21st Jul 2005 17:42
Caterpillar Inc21 July 2005 Caterpillar Inc.2Q Earnings Release July 21, 2005-------------------------------------------------------------------------------- FOR IMMEDIATE RELEASE Caterpillar Inc. Announces Record Sales and Profits Amid Continued Growth In Key Markets and Industries; Company Again Raises Full-Year Outlook PEORIA, Ill. - Bolstered by continued global strength in the markets andindustries it serves, Caterpillar Inc. (NYSE: CAT) today reported recordsecond-quarter sales and revenues of $9.360 billion and record profit of $760million, or $1.08 per share. First half of the year results were also records,with company sales and revenues of $17.699 billion and profit of $1.341 billion,or $1.89 per share. "Our global markets continue to exhibit the fundamental strengths neededfor further growth, and Team Caterpillar remains well positioned to leveragethis unprecedented opportunity now and in the years ahead," saidCaterpillar Chairman and Chief Executive Officer Jim Owens. "We're aggressively pursuing improvement - utilizing our leadership position, strongcash flow and global capabilities in engineering, purchasing, sales andmanufacturing to enhance the value customers and stockholders receive from aninvestment in Caterpillar." Sales and revenues of $9.360 billion were up $1.777 billion, or 23 percent,compared to $7.583 billion in the second quarter of 2004. Improving sales volumeand price realization drove the increase in sales and revenues. Profit of $760 million, or $1.08 a share, was up 34 percent compared to profitof $566 million in the second quarter of 2004. The main contributors wereimproved price realization and sales volume, partially offset by higher coreoperating costs, about half of which were material costs. Page 1-------------------------------------------------------------------------------- "We're very pleased that this quarter marks another improvementin our profitability as measured by return on sales - 8.1 percent this quartercompared to 7.5 percent a year ago," Owens added. "Somewhatbetter prices were a positive factor in the profit improvement, and for the mostpart, we expect the price increases announced earlier this year to hold in themarketplace. That said, we are closely monitoring the competitive landscape andare determined to hold our market position. Further, our results continue to bepositively driven by literally hundreds of 6 Sigma projects which are beingcompleted every month." Outlook The outlook for 2005 has been increased over previously reported levels. Salesand revenues are now expected to be up 18 to 20 percent from 2004. The profitoutlook for 2005 has also been improved to reflect an estimated profit range of$4.00 to $4.20 per share. The previous outlook reflected sales and revenues up 16 to 18 percent, andprofit per share of $3.89 to $4.03, up 35 to 40 percent from 2004. "The strength of our markets is clearly not a blip on the radar," Owens said. "Key indicators such as low interest rates, robustcommodity prices and needed investment for capacity in electric power and energyproduction point to continued growth. While this growth is expected to continuein the near term, we're laying a solid foundation for our future bystaying focused on prudently managing our cost structure and margins whilecontinuing to invest in new products and production capacity to meet strongcustomer demand." (Complete outlook begins on page 11.) For 80 years, Caterpillar has been building the world's infrastructure and, inpartnership with our independent dealers, is driving positive and sustainablechange on every continent. Caterpillar is a technology leader and the world'slargest maker of construction and mining equipment, diesel and natural gasengines and industrial gas turbines. More information is available at http://www.CAT.com. Note: Glossary of terms included on pages 21-22; first occurrence of terms shownin bold italics. Page 2-------------------------------------------------------------------------------- Key Points Second-Quarter Comparison • Second-quarter sales and revenues were a record -- $9.360 billion, and were 23 percent higher than the second quarter of 2004. • Machinery sales increased 25 percent, Engines sales increased 22 percent, and Financial Products revenues rose 19 percent from a year ago. • Second-quarter profit was a record -- $760 million, and was 34 percent higher than the second quarter of 2004. • As expected, core operating costs were higher than a year ago, largely due to material costs, and continue to be a challenge. • The second-quarter provision for income taxes includes an $11 million discrete charge related to our plan to take advantage of the temporary repatriation incentive provided in the American Jobs Creation Act. We expect to repatriate earnings of approximately $1.4 billion in 2005. Outlook • The outlook for 2005 sales and revenues has been raised, and now reflects an increase of 18 to 20 percent from 2004. • The 2005 profit outlook has increased and now reflects a profit range of $4.00 to $4.20 per share. General • Caterpillar stock (symbol CAT) split two-for-one during the second quarter and all per share amounts in this release reflect the effects of the stock split. A table has been included in the Investor section of the Caterpillar website showing historical split-adjusted quarterly profit per share amounts. • A question and answer section has been included in this release starting on page 16. Page 3-------------------------------------------------------------------------------- DETAILED ANALYSIS Second Quarter 2005 vs. Second Quarter 2004 Sales and Revenues Sales and revenues for the second quarter of 2005 were $9.360 billion, up $1.777billion or 23 percent from second quarter 2004. Machinery volume was up $768million, Engines volume was up $359 million, price realization improved $470million, and currency had a positive impact on sales of $87 million, dueprimarily to a stronger euro compared with second quarter 2004. In addition,Financial Products revenues increased $93 million. Page 4-------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Sales and Revenues by Geographic Region (Millions of Total % North % EAME % Latin % Asia/ %dollars) Change America Change Change America Change Pacific Change ------- ------ ------- ------ ------- ------- -------- ------ -------- -------2nd Quarter2004Machinery $ 4,836 $ 2,674 $ 1,163 $ 346 $ 653Engines1 2,264 1,001 733 177 353Financial 483 341 83 29 30Products2 - ----- - ----- - ----- -- ----- -- ----- $ 7,583 $ 4,016 $ 1,979 $ 552 $ 1,036 - ----- - ----- - ----- -- ----- -- ----- 2nd Quarter2005Machinery $ 6,026 25% $ 3,321 24% $ 1,430 23% $ 526 52% $ 749 15%Engines1 2,758 22% 1,226 22% 949 29% 251 42% 332 -6%Financial 576 19% 410 20% 84 1% 35 21% 47 57%Products2 - ----- - ----- - ----- -- ----- -- ----- $ 9,360 23% $ 4,957 23% $ 2,463 24% $ 812 47% $ 1,128 9% - ----- - ----- - ----- -- ----- -- ----- 1 Does not include internal engines transfers of $537 million and $447 million in 2005 and 2004, respectively.Internal engines transfers are valued at prices comparable to those for unrelated parties.2 Does not include revenues earned from Machinery and Engines of $80 million and $150 million in 2005 and 2004,respectively.------------------------------------------------------------------------------------------------------------------ Machinery Sales Machinery sales were $6.026 billion in the second quarter of 2005 - up $1.190billion or 25 percent from the second quarter of 2004. Sales volume was $768million of the increase, price realization accounted for $366 million, and theremaining $56 million was due to currency. Sales volume benefited from continuedstrong growth in dealer sales to end users in all regions and in nearly allindustries. Dealer machine inventory declined during the second quarters of both 2004 and2005, which is a normal seasonal development. The decline during the secondquarter of 2005 was greater than a year ago, reflecting dealer efforts tomaintain inventories in line with deliveries. As a result, the inventory declinehad a slightly moderating effect on quarter-over-quarter sales growth.Worldwide, machine inventories in months of sales are at historical lows forthis time of the year. • North America sales were up $647 million or 24 percent. Benefiting from strong demand in most applications, sales volume increased $421 million and price realization added $226 million. Low interest rates and rising home prices supported housing construction, and nonresidential construction benefited from record corporate profits and favorable credit conditions. Mining remained strong - the result of higher coal and metals prices. Page 5-------------------------------------------------------------------------------- • EAME sales were up $267 million or 23 percent -- $162 million from higher volume, $69 million from improved price realization, and $36 million from a favorable currency impact, primarily due to the stronger euro. Sales volume in Europe, where the economy remained weak, was up slightly, the result of a continued recovery in housing construction and some improvement in business investment. Higher metals and energy prices allowed robust economic growth to continue in both Africa/Middle East (AME) and the Commonwealth of Independent States (CIS). As a result, sales volume in those two regions increased significantly. • Latin America sales increased $180 million or 52 percent -- $132 million from higher volume, $37 million from improved price realization, and the remaining $11 million was due to currency. The region continued to benefit from increased capital inflows, higher metals and energy prices, and low domestic interest rates. Sales increased rapidly in most countries and in most applications throughout Latin America. • Asia/Pacific sales were up $96 million or 15 percent -- $53 million from higher volume, $34 million from improved price realization and the remaining $9 million due to currency. Robust mining activity drove sales gains in Australia, India and Indonesia. Sales in China improved over the past three quarters but remained below last year's record second quarter. The Chinese government's administrative actions to slow construction last year caused sales to drop sharply in the last half of 2004. A return to more normal conditions, along with increased financing from Cat Financial, contributed to the improved sales. Engines Sales Engines sales were $2.758 billion in the second quarter of 2005, up $494 millionor 22 percent from the second quarter of 2004. Sales volume was $359 million ofthe increase, price realization added $104 million, and the favorable impact ofcurrency accounted for $31 million of the increase. Dealer engine inventory increased at a slower rate during the second quarter of2005, compared to the rate of increase during the second quarter of 2004. Thelower rate of dealer inventory increases during the second quarter of 2005 had aslight moderating effect on quarter-over-quarter sales growth. Overall, dealerengine inventories are in line with selling rates. Page 6-------------------------------------------------------------------------------- • North America sales were up 22 percent. Sales of on-highway truck engines increased 23 percent, as the industry continued to expand and we maintained our leadership position. On-highway truck growth was a result of increased tonnage versus a year ago, healthy freight carrier profitability and aging fleet replacements. Sales to the petroleum sector increased 69 percent, as high energy prices drove exploration and production. Sales to the electric power sector increased 12 percent, benefiting from investment in data and communication systems, and the impact of tax credits for investment in natural gas generators. Sales to the marine sector were about flat. • EAME sales were up 29 percent. Sales into the electric power sector were up 67 percent, driven by strong demand for prime and standby generator sets, and incremental sales from the acquisition of Turbomach. Sales into the marine sector rose 46 percent, primarily due to strong tugboat demand to support port and shipping activity. Sales of engines to the petroleum sector were down 37 percent with reduced sales of turbines and turbine related services for petroleum projects in the Africa/Middle East region, due primarily to timing of major projects quarter to quarter. • Latin America sales were up 42 percent. Sales of petroleum engines increased 29 percent driven by investments in production capacity. Sales of electric power engines were up 50 percent, primarily influenced by sales of generator sets for disaster preparedness. • Asia/Pacific sales were down 6 percent. Sales of engines to the petroleum sector declined 18 percent primarily as a result of lower sales of turbines and related services due to the timing of major infrastructure projects. Partially offsetting the decrease was a 36 percent increase in marine engine sales driven by strong demand for oceangoing vessels and workboats. Sales to the electric power sector increased 2 percent driven by general business investment in construction and real estate development. Page 7-------------------------------------------------------------------------------- Financial Products Revenues Financial Products revenues were $576 million, up $93 million or 19 percent fromsecond quarter 2004. The increase was due primarily to a $69 million favorableimpact from continued growth of Earning Assets at Cat Financial. Operating Profit Second quarter operating profit improved $251 million, or 33 percent over a yearago, driven by higher price realization and sales volume. In addition, FinancialProducts contributed $28 million to the increase in operating profit. The improvement in price realization was primarily a result of price increasestaken over the past year. Most of the price increases taken during the secondquarter of 2005 were not fully realized in the quarter as a result of the timingof the increases and price protection policies. Page 8-------------------------------------------------------------------------------- Core operating costs rose $476 million from the second quarter of 2004, abouthalf of the increase was material costs, resulting primarily from steel-relatedincreases. In addition, manufacturing costs rose to support increased volume andas a result of remaining inefficiencies due to supply chain constraints.Non-manufacturing related core operating costs were up $76 million - a result ofhigher Research and Development (R&D) and Selling, General and Administrative(SG&A) expenses to support product programs and the growth in volume. As apercent of sales and revenues, the total of SG&A and R&D expenses were lowerthan the second quarter of 2004. -------------------------------------------------------------------------------- Operating Profit by Principal Line of Business (Millions of dollars) 2nd Quarter 2nd Quarter Change 2004 2005 $ ----------------- --------------- -----------------Machinery1 $ 538 $ 676 $ 138Engines1 149 265 116Financial Products 114 142 28Consolidating Adjustments (31 ) (62 ) (31 ) ----- ----- ----- --- ------- --- ------ ----- ----Consolidated Operating Profit $ 770 $ 1,021 $ 251 ----- ----- ----- --- ------- --- ------ ----- ----1 Caterpillar operations are highly integrated; therefore, the company uses a number of allocations to determinelines of business operating profit for Machinery and Engines.------------------------------------------------------------------------------------------------------------------- Operating Profit by Principal Line of Business • Machinery operating profit of $676 million was up $138 million, or 26 percent, from second quarter 2004. The favorable impact of improved price realization and higher sales volume was partially offset by higher core operating costs, higher retirement benefits and the unfavorable impact of currency. • Engines operating profit of $265 million was up $116 million, or 78 percent, from second quarter 2004. The favorable impact of higher sales volume and improved price realization was partially offset by higher core operating costs, higher retirement benefits and the unfavorable impact of currency. • Financial Products operating profit of $142 million was up $28 million, or 25 percent, from second quarter 2004. The increase was primarily due to a $33 million impact from the growth of earning assets and a $12 million impact of lower provision for credit losses due to improved portfolio health, partially offset by a $11 million increase in operating expenses primarily related to growth at Cat Financial. In addition, there was a $9 million unfavorable impact due to favorable reserve adjustments being higher in 2004 than in 2005 at Cat Insurance. Page 9-------------------------------------------------------------------------------- Other Profit/Loss Items • Other income/expense was income of $90 million compared with income of $50 million in the second quarter of 2004 for a favorable impact of $40 million. The change was primarily due to the favorable impact of currency gains of $33 million. • The provision for income taxes in the second quarter reflects an estimated annual tax rate of 29 percent, excluding the discrete items discussed below, and compares to a 27 percent rate in 2004. The increase is primarily due to the impact of the American Jobs Creation Act permitting only 80 percent of Extraterritorial Income Exclusion (ETI) benefits in 2005 as well as a change in our geographic mix of profits. In the second quarter, we completed our evaluation of the repatriation provisions of the American Jobs Creation Act and recognized an income tax charge of $49 million under the provisions of the Act. We expect to repatriate earnings of approximately $1.4 billion in 2005, which includes $500 million subject to the preferential tax treatment allowed by the Act. In connection with our current repatriation plan, we have changed our intention of repatriating earnings of a few selected non-U.S. subsidiaries and have recognized an income tax benefit of $38 million. The net impact of these items is an $11 million discrete charge to our second quarter provision for income taxes. • The equity in profit/loss of unconsolidated affiliated companies favorably impacted profit by $15 million over second-quarter 2004, primarily driven by increased profitability at Shin Caterpillar Mitsubishi Ltd. (SCM). Employment At the end of the second quarter, worldwide employment was 82,248, compared with72,916 one year ago. The increase was primarily due to about 5,000 hourly laboradditions to support higher volume, the conversion of about 2,000 supplementalemployees to full-time employment, and approximately 900 employees fromacquisitions. Page 10-------------------------------------------------------------------------------- Other Significant Events On June 8, 2005, Caterpillar Inc. announced a two-for-one stock split andincreased the quarterly dividend rate 22 percent from 41 cents to 50 cents pershare pre-split. The dividend increase was the largest in our 80-year history(on a split-adjusted basis). The stock split shares were distributed on July 13to stockholders of record at the close of business on June 22, 2005. All priorperiod per share information included in this release has been restated toreflect the split. Supplemental Information Information previously located in this section is now included in tabular formatat http://www.cat.com/investor under the Quarterly Supplemental Informationsection. Outlook -------------------------------------------------------------------------------- Sales and Revenue Outlook - Midpoint of Range1 (Millions of dollars) 2004 2005 % Actual Outlook2 Change ---------------- ---------------- -----------------Machinery and EnginesNorth America $ 14,521 $ 17,700 22%EAME 7,505 9,000 20%Latin America 2,372 2,800 18%Asia/Pacific 3,938 4,200 7% --- -------- --- --- -------- ---Total Machinery and Engines 28,336 33,700 19% --- -------- --- --- -------- ---Financial Products3 1,970 2,400 22% --- -------- --- --- -------- ---Total $ 30,306 $ 36,100 19% --- -------- --- --- -------- ---1 The volume stair step in the Consolidating Operating Profit chart on page 15 reflects sales and revenue at themidpoint of the range. 2 Based on the sales expectations by geographic region, the forecast of Consolidated Sales and Revenues is anincrease of 18 to 20 percent versus 2004. For purposes of this chart, numbers are shown at the middle of the outlookrange (i.e., 19 percent). 3 Does not include revenues earned from Machinery and Engines of $199 million and $275 million in 2004 and 2005outlook, respectively. -------------------------------------------------------------------------------------------------------------------- Sales and Revenues Outlook We project another record year in 2005. We expect sales and revenues willincrease 18 to 20 percent, with Machinery and Engines volume increasing about 10to 12 percent. We expect improved price realization to add over 5 percent,higher Financial Products revenues will add about 2 percent, and the favorableimpact of currency will add less than 1 percent. Page 11-------------------------------------------------------------------------------- • While economic growth is slowing overall from a very robust 2004, 2005 will be another year of solid economic activity. Record profits, favorable credit conditions and years of past underinvestment are producing attractive investment environments, particularly for industries served by Caterpillar. • Despite oil prices nearly tripling over the past three years, inflation has continued within central bank target ranges, often on the low side. Outside the United States, most central banks are holding interest rates at or near the lowest level in decades, with little pressure for rate hikes. In Europe, prolonged weak growth makes even lower interest rates possible. Rates within the United States, while rising, still compare favorably with those of the last business cycle. As a result, we project world economic growth will be from 3 to 3.5 percent this year. • Low interest rates have prompted households to upgrade housing quality. Housing prices are increasing significantly in many countries, encouraging construction to alleviate housing shortages. We expect strong residential construction to continue in most regions this year. • Demand for metals and energy is outpacing growth in supply, maintaining upward pressure on prices. Governments, particularly in developing countries, are using revenues to upgrade infrastructure, some of which is necessary to support increased commodity production. We do not expect supply pressures to ease substantially this year and as a result, commodity prices should remain high enough to encourage investment. • Higher oil and natural gas exploration and production are increasing opportunities in powering drill rigs, well servicing and gas compression. The world has little spare production capacity, so we expect exploration will increase. • Increased international trade and an aging ship fleet are driving strong growth in shipbuilding. Demand for support vessels to cope with port congestion and increased offshore oil and gas production is also increasing. North America (United States and Canada) Machinery and Engines sales areexpected to increase about 22 percent in 2005. Page 12-------------------------------------------------------------------------------- • The U.S. Federal Reserve increased interest rates at each of the past nine meetings, but we expect the Fed may soon slow the pace of rate increases. Economic growth is stabilizing below 4 percent, employment gains are in line with growth in the working age population and core inflation remains low. Consequently, we believe the Federal funds rate should end the year at 4 percent or less and the economy will grow about 3.5 percent in 2005. • U.S. housing starts are on track to exceed 2 million units this year, which would be the best year since 1973. The many positives for housing construction include rising employment, continued low mortgage rates, higher home prices, a move away from mobile homes, increased replacement of older houses and a desire for more second homes. • Nonresidential construction bottomed in 2004 with sluggish recovery to date. However, all the conditions needed for a sustained, rapid recovery, similar to the last recovery, are in place. Businesses have record cash holdings, banks are easing conditions on commercial loans, bond spreads remain attractive and the existing stock of nonresidential structures is inadequate for today's economy. • Prices for metals and energy commodities generally increased throughout the second quarter and are well above year-earlier prices. Production of metals increased 12 percent year-to-date and the 1 percent increase in coal production was insufficient to maintain electrical utility stockpiles. The environment for increasing both production and investment should remain very positive for the rest of the year. • Demand for on-highway trucks is expected to remain high for the rest of the year. Truck tonnage is rising, trucking company profits are high and the truck fleet aged during the last downturn. • Canadian inflation is below the middle of the central bank's target range, which should allow a low interest rate environment to continue throughout 2005. Mining, energy and construction should do well this year as a result. EAME Machinery and Engines sales are expected to increase about 20 percent in2005, driven largely by favorable conditions in AME and the CIS. Page 13-------------------------------------------------------------------------------- • The Euro-area economy is entering its fifth year of below-trend growth and its third year of stable interest rates. With leading indicators turning down, the European Central Bank may need to cut interest rates later this year to revive the economy. Manufacturing in the United Kingdom is declining and retail sales are slowing, suggesting a rate cut is likely. We project overall European growth should be less than 2 percent this year. • Interest rates in Europe have been low enough to benefit housing and investment in some equipment. Housing prices are up sharply in many countries and building permits are increasing for the fourth consecutive year. We expect housing and equipment investment to increase this year. • We forecast economic growth in AME should exceed 5 percent in 2005 and growth in the CIS should exceed 6 percent, the third year of recovery for both. Both regions are benefiting from higher metals and energy prices as well as pro-growth economic policies in some larger economies, such as Turkey, South Africa and Russia. Latin America Machinery and Engines sales are expected to increase about 18percent in 2005. • Positives for the region include low inflation, relatively low domestic interest rates, higher direct investment inflows and increased metals exports. As a result, we expect economies should grow at least 4 percent in 2005, continuing the recovery that started in late 2003. • Overall, the region is a net oil exporter and oil prices this year have been higher than governments budgeted. Some of this surplus is being channeled into construction. Mines are increasing production in response to higher metals prices and using some of the profit to further increase capacity. Brazil should continue to benefit from iron ore mining, with production up 38 percent from 2002 and prices more than doubling since that time. Asia/Pacific Machinery and Engines sales are expected to increase about 7percent in 2005. • We expect regional economic growth of about 6 percent in 2005. Competitive exchange rates and world economic growth should allow increased exports, and low interest rates should support recoveries in consumer spending and business investment. Growth in nonresidential construction should increase demand for standby electrical power. Page 14-------------------------------------------------------------------------------- • Higher coal and iron ore prices are causing mine production to increase, particularly in Australia, India and Indonesia. We project investments in new mine capacity and supporting infrastructure will continue to grow. Sales in China should improve further. Financial Products revenues are expected to increase 22 percent in 2005 due tohigher average earning assets at Cat Financial. Profit Outlook Our 2005 profit outlook has improved from the end of the first quarter. Profitper share is now expected to be $4.00 to $4.20 per share. This outlook is $.11to $.17 per share higher than the previous outlook, which reflected profitgrowth of 35 to 40 percent from 2004 - $3.89 to $4.03 per share. The primary factors in the profit improvement from 2004 are improved pricerealization and sales volume. The cost environment remains challenging, and coreoperating cost increases are expected to partially offset the positive effectsof higher sales. Page 15-------------------------------------------------------------------------------- QUESTION AND ANSWER General Q1: Will your 2007 on-highway engines be based on ACERT(R) Technology? A: Yes. Caterpillar will utilize the ACERT Technology to meet the 2007 on-highway emissions requirements. We demonstrated Caterpillar technological and environmental leadership at the Mid-America Truck Show earlier this year, when we presented our 2007 ACERT emissions solution to the trade and business press. Our press event, which highlighted the new On-highway Vocational Transmission and our Clean Power Technology commitment, included a chance for editors to drive an ACERT equipped 2007 compliant truck. Cat was the only engine manufacturer with an operable 2007 clean diesel engine on display at the show. Moreover, engines have been provided to OEMs for summer-cooling tests and additional field evaluation units are now shipping to fleet customers. We have pledged to provide hundreds of 2007 compliant truck engines to truck fleet customers this summer so they will have the opportunity to field test this new technology well ahead of the rigorous 2007 emissions deadline. ACERT Technology reduces emissions via a 'building blocks' systems approach to air management, electronics and fuel systems. For 2007 on-highway engines, Caterpillar will build on the ACERT Technology foundation by utilizing a diesel particulate filter (DPF) to trap particulates and by introducing Clean Gas Induction (CGI). A differentiated approach, CGI will draw cool, clean filtered gas from downstream of the DPF and then put it into the engine's intake air system to achieve additional NOx reduction. Development of the Caterpillar unique CGI and After-treatment Regeneration Device (ARD) is showing added value versus the competition's continued use of more EGR and fuel dosing regeneration. Advantages in fuel economy, engine durability and after-treatment life are expected. In a recent visit from the Environmental Protection Agency, they indicated their support of our technical strategy for 2007 and their positive reaction to the status of the development program. Q2: You've mentioned your accelerated timetable of having 2007 ACERT-equipped test engines placed with customers during mid-year 2005. Can you comment on the progress? A: We have field test engines running or ready to run at several customer sites. Page 16-------------------------------------------------------------------------------- Q3: How are your plans to leverage ACERT Technology into other off-road applications going? A: The ACERT launch in the machine business is well underway. We have 26 different Cat machine models powered by ACERT-equipped engines in production. By the end of 2005, 45 machine models powered by Tier 3/Stage IIIA ACERT-equipped engines will be in production. Caterpillar was the only manufacturer at CONEXPO exhibiting machines with Tier 3/Stage IIIA certified engines. Second Quarter 2005 vs. Second Quarter 2004 Q4: Are recent price increases holding in the marketplace? A: We continue to monitor the marketplace for the impact of the recent price actions. Indications are that these actions are finding their way into the commercial transactions. The degree and speed may vary for different markets, but the trends at this time are indicating improving price levels. We closely monitor price levels for our products by region and we are determined to maintain our market position. Q5: Are dealer inventories of Machines and Engines at levels that you think are appropriate overall? A: Machines - Worldwide dealer machine inventories are up 34 percent from a year ago, but are down 4 percent from the end of the first quarter. Robust machine inventory growth was needed to support strong expected dealer retail demand. Worldwide, machine inventories in months of sales are at historical lows for this time of the year. Engines - We believe inventory levels are healthy and anticipate some continued reduction in months of sales of inventory due to higher levels of retail delivery. Q6: Are you seeing any evidence yet of improvement in supply chain conditions? A: Yes. For most components, our plants are seeing improved supplier delivery performance. However, demand continues to increase and our factories are working to raise production schedules to meet the strong growth in demand. Tires and heat treated plate continue to have tight availability. Page 17-------------------------------------------------------------------------------- Q7: Is product availability improving? A: Machines - Product availability has shown steady, but modest, improvement over the last two quarters for most product lines, with the notable exception of large mining products. Overall, availability has not yet recovered to where it was in the first half of 2004, and strong increases in demand continue to pose a challenge to our production operations. As a result, at this time there are still 58 machine models on managed distribution. Engines - Product availability is improving in most areas, with a few supply constraints still being worked. Heavy-duty truck and commercial engines have demonstrated substantial line rate increases, and we are able to meet most of our customer demand. In addition, our larger high-speed engine production is running at substantially higher line rates compared to 2004. Currently, the C15 platform, C13 platform and 3600 family of engines are on managed distribution. Q8: Are you at capacity for large mining products? If so, what are you doing about it? A: Demand for mining products has increased at an unprecedented rate over the past two years and our factories have responded by dramatically increasing production. Lead times on most large mining products are significantly longer than usual, primarily due to supply chain constraints - in particular a continued tire shortage. The factories continue to respond to the increasing demand and have numerous 6 Sigma teams working to increase production. Q9: Can you please provide more detail on your increases in Core Operating Costs? A: The following table summarizes the increase in core operating costs in second-quarter 2005 vs. second-quarter 2004: ------------------------------------------------------------------------------------------------------ Core Operating Cost Change 2nd Quarter 2005 vs. 2nd Quarter 2004 (Millions of dollars) ----------------------------- Manufacturing Costs $ 400 SG&A 29 R&D 49 Other Operating Costs (2 ) ----- ------------- --------- Total $ 476 ----- ------------- ----------------------------------------------------------------------------------------- Page 18-------------------------------------------------------------------------------- Approximately two-thirds of the manufacturing cost increase is attributable to variable cost increases - primarily material with some related supply chain inefficiencies. Material costs, particularly steel, and volume related manufacturing and supply chain inefficiencies began accelerating in the second half of 2004. Manufacturing costs also include period costs associated with building our products. Period manufacturing costs increased 15 percent or approximately $130 million to support the 24 percent increase in Machinery and Engines sales. Machinery and Engines SG&A declined as a percentage of sales from 9.0 percent in second quarter 2004 to 7.8 percent in second quarter 2005 but was up $29 million vs. 2004 excluding the impact of currency and retirement benefits. Although we continue to experience cost pressures, we expect core operating costs in the second half of 2005 compared with the second half of 2004 to be less unfavorable than the first half comparison. Machinery and Engines operating margins are improving compared with the second half of 2004: ----------------------------------------------------------------------------------------------------------- Q1'04 Q2'04 Q3'04 Q4'04 Q1'05 Q2'05 ------------ ------------ ------------ ------------ --------------- -------------- 8.0 % 9.7 % 7.9 % 7.6 % 8.7 % 10.7 % -- ---- ---- -- ---- ---- -- ---- ---- -- ---- ---- --- ----- ----- -- ------ ---- ----------------------------------------------------------------------------------------------------------- Outlook Q10: Are the machine industries you serve approaching a peak after seeing sales growth in 2003, 2004 and 2005? A: We don't think so. This recovery follows a four-year period of industry weakness, with flat sales from 1999 to 2002. Extended weak periods in the early 1980s and 1990s were followed by lengthy recoveries, with sales doubling over a five to six-year period. In addition, many industries we serve still have growth potential. Page 19-------------------------------------------------------------------------------- In the United States, nonresidential construction and mining have not yet regained prior peaks. Passage of a new highway bill should support further growth in highway construction. In the Euro countries, economic recovery has not really started, even after four years of weak growth. However, low interest rates are boosting housing construction and some investment in equipment. AME, Latin America and the CIS are seeing gains from better commodity prices. Their economies, along with construction, are recovering from years of weak growth. Asian economies have demonstrated a long-term ability to grow rapidly, which requires more construction. We expect that to continue. Finally, capacities in mining and energy are inadequate to meet today's requirements. Rebuilding adequate capacity and meeting future growth in demand for metals and energy will require significant further investment. Q11: Based on your full year outlook, it looks like the second half of 2005 growth is slowing. Given the positive economic outlook for the sectors your products serve, why is second half growth slowing? A: We expect sales volume in the last half of the year to continue to increase from first half levels and from year-earlier levels, albeit at a moderating pace from recent very sizable gains. The slower, but steady, pace of volume growth reflects gradual progress in alleviating supply chain capacity constraints after the initial production surge to record levels in the past year. Q12: Please elaborate on your expectations for material costs in the second half of 2005. A: For steel, commercial grade plate costs are showing a downward trend. Heat treated plate costs are expected to remain at current levels for the near term. Additional industry capacity in early 2006 may provide additional cost relief. Special bar quality material costs are expected to trend downward during the second half of 2005. For some components, we are expecting higher costs driven by either tight capacities or their basic raw material commodity increases. Tires are experiencing additional increases over the first half of 2005. Increased copper costs in the second quarter will result in increased material costs for certain electrical components. Page 20-------------------------------------------------------------------------------- Overall, commodity driven costs, led by steel, should trend downward. However,there is still significant cost pressure on material costs, and we do not expectthat costs will return to early 2004 levels in the second half of 2005. Q13: Is incentive compensation a factor in the increase in core operating costs for 2005? A: Based on our latest outlook, 2005 incentive compensation is expected to be lower than in 2004. Q14: Can you comment on Caterpillar's financial strength and cash flow? A: Caterpillar's financial position is very strong. Our pension plans are well funded and stockholders are benefiting from both higher dividends and the share repurchase program. In the first half of 2005, we repurchased 18.5 million shares. We expect 2005 operating cash flow from the Machinery and Engines line of business to exceed 2004 levels even though inventories have risen because of higher sales volume and supply chain inefficiencies. GLOSSARY OF TERMS 1. Consolidating Adjustments - Eliminations of transactions between Machinery and Engines and Financial Products. 2. Core Operating Costs - Machinery and Engines operating cost change adjusted for volume. It excludes the impact of currency and retirement benefits. 3. Currency - With respect to sales and revenues, currency represents the translation impact on sales resulting from changes in foreign currency exchange rates versus the U.S. dollar. With respect to operating profit, currency represents the net translation impact on sales and operating costs resulting from changes in foreign currency exchange rates versus the U.S. dollar. Currency includes the impacts on sales and operating profit for the Machinery and Engines lines of business only; currency impacts on the Financial Products line of business are included in the Financial Products portions of the respective analyses. With respect to profit before tax, currency represents the net translation impact on sales, operating costs and other income/expense resulting from changes in foreign currency exchange rates versus the U.S. dollar. Also included in the currency impact on other income/expense are the effects of currency forward and option contracts entered into by the company to reduce the risk of fluctuations in exchange rates and the net effect of changes in foreign currency exchange rates on our foreign currency assets and liabilities. 4. EAME - Geographic region including Europe, Africa, the Middle East and the Commonwealth of Independent States (CIS). 5. Earning Assets - These assets consist primarily of total net finance receivables plus retained interests in securitized trade receivables, plus equipment on operating leases, less accumulated depreciation at Cat Financial. Net finance receivables represent the gross receivables amount less unearned income and the allowance for credit losses. Page 21-------------------------------------------------------------------------------- 6. Engines - A principal line of business including the design, manufacture, marketing and sales of engines for Caterpillar machinery, electric power generation systems; on-highway vehicles and locomotives; marine, petroleum, construction, industrial, agricultural and other applications; and related parts. Reciprocating engines meet power needs ranging from 5 to over 22,000 horsepower (4 to over 16 200 kilowatts). Turbines range from 1,200 to 20,500 horsepower (900 to 15 000 kilowatts). 7. Financial Products - A principal line of business consisting primarily of Caterpillar Financial Services Corporation (Cat Financial), Caterpillar Insurance Holdings, Inc. (Cat Insurance), Caterpillar Power Ventures Corporation (Cat Power Ventures) and their respective subsidiaries. Cat Financial provides a wide range of financing alternatives to customers and dealers for Caterpillar machinery and engines, Solar gas turbines, as well as other equipment and marine vessels. Cat Financial also extends loans to customers and dealers. Cat Insurance provides various forms of insurance to customers and dealers to help support the purchase and lease of our equipment. Cat Power Ventures is an active investor in independent power projects using Caterpillar power generation equipment and services. 8. Latin America - Geographic region including the Central and South American countries and Mexico. 9. Machinery - A principal line of business which includes the design, manufacture, marketing and sales of construction, mining and forestry machinery - track and wheel tractors, track and wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, telescopic handlers, skid steer loaders and related parts. Also includes logistics services for other companies. 10. Machinery and Engines - Due to the highly integrated nature of operations, represents the aggregate total of the Machinery and Engines lines of business and includes primarily our manufacturing, marketing and parts distribution operations. 11. Price Realization - The impact of net price changes excluding currency. 12. Retirement Benefits - Cost of defined benefit pension plans, defined contribution plans and retirement healthcare and life insurance. 13. Sales Volume - With respect to sales and revenues, sales volume represents the impact of changes in the quantities sold for machines, engines and parts. With respect to operating profit, sales volume represents the impact of changes in the quantities sold for machines, engines and parts combined with the net operating profit impact of changes in the relative weighting of machines, engines and parts sales with respect to total sales. 14. 6 Sigma - On a technical level, 6 Sigma represents a measure of variation that achieves 3.4 defects per million opportunities. At Caterpillar, 6 Sigma represents a much broader cultural philosophy to drive continuous improvement throughout the value chain. It is a fact-based, data-driven methodology that we are using to improve processes, enhance quality, cut costs, grow our business and deliver greater value to our customers through Black Belt-led project teams. At Caterpillar, 6 Sigma goes beyond mere process improvement; it has become the way we work as teams to process business information, solve problems and manage our business successfully. Page 22-------------------------------------------------------------------------------- NON-GAAP FINANCIAL MEASURES The following definition is provided for "non-GAAP financial measures"in connection with Regulation G issued by the Securities and 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 27-32 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 July 21, 2005. This filing isavailable on our website at http://www.CAT.com/sec_filings. Caterpillar's latest financial results and current outlook are also availablevia: Telephone:(800) 228-7717 (Inside the United States and Canada)(858) 244-2080 (Outside the United States and Canada) Internet:http://www.CAT.com/investorhttp://www.CAT.com/irwebcast (live broadcast/replays of quarterly conferencecall) Caterpillar contact:Ben CordaniCorporate Public Affairs(309) [email protected] Page 23-------------------------------------------------------------------------------- Caterpillar Inc. Condensed Consolidated Statement of Results of Operations (Unaudited) (Dollars in millions except per share data) Three Months Ended Six Months Ended June 30, June 30, 2005 2004 2005 2004 -------------- ------------ -------------- --------------- Sales and revenues: Sales of Machinery and Engines $ 8,784 $ 7,100 $ 16,573 $ 13,102 Revenues of Financial Products 576 483 1,126 961 --- ------ --- --- ----- -- --- ------- -- --- ------- --- Total sales and revenues 9,360 7,583 17,699 14,063 Operating costs: Cost of goods sold 6,890 5,563 13,105 10,264 Selling, general and administrative 789 744 1,533 1,417 expenses Research and development expenses 268 214 509 445 Interest expense of Financial 184 121 354 240 Products Other operating expenses 208 171 421 359 --- ------ --- --- ----- -- --- ------- -- --- ------- --- Total operating costs 8,339 6,813 15,922 12,725 --- ------ --- --- ----- -- --- ------- -- --- ------- --- Operating profit 1,021 770 1,777 1,338 Interest expense excluding Financial 65 59 130 116 Products Other income (expense) 90 50 198 111 --- ------ --- --- ----- -- --- ------- -- --- ------- --- Consolidated profit before taxes 1,046 761 1,845 1,333 Provision for income taxes 315 209 547 367 --- ------ --- --- ----- -- --- ------- -- --- ------- --- Profit of consolidated companies 731 552 1,298 966 Equity in profit (loss) of 29 14 43 20 unconsolidated affiliated companies --- ------ --- --- ----- -- --- ------- -- --- ------- ---Profit $ 760 $ 566 $ 1,341 $ 986 --- ------ --- --- ----- -- --- ------- -- --- ------- ------ ------------------------------------- --- ------ --- ---- --- ----- -- ----- --- ------- -- ---- --- ------- ---Profit per common share $ 1.12 $ .83 $ 1.97 $ 1.44 Profit per common share - diluted 1 $ 1.08 $ .80 $ 1.89 $ 1.39 Weighted average common sharesoutstanding (millions)- Basic 678.3 684.8 680.9 685.2- Diluted 1 705.1 709.5 707.9 710.4 Cash dividends declared per common share $ .46 $ .39 $ .46 $ .39 --- ------------------------------------- --- ------ --- ---- --- ----- -- ----- --- ------- -- ---- --- ------- ---1 Diluted by assumed exercise of stock options, using the treasury stock method.Certain amounts from prior periods have been reclassified to conform to current financial statement presentation. Page 24-------------------------------------------------------------------------------- Caterpillar Inc. Condensed Consolidated Statement of Financial Position (Unaudited) (Millions of dollars) Jun. 30, Dec. 31, 2005 2004 ------------------ ------------------Assets Current assets:Related Shares:
Ct Automotive