CAT

Caterpillar Inc. 10-Q Summary: Quarter Ended September 30, 2008

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2008, and the nine-month period ended on the same date. Caterpillar Inc. operates in three principal lines of business: Machinery, Engines, and Financial Products. The reporting period coincides with significant global financial market turbulence, recessionary conditions in North America, and growing economic weakness in Europe and Japan, partially offset by strong demand in emerging markets and high commodity prices.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Third-quarter sales increased 13% ($1.54 billion) compared to Q3 2007, driven by a 13% increase in Machinery sales and a 16% increase in Engines sales. Nine-month sales rose 17% year-over-year.
• Profit Decline: Despite revenue growth, third-quarter net profit decreased 6% to $868 million (from $927 million in Q3 2007). This was primarily due to higher manufacturing costs, specifically for steel and freight, which offset gains from price realization and volume.
• Segment Performance:
  • Machinery: Operating profit fell 32% to $464 million due to rising material costs.
  • Engines: Operating profit rose 16% to $616 million, supported by strong demand in mining and energy sectors.
  • Financial Products: Operating profit declined 19% to $144 million, impacted by lower net yields and increased provisions for credit losses.
• Acquisitions and Consolidation: On August 1, 2008, Caterpillar increased its ownership in Shin Caterpillar Mitsubishi Ltd. (SCM) to 67%, renaming it Caterpillar Japan Ltd. (Cat Japan). Cat Japan's financial position was consolidated as of September 30, 2008, adding $2.4 billion in assets and $2.05 billion in liabilities.

Guidance, Outlook, and Risks

• 2008 Outlook: Management maintains its full-year 2008 outlook, expecting sales and revenues to exceed $50 billion and profit per share to be approximately $6.00.
• 2009 Outlook: Preliminary forecasts suggest 2009 sales and revenues will be flat compared to 2008. Management expects pockets of strength in global mining, energy, and emerging market infrastructure to offset acute weakness in North America, Europe, and Japan. A specific profit per share outlook for 2009 will be issued in January 2009 due to economic uncertainty.
• Risks and Contingencies:
  • Financial Markets: Severe volatility and credit tightening pose risks to customer financing and Cat Financial's liquidity, though the company maintains access to capital.
  • Cost Pressures: Continued high steel and freight costs remain a headwind to profitability.
  • Legal/Environmental: Ongoing negotiations with the EPA regarding Clean Air Act violations; potential penalties are not expected to be material. Litigation regarding patent infringement (Kruse Technology Partnership) is pending.
  • Pension Obligations: Market volatility has negatively impacted plan asset values. Management estimates a potential increase in underfunded status of approximately $3.3 billion by year-end 2008.

Key Facts for Investor Verification

• Cat Japan Consolidation: Verify the impact of the August 1, 2008, share redemption on Q4 2008 results, as Cat Japan's operating results will be consolidated starting in the fourth quarter.
• Cost Inflation: Monitor the trajectory of steel and freight costs, which significantly eroded Machinery operating margins in Q3.
• Credit Quality: Review Cat Financial's allowance for credit losses, which increased to $390 million, and past-due rates, which rose to 3.64% due to the U.S. housing downturn.
• Pension Funding: Assess the potential cash outflow required to fund pension plans, with $328 million contributed YTD and an additional $110 million anticipated for the remainder of 2008.
• Stock Repurchases: Confirm the remaining authorization under the $7.5 billion program; $3.6 billion has been spent through Q3 2008.