Interim Results

Caterpillar Inc 21 July 2005 Caterpillar Inc. 2Q Earnings Release July 21, 2005 -------------------------------------------------------------------------------- FOR IMMEDIATE RELEASE Caterpillar Inc. Announces Record Sales and Profits Amid Continued Growth In Key Markets and Industries; Company Again Raises Full-Year Outlook PEORIA, Ill. - Bolstered by continued global strength in the markets and industries it serves, Caterpillar Inc. (NYSE: CAT) today reported record second-quarter sales and revenues of $9.360 billion and record profit of $760 million, or $1.08 per share. First half of the year results were also records, with company sales and revenues of $17.699 billion and profit of $1.341 billion, or $1.89 per share. 'Our global markets continue to exhibit the fundamental strengths needed for further growth, and Team Caterpillar remains well positioned to leverage this unprecedented opportunity now and in the years ahead,' said Caterpillar Chairman and Chief Executive Officer Jim Owens. 'We're aggressively pursuing improvement - utilizing our leadership position, strong cash flow and global capabilities in engineering, purchasing, sales and manufacturing to enhance the value customers and stockholders receive from an investment in Caterpillar.' Sales and revenues of $9.360 billion were up $1.777 billion, or 23 percent, compared to $7.583 billion in the second quarter of 2004. Improving sales volume and price realization drove the increase in sales and revenues. Profit of $760 million, or $1.08 a share, was up 34 percent compared to profit of $566 million in the second quarter of 2004. The main contributors were improved price realization and sales volume, partially offset by higher core operating costs, about half of which were material costs. Page 1 -------------------------------------------------------------------------------- 'We're very pleased that this quarter marks another improvement in our profitability as measured by return on sales - 8.1 percent this quarter compared to 7.5 percent a year ago,' Owens added. 'Somewhat better prices were a positive factor in the profit improvement, and for the most part, we expect the price increases announced earlier this year to hold in the marketplace. That said, we are closely monitoring the competitive landscape and are determined to hold our market position. Further, our results continue to be positively driven by literally hundreds of 6 Sigma projects which are being completed every month.' Outlook The outlook for 2005 has been increased over previously reported levels. Sales and revenues are now expected to be up 18 to 20 percent from 2004. The profit outlook for 2005 has also been improved to reflect an estimated profit range of $4.00 to $4.20 per share. The previous outlook reflected sales and revenues up 16 to 18 percent, and profit per share of $3.89 to $4.03, up 35 to 40 percent from 2004. 'The strength of our markets is clearly not a blip on the radar, ' Owens said. 'Key indicators such as low interest rates, robust commodity prices and needed investment for capacity in electric power and energy production point to continued growth. While this growth is expected to continue in the near term, we're laying a solid foundation for our future by staying focused on prudently managing our cost structure and margins while continuing to invest in new products and production capacity to meet strong customer demand.' (Complete outlook begins on page 11.) 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 21-22; first occurrence of terms shown in bold italics. Page 2 -------------------------------------------------------------------------------- Key Points Second-Quarter Comparison â€¢ Second-quarter sales and revenues were a record -- $9.360 billion, and were 23 percent higher than the second quarter of 2004. â€¢ Machinery sales increased 25 percent, Engines sales increased 22 percent, and Financial Products revenues rose 19 percent from a year ago. â€¢ Second-quarter profit was a record -- $760 million, and was 34 percent higher than the second quarter of 2004. â€¢ As expected, core operating costs were higher than a year ago, largely due to material costs, and continue to be a challenge. â€¢ The second-quarter provision for income taxes includes an $11 million discrete charge related to our plan to take advantage of the temporary repatriation incentive provided in the American Jobs Creation Act. We expect to repatriate earnings of approximately $1.4 billion in 2005. Outlook â€¢ The outlook for 2005 sales and revenues has been raised, and now reflects an increase of 18 to 20 percent from 2004. â€¢ The 2005 profit outlook has increased and now reflects a profit range of $4.00 to $4.20 per share. General â€¢ Caterpillar stock (symbol CAT) split two-for-one during the second quarter and all per share amounts in this release reflect the effects of the stock split. A table has been included in the Investor section of the Caterpillar website showing historical split-adjusted quarterly profit per share amounts. â€¢ A question and answer section has been included in this release starting on page 16. Page 3 -------------------------------------------------------------------------------- DETAILED ANALYSIS Second Quarter 2005 vs. Second Quarter 2004 Sales and Revenues Sales and revenues for the second quarter of 2005 were $9.360 billion, up $1.777 billion or 23 percent from second quarter 2004. Machinery volume was up $768 million, Engines volume was up $359 million, price realization improved $470 million, and currency had a positive impact on sales of $87 million, due primarily to a stronger euro compared with second quarter 2004. In addition, Financial Products revenues increased $93 million. Page 4 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Sales and Revenues by Geographic Region (Millions of Total % North % EAME % Latin % Asia/ % dollars) Change America Change Change America Change Pacific Change ------- ------ ------- ------ ------- ------- -------- ------ -------- ------- 2nd Quarter 2004 Machinery $ 4,836 $ 2,674 $ 1,163 $ 346 $ 653 Engines1 2,264 1,001 733 177 353 Financial 483 341 83 29 30 Products2 - ----- - ----- - ----- -- ----- -- ----- $ 7,583 $ 4,016 $ 1,979 $ 552 $ 1,036 - ----- - ----- - ----- -- ----- -- ----- 2nd Quarter 2005 Machinery $ 6,026 25% $ 3,321 24% $ 1,430 23% $ 526 52% $ 749 15% Engines1 2,758 22% 1,226 22% 949 29% 251 42% 332 -6% Financial 576 19% 410 20% 84 1% 35 21% 47 57% Products2 - ----- - ----- - ----- -- ----- -- ----- $ 9,360 23% $ 4,957 23% $ 2,463 24% $ 812 47% $ 1,128 9% - ----- - ----- - ----- -- ----- -- ----- 1 Does not include internal engines transfers of $537 million and $447 million in 2005 and 2004, respectively. Internal engines transfers are valued at prices comparable to those for unrelated parties. 2 Does not include revenues earned from Machinery and Engines of $80 million and $150 million in 2005 and 2004, respectively. ------------------------------------------------------------------------------------------------------------------ Machinery Sales Machinery sales were $6.026 billion in the second quarter of 2005 - up $1.190 billion or 25 percent from the second quarter of 2004. Sales volume was $768 million of the increase, price realization accounted for $366 million, and the remaining $56 million was due to currency. Sales volume benefited from continued strong growth in dealer sales to end users in all regions and in nearly all industries. Dealer machine inventory declined during the second quarters of both 2004 and 2005, which is a normal seasonal development. The decline during the second quarter of 2005 was greater than a year ago, reflecting dealer efforts to maintain inventories in line with deliveries. As a result, the inventory decline had a slightly moderating effect on quarter-over-quarter sales growth. Worldwide, machine inventories in months of sales are at historical lows for this time of the year. â€¢ North America sales were up $647 million or 24 percent. Benefiting from strong demand in most applications, sales volume increased $421 million and price realization added $226 million. Low interest rates and rising home prices supported housing construction, and nonresidential construction benefited from record corporate profits and favorable credit conditions. Mining remained strong - the result of higher coal and metals prices. Page 5 -------------------------------------------------------------------------------- â€¢ EAME sales were up $267 million or 23 percent -- $162 million from higher volume, $69 million from improved price realization, and $36 million from a favorable currency impact, primarily due to the stronger euro. Sales volume in Europe, where the economy remained weak, was up slightly, the result of a continued recovery in housing construction and some improvement in business investment. Higher metals and energy prices allowed robust economic growth to continue in both Africa/Middle East (AME) and the Commonwealth of Independent States (CIS). As a result, sales volume in those two regions increased significantly. â€¢ Latin America sales increased $180 million or 52 percent -- $132 million from higher volume, $37 million from improved price realization, and the remaining $11 million was due to currency. The region continued to benefit from increased capital inflows, higher metals and energy prices, and low domestic interest rates. Sales increased rapidly in most countries and in most applications throughout Latin America. â€¢ Asia/Pacific sales were up $96 million or 15 percent -- $53 million from higher volume, $34 million from improved price realization and the remaining $9 million due to currency. Robust mining activity drove sales gains in Australia, India and Indonesia. Sales in China improved over the past three quarters but remained below last year's record second quarter. The Chinese government's administrative actions to slow construction last year caused sales to drop sharply in the last half of 2004. A return to more normal conditions, along with increased financing from Cat Financial, contributed to the improved sales. Engines Sales Engines sales were $2.758 billion in the second quarter of 2005, up $494 million or 22 percent from the second quarter of 2004. Sales volume was $359 million of the increase, price realization added $104 million, and the favorable impact of currency accounted for $31 million of the increase. Dealer engine inventory increased at a slower rate during the second quarter of 2005, compared to the rate of increase during the second quarter of 2004. The lower rate of dealer inventory increases during the second quarter of 2005 had a slight moderating effect on quarter-over-quarter sales growth. Overall, dealer engine inventories are in line with selling rates. Page 6 -------------------------------------------------------------------------------- â€¢ North America sales were up 22 percent. Sales of on-highway truck engines increased 23 percent, as the industry continued to expand and we maintained our leadership position. On-highway truck growth was a result of increased tonnage versus a year ago, healthy freight carrier profitability and aging fleet replacements. Sales to the petroleum sector increased 69 percent, as high energy prices drove exploration and production. Sales to the electric power sector increased 12 percent, benefiting from investment in data and communication systems, and the impact of tax credits for investment in natural gas generators. Sales to the marine sector were about flat. â€¢ EAME sales were up 29 percent. Sales into the electric power sector were up 67 percent, driven by strong demand for prime and standby generator sets, and incremental sales from the acquisition of Turbomach. Sales into the marine sector rose 46 percent, primarily due to strong tugboat demand to support port and shipping activity. Sales of engines to the petroleum sector were down 37 percent with reduced sales of turbines and turbine related services for petroleum projects in the Africa/Middle East region, due primarily to timing of major projects quarter to quarter. â€¢ Latin America sales were up 42 percent. Sales of petroleum engines increased 29 percent driven by investments in production capacity. Sales of electric power engines were up 50 percent, primarily influenced by sales of generator sets for disaster preparedness. â€¢ Asia/Pacific sales were down 6 percent. Sales of engines to the petroleum sector declined 18 percent primarily as a result of lower sales of turbines and related services due to the timing of major infrastructure projects. Partially offsetting the decrease was a 36 percent increase in marine engine sales driven by strong demand for oceangoing vessels and workboats. Sales to the electric power sector increased 2 percent driven by general business investment in construction and real estate development. Page 7 -------------------------------------------------------------------------------- Financial Products Revenues Financial Products revenues were $576 million, up $93 million or 19 percent from second quarter 2004. The increase was due primarily to a $69 million favorable impact from continued growth of Earning Assets at Cat Financial. Operating Profit Second quarter operating profit improved $251 million, or 33 percent over a year ago, driven by higher price realization and sales volume. In addition, Financial Products contributed $28 million to the increase in operating profit. The improvement in price realization was primarily a result of price increases taken over the past year. Most of the price increases taken during the second quarter of 2005 were not fully realized in the quarter as a result of the timing of the increases and price protection policies. Page 8 -------------------------------------------------------------------------------- Core operating costs rose $476 million from the second quarter of 2004, about half of the increase was material costs, resulting primarily from steel-related increases. In addition, manufacturing costs rose to support increased volume and as a result of remaining inefficiencies due to supply chain constraints. Non-manufacturing related core operating costs were up $76 million - a result of higher Research and Development (R&D) and Selling, General and Administrative (SG&A) expenses to support product programs and the growth in volume. As a percent of sales and revenues, the total of SG&A and R&D expenses were lower than the second quarter of 2004. -------------------------------------------------------------------------------- Operating Profit by Principal Line of Business (Millions of dollars) 2nd Quarter 2nd Quarter Change 2004 2005 $ ----------------- --------------- ----------------- Machinery1 $ 538 $ 676 $ 138 Engines1 149 265 116 Financial Products 114 142 28 Consolidating Adjustments (31 ) (62 ) (31 ) ----- ----- ----- --- ------- --- ------ ----- ---- Consolidated Operating Profit $ 770 $ 1,021 $ 251 ----- ----- ----- --- ------- --- ------ ----- ---- 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 â€¢ Machinery operating profit of $676 million was up $138 million, or 26 percent, from second quarter 2004. The favorable impact of improved price realization and higher sales volume was partially offset by higher core operating costs, higher retirement benefits and the unfavorable impact of currency. â€¢ Engines operating profit of $265 million was up $116 million, or 78 percent, from second 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. â€¢ Financial Products operating profit of $142 million was up $28 million, or 25 percent, from second quarter 2004. The increase was primarily due to a $33 million impact from the growth of earning assets and a $12 million impact of lower provision for credit losses due to improved portfolio health, partially offset by a $11 million increase in operating expenses primarily related to growth at Cat Financial. In addition, there was a $9 million unfavorable impact due to favorable reserve adjustments being higher in 2004 than in 2005 at Cat Insurance. Page 9 -------------------------------------------------------------------------------- Other Profit/Loss Items â€¢ Other income/expense was income of $90 million compared with income of $50 million in the second quarter of 2004 for a favorable impact of $40 million. The change was primarily due to the favorable impact of currency gains of $33 million. â€¢ The provision for income taxes in the second quarter reflects an estimated annual tax rate of 29 percent, excluding the discrete items discussed below, and compares to a 27 percent rate in 2004. The increase is primarily due to the impact 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. In the second quarter, we completed our evaluation of the repatriation provisions of the American Jobs Creation Act and recognized an income tax charge of $49 million under the provisions of the Act. We expect to repatriate earnings of approximately $1.4 billion in 2005, which includes $500 million subject to the preferential tax treatment allowed by the Act. In connection with our current repatriation plan, we have changed our intention of repatriating earnings of a few selected non-U.S. subsidiaries and have recognized an income tax benefit of $38 million. The net impact of these items is an $11 million discrete charge to our second quarter provision for income taxes. â€¢ The equity in profit/loss of unconsolidated affiliated companies favorably impacted profit by $15 million over second-quarter 2004, primarily driven by increased profitability at Shin Caterpillar Mitsubishi Ltd. (SCM). Employment At the end of the second quarter, worldwide employment was 82,248, compared with 72,916 one year ago. The increase was primarily due to about 5,000 hourly labor additions to support higher volume, the conversion of about 2,000 supplemental employees to full-time employment, and approximately 900 employees from acquisitions. Page 10 -------------------------------------------------------------------------------- Other Significant Events On June 8, 2005, Caterpillar Inc. announced a two-for-one stock split and increased the quarterly dividend rate 22 percent from 41 cents to 50 cents per share pre-split. The dividend increase was the largest in our 80-year history (on a split-adjusted basis). The stock split shares were distributed on July 13 to stockholders of record at the close of business on June 22, 2005. All prior period per share information included in this release has been restated to reflect the split. Supplemental Information Information previously located in this section is now included in tabular format at http://www.cat.com/investor under the Quarterly Supplemental Information section. Outlook -------------------------------------------------------------------------------- Sales and Revenue Outlook - Midpoint of Range1 (Millions of dollars) 2004 2005 % Actual Outlook2 Change ---------------- ---------------- ----------------- Machinery and Engines North America $ 14,521 $ 17,700 22% EAME 7,505 9,000 20% Latin America 2,372 2,800 18% Asia/Pacific 3,938 4,200 7% --- -------- --- --- -------- --- Total Machinery and Engines 28,336 33,700 19% --- -------- --- --- -------- --- Financial Products3 1,970 2,400 22% --- -------- --- --- -------- --- Total $ 30,306 $ 36,100 19% --- -------- --- --- -------- --- 1 The volume stair step in the Consolidating Operating Profit chart on page 15 reflects sales and revenue at the midpoint of the range. 2 Based on the sales expectations by geographic region, the forecast of Consolidated Sales and Revenues is an increase of 18 to 20 percent versus 2004. For purposes of this chart, numbers are shown at the middle of the outlook range (i.e., 19 percent). 3 Does not include revenues earned from Machinery and Engines of $199 million and $275 million in 2004 and 2005 outlook, respectively. -------------------------------------------------------------------------------------------------------------------- Sales and Revenues Outlook We project another record year in 2005. We expect sales and revenues will increase 18 to 20 percent, with Machinery and Engines volume increasing about 10 to 12 percent. We expect improved price realization to add over 5 percent, higher Financial Products revenues will add about 2 percent, and the favorable impact of currency will add less than 1 percent. Page 11 -------------------------------------------------------------------------------- â€¢ While economic growth is slowing overall from a very robust 2004, 2005 will be another year of solid economic activity. Record profits, favorable credit conditions and years of past underinvestment are producing attractive investment environments, particularly for industries served by Caterpillar. â€¢ Despite oil prices nearly tripling over the past three years, inflation has continued within central bank target ranges, often on the low side. Outside the United States, most central banks are holding interest rates at or near the lowest level in decades, with little pressure for rate hikes. In Europe, prolonged weak growth makes even lower interest rates possible. Rates within the United States, while rising, still compare favorably with those of the last business cycle. As a result, we project world economic growth will be from 3 to 3.5 percent this year. â€¢ Low interest rates have prompted households to upgrade housing quality. Housing prices are increasing significantly in many countries, encouraging construction to alleviate housing shortages. We expect strong residential construction to continue in most regions this year. â€¢ Demand for metals and energy is outpacing growth in supply, maintaining upward pressure on prices. Governments, particularly in developing countries, are using revenues to upgrade infrastructure, some of which is necessary to support increased commodity production. We do not expect supply pressures to ease substantially this year and as a result, commodity prices should remain high enough to encourage investment. â€¢ Higher oil and natural gas exploration and production are increasing opportunities in powering drill rigs, well servicing and gas compression. The world has little spare production capacity, so we expect exploration will increase. â€¢ Increased international trade and an aging ship fleet are driving strong growth in shipbuilding. Demand for support vessels to cope with port congestion and increased offshore oil and gas production is also increasing. North America (United States and Canada) Machinery and Engines sales are expected to increase about 22 percent in 2005. Page 12 -------------------------------------------------------------------------------- â€¢ The U.S. Federal Reserve increased interest rates at each of the past nine meetings, but we expect the Fed may soon slow the pace of rate increases. Economic growth is stabilizing below 4 percent, employment gains are in line with growth in the working age population and core inflation remains low. Consequently, we believe the Federal funds rate should end the year at 4 percent or less and the economy will grow about 3.5 percent in 2005. â€¢ U.S. housing starts are on track to exceed 2 million units this year, which would be the best year since 1973. The many positives for housing construction include rising employment, continued low mortgage rates, higher home prices, a move away from mobile homes, increased replacement of older houses and a desire for more second homes. â€¢ Nonresidential construction bottomed in 2004 with sluggish recovery to date. However, all the conditions needed for a sustained, rapid recovery, similar to the last recovery, are in place. Businesses have record cash holdings, banks are easing conditions on commercial loans, bond spreads remain attractive and the existing stock of nonresidential structures is inadequate for today's economy. â€¢ Prices for metals and energy commodities generally increased throughout the second quarter and are well above year-earlier prices. Production of metals increased 12 percent year-to-date and the 1 percent increase in coal production was insufficient to maintain electrical utility stockpiles. The environment for increasing both production and investment should remain very positive for the rest of the year. â€¢ Demand for on-highway trucks is expected to remain high for the rest of the year. Truck tonnage is rising, trucking company profits are high and the truck fleet aged during the last downturn. â€¢ Canadian inflation is below the middle of the central bank's target range, which should allow a low interest rate environment to continue throughout 2005. Mining, energy and construction should do well this year as a result. EAME Machinery and Engines sales are expected to increase about 20 percent in 2005, driven largely by favorable conditions in AME and the CIS. Page 13 -------------------------------------------------------------------------------- â€¢ The Euro-area economy is entering its fifth year of below-trend growth and its third year of stable interest rates. With leading indicators turning down, the European Central Bank may need to cut interest rates later this year to revive the economy. Manufacturing in the United Kingdom is declining and retail sales are slowing, suggesting a rate cut is likely. We project overall European growth should be less than 2 percent this year. â€¢ Interest rates in Europe have been low enough to benefit housing and investment in some equipment. Housing prices are up sharply in many countries and building permits are increasing for the fourth consecutive year. We expect housing and equipment investment to increase this year. â€¢ We forecast economic growth in AME should exceed 5 percent in 2005 and growth in the CIS should exceed 6 percent, the third year of recovery for both. Both regions are benefiting from higher metals and energy prices as well as pro-growth economic policies in some larger economies, such as Turkey, South Africa and Russia. Latin America Machinery and Engines sales are expected to increase about 18 percent in 2005. â€¢ Positives for the region include low inflation, relatively low domestic interest rates, higher direct investment inflows and increased metals exports. As a result, we expect economies should grow at least 4 percent in 2005, continuing the recovery that started in late 2003. â€¢ Overall, the region is a net oil exporter and oil prices this year have been higher than governments budgeted. Some of this surplus is being channeled into construction. Mines are increasing production in response to higher metals prices and using some of the profit to further increase capacity. Brazil should continue to benefit from iron ore mining, with production up 38 percent from 2002 and prices more than doubling since that time. Asia/Pacific Machinery and Engines sales are expected to increase about 7 percent in 2005. â€¢ We expect regional economic growth of about 6 percent in 2005. Competitive exchange rates and world economic growth should allow increased exports, and low interest rates should support recoveries in consumer spending and business investment. Growth in nonresidential construction should increase demand for standby electrical power. Page 14 -------------------------------------------------------------------------------- â€¢ Higher coal and iron ore prices are causing mine production to increase, particularly in Australia, India and Indonesia. We project investments in new mine capacity and supporting infrastructure will continue to grow. Sales in China should improve further. Financial Products revenues are expected to increase 22 percent in 2005 due to higher average earning assets at Cat Financial. Profit Outlook Our 2005 profit outlook has improved from the end of the first quarter. Profit per share is now expected to be $4.00 to $4.20 per share. This outlook is $.11 to $.17 per share higher than the previous outlook, which reflected profit growth of 35 to 40 percent from 2004 - $3.89 to $4.03 per share. The primary factors in the profit improvement from 2004 are improved price realization and sales volume. The cost environment remains challenging, and core operating cost increases are expected to partially offset the positive effects of higher sales. Page 15 -------------------------------------------------------------------------------- QUESTION AND ANSWER General Q1: Will your 2007 on-highway engines be based on ACERT(R) Technology? A: Yes. Caterpillar will utilize the ACERT Technology to meet the 2007 on-highway emissions requirements. We demonstrated Caterpillar technological and environmental leadership at the Mid-America Truck Show earlier this year, when we presented our 2007 ACERT emissions solution to the trade and business press. Our press event, which highlighted the new On-highway Vocational Transmission and our Clean Power Technology commitment, included a chance for editors to drive an ACERT equipped 2007 compliant truck. Cat was the only engine manufacturer with an operable 2007 clean diesel engine on display at the show. Moreover, engines have been provided to OEMs for summer-cooling tests and additional field evaluation units are now shipping to fleet customers. We have pledged to provide hundreds of 2007 compliant truck engines to truck fleet customers this summer so they will have the opportunity to field test this new technology well ahead of the rigorous 2007 emissions deadline. 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. Development of the Caterpillar unique CGI and After-treatment Regeneration Device (ARD) is showing added value versus the competition's continued use of more EGR and fuel dosing regeneration. Advantages in fuel economy, engine durability and after-treatment life are expected. In a recent visit from the Environmental Protection Agency, they indicated their support of our technical strategy for 2007 and their positive reaction to the status of the development program. Q2: You've mentioned your accelerated timetable of having 2007 ACERT-equipped test engines placed with customers during mid-year 2005. Can you comment on the progress? A: We have field test engines running or ready to run at several customer sites. Page 16 -------------------------------------------------------------------------------- Q3: How are your plans to leverage ACERT Technology into other off-road applications going? A: The ACERT launch in the machine business is well underway. We have 26 different Cat machine models powered by ACERT-equipped engines in production. By the end of 2005, 45 machine models powered by Tier 3/Stage IIIA ACERT-equipped engines will be in production. Caterpillar was the only manufacturer at CONEXPO exhibiting machines with Tier 3/Stage IIIA certified engines. Second Quarter 2005 vs. Second Quarter 2004 Q4: Are recent price increases holding in the marketplace? A: We continue to monitor the marketplace for the impact of the recent price actions. Indications are that these actions are finding their way into the commercial transactions. The degree and speed may vary for different markets, but the trends at this time are indicating improving price levels. We closely monitor price levels for our products by region and we are determined to maintain our market position. Q5: Are dealer inventories of Machines and Engines at levels that you think are appropriate overall? A: Machines - Worldwide dealer machine inventories are up 34 percent from a year ago, but are down 4 percent from the end of the first quarter. Robust machine inventory growth was needed to support strong expected dealer retail demand. Worldwide, machine inventories in months of sales are at historical lows for this time of the year. Engines - We believe inventory levels are healthy and anticipate some continued reduction in months of sales of inventory due to higher levels of retail delivery. Q6: Are you seeing any evidence yet of improvement in supply chain conditions? A: Yes. For most components, our plants are seeing improved supplier delivery performance. However, demand continues to increase and our factories are working to raise production schedules to meet the strong growth in demand. Tires and heat treated plate continue to have tight availability. Page 17 -------------------------------------------------------------------------------- Q7: Is product availability improving? A: Machines - Product availability has shown steady, but modest, improvement over the last two quarters for most product lines, with the notable exception of large mining products. Overall, availability has not yet recovered to where it was in the first half of 2004, and strong increases in demand continue to pose a challenge to our production operations. As a result, at this time there are still 58 machine models on managed distribution. Engines - Product availability is improving in most areas, with a few supply constraints still being worked. Heavy-duty truck and commercial engines have demonstrated substantial line rate increases, and we are able to meet most of our customer demand. In addition, our larger high-speed engine production is running at substantially higher line rates compared to 2004. Currently, the C15 platform, C13 platform and 3600 family of engines are on managed distribution. Q8: Are you at capacity for large mining products? If so, what are you doing about it? A: Demand for mining products has increased at an unprecedented rate over the past two years and our factories have responded by dramatically increasing production. Lead times on most large mining products are significantly longer than usual, primarily due to supply chain constraints - in particular a continued tire shortage. The factories continue to respond to the increasing demand and have numerous 6 Sigma teams working to increase production. Q9: Can you please provide more detail on your increases in Core Operating Costs? A: The following table summarizes the increase in core operating costs in second-quarter 2005 vs. second-quarter 2004: ------------------------------------------------------------------------------------------------------ Core Operating Cost Change 2nd Quarter 2005 vs. 2nd Quarter 2004 (Millions of dollars) ----------------------------- Manufacturing Costs $ 400 SG&A 29 R&D 49 Other Operating Costs (2 ) ----- ------------- --------- Total $ 476 ----- ------------- --------- -------------------------------------------------------------------------------- Page 18 -------------------------------------------------------------------------------- Approximately 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 in the second half of 2004. Manufacturing costs also include period costs associated with building our products. Period manufacturing costs increased 15 percent or approximately $130 million to support the 24 percent increase in Machinery and Engines sales. Machinery and Engines SG&A declined as a percentage of sales from 9.0 percent in second quarter 2004 to 7.8 percent in second quarter 2005 but was up $29 million vs. 2004 excluding the impact of currency and retirement benefits. Although we continue to experience cost pressures, we expect core operating costs in the second half of 2005 compared with the second half of 2004 to be less unfavorable than the first half comparison. Machinery and Engines operating margins are improving compared with the second half of 2004: ----------------------------------------------------------------------------------------------------------- Q1'04 Q2'04 Q3'04 Q4'04 Q1'05 Q2'05 ------------ ------------ ------------ ------------ --------------- -------------- 8.0 % 9.7 % 7.9 % 7.6 % 8.7 % 10.7 % -- ---- ---- -- ---- ---- -- ---- ---- -- ---- ---- --- ----- ----- -- ------ ---- ----------------------------------------------------------------------------------------------------------- Outlook Q10: Are the machine industries you serve approaching a peak after seeing sales growth in 2003, 2004 and 2005? A: We don't think so. This recovery follows a four-year period of industry weakness, with flat sales from 1999 to 2002. Extended weak periods in the early 1980s and 1990s were followed by lengthy recoveries, with sales doubling over a five to six-year period. In addition, many industries we serve still have growth potential. Page 19 -------------------------------------------------------------------------------- In the United States, nonresidential 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 and some investment in equipment. 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. Q11: Based on your full year outlook, it looks like the second half of 2005 growth is slowing. Given the positive economic outlook for the sectors your products serve, why is second half growth slowing? A: We expect sales volume in the last half of the year to continue to increase from first half levels and from year-earlier levels, albeit at a moderating pace from recent very sizable gains. The slower, but steady, pace of volume growth reflects gradual progress in alleviating supply chain capacity constraints after the initial production surge to record levels in the past year. Q12: Please elaborate on your expectations for material costs in the second half of 2005. A: For steel, commercial grade plate costs are showing a downward trend. Heat treated plate costs are expected to remain at current levels for the near term. Additional industry capacity in early 2006 may provide additional cost relief. Special bar quality material costs are expected to trend downward during the second half of 2005. For some components, we are expecting higher costs driven by either tight capacities or their basic raw material commodity increases. Tires are experiencing additional increases over the first half of 2005. Increased copper costs in the second quarter will result in increased material costs for certain electrical components. Page 20 -------------------------------------------------------------------------------- Overall, commodity driven costs, led by steel, should trend downward. However, there is still significant cost pressure on material costs, and we do not expect that costs will return to early 2004 levels in the second half of 2005. Q13: Is incentive compensation a factor in the increase in core operating costs for 2005? A: Based on our latest outlook, 2005 incentive compensation is expected to be lower than in 2004. Q14: 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 half of 2005, we repurchased 18.5 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. 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. 3. Currency - With respect to sales and revenues, currency represents the translation impact on sales resulting from changes in foreign currency exchange rates versus the U.S. dollar. With respect to operating profit, currency represents the net translation impact on sales and operating costs resulting from changes in foreign currency exchange rates versus the U.S. dollar. Currency includes the impacts on sales and operating profit for the Machinery and Engines lines of business only; currency impacts on the Financial Products line of business are included in the Financial Products portions of the respective analyses. 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. 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. Page 21 -------------------------------------------------------------------------------- 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. 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. Page 22 -------------------------------------------------------------------------------- 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 27-32 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 July 21, 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 23 -------------------------------------------------------------------------------- Caterpillar Inc. Condensed Consolidated Statement of Results of Operations (Unaudited) (Dollars in millions except per share data) Three Months Ended Six Months Ended June 30, June 30, 2005 2004 2005 2004 -------------- ------------ -------------- --------------- Sales and revenues: Sales of Machinery and Engines $ 8,784 $ 7,100 $ 16,573 $ 13,102 Revenues of Financial Products 576 483 1,126 961 --- ------ --- --- ----- -- --- ------- -- --- ------- --- Total sales and revenues 9,360 7,583 17,699 14,063 Operating costs: Cost of goods sold 6,890 5,563 13,105 10,264 Selling, general and administrative 789 744 1,533 1,417 expenses Research and development expenses 268 214 509 445 Interest expense of Financial 184 121 354 240 Products Other operating expenses 208 171 421 359 --- ------ --- --- ----- -- --- ------- -- --- ------- --- Total operating costs 8,339 6,813 15,922 12,725 --- ------ --- --- ----- -- --- ------- -- --- ------- --- Operating profit 1,021 770 1,777 1,338 Interest expense excluding Financial 65 59 130 116 Products Other income (expense) 90 50 198 111 --- ------ --- --- ----- -- --- ------- -- --- ------- --- Consolidated profit before taxes 1,046 761 1,845 1,333 Provision for income taxes 315 209 547 367 --- ------ --- --- ----- -- --- ------- -- --- ------- --- Profit of consolidated companies 731 552 1,298 966 Equity in profit (loss) of 29 14 43 20 unconsolidated affiliated companies --- ------ --- --- ----- -- --- ------- -- --- ------- --- Profit $ 760 $ 566 $ 1,341 $ 986 --- ------ --- --- ----- -- --- ------- -- --- ------- --- --- ------------------------------------- --- ------ --- ---- --- ----- -- ----- --- ------- -- ---- --- ------- --- Profit per common share $ 1.12 $ .83 $ 1.97 $ 1.44 Profit per common share - diluted 1 $ 1.08 $ .80 $ 1.89 $ 1.39 Weighted average common shares outstanding (millions) - Basic 678.3 684.8 680.9 685.2 - Diluted 1 705.1 709.5 707.9 710.4 Cash dividends declared per common share $ .46 $ .39 $ .46 $ .39 --- ------------------------------------- --- ------ --- ---- --- ----- -- ----- --- ------- -- ---- --- ------- --- 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 24 -------------------------------------------------------------------------------- Caterpillar Inc. Condensed Consolidated Statement of Financial Position (Unaudited) (Millions of dollars) Jun. 30, Dec. 31, 2005 2004 ------------------ ------------------ Assets Current assets: Cash and short-term investments $ 749 $ 445 Receivables - trade and other 7,577 7,463 Receivables - finance 5,489 5,182 Deferred and refundable income taxes 552 398 Prepaid expenses 1,278 1,369 Inventories 5,349 4,675 ---- -------- ---- ---- -------- ---- Total current assets 20,994 19,532 Property, plant and equipment - net 7,593 7,682 Long-term receivables - trade and other 845 764 Long-term receivables - finance 9,932 9,903 Investments in unconsolidated affiliated companies 555 517 Deferred income taxes 700 674 Intangible assets 468 315 Goodwill 1,451 1,450 Other assets 2,285 2,258 ---- -------- ---- ---- -------- ---- Total assets $ 44,823 $ 43,095 ---- -------- ---- ---- -------- ---- Liabilities Current liabilities: Short-term borrowings: -- Machinery and Engines $ 312 $ 93 -- Financial Products 2,693 4,064 Accounts payable 3,495 3,580 Accrued expenses 2,332 2,261 Accrued wages, salaries and employee benefits 1,551 1,730 Customer advances 536 447 Dividends payable 169 141 Deferred and current income taxes payable 493 259 Long-term debt due within one year: -- Machinery and Engines 232 6 -- Financial Products 3,209 3,525 ---- -------- ---- ---- -------- ---- Total current liabilities 15,022 16,106 Long-term debt due after one year: -- Machinery and Engines 3,738 3,663 -- Financial Products 14,293 12,174 Liability for postemployment benefits 3,271 2,986 Deferred income taxes and other liabilities 794 699 ---- -------- ---- ---- -------- ---- Total liabilities 37,118 35,628 ---- -------- ---- ---- -------- ---- Stockholders' equity Common stock 1,704 1,231 Treasury stock (3,965 ) (3,277 ) Profit employed in the business 10,632 9,937 Accumulated other comprehensive income (666 ) (424 ) ---- -------- ---- ---- -------- ---- Total stockholders' equity 7,705 7,467 ---- -------- ---- ---- -------- ---- Total liabilities and stockholders' equity $ 44,823 $ 43,095 ---- -------- ---- ---- -------- ---- Certain amounts from prior periods have been reclassified to conform to current financial statement presentation. Page 25 -------------------------------------------------------------------------------- Caterpillar Inc. Condensed Consolidated Statement of Cash Flow (Unaudited) (Millions of dollars) Six Months Ended June 30, Cash flow from operating activities: 2005 2004 ---------------- ---------------- Profit $ 1,341 $ 986 Adjustments for non-cash items: Depreciation and amortization 744 703 Other (113 ) (58 ) Changes in assets and liabilities: Receivables - trade and other (see non-cash items below) (742 ) (5,508 ) Inventories (674 ) (921 ) Accounts payable and accrued expenses 236 476 Other - net 204 (275 ) ----- ------- -- ----- ------- -- Net cash provided by (used for) operating activities 996 (4,597 ) ----- ------- -- ----- ------- -- Cash flow from investing activities: Capital expenditures - excluding equipment leased to others (402 ) (293 ) Expenditures for equipment leased to others (608 ) (535 ) Proceeds from disposals of property, plant and equipment 304 281 Additions to finance receivables (5,159 ) (4,221 ) Collections of finance receivables 3,444 2,939 Proceeds from the sale of finance receivables 859 645 Collections of retained interests in securitized trade receivables - 4,476 Investments and acquisitions (net of cash acquired) (8 ) (5 ) Other - net 51 (10 ) ----- ------- -- ----- ------- -- Net cash provided by (used for) investing activities (1,519 ) 3,277 ----- ------- -- ----- ------- -- Cash flow from financing activities: Dividends paid (280 ) (254 ) Common stock issued, including treasury shares reissued 278 107 Treasury shares purchased (839 ) (250 ) Proceeds from long-term debt issued 3,979 3,322 Payments on long-term debt (2,390 ) (1,571 ) Short-term borrowings - net 65 45 ----- ------- -- ----- ------- -- Net cash provided by financing activities 813 1,399 ----- ------- -- ----- ------- -- Effect of exchange rate changes on cash 14 46 ----- ------- -- ----- ------- -- Increase in cash and short-term investments 304 125 Cash and short-term investments at beginning of period 445 342 ----- ------- -- ----- ------- -- Cash and short-term investments at end of period $ 749 $ 467 ----- ------- -- ----- ------- -- 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 $5,090 million were exchanged for retained interests in securitized trade receivables during the six months ended June 30, 2005 and 2004, respectively. Certain amounts from prior periods have been reclassified to conform to current financial statement presentation. Page 26 -------------------------------------------------------------------------------- Caterpillar Inc. Supplemental Data for Results of Operations For The Three Months Ended June 30, 2005 (Unaudited) (Millions of dollars) Supplemental Consolidating Data ---------------------------------------------------- Consolidated Machinery Financial Consolidating and Engines 1 Products Adjustments ---------------- --------------- ------------ --------------- Sales and revenues: Sales of Machinery and Engines $ 8,784 $ 8,784 $ - $ - Revenues of Financial Products 576 - 656 (80 )2 --- ------- ---- -- --------- -- -- ----- --- -- -------- --- Total sales and revenues 9,360 8,784 656 (80 ) Operating costs: Cost of goods sold 6,890 6,890 - - Selling, general and administrative 789 689 111 (11 )3 expenses Research and development expenses 268 268 - - Interest expense of Financial 184 - 189 (5 )4 Products Other operating expenses 208 (4 ) 214 (2 )3 --- ------- ---- -- --------- -- -- ----- --- -- -------- --- Total operating costs 8,339 7,843 514 (18 ) --- ------- ---- -- --------- -- -- ----- --- -- -------- --- Operating profit 1,021 941 142 (62 ) Interest expense excluding Financial 65 67 - (2 )4 Products Other income (expense) 90 21 9 60 5 --- ------- ---- -- --------- -- -- ----- --- -- -------- --- Consolidated profit before taxes 1,046 895 151 - Provision for income taxes 315 262 53 - --- ------- ---- -- --------- -- -- ----- --- -- -------- --- Profit of consolidated companies 731 633 98 - Equity in profit (loss) of 29 26 3 - unconsolidated affiliated companies Equity in profit of Financial - 101 - (101 )6 Products' subsidiaries --- ------- ---- -- --------- -- -- ----- --- -- -------- --- Profit $ 760 $ 760 $ 101 $ (101 ) --- ------- ---- -- --------- -- -- ----- --- -- -------- --- 1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis. 2 Elimination of Financial Products revenues earned from Machinery and Engines. 3 Elimination of net expenses recorded by Machinery and Engines paid to Financial Products. 4 Elimination of interest expense recorded between Financial Products and Machinery and Engines. 5 Elimination of discount recorded by Machinery and Engines on receivables sold to Financial Products and of interest earned between Machinery and Engines and Financial Products. 6 Elimination of Financial Products profit due to equity method of accounting. Page 27 -------------------------------------------------------------------------------- Caterpillar Inc. Supplemental Data for Results of Operations For The Three Months Ended June 30, 2004 (Unaudited) (Millions of dollars) Supplemental Consolidating Data ---------------------------------------------------- Consolidated Machinery Financial Consolidating and Engines 1 Products Adjustments ---------------- --------------- ------------- -------------- Sales and revenues: Sales of Machinery and Engines $ 7,100 $ 7,100 $ - $ - Revenues of Financial Products 483 - 633 (150 )2 --- ------- ---- -- --------- -- -- ------ --- -- ------- --- Total sales and revenues 7,583 7,100 633 (150 ) Operating costs: Cost of goods sold 5,563 5,563 - - Selling, general and administrative 744 638 118 (12 )3 expenses Research and development expenses 214 214 - - Interest expense of Financial 121 - 123 (2 )4 Products Other operating expenses 171 (2 ) 278 (105 )3 --- ------- ---- -- --------- -- -- ------ --- -- ------- --- Total operating costs 6,813 6,413 519 (119 ) --- ------- ---- -- --------- -- -- ------ --- -- ------- --- Operating profit 770 687 114 (31 ) Interest expense excluding Financial 59 60 - (1 )4 Products Other income (expense) 50 15 5 30 5 --- ------- ---- -- --------- -- -- ------ --- -- ------- --- Consolidated profit before taxes 761 642 119 - Provision for income taxes 209 168 41 - --- ------- ---- -- --------- -- -- ------ --- -- ------- --- Profit of consolidated companies 552 474 78 - Equity in profit (loss) of 14 13 1 - unconsolidated affiliated companies Equity in profit of Financial - 79 - (79 )6 Products' subsidiaries --- ------- ---- -- --------- -- -- ------ --- -- ------- --- Profit $ 566 $ 566 $ 79 $ (79 ) --- ------- ---- -- --------- -- -- ------ --- -- ------- --- 1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis. 2 Elimination of Financial Products revenues earned from Machinery and Engines. 3 Elimination of net expenses recorded by Machinery and Engines paid to Financial Products. 4 Elimination of interest expense recorded between Financial Products and Machinery and Engines. 5 Elimination of discount recorded by Machinery and Engines on receivables sold to Financial Products and of interest earned between Machinery and Engines and Financial Products. 6 Elimination of Financial Products profit due to equity method of accounting. Certain amounts have been reclassified to conform to the 2005 financial statement presentation. Page 28 -------------------------------------------------------------------------------- Caterpillar Inc. Supplemental Data for Results of Operations For The Six Months Ended June 30, 2005 (Unaudited) (Millions of dollars) Supplemental Consolidating Data ---------------------------------------------------- Consolidated Machinery Financial Consolidating and Engines 1 Products Adjustments ---------------- -------------- ------------ ---------------- Sales and revenues: Sales of Machinery and Engines $ 16,573 $ 16,573 $ - $ - Revenues of Financial Products 1,126 - 1,268 (142 )2 --- ------- ---- -- -------- -- -- ------ -- -- -------- ---- Total sales and revenues 17,699 16,573 1,268 (142 ) Operating costs: Cost of goods sold 13,105 13,105 - - Selling, general and administrative 1,533 1,337 218 (22 )3 expenses Research and development expenses 509 509 - - Interest expense of Financial 354 - 362 (8 )4 Products Other operating expenses 421 2 422 (3 )3 --- ------- ---- -- -------- -- -- ------ -- -- -------- ---- Total operating costs 15,922 14,953 1,002 (33 ) --- ------- ---- -- -------- -- -- ------ -- -- -------- ---- Operating profit 1,777 1,620 266 (109 ) Interest expense excluding Financial 130 133 - (3 )4 Products Other income (expense) 198 75 17 106 5 --- ------- ---- -- -------- -- -- ------ -- -- -------- ---- Consolidated profit before taxes 1,845 1,562 283 - Provision for income taxes 547 448 99 - --- ------- ---- -- -------- -- -- ------ -- -- -------- ---- Profit of consolidated companies 1,298 1,114 184 - Equity in profit (loss) of 43 38 5 - unconsolidated affiliated companies Equity in profit of Financial - 189 - (189 )6 Products' subsidiaries --- ------- ---- -- -------- -- -- ------ -- -- -------- ---- Profit $ 1,341 $ 1,341 $ 189 $ (189 ) --- ------- ---- -- -------- -- -- ------ -- -- -------- ---- 1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis. 2 Elimination of Financial Products revenues earned from Machinery and Engines. 3 Elimination of net expenses recorded by Machinery and Engines paid to Financial Products. 4 Elimination of interest expense recorded between Financial Products and Machinery and Engines. 5 Elimination of discount recorded by Machinery and Engines on receivables sold to Financial Products and of interest earned between Machinery and Engines and Financial Products. 6 Elimination of Financial Products profit due to equity method of accounting. Page 29 -------------------------------------------------------------------------------- Caterpillar Inc. Supplemental Data for Results of Operations For The Six Months Ended June 30, 2004 (Unaudited) (Millions of dollars) Supplemental Consolidating Data ---------------------------------------------------- Consolidated Machinery Financial Consolidating and Engines 1 Products Adjustments ---------------- -------------- ------------ ---------------- Sales and revenues: Sales of Machinery and Engines $ 13,102 $ 13,102 $ - $ - Revenues of Financial Products 961 - 1,150 (189 )2 --- ------- ---- -- ------- --- -- ------ -- -- -------- ---- Total sales and revenues 14,063 13,102 1,150 (189 ) Operating costs: Cost of goods sold 10,264 10,264 - - Selling, general and administrative 1,417 1,224 217 (24 )3 expenses Research and development expenses 445 445 - - Interest expense of Financial 240 - 245 (5 )4 Products Other operating expenses 359 - 463 (104 )3 --- ------- ---- -- ------- --- -- ------ -- -- -------- ---- Total operating costs 12,725 11,933 925 (133 ) --- ------- ---- -- ------- --- -- ------ -- -- -------- ---- Operating profit 1,338 1,169 225 (56 ) Interest expense excluding Financial 116 118 - (2 )4 Products Other income (expense) 111 49 8 54 5 --- ------- ---- -- ------- --- -- ------ -- -- -------- ---- Consolidated profit before taxes 1,333 1,100 233 - Provision for income taxes 367 287 80 - --- ------- ---- -- ------- --- -- ------ -- -- -------- ---- Profit of consolidated companies 966 813 153 - Equity in profit (loss) of 20 18 2 - unconsolidated affiliated companies Equity in profit of Financial - 155 - (155 )6 Products' subsidiaries --- ------- ---- -- ------- --- -- ------ -- -- -------- ---- Profit $ 986 $ 986 $ 155 $ (155 ) --- ------- ---- -- ------- --- -- ------ -- -- -------- ---- 1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis. 2 Elimination of Financial Products revenues earned from Machinery and Engines. 3 Elimination of net expenses recorded by Machinery and Engines paid to Financial Products. 4 Elimination of interest expense recorded between Financial Products and Machinery and Engines. 5 Elimination of discount recorded by Machinery and Engines on receivables sold to Financial Products and of interest earned between Machinery and Engines and Financial Products. 6 Elimination of Financial Products profit due to equity method of accounting. Certain amounts have been reclassified to conform to the 2005 financial statement presentation. Page 30 -------------------------------------------------------------------------------- Caterpillar Inc. Supplemental Data for Cash Flow For The Six Months Ended June 30, 2005 (Unaudited) (Millions of dollars) Supplemental Consolidating Data ------------------------------------------------------ Machinery Financial Consolidating Consolidated and Engines1 Products Adjustments ------------- ---------------- ------------- -------------- Cash flow from operating activities: Profit $ 1,341 $ 1,341 $ 189 $ (189 )2 Adjustments for non-cash items: Depreciation and amortization 744 426 318 - Undistributed profit of Financial - (189 ) - 189 3 Products Other (113 ) (129 ) (94 ) 110 4 Changes in assets and liabilities: Receivables - trade and other (742 ) (256 ) 19 (505 )4/ 5 Inventories (674 ) (674 ) - - Accounts payable and accrued expenses 236 118 131 (13 )4 Other - net 204 216 (7 ) (5 )4 -- ------ --- --- ------ ----- -- ------- -- -- ------- --- Net cash provided by operating activities 996 853 556 (413 ) -- ------ --- --- ------ ----- -- ------- -- -- ------- --- Cash flow from investing activities: Capital expenditures - excluding (402 ) (385 ) (17 ) - equipment leased to others Expenditures for equipment leased to (608 ) - (608 ) - others Proceeds from disposals of property, 304 18 286 - plant and equipment Additions to finance receivables (5,159 ) - (16,035 ) 10,876 5 Collections of finance receivables 3,444 - 13,894 (10,450 )5 Proceeds from the sale of finance 859 - 859 - receivables Net intercompany borrowings - (67 ) (9 ) 76 6 Investments and acquisitions (net of (8 ) (8 ) - - cash acquired) Other - net 51 13 38 - -- ------ --- --- ------ ----- -- ------- -- -- ------- --- Net cash used for investing activities (1,519 ) (429 ) (1,592 ) 502 -- ------ --- --- ------ ----- -- ------- -- -- ------- --- Cash flow from financing activities: Dividends paid (280 ) (280 ) - - Common stock issued, including treasury 278 278 - - shares reissued Treasury shares purchased (839 ) (839 ) - - Net intercompany borrowings - 9 67 (76 )6 Proceeds from long-term debt issued 3,979 390 3,589 - Payments on long-term debt (2,390 ) (30 ) (2,360 ) - Short-term borrowings - net 65 219 (154 ) - -- ------ --- --- ------ ----- -- ------- -- -- ------- --- Net cash provided by (used for) financing 813 (253 ) 1,142 (76 ) activities -- ------ --- --- ------ ----- -- ------- -- -- ------- --- Effect of exchange rate changes on cash 14 23 4 (13 )7 -- ------ --- --- ------ ----- -- ------- -- -- ------- --- Increase in cash and short-term investments 304 194 110 - Cash and short-term investments at beginning 445 270 175 - of period -- ------ --- --- ------ ----- -- ------- -- -- ------- --- Cash and short-term investments at end of $ 749 $ 464 $ 285 $ - period -- ------ --- --- ------ ----- -- ------- -- -- ------- --- 1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis. 2 Elimination of Financial Products profit after tax due to equity method of accounting. 3 Non-cash adjustment for the undistributed earnings from Financial Products. 4 Elimination of non-cash adjustments and changes in assets and liabilities related to consolidated reporting. 5 Reclassification of Cat Financial's cash flow activity from investing to operating for receivables that arose from the sale of inventory. 6 Net proceeds and payments to/from Machinery and Engines and Financial Products. 7 Elimination of the effect of exchange on intercompany balances. Page 31 -------------------------------------------------------------------------------- Caterpillar Inc. Supplemental Data for Cash Flow For The Six Months Ended June 30, 2004 (Unaudited) (Millions of dollars) Supplemental Consolidating Data ------------------------------------------------- Consolidated Machinery Financial Consolidating and Products Adjustments Engines1 -------------- ------------ ------------ -------------- Cash flow from operating activities: Profit $ 986 $ 986 $ 155 $ (155 )2 Adjustments for non-cash items: Depreciation and amortization 703 408 295 - Undistributed profit of Financial - (155 ) - 155 3 Products Other (58 ) (51 ) (66 ) 59 4 Changes in assets and liabilities: Receivables - trade and other (5,508 ) (131 ) 116 (5,493 )4/5 Inventories (921 ) (921 ) - - Accounts payable and accrued expenses 476 345 (25 ) 156 4 Other - net (275 ) (385 ) 90 20 4 -- ------ ---- -- ------ -- -- ------ -- -- ------ ---- Net cash provided by (used for) operating (4,597 ) 96 565 (5,258 ) activities -- ------ ---- -- ------ -- -- ------ -- -- ------ ---- Cash flow from investing activities: Capital expenditures - excluding equipment (293 ) (262 ) (31 ) - leased to others Expenditures for equipment leased to (535 ) (1 ) (534 ) - others Proceeds from disposals of property, 281 13 268 - plant and equipment Additions to finance receivables (4,221 ) - (7,702 ) 3,481 5 Collections of finance receivables 2,939 - 5,670 (2,731 )5 Proceeds from the sale of finance 645 - 1,181 (536 )5 receivables Additions to retained interests in - - (5,038 ) 5,038 6 securitized trade receivables Collections of retained interests in 4,476 - 4,476 - securitized trade receivables Net intercompany borrowings - 201 (43 ) (158 )7 Investments and acquisitions (net of cash (5 ) (7 ) 2 - acquired) Other - net (10 ) (8 ) (2 ) - -- ------ ---- -- ------ -- -- ------ -- -- ------ ---- Net cash provided by (used for) investing 3,277 (64 ) (1,753 ) 5,094 activities -- ------ ---- -- ------ -- -- ------ -- -- ------ ---- Cash flow from financing activities: Dividends paid (254 ) (254 ) - - Common stock issued, including treasury 107 107 - - shares reissued Treasury shares purchased (250 ) (250 ) - - Net intercompany borrowings - 43 (201 ) 158 7 Proceeds from long-term debt issued 3,322 255 3,067 - Payments on long-term debt (1,571 ) (29 ) (1,542 ) - Short-term borrowings - net 45 133 (88 ) - -- ------ ---- -- ------ -- -- ------ -- -- ------ ---- Net cash provided by financing activities 1,399 5 1,236 158 -- ------ ---- -- ------ -- -- ------ -- -- ------ ---- Effect of exchange rate changes on cash 46 39 1 6 8 -- ------ ---- -- ------ -- -- ------ -- -- ------ ---- Increase in cash and short-term investments 125 76 49 - Cash and short-term investments at beginning 342 220 122 - of period -- ------ ---- -- ------ -- -- ------ -- -- ------ ---- Cash and short-term investments at end of $ 467 $ 296 $ 171 $ - period -- ------ ---- -- ------ -- -- ------ -- -- ------ ---- 1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis. 2 Elimination of Financial Products profit after tax due to equity method of accounting. 3 Non-cash adjustment for the undistributed earnings from Financial Products. 4 Elimination of non-cash adjustments and changes in assets and liabilities related to consolidated reporting. Receivables amounts include adjustment for consolidated non-cash receipt of retained interests in securitized trade receivables. 5 Reclassification of Cat Financial's cash flow activity from investing to operating for receivables that arose from the sale of inventory. 6 Elimination of Cat Financial's additions to retained interests in securitized trade receivables that arose from an intercompany purchase of receivables. 7 Net proceeds and payments to/from Machinery and Engines and Financial Products. 8 Elimination of the effect of exchange on intercompany balances. Certain amounts have been reclassified to conform to the 2005 financial statement presentation. Page 32 -------------------------------------------------------------------------------- Safe Harbor Statement under the Securities Litigation Reform Act of 1995 Certain statements contained in our second-quarter 2005 results release and prepared statements from the related results webcast are forward-looking and involve uncertainties that could significantly impact results. The words 'believes,' 'expects,' 'estimates,' 'anticipates,' 'will be,' 'should' and similar words or expressions identify forward-looking statements made on behalf of Caterpillar. Uncertainties include factors that affect international businesses, as well as matters specific to the company and the markets it serves. World Economic Factors Our projection for 3 to 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. We expect the U.S. economy to continue to grow at about 3.5 percent, 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 4 percent or less 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 a significant slowing in the European economy or a collapse in commodity prices. Those developments would likely 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 will be concentrated in Australia, India and Indonesia. 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 33 -------------------------------------------------------------------------------- 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 raised 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). 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 34 -------------------------------------------------------------------------------- Financial Products Division Factors Inherent in the operation of Cat Financial is the credit risk associated with its customers. The creditworthiness of each customer, and the rate of delinquencies, repossessions and net losses on customer obligations are directly impacted by several factors, including, but not limited to, relevant industry and economic conditions, the availability of capital, the experience and expertise of the customer's management team, commodity prices, political events, and the sustained value of the underlying collateral. Additionally, interest rate movements create a degree of risk to our operations by affecting the amount of our interest payments and the value of our fixed rate debt. Our 'match funding' policy addresses interest rate risk by aligning the interest rate profile (fixed or floating rate) of our debt portfolio with the interest rate profile of our receivables portfolio (loans and leases with customers and dealers) within pre-determined ranges on an ongoing basis. To achieve our match funding objectives, we issue debt with a similar interest rate profile to our receivables and also use interest rate swap agreements to manage our interest rate risk exposure to interest rate changes and in some cases to lower our cost of borrowed funds. If interest rates move upward more sharply than anticipated, our financial results could be negatively impacted. 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. 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 price increases announced in early 2005 will hold in the marketplace. 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. 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: â€¢ Any sudden drop in consumer or business confidence; â€¢ Delays in legislation needed to fund public construction; â€¢ Regulatory or legislative changes that slow activity in key industries; and/ or â€¢ 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 35 -------------------------------------------------------------------------------- This information is provided by RNS The company news service from the London Stock Exchange

Companies

CT Automotive Group (CTA)

Friday, 17th May 2024

COMPANIES COVERED:

BT.A LAND FA.

BT Group continues to bask in yesterday’s well received earnings news and FireAngel jumps on clarity over getting a possible takeover across the line but Land Securities investors fail to find inspiration despite macroeconomic woes easing.

Full Archive

UK 100

Latest directors dealings

17 hours ago Gran Tierra Energy Inc. (CDI)
18 hours ago Wheaton Precious Metals Corp.NPV (CDI)
18 hours ago H&T Group
18 hours ago Centrica
19 hours ago Vistry Group

All directors dealings today