20th Oct 2006 17:12
Caterpillar Inc20 October 2006 Caterpillar Inc.3Q 2006 Earnings Release-------------------------------------------------------------------------------- October 20, 2006 FOR IMMEDIATE RELEASE Caterpillar Reports Record Third Quarter; Sales and Revenues up 17 Percent; Profit Per Share Up 21 Percent Caterpillar has best third quarter in the company's history; focus is on execution of the company's strategy in areas of quality, safety and velocity PEORIA, Ill. - With a strong focus on executing its corporate strategy, todayCaterpillar Inc. (NYSE: CAT) reported record third quarter 2006 sales andrevenues of $10.517 billion and record third-quarter profit of $769 million, or$1.14 per share. Sales and revenues increased 17 percent, and profit per sharewas up 21 percent compared with the third quarter of 2005. Sales and revenuesfor the first nine months of 2006 of $30.514 billion and profit of $2.655billion, or $3.86 per share, were also records. "We achieved this quarter's results due in great part to the efforts ofCaterpillar's employees, dealers and suppliers who continue to work to removebottlenecks and increase production for a number of products," said CaterpillarChairman and Chief Executive Officer Jim Owens. "Team Caterpillar remainsfocused on achieving our 2010 goals and executing our corporate strategy with 6Sigma-especially in the areas of quality, safety and velocity." Sales and revenues increased $1.540 billion-$1.063 billion from highersales volume, $290 million from improved price realization, $97 million from theeffects of currency and $90 million from higher Financial Products revenues. Third-quarter profit increased $102 million from third quarter 2005. Theincrease was largely due to improved price realization and higher sales volume,partially offset by higher costs, including approximately $80 million of expenserelated to various legal disputes, principally a settlement with Navistar. Page 1-------------------------------------------------------------------------------- "I'm excited about Caterpillar's future and our ability to deliver on the goalswe've set," Owens said. "We're into our fourth year of solid growth in many ofthe key industries we serve-mining, energy and infrastructure development inparticular. Our product line remains the global leader, and our brands arestrong and recognized worldwide as the highest in customer value. We're well-positioned to build on these strengths going forward." (A more complete review of third-quarter results begins on page 4.) 2006 Outlook / 2007 Preliminary OutlookWe expect sales and revenues for 2006 to be about $41 billion, up about 13percent from 2005, and profit per share to be in a range of $5.05 to $5.30. Theprevious outlook reflected sales and revenues up 12 to 15 percent and profit pershare of $5.25 to $5.50. The decline from the previous outlook was a result ofcharges related to third-quarter legal disputes, higher core operating costs andslightly lower sales volume. Our preliminary outlook for 2007 sales and revenues is flat to up 5 percent from2006, and profit per share is expected to be flat to up 10 percent from themidpoint of the 2006 outlook range. "We're expecting slightly higher sales and revenues in 2007 despite theprospects of a slowing U.S. economy, a sharp drop in sales of on-highway truckengines and weaker housing construction," Owens said. "It's a testament to thestrength and diversity of the industries we serve and the global nature of ourproducts and services that we expect at least modest growth despite a weakerU.S. economy and significant declines in important North American markets. Whilenext year will likely be a year of slower corporate growth, the fundamentals forkey global industries we serve are strong, and after the 2007 pause, we expectcontinued solid growth through the end of the decade." (Complete outlook begins on page 10.) For more than 80 years, Caterpillar Inc. has been making progress possible anddriving positive and sustainable change on every continent. With 2005 sales andrevenues of $36.339 billion, Caterpillar is the world's leadingmanufacturer of construction and mining equipment, diesel and natural gasengines, industrial gas turbines and a wide and growing offering of relatedservices. More information is available at http://www.cat.com. Caterpillar contact: Rusty Dunn Corporate Public Affairs (309) 675-4803 [email protected] Note: Glossary of terms included on pages 23-24; first occurrence of terms shownin bold italics. Page 2-------------------------------------------------------------------------------- Key Points Third Quarter • Third-quarter sales and revenues of $10.517 billion were 17 percent higher than third quarter 2005. • Machinery sales increased 15 percent, Engines sales increased 23 percent and Financial Products revenues rose 15 percent from a year ago. • Third-quarter profit was $769 million, or $1.14 per share-21 percent higher than third quarter 2005. • Shares repurchased totaled 6.6 million during the quarter. With shares issued to offset employee stock options exercised, the net reduction of shares outstanding was 5.2 million. Year to Date • Year-to-date sales and revenues were $30.514 billion, up 14 percent from 2005. Profit was $2.655 billion, or $3.86 per share, up 36 percent from 2005. • Machinery and Engines operating profit as a percent of sales increased-from 10 percent year to date 2005 to 13 percent in 2006. • Machinery and Engines "operating profit pull through"-the change in operating profit divided by the change in sales-was 30 percent. • Machinery and Engines operating cash flow year to date 2006 was $2.774 billion, up $832 million from 2005. This strong cash flow allowed us to increase capital expenditures to $900 million, acquire Progress Rail, announce a 20 percent dividend increase and repurchase 39.9 million shares. After issuing shares for stock option exercises and the acquisition of Progress Rail, the net reduction of shares outstanding was 20.3 million. Outlook • We expect sales and revenues to be about $41 billion in 2006, up about 13 percent from 2005. The 2006 profit range has been revised to $5.05 to $5.30per share from the previous range of $5.25 to $5.50 per share. • Sales and revenues in 2007 are expected to be flat to up 5 percent from 2006, with profit per share ranging from flat to up 10 percent from the midpoint of the 2006 range, which is $5.18. A question and answer section has been included in this release starting on page16. Page 3-------------------------------------------------------------------------------- DETAILED ANALYSIS Third Quarter 2006 vs. Third Quarter 2005 Sales and RevenuesSales and revenues for third quarter 2006 were $10.517 billion, up $1.540billion, or 17 percent, from third quarter 2005. Machinery volume was up $579million, Engines volume was up $484 million, price realization improved $290million and currency had a positive impact on sales of $97 million. In addition,Financial Products revenues increased $90 million. ---------------------------------------------------------------------------------------------------------------Sales and Revenues by Geographic Region Total % North % EAME % Latin % Asia/ %(Millions of Change America Change Change America Change Pacific Changedollars) -------- ------ ------- ------ -------- ------ ------- ------ ------- -------Third Quarter2005Machinery $ 5,648 $ 3,198 $ 1,199 $ 551 $ 700Engines1 2,744 1,299 816 249 380Financial 585 412 85 39 49Products2 - ------ - ----- -- ----- -- ---- - ----- $ 8,977 $ 4,909 $ 2,100 $ 839 $ 1,129 - ------ - ----- -- ----- -- ---- - -----Third Quarter2006Machinery $ 6,472 15% $ 3,570 12% $ 1,510 26% $ 650 18% $ 742 6%Engines 1 3,370 23% 1,561 20% 1,078 32% 249 0% 482 27%Financial 675 15% 471 14% 95 12% 49 26% 60 22%Products 2 - ------ - ----- -- ----- -- ---- - ----- $ 10,517 17% $ 5,602 14% $ 2,683 28% $ 948 13% $ 1,284 14% - ------ - ----- -- ----- -- ---- - ----- 1 Does not include internal engines transfers of $564 million and $549 million in third quarter 2006 and 2005, respectively. Internal engines transfers are valued at prices comparable to those for unrelated parties.2 Does not include revenues earned from Machinery and Engines of $126 million and $82 million in third quarter 2006 and 2005, respectively. Page 4-------------------------------------------------------------------------------- Machinery Sales were $6.472 billion, an increase of $824 million, or 15 percent,from third quarter 2005. • Sales volume increased $579 million. • Price realization increased $183 million. • Currency benefited sales by $62 million. • Worldwide, and in most regions, dealers reported higher inventories in constant dollars compared with third quarter 2005. During the quarter, dealers reduced inventories, which had a negative impact on sales volume. Inventories in terms of months of supply were down from a year earlier for the world and all regions, with the exception of North America. • Sales were up in North America due to the acquisition of Progress Rail. • Sales increased in Europe, Africa, Middle East (EAME); Europe had its best quarter for growth in six years, and strong economic growth continued in both Africa/Middle East and the Commonwealth of Independent States (CIS). • Although mining activity continued to be strong, new product introductions and mine permit delays in the U.S. slowed growth in large machine sales. North America - Sales increased $372 million, or 12 percent. • Progress Rail sales were $438 million. Excluding Progress Rail, sales volume declined $184 million. • Price realization increased $118 million. • Dealers reported higher inventories in terms of months of supply than a year earlier. • The U.S. economy slowed to a 2.6 percent rate of growth in the second quarter of 2006, and we project third-quarter growth was even slower, possibly below 2 percent. The slowdown has been concentrated in consumer spending and housing. Except for housing, other industries we serve continued to do well in the third quarter. • Sales of smaller machines, which are highly dependent upon general construction applications, were down. • Mine production increased more than 3 percent in the third quarter. However, new product introductions and mine permit delays led to a decline in large machine sales. • Nonresidential construction did well in the third quarter with spending up more than 20 percent from a year earlier. Highway spending increased 19 percent, office construction rose 27 percent and hotel constructionincreased 69 percent. EAME - Sales increased $311 million, or 26 percent. • Sales volume increased $253 million. • Price realization increased $8 million. • Currency benefited sales by $50 million. • Dealers reported the same inventories as a year earlier; in months of supply, inventories were lower. • Sales increased in Europe, the result of continued growth in housing construction and a rebound in nonresidential construction. Second-quarter data indicated over a 3 percent increase in construction compared to a year earlier, the best growth in six years. Surveys of construction confidence in the third quarter were more favorable than those taken in the second quarter. • Sales increased in Africa/Middle East, particularly in the oil producing countries as well as Turkey and South Africa. Construction spending increased more than 5 percent in South Africa, Saudi Arabia, United Arab Emirates and Turkey when compared to a year earlier. Energy production also increased, as did investments in new capacity. • Sales growth in the CIS occurred mostly in Russia and Ukraine. Russia increased production of crude oil, natural gas, coal and metals. In Ukraine, construction increased 7 percent compared to a year earlier, and mining andquarrying increased 6 percent. Page 5-------------------------------------------------------------------------------- Latin America - Sales increased $99 million, or 18 percent. • Sales volume increased $41 million. • Price realization increased $49 million. • Currency benefited sales by $9 million. • Dealers reported lower inventories than last year, and months of supply were below a year earlier. • Healthy economic growth has led to increases in construction. Spending is upin the major countries, ranging from 5 percent to over 20 percent. • Higher prices for metals caused countries to increase production between 2and 5 percent. Brazil was one of the few countries able to capitalize on higheroil prices by increasing production. • Chile, Brazil and Colombia accounted for much of the growth in sales. Asia/Pacific - Sales increased $42 million, or 6 percent. • Sales volume increased $31 million. • Price realization increased $8 million. • Currency benefited sales by $3 million. • Dealers reported higher inventories than a year earlier but lower inventories in months of supply. • Sales growth occurred in China and India where construction and mining areincreasing. In China, office and commercial construction completions increased15 percent from a year earlier, and residential completions increased 29percent. • Sales also increased in Australia where nonresidential construction and mining increased. • Sales declined in Indonesia. Although sales have been on an improving path this year, they have yet to return to last year's peak. Engines Sales were $3.370 billion, an increase of $626 million, or 23 percent,from third quarter 2005. • Sales volume increased $484 million. • Price realization increased $107 million. • Currency impact benefited sales $35 million. • Worldwide, and for most geographic regions and industries, dealer reportedinventories in constant dollars were up. Inventories in months of supply alsoincreased. • Strong prices for oil and gas, coupled with limited reserve capacity,continued to drive strong sales of turbines and reciprocating engines forpetroleum applications. North America - Sales increased $262 million, or 20 percent. • Sales volume increased $197 million. • Price realization increased $65 million. • Sales for petroleum applications increased 56 percent, led by strong demandfor large reciprocating engines in gas drilling and compression as well asstrong sales of turbines and turbine-related services for pipeline compression. • Sales for on-highway truck applications increased 13 percent due to strongtruck demand and the impact of truck purchases prior to the 2007 emissionschangeover. • Sales for industrial applications increased 10 percent with ongoinginvestment in various types of industrial Original Equipment Manufacturer (OEM)equipment. • Sales for marine applications increased 7 percent as increased sales forwork boats were partially offset by reduced demand for pleasure craft. • Sales for electric power applications remained about flat as increased salesfor telecommunications and data applications were offset by lower power plantsales. Page 6-------------------------------------------------------------------------------- EAME - Sales increased $262 million, or 32 percent. • Sales volume increased $207 million. • Price realization increased $24 million. • Currency impact benefited sales $31 million. • Sales for electric power applications increased 42 percent with strongincreases in developing region demand for generator sets supported by highcommodity prices, increased demand for electric power rentals and higher salesof turbines and turbine-related services for power plants. • Sales for marine applications increased 25 percent from higher demand for oceangoing vessels. • Sales for industrial applications increased 14 percent due partially toimproved demand for agricultural equipment. • Sales for petroleum applications increased 21 percent with increased demandfor turbines and turbine-related services for oil production and gastransmission. Latin America - Sales remained flat. • Sales volume decreased $9 million. • Price realization increased $9 million. • While sales overall were flat, sales for on-highway truck and electric powerapplications increased but were offset by a decline in petroleum engines. Asia/Pacific - Sales increased $102 million, or 27 percent. • Sales volume increased $89 million. • Price realization increased $9 million. • Currency impact benefited sales $4 million. • Sales for petroleum applications increased 58 percent, primarily fromcontinued growth in demand for turbines and turbine-related services inSoutheast Asia as well as ongoing increased demand for drill rigs. • Sales for electric power applications increased 20 percent with increasedshipments of large generator sets to support textile and other manufacturingindustries. • Sales for marine applications increased 2 percent as higher deliveries tooceangoing vessels were mostly offset by lower pleasure craft demand. Financial Products Revenues were $675 million, an increase of $90 million, or 15percent, from third quarter 2005. • Growth in average earning assets increased revenues $43 million. • The impact of higher interest rates on new and existing finance receivables at Cat Financial added $31 million. Page 7-------------------------------------------------------------------------------- Operating Profit Operating profit in third quarter 2006 improved $138 million, or 15 percent,from last year, driven by higher price realization and sales volume, partiallyoffset by higher core operating costs needed to support sales growth. Core operating costs rose $407 million from third quarter 2005. Of thisincrease, $225 million was attributable to higher manufacturing costs. Theincrease in manufacturing costs was split about evenly between period costs tosupport higher volumes, higher material costs and variable inefficiencies.Non-manufacturing core operating costs were up $182 million as a result ofhigher Selling, General and Administrative (SG&A) and Research and Development(R&D) expenses to support significant new product programs as well as orderfulfillment/velocity initiatives. Third quarter 2006 SG&A expense includesapproximately $70 million related to a settlement of various legal disputes withNavistar. ------------------------------------------------------------------------------------------------------------------Operating Profit by Principal Line of Business (Millions of dollars) Third Quarter Third Quarter $ % 2005 2006 Change Change ------------------ --------------- ----------------- ----------Machinery 1 $ 615 $ 626 $ 11 2%Engines 1 265 398 133 50%Financial Products 123 171 48 39%Consolidating Adjustments (63 ) (117 ) (54 ) --- ------- ------ --- ------ ---- ---- ------ -----Consolidated Operating Profit $ 940 $ 1,078 $ 138 15% --- ------- ------ --- ------ ---- ---- ------ -----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. Page 8-------------------------------------------------------------------------------- Operating Profit by Principal Line of Business • Machinery operating profit of $626 million was up $11 million, or 2 percent,from third quarter 2005. The favorable impact of improved price realization andhigher sales volume was largely offset by higher core operating costs. • Engines operating profit of $398 million was up $133 million, or 50 percent,from third quarter 2005. The favorable impact of higher sales volume andimproved price realization was partially offset by higher core operating costs,which included expense related to a settlement of various legal disputes withNavistar. • Financial Products operating profit of $171 million was up $48 million, or39 percent, from third quarter 2005. The increase was primarily due to a $21million impact from the continued growth of average earning assets and a $23million impact from improved net yield on average earning assets at CatFinancial. Other Profit/Loss Items • Other income/expense was income of $72 million compared with income of $80million in third quarter 2005. The decrease is primarily due to expense relatedto legal disputes. • The provision for income taxes in the third quarter reflects an estimatedannual tax rate of 31 percent for 2006 compared to 30 percent for the thirdquarter 2005 and 29.5 percent for the full year 2005 (excluding discrete items).The increase is primarily due to a change in our geographic mix of profits aswell as the impact of the phaseout provision of the American Jobs Creation Actpermitting only 60 percent of Extraterritorial Income Exclusion (ETI) benefitsin 2006. The third quarter 2005 provision for income taxes included an unfavorableadjustment of $18 million resulting from an increase in the estimated annual taxrate from 29 to 30 percent for the first six months of 2005. Employment Caterpillar's worldwide employment was 93,233 in third quarter 2006, up9,334 from 83,899 in third quarter 2005. Of the increase, about 5,200 was aresult of acquisitions, and about 1,900 hourly and 2,200 salaried and managementemployees were added to support higher volume and new product introductions. Theincrease related to acquisitions was for Progress Rail and a logistics businessin Europe. Page 9-------------------------------------------------------------------------------- 2006 Outlook - Sales & Revenues The outlook for 2006 sales and revenues is about $41 billion, an increase ofabout 13 percent from 2005. • The U.S. Federal Reserve (Fed) interest rate actions slowed the U.S. economysignificantly the past two quarters. Fortunately, better growth in both Europeand Japan is helping fill the void caused by the U.S., and developing countrygrowth remains strong. We expect world economic growth of slightly less than 4percent this year, up from 3.5 percent in 2005. • The Fed and the Bank of Canada have held rates constant in recent policyreviews and are not expected to change for the rest of the year. In countriesoutside North America, central banks have raised interest rates from some of thelowest levels in years, but these increases should pose only a scattered threatto economic growth. • Housing construction dropped sharply in the U.S., and the recent reversal inmortgage rates is unlikely to revive activity much this year. • Elsewhere, prospects for housing are more favorable, the result of higherhome prices, low interest rates and growing populations. The supply of new homesoutside of the U.S. generally appears short of demand. • Nonresidential building construction should do well in most countries.Construction has not caught up with needs deferred in the past, profits are atrecord highs and most businesses have ready access to capital. • Infrastructure construction should continue to grow as well. Increasedfederal funding and improved state budgets have led to a large increase inhighway contracts awarded in the U.S. Developing countries are using revenuegains from increases in both commodity prices and production to extendinfrastructure development booms. • Worldwide, metals mining companies increased exploration and developmentbudgets 45 percent in 2006, the fourth consecutive year of double-digitpercentage increases. Despite those increases, mining production capacitycontinues to struggle to meet demand. Metals demand is growing rapidly,inventories are nearly depleted and production problems persist. Mine productionin three major producing countries-Australia, Canada and South Africa -declinedyear to date. • West Texas Intermediate crude oil prices recently dipped below $60 perbarrel, and natural gas prices also declined sharply. However, we do not expectthese lower prices to disrupt the growth in exploration, drilling, pipelineexpenditures and tar sands development that has benefited both machine andengine sales. Very little surplus production capacity is available, and thepotential for supply disruptions is high. • International spot prices for coal are trading above year earlier prices;demand continues strong, and many exporters are struggling to increase output.Continued good economic growth should require increased electricity production,and coal is often the most cost-effective energy source. • Ocean shipping rates are higher than last year, and shipyards have healthyorder backlogs. A high percent of ships are more than 20 years old, which shouldkeep demand for new ships and ship rebuilds high. Both should boost enginesales. Page 10-------------------------------------------------------------------------------- North America (United States and Canada) - Machinery and Engines sales areexpected to increase about 14 percent in 2006. • The Fed held interest rates at 5.25 percent the past two meetings, and weexpect no rate changes for the rest of the year. Past actions have alreadyslowed the economy, and growth should average around 2 percent in the last twoquarters. • So far, economic weakness has been concentrated in consumer spending andhousing. We expect housing starts to reversed the second-quarter increase, andsingle-family starts appear to have dropped below a rate consistent with single-family home sales. Housing construction will be below year-earlier activity therest of the year, which will continue to depress year-over-year salescomparisons for smaller machines. • Nonresidential construction should remain strong for the rest of the year,the result of record corporate profits, increased commercial and industriallending and more highway funding. The value of commercial and industrialconstruction contracts awarded, net of inflation, increased 9 percent year todate; highway construction contracts increased by more than 6 percent. • Mining and quarrying operations should continue to do well for the rest ofthe year. Sand and gravel prices rose almost 9 percent year to date, and coalprices were up almost 10 percent. Production increased 10 percent and 7 percentrespectively. Metals mines, despite sharply higher prices, increased productionless than 2 percent, symptomatic of the difficulties mines have had boostingoutput this recovery. • Production of on-highway trucks should be up about 8 percent this year, theresult of better trucking company profits and ordering in advance of 2007emission standards. Truck manufacturers have covered production slots throughyear-end with orders. • The Bank of Canada appears to be finished raising interest rates, andeconomic growth should be near 3 percent this year. Although higher mortgagerates are slowing housing, record corporate profits and favorable output pricesshould allow growth in nonresidential construction, quarrying and tar sandsdevelopment. Output from both coal and metals mines declined, despite favorableprices. EAME - Machinery and Engines sales are expected to increase about 11 percent in2006. • The European Union (EU) economy grew at a 3.5 percent annual rate in thesecond quarter, the fastest in six years. Leading indicators and businesssurveys are positive, and we forecast economic growth slightly below 2.5 percentin 2006. That growth would be a significant improvement over the 1.5 percentaverage rate of the past five years. • Residential building permits increased 8 percent in first half 2006, and lowmortgage interest rates, higher employment and rising home prices should drivefurther growth in housing construction. Nonresidential construction isbenefiting from good corporate profits, high capacity utilization and readilyavailable financing. • The European Central Bank recently raised interest rates to 3.25 percent, thefourth hike of the year. Although the preliminary estimate for August inflationwas within target, another rate increase is possible this year. The Bank ofEngland is expected to hold rates steady for the rest of the year. • The Central European economies successfully reduced inflation and aremaintaining low interest rates. Economic growth should be near 5 percent thisyear, the fifth consecutive year of good growth. Page 11-------------------------------------------------------------------------------- • The Africa/Middle East region's best recovery in years continues, with growthof over 5 percent expected this year. Inflation is the lowest in over 30 years,and key countries are maintaining low interest rates. So far this year, oilproduction is running about a half percent higher than last year, and mineoutput in South Africa declined. A limited production response in the face ofmuch higher prices suggests a need to increase capacity. • Russia surpassed Saudi Arabia as the world's largest oil producer this year,and mining is attracting foreign investment throughout the CIS. Increasedcommodity revenues helped Russia to complete an early repayment of its debt toofficial creditors and amass over $180 billion in foreign exchange reserves.Those positives, along with a 2 percent short-term interest rate, should allowover 6 percent economic growth this year. Latin America - Machinery and Engines sales are expected to increase about 12percent in 2006. • Second-quarter economic growth ranged between 4 and 9 percent in keycountries, which should push regional growth in 2006 close to 5 percent.Interest rates remain low, with Brazil cutting rates over 400 basis points thisyear. • Most countries responded to higher metals prices by increasing mineproduction this year; Brazil and Peru are the leaders with over 6 percentgrowth. Chile, the world's largest copper producer, was able to rebound fromlast year's decline. • Good economic growth and higher commodity prices are helping construction. Inthe major countries, year-to-date gains in construction range from almost 5percent to 27 percent. Asia/Pacific - Machinery and Engines are expected to increase about 11 percentin 2006. • Inflation in the region increased slightly this year, leading to someincreases in interest rates. However, regional economic growth should be over 7percent, a slight improvement from last year. • Construction continues to increase, with spending in the major countries ofChina, India and Indonesia up 7 percent or more. Nonresidential construction isbooming in Australia, but high interest rates are causing housing to decline.Overall, construction should continue to grow in response to good economicgrowth and low interest rates. • Mining output is increasing in most countries in response to favorableprices. Both metals and coal prices are trading above year-earlier prices, whichshould support production the rest of the year. • Australia increased expenditures for mineral exploration 19 percent in thefirst half, which should make 2006 the fourth year of significant growth.Despite those increased investments, mine output declined more than 6 percent inthe first half. We expect mining companies will continue to increaseinvestments. Financial Products Revenues • We expect continued growth in Financial Products for 2006. Revenues areexpected to increase approximately 14 percent versus 2005, primarily due tohigher average earning assets in 2006. Page 12-------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------Sales and Revenues Outlook - Midpoint of Range1 (Millions of dollars) 2005 2006 % Actual Outlook Change ---------------- ------------------ ----------------Machinery and Engines North America $ 17,709 $ 20,250 14 % EAME 8,860 9,800 11 % Latin America 3,024 3,400 12 % Asia/Pacific 4,413 4,900 11 % --- -------- --- ---- -------- ---- 34,006 38,350 13 %Total Machinery and Engines --- -------- --- ---- -------- ----Financial Products 2 2,333 2,650 14 % --- -------- --- ---- -------- ----Total $ 36,339 $ 41,000 13 % --- -------- --- ---- -------- ---- 1 The Consolidated Operating Profit chart below reflects sales and revenues at the midpoint of the range.2 Does not include revenues earned from Machinery and Engines of $458 million and $317 million in 2006 and 2005, respectively. 2006 Outlook - Profit We expect profit per share to be in the range of $5.05 to $5.30. The year isexpected to benefit from improved price realization and higher sales volume,partially offset by core operating cost increases and stock-based compensationexpense. Page 13-------------------------------------------------------------------------------- About half of the expected core operating cost increase is from manufacturingcosts and about half from SG&A and R&D. Manufacturing costs are expected to behigher due to an increase in period manufacturing costs, about a 1 percentincrease in material costs and variable inefficiencies. SG&A and R&D areexpected to be higher in support of growth, new product programs needed toexecute Caterpillar's long-term strategy and an expense related to asettlement of various legal disputes with Navistar. Preliminary 2007 Outlook Our preliminary outlook for 2007 sales and revenues is flat to up 5 percent from2006, and profit per share is expected to be flat to up 10 percent from themidpoint of the 2006 outlook range. Economic conditions remain generally favorable, but we expect some slowing inworld economic growth to about 3.5 percent in 2007, with the slowdown mostpronounced in the U.S. In this economic environment, sales and revenue growth isexpected to slow to 0 to 5 percent in 2007. This limited sales growth reflectsincreasing risks that have developed in the U.S. and an expectation that ourdealers will reduce inventories significantly. Our strategy will be to establisha cost base that will allow profit growth, even with limited sales and revenuegrowth. We believe 2007 will be a slowdown in the current cycle, not the start of anextended downturn. The historical precedent would be 1996 when sales and revenuegrowth slowed to 3 percent after three years of double-digit percentage growth.Double-digit sales growth returned in 1997. Our analyses suggest that theworldwide need to improve housing, nonresidential structures, infrastructure andmining and energy capacity, identified at the start of the current businesscycle, has not yet been satisfied. Moreover, our growing service businesses andproduct support for the expanded field population will provide a base ofsustained solid growth going forward. Improved price realization is expected to account for most of the growth in2007, when comparing the midpoint of the 2007 estimate with that for 2006.Worldwide market demand is expected to be down modestly, with weaker conditionsin the U.S. largely offset by continuing strength in other regions. In addition,we expect dealers to reduce their inventories significantly. • We believe the slowing U.S. economy will eventually prompt the Fed to cutinterest rates in first half 2007, probably by 50 to 100 basis points. Thatpolicy change should be enough to let the economy escape with a mid-cycleslowdown, similar to the one that occurred in the mid 1990s. Economic growthshould improve in the second half and average about 2.5 percent for the year. • We project a further decrease in U.S. housing starts to about 1.75 millionunits in 2007; lower starts would continue to depress sales of smaller machines.However, mortgage interest rates appear to have peaked, which suggests thedecline in housing starts should be nearing an end. • Rising U.S. interest rates over the last two and a half years appear to besufficient to have reduced the financial incentives for users to replaceexisting machines with new machines. As a result, slower replacement buyingcould lead to slower sales growth in some industry applications despitecontinued strong activity and a favorable investment climate in these sectors. • New emissions standards in the U.S. and slowing freight activity should causeheavy-duty on-highway truck production to fall an estimated 40 percent. Truckengine shipments to OEMs would fall even further. • Interest rates in many countries outside North America should increase fromvery low rates. Those increases should slow growth slightly but not below trendrates. Our forecasts are for almost 3 percent growth in EAME, over 4 percent inLatin America and about 6.5 percent in Asia/Pacific. Page 14-------------------------------------------------------------------------------- • Construction is doing well in most countries outside North America, and weexpect that trend to continue in 2007. Growing populations, higher home pricesand low interest rates should benefit housing construction. Rapid economicgrowth, record corporate profits and higher office rental rates should supportnonresidential building construction. We expect that developing countrygovernments will continue to use earnings from high commodity prices to developinfrastructure. • Although metals mining companies worldwide increased investments the past fewyears, evidence suggests that mine capacity is still not adequate. Inventoriesof many metals are near critical lows, production problems persist and pricesremain elevated. Our economic growth forecasts for 2007 imply further growth inmetals demand so prices should ease only modestly. Prices for most metals shouldremain high enough to encourage mines to increase investments further. Thestrength in the mining sector continues to drive record demand for largemachines, with our sales prospects limited essentially by our ability to raiseproduction levels. • The coal industry should continue to grow in 2007, requiring more investmentin capacity. Expected growth in the world economy will require more electricityproduction, and coal should be a preferred energy source. The strong recovery inworldwide steel production, which should continue, will increase demand formetallurgical coal. • We project oil prices for West Texas Intermediate oil to be down slightlyfrom the 2006 average. However, the 2007 price should be high enough toencourage further investment in exploration and development. Spare productioncapacity remains tight, considerable production occurs in areas vulnerable tosupply disruptions and demand should increase. The outlook above describes our preliminary expectations for 2007. Economicrisks to this outlook are higher than in the past two years, primarily due todevelopments in the U.S. Future Fed actions and the economy's responseare less certain and could require changes to our outlook. Nonetheless, we remain optimistic for the longer term prospects in the marketswe serve. The economic environment outside the U.S. is more positive-reflecting improving conditions in Europe and Japan and continued robust growthin China, India and the developing world. Moreover, a very favorable investmentclimate worldwide and pressures to catch up for past underinvestment ininfrastructure, energy and mining continue to provide very strong fundamentalgrowth drivers in many of the markets we serve. Page 15-------------------------------------------------------------------------------- QUESTION AND ANSWER Sales and Revenues / Price Realization / Demand Q1: Do you expect that 2006 is the peak year in this business cycle for Caterpillar? A: We believe 2007 will be a mid-cycle slowdown similar to 1996. In 1996, sales and revenues increased 3 percent, a brief interruption in five years of double-digit growth in sales. Our outlook reflects a slowdown in the U.S. and a significant reduction in dealer inventories. Both should be temporary factors. Expected Fed interest rate cuts should begin to improve the U.S. economy late in 2007, and once dealers have finished reducing inventories, our sales should more closely match growth in dealer deliveries to end users. Q2: What are your expectations for price realization in 2007? A: We expect price realization to be about 2 percent in 2007. The improvement is the result of price actions that will take effect in January 2007, partially offset by higher sales variances to support extended service coverage programs and the effect of geographic mix on price realization. In addition, the industries that we serve remain very competitive, and we intend to defend our market position. Q3: We have heard that you have announced some 2008 price increases. Is this true? A: Yes. We have announced 2008 price increases to our dealers for large engine products. Lead times and strong order demand have driven the need to announce these price increases at this time. Q4: What are you assuming the U.S. Federal Reserve will do with interest rates? A: We expect the Federal Reserve will hold the Fed funds rate at 5.25 percent for the rest of 2006, continuing the policy stance established at its August meeting. Our outlook assumes that slowing economic growth will prompt the Fed to cut interest rates 50 to 100 basis points in first half 2007. The historical precedent for such a policy change would be the mid-1990s. Economic growth slowed to a rate of about 1 percent in first half 1995 following a year in which interest rates increased 300 basis points. The Fed made its last rate hike on February 1, 1995, and then made a 25 basis point cut on July 6. Within six months, the Fed reduced interest rates by 75 basis points, a timely response that quickly revived the economy. Page 16-------------------------------------------------------------------------------- Q5: What are your expectations for housing in the United States? A: In our second-quarter release, we projected 2006 U.S. housing starts at about 1.9 million units. We are revising our estimate to about 1.85 million. For 2007, we expect a further decline to around 1.75 million units. We expect the decline in housing activity should be nearing an end. The 30-year mortgage interest rate recently dropped to 6.3 percent, completely reversing the run-up in the second quarter. Our expectation of Fed rate cuts in first half 2007 should result in further declines in mortgage rates. New home sales appear to be stabilizing, and we estimate that housing starts over the past five months were lower than needed to support new home sales. The inventory of unsold new homes is a record high, but relative to the selling rate is below past peaks. Multi-family starts are holding up better than single-family starts, and financial returns for apartments appear to be improving. Mobile home shipments are running about 100,000 units lower than in the last downturn, shifting demand to construction starts. Q6: Can you comment on the strength in nonresidential spending, both public and private? A: Nonresidential construction is increasing in many countries throughout the world, and we expect further growth in 2007. One reason is that we believe investment has lagged behind economic growth for years, and significant catch-up needs remain. As an example, U.S. investment in business structures, net of inflation and depreciation, has declined since the early 1980s. Transportation infrastructure throughout the world is inadequate to meet growing trade, resulting in congestion, delays and wasted fuel. In many countries, profits are at record highs, allowing businesses to invest more. In addition, businesses in Europe and the United States have significantly increased their use of credit. The large increase in commodity revenues over the past four years is providing developing countries the funds needed to upgrade infrastructure. Q7: Mining has been very strong for the past three years. Can you comment on your expectations going forward from here? A: The outlook for mining continues to look positive. Worldwide exploration and development budgets increased 45 percent in 2006, the fourth consecutive year with increases in excess of 20 percent. But there is little evidence that capacity has outgrown demand. Inventories of base metals are low relative to consumption, in some cases near critical lows, and demand is growing. A unique feature of this recovery is that the production response has been much slower to develop than many expected, the result of insufficient past investment. Year-to-date mine production in three major producing countries- Australia, Canada and South Africa-declined. Page 17-------------------------------------------------------------------------------- Q8: You mention energy as an industry that's doing very well. From a Caterpillar perspective, how are you participating? A: Caterpillar's equipment plays a key role in a number of energy-related areas, and today's high energy prices indicate a need to increase output to meet the needs of a growing world economy. The long-term investments that would be required to develop adequate energy offer excellent growth opportunities for Caterpillar. Our machines are important to energy production. We are a key supplier of machines to coal mining with products like large trucks, track-type tractors and wheel loaders, and we supply large mining trucks in the Canadian oil sands where most of the oil is mined. In addition, we supply pipelayers and other equipment used to build pipelines for oil and gas. Our engines-diesel and gas reciprocating engines and gas turbines-are important to producers of oil and gas worldwide. Solar Turbines Incorporated, a wholly owned subsidiary, is a leader in industrial gas turbines. Gas compression, transmission and power for offshore rigs are significant energy-related applications. Our industry-leading reciprocating engines are used for gas compression, to pump oil, power drill rigs and service wells to increase output. In addition, we are a major producer of generator sets for distributed power, dedicated primary power and for standby applications. We expect oil prices to decline from an average $68 per barrel in 2006 to $66 in 2007, using West Texas Intermediate oil prices as the reference. Prices recently dropped below $60, which likely reflects less concern about supply disruptions. Worldwide demand, relative to supply, remains tight, and the potential for supply disruptions is high. The outlook for energy development would remain positive even if lower prices should persist. We believe it unlikely that prices would decline so low (below $40) as to make new investment unattractive. Q9: Are dealer reported inventories for machines and engines at levels you think are appropriate overall? A: Overall, dealer reported inventories of machines and engines were higher than a year ago. In terms of months of supply, dealer reported machine and engine inventories were near historic averages at the end of the third quarter. As delivery times improve, we expect dealer reported inventories to decline during the fourth quarter of 2006 and in 2007. Engines Q10: Many who follow the heavy-duty truck industry expect a significant drop in demand in 2007 as a result of new emissions requirements. Do you agree, and what are your expectations? A: We are seeing indications that fleets are engaging in a pre-buy prior to the 2007 regulations. The 2007 Class 8 North American heavy-duty truck industry is anticipated to drop from about 325,000 units in 2006 to about 190,000 to 220,000 units in 2007. The industry drop is expected to be more concentrated in the first quarter of the year, with demand increasing somewhat in the remainder of 2007. Page 18-------------------------------------------------------------------------------- Q11: What actions do you expect to take in your heavy-duty engine business as you prepare for the likely drop in demand for truck engines in 2007? A: We are preparing to implement multiple activities to manage our cost structure for the short-term decrease in heavy-duty truck engine demand. These include specific plans related to operating costs, support costs and sales/marketing costs. In addition, continued strength in our petroleum, electric power and marine engine businesses should also help reduce the impact of the lower truck engine volumes, leading to another strong year for our engine business. Q12: What actions do you expect to take in your engine business as a result of the significant reduction in mid-range engine demand due to the loss of Freightliner and PACCAR business? A: We are in the process of implementing actions to adjust our cost structure as a result of this longer term drop in mid-range engine volume. Our major action is to transform the Greenville Engine Center into a marine engine facility. This operation will take core engines from our U.S. locations and convert them to marine engines by adding marine specific components, applying specialized paint and performing marine specific testing. These operations are currently performed by a third party. The marine facility should be fully operational in late 2007/early 2008. We are also taking actions to adjust our cost structure, especially in the first half of 2007. Q13: Will you be ready with your 2007 emissions-certified truck engines, and how are your plans going for transitioning your production to the new engines? A: Since March of 2005, Caterpillar has been building and validating the next generation ACERT(R) Technology that meets 2007 requirements. We have tested over 160 2007 engines operating on ultra low sulfur diesel (ULSD) fuel in a wide spectrum of mid-range and heavy-duty applications. To date we have accumulated over 10 million miles of validation on these engines plus significant hours on hundreds of lab engines. Several trucks with early generation engines were driven more than 250,000 miles prior to being updated to our latest generation engines. We are continuing to run 2007 engines in a variety of environments and applications to validate a full range of operating conditions. We are currently building 10 heavy-duty 2007 engines per day to meet our customers' demands. Product Availability Q14: We've heard from dealers and customers that delivery times for large engines for marine, petroleum and electric power applications are very long. Can you update us on the situation? A: Delivery times for large engines continue to run at extended levels and are expected to remain extended through 2007. Demand for our larger 3500 and 3600 families of engines, assembled in Lafayette, Indiana, has grown substantially since 2004 in most of our markets and continues to run at very high levels. Since early 2004, we have roughly doubled 3500 engine deliveries and increased 3600 engine output by over 50 percent using 6 Sigma Lean initiatives. We are investing now to further increase manufacturing line and supply chain capability to continue increasing engine output during the latter part of 2007 and early part of 2008. Page 19-------------------------------------------------------------------------------- Q15: How many machine models do you have on managed distribution? A: Availability of many models has improved. In North America, we had 36 models on managed distribution at the end of the third quarter, down from 69 models at the end of 2005. Q16: How will your 2007 on-highway truck engine compare with your current on-highway product? A: Building on our current 2004 ACERT Technology engines, we will add clean gas induction (CGI) and a diesel particulate filter (DPF) to meet the 2007 on-highway regulations. Our 2007 engines will deliver equal fuel economy, durability and reliability as today's industry-leading product. Q17: Are Caterpillar machines with emissions-compliant ACERT engines at year-end being released as you had expected, and will all machines that need to meet new regulations be ready? A: Yes. Since launch in October 2004, over 55 machine models are in production using 300-700 horsepower ACERT engines. Over 70 models using 100-300 horsepower ACERT engines will be going to production in 2006 and 2007. We have met production dates for all machine models that require the ACERT Tier 3 engines and are on track to continue to meet schedules. Costs Q18: Can you break down your core operating costs in more detail? A: The following table summarizes the increase in core operating costs in third quarter 2006 versus third quarter 2005: Core Operating Cost Change 3rd Quarter 2006 vs. (Millions of dollars) 3rd Quarter 2005 --------------------------- Manufacturing Costs $ 225 SG&A 145 R&D 37 ----- ----------- --------- Total $ 407 ----- ----------- --------- Manufacturing costs include both period and variable costs associated with building our products. The increase in manufacturing costs was split about evenly between period costs that tend to increase somewhat with volume, higher material costs and variable inefficiencies. The increase in period manufacturing costs includes items such as machine and equipment repair and maintenance and facility support. The increase also includes costs not directly related to changes in volume such as depreciation of manufacturing assets. The increase in SG&A is due largely to approximately $70 million of expense related to a settlement of various legal disputes with Navistar. This settlement was not included in our previous outlook. Higher employment to support volumes, new product introductions, order fulfillment/velocity initiatives, growth of our services and development in China also contributed to the increase in SG&A. Page 20-------------------------------------------------------------------------------- The increase in R&D is due to a significant number of new product introduction programs. Machinery and Engines operating margins were 10.4 percent in the third quarter of 2006 compared to 10.5 percent in the third quarter of 2005. Machinery and Engines Operating Profit as a Percent of Sales --------------------------------------------------------------------------------------------------------- Q3 '05 Q4 '05 Q1 '06 Q2 '06 Q3 '06 ------------- --------------- --------------- --------------- --------------- 10.5 % 11.1 % 12.9 % 14.3 % 10.4 % Q19: What are your expectations for incentive compensation for 2006? A: At the midpoint of our revised 2006 outlook, we now expect expenses related to incentive compensation to be about $450 million compared to $505 million in 2005. Q20: Can you update your expectations for stock-based compensation for 2006? A: Based on the valuation of our 2006 employee grant, we expect our 2006 stock-based compensation expense to be about $135 million ($130 million for Machinery and Engines and $5 million for Financial Products). The distribution of the expense will be as follows: Consolidated Stock-Based Compensation Expense (Millions of dollars) ----------------------------------------------------------------------------------------------------- 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 2006 Full Year ------------- ------------- ------------- ------------- ----------------- $ 34 $ 58 $ 31 $ 12 $ 135 The distribution by quarter is the result of our policy to immediately vest awards upon retirement for employees who are 55 years old or older, have 10 or more years of service and who have completed six months of service after the grant date (i.e. the fair value of awards for employees who have met these age /years of service requirements is expensed over six months rather than the normal three year vesting period). As the 2006 award was granted on February 17, the impact is higher expense in the second and third quarters. In addition, expense for the first and second quarters is higher because expense for the final months of vesting for the 2003 grant was included in the first two quarters. As a result of prior decisions that resulted in full vesting of the 2004 and 2005 awards prior to 2006, a full complement of stock-based compensation expense will not be recognized until 2009. Page 21-------------------------------------------------------------------------------- Q21: What is the estimated impact on your financial statements from the adoption of SFAS 158 - Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans? A: The standard requires recognition of the overfunded or underfunded status of pension and other postretirement benefit plans on the balance sheet. The offset to the additional asset or liability is recorded to equity. The adoption of FAS 158 is expected to reduce Caterpillar's stockholders' equity at December 31, 2006, by approximately $2.6 billion, net of tax. The pronouncement does not affect the results of operations. Cash Flow Q22: Can you comment on third-quarter cash flow? A: The first three quarters of 2006 were very positive for operating cash flow. For Machinery and Engines, operating cash flow was $2,774 million-$832 million more than the $1,942 million in the first three quarters of 2005. The strong cash flow in Machinery and Engines was primarily used for: • Capital Expenditures-$900 million-primarily to support new product programs and additional capacity. • Acquisitions-$512 million, primarily for the Progress Rail acquisition in the second quarter. • Dividends-$531 million-the quarterly dividend is currently 30 cents per share. • Share repurchase-$2,858 million-39.9 million shares were repurchased. Basic shares outstanding at the end of the third quarter were 650.5 million-approximately 20 million shares lower than at year-end 2005. Page 22-------------------------------------------------------------------------------- GLOSSARY OF TERMS 1. Consolidating Adjustments - Eliminations of transactions between Machinery and Engines and Financial Products. 2. Core Operating Costs - Machinery and Engines variable manufacturing cost change adjusted for volume and change in period costs. Excludes the impact of currency and stock-based compensation. 3. Currency - With respect to sales and revenues, currency represents the translation impact on sales resulting from changes in foreign currency exchange rates versus the U.S. dollar. With respect to operating profit, currency represents the net translation impact on sales and operating costs resulting from changes in foreign currency exchange rates versus the U.S. dollar. Currency includes the impacts on sales and operating profit for the Machinery and Engines lines of business only; currency impacts on Financial Products revenues and operating profit are included in the Financial Products portions of the respective analyses. With respect to other income/expense, currency represents the effects of forward and option contracts entered into by the company to reduce the risk of fluctuations in exchange rates and the net effect of changes in foreign currency exchange rates on our foreign currency assets and liabilities for consolidated results. 4. EAME - Geographic region including Europe, Africa, the Middle East and the Commonwealth of Independent States (CIS). 5. Earning Assets - These assets consist primarily of total finance receivables net of unearned income, plus equipment on operating leases, less accumulated depreciation at Cat Financial. 6. Engines - A principal line of business including the design, manufacture, marketing and sales of engines for Caterpillar machinery; electric power generation systems; on-highway vehicles and locomotives; marine, petroleum, construction, industrial, agricultural and other applications; and related parts. Reciprocating engines meet power needs ranging from 5 to 21,500 horsepower (4 to over 16 000 kilowatts). Turbines range from 1,600 to 20,500 horsepower (1 200 to 15 000 kilowatts). 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 investor in independent power projects using Caterpillar power generation equipment and services. 8. Latin America - Geographic region including Central and South American countries and Mexico. 9. Machinery - A principal line of business which includes the design, manufacture, marketing and sales of construction, mining and forestry machinery--track and wheel tractors, track and wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, telehandlers, skid steer loaders and related parts. Also includes logistics services for other companies and rail-related products and services. Page 23-------------------------------------------------------------------------------- 10. Machinery and Engines (M&E) - Due to the highly integrated nature of operations, it represents the aggregate total of the Machinery and Engines lines of business and includes primarily our manufacturing, marketing and parts distribution operations. 11. Managed Distribution - The process to provide a fair and equitable allocation of available machine and engine production positions to worldwide dealers on models where demand exceeds factory supply. 12. Manufacturing Costs - Manufacturing costs represent the volume-adjusted change for variable costs and the absolute dollar change for period manufacturing costs. Variable manufacturing costs are defined as having a direct relationship with the volume of production. This includes material costs, direct labor and other costs that vary directly with production volume such as freight, power to operate machines and supplies that are consumed in the manufacturing process. Period manufacturing costs support production but are defined as generally not having a direct relationship to short-term changes in volume. Examples include machine and equipment repair, depreciation on manufacturing assets, facility support, procurement, factory scheduling, manufacturing planning and operations management. Excludes the impact of currency and stock-based compensation. 13. M&E Other Operating Expenses - Comprised primarily of gains (losses) on disposal of long-lived assets, long-lived asset impairment charges and impairment of goodwill. 14. Period Costs - Comprised of Machinery and Engines period manufacturing costs, SG&A expense and R&D expense. Excludes the impact of currency and stock-based compensation. 15. Price Realization - The impact of net price changes excluding currency. Includes the impact of changes in the relative weighting of sales between geographic regions. 16. Sales Volume - With respect to sales and revenues, sales volume represents the impact of changes in the quantities sold for machines, engines and parts. With respect to operating profit, sales volume represents the impact of changes in the quantities sold for machines, engines and parts combined with the net operating profit impact of changes in the relative weighting of machines, engines and parts sales with respect to total sales. 17. Stock-Based Compensation - As required by Statement of Financial Accounting Standards 123R, we began expensing stock-based compensation awards in 2006. Compensation cost is based on the fair value of the award on the date of grant. Our awards consist of stock options and stock-settled stock appreciation rights (SARs). 18. 6 Sigma - On a technical level, 6 Sigma represents a measure of variation that achieves 3.4 defects per million opportunities. At Caterpillar, 6 Sigma represents a much broader cultural philosophy to drive continuous improvement throughout the value chain. It is a fact-based, data-driven methodology that we are using to improve processes, enhance quality, cut costs, grow our business and deliver greater value to our customers through Black Belt-led project teams. At Caterpillar, 6 Sigma goes beyond mere process improvement -it has become the way we work as teams to process business information, solve problems and manage our business successfully. Page 24-------------------------------------------------------------------------------- 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 29-34 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 October 20, 2006. 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/investor http://www.cat.com/irwebcast (live broadcast/replays of quarterly conference call) Caterpillar contact: Rusty Dunn Corporate Public Affairs (309) 675-4803 [email protected] Page 25-------------------------------------------------------------------------------- Caterpillar Inc. Condensed Consolidated Statement of Results of Operations (Unaudited) (Dollars in millions except per share data) Three Months Ended Nine Months Ended September 30, September 30, 2006 2006 2005 2005 -------------- ------------- ------------- ---------------Sales and revenues: Sales of Machinery and Engines $ 9,842 $ 8,392 $ 28,541 $ 24,965 Revenues of Financial Products 675 585 1,973 1,711 --- ------ --- --- ------ -- --- ------ -- --- ------- --- Total sales and revenues 10,517 8,977 30,514 26,676 Operating costs: Cost of goods sold 7,610 6,547 21,578 19,652 Selling, general and administrative 988 775 2,690 2,308 expenses Research and development expenses 329 285 979 794 Interest expense of Financial 266 197 754 551 Products Other operating expenses 246 233 738 654 --- ------ --- --- ------ -- --- ------ -- --- ------- --- Total operating costs 9,439 8,037 26,739 23,959 --- ------ --- --- ------ -- --- ------ -- --- ------- ---Operating profit 1,078 940 3,775 2,717 Interest expense excluding Financial 72 68 206 198 Products Other income (expense) 72 80 165 278 --- ------ --- --- ------ -- --- ------ -- --- ------- ---Consolidated profit before taxes 1,078 952 3,734 2,797 Provision for income taxes 334 303 1,153 850 --- ------ --- --- ------ -- --- ------ -- --- ------- --- Profit of consolidated companies 744 649 2,581 1,947 Equity in profit (loss) of 25 18 74 61 unconsolidated affiliated companies --- ------ --- --- ------ -- --- ------ -- --- ------- ---Profit $ 769 $ 667 $ 2,655 $ 2,008 --- ------ --- --- ------ -- --- ------ -- --- ------- ---Profit per common share $ 1.18 $ .98 $ 4.01 $ 2.95 Profit per common share - diluted 1 $ 1.14 $ .94 $ 3.86 $ 2.84 Weighted average common sharesoutstanding (millions)- Basic 653.2 678.8 662.4 680.5- Diluted 1 677.2 710.7 688.5 707.4Cash dividends declared per common share $ $ - $ .55 $ .46 - 1 Diluted by assumed exercise of stock options and SARs, using the treasury stock method. Page 26-------------------------------------------------------------------------------- Caterpillar Inc. Condensed Consolidated Statement of Financial Position (Unaudited) (Millions of dollars) Sep. 30, Dec. 31, 2006 2005 ------------------ ------------------Assets Current assets: Cash and short-term investments $ 553 $ 1,108 Receivables - trade and other 8,246 7,526 Receivables - finance 6,376 6,442 Deferred and refundable income taxes 403 255 Prepaid expenses 2,107 2,146 Inventories 6,411 5,224 ---- -------- ---- ---- -------- ---- Total current assets 24,096 22,701 Property, plant and equipment - net 8,424 7,988 Long-term receivables - trade and other 742 1,037 Long-term receivables - finance 11,178 10,301 Investments in unconsolidated affiliated companies 606 565 Deferred income taxes 986 857 Intangible assets 646 424 Goodwill 1,877 1,451 Other assets 1,928 1,745 ---- -------- ---- ---- -------- ----Total assets $ 50,483 $ 47,069 ---- -------- ---- ---- -------- ----Liabilities Current liabilities: Short-term borrowings: -- Machinery and Engines $ 745 $ 871 -- Financial Products 4,930 4,698 Accounts payable 3,857 3,412 Accrued expenses 2,747 2,617 Accrued wages, salaries and employee benefits 1,388 1,601 Customer advances 742 454 Dividends payable - 168 Deferred and current income taxes payable 685 528 Long-term debt due within one year: -- Machinery and Engines 99 340 -- Financial Products 3,492 4,159 ---- -------- ---- ---- -------- ---- Total current liabilities 18,685 18,848 Long-term debt due after one year: -- Machinery and Engines 4,007 2,717 -- Financial Products 14,138 12,960 Liability for postemployment benefits 3,510 3,161 Deferred income taxes and other liabilities 1,115 951 ---- -------- ---- ---- -------- ----Total liabilities 41,455 38,637 ---- -------- ---- ---- -------- ----Stockholders' equity Common stock 2,441 1,859 Treasury stock (7,031 ) (4,637) Profit employed in the business 14,100 11,808 Accumulated other comprehensive income (482 ) (598) ---- -------- ---- ---- -------- ----Total stockholders' equity 9,028 8,432 ---- -------- ---- ---- -------- ----Total liabilities and stockholders' equity $ 50,483 $ 47,069 ---- -------- ---- ---- -------- ---- Page 27-------------------------------------------------------------------------------- Caterpillar Inc. Condensed Consolidated Statement of Cash Flow (Unaudited) (Millions of dollars) Nine Months Ended September 30, 2006 2005 ---------------- ----------------Cash flow from operating activities: Profit $ 2,655 $ 2,008 Adjustments for non-cash items: Depreciation and amortization 1,220 1,113 Other 110 (89 ) Changes in assets and liabilities: Receivables - trade and other (165 ) (521 ) Inventories (902 ) (794 ) Accounts payable and accrued expenses 327 313 Other assets - net (345 ) 69 Other liabilities - net 666 31 ----- ------- -- ----- ------- --Net cash provided by (used for) operating activities 3,566 2,130 ----- ------- -- ----- ------- --Cash flow from investing activities: Capital expenditures - excluding equipment leased to others (905 ) (709 ) Expenditures for equipment leased to others (798 ) (965 ) Proceeds from disposals of property, plant and equipment 440 447 Additions to finance receivables (7,817 ) (7,310 ) Collections of finance receivables 6,204 4,889 Proceeds from the sale of finance receivables 1,004 916 Investments and acquisitions (net of cash acquired) (512 ) (12 ) Proceeds from sale of available-for-sale securities 255 443 Investments in available-for-sale securities (357 ) (508 ) Other - net 201 145 ----- ------- -- ----- ------- --Net cash provided by (used for) investing activities (2,285 ) (2,664 ) ----- ------- -- ----- ------- --Cash flow from financing activities: Dividends paid (531 ) (449 ) Common stock issued, including treasury shares reissued 383 412 Treasury shares purchased (2,858 ) (1,039 ) Excess tax benefit from stock-based compensation 159 - Proceeds from debt issued (original maturities greater than three 8,629 9,796 months) Payments on debt (original maturities greater than three months) (8,517 ) (7,619 ) Short-term borrowings (original maturities three months or less) - 905 (58 ) net ----- ------- -- ----- ------- --Net cash provided by (used for) financing activities (1,830 ) 1,043 ----- ------- -- ----- ------- --Effect of exchange rate changes on cash (6 ) 13 ----- ------- -- ----- ------- --Increase (decrease) in cash and short-term investments (555 ) 522 Cash and short-term investments at beginning of period 1,108 445 ----- ------- -- ----- ------- --Cash and short-term investments at end of period $ 553 $ 967 ----- ------- -- ----- ------- -- All short-term investments, which consist primarily of highly liquid investments with original maturities of threemonths or less, are considered to be cash equivalents. Page 28-------------------------------------------------------------------------------- Caterpillar Inc. Supplemental Data for Results of Operations For The Three Months Ended September 30, 2006 (Unaudited) (Millions of dollars) Supplemental Consolidating Data ---------------------------------------------------- Consolidated Machinery Financial Consolidating and Engines 1 Products Adjustments ---------------- --------------- ------------ ---------------Sales and revenues: Sales of Machinery and Engines $ 9,842 $ 9,842 $ - $ - Revenues of Financial Products 675 - 801 (126 )2 --- ------- ---- -- --------- -- -- ----- --- -- -------- --- Total sales and revenues 10,517 9,842 801 (126 ) Operating costs: Cost of goods sold 7,610 7,610 - - Selling, general and administrative 988 877 110 1 3 expenses Research and development expenses 329 329 - - Interest expense of Financial 266 - 269 (3 )4 Products Other operating expenses 246 2 251 (7 )3 --- ------- ---- -- --------- -- -- ----- --- -- -------- --- Total operating costs 9,439 8,818 630 (9 ) --- ------- ---- -- --------- -- -- ----- --- -- -------- ---Operating profit 1,078 1,024 171 (117 ) Interest expense excluding Financial 72 76 - (4 )4 Products Other income (expense) 72 (63 ) 22 113 5 --- ------- ---- -- --------- -- -- ----- --- -- -------- ---Consolidated profit before taxes 1,078 885 193 - Provision for income taxes 334 269 65 - --- ------- ---- -- --------- -- -- ----- --- -- -------- --- Profit of consolidated companies 744 616 128 - Equity in profit (loss) of 25 24 1 - unconsolidated affiliated companies Equity in profit of Financial - 129 - (129 )6 Products' subsidiaries --- ------- ---- -- --------- -- -- ----- --- -- -------- ---Profit $ 769 $ 769 $ 129 $ (129 ) --- ------- ---- -- --------- -- -- ----- --- -- -------- --- 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 Three Months Ended September 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 $ 8,392 $ 8,392 $ - $ - Revenues of Financial Products 585 - 667 (82 )2 --- ------- ---- -- --------- -- -- ------ --- -- ------- --- Total sales and revenues 8,977 8,392 667 (82 ) Operating costs: Cost of goods sold 6,547 6,547 - - Selling, general and administrative 775 676 110 (11 )3 expenses Research and development expenses 285 285 - - Interest expense of Financial 197 - 203 (6 )4 Products Other operating expenses 233 4 231 (2 )3 --- ------- ---- -- --------- -- -- ------ --- -- ------- --- Total operating costs 8,037 7,512 544 (19 ) --- ------- ---- -- --------- -- -- ------ --- -- ------- --- Operating profit 940 880 123 (63 ) Interest expense excluding Financial 68 69 - (1 )4 Products Other income (expense) 80 1 17 62 5 --- ------- ---- -- --------- -- -- ------ --- -- ------- ---Consolidated profit before taxes 952 812 140 - Provision for income taxes 303 256 47 - --- ------- ---- -- --------- -- -- ------ --- -- ------- --- Profit of consolidated companies 649 556 93 - Equity in profit (loss) of 18 16 2 - unconsolidated affiliated companies Equity in profit of Financial - 95 - (95 )6 Products' subsidiaries --- ------- ---- -- --------- -- -- ------ --- -- ------- ---Profit $ 667 $ 667 $ 95 $ (95 ) --- ------- ---- -- --------- -- -- ------ --- -- ------- --- 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 30-------------------------------------------------------------------------------- Caterpillar Inc. Supplemental Data for Results of Operations For The Nine Months Ended September 30, 2006 (Unaudited) (Millions of dollars) Supplemental Consolidating Data ---------------------------------------------------- Consolidated Machinery Financial Consolidating and Engines 1 Products Adjustments ---------------- -------------- ------------ ----------------Sales and revenues: Sales of Machinery and Engines $ 28,541 $ 28,541 $ - $ - Revenues of Financial Products 1,973 - 2,315 (342 )2 --- ------- ---- -- -------- -- -- ------ -- -- -------- ---- Total sales and revenues 30,514 28,541 2,315 (342 ) Operating costs: Cost of goods sold 21,578 21,578 - - Selling, general and administrative 2,690 2,378 326 (14 )3 expenses Research and development expenses 979 979 - - Interest expense of Financial 754 - 761 (7 )4 Products Other operating expenses 738 30 730 (22 )3 --- ------- ---- -- -------- -- -- ------ -- -- -------- ---- Total operating costs 26,739 24,965 1,817 (43 ) --- ------- ---- -- -------- -- -- ------ -- -- -------- ---- Operating profit 3,775 3,576 498 (299 ) Interest expense excluding Financial 206 214 - (8 )4 Products Other income (expense) 165 (194 ) 68 291 5 --- ------- ---- -- -------- -- -- ------ -- -- -------- ----Consolidated profit before taxes 3,734 3,168 566 - Provision for income taxes 1,153 962 191 - --- ------- ---- -- -------- -- -- ------ -- -- -------- ---- Profit of consolidated companies 2,581 2,206 375 - Equity in profit (loss) of 74 72 2 - unconsolidated affiliated companies Equity in profit of Financial - 377 - (377 )6 Products' subsidiaries --- ------- ---- -- -------- -- -- ------ -- -- -------- ----Profit $ 2,655 $ 2,655 $ 377 $ (377 ) --- ------- ---- -- -------- -- -- ------ -- -- -------- ---- 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 31-------------------------------------------------------------------------------- Caterpillar Inc. Supplemental Data for Results of Operations For The Nine Months Ended September 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 $ 24,965 $ 24,965 $ - $ - Revenues of Financial Products 1,711 - 1,935 (224 )2 --- ------- ---- -- ------- --- -- ------ -- -- -------- ---- Total sales and revenues 26,676 24,965 1,935 (224 ) Operating costs: Cost of goods sold 19,652 19,652 - - Selling, general and administrative 2,308 2,013 328 (33 )3 expenses Research and development expenses 794 794 - - Interest expense of Financial 551 - 565 (14 )4 Products Other operating expenses 654 6 653 (5 )3 --- ------- ---- -- ------- --- -- ------ -- -- -------- ---- Total operating costs 23,959 22,465 1,546 (52 ) --- ------- ---- -- ------- --- -- ------ -- -- -------- ----Operating profit 2,717 2,500 389 (172 ) Interest expense excluding Financial 198 202 - (4 )4 Products Other income (expense) 278 76 34 168 5 --- ------- ---- -- ------- --- -- ------ -- -- -------- ----Consolidated profit before taxes 2,797 2,374 423 - Provision for income taxes 850 704 146 - --- ------- ---- -- ------- --- -- ------ -- -- -------- ---- Profit of consolidated companies 1,947 1,670 277 - Equity in profit (loss) of 61 54 7 - unconsolidated affiliated companies Equity in profit of Financial - 284 - (284 )6 Products' subsidiaries --- ------- ---- -- ------- --- -- ------ -- -- -------- ----Profit $ 2,008 $ 2,008 $ 284 $ (284 ) --- ------- ---- -- ------- --- -- ------ -- -- -------- ---- 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 32-------------------------------------------------------------------------------- Caterpillar Inc. Supplemental Data for Cash Flow For The Nine Months Ended September 30, 2006 (Unaudited) (Millions of dollars) Supplemental Consolidating Data ---------------------------------------------------- Consolidated Machinery Financial Consolidating and Engines1 Products Adjustments --------------- ------------- --------------- --------------Cash flow from operating activities: Profit $ 2,655 $ 2,655 $ 377 $ (377 )2 Adjustments for non-cash items: Depreciation and amortization 1,220 721 499 - Undistributed profit of Financial - (377 ) - 377 3 Products Other 110 113 (279 ) 276 4 Changes in assets and liabilities: Receivables - trade and other (165 ) 15 78 (258 )4/5 Inventories (902 ) (902 ) - - Accounts payable and accrued 327 258 51 18 4 expenses Other assets - net (345 ) (280 ) (27 ) (38 )4 Other liabilities - net 666 571 73 22 4 ---- ------ --- --- ------ -- --- ------- --- -- ------- ---Net cash provided by (used for) operating 3,566 2,774 772 20activities ---- ------ --- --- ------ -- --- ------- --- -- ------- ---Cash flow from investing activities: Capital expenditures - excluding (905 ) (900 ) (33 ) 28 4 equipment leased to others Expenditures for equipment leased to (798 ) - (822 ) 24 4 others Proceeds from disposals of property, 440 22 456 (38 )4 plant and equipment Additions to finance receivables (7,817 ) - (26,783 ) 18,966 5 Collections of finance receivables 6,204 - 24,465 (18,261 )5 Proceeds from the sale of finance 1,004 - 1,747 (743 )5 receivables Net intercompany borrowings - 36 (235 ) 199 6 Investments and acquisitions (net of (512 ) (512 ) - - cash acquired) Proceeds from sale of 255 17 238 - available-for-sale securities Investments in available-for-sale (357 ) (34 ) (323 ) - securities Other - net 201 5 204 (8 )7 ---- ------ --- --- ------ -- --- ------- --- -- ------- ---Net cash provided by (used for) investing (2,285 ) (1,366 ) (1,086 ) 167activities ---- ------ --- --- ------ -- --- ------- --- -- ------- ---Cash flow from financing activities: Dividends paid (531 ) (531 ) - - Common stock issued, including 383 383 (12 ) 12 7 treasury shares reissued Treasury shares purchased (2,858 ) (2,858 ) - - Excess tax benefit from stock-based 159 159 - - compensation Net intercompany borrowings - 235 (36 ) (199 )6 Proceeds from debt issued (original 8,629 1,378 7,251 - maturities greater than three months) Payments on debt (original maturities (8,517 ) (766 ) (7,751 ) - greater than three months) Short-term borrowings (original 905 (10 ) 915 - maturities three months or less) - net ---- ------ --- --- ------ -- --- ------- --- -- ------- ---Net cash provided by (used for) financing (1,830 ) (2,010 ) 367 (187 )activities ---- ------ --- --- ------ -- --- ------- --- -- ------- ---Effect of exchange rate changes on cash (6 ) 12 (18 ) - ---- ------ --- --- ------ -- --- ------- --- -- ------- ---Increase (decrease) in cash and short-term (555 ) (590 ) 35 -investmentsCash and short-term investments at 1,108 951 157 -beginning of period ---- ------ --- --- ------ -- --- ------- --- -- ------- ---Cash and short-term investments at end of $ 553 $ 361 $ 192 $ -period ---- ------ --- --- ------ -- --- ------- --- -- ------- --- 1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.2 Elimination of Financial Products profit after tax due to equity method of accounting.3 Non-cash adjustment for the undistributed earnings from Financial Products.4 Elimination of non-cash adjustments and changes in assets and liabilities related to consolidated reporting.5 Reclassification of Cat Financial's cash flow activity from investing to operating for receivables that arose from the sale of inventory.6 Net proceeds and payments to/from Machinery and Engines and Financial Products.7 Change in investment and common stock related to Financial Products. Page 33-------------------------------------------------------------------------------- Caterpillar Inc. Supplemental Data for Cash Flow For The Nine Months Ended September 30, 2005 (Unaudited) (Millions of dollars) Supplemental Consolidating Data --------------------------------------------------- Consolidated Machinery Financial Consolidating and Engines1 Products Adjustments ------------- -------------- ------------- --------------Cash flow from operating activities: Profit $ 2,008 $ 2,008 $ 284 $ (284 )2 Adjustments for non-cash items: Depreciation and amortization 1,113 633 480 - Undistributed profit of Financial - (284 ) - 284 3 Products Other (89 ) (150 ) (141 ) 202 4 Changes in assets and liabilities: Receivables - trade and other (521 ) 248 10 (779 )4/5 Inventories (794 ) (794 ) - - Accounts payable and accrued 313 207 114 (8 )4 expenses Other assets - net 69 100 (23 ) (8 )4 Other liabilities - net 31 (26 ) 58 (1 )4 -- ------ --- -- ------ ---- -- ------- -- -- ------- ---Net cash provided by (used for) operating 2,130 1,942 782 (594 )activities -- ------ --- -- ------ ---- -- ------- -- -- ------- ---Cash flow from investing activities: Capital expenditures - excluding equipment (709 ) (677 ) (32 ) - leased to others Expenditures for equipment leased to (965 ) - (965 ) - others Proceeds from disposals of property, plant 447 31 416 - and equipment. Additions to finance receivables (7,310 ) - (24,898 ) 17,588 5 Collections of finance receivables 4,889 - 21,589 (16,700 )5 Proceeds from the sale of finance 916 - 1,178 (262 )5 receivables Net intercompany borrowings - (315 ) (11 ) 326 6 Investments and acquisitions (net of cash (12 ) (12 ) - - acquired) Proceeds from sale of available-for-sale 443 17 426 - securities Investments in available-for-sale (508 ) (19 ) (489 ) - securities Other - net 145 (5 ) 150 - -- ------ --- -- ------ ---- -- ------- -- -- ------- ---Net cash provided by (used for) investing (2,664 ) (980 ) (2,636 ) 952activities -- ------ --- -- ------ ---- -- ------- -- -- ------- ---Cash flow from financing activities: Dividends paid (449 ) (449 ) - - Common stock issued, including treasury 412 412 - - shares reissued Treasury shares purchased (1,039 ) (1,039 ) - - Net intercompany borrowings - 11 315 (326 )6 Proceeds from debt issued (original 9,796 146 9,650 - maturities greater than three months) Payments on debt (original maturities (7,619 ) (85 ) (7,534 ) - greater than three months) Short-term borrowings (original (58 ) 474 (532 ) - maturities three months or less) - net -- ------ --- -- ------ ---- -- ------- -- -- ------- ---Net cash provided by (used for) financing 1,043 (530 ) 1,899 (326 )activities -- ------ --- -- ------ ---- -- ------- -- -- ------- ---Effect of exchange rate changes on cash 13 52 (7 ) (32 )7 -- ------ --- -- ------ ---- -- ------- -- -- ------- ---Increase (decrease) in cash and short-term 522 484 38 -investmentsCash and short-term investments at beginning 445 270 175 -of period -- ------ --- -- ------ ---- -- ------- -- -- ------- ---Cash and short-term investments at end of $ 967 $ 754 $ 213 $ -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 34-------------------------------------------------------------------------------- Safe Harbor Statement under the Securities Litigation Reform Act of 1995 Certain statements contained in our third quarter 2006 results release andconference call transcript are forward-looking and involve uncertainties thatcould significantly impact results. The words "believes," "expects,""estimates," "anticipates," "will be," "should" and similar words or expressionsidentify forward-looking statements made on behalf of Caterpillar. Uncertaintiesinclude factors that affect international businesses, as well as mattersspecific to the company and the markets it serves. World Economic FactorsOur projection of increased sales of Machinery and Engines in 2006 assumesgrowth occurs in all regions. Principal factors underlying those forecastsinclude world economic growth of almost four percent, high commodity prices andgood growth in both construction and mining. The major economic risk is thatpast interest rate hikes in the U.S., which have already depressed housingconstruction and sales of smaller machines, could impact other sectors andreduce replacement buying. Outside North America, a sharp drop in commodity prices could reduce investmentin energy and mining development as well as infrastructure construction. Inaddition, recent interest rate increases in Europe could undermine a recovery inconstruction that just started. Either of those developments could slow theexpected increase in our results. Demand for some products has strained production capabilities. Our forecast isvulnerable to supply disruptions, which could result from component shortages,transportation problems or new product introduction delays. Our preliminary outlook for 2007 projects about 3.5 percent growth in the worldeconomy, down slightly from 2006. In that environment, we expect sales andrevenues will increase zero to five percent. We expect the U.S. Federal Reserve will cut interest rates in 2007, allowing theeconomy to escape with a mid-cycle slowdown. Should the Fed hold interest ratessteady well into 2007, or raise interest rates, the risk of a recession orsevere slowdown would increase. Under those conditions, housing could declinemore than expected, activity in other sectors could slow and fleet owners mightscale back plans to replace machines. Those developments could be detrimental toour sales and revenue outlook. New emissions standards for on-highway diesel truck engines come into effect in2007, and we expect that implementation of the standards will significantlyreduce sales of truck engines early in the year. However, the impact could beworse than anticipated, particularly if the economy weakens more than projected. Preliminary 2007 forecasts assume modest increases in interest rates outsideNorth America and only a slight slowing in economic growth. Should central banksreact more aggressively, perhaps in response to inflation concerns, economicgrowth and construction could grow less than expected. That development couldreduce growth in sales and revenues. The expected increase in sales and revenues assumes continued good growth inboth mining and energy development worldwide. Risks to the forecast include asignificant weakening in commodity prices, widespread increases in interestrates, a slowdown in world industrial production, lower inflows of foreigninvestment and political disruptions. Page 35-------------------------------------------------------------------------------- Commodity PricesCommodities represent a significant sales opportunity, with prices andproduction as key drivers. Prices have improved sharply over the past fouryears, and our outlook assumes that continued growth in world industrialproduction, low inventories and some difficulties in increasing production willcause metals prices to remain high enough in 2006 to encourage further mineinvestment. We expect most metals prices to decline in 2007 but not so much asto make new investment unprofitable. However, metals prices are volatile andrespond quickly to any signs that markets are being over-supplied. Factors thatcould signal excess supply include an unexpected rise in inventories, minesincreasing output faster than expected, a slowing in world industrial productionand speculative selling of metals. Any, or all, of these developments couldcause prices to drop sharply and mines to scale back investments to thedetriment of our results. International coal prices strengthened in recent months, but prices in theUnited States softened. We expect some decline in prices throughout 2007, butanticipate that worldwide demand for coal will increase and that mines will findit financially attractive to increase capacity. The outlook for continued growthin coal mining is vulnerable to mine permitting problems, transportationdifficulties, weak utility demand, slow growth in world industrial productionand steep declines in oil and natural gas prices. Oil and natural gas prices increased sharply over the past four years due tostrong demand and high capacity usage. Higher energy prices have not haltedeconomic recoveries since strong demand boosted prices and world productionincreased. High prices are encouraging more exploration and development. Pricesdeclined recently, but we expect prices to remain high enough throughout 2007 tofavor investment in production capacity. Risks are twofold. One, prices could surge sharply higher due to OPEC productioncuts or political unrest in a major producing country. The resulting oilshortages and price spikes could slow economies, potentially with a depressingimpact on our sales. Two, weak oil demand, particularly in the face of supplyincreases, could lead to much lower prices and a reduction in exploration anddevelopment. Monetary and Fiscal PoliciesFor most companies operating in a global economy, monetary and fiscal policiesimplemented in the United States and abroad could have a significant impact oneconomic growth and demand for our product. In general, higher than expectedinterest rates, reductions in government spending, higher taxes, excessivecurrency movements and uncertainty over key policies are some factors likely tolead to slower economic growth and lower industry demand. With economic data looking more favorable, central banks in many countries haveraised interest rates from the lowest rates in decades, with the U. S. FederalReserve Bank being the most aggressive. Our outlook assumes that the Fed willkeep rates steady for the rest of this year and then cut rates in 2007. Shouldthat not occur, risks of a recession or significant slowdown would increase tothe detriment of our results. Many countries outside the United States willraise rates further. Our assumption is that increases will be cautious and causeonly modest slowing in economic growth next year. Should central banks raiseinterest rates more aggressively than anticipated, both economic growth and oursales could suffer. Budget deficits in many countries remain higher than governments would like. Ouroutlook assumes that governments will not aggressively raise taxes and slashspending to deal with their budget imbalances. Such actions could disrupt growthand negatively affect our sales. Page 36-------------------------------------------------------------------------------- Political FactorsPolitical factors in the United States and abroad can impact global companies.Our outlook assumes that no major disruptive changes in economic policies occurin either the United States or other major economies. Significant changes ineither taxing or spending policies could reduce activities in sectors importantto our businesses, thereby reducing sales. Our outlook assumes that there will be no widespread military conflicts ineither North Korea or the Middle East in the forecast period. Such militaryconflicts could severely disrupt sales into countries affected as well as nearbycountries. Our outlook also assumes that there will be no major terrorist attacks. If thereis a major terrorist attack, confidence could be undermined, potentially causinga sharp drop in economic activities and our sales. Attacks in major developedeconomies would be the most disruptive. Our outlook assumes that efforts by countries to increase their exports will notresult in retaliatory countermeasures by other countries to block such exports,particularly in the Asia/Pacific region. Our outlook includes a negative impact from the phaseout of the ExtraterritorialIncome Exclusion as enacted by the American Jobs Creation Act of 2004. Ouroutlook assumes any other tax law changes will not negatively impact ourprovision for income taxes. Currency FluctuationsThe company has costs and revenues in many currencies and is therefore exposedto risks arising from currency fluctuations. Our outlook assumes no significantcurrency crises occur that could disrupt international trade or thecompetitiveness of our facilities. Should any crisis develop, economic activityand our results could be negatively impacted. The company's largest manufacturing presence is in the United States, so anyunexpected strengthening of the dollar tends to raise the foreign currency coststo our end users and reduce our global competitiveness. Dealer/Original Equipment Manufacturers Inventory PracticesThe company sells finished products through an independent dealer network ordirectly to Original Equipment Manufacturers (OEM). Both carry inventories offinished products as part of ongoing operations and adjust those inventoriesbased on their assessments of future needs. Such adjustments can impact ourresults either positively or negatively. The current outlook assumes our dealers will make significant reductions torecord high machine inventories. Should dealers control inventories even moretightly, possibly if construction and mining were weaker than expected, oursales would be lower. Page 37-------------------------------------------------------------------------------- Financial Products Division FactorsInherent in the operation of Cat Financial is the credit risk associated withits customers. The creditworthiness of each customer and the rate ofdelinquencies, repossessions and net losses on customer obligations are directlyimpacted by several factors, including, but not limited to, relevant industryand economic conditions, the availability of capital, the experience andexpertise of the customer's management team, commodity prices, political eventsand the sustained value of the underlying collateral. Additionally, interestrate movements create a degree of risk to our operations by affecting the amountof interest expense associated with our debt portfolio. Our "match funding"policy addresses interest rate risk by aligning the interest rate profile (fixedor floating rate) of our debt portfolio with the interest rate profile of ourreceivables portfolio (loans and leases with customers and dealers) withinpre-determined ranges on an ongoing basis. To achieve our match fundingobjectives, we issue debt with a similar interest rate profile to ourreceivables and also use interest rate swap agreements to manage our interestrate risk exposure to interest rate changes and in some cases to lower our costof borrowed funds. If interest rates move upward more sharply than anticipated,our financial results could be negatively impacted. Cat Financial's results arealso dependent upon the demand for Caterpillar machinery and engines; ourmarketing, operational and administrative support; and competition from otherfinance companies. With respect to our insurance and investment managementoperations, changes in the equity and bond markets could cause an impairment ofthe value of our investment portfolio, thus requiring a negative adjustment toearnings. Other FactorsThe rates of infrastructure spending, housing starts, commercial constructionand mining play a significant role in the company's results. Our products are anintegral component of these activities, and as these activities increase ordecrease in the U.S. or abroad, demand for our products may be significantlyimpacted. Historical data show that major flu epidemics often caused sharp drops ineconomic output. Should the avian flu virus gain the ability to transfer fromperson to person, a severe epidemic could occur. The resulting disruptions toeconomic activity could reduce our sales. Projected cost savings or synergies from alliances with new partners could alsobe 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 thejurisdictions 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 mixof sales. If actual results vary from this projected geographic and product mixof sales, our results could be negatively impacted. The company operates in a highly competitive environment, and our outlookdepends on a forecast of the company's share of industry sales. An unexpectedreduction in that share could result from pricing or product strategies pursuedby competitors, unanticipated product or manufacturing difficulties, a failureto price the product competitively or an unexpected buildup in competitors' newmachine or dealer owned rental fleets, leading to severe downward pressure onmachine rental rates and/or used equipment prices. The environment remains competitive from a pricing standpoint. Our 2006 salesoutlook assumes that the company continues to recognize worldwide machine priceactions communicated to dealers during the year. Our 2007 sales outlook assumesthat the price increases announced for January 2007 hold in the marketplace.While we expect that the environment will continue to absorb these priceactions, changes in the marketplace acceptance would negatively impact ourresults. Moreover, additional price discounting to maintain our competitiveposition could result in lower than anticipated realization. Page 38-------------------------------------------------------------------------------- Our sales and results are generally sensitive to changes in economic growth,particularly those originating in construction, mining and energy. Developmentsreducing such activities also tend to lower our sales. In addition to thefactors mentioned above, our sales and results could be negatively impacted byany of the following: • Any sudden drop in consumer or business confidence; • Delays in legislation needed to fund public construction; • Regulatory or legislative changes that slow activity in key industries; and/or • Unexpected collapses in stock markets. This discussion of uncertainties is by no means exhaustive but is designed tohighlight important factors that may impact our outlook. Obvious factors such asgeneral economic conditions throughout the world do not warrant furtherdiscussion but are noted to further emphasize the myriad of contingencies thatmay cause the company's actual results to differ from those currentlyanticipated. Page 39-------------------------------------------------------------------------------- This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Ct Automotive