SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 16, 1999
CATERPILLAR INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
1-768
(Commission File Number)
37-0602744
(IRS Employer I.D. No.)
100 NE Adams Street, Peoria, Illinois
(Address of principal executive offices)
61629
(Zip Code)
Registrant's telephone number, including area code: (309) 675-1000
Item 5. Other Events
April 16, 1999
CATERPILLAR REPORTS FIRST-QUARTER RESULTS
AND REAFFIRMS 1999 OUTLOOK
PEORIA, Ill. -- Caterpillar Inc. (NYSE: CAT) today reported record
first-quarter sales and revenues of $4.87 billion, $73 million higher than
first-quarter 1998. A 2% increase in physical sales volume and a 22%
increase in Financial Products revenues were partially offset by lower
price realization. Without Perkins, physical sales volume would have
declined 1%. Profit of $205 million was $225 million less than 1998's
first-quarter record of $430 million. Unfavorable product sales mix, the
lower price realization and the impact of lower production volumes on
manufacturing efficiencies were the most significant reasons for the lower
profit. Profit per share was $.57.
First-quarter 1999 sales and profit were somewhat better than
expected at the time of the company's March 12, 1999, news release. Some
shipments anticipated for the second quarter took place at the end of
March. This will have no impact on the year as the first-quarter benefit
will be offset in the second quarter.
"While first-quarter profit was disappointing compared with a year
ago, our outlook for the full year remains unchanged," said Caterpillar
Chairman and Chief Executive Officer Glen Barton. "The breadth and
diversity of the products we offer, the markets we serve and the
businesses we're in will allow us to continue to achieve solid financial
results even though many markets and regions of the world are in recession
or experiencing slow growth. In addition, our business units are
responding quickly to changes in demand. We expect to benefit from a
number of cost reduction efforts, improved price realization, higher sales
in Asia and continued strong demand in the United States."
HIGHLIGHTS
FIRST-QUARTER 1999 COMPARED WITH FIRST-QUARTER 1998
*Sales and revenues of $4.87 billion, the highest ever for a first
quarter, were $73 million or 2% higher than first-quarter 1998.
(First-quarter 1998 included only one month of Perkins sales.)
*Revenues from Financial Products increased 22%.
*Sales inside the United States were 57% of worldwide sales compared
with 53% a year ago.
*Profit of $205 million and profit per share of $.57 were down 52% and
50%, respectively, from first-quarter 1998. Profit per share continues
to benefit from the company's share repurchase programs.
*1.7 million shares were repurchased during the quarter under the
program announced in October 1998 to reduce the number of shares
outstanding to 320 million within the next three to five years. On
March 31, 1999 there were 355.8 million shares outstanding (360.0
million assuming dilution).
OUTLOOK
Our outlook is unchanged from the March 12, 1999, news release.
We expect 1999 sales and revenues to be slightly below 1998. Profit per
share for 1999 is expected to be 10%-15% lower. (Complete outlook begins
on page 9.)
DETAILED ANALYSIS
FIRST-QUARTER 1999 COMPARED WITH FIRST-QUARTER 1998
Sales and revenues for the first-quarter 1999 were $4.87 billion,
$73 million higher than first-quarter 1998. A 2% increase in physical
sales volume and a 22% increase in Financial Products revenues were
partially offset by lower price realization. Without Perkins, physical
sales volume would have declined 1%. Profit of $205 million was $225
million less than 1998's first-quarter record of $430 million.
Unfavorable product sales mix, the lower price realization and the
impact of lower production volumes on manufacturing efficiencies were
the most significant reasons for the lower profit. Profit per share
of $.57 was down $.58 from the 1998 record of $1.15.
MACHINERY AND ENGINES
Sales Table
(Millions of North Latin Asia/
dollars) Total America EAME ** America Pacific
First-Quarter
1999
Machinery $3,290 $2,139 $718 $202 $231
Engines * 1,308 770 340 85 113
$4,598 $2,909 $1,058 $287 $344
First-Quarter
1998
Machinery $3,438 $2,167 $706 $343 $222
Engines * 1,135 632 307 110 86
$4,573 $2,799 $1,013 $453 $308
* Does not include internal engine transfers of $316 million and
$308 million in 1999 and 1998, respectively. Internal engine
transfers are valued at prices comparable to those for unrelated parties.
** Europe, Africa & Middle East and Commonwealth of Independent States
Machinery sales were $3.29 billion, a decrease of $148 million
or 4% from first-quarter 1998. The lower sales resulted primarily from
a 3% decrease in physical sales volume due to lower sales to end users.
Price realization also declined.
Nearly all the decline occurred in Latin America where recession
or slower growth in a number of countries caused drops in both dealer
new machine inventories and sales to users. In North America, sales
remained near first-quarter 1998 levels as an increase in the United
States was offset by a drop in Canada. The increase in the United
States resulted from an increase in dealer new machine inventories and
from higher sales to end users. In Canada, just the opposite occurred
as dealers reduced new machine inventories and sales to users fell. In
EAME (Europe, Africa & Middle East and Commonwealth of Independent
States), sales remained near last year's levels as higher end-user
driven sales in Europe offset lower sales in Africa & Middle East.
Sales were slightly higher in the Asia/Pacific region as dealers in
developing Asia began to rebuild new machine inventories rather than
decrease them as they did a year ago.
Engine sales were $1.31 billion, an increase of $173 million or
15% from first-quarter 1998. Sales, excluding Perkins, were higher than
a year ago as a 7% increase in physical sales volume more than offset
lower price realization.
Sales excluding Perkins were up in North America and Asia/Pacific
and lower in EAME and Latin America. In North America, sales were up
in both the United States and Canada due to the strong on-highway truck
market as well as increased demand for power generation and marine
applications. Sales excluding Perkins were lower in EAME and Latin
America reflecting the impact of low oil prices, weak growth in Africa &
Middle East and recession or slower growth in most of Latin America.
In the Asia/Pacific region, an increase in Australia more than offset
decreases in developing Asia.
Operating Profit Table
(Millions of First- First-
dollars) Quarter Quarter
1999 1998
Machinery $283 $474
Engines 31 98
$314 $572
Caterpillar operations are highly integrated; therefore, the
company uses a number of allocations to determine lines of business
operating profit.
Machinery operating profit decreased $191 million, or 40% from
first-quarter 1998. Margin (sales less cost of goods sold) declined
primarily due to the lower sales volume, an unfavorable change in
product sales mix, the impact of lower production volumes on
manufacturing efficiencies and the lower price realization. Selling,
general, and administrative as well as research and development
expenses were about the same.
Engine operating profit decreased $67 million, or 68% from
first-quarter 1998. Margin declined as the benefit of higher sales
volumes was more than offset by an unfavorable change in product sales
mix and the lower price realization. Selling, general, and administrative
expenses were higher due largely to the Perkins acquisition. (First-
quarter 1998 included only one month of Perkins costs.) Research and
development costs were about the same.
Interest expense was $6 million higher than a year ago due to higher
average debt levels to support the Perkins acquisition and increased
working capital needs.
Other income/expense was expense of $17 million compared with income
of $42 million first quarter last year. The decrease was due mostly to an
unfavorable change in foreign exchange gains and losses, lower interest
income and to the discounts taken on the sales of trade receivables to
Caterpillar Financial Services Corporation (Cat Financial). Discounts
taken on this revolving sale of receivables to Cat Financial are reflected
in Machinery and Engines as other expense. Revenues offsetting these
discounts as well as the related borrowing costs are reflected in
Financial Products.
FINANCIAL PRODUCTS
Revenues were a first-quarter record $303 million, up $63 million or
26% compared with first-quarter 1998. The increase resulted primarily
from continued growth in Cat Financial's portfolio.
Before tax profit decreased $5 million or 7% from first-quarter 1998.
Higher profit at Cat Financial from continued portfolio growth was more
than offset by lower profit at Caterpillar Insurance Co. Ltd. (Cat
Insurance). Lower investment income and less favorable reserve
adjustments were the reasons for lower profit at Cat Insurance.
INCOME TAXES
First-quarter 1999 tax expense reflects an effective annual tax rate
of 32%. First-quarter 1998 tax expense reflected an effective annual tax
rate of 33%.
UNCONSOLIDATED AFFILIATED COMPANIES
The company's share of unconsolidated affiliated companies' results
declined $8 million from a year ago. The major factor for the decrease
was less profit at Shin Caterpillar Mitsubishi Ltd.
SUPPLEMENTAL INFORMATION
Dealer Machine Sales to End Users and Deliveries to Dealer Rental
Operations
Sales and deliveries in North America remained near first-quarter
1998 levels. Sales were slightly higher in the United States where the
economy has registered excellent growth and residential construction
remains strong. Sales were lower in Canada, however, reflecting the
impact of higher interest rates last year and continued low commodity
prices. For the region as a whole, sales to end users were higher in
all key construction sectors and lower in most commodity sectors except
petroleum. Deliveries to dealer rental operations continued at last
year's pace.
Sales and deliveries in the EAME region also were unchanged from
year-ago levels as higher sales in Europe were offset by lower sales in
Africa & Middle East and the Commonwealth of Independent States. In
Europe, continued moderate economic growth combined with lower interest
rates resulted in higher sales to users in Italy, France and Germany.
Sales were also up in the United Kingdom despite a weak economy. In
Africa & Middle East, low commodity prices, weak growth and spending
reductions led to lower sales. Sales were higher in the United Arab
Emirates and Egypt but lower in Turkey and South Africa. In the
Commonwealth of Independent States, sales were lower due to severe
recession in Russia. For EAME as a whole, sales to users were higher for
construction and solid waste applications as well as aggregates mining.
Sales and deliveries in Latin America fell due to widespread
recession and slower growth. Only Mexico and Peru have maintained
moderate growth. Sales in the first quarter were lower in Brazil,
Chile, Venezuela, Mexico and Colombia, but higher in Peru and Argentina.
Although sales to users in the metals mining sector were up, sales to
users were lower for construction applications as well as other commodity
applications.
Sales and deliveries in Asia/Pacific remained below year earlier
levels reflecting the impact of last year's severe recessions in Southeast
Asia, Korea and Japan. Sales were below first-quarter 1998 levels in
Indonesia, Thailand and the Philippines but higher in Japan, Malaysia and
Korea. Sales also were higher in China reflecting the impact of the
government's sizable infrastructure initiative and in India which has
continued to register good economic growth. Sales were lower in
Australia. For the region as a whole, sales to users were lower in all
key applications except forestry and aggregates mining.
Dealer Inventories of Machines
Worldwide dealer new machine inventories at the end of the first
quarter were about the same as year earlier and just slightly above normal
relative to current selling rates. Higher inventories in North America
offset declines in Asia/Pacific and Latin America. At quarter's end,
inventories compared with current selling rates were about normal in
Asia/Pacific and moderately below normal in EAME. Inventories in North
America continue to be moderately above normal compared with current
selling rates as dealers took advantage of special financing and inventory
programs late last year to improve product availability for the 1999
selling season. Inventories in Latin America were significantly above
current selling rates as sales fell sharply due to recession and slower
growth.
Engine Sales to End Users and OEMs (excluding Perkins)
Sales in North America were up primarily due to continued, very
strong demand for on-highway truck engines. Sales also were higher in
power generation and marine applications but lower in the industrial and
petroleum sectors. Sales of both reciprocating and turbine engines were
higher. Sales were up in Canada as well as the United States.
Sales in EAME were down primarily due to a decline in Europe. Sales
were higher in marine applications but lower in power generation,
petroleum and industrial applications. Sales were lower for both
reciprocating and turbine engines.
Sales in Asia/Pacific remained near last year's levels as higher
sales in Australia and Japan offset lower sales in developing Asia, which
remained weak following last year's severe recessions. Sales of turbine
engines were above year earlier levels as higher sales in Australia more
than offset lower sales elsewhere. Sales of reciprocating engines were
lower across most of the region. Sales were higher for petroleum
applications and lower for power generation.
Sales in Latin America also were lower for both reciprocating and
turbine engines as well as for most applications, reflecting the impact of
recessions and slower growth.
CONDENSED CASH FLOW
Net free cash flow (profit after tax adjusted for depreciation,
changes in working capital, capital expenditures, and dividends) for
Machinery and Engines was a negative $171 million for 1999, a decrease of
$903 million from 1998. This decrease was primarily due to a seasonal
increase in receivables during the first quarter of 1999 compared with
a decrease in receivables during the first quarter of 1998. First-quarter
1998 benefited from the initiation of the revolving sale of receivables to
Cat Financial.
For the Three Consolidated Machinery & Financial
Months Ended Engines * Products
(Millions of dollars)
Mar. Mar. Mar. Mar. Mar. Mar.
31, 31, 31, 31, 31, 31,
1999 1998 1999 1998 1999 1998
Profit after tax $205 $430 $205 $430 $45 $48
Depreciation 232 204 186 166 46 38
and amortization
Change in working
capital -
excluding cash,
debt and
dividends (620) (726) (344) 344 (275) (1,070)
Capital
expenditures
excluding
equipment
leased to others (111) (117) (110) (116) (1) (1)
Expenditures
for equipment
leased to
others, net of
disposals (51) (56) (1) - (50) (56)
Dividends paid (107) (92) (107) (92) (36) (20)
Net Free Cash Flow (452) (357) (171) 732 (271) (1,061)
Other significant
cash flow items:
Treasury shares
purchased (78) (86) (78) (86) - -
Net (increase)
decrease in
long-term
finance
receivables (86) (335) - - (86) (335)
Net increase
(decrease) in debt 477 1,979 175 647 302 1,332
Investments and
acquisitions -
(net of cash
acquired) (33) (1,103) (33) (1,103) - -
Prefunding of
employee benefit
Plans - - - - - -
Other 56 (84) 4 (159) 42 47
Change in cash and
short-term
investments $(116) $14 $(103) $31 $(13) $(17)
* Represents Caterpillar Inc. and its subsidiaries, except for
Financial Products which is accounted for on the equity basis.
Note: Lines titled "Change in working capital - excluding cash, debt
and dividends" and "Capital expenditures excluding equipment leased to
others" exclude $201 million and $331 million, respectively, included in
the "Investments and acquisitions - (net of cash acquired)" line for the
three months ended March 31, 1998.
EMPLOYMENT
At the end of the first quarter, Caterpillar's worldwide employment
was 65,377 compared with 64,681 one year ago.
OUTLOOK
1999 company sales and revenues are expected to be slightly below
1998's record levels due to weakness in Latin America, a reversal of last
year's increase in North American dealer inventory levels and the impact
of low commodity prices. Sales are forecast to be higher in EAME due to
improved demand for machinery in Europe. Sales also are forecast to be up
in Asia/Pacific where dealers were liquidating new machine inventories in
1998.
As a result of adverse product sales mix, lower sales and a
continuing competitive pricing environment, the company is implementing
actions to reduce costs. These include selected production schedule cuts,
employment reductions and temporary plant shutdowns at facilities in the
United States, Latin America and Europe. Other actions include reducing
inventory and selling, general and administrative and research and
development expenses. As a result of these actions and anticipated better
demand, profit in the second half of 1999 is expected to be higher than
Summary
World economic growth in 1999 is forecast to be similar to 1998 as
improvement in Asia is largely offset by recession in Latin America. The
United States and Australian economies should register another year of
excellent growth while moderate growth is forecast to continue in Europe.
Combined with low prices for metals and uncertainty over oil prices,
this outlook is expected to result in slightly lower industry demand for
construction and mining equipment. Machine demand is forecast to remain
close to 1998 levels in the United States and just below last year's
levels in Australia and Japan. Higher demand in Europe and developing
Asia should offset lower demand in Latin America and Canada. In contrast
to construction and mining equipment, industry demand for agricultural
equipment is forecast to be down sharply due to depressed commodity
prices.
Industry demand for engines is now forecast to exceed 1998 levels in
North America due primarily to the continued strong on-highway truck
market. Demand in the rest of the world, however, is likely to be down.
In this environment of generally weaker industry demand, company
sales and revenues are expected to be slightly below 1998 levels. The
decline is due primarily to the sharp drop in demand from Latin America,
the impact of low commodity prices on the mining, oil and agricultural
sectors and an inventory adjustment by North American dealers.
North America
In the United States, Gross Domestic Product (GDP) growth is
forecast to slow from 3.9% in 1998 to 3.0%-3.5% in 1999. Housing starts
should remain strong, and the new six-year highway spending bill will
boost highway construction spending as well as aggregates production.
Metals mining and agriculture, however, are expected to remain weak due
to low worldwide prices. Industry demand for construction and mining
machines is expected to be about flat while demand for agricultural
equipment is forecast to fall. In Canada, slower economic growth and
low commodity prices are expected to result in slightly lower industry
demand for machines. For North America, industry demand for reciprocating
engines is forecast to increase due to the continued strong on-highway
truck market, but demand for turbines is forecast to decline due to low
oil prices over the past year. In total, industry demand for the region
should remain near 1998 levels but company sales are forecast to decline
primarily due to a reversal of last year's increase in dealer new machine
inventory levels.
EAME
In Western Europe, GDP growth is expected to be about 2.5%,
resulting in slightly higher industry demand for construction and mining
machines. Demand in the United Kingdom, however, is anticipated to
decline due to weak growth resulting from high interest rates and a
strong currency. European demand for reciprocating engines, especially
from OEMs, is forecast to be down. In Africa & Middle East, weak growth
and low commodity prices should result in lower industry demand for both
machines and engines. In Russia, continued recession and instability will
result in lower industry demand. For the region as a whole, company sales
are forecast to be near 1998 levels as higher machinery sales are offset
by lower engine sales.
Latin America
Recessions in Brazil, Argentina, Venezuela, Colombia and Ecuador are
likely to continue for another three to six months before the region
stabilizes. Consequently, industry demand for machines and engines in
these countries will be much lower than last year. Mexico and Peru are
expected to sustain moderate economic growth, but industry demand for the
entire region is still likely to be down significantly leading to lower
company sales.
Asia/Pacific
In the Asia/Pacific region, some of the developing countries which
experienced severe recession in 1998 are beginning to stabilize and growth
should resume later this year. China should continue to grow at about 7%.
As a result, GDP for developing Asia is expected to increase from 1.0% in
1998 to 3.5% in 1999. Industry demand for machines is forecast to be up
slightly with an increase in China due to strong infrastructure spending
more than offsetting continued weakness in Southeast Asia. Industry
demand for engines is expected to be down moderately. Business conditions
in Japan are expected to remain weak in 1999, but massive public works
spending should begin to stabilize industry demand after the steep decline
of the past two years. In Australia, continued good economic growth
should keep industry demand just slightly below 1998 levels. For the
region as a whole, industry demand will be about flat but company sales
are forecast to be up slightly because dealers are not expected to
decrease new machine inventories as they did in 1998.
CATERPILLAR INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
(Millions of dollars except per share data)
Consolidated Machinery & Financial
Engines * Products
Mar. Mar. Mar. Mar. Mar. Mar.
31, 31, 31, 31, 31, 31,
1999 1998 1999 1998 1999 1998
Sales and revenues:
Sales of Machinery
& Engines $4,598 $4,573 $4,598 $4,573 $ - $ -
Revenues of
Financial Products 269 221 - - 303 240
Total sales
and revenues 4,867 4,794 4,598 4,573 303 240
Operating costs:
Cost of goods sold 3,578 3,334 3,578 3,334 - -
Selling, general,
and administrative
expenses 653 587 551 512 109 81
Research and
development
expenses 155 155 155 155 - -
Interest expense
of Financial
Products 129 101 - - 134 105
Total
operating costs 4,515 4,177 4,284 4,001 243 186
Operating Profit 352 617 314 572 60 54
Interest expense
excluding
Financial Products 67 61 67 61 - -
Other income
(expense) 16 73 (17) 42 11 22
Consolidated profit
before taxes 301 629 230 553 71 76
Provision for
income taxes 96 207 70 179 26 28
Profit of
consolidated
companies 205 422 160 374 45 48
Equity in profit
of
unconsolidated
affiliates - 8 - 8 - -
Equity in profit
of Financial
Products
subsidiaries - - 45 48 - -
Profit $205 $430 $205 $430 $45 $48
EPS of common
stock $0.58 $1.17
EPS of common
stock
- assuming dilution $0.57 $1.15
Weighted average
shares
outstanding
(thousands)
Basic 356,291 367,054
Assuming
dilution 360,497 372,527
* Represents Caterpillar Inc. and its subsidiaries, except for Financial
Products which is accounted for on the equity basis. Transactions between
Machinery and Engines and Financial Products have been eliminated to arrive
at the Consolidated data.
CATERPILLAR INC.
CONDENSED FINANCIAL POSITION
(Millions of dollars)
Consolidated
(Caterpillar Inc. and
Subsidiaries)
Mar. Dec. Mar.
31, 31, 31,
1999 1998 1998
Assets
Current assets:
Cash and short-term investments $244 $360 $306
Receivables - trade and other 4,183 3,660 3,794
Receivables - finance 3,448 3,516 2,738
Deferred income taxes 516 474 437
Prepaid expenses 620 607 510
Inventories 2,892 2,842 3,091
Total current assets 11,903 11,459 10,876
Property, plant, and equipment - net 4,852 4,866 4,376
Long-term receivables - trade and other 92 85 127
Long-term receivables - finance 5,144 5,058 4,216
Investments in unconsolidated affiliated
companies 835 773 814
Deferred income taxes 977 955 1,018
Intangible assets 1,235 1,241 1,169
Other assets 681 691 981
Total Assets $25,719 $25,128 $23,577
Liabilities
Current liabilities:
Short-term borrowings:
-- Machinery & Engines $236 $49 $382
-- Financial Products 697 760 464
Accounts payable 2,123 2,250 2,535
Accrued expenses 990 928 921
Accrued wages, salaries, and employee
benefits 1,090 1,217 1,026
Dividends payable - 107 -
Deferred and current income taxes
payable 147 15 390
Long-term debt due within one year:
-- Machinery & Engines 48 60 40
-- Financial Products 2,439 2,179 1,345
Total current liabilities 7,770 7,565 7,103
Long-term debt due after one year:
-- Machinery & Engines 2,993 2,993 2,699
-- Financial Products 6,516 6,411 5,617
Liability for postemployment benefits 2,698 2,590 2,698
Deferred income taxes and other liabilities 429 438 451
Total Liabilities 20,406 19,997 18,568
Stockholders' Equity
Common stock 1,062 1,063 1,069
Profit employed in the business 6,328 6,123 5,456
Accumulated other comprehensive income 50 1 73
Treasury stock (2,127) (2,056) (1,589)
Total Stockholders' Equity 5,313 5,131 5,009
Total Liabilities and Stockholders' Equity $25,719 $25,128 $23,577
Certain amounts for 1998 have been reclassified to conform with
the 1999 financial statement presentation.
SAFE HARBOR STATEMENT UNDER THE SECURITIES LITIGATION
REFORM ACT OF 1995
- ------------------------------------------------------
The information included in the "Outlook" section is forward looking
and involves uncertainties that could significantly impact expected
results. These uncertainties include factors that affect all
international businesses, as well as matters specific to the Company
and the markets it serves.
Events in Asia, Latin America and Russia
- ----------------------------------------
Unforeseen events in Asia, Latin America, Russia or elsewhere could
impact sales. Our current assessment calls for recession to continue
through at least the first half of 1999 in Japan, Thailand, Indonesia,
Malaysia, and Hong Kong with improvement expected in most countries
during the second half.
Brazil, Argentina, Venezuela, Columbia and Ecuador are forecast to be
in recession for another three to six months. Brazil is expected to
remain in recession at least through the first half of 1999 due to high
interest rates, reduced government spending and increased uncertainty.
Our outlook assumes the Brazilian congress will implement the necessary
fiscal austerity measures over the next few months to reduce the budget
deficit which in turn will allow interest rates to come down
stimulating a better economic performance in the second half of 1999.
If Brazil fails to enact the necessary measures, the currency could
once again decline and interest rates would likely have to increase
resulting in recession in the second half as well. Mexico will likely
experience slower growth as a result of the Brazilian devaluation but
should avoid recession.
This assessment presumes Latin American currencies and stock markets
continue to stabilize over the next several months and that there is
some improvement in the second half. If the region's currencies and/or
stock markets were to resume their decline, if China or Hong Kong were
to devalue, or if Japan were to experience a financial collapse, then
the impact on world growth and industry demand would be more severe
which could result in lower company sales. Company sales also could be
negatively impacted by a greater than anticipated flow of new and used
equipment from weak Asian markets to the rest of the world which could
exert pressure on both price realization and share of industry sales.
Russia remains in severe recession. Political and economic instability
are very high and a further deterioration could impact worldwide stock
or currency markets, which in turn could weaken Company sales.
Monetary and Fiscal Policies
- ----------------------------
For most companies operating in a global economy, monetary and fiscal
policies implemented in the U.S. and abroad could have a significant
impact on economic growth, and, accordingly, demand for a product. For
example, if the Federal Reserve fails to cut interest rates quickly
enough in response to a significant decline in world stock markets, the
U.S. economy could slow and negatively impact demand for the Company's
products. In general, high interest rates, reductions in government
spending, higher taxes, significant currency devaluations, and
uncertainty over key policies are some factors likely to lead to slower
economic growth and lower industry demand. The current outlook is for
slightly slower U.S. growth in 1999 and not recession. If, for
whatever reason, the U.S. were to enter a recession then demand for
Company products would fall in the U.S. and Canada and would also be
lower throughout the rest of the world.
Political Factors
- -----------------
Political factors in the U.S. and abroad also have a major impact on
global companies. The Company is one of the largest U.S. exporters as
a percentage of sales. International trade and fiscal policies
implemented in the U.S. this year could impact the Company's ability to
expand its business abroad. U.S. foreign relations with certain
countries and any related restrictions imposed could also have a
significant impact on foreign sales. In addition, political
instability in regions such as the CIS make potential economic growth
difficult to predict for those countries.
Currency Fluctuations
- ---------------------
Currency fluctuations are also a significant unknown for global
companies. If the U.S. dollar strengthens against foreign currencies,
the Company's ability to realize price increases on sales could be
negatively impacted. Most of the Company's key competitors have their
principal manufacturing operations based in Japan or European
countries. The majority of our manufacturing assets are in the United
States. Consequently, should an overvalued dollar persist, our costs
compared with these competitors would be relatively higher. As a major
net exporter from the United States, the persistence of an overvalued
dollar, over time, could have an unfavorable impact on our global
competitive position.
Dealer Practices
- ----------------
In addition to these factors, there are uncertainties related to the
Company's industry and specific operations. A major factor
contributing to the Company's success is its dealer distribution
network. Dealer practices, such as changes in inventory levels for
both new and rental equipment, are not within the Company's control
(primarily because these practices depend upon the dealer's assessment of
anticipated sales) and may have a significant positive or negative
impact on our results. At the end of the first quarter of 1999, dealer
new machine inventories were significantly above normal in Latin
America and moderately above normal in North America and could result
in lower than anticipated company sales in the first half of 1999.
Other Factors
- -------------
The rate of infrastructure spending, housing starts, commercial
construction and mining also play a significant role in the Company's
results. Our products are an integral component of these activities
and as these activities increase or decrease in the U.S. or abroad,
demand for our products may be significantly impacted.
Another factor which can impact company sales and profit is mix. Our
outlook assumes a certain geographic mix of sales as well as a product
mix of sales (machines vs. engines, small vs. large, high margin vs.
low margin). Results may be impacted positively or negatively by
changes in the mix.
The Company operates in a highly competitive environment and our
outlook depends on a forecast of the Company's percentage of industry
sales. A reduction in that percentage could result from pricing or
product strategies pursued by competitors, unanticipated product or
manufacturing difficulties, a failure to price the product
competitively, or an unexpected buildup in competitors' new machine or
dealer owned rental fleets.
The outlook also depends on our ability to realize price increases. The
environment remains very competitive and a repeat of the price
discounting that occurred in 1998 would result in lower than
anticipated price realization.
This discussion of uncertainties is by no means exhaustive but is
designed to highlight important factors that may impact our outlook.
Obvious factors such as general economic conditions throughout the
world do not warrant further discussion but are noted to further
emphasize the myriad of contingencies that may cause the Company's
actual results to differ from those currently anticipated.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CATERPILLAR INC.
By: /s/ R. Rennie Atterbury III
R. Rennie Atterbury III
Vice President
Date: April 16, 1999
