first half of 2002, moved back down in August and September. Most industrialized
markets continued to operate at relatively low levels of capacity utilization
and as a result capital goods prices, margins and earnings continued to be under
pressure in the third quarter.
In North America, consumption and housing continued at good rates through the
third quarter, but corporate earnings are trailing the recovery and resulting
cash flow continues to be poor. While overall capital spending started to show
signs of stabilizing in the third quarter, the projected improvement in the
fourth quarter is from a low base and faces significant headwinds. Industry
sales and company sales are estimated to be down moderately.
Overall growth in EAME was weak in the first half and leading indicators also
point to some deterioration in momentum at the end of the third quarter.
Industry sales are expected to be down moderately and company sales about flat.
In Asia/Pacific (excluding Japan) industry sales and company sales are expected
to be up moderately in response to strong regional growth. In Latin America,
industry sales and company sales are expected to be down slightly.
For 2002, worldwide industry sales are expected to be down moderately and
company sales are estimated to be down slightly. Full-year profit in 2002 is
expected to be about 15 percent lower than last year, excluding nonrecurring
charges recorded in 2001 for the sale of the Challenger agricultural tractor
line, plant closing and consolidations and costs for planned employment
reductions. However, uncertain near-term political and economic conditions make
the remainder of the year more difficult than normal to predict.
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* * *
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 October 16, 2002. That filing is
available from the SEC website at http://www.sec.gov/cgi-bin/srch-edgar
Caterpillar's latest financial results and current outlook are also available
via:
Telephone:
(800) 228-7717 (Inside the United States and Canada)
(858) 244-2080 (Outside the United States and Canada)
Internet:
http://www.CAT.com/investor
http://www.CAT.com/irwebcast (live broadcast/replays of quarterly conference
call)
Caterpillar contact:
Kelly Wojda
Corporate Public Affairs
(309) 675-1307
wojda_kelly_g@CAT.com
Note: Information contained on our website is not incorporated by reference into
this release.
Financial Pages Follow
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CATERPILLAR INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
(UNAUDITED)
(Dollars in millions except per share data)
Supplemental Consolidating Data
---------------------------------------------
Consolidated Machinery & Financial Products
Engines *
--------------------- --------------------- ---------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2002 2001 2002 2001 2002 2001
--------- --------- --------- --------- --------- ---------
Sales and revenues:
Sales of Machinery & Engines $4,700 $4,699 $4,700 $4,699 $ - $ -
Revenues of Financial Products 375 357 - - 426 417
--------- --------- --------- --------- --------- ---------
Total sales and revenues 5,075 5,056 4,700 4,699 426 417
--------- --------- --------- --------- --------- ---------
Operating costs:
Cost of goods sold 3,690 3,669 3,690 3,669 - -
Selling, general, and
administrative expenses 646 638 559 557 106 92
Research and development
expenses 167 167 167 167 - -
Interest expense of
Financial Products 135 161 - - 140 167
Other operating expenses 108 80 - - 108 80
--------- --------- --------- --------- --------- ---------
Total operating costs 4,746 4,715 4,416 4,393 354 339
--------- --------- --------- --------- --------- ---------
Operating Profit 329 341 284 306 72 78
Interest expense excluding
Financial Products 66 69 66 69 - -
Other income (expense) 20 23 (31) (54) 24 34
--------- --------- --------- --------- --------- ---------
Consolidated profit before taxes 283 295 187 183 96 112
Provision for income taxes 71 94 37 51 34 43
--------- --------- --------- --------- --------- ---------
Profit of consolidated companies 212 201 150 132 62 69
Equity in profit of
unconsolidated affiliates 1 4 (1) 2 2 2
Equity in profit of Financial
Products subsidiaries - - 64 71 - -
--------- --------- --------- --------- --------- ---------
Profit $213 $205 $213 $205 $64 $71
--------- --------- --------- --------- --------- ---------
EPS of common stock $0.62 $0.60
--------- ---------
EPS of common stock
assuming dilution $0.61 $0.59
--------- ---------
Weighted average shares
outstanding (thousands)
Basic 344,172 343,320
Assuming dilution 346,225 347,519
* Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.
Transactions between Machinery and Engines and Financial Products have been eliminated to arrive at the Consolidated
data.
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CATERPILLAR INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED
(UNAUDITED)
(Dollars in millions except per share data)
Supplemental Consolidating Data
---------------------------------------------
Consolidated Machinery & Financial Products
Engines *
--------------------- --------------------- ---------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2002 2001 2002 2001 2002 2001
--------- --------- --------- --------- --------- ---------
Sales and revenues:
Sales of Machinery & Engines $13,659 $14,292 $13,659 $14,292 $ - $ -
Revenues of Financial Products 1,116 1,062 - - 1,247 1,230
--------- --------- --------- --------- --------- ---------
Total sales and revenues 14,775 15,354 13,659 14,292 1,247 1,230
--------- --------- --------- --------- --------- ---------
Operating costs:
Cost of goods sold 10,751 11,086 10,751 11,086 - -
Selling, general, and
administrative expenses 1,915 1,914 1,654 1,679 317 267
Research and development
expenses 524 506 524 506 - -
Interest expense of
Financial Products 393 518 - - 406 542
Other operating expenses 300 222 - - 300 222
--------- --------- --------- --------- --------- ---------
Total operating costs 13,883 14,246 12,929 13,271 1,023 1,031
--------- --------- --------- --------- --------- ---------
Operating Profit 892 1,108 730 1,021 224 199
Interest expense excluding
Financial Products 206 222 206 222 - -
Other income (expense) 13 46 (44) (130) (5) 64
--------- --------- --------- --------- --------- ---------
Consolidated profit before taxes 699 932 480 669 219 263
Provision for income taxes 196 297 116 199 80 98
--------- --------- --------- --------- --------- ---------
Profit of consolidated companies 503 635 364 470 139 165
Equity in profit of
unconsolidated affiliates (10) 3 (16) (2) 6 5
Equity in profit of Financial
Products subsidiaries - - 145 170 - -
--------- --------- --------- --------- --------- ---------
Profit $493 $638 $493 $638 $145 $170
--------- --------- --------- --------- --------- ---------
EPS of common stock $1.43 $1.86
--------- ---------
EPS of common stock
- assuming dilution $1.42 $1.84
--------- ---------
Weighted average shares
outstanding (thousands)
Basic 343,905 343,327
Assuming dilution 347,174 347,191
* Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.
Transactions between Machinery and Engines and Financial Products have been eliminated to arrive at the Consolidated
data.
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CATERPILLAR INC.
CONDENSED FINANCIAL POSITION*
(Millions of dollars)
Consolidated
(Caterpillar Inc. and Subsidiaries)
-------------------------------------
Sept. 30, Dec. 31, Sept.
2002 2001 30,
2001
---------- --------- --------
Assets
Current assets:
Cash and short-term investments $445 $400 $232
Receivables - trade and other 2,868 2,592 2,644
Receivables - finance 6,667 5,849 6,187
Deferred and refundable income taxes 441 423 322
Prepaid expenses 1,280 1,211 1,128
Inventories 3,084 2,925 2,922
---------- --------- --------
Total current assets 14,785 13,400 13,435
Property, plant, and equipment - net 6,810 6,603 6,311
Long-term receivables - trade and other 56 55 88
Long-term receivables - finance 6,320 6,267 5,854
Investments in unconsolidated affiliated companies 751 787 787
Deferred income taxes 834 938 979
Intangible assets 304 274 73
Goodwill 1,402 1,397 1,412
Other assets 1,112 936 964
---------- --------- --------
Total Assets $32,374 $30,657 $29,903
---------- --------- --------
Liabilities
Current liabilities:
Short-term borrowings:
-- Machinery & Engines $65 $219 $241
-- Financial Products 1,956 1,961 988
Accounts payable 2,410 2,123 2,171
Accrued expenses 1,521 1,419 1,248
Accrued wages, salaries, and employee benefits 1,242 1,292 1,396
Dividends payable - 120 -
Deferred and current income taxes payable 7 11 62
Long-term debt due within one year:
-- Machinery & Engines 267 73 62
-- Financial Products 3,036 3,058 3,172
---------- --------- --------
Total current liabilities 10,504 10,276 9,340
Long-term debt due after one year:
-- Machinery & Engines 3,410 3,492 3,332
-- Financial Products 9,025 7,799 8,367
Liability for post-employment benefits 3,065 3,103 2,491
Deferred income taxes and other liabilities 392 376 496
---------- --------- --------
Total Liabilities 26,396 25,046 24,026
---------- --------- --------
Stockholders' Equity
Common stock 1,035 1,043 1,044
Profit employed in the business 7,785 7,533 7,606
Accumulated other comprehensive income (170) (269) (73)
Treasury stock (2,672) (2,696) (2,700)
---------- --------- --------
Total Stockholders' Equity 5,978 5,611 5,877
---------- --------- --------
Total Liabilities and Stockholders' Equity $32,374 $30,657 $29,903
---------- --------- --------
* Unaudited except for Consolidated December 31, 2001 amounts.
Certain amounts for prior periods have been reclassified to conform with current financial statement
presentation.
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SAFE HARBOR STATEMENT UNDER THE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in our Third-Quarter 2002 Results Release and
related prepared statements from the results webcast are forward looking and
involve uncertainties that could significantly impact results. The words
'believes,' 'expects,' 'estimates,' 'anticipates,' 'will be' 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 current outlook calls for the continuation of a moderate recovery in the
U.S. economy in the fourth quarter of 2002 and in 2003. Our outlook assumes that
the events of September 11, 2001 and the resulting impact on the economy were a
one-time event and that there will be no further events of this magnitude. If,
however, there are other significant shocks or sequence of shocks, financial,
economic or acts of war and/or political terror, there could be a more
protracted negative impact on consumer spending, housing starts, and capital
spending which would negatively impact company results.
After a strong first quarter, followed by more moderate growth in the second and
third quarters, U.S. GDP growth is expected to continue at moderate rates in the
fourth quarter of 2002 and in 2003. Should recent interest rate and tax
reductions fail to sustain growth in the U.S. economy as expected, leading to
renewed economic weakness, then sales of machines and engines may be lower than
expected in the fourth quarter of 2002 and in 2003. The outlook also projects
that economic growth in 2003 is expected to improve in Asia/Pacific, Europe,
Africa & Middle East and, more moderately, in Latin America. If, for any reason,
these projected growth rates do not occur, sales would likely be lower than
anticipated in the affected region. Persistent weakness in the construction
sector in Japan is leading to lower machine sales in the Japanese market. In
general, renewed currency speculation, significant declines in the stock
markets, further oil or energy price increases, political disruptions or higher
interest rates could result in weaker than anticipated economic growth and
worldwide sales of both machines and engines could be lower than expected as a
result. Economic recovery could also be delayed or weakened by growing budget or
current account deficits or inappropriate government policies.
In particular, our outlook assumes that Europe, the United Kingdom and Canada
implement and commit to maintain economic stimulus measures and that the
Japanese government remains committed to stimulating their economic recovery
with appropriate monetary and fiscal policies. The outlook also assumes that the
Brazilian government follows through with promised fiscal and structural
reforms; that there is an orderly democratic transition in the upcoming
Brazilian elections, and that the Argentina crisis is confined to only
Argentina, and does not spill over to negatively impact growth prospects in
neighboring countries. If negative spillover effects become amplified, this
could result in greater regional economic and financial uncertainty and weaker
regional growth. Our outlook also assumes that currency and stock markets remain
relatively stable, and that average world oil prices move back down from current
levels near $30 per barrel to fluctuate in a range of $20 to $27 a barrel. If
commodity and/or currency markets experience a significant increase in
volatility, and/or stock markets do not recover, uncertainty would increase,
both of which would result in slower economic growth, lower sales and potential
impairment of investments. In addition, an eruption of political violence in the
Middle East or a war with Iraq could lead to oil supply disruptions and
persistent upward pressure on oil prices. In this case business and consumer
confidence would fall and inflation pressures would move up leading to slower
world economic growth and lower company sales.
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The Russian economy has improved, but political and economic uncertainty remains
high and an unexpected deterioration could impact worldwide stock or currency
markets, which in turn could weaken company sales.
Commodity Prices
The outlook for our sales also depends on commodity prices. Our outlook for an
improvement in world economic growth in 2003 suggests that industrial metals
prices continue to see a recovery. Industrial metal prices improved in the first
eight months of 2002, but further gains are required before we see gains in
production and a positive impact on equipment sales. As a result, machine sales
to the industrial metals industry have been delayed and further delays could
happen in the second half of 2002. Oil prices declined, as expected, from an
average of about $30 to $32 a barrel in 2000 to an average of $25 to $30 a
barrel in 2001. We are expecting an average price of $22 to $29 a barrel in 2002
and an average price of $22 to $28 in 2003. Based on this forecast, equipment
sales into sectors that are sensitive to crude oil prices (oil, oil sands, coal
and natural gas) are expected to be down moderately in 2002 and generally up in
2003.
Extended weakness in world economic growth could lead to sharp declines in
commodity prices and lower than expected sales to the industrial metals and
agriculture sectors.
Monetary and Fiscal Policies
For most companies operating in a global economy, monetary and fiscal policies
implemented in the U.S. and abroad could have a significant impact on economic
growth, and, accordingly, demand for a product. In the United States, the
Federal Reserve moved aggressively to reduce interest rates in 2001. Rates were
maintained at a low level in 2002, and we expect further modest reductions
before the end of 2002. These actions, together with federal tax cuts, are
expected to lead to a sustained recovery in U.S. growth in the fourth quarter of
2002 through 2003. In Europe, the European Central Bank reduced interest rates
in 2001, and growth in Europe is expected to improve in the second half of 2002.
However, recent currency movements leading to a stronger euro may dampen
European growth prospects in the second half of 2002 and in 2003 and this would
cause machine sales to be lower than expected.
In general, higher than expected interest rates, reductions in government
spending, higher taxes, significant currency devaluations, and uncertainty over
key policies are some factors likely to lead to slower economic growth and lower
industry demand. The current outlook is for higher year over year U.S. growth in
2002 and 2003. This is expected to lead to a modest improvement in average
industry sales levels in the fourth quarter of 2002 and in 2003. If, for
whatever reason, there was a setback leading to weak or negative growth in the
fourth quarter of 2002 and in 2003 then demand for company products could fall
in the U.S. and Canada and would also be lower throughout the rest of the world.
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Political Factors
Political factors in the U.S. and abroad have a major impact on global
companies. In 2001, the U.S. Congress enacted a tax cut with the first
reductions effective in the third and fourth quarters of 2001 and with
additional benefits in 2002, which is having and should continue to have a
positive impact on the U.S. economy. The Company is one of the largest U.S.
exporters as a percentage of sales. International trade and fiscal policies
implemented in the U.S. this year could impact the Company's ability to expand
its business abroad. U.S. foreign relations with certain countries and any
related restrictions imposed could also have a significant impact on foreign
sales. There are a number of significant political developments in Latin
America, Asia, Europe, and Africa/Middle East which are expected to take place
in the fourth quarter of 2002 and in 2003 that could affect U.S. trade policies
and/or de-stabilize local market conditions leading to lower company sales. In
particular, a recent escalation of political uncertainty in Brazil is
contributing to a decline in business confidence and reduced capital investment
intentions.
In addition, significant political and economic instability persists in
Argentina, Venezuela and the Middle East. Our outlook assumes that the effects
of instability in Argentina and Venezuela will be confined to those countries
and not spread to other countries in the region. Our outlook also assumes that
stability will ultimately be restored in Argentina and Venezuela through
democratic means. If, however, the instability persists, worsens or spreads to
other countries in the region, it could materially impact company sales into
Argentina, Venezuela and other countries in the region. In addition, our outlook
assumes that the recent escalation of the conflict in the Middle East does not
persist or deteriorate further. The outlook assumes that Middle East tensions
will ease over time.
Currency Fluctuations
Currency fluctuations are also an unknown for global companies. The Company has
facilities in major sales areas throughout the world and significant costs and
revenues in most major currencies. This diversification greatly reduces the
overall impact of currency movements on results. However, if the U.S. dollar
strengthens against foreign currencies, the conversion of net non-U.S. dollar
proceeds to U.S. dollars would somewhat adversely impact the Company's results.
Further, since the Company's largest manufacturing presence is in the U.S., a
sustained overvalued dollar could have an unfavorable impact on our global
competitiveness.
Dealer Practices
A majority of the Company's sales are made through its independent dealer
distribution network. Dealer practices, such as changes in inventory levels for
both new and rental equipment, are not within the Company's control (primarily
because these practices depend upon the dealer's assessment of anticipated sales
and the appropriate level of inventory) and may have a significant positive or
negative impact on our results. In particular, the outlook assumes that dealer
inventories of new machines will be slightly lower at the end of 2002 than at
the end of 2001. If dealers reduce inventory levels more than anticipated,
company sales will be adversely impacted.
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Other Factors
The rate of infrastructure spending, housing starts, commercial construction and
mining play a significant role in the Company's results. Our products are an
integral component of these activities and as these activities increase or
decrease in the U.S. or abroad, demand for our products may be significantly
impacted. In 1999, the six-year Federal highway bill did not boost U.S. sales as
much as anticipated due to delays in getting major capital projects for highways
underway. In 2000 and 2001, there was a material increase in the volume of
highway construction contracts, which had a positive impact on sales of certain
types of equipment, and the company expects higher highway construction activity
in 2002. In the first eight months of 2002 contracts let for highways, streets
and bridges were up about 1%. A bill approving federal funding for highways,
streets, bridges, airports, etc. in the final quarter of 2002 and in 2003 has
been delayed. However, the baseline outlook assumes that a new transportation
appropriations bill is passed before the end of 2002 that maintains funding for
2003 close to 2002 levels. If funding is reduced, sales could be negatively
impacted in 2003. Furthermore, if infrastructure spending plans are reduced by
Federal and/or state governments due to budget constraints, machine sales would
be lower in the fourth quarter of 2002 and in 2003 than current projections.
Pursuant to a Consent Decree Caterpillar entered into with the United States
Environmental Protection Agency ('EPA'), the Company is required to meet certain
emission standards by October 2002. The Consent Decree provides, however, for
the possibility that diesel engine manufacturers may not be able to meet these
standards exactly on that date, and allows companies to continue selling
non-compliant engines if they pay non-conformance penalties on those engines.
However, EPA is currently in the process of setting new levels for these
non-conformance penalties. Our outlook assumes that complying with the Consent
Decree, and related volatility in on-highway truck engine demand, will not
materially impact our results. If, however, Caterpillar must pay non-conformance
penalties and EPA imposes penalty levels higher than anticipated, our profit
could be negatively 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 materials costs,
and/or higher than expected financing costs due to unforeseen changes in central
bank interest rate policies. Cost savings could also be negatively impacted by
unforeseen changes in tax, trade, environmental, labor, safety, payroll or
pension policies in any of the jurisdictions where the alliances conduct their
operations.
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.
The Company operates in a highly competitive environment and our outlook depends
on a forecast of the Company's share of industry sales. A 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 also remains very competitive from a pricing standpoint.
Additional price discounting would result in lower than anticipated price
realization.
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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.
Inherent in the operation of the Financial Products Division is the credit risk
associated with its customers. The creditworthiness of each customer, and the
rate of delinquencies, repossessions and net losses on customer obligations are
directly impacted by several factors, including, but not limited to, relevant
industry and economic conditions, the availability of capital, the experience
and expertise of the customer's management team, commodity prices, political
events, and the sustained value of the underlying collateral. Additionally,
interest rate movements create a degree of risk to our operations by affecting
the amount of our interest payments and the value of our fixed rate debt. While
our policy is to use interest rate swap agreements to manage our exposure to
interest rate changes and lower the costs of borrowed funds, if interest rates
move more sharply than anticipated, it could negatively impact our results.
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This information is provided by RNS
The company news service from the London Stock Exchange