21st Apr 2005 07:00
Caterpillar Inc20 April 2005 Caterpillar Inc.1Q Earnings Release April 20, 2005 -------------------------------------------------------------------------------- FOR IMMEDIATE RELEASE Caterpillar Achieves Record Profitability; Company Raises Full-Year Outlook. PEORIA, Ill. -- Caterpillar Inc. (NYSE: CAT) today reported first-quarter salesand revenues of $8.34 billion and record profit of $581 million, or $1.63 pershare. Sales and revenues were up 29 percent and profit was up 38 percentcompared to the first quarter of 2004. "These record results are further evidence of the strength of the manyglobal markets we serve and our ability to successfully meet this continuingstrong market demand," said Chairman and Chief Executive Officer JimOwens. "Thanks to the commitment of Team Caterpillar -- our employees,dealers and suppliers around the world - we are working diligently to improveour performance while meeting customer needs. Our operating margins in the firstquarter were the best since the first half of 2004 when material cost pressuresbegan to accelerate. We have an unwavering commitment to fulfilling customerdemand while improving operating margins through Price Realization, which morethan offsets material cost increases, and enhanced manufacturing efficiencies." Sales and revenues of $8.34 billion were up $1.86 billion, or 29 percent,compared to $6.48 billion in the first quarter of 2004. The increase in salesand revenues was driven by $1.44 billion of higher Machinery and Engines volume,$250 million of increased price realization, a $102 million favorable impact ofCurrency on sales due primarily to the strengthening euro and British pound and$72 million of higher Financial Products revenues. Profit of $581 million or $1.63 per share was up $161 million, or 38 percent,compared to $420 million or $1.19 per share in the first quarter of 2004. Themain contributors to the profit increase were higher Sales Volume of $521million and higher price realization of $250 million. Partially offsetting thesefavorable items were $489 million of higher Core Operating Costs and $48 millionof higher Retirement Benefits. "We remain squarely focused on responding to customer needs andimproving operating performance, and we are on track to meet our long-termfinancial targets," Owens said. "We're well positionedfor growth and will continue to build on our record results, utilizing the powerof 6 Sigma across the value chain to further increase supply chain efficienciesand performance. While we still face selected industry-wide issues associatedwith material availability, our suppliers have responded and materialavailability is improving steadily." Page 1-------------------------------------------------------------------------------- Outlook We are raising our outlook for both sales and revenues and profit per share. Wenow expect 2005 sales and revenues to be up 16 to 18 percent and profit pershare to be up 35 to 40 percent from 2004. "As 2005 unfolds, we are encouraged by the fundamental strength of thekey markets we serve," Owens said. "Mining companies will continue toadd capacity to meet anticipated growth in demand for the next several years. Inaddition, global demand for energy, including coal as well as oil and gas, andlarge infrastructure projects are growing. Likewise, commercial construction andhousing in most countries will create even further demand for our products andservices. This positions Team Caterpillar to deliver results beyond our initialexpectations for the year." (Complete outlook begins on page 7.) For 80 years, Caterpillar has been building the world's infrastructure and, inpartnership with our independent dealers, is driving positive and sustainablechange on every continent. Caterpillar is a technology leader and the world'slargest maker of construction and mining equipment, diesel and natural gasengines and industrial gas turbines. More information is available at http://www.CAT.com/. Note: Glossary of terms included on pages 14-16; first occurrence of terms shown in bold italics. Page 2-------------------------------------------------------------------------------- DETAILED ANALYSIS First Quarter 2005 vs. First Quarter 2004 Sales and Revenues Sales and revenues for the first quarter of 2005 were $8.339 billion, up $1.859billion or 29 percent from first quarter 2004. The increase was due to higherMachinery volume of $1.010 billion, higher Engines volume of $425 million,improved price realization of $250 million, the favorable impact of currency onsales of $102 million due primarily to the strengthening euro and British poundand higher Financial Products revenues of $72 million. Sales and Revenues by Geographic Region------------------------------------------------------------------------------------------------------------------------(Millions of Total % North % EAME % Latin % Asia/ %dollars) Change America Change Change America Change Pacific Change ------- ------ ------- ------ ------- ------ -------- ------ -------- -----1st Quarter 2004-------------------Machinery $ 4,152 $ 2,283 $ 963 $ 295 $ 611Engines1 1,850 870 559 195 226Financial Products2 478 336 84 30 28 ------ ------- ------- -------- -------- $ 6,480 $ 3,489 $ 1,606 $ 520 $ 865 ------ ------- ------- -------- -------- 1st Quarter 2005-------------------Machinery $ 5,400 30% $ 2,928 28% $ 1,355 41% $ 440 49% $ 677 11%Engines1 2,389 29% 1,200 38% 743 33% 157 -19% 289 28%Financial Products2 550 15% 390 16% 87 4% 31 3% 42 50% ------ ------- ------- -------- -------- $ 8,339 29% $ 4,518 29% $ 2,185 36% $ 628 21% $ 1,008 17% ------ ------- ------- -------- -------- 1 Does not include internal engine transfers of $619 million and $484 million in 2005 and 2004, respectively. Internal engine transfers are valued at prices comparable to those for unrelated parties. 2 Does not include revenues earned from Machinery and Engines of $62 million and $39 million in 2005 and 2004, respectively.-------------------------------------------------------------------------------- Page 3-------------------------------------------------------------------------------- Machinery Sales Machinery sales were $5.400 billion in first quarter 2005, a $1.248 billion or30 percent increase over first quarter 2004, and a record for any quarter. Salesvolume was up about 24 percent. Improved price realization accounted for about 4percent of the sales change, while the remainder of the sales change was due tothe favorable impact of currency. A portion of the higher volume was due to anincrease in dealer inventories, which was the result of more machines in transitor dealer preparation to support future deliveries. Dealer inventories, relativeto dealer deliveries to end users, were marginally lower than a year earlier. • North America sales were up 28 percent over first quarter 2004, with sales volume up about 24 percent and the remainder due to improved price realization. Sales volume benefited from strong demand in all applications. Housing construction increased in response to low mortgage interest rates and there is a large backlog of unused permits. Nonresidential construction benefited from healthy business cash flows. Both coal and metals prices and production increased, driving sizable increases into mining deliveries. • EAME sales in first quarter 2005 were 41 percent higher than a year earlier. Volume, up about 29 percent, was the biggest contributor. The favorable impact of currency added about 6 percent and improved price realization added the remainder. Low interest rates in Europe are beginning to revive construction, and both Africa/Middle East (AME) and the CIS continued to benefit from high energy and metals prices and production. Both AME and the CIS are investing in new capacity and upgrading infrastructure. • Latin America first quarter sales were 49 percent higher than a year earlier. Volume contributed about 41 percent, improved price realization added about 7 percent and the remainder was due to currency. Mining benefited from higher prices and production while low interest rates, increased spending on infrastructure and better economic growth boosted construction. • Asia/Pacific sales were up 11 percent over first quarter 2004. Increased volume contributed about 8 percent, improved price realization added about 2 percent and the remainder was due to currency. Volume in China declined, but was largely offset by increases in Australia and Indonesia. Coal mining increased sharply in Australia and Indonesia, benefiting from higher coal prices. Engines Sales Engines sales were $2.389 billion in first quarter 2005, a $539 million or 29percent increase over first quarter 2004. Sales volume was up about 23 percent,improved price realization accounted for about 4 percent and the remainder wasdue to the favorable impact of currency. • North America sales were up 38 percent over first quarter 2004. Sales of on-highway truck engines increased 33 percent, as truck manufacturers successfully increased line rates to serve an ongoing expansion and replacement cycle driven by high average fleet age, high freight demand, and improved freight carrier profitability. Sales of engines to the petroleum sector increased 54 percent compared to last year, with widespread increases in sales of engines to gas compression, and Original Equipment Manufacturer (OEM) equipment for drilling and well servicing, supported by higher energy prices. Sales of engines to the marine sector increased 59 percent, benefiting from strengthening workboat activity. Sales of engines to the electric power sector gained 3 percent with increased demand for critical standby generator sets to support sustainability for telecommunications and financial service applications. Sales of reciprocating engines were partially offset by reduced turbine sales as fuel prices increased faster than electricity rates. Dealer inventories of reciprocating engines increased above selling rates due to higher levels of in-transit inventory with increasing volume. Page 4-------------------------------------------------------------------------------- • EAME sales were up 33 percent over first quarter 2004. Sales of engines into the electric power sector increased 65 percent due to widespread increased demand for prime, cogeneration and standby systems, ongoing Middle East reconstruction demand, and sales resulting from the acquisition of Turbomach. Sales of engines to the industrial sector increased 26 percent due to strong demand for various types of OEM equipment and the favorable impact of currency. In addition, the comparison is with a reduced first quarter 2004 base that was impacted by the fourth quarter 2003 pre-buy of engines prior to the implementation of European Tier II emissions regulations. Sales of engines to the marine sector increased 73 percent, with increased demand for inland waterways workboats and larger engines for oceangoing vessels, as well as the favorable effects of currency. Dealer inventories increased above selling rates due to increasing volume, increased installation time associated with more complex applications, and some investment in inventory from previously reduced levels to serve ongoing demand increases. • Latin America sales decreased 19 percent versus first quarter 2004, with decreases in most sectors. Sales of marine engines decreased 60 percent, with all of the reduction due to the absence of a large marine project that occurred in 2004. Sales of electric power engines in Latin America decreased 9 percent, while sales of engines to the petroleum sector decreased 4 percent. Dealer inventory increased above selling rates primarily due to higher levels of in-transit inventory in the delivery process. • Asia/Pacific sales were up 28 percent over first quarter 2004 with increases in all sectors, led by a 36 percent increase in sales of petroleum engines, with all of the increase coming from turbines and turbine related services to support increased exploration and production. Sales of engines to the marine sector increased 49 percent with strong demand for oceangoing, pleasure craft and offshore supply vessels, followed by a 9 percent increase in sales of electric power engines. Current months of sales of dealer inventory are above first quarter 2004 due to higher levels of in-transit inventory in the delivery process. Financial Products Revenues Financial Products revenues were $550 million, an increase of $72 million or 15percent from first quarter 2004. The increase in revenues was due primarily to a$65 million favorable impact from continued growth of Earning Assets at CatFinancial. Page 5-------------------------------------------------------------------------------- Operating Profit Higher sales volume in all regions resulted in a favorable operating profitimpact of $521 million, and improved price realization favorably impactedoperating profit by $250 million, which more than offset increases in materialcosts. Improved profitability of $13 million at Financial Products alsocontributed to the increase in operating profit. Partially offsetting the favorable items were $489 million in higher coreoperating costs, $48 million of higher retirement benefits and a $37 millionunfavorable impact of currency on operating profit. Manufacturing costsrepresented $439 million of the total increase in core operating costs. Roughlytwo-thirds of the manufacturing cost increase was attributable to variable costincreases - primarily material with some related supply chain inefficiencies.The remaining amount represented normal and expected period manufacturing coststo support the increase in volume. We continued to satisfy our customers in 2005 by delivering record first-quartersales. The core operating cost increase reflected above was largely attributableto increases in manufacturing costs to meet this demand. These additionalmanufacturing costs included higher material costs resulting primarily fromsteel-related increases, higher manufacturing costs to support increased volume,inefficiencies due to supply constraints, a United Auto Workers (UAW) contractratification payment, and higher freight and expediting costs to ensure timelydelivery of material. The remainder of the core operating cost increase wasmainly due to planned spending on general support programs. Operating Profit by Principal Line of Business-------------------------------------------------------------------------------(Millions of dollars) 1st Quarter 1st Quarter Change 2004 2005 $ ------------- ------------ -----------Machinery1 $ 441 $ 496 $ 55Engines1 41 183 142Financial Products 111 124 13Consolidating Adjustments (25 ) (47 ) (22 ) ------------- ------------ -----------Consolidated Operating Profit $ 568 $ 756 $ 188 ------------- ------------ ----------- 1 Caterpillar operations are highly integrated; therefore, the company uses a number of allocations to determine lines of business operating profit for Machinery and Engines. Operating Profit by Principal Line of Business • Machinery operating profit of $496 million was up $55 million, or 12 percent, from first quarter 2004. The favorable impact of higher sales volume and improved price realization was partially offset by higher core operating costs, higher retirement benefits and the unfavorable impact of currency. • Engines operating profit of $183 million was up $142 million, or 346 percent, from first quarter 2004. The favorable impact of higher sales volume and improved price realization was partially offset by higher core operating costs, higher retirement benefits and the unfavorable impact of currency. • Financial Products operating profit of $124 million was up $13 million, or 12 percent, from first quarter 2004. The increase was primarily due to a $30 million impact from the growth of earning assets, partially offset by an $11 million increase in operating expenses primarily related to growth, at Cat Financial. Page 6-------------------------------------------------------------------------------- Other Profit/Loss Items • Other income/expense was income of $108 million compared with income of $61 million in first quarter 2004 for a favorable impact of $47 million. The change was primarily due to the favorable impact of currency gains of $41 million. This, combined with the $37 million unfavorable impact on operating profit, created a net favorable impact of currency on profit before tax of $4 million. • The provision for income taxes in the first quarter reflects an estimated annual tax rate of 29 percent for 2005. We are anticipating a 29 percent rate for the full year compared to 27 percent in 2004 primarily due to the impact of the phase-out provision of the American Jobs Creation Act permitting only 80 percent of Extraterritorial Income Exclusion (ETI) benefits in 2005 as well as a change in our geographic mix of profits. • The equity in profit/loss of unconsolidated affiliated companies favorably impacted profit by $8 million over first quarter 2004, primarily driven by increased profitability at Shin Caterpillar Mitsubishi Ltd. (SCM). Employment At the end of the first quarter of 2005, Caterpillar's worldwide employment was79,988 compared with 70,815 one year ago. The increase is primarily due toapproximately 3,500 hourly labor additions to support increased volume, theconversion of approximately 2,000 supplemental employees to full-time employmentin our Midwestern U.S. facilities, and the addition of approximately 2,000employees from acquisitions and growing Caterpillar Logistics operations. Sales and Revenues Outlook We project another record year in 2005. We expect company sales and revenueswill increase 16 to 18 percent, with Machinery and Engines volume increasingabout 8 to 10 percent. We expect improved price realization to add about 5.5percent, the favorable impact of currency to add about 1.5 percent with the restcoming from Financial Products revenues. • Economic growth in most countries is moderate and key inflation measures are well within target ranges. As a result, we expect central banks will remain cautious about raising interest rates, allowing the current recovery to continue throughout the year. We project the world economy will grow about 3.5 percent. • Investment sectors are generally faring better than consumer sectors this recovery. Business profits in many countries are at, or near, record shares of national incomes and companies are using profits to boost productivity. Low interest rates are encouraging companies to upgrade and expand aged capital equipment and, more recently, structures. Recoveries in nonresidential construction should strengthen this year, increasing the demand for reliable standby electrical power. • Housing prices are increasing significantly in many countries and this has begun to encourage construction to alleviate housing shortages. Low interest rates and rising employment should benefit residential construction in most regions. • Most governments have not invested enough in infrastructure for years, which is now creating inefficiencies, particularly in transportation. Governments have started to allocate more of the revenues rising from faster economic growth to infrastructure, and such construction should improve throughout the year. • Mining and energy companies underinvested in capacities for years due to unfavorable prices and capacities are now insufficient. Last year, prices surged above the minimums needed to make investment attractive and companies increased spending. Prices are expected to remain above those minimums this year and mining and energy companies should again increase investments. Page 7-------------------------------------------------------------------------------- • Increased international trade and an aging ship fleet are driving strong growth in shipbuilding. Demand for support vessels to cope with more port congestion and increased offshore oil and gas production is also increasing. Sales and Revenues Outlook - Midpoint of Range--------------------------------------------------------------------------------------------------------(Millions of dollars) 2004 2005 % Actual Outlook1 Change -------------- -------------- --------------Machinery and Engines North America $ 14,521 $ 17,250 19 % EAME 7,505 9,000 20 % Latin America 2,372 2,750 16 % Asia/Pacific 3,938 4,150 5 % -------------- --------------Total Machinery and Engines 28,336 33,150 17 % -------------- --------------Financial Products2 1,970 2,300 17 % -------------- --------------Total $ 30,306 $ 35,450 17 % -------------- -------------- 1 Based on the sales expectations by geographic region, the company forecasts Consolidated Sales and Revenues to increase in the range of 16 to 18 percent versus 2004. For purposes of this chart, numbers are shown at the middle of the outlook range (i.e., 17 percent). 2 Does not include revenues earned from Machinery and Engines of $200 million and $199 million in 2005 Outlook and 2004, respectively. North America (United States and Canada) Machinery and Engines sales areexpected to increase about 19 percent in 2005. • The U.S. economy appeared to grow above a 4 percent rate in the first quarter and employment is strengthening further. While inflation is gaining more attention, most inflation measures do not indicate an immediate problem. Consequently, we believe the Fed will continue gradually raising the Federal funds rate to about 4 percent by the end of the year. Overall, interest rates should continue to support growth, particularly in business investment, and the economy should grow close to 4 percent in 2005. • Housing activity continued to strengthen in the first quarter. The backlog of unused permits, increases in new home prices and low mortgage rates suggest another good year for housing. • Nonresidential construction recovered from a steep 3-year decline last year and a significant recovery is needed to bring the capacity of this sector in line with the size of the economy. Improved financial conditions and good business cash flows should drive a strong recovery this year. • Prices for metals and coal are well above year-earlier prices and production increased in the first quarter. Investment is increasing rapidly. • Trucking companies, which are experiencing improved profitability, should significantly increase purchases to handle strong freight demand and upgrade aging fleets. • The Canadian economy, benefiting from low interest rates and high commodity prices, should grow about 3 percent in 2005. Page 8-------------------------------------------------------------------------------- EAME Machinery and Engines sales are expected to increase about 20 percent in2005. • The Euro-zone economy slowed in the last half of 2004 and showed little improvement in the first quarter of 2005. Weak growth is forcing the European Central Bank to hold interest rates steady, and any rate hikes are not likely before the fourth quarter. Low interest rates are beginning to revive construction, particularly housing, and encourage some replacement buying. The U. K. and Central European economies are performing better, which should maintain overall European growth near 2 percent in 2005. • Both AME and the CIS are major beneficiaries of favorable commodity prices and increased production of metals and energy. We expect both regions will continue using higher incomes to increase capacity and improve infrastructures. The AME economy should grow over 5 percent in 2005 and the CIS economy more than 6 percent, the third consecutive year of good growth for both. • A positive impact of currency on sales is expected to contribute about 4 percent of the increase. Latin America Machinery and Engines sales are expected to increase about 16percent in 2005. • Latin American economies should grow about 4 percent in 2005, continuing the recovery that started in late 2003. Projected positives include higher commodity prices, low inflation and increased foreign direct investment. • Our outlook assumes that mines will invest heavily in new capacity and equipment. Better economic growth is causing some governments to increase infrastructure spending to correct for years of underinvestment. Asia/Pacific Machinery and Engines sales are expected to increase about 5percent in 2005. • We anticipate that interest rates will rise slightly this year and we expect regional growth to slow to about 6 percent. Interest rates are expected to support recoveries in consumer spending and business investment while competitive exchange rates are expected to further boost exports. We anticipate that continued economic growth will boost nonresidential construction and demand for standby electrical power. • Contract prices for coal, particularly coking coal, will increase substantially this year and we expect coal mining will again be a major contributor to sales. Metals mining should benefit from higher contract prices for iron ore and favorable base metals prices. Financial Products revenues are expected to increase about 17 percent in 2005. • We expect continued growth in Financial Products, with revenues expected to increase primarily due to higher average earning assets in 2005. Page 9-------------------------------------------------------------------------------- Profit Outlook We expect profit per share to be up 35 to 40 percent from 2004. We expect 2005operating profit to increase between $1.02 and $1.17 billion from 2004. The yearwill benefit from increased price realization, including the effect of thepreviously announced mid-year price action, as well as increased volume. Weexpect our costs in the first half of 2005 will appear substantially higher thancosts in the first half of 2004 because this comparative period contains lowermaterial (primarily steel-related) costs. We anticipate continued pressure onour core operating costs throughout the year, with some relief on material costsin the last six months. As a result, we expect the last half of 2005 to bestronger than the first half. Supplemental Information Information formerly located in this section is now included in tabular formatat http://www.cat.com/investor under the Quarterly Supplemental Informationsection. Page 10-------------------------------------------------------------------------------- Question and Answer General Q1: Will your 2007 emissions solution be based on ACERT(R) technology? A: Yes. Caterpillar will utilize the ACERT Technology to meet the 2007on-highway emission requirements. Caterpillar has shipped over 200,000 of the five engine models equipped withACERT Technology thus far. The current field population of engines featuringACERT Technology continues to exhibit strong reliability. Teardowns of highermileage engines display excellent longevity of the wear components.Additionally, ACERT Technology serves as the platform for complying withemissions regulations in off-highway applications. As of March 2005, over 20different Cat machine models equipped with engines featuring ACERT Technologyhave gone into production. ACERT Technology reduces emissions via a 'building blocks'systems approach to air management, electronics and fuel systems. For 2007on-highway engines, Caterpillar will build on the ACERT Technology foundation byutilizing a diesel particulate filter (DPF) to trap particulates and byintroducing Clean Gas Induction (CGI). A differentiated approach, CGI will drawcool, clean filtered gas from downstream of the DPF and then put it into theengine's intake air system to achieve additional NOx reduction. With ACERT for2007, Caterpillar on-highway engine customers can expect the same reliability,fuel economy, service intervals and durability that they have come to expectfrom Caterpillar. Caterpillar currently has built engines to 2007 standards. A truck with 2007technology has been demonstrated to the Department of Energy and was recentlyexhibited at the March 2005 Mid-America Truck Show in Louisville, Kentucky.Moreover, units have been provided to OEMs for summer-cooling tests, andadditional field evaluation units are planned to ship to fleet customersbeginning in mid-2005. First Quarter 2005 vs. First Quarter 2004 Q2: Are you achieving price realization associated with the announced priceincreases in 2004 and 2005? A: Yes. In general, the price increases are holding in the marketplace. However,as we have discussed over the last few quarters, there is a delay betweenannounced price increases and price realization due to price protection. Priceprotection means that for most products, if there is a firm customer orderbefore a price increase is announced, we won't harm customers by raising theprice on that order already on hand. With recent long lead times for productdelivery attributable to the increase in customer demand, the lag between theannounced effective date and the actual realization date has been even longerthan usual. Page 11-------------------------------------------------------------------------------- Q3: Can you please provide more detail on your increases in Core Operating Costsin first quarter 2005 vs. first quarter 2004? A: The following table summarizes the increase in core operating costs in firstquarter 2005 vs. first quarter 2004: Core Operating Cost Change------------------------------------------------------------------------------------------------------ 1st Quarter 2005 vs. 1st Quarter 2004 --------------------Manufacturing Costs $ (439 )SG&A (46 )R&D (4 )Total $ (489 ) -------------------- Roughly two-thirds of the manufacturing cost increase is attributable tovariable cost increases - primarily material with some related supply chaininefficiencies. Material costs, particularly steel, and volume relatedmanufacturing and supply chain inefficiencies began accelerating more rapidly inthe second half of 2004. As a result, first quarter of 2005 vs. the firstquarter of 2004 is a tough comparison. We expect the second quarter comparisonwill also be difficult. Manufacturing costs also include period costs associated with building ourproducts. Period manufacturing costs increased 15 percent or approximately $100million to support a 30 percent increase in Machinery and Engines sales. Inaddition, we made a UAW contract ratification payment. Machinery and Engines SG&A declined as a percentage of sales from 9.8 percent infirst quarter 2004 to 8.3 percent in first quarter 2005 but was up $46 millionvs. 2004 excluding the impact of currency and retirement benefits. Machinery and Engines operating margins are improving compared with the secondhalf of 2004. Machinery and Engines------------------------------------------------------------------------------------------------------------ Operating Profit as a % of Sales Q1 '04 Q2 '04 Q3 '04 Q4 '04 Q1 '05---------------- ---------- ------------- ------------ -------------- 8.0% 9.7% 7.9% 7.6% 8.7% Q4: Are you seeing any evidence yet of improvement in supply chain conditions? A: Yes. As the plants strive to further ramp-up production in 2005 from record2004 levels to meet continued strong growth in demand, availability of tires,castings, and several other critical components remains tight. However, theplants are reporting that material flow continues to improve, and they have beenable to raise production levels. Page 12-------------------------------------------------------------------------------- Outlook Q5: Are the industries you serve approaching a peak after seeing sales andrevenue growth in 2003, 2004 and 2005? A: We don't think so. This recovery follows a four-year period of industryweakness, with flat company sales from 1999 to 2002. Extended weak periods inthe early 1980s and 1990s were followed by lengthy recoveries, with companysales doubling over a five to six-year period. In addition, many industries we serve still have growth potential. • In the United States, non-residential construction and mining have not yet regained prior peaks. Passage of a new highway bill should support further growth in highway construction. • In the Euro countries, economic recovery has not really started, even after four years of weak growth. However, low interest rates are boosting housing construction. • AME, Latin America and the CIS are seeing gains from better commodity prices. Their economies, along with construction, are recovering from years of weak growth. • Asian economies have demonstrated a long-term ability to grow rapidly, which requires more construction. We expect that to continue. • Finally, capacities in mining and energy are inadequate to meet today's requirements. Rebuilding adequate capacity and meeting future growth in demand for metals and energy will require significant further investment. Q6: What is the basis of the volume increase in this outlook compared with theJanuary outlook for 2005? A: First-quarter sales were stronger than expected and accounted for some of theincrease. The first-quarter increase, which was related to even more robusteconomic conditions than expected, prompted us to conclude sales were on astronger path for the rest of the year. In particular, housing starts in theUnited States are better than expected and the recovery in non-residentialconstruction appears to be gaining momentum. Metals and energy prices have beenhigher than expected, which is benefiting sales to mining and into thedeveloping countries. Q7: What is your current view on material costs? Do you believe there will besome relief in the second half and can you provide more detail on steel andtires? A: The 2005 materials environment continues to be challenging, as steel pricescontinued to rise in the first quarter. In the United States, foundry and forgeshop product prices were up 3.2 percent compared to fourth quarter 2004 and theWorld Bank's steel price index was up 3.3 percent versus the fourthquarter 2004. We now expect material costs to be slightly higher than originallyexpected. We don't expect steel prices to decline overall until thesecond half of 2005 at the earliest. Material availability is increasing as supplier confidence and willingness toinvest in capacity continues to improve. We are beginning to see improveddelivery performances from the second half of 2004. Steel casting and special bar quality steel availability continues to improve.This has allowed us to improve the flow of steel to the forge shops, machineshops and into our facilities. Tires continue to be a challenge, although availability is improving. We areworking with dealers, customers, and suppliers and are exercising a variety ofalternatives including bias-for-radial substitutions, adding new suppliers,adding capacity and considering retreads in some applications. Page 13-------------------------------------------------------------------------------- Q8: Do you still expect price realization to more than offset material costincreases? A: Yes. Q9: Is incentive compensation a factor in the increase in core operating costsfor 2005? A: Based on our latest outlook, incentive compensation is expected to beapproximately 15 to 20 percent lower than in 2004. Q10: What impact does Caterpillar expect from the American Jobs Creation Act of2004? A: The American Jobs Creation Act of 2004 signed by President Bush on October22, 2004 repeals Extraterritorial Income Exclusion (ETI) benefits, which arephased out over 2005 and 2006. Caterpillar will receive 80 percent of the 2005ETI benefit and 60 percent of the 2006 ETI benefit. After 2006, Caterpillar willreceive no ETI benefit. The benefit of ETI was a reduction of approximately 5percentage points on Caterpillar's tax rate in 2003 and 2004. Theanticipated impact of the ETI phase-out is reflected in the first quartereffective tax rate and our outlook. We are currently studying the dividend repatriation provisions of the AmericanJobs Creation Act of 2004 and our cash needs around the world. We will make adecision on repatriation of non-U.S. earnings in the second quarter, and thepotential impact has not been included in our first-quarter effective tax rateor our outlook. Q11: Can you comment on Caterpillar's financial strength and cash flow? A: Caterpillar's financial position is very strong. Our pension plansare well funded and stockholders are benefiting from both higher dividends andthe share repurchase program. In the first quarter of 2005, we repurchasedalmost 3.9 million shares. We expect 2005 operating cash flow from the Machineryand Engines line of business to exceed 2004 levels even though inventories haverisen because of higher sales volume and supply chain inefficiencies. Q12: Are margins improving in this outlook? A: Yes. Overall we expect consolidated operating profit as a percent of salesand revenues to improve to 10.7 percent. The improvements from volume and pricerealization are expected to more than offset changes in core operating costs. GLOSSARY OF TERMS 1. Consolidating Adjustments - Eliminations of transactions between Machinery and Engines and Financial Products. 2. Core Operating Costs - Machinery and Engines operating cost change adjusted for volume. It excludes the impact of currency and retirement benefits. Page 14-------------------------------------------------------------------------------- 3. Currency - With respect to sales and revenues, currency represents the translation impact on sales resulting from changes in foreign currency exchange rates versus the U.S. dollar. With respect to operating profit, currency represents the net translation impact on sales and operating costs resulting from changes in foreign currency exchange rates versus the U.S. dollar. With respect to profit before tax, currency represents the net translation impact on sales, operating costs and other income/expense resulting from changes in foreign currency exchange rates versus the U.S. dollar. Also included in the currency impact on other income/expense are the effects of currency forward and option contracts entered into by the company to reduce the risk of fluctuations in exchange rates and the net effect of changes in foreign currency exchange rates on our foreign currency assets and liabilities. Currency includes the impacts on sales and operating profit for the Machinery and Engines lines of business only; currency impacts on the Financial Products line of business are included in the Financial Products portions of the respective analyses. 4. EAME - Geographic region including Europe, Africa, the Middle East and the Commonwealth of Independent States (CIS). 5. Earning Assets - These assets consist primarily of total net finance receivables plus retained interests in securitized trade receivables, plus equipment on operating leases, less accumulated depreciation at Cat Financial. Net finance receivables represent the gross receivables amount less unearned income and the allowance for credit losses. 6. Engines - A principal line of business including the design, manufacture, marketing and sales of engines for Caterpillar machinery, electric power generation systems; on-highway vehicles and locomotives; marine, petroleum, construction, industrial, agricultural and other applications; and related parts. Reciprocating engines meet power needs ranging from 5 to over 22,000 horsepower (4 to over 16 200 kilowatts). Turbines range from 1,200 to 20,500 horsepower (900 to 15 000 kilowatts). 7. Financial Products - A principal line of business consisting primarily of Caterpillar Financial Services Corporation (Cat Financial), Caterpillar Insurance Holdings, Inc. (Cat Insurance), Caterpillar Power Ventures Corporation (Cat Power Ventures) and their respective subsidiaries. Cat Financial provides a wide range of financing alternatives to customers and dealers for Caterpillar machinery and engines, Solar gas turbines, as well as other equipment and marine vessels. Cat Financial also extends loans to customers and dealers. Cat Insurance provides various forms of insurance to customers and dealers to help support the purchase and lease of our equipment. Cat Power Ventures is an active investor in independent power projects using Caterpillar power generation equipment and services. 8. Latin America - Geographic region including the Central and South American countries and Mexico. 9. Machinery - A principal line of business which includes the design, manufacture, marketing and sales of construction, mining and forestry machinery - track and wheel tractors, track and wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, telescopic handlers, skid steer loaders and related parts. Also includes logistics services for other companies. 10. Machinery and Engines - Due to the highly integrated nature of operations, represents the aggregate total of the Machinery and Engines lines of business and includes primarily our manufacturing, marketing and parts distribution operations. 11. Price Realization - The impact of net price changes excluding currency. 12. Retirement Benefits - Cost of defined benefit pension plans, defined contribution plans and retirement healthcare and life insurance. Page 15-------------------------------------------------------------------------------- 13. Sales Volume - With respect to sales and revenues, sales volume represents the impact of changes in the quantities sold for machines, engines and parts. With respect to operating profit, sales volume represents the impact of changes in the quantities sold for machines, engines and parts combined with the net operating profit impact of changes in the relative weighting of machines, engines and parts sales with respect to total sales. 14. 6 Sigma - On a technical level, 6 Sigma represents a measure of variation that achieves 3.4 defects per million opportunities. At Caterpillar, 6 Sigma represents a much broader cultural philosophy to drive continuous improvement throughout the value chain. It is a fact-based, data-driven methodology that we are using to improve processes, enhance quality, cut costs, grow our business and deliver greater value to our customers through Black Belt-led project teams. At Caterpillar, 6 Sigma goes beyond mere process improvement; it has become the way we work as teams to process business information, solve problems and manage our business successfully. NON-GAAP FINANCIAL MEASURES The following definition is provided for "non-GAAP financial measures" in connection with Regulation G issued by the Securities and ExchangeCommission. This non-GAAP financial measure has no standardized meaningprescribed by U.S. GAAP, and therefore, is unlikely to be comparable to thecalculation of similar measures for other companies. Management does not intendthis item to be considered in isolation or as a substitute for the related GAAPmeasure. Machinery and Engines Caterpillar defines Machinery and Engines as it is presented in the supplementaldata as Caterpillar Inc. and its subsidiaries with Financial Products accountedfor on the equity basis. Machinery and Engines information relates to thedesign, manufacture and marketing of our products. Financial Productsinformation relates to the financing to customers and dealers for the purchaseand lease of Caterpillar and other equipment. The nature of these businesses isdifferent especially with regard to the financial position and cash flow items.Caterpillar management utilizes this presentation internally to highlight thesedifferences. We also believe this presentation will assist readers inunderstanding our business. Pages 20-23 reconcile Machinery and Engines withFinancial Products on the Equity Basis to Caterpillar Inc. Consolidatedfinancial information. * * * The information included in the Outlook section is forward-looking and involvesrisks and uncertainties that could significantly affect expected results. Adiscussion of these risks and uncertainties is contained in Form 8-K filed withthe Securities & Exchange Commission (SEC) on April 20, 2005. This filing isavailable on our website at http://www.CAT.com/sec_filings. Caterpillar's latest financial results and current outlook are also availablevia: Telephone:(800) 228-7717 (Inside the United States and Canada)(858) 244-2080 (Outside the United States and Canada) Internet:http://www.CAT.com/investorhttp://www.CAT.com/irwebcast (live broadcast/replays of quarterly conferencecall) Caterpillar contact: Ben Cordani Corporate Public Affairs (309) 675-5786 [email protected] Page 16-------------------------------------------------------------------------------- Caterpillar Inc. Condensed Consolidated Statement of Results of Operations (Unaudited) (Dollars in millions except per share data) Three Months Ended March 31, 2005 2004 --------------- ---------------- Sales and revenues: Sales of Machinery and Engines $ 7,789 $ 6,002 Revenues of Financial Products 550 478 --------------- ---------------- Total sales and revenues 8,339 6,480 Operating costs: Cost of goods sold 6,215 4,701 Selling, general and administrative expenses 744 673 Research and development expenses 241 231 Interest expense of Financial Products 170 119 Other operating expenses 213 188 --------------- ---------------- Total operating costs 7,583 5,912 --------------- ---------------- Operating profit 756 568 Interest expense excluding Financial Products 65 57 Other income (expense) 108 61 --------------- ----------------Consolidated profit before taxes 799 572 Provision for income taxes 232 158 --------------- ---------------- Profit of consolidated companies 567 414 Equity in profit (loss) of unconsolidated affiliated companies 14 6 --------------- ---------------- Profit $ 581 $ 420 --------------- ---------------- ------------------------------------------------------------------------------------------------------------------ Profit per common share $ 1.70 $ 1.23 Profit per common share - diluted 1 $ 1.63 $ 1.19 Weighted average common shares outstanding (millions)- Basic 342.1 342.6- Diluted 1 356.6 355.7 Cash dividends declared per common share $ - $ - ------------------------------------------------------------------------------------------------------------------ 1 Diluted by assumed exercise of stock options, using the treasury stock method. Certain amounts from prior periods have been reclassified to conform to current financial statement presentation. Page 17-------------------------------------------------------------------------------- Caterpillar Inc. Condensed Consolidated Statement of Financial Position (Unaudited) (Millions of dollars) Mar. 31, Dec. 31, 2005 2004 ------------------ ------------------Assets Current assets: Cash and short-term investments $ 517 $ 445 Receivables - trade and other 7,517 7,459 Receivables - finance 5,188 5,182 Deferred and refundable income taxes 443 398 Prepaid expenses 1,329 1,369 Inventories 5,230 4,675 ----------------- ------------------ Total current assets 20,224 19,528 Property, plant and equipment - net 7,551 7,682 Long-term receivables - trade and other 780 764 Long-term receivables - finance 10,300 9,903 Investments in unconsolidated affiliated companies 558 517 Deferred income taxes 665 674 Intangible assets 310 315 Goodwill 1,450 1,450 Other assets 2,321 2,258 ----------------- ------------------Total assets $ 44,159 $ 43,091 ----------------- ------------------ Liabilities Current liabilities: Short-term borrowings: -- Machinery and Engines $ 101 $ 93 -- Financial Products 3,164 4,064 Accounts payable 3,978 3,990 Accrued expenses 1,800 1,847 Accrued wages, salaries and employee benefits 1,437 1,730 Customer advances 631 555 Dividends payable - 141 Deferred and current income taxes payable 416 259 Long-term debt due within one year: -- Machinery and Engines 29 6 -- Financial Products 3,231 3,525 ----------------- ------------------ Total current liabilities 14,787 16,210 Long-term debt due after one year: -- Machinery and Engines 3,819 3,663 -- Financial Products 14,090 12,174 Liability for postemployment benefits 2,984 2,986 Deferred income taxes and other liabilities 687 591 ----------------- ------------------Total liabilities 36,367 35,624 ----------------- ------------------Related Shares:
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