PEORIA, Ill., July 20 /PRNewswire-FirstCall/ -- Caterpillar Inc. today reported record second-quarter sales and revenues of $11.356 billion. The company also reported profit of $823 million, or $1.24 per share, for the second quarter ending June 30, 2007.
"We're pleased with second-quarter sales and revenues which demonstrated the strength of our global reach. Sales growth outside of North America largely offset the impact of the planned decline in North American dealer machine inventories, the severe drop in demand for on-highway truck engines and weakness in North American construction markets," said Chairman and Chief Executive Officer Jim Owens. "Sales and revenues were up 7 percent from last year's second quarter. The strength of economies outside of North America, our broad global footprint and growth in diversified service businesses all helped us deliver higher sales."
Sales and revenues of $11.356 billion increased $751 million from the second quarter of 2006. The increase was a result of:
-- $943 million improvement in sales volume outside North America
-- $411 million of sales from Progress Rail, which was acquired in June of
2006
-- $198 million of higher sales related to the impact of currency
-- $168 million of improved price realization, despite an unfavorable
geographic sales mix
-- $94 million of additional Financial Products revenues.
The increase was partially offset by a $1.063 billion decline in physical sales volume in North America, which was largely a result of the following three factors:
-- Dealer Machine Inventories -- North American dealers reduced inventory,
as planned, by about $800 million during the second quarter of 2007 as
compared with a $200 million reduction in the second quarter of 2006.
The improvement this year is a joint effort with dealers, is a key
element of the Cat Production System (CPS) and is consistent with our
goal of improving velocity throughout the value chain.
-- On-highway truck -- a $366 million drop in on-highway truck engine
sales.
-- Weak construction activity in North America, notably U.S. housing
related markets, resulted in lower sales.
Profit of $823 million was down $223 million from the second quarter of 2006, and profit per share (PPS) decreased $0.28 -- from $1.52 per share in the second quarter of 2006 to $1.24.
"Disappointing earnings in the second quarter were attributable to the sharp negative swing in on-highway truck engine profitability, weakness in North American machine sales, continued selected supply chain disruptions and higher material costs," said Owens. "Manufacturing costs were also higher, in part, due to transitional costs associated with the launch of the Cat Production System," added Owens.
"While costs were a challenge, we were pleased with the spectacular sales growth outside North America and the performance of our engine businesses other than on-highway truck. As we look forward, we're encouraged by the strength of our order board overall, particularly for our large machines and engines," said Owens.
Outlook
Caterpillar is maintaining its full-year outlook for profit per share. The company expects full-year sales and revenues of about $44 billion, up from $41.5 billion in 2006, and profit in a range of $5.30 to $5.80 per share, up from $5.17 per share in 2006.
"With six months under our belt we're confident in the top-line and have adjusted our expectation for sales and revenues to about $44 billion," said Owens. "While we have more work to do on costs, we are maintaining our per share profit outlook of between $5.30 and $5.80 for the full year. We expect core operating cost comparisons to improve and are taking action to lower discretionary spending. However, we'll continue to aggressively implement the Cat Production System. We know that CPS deployment and 6 Sigma discipline are the keys to realizing our 2010 targets for safety, quality, velocity and PPS growth.
"Given the substantial investments that we are making in new product technology, expanded capacity, CPS deployment and selective acquisitions, I'm more confident than ever that we'll deliver solid top-line growth and our goal of 15-20 percent average annual growth in PPS to 2010. Our leadership team is committed to delivering these results, and we have a good line of sight to achieving these goals," Owens said.
(Complete outlook begins on page 12.)
For more than 80 years, Caterpillar Inc. has been making progress possible and driving positive and sustainable change on every continent. With 2006 sales and revenues of $41.517 billion, Caterpillar is the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines. The company also is a leading services provider through Caterpillar Financial Services, Caterpillar Remanufacturing Services, Caterpillar Logistics Services and Progress Rail Services. More information is available at http:/ http://www.cat.com/.
Note: Glossary of terms included on pages 23-24; first occurrence of terms shown in bold italics.
Key Points
Second Quarter 2007
(Dollars in millions except
per share data)
Second Second
Quarter Quarter $ %
2006 2007 Change Change
Machinery and Engines Sales $9,956 $10,613 $657 7%
Financial Products Revenues 649 743 94 14%
Total Sales and Revenues 10,605 11,356 751 7%
Profit $1,046 $823 $(223) -21%
Profit per common share - diluted $1.52 $1.24 $(0.28) -18%
-- Machinery and Engines sales improved $657 million despite the impact of
planned declines in North American dealer machine inventories, the
severe drop in demand for on-highway truck engines and weakness in
North American construction sales. The strength of economies outside
North America, our broad global footprint and growth in diversified
service businesses, including the acquisition of Progress Rail, were
positive.
-- Core operating cost increases were primarily attributable to higher
manufacturing costs. The increase in manufacturing costs was due
primarily to operating inefficiencies and higher material costs.
Operating inefficiencies were the result of a significant decline in
on-highway truck engine production, selected supply chain challenges,
inefficiencies related to new product introductions and capacity
increases. Our manufacturing costs were also up from last year's
levels due to transitional costs associated with the launch of the Cat
Production System. Selling, General and Administrative (SG&A) and
Research and Development (R&D) combined as a percent of sales remained
essentially flat with last year.
-- During the second quarter 6.6 million shares were repurchased at a cost
of $506 million.
Full-Year 2007 Outlook
(Dollars in billions except
per share data)
2006 Previous Current
Actual 2007 Outlook 2007 Outlook
Sales and Revenues $41.5 $42.0 to $44.0 About $44
Profit per common share -
diluted $5.17 $5.30 to $5.80 $5.30 to $5.80
-- Sales outside North America are expected to be up 24 percent from 2006,
or about $4.5 billion -- more than offsetting a $2.4 billion, or 12
percent, decline in North America. This reflects solid 2007 economic
and industry growth in most of the world outside North America.
-- Below trend economic growth in the United States for 2007 -- Gross
Domestic Product (GDP) of about 2.1 percent
-- Weak U.S. housing starts -- 1.4 million in 2007
-- Continued expectation of a very weak industry for heavy-duty truck
engines
-- Continued strength in commodity prices at levels sufficient to
encourage investment
-- $0.4 billion increase from 2006 in Revenues of Financial Products
-- The outlook for profit per share reflects an improvement in core
operating cost comparisons during the second half of the year.
A question and answer section has been included in this release starting on page 17.
DETAILED ANALYSIS
Second Quarter 2007 vs. Second Quarter 2006
Consolidated Sales and Revenues Comparison
2nd Qtr. 2007 vs. 2nd Qtr. 2006
To access this chart, go to http://www.cat.com/ for the downloadable version of Caterpillar 2Q 2007 earnings.
Sales and Revenues
Sales and revenues for second quarter 2007 were $11.356 billion, up $751 million, or 7 percent, from second quarter 2006. Machinery volume including Progress Rail was up $203 million. Excluding Progress Rail, Machinery volume was down $208 million. Engines volume was up $88 million. Currency had a positive impact on sales of $198 million due primarily to the strengthening of the euro. Price realization improved $168 million despite unfavorable geographic mix. In addition, Financial Products revenues increased $94 million.
Sales and Revenues by Geographic Region
% North % %
Total Change America Change EAME Change
(Millions of dollars)
Second Quarter 2006
Machinery $6,875 $3,764 $1,680
Engines(1) 3,081 1,447 998
Financial
Products(2) 649 458 95
$10,605 $5,669 $2,773
Second Quarter 2007
Machinery $7,275 6% $3,250 (14%) $2,260 35%
Engines(1) 3,338 8% 1,338 (8%) 1,263 27%
Financial
Products(2) 743 14% 508 11% 109 15%
$11,356 7% $5,096 (10%) $3,632 31%
Latin % Asia/ %
America Change Pacific Change
Second Quarter 2006
(Millions of dollars)
Machinery $667 $764
Engines(1) 233 403
Financial
Products(2) 48 48
$948 $1,215
Second Quarter 2007
Machinery $823 23% $942 23%
Engines(1) 262 12% 475 18%
Financial
Products(2) 66 38% 60 25%
$1,151 21% $1,477 22%
(1) Does not include internal engines transfers of $647 million and
$599 million in second quarter 2007 and 2006, respectively. Internal
engines transfers are valued at prices comparable to those for
unrelated parties.
(2) Does not include internal revenues earned from Machinery and Engines
of $103 million and $119 million in second quarter 2007 and 2006,
respectively.
Machinery Sales
Sales were $7.275 billion in second quarter 2007, an increase of $400 million,
or 6 percent, from second quarter 2006.
-- Excluding Progress Rail, machine volume decreased $208 million. Sales
volume declined in North America but increased in all other regions.
-- Price realization increased $62 million.
-- Currency benefited sales by $135 million.
-- Geographic mix between regions (included in price realization) was
$59 million unfavorable due to a decrease in North American sales
compared to second quarter 2006.
-- The acquisition of Progress Rail added $411 million to sales in North
America.
-- A primary driver of the decline in sales volume was the joint
undertaking with dealers to reduce their inventories. Dealers reported
inventories at the end of the quarter lower than a year earlier in both
dollars and months of supply.
-- Sales volume declined significantly in North America due to sizable
reductions in dealer inventories and an unfavorable economic
environment for key industries in the United States. Problems included
a severe downturn in housing construction, a decline in contracting for
both nonresidential building and highway construction and much lower
coal production.
-- As in the first quarter, sales volume increased in all regions outside
North America with the Europe, Africa and the Middle East (EAME) region
particularly strong. Interest rates generally remained favorable, and
most economies experienced strong growth. Higher commodity prices
improved budget revenues for many governments, particularly in emerging
markets. As a result, construction grew in many countries, often 10
percent or more.
-- Throughout the world, including the United States, metals mining and
petroleum remained favorable for machine sales. Metals prices
continued to rise during the quarter and were well above year earlier
prices. Oil and natural gas prices, although not much different from a
year earlier, remained extremely favorable for new investment. Both
drill rig and pipeline activity increased.
-- Coal mining was favorable, except in the United States. International
contract prices for thermal coal increased 6 percent, and output
increased in the major producing countries of China, Indonesia and
South Africa.
North America - Sales declined $514 million, or 14 percent.
-- Progress Rail sales were $411 million. Excluding Progress Rail, sales
volume decreased $922 million.
-- The major contributor to lower sales volume was a joint effort to
significantly reduce dealer inventories to improve velocity and better
cope with weaker economic conditions. Dealer inventories declined
almost $800 million in the second quarter compared to a decline of
about $200 million in second quarter 2006. As a result, reported
dealer inventories at the end of the quarter were well below a year
earlier in both dollars and months of supply.
-- Price realization decreased $3 million.
-- The economic environment facing many key industries in the United
States was unfavorable. Activity declined in some sectors, output
prices fell in others and uncertainty about the future increased. As a
result, users curtailed fleet expansions and delayed replacement
purchases, even in some applications where activity and output prices
were favorable. In addition, dealers added fewer units to their rental
fleets and let existing fleets age.
-- Housing construction continued to decline in the second quarter.
Housing starts in the United States were 21 percent lower than in
second quarter 2006. New home prices declined, and the inventory of
unsold homes remained above normal. Mortgage interest rates increased
during the quarter, and lenders tightened standards.
-- Nonresidential building construction underway remains strong, but
contracting for new projects slowed abruptly, possibly in response to
lower returns on industrial and retail projects and fewer new home
developments. Compared to a year earlier, contracts awarded for
commercial and industrial construction declined almost 7 percent, and
those for institutional buildings fell 19 percent.
-- Highway contracts awarded in the second quarter, net of inflation, were
almost 7 percent lower than a year earlier. Delays in passing the
federal government budget limited the increase in federal funding early
in the year.
-- Coal production fell 6 percent from second quarter 2006, depressing
sales of machines used in coal mining. Electric utilities increased
output slightly more than 1 percent and continued shifting fuel usage
towards natural gas. At the start of the quarter, coal stockpiles were
almost 20 percent higher than a year earlier. Spot coal prices
improved during the quarter but still averaged more than 10 percent
lower than a year earlier.
-- Metals mining and petroleum were favorable since metals, oil and
natural gas prices were attractive for investment. In addition, metals
mine output increased almost 2 percent, and pipeline activity
strengthened.
EAME - Sales increased $580 million, or 35 percent.
-- Sales volume increased $405 million.
-- Price realization increased $72 million.
-- European currencies strengthened against the U.S. dollar and benefited
sales by $103 million.
-- The gain in sales volume resulted largely from increases in deliveries
to end users, as reported by dealers. Dealers also increased
inventories to support that growth, but reported inventories in months
of supply were lower than a year earlier.
-- Sales volume in Europe continued to benefit from good economic growth.
Housing permits have declined, but both nonresidential and
infrastructure construction grew rapidly. Total construction activity
has increased about 7 percent this year. Within the Eurozone, improved
corporate profits and increased lending to businesses contributed to
growth in nonresidential construction. Governments also increased
capital spending, which benefited infrastructure construction.
-- Sales volume increased rapidly in Africa/Middle East, with most
countries participating in that growth. Favorable crude oil prices
encouraged a 15 percent increase in drill rig activity, and high metals
prices led to more mine development. Higher coal prices caused South
African coal production to increase more than 7 percent this year.
Favorable commodity prices, along with greater output, let governments
increase foreign exchange holdings more than 20 percent and expand
spending. Significant construction activity is underway; year-to-date
construction increased 17 percent in South Africa, 16 percent in Turkey
and 10 percent in Egypt. Infrastructure booms are underway in several
Middle Eastern countries.
-- Sales volume in the Commonwealth of Independent State (CIS) nearly
doubled with the gain largely occurring in Russia. Higher commodity
prices and low interest rates allowed strong economic growth and
improved the government's budget. The Russian government raised
expenditures more than 35 percent year to date, increased the budget
surplus and increased foreign exchange reserves more than 60 percent.
As a result, construction has increased 25 percent year to date.
Latin America - Sales increased $156 million, or 23 percent.
-- Sales volume increased $132 million.
-- Price realization rose $13 million.
-- Currency benefited sales by $11 million.
-- Dealers increased machine inventories in anticipation of stronger
customer demand which accounted for the growth in sales volume.
However, reported inventories in months of supply were about even with
last year's low supply figures.
-- Dealers reported a slight decline in deliveries compared to second
quarter last year, which was the highest quarter on record. Economic
factors impacting sales remained positive.
-- Most governments kept inflation under control, allowing them to
maintain low interest rates. Regional exports grew about 13 percent,
and governments increased foreign exchange reserves 25 percent. These
factors contributed to good growth in construction.
-- Favorable prices encouraged increased mining output. Chile, the
world's largest copper producer, increased exports 24 percent year to
date, and Brazil, a major iron ore producer, increased exports 35
percent.
Asia/Pacific - Sales increased $178 million, or 23 percent.
-- Sales volume increased $118 million.
-- Price realization increased $39 million.
-- Currency benefited sales by $21 million.
-- The gain in sales volume resulted from an increase in deliveries to end
users as reported by dealers. Dealers reduced reported inventories
during the quarter, leaving them lower than last year in terms of both
dollars and months of supply.
-- China and India both raised interest rates, but those changes had
little impact on economic growth. Most other countries either held
rates steady or lowered them. As a result, regional economic growth
likely continued near a 7 percent rate. Construction increased
rapidly, with 11 percent growth in both Australia and India. In China,
year-to-date spending on housing construction increased 30 percent, and
spending on office construction rose 29 percent.
-- Mining benefited from higher metals and coal prices. Australia
increased exploration spending 40 percent in the first quarter, and
mine production increased 13 percent. Year to date, China's production
of coal rose 12 percent, and Indonesia, a major coal exporter, had a
49 percent increase in all mineral exports.
Engines Sales
Sales were $3.338 billion in second quarter 2007, an increase of $257 million,
or 8 percent, from second quarter 2006.
-- Sales volume increased $88 million.
-- Price realization increased $106 million.
-- Currency benefited sales by $63 million.
-- Geographic mix between regions (included in price realization) was
$12 million favorable.
-- Dealer reported inventories in constant dollars and months of supply
were up but continued to be supported by strong delivery rates.
-- Significant increases in sales for electric power, petroleum, marine
and industrial applications have more than offset a $380 million
decline in on-highway truck engine sales.
-- Price realization for the second quarter 2007 benefited from price
increases implemented in the third quarter 2006 and first quarter 2007.
North America - Sales decreased $109 million, or 8 percent.
-- Sales volume decreased $141 million.
-- Price realization increased $32 million.
-- Sales for on-highway truck applications declined $366 million due to
less than anticipated demand for the 2007 model year engines and
continuing transition of several original equipment manufacturers
(OEMs) to the 2007 emissions technology engines.
-- Sales for petroleum applications increased 47 percent due to high oil
and gas commodity prices leading to strong engine demand from
exploration and production companies along with success from gas
pipeline and storage construction projects. Turbine sales increased
with strong sales in North American natural gas transmission.
-- Sales for electric power applications increased 41 percent supported by
data center installations.
EAME - Sales increased $265 million, or 27 percent.
-- Sales volume increased $184 million.
-- Price realization increased $34 million.
-- Currency benefited sales by $47 million.
-- Sales for electric power applications increased 32 percent with strong
demand for large gas units and Middle East rental fleet expansion.
Turbines increased with sales into large power plant projects.
-- Sales for petroleum applications increased 50 percent based on
widespread demand for engines used in drilling applications and
turbines and turbine-related services to support oil production.
-- Sales for marine applications increased 24 percent with increased
demand for workboats, commercial oceangoing vessels and cruise ships.
-- Sales for industrial applications increased 9 percent with widespread
demand for agriculture and other types of OEM equipment.
Latin America - Sales increased $29 million, or 12 percent.
-- Sales volume increased $26 million.
-- Price realization increased $3 million.
-- Sales for electric power engines increased 61 percent from widespread
investment supported by strong oil and commodity prices.
-- Sales into truck applications declined 48 percent as a result of
reduced demand. Latin American truck facilities decreased exports of
trucks destined for North America.
-- Sales for marine applications more than tripled due to increased
workboat activity, which supports the petroleum industry.
Asia/Pacific - Sales increased $72 million, or 18 percent.
-- Sales volume increased $31 million.
-- Price realization increased $25 million.
-- Currency benefited sales by $16 million.
-- Sales for petroleum applications increased 30 percent as Chinese drill
rig builders manufactured at record levels for domestic and export use.
-- Sales for marine applications increased 54 percent with continued
strong demand for workboat and offshore shipbuilding. Large diesel
demand grew in the offshore and general cargo industries.
-- Sales for electric power applications decreased by 24 percent driven by
delays in securing financing for several key projects.
-- Sales for industrial applications increased 60 percent with widespread
demand for engines used in agriculture and other types of OEM
applications.
Financial Product Revenues
Revenues were $743 million in second quarter 2007, an increase of $94 million,
or 14 percent, from second quarter 2006.
-- Growth in average earning assets increased revenues $40 million.
-- The impact of higher interest rates on new and existing finance
receivables benefited revenues $30 million.
-- Other revenues increased $16 million due to the absence of a write-down
of a marine-related asset in second quarter 2007 compared to second
quarter 2006.
-- Revenues from earned premiums at Cat Insurance increased $14 million.
Consolidated Operating Profit Comparison
2nd Qtr. 2007 vs. 2nd Qtr. 2006
To access this chart, go to http://www.cat.com/ for the downloadable version of Caterpillar 2Q 2007 earnings.
Operating Profit
Operating profit in second quarter 2007 decreased $266 million, or 18 percent, from last year, driven by higher core operating costs, partially offset by higher price realization.
Core Operating costs rose $435 million from second quarter 2006. Of this increase, $394 million was due to increased manufacturing costs. The increase in manufacturing costs was due primarily to operating inefficiencies and higher material costs. Operating inefficiencies were the result of a significant decline in on-highway truck engine production, selected supply chain challenges, inefficiencies related to new product introductions and capacity increases. Our manufacturing costs were also up from last year's levels due to transitional costs associated with the launch of the Cat Production System. SG&A and R&D combined as a percent of sales remained essentially flat with last year.
Manufacturing and non-manufacturing costs were impacted about equally by a second quarter 2007 charge of $44 million to recognize previously unrecorded liabilities related to a subsidiary pension plan.
Operating Profit by Principal Line of Business
Second Second
Quarter Quarter $ %
2006 2007 Change Change
(Millions of dollars)
Machinery(1) $986 $741 $(245) (25%)
Engines(1) 435 379 (56) (13%)
Financial Products 157 184 27 17%
Consolidating Adjustments (99) (91) 8
Consolidated Operating Profit $1,479 $1,213 $(266) (18%)
(1)Caterpillar operations are highly integrated; therefore, the company
uses a number of allocations to determine lines of business operating
profit for Machinery and Engines.
Operating Profit by Principal Line of Business
-- Machinery operating profit of $741 million was down $245 million, or
25 percent, from second quarter 2006. Improved price realization was
offset by the unfavorable impact of lower sales volume and higher core
operating costs.
-- Engines operating profit of $379 million was down $56 million, or
13 percent, from second quarter 2006. Higher sales volume and improved
price realization were offset by higher core operating costs including
a $44 million charge to recognize previously unrecorded liabilities
related to a subsidiary pension plan. Continued strength in our
commercial engines industries has allowed us to offset much of the
profit decline in the on-highway truck engine industry.
-- Financial Products operating profit of $184 million was up $27 million,
or 17 percent, from second quarter 2006. The increase was primarily
attributable to a $26 million impact from improved net yield on average
earning assets and the absence of a $16 million write-down of a marine-
related asset, partially offset by an $11 million decrease in operating
profit at Cat Insurance due to higher claims experience.
Other Profit/Loss Items
-- Other income/(expense) was $70 million of income compared with
$50 million of income in second quarter 2006. The improvement was due
to favorable impacts of currency.
-- The provision for income taxes in the second quarter reflects an
estimated annual tax rate of 32 percent for 2007 compared to 31 percent
for the second quarter 2006 and 29 percent for the full year 2006. The
increase is primarily due to the repeal of Extraterritorial Income
Exclusion (ETI) benefits in 2007 as well as a change in our geographic
mix of profits.
-- Equity in profit/(loss) of unconsolidated affiliated companies was
income of $5 million compared with income of $32 million in the second
quarter of 2006. As previously announced, we are currently negotiating
definitive agreements with Mitsubishi Heavy Industries that would
result in Caterpillar owning a majority stake in Shin Caterpillar
Mitsubishi Ltd. (SCM). Second quarter equity in profit/(loss) of
unconsolidated affiliated companies reflects a $13 million after-tax
charge for net adjustments that were identified during our due
diligence procedures. Lower profit at SCM also contributed to the
decrease.
Employment
Caterpillar's worldwide employment was 96,315 at the end of the second quarter, up 4,001, or 4 percent, from a year ago. Of the increase, about 1,000 were the result of acquisitions, about 2,000 were salaried and management employees and 1,000 were hourly employees.
Sales & Revenues Outlook for 2007
We are raising our projection of 2007 sales and revenues to about $44 billion, or a 6 percent increase, from 2006. The previous outlook was a range of $42 to $44 billion. The expected improvement from 2006 is from increased volume outside North America, price realization, the impact of Progress Rail and currency impacts. North American machinery and engines sales volume, net of Progress Rail, is expected to be down.
Sales outside North America are expected to be up about $4.5 billion, or 24 percent -- more than offsetting a $2.4 billion, or 12 percent, decline in North America. This improvement reflects a continued strong economic performance outside North America.
-- We expect dealers to further reduce inventories in the second half of
this year, mostly in North America and EAME. Dealers should end the
year with inventories well below last year, both in dollars and months
of supply.
-- North America will continue to be a weak area in the second half, the
result of further dealer inventory reductions, a sharp drop in North
American on-highway engine sales and unfavorable economic conditions
for many key industries. The likely improvement in second-quarter
economic growth and the Fed's continuing focus on inflation concerns
prompted us to drop our forecast of interest rate cuts in the second
half.
-- The North American machine industry continued to decline in the second
quarter despite the improvement in the economy. Without interest rate
relief, we believe economic growth will slow again in the last half,
and the machine industry will decline further. Housing, nonresidential
construction and coal mining will likely remain weak.
-- Fortunately, economies outside North America should remain robust.
Central banks raised interest rates in the first half, and additional
increases in the second half are likely. However, in most countries,
rates remain low relative to inflation, and economies should grow
almost as fast as last year.
-- Data for the early months of 2007 indicate strong growth in
construction in most countries outside North America. For the year,
nonresidential building construction should do well -- office rents are
up, employment is increasing and business profits are good. Improved
government budgets should mean increased spending to upgrade inadequate
infrastructures. Housing construction likely will slow since permits
are declining in Europe and Australia.
-- Coal mining should do well outside North America. Contract prices for
thermal coal increased 6 percent on April 1, and spot prices have
traded above contract prices. Major producing countries increased
production early this year, and our forecasts for economic growth
indicate coal demand will increase this year. Transportation problems,
not demand, are likely to limit coal production.
-- Metals mining should do well throughout the world, including the United
States. Prices of most metals increased over the first half of this
year, and we expect only moderate easing in the last half. The past
surge in investment should finally result in more consistent growth in
mine output this year.
-- West Texas Intermediate crude oil prices averaged $61.55 per barrel in
the first half, and we expect it will average about $63 for the year.
That price will be attractive for increased exploration, drilling,
pipeline expenditures and tar sands development which should benefit '
both machine and engine sales.
-- Contract rates for oceangoing vessels are up this year with the Baltic
Exchange Dry Index more than double last year's rate. Shipyards are
contracting for 2009 berths, so demand for marine engines should be
strong this year.
North America (United States and Canada) Machinery and Engines sales are expected to decrease about 12 percent in 2007.
-- We expect dealers will continue to reduce machine inventories in the
second half, although not as much as in the first half.
-- The North American on-highway truck industry should decline about
40 percent this year. Most of this decline is a correction for advance
buying and inventory building undertaken last year to cope with the
risks of new diesel engine emission standards. However, declining
freight volume and some deterioration in truck carrier profit margins
have emerged as additional negative factors.
-- Recent economic data suggest that U.S. economic growth will rebound
from the depressed rate of the first quarter, perhaps achieving
3 percent or better growth in the second quarter. This improvement
means the Fed is unlikely to reduce interest rates this year.
-- Without interest rate relief, we believe the second-quarter improvement
will prove temporary, and economic growth will slow to 2.5 percent or
less in the second half. For the year, we project the economy will
grow a little more than 2 percent. As in the past four quarters,
industries critical to our businesses are likely to fare worse than the
overall economy, and the machine industry should decline further in the
second half. Slow economic growth would also unfavorably impact demand
for marine pleasure craft engines and standby electric power.
-- The housing industry took a tremendous battering this past year as
housing starts plunged 30 percent from the 2006 peak. The recent
increase in mortgage interest rates, tighter lending standards,
declining home prices and an overhang of unsold homes suggest even
lower starts in the second half. We reduced our forecast of 2007
starts to near 1.4 million units. Total housing units supplied,
including mobile homes, should be about 1.5 million units -- the lowest
since 1992.
-- Although nonresidential building contracting declined in the first
half, leading indicators for this sector are positive, and businesses
are borrowing more money. We project some recovery in the second half
so that contracting for the full year will be about even with last
year. However, the lack of any growth would be unfavorable for
construction machinery demand.
-- Late authorization of federal highway funding means states should have
an opportunity to accelerate requests for funds in coming months. We
expect that highway contracts awarded will increase in the last half of
2007, resulting in 2 percent growth for the full year. The budget
proposal for the next fiscal year (starts October 1) calls for only a
3 percent increase in federal funding which could keep contractors
cautious about buying new machines.
-- Electric utilities have large coal stockpiles and appear to be reducing
coal burn in favor of natural gas, so we expect coal production will
decline almost 2 percent this year. Lower coal production, mine
permitting delays and environmental concerns could discourage mining
investment the rest of this year.
-- We expect metals mining production will increase almost 3 percent this
year and expect most metals prices will decline moderately over the
last half. However, prices should remain high enough to make new
investments profitable.
-- Oil and natural gas prices should remain attractive for new investments
this year. As a result, we expect increased opportunities for machine
sales into pipelines and turbine and engine sales for gas compression,
drill rigs and well servicing equipment.
-- The Canadian economy likely will grow more than 2 percent this year.
Increased construction, tar sands development and mining growth should
create a more favorable environment for the construction machinery
industry than in the United States.
EAME Machinery and Engines sales are expected to increase about 29 percent in 2007.
-- Dealers built inventories in the first half to prepare for increased
customer demand. As they complete deliveries to customers, we expect
reported inventories will decline sharply in coming months.
-- Regional growth should exceed 3 percent this year, slightly slower than
last year. Europe, Africa/Middle East and the CIS should have above-
average growth in both their economies and construction. The good
growth should benefit machine sales and demand for standby electric
power.
-- The European Union economy grew at more than a 3 percent rate in the
first quarter, and both business surveys and leading indicators suggest
continued good growth. We project growth for the full year will be
about 2.5 percent.
-- Both the European Central Bank and the Bank of England raised interest
rates this year, and we expect one more increase from both in the last
half. Although rate increases have not slowed economies, currencies
have strengthened.
-- Construction was strong in the first half, and we expect growth will
continue. Residential building permits declined, and business surveys
suggest housing construction will soften. However, both nonresidential
and infrastructure construction should strengthen. Industrial capacity
utilization reached 84.4 percent in the second quarter, highest since
1990, and businesses have good profits. Government finances improved,
allowing increased capital expenditures.
-- We forecast economic growth will be about 5.5 percent in Africa/Middle
East this year, the same as in 2006. Countries will benefit from high
energy, metals and agriculture prices and increased production of many
of these commodities. Most governments improved budgets and are
allocating more funds to infrastructure development.
-- Inflation rates in both Turkey and South Africa are higher than central
banks like, and both will continue high interest rate policies.
However, construction has been strong in both countries, and we
anticipate good growth for the year. South Africa should also increase
production of coal and copper.
-- We expect the CIS economy will grow more than 7 percent this year,
slightly slower than last year. The Russian government's budget is in
excellent shape, which should allow further large increases in spending
for infrastructure development and housing construction. Favorable
oil, natural gas and metals prices should drive capacity investments in
these industries. The Ukrainian economy is growing rapidly, and
construction, which was up 12 percent year to date, should continue
growing.
Latin America Machinery and Engines sales are expected to increase about 15 percent in 2007.
-- We project the Latin American economy will grow almost 5 percent this
year, compared to 5.5 percent growth last year. Favorable interest
rates and better economic growth should support good construction
growth in most countries. Mining investment surged sharply the past
few years, and production began to improve in the first half of this
year. We expect mining investment and production to increase this
year.
-- Brazil steadily lowered interest rates from a peak of 19.75 percent in
2005 to 12 percent in June, and we expect another 50 basis point
reduction in the last half of 2007. Lower interest rates should result
in faster economic growth this year and an improvement in construction
activity. Mining, which was up 5 percent year to date, should have
good growth this year.
-- Economic growth in Chile improved this year, and we forecast better
growth than last year despite a recent reversal of an interest rate
reduction. Copper mining increased in the first quarter, so the
industry should be able to recover from two years of decline.
Construction, which rose 7 percent so far this year, should also be up.
-- We expect Mexico's economy to slow significantly this year, the result
of declining oil production and little growth in exports to the United
States. Construction, which rose 2 percent year to date, likely will
remain sluggish.
Asia/Pacific Machinery and Engines sales are expected to increase about 20 percent in 2007.
-- Regional growth should be about 7.5 percent this year, down slightly
from last year. Favorable interest rates, good growth in construction
and increased mining investment should all support growth in machinery
and engine sales.
-- China has raised both reserve requirements and interest rates several
times to slow economic growth and contain inflation. So far these
actions have not had much impact, and we forecast economic growth of
about 10.5 percent this year, marginally lower than in 2006.
Construction and coal mining were up year to date about 25 percent and
12 percent, respectively, and both should continue rapid growth.
-- Australian economic growth improved in the first quarter, which should
prompt the central bank to raise interest rates. However,
nonresidential building permits indicate such construction should grow
this year, and mining investment should be up significantly. Growth in
mining production likely will be limited by transportation capacity.
-- Indonesia's recovery in sales should continue in the second half.
Interest rates declined 150 basis points this year, and economic growth
was almost 6 percent in the first quarter. Both mining and
construction should have good years.
-- The Indian economy started the year strong, with growth of 9 percent
overall, 7 percent for mining and 11 percent for construction.
Inflation is back within target, so the central bank should be on hold
for the rest of the year. Businesses remain confident, and interest
rates seem low relative to inflation. As a result, we project that
construction and mining will do well.
Financial Products Revenues
-- We expect continued growth in Financial Products for 2007. Revenues
are expected to increase approximately 13 percent versus 2006,
primarily due to higher average earning assets and interest rates at
Cat Financial and increased premiums at Cat Insurance.
Sales and Revenues Outlook - Midpoint of Range(1)
2006 2007 %
(Millions of dollars) Actual Outlook Change
Machinery and Engines
North America $20,155 $17,800 (12%)
EAME 10,287 13,250 29%
Latin America 3,646 4,200 15%
Asia/Pacific 4,781 5,750 20%
Total Machinery and Engines 38,869 41,000 5%
Financial Products(2) 2,648 3,000 13%
Total $41,517 $44,000 6%
(1) The Consolidated Operating Profit chart below reflects sales and
revenues at $44 billion.
(2) Does not include revenues earned from Machinery and Engines of
$380 million and $466 million in 2007 and 2006, respectively.
Consolidated Operating Profit Comparison(1)
2007 Outlook vs. 2006
To access this chart, go to http://www.cat.com/ for the downloadable version of Caterpillar 2Q 2007 earnings.
2007 Outlook - Profit
We expect profit per share to be in the range of $5.30 to $5.80. 2007 is expected to benefit from improved price realization and sales volume, partially offset by higher core operating costs and a higher effective tax rate.
Questions and Answers
Sales and Revenues / Economic & Industry
Q1: Your economic and industry outlook for 2007 has changed somewhat
from your previous outlook. Can you summarize the key differences?
A: We made several changes. We dropped our forecast of U.S. interest
rate cuts in the second half. The prospect of better economic
growth in the second quarter means that the Fed will not be facing
the challenge of reacting to two consecutive quarters of weak
economic growth. Consequently, the Fed will feel more comfortable
in holding rates steady in an effort to reduce inflation.
Without interest rate relief, many key industries in the United
States face continued unfavorable economic conditions. Housing
construction is the most distressed, and we reduced our forecast for
new starts from 1.5 million units in 2007 to about 1.4 million
units. Nonresidential construction and coal mining will likely
remain weak. Overall, we adjusted U.S. economic growth upward
slightly, from 2 percent growth in 2007 to a little more than
2 percent.
More positively, economic growth outside North America appears
slightly more favorable than we expected in the last report. That
improvement occurs even though interest rates are higher than what
we assumed in the previous outlook.
Metals and energy price forecasts are higher in this forecast than
in the previous outlook. Prices increased more in the first half
than we expected, so the moderation in prices that we still expect
will start from a higher base.
Q2: You have highlighted residential construction in the United States
as a weak spot and have lowered your estimates. Can you comment on
your expectations for residential and nonresidential spending in the
United States and worldwide?
A: U.S. residential construction looks even more distressed now than
three months ago, the result of higher mortgage interest rates,
falling new home prices, tighter lending standards and limited
progress in reducing the stock of unsold new homes. Consequently,
we reduced the housing start forecast for this year from 1.5 million
units to approximately 1.4 million units.
U.S. nonresidential contracting declined year to date even though
some of the supporting factors remained positive -- office rents
were up, business profits were good, lending to businesses increased
and federal highway funding was up. Weakness in building ontracting
possibly resulted from lower returns on commercial investments and
fewer new home developments. Delays in passing the federal budget
limited the release of highway funds early in the year. We expect
very little growth in nonresidential construction this year, which
could cause contractors to be cautious about buying new machines.
Outside the United States prospects for nonresidential construction
are favorable. Office rents are up, business profits are high, and
improved government budgets are allowing more spending on
infrastructure.
Q3: Mining and oil and gas have been very strong industries for the past
few years. Can you comment on your expectations going forward from
here?
A: These industries were strong in the first half of this year, and we
expect continued strength in the last half. Metals, oil and natural
gas prices are well above levels that are attractive for investment
and should remain favorable the rest of the year. Investments in
both metals mining and energy development should increase this year.
We project these industries will be strong worldwide, including in
the United States.
Q4: You are expecting price realization of $850 million for 2007. Can
you comment on your projected improvement in the second half of
2007?
A: Year-over-year price realization is expected to increase in the
second half of 2007. Factors driving this increase include: timing
of merchandising program spending and stronger sales volume in the
second half of 2007 as well as weak price realization in the fourth
quarter of 2006.
Q5: You said you were expecting dealer machine inventories to decline in
2007, particularly in North America. Can you comment on the status
during the second quarter? What are your expectations for the full
year 2007? What are your expectations for dealer inventory outside
North America?
A: Dealers made excellent progress in reducing their machine
inventories in the second quarter. Reported inventories at the end
of the quarter were lower than a year earlier in months of supply in
all regions except Latin America. In Latin America, months of
supply were the same as last year, which was a low figure already.
We project that North American dealers will further reduce
inventories in the second half of this year so that reported
inventories will be less than at the end of 2006 in both dollars and
months supply. Dealers outside North America likely will increase
inventories to manage the strong increase in demand expected this
year. However, reported inventories in months of supply should end
the year lower than at the end of 2006.
Engines
Q6: How has the severe decline in on-highway truck engine sales impacted
overall engine sales and operating profit?
A: The impact of the decline in truck engine sales has had a
significant negative effect on overall engine sales and operating
profit. Overall engine sales in the quarter are up $257 million,
despite a decline in truck-related sales of $380 million ($366
million in North America). Sales of electric power, petroleum,
marine and industrial engines were up $637 million and reflect
continued end market strength in those areas.
Engine operating profit declined $56 million from the second quarter
of 2006. The negative impact of the drop in on-highway truck was
about $150 million, and we had a charge of $44 million to recognize
previously unrecorded liabilities related to a subsidiary pension
plan. Excluding the impact from truck engines and the pension
charge, engines operating profit rose about $140 million.
Q7: You expected a significant drop in demand in 2007 sales of truck
engines as a result of new emissions requirements. How has second-
quarter demand come in relative to your expectations?
A: The transition at our truck OEM customers to the 2007 model year
engine has been slower than anticipated. The impact of the 2006
engines in OEMs' inventories has reduced the demand for the 2007
product. Also, getting our differentiated solution engineered into
the various OEMs' chassis is taking longer than planned, but we feel
the transient regeneration capability of our engine will be the
solution of choice versus some of our competitors. Our market share
in the second half of 2007 should benefit from full availability at
all major OEMs, and we expect our market share to return to more
traditional levels.
Q8: What are your current expectations for the full year for the heavy-
duty North American truck industry?
A: For 2007, we are still anticipating a heavy-duty North American
truck industry of 175,000 to 180,000 units. Through the first half
of 2007, we estimate that heavy-duty truck production is off
40 percent from the first half of last year, compared to the
68 percent unit reduction in our heavy-duty truck engine production.
Q9: We understand that you've invested to increase production capacity
of large 3500 series engines. What's the status? Will your
production capability in the second half of the year be higher than
the first half?
A: The capacity increase program is on schedule. The additional
capacity will begin in third quarter of this year, and we will
continue increasing capacity during the next three years.
Q10: When will you be ready to talk about your technology for the 2010
on-highway emissions changes?
A: Caterpillar plans for 2010 emissions technology are ongoing. Our
path continues to be in-cylinder emission reduction through the
suite of ACERT(R) technologies, including advanced aftertreatment
capability.
Q11: Are dealer reported inventories for engines at levels you think are
appropriate overall?
A: Yes. Comparing second quarter 2007 to a year earlier, dealer
reported inventories in constant dollars and months of supply were
up, but continued to be supported by strong delivery rates.
Q12: We have heard that you have had technical problems with your new
on-highway engines. How has the quality of the 2007 engines
compared with previous releases?
A: We are highly satisfied with our projected 2007 engine reliability.
The 2007 ACERT(R) engines are equal to or better than our 2006
models and compare favorably with the historical levels that have
resulted in the JD Power Customer Satisfaction awards for
Caterpillar truck engines six years in a row.
Costs / Profit / Cash Flow
Q13: Your outlook for core operating costs for 2007 has increased. It's
higher than your first-quarter outlook of $300 million. What is
causing the increase?
A: Our outlook for core operating costs for 2007 has increased to
$700 million. Material costs are expected to be about $150 million
higher than originally forecast. Truck engine-related production
inefficiencies have been worse than expected, primarily due to lower
than anticipated volume. In addition, manufacturing inefficiencies
related to supply chain disruption and our focus on improving
Order-to-Delivery processes and capacity expansion initiatives
essential to achieving our strategic goals have resulted in higher
costs.
Q14: We hear about continuing cost pressure on material costs. What are
your expectations for 2007?
A: We now expect material costs to be up about 1 percent this year. We
had expected overall material cost increases to be minimal in 2007.
Commodities, like nickel and aluminum, are higher than we expected,
and some component suppliers are pushing through higher prices than
we planned.
Q15: You've said before that you expect efficiency benefits from the
implementation of the Cat Production System. However, your factory
efficiencies do not seem to be getting better. Can you comment?
A: We are implementing enterprise wide changes to our Order-to-Delivery
process in an effort to achieve our safety, quality and velocity
goals for 2010 and beyond. As we have deployed Cat Production
System methodologies, we have also introduced additional quality
procedures. These procedures are intended to resolve problems prior
to customer delivery and to introduce corrective actions in our
factories. The combination of CPS implementation and additional
quality procedures has resulted in some cost increase.
Q16: Can you break down your second quarter core operating costs in more
detail?
A: The following table summarizes the increase in core operating costs
in second quarter 2007 versus second quarter 2006:
Core Operating Cost Change 2nd Quarter 2007
vs.
(Millions of dollars) 2nd Quarter 2006
Manufacturing Costs $ 394
SG&A 41
R&D 0
Total $ 435
Core operating costs rose $435 million from second quarter 2006. Of
this increase, $394 million was attributable to higher manufacturing
costs. The increase in manufacturing costs was primarily due to
operating inefficiencies and higher material costs. Operating
inefficiencies were the result of a significant decline in on-
highway truck engine production, selected supply chain challenges,
inefficiencies related to new product introductions and capacity
increases. Our manufacturing costs were also up from last year's
levels due to transitional costs associated with the launch of the
Cat Production System. SG&A and R&D combined as a percent of sales
remained essentially flat with last year.
Manufacturing and non-manufacturing costs were impacted about
equally by a second quarter 2007 charge of $44 million to recognize
previously unrecorded liabilities related to a subsidiary pension
plan.
Q17: Core operating costs were up $435 million in the second quarter and
$642 million year to date. Based on your full-year outlook, what
does this mean for costs in the second half of the year?
A: We expect 2007 core operating costs to be $700 million higher than
full year 2006. Operationally, the first half of 2007 included a
significant number of new product introductions that tend to
temporarily slow production. The second half of 2007 includes much
less new product introduction. We are taking action to address the
lower volumes forecasted for truck engines, and we are focused on
improving our operating efficiencies through the Cat Production
System. Cost comparisons with the second half of 2006 should
improve. Costs increased in the second half of 2006 and included an
expense for a legal dispute settlement. We are also taking action
to lower discretionary spending.
Q18: Can you comment on first-half operating cash flow and expectations
for the remainder of 2007?
A: In the first half of 2007, Machinery and Engines generated
$1.477 billion of operating cash flow. While we do not provide an
outlook on cash flow, the second half of 2007 should benefit from
higher profit and improved inventory performance as compared to the
first half. This will allow us to continue to maintain a strong
financial position and deliver an excellent return for stockholders.
Q19: Can you comment on cash deployment in the first half of 2007?
A: Our priorities for the use of cash are:
-- Maintain a strong financial position
-- Fund profitable growth
-- Maintain well-funded pension plans
-- Consistently increase dividends
-- Repurchase common stock.
The solid Machinery and Engines operating cash flow through second
quarter 2007 was primarily used for:
-- Financial position strength; the debt-to-debt-plus-equity ratio
for Machinery and Engines was 37.2 percent at the end of second
quarter, well within our current target range of 35 to
45 percent. This strong financial position provides flexibility
to take advantage of future opportunities.
-- Capital Expenditures, $575 million, primarily for additional
capacity including replacement of older machines and to support
new product introductions
-- Acquisitions, $181 million, primarily to grow our
remanufacturing operations
-- Maintain well-funded pension plans; during the first half of
2007, $33 million of contributions were made to global pension
plans. Due to the well-funded status of our pension plans,
required contributions over the next three years are expected to
be limited.
-- Dividends, $386 million. The quarterly dividend rate was
increased 20 percent to $0.36 per share in June; this is our
third consecutive year of a 20 percent or greater dividend
increase and our fourteenth consecutive increase in the annual
dividend.
-- Stock repurchase, $1.017 billion for 14.7 million shares, of
which 6.2 million shares were repurchased under the recently
announced $7.5 billion stock repurchase program.
Q20: Last summer you acquired Progress Rail. In general, how has it
performed?
A: We are very pleased with the performance of Progress Rail since it
was acquired in June 2006. Actual results were better than we had
projected in both 2006 and in the first half of 2007. Sales,
operating profit and operating profit as a percent of sales are all
higher than anticipated at the time of acquisition. In the second
quarter of 2007, Progress Rail sales were $411 million.
