Caterpillar Inc. April 2001
Glen A. Barton
Chairman & Chief Executive Officer
Caterpillar enters the new millennium as a growth-oriented, high-tech global leader and competitor...strong, diversified, resilient and forward thinking. We're dedicated to pursuing strategic investments and taking tough action to improve our long-term cost structure. We continue to bolster our leadership in the industries we serve, progressing with a clear focus on well-defined initiatives and renewed strategic planning efforts. We remain committed to realizing profitable growth, fully leveraging the benefits of e-business, aggressively reducing costs and dramatically improving quality-all in an effort to strengthen business processes and improve efficiencies throughout our value chain. We intend to continually advance our ability to cost-effectively serve Customers While enhancing profitability, and shareholder value. We will continue to raise the bar, building on traditions of excellence based, as always, on the knowledge, creativity, commitment and passion of Caterpillar people worldwide.
FIRST QUARTER 2001 RESULTS
◆Sales and revenues of $4.81 billion-2% ($109million) lower than 1QOO
◆Earnings per share of $0.47-in line with weaker first half expectations, but 36% lower than 1QOO
◆Profit of $162million-$96million lower than 1QOO
◆Machine sales down in North America due to drop in overall industry demand for third consecutive year, up in all other geographic regions
◆Growth in sales of power generation products remained strong and sales into oil and natural gas industries rose significantly, but were not enough to offset the North American sharp sales downturn of truck engines
◆Revenue growth in Financial Products Division continued strong at 19%
◆Currency had no impact on earnings per share
◆While a number of business sectors such as truck engines and metals mining remain weak, we're encouraged to see an upturn in coal mining, heavy construction and oil and gas, and the ongoing strength of electric power and financial services. Our diversity continues to serve us well in these times of global economic challenge.
REALIZING PROFITABLE GROWTH
◆On target to top $30 billion in sales and revenue by 2006
◆Key growth factor-engine business
・ 2000 engine sales of$7.06 billion-$202 million (3%) increase over 1999
・ Projected to account for nearly 50% of total sales by 2006-that's an annual growth rate in excess of 10% from 2000's actual sales
◆Electric power-our largest engine segment
・ Growing explosively-Cat's largest growth opportunity
・ Packaged systems achieving annual compound growth rate in excess of 20% for last six years-similar future growth expected
・ Should reach $6 billion by mid-decade through new products, rental growth, complete electric power systems and entry into solution sales-supported by performance guarantees
・ Cat leads in providing distributed power solutions necessary to generate "quality power"
・ Product line of 5kW to 16 MW with multiple fuel options
・ Cat sold 20 Gigawatts of electric generating capacity in 2000
◆Oil and gas-another significant opportunity for engine sales
・ Natural gas increasingly becoming the fuel of choice for energy applications
・ Cat is major participant in all phases of natural gas value chain
・ Recovery of oil and gas prices translating into orders for both reciprocating and turbine engines
◆Other engine business segments registering PINS and margin improvement
・ Improved share of industry sales of engines to North American truck OEMs helped partly offset impact of sharply lower North American truck industry
・ Flagship brands of Caterpillar, Solar, Perkins, FG Wilson and MaK position Cat for growing leadership in 5 to 25,000 hp product offerings
・ 50/50 global alliance with Daimler/Chrysler to produce medium-duty engines and fuel systems and future cooperation on power train components...leverages the combination of two global technology leaders with the efficiencies of scale to create a premier global engine and fuel systems producer...should produce increased profit per share through substantial sales growth and cost synergies
◆The established global leader in machinery business-sales of $11.9 billion in 2000, with more growth potential
◆Compact equipment business
・ Sales of about $300 million, nearly double 1999 sales volume
・ 2000 production exceeded 12,000 units
・ 2001 sales expected to increase by approximately 30%
・ About $5 billion annual sales opportunity and growing steadily
・ Cat will be leading global player with sales of about $1 billion by 2006
・ Strategic alliance with ASV Inc. for design, manufacture and sale of five models of tracked skid-steer loaders starting 2QO1;increases compact equipment product line to 19 models-additional models scheduled for early 2002
◆Paving Products
・ Nearly 30% annual growth rate between 1993 and 1999-flat in 2000
・ Leader in North American compaction with growing equipment popularity
・ Acquisition of Bitelli strengthens European position
・ Sales of close to $1 billion by mid-decade
◆Core machinery business expected to grow due to improvements in annual industry demand of 2-5%, share of industry sales, products and customer focus
・ Formation of Cat Global Mining offers single-point accountability for global mining business...ensures mining products effectively serve needs of mining customers... creates partnership among Cat, the dealer and the customer
・ Purchased Earthmoving Equipment Division of Hindustan Motors Limited-positions Cat in growing Indian market for earthmoving machines; market nearly doubled in past five years-continued rapid growth anticipated
・ Articulated truck business to double by mid-decade to about $500 million; introduced smaller 700 Series trucks-more productive and fuel efficient, lower maintenance cost than current smaller truck; Waco coming on stream
◆Rental Services
・ Critical to Cat's success to be undisputed world leader in rent-to-rent and rental services businesses by end of 2001-on track to accomplish
・ Dealers added 60 North American rental stores in 2000 for a total of 295-growing to about 350 by year-end 2001;rapidly changing industry undergoing ongoing consolidation
・ About 640 outlets, 135 of which are Cat Rental Stores, in Europe/Africa/Middle East;70 in Latin America;5 in Asia/Pacific-growing to about 280 outside NA during 2001
・ Won't commoditize product and will strengthen dealers
◆Service Business Growth
・ Cat Financial managed portfolio of $14 billion, with lending in 29 currencies-Finances more than half of all Cat sales worldwide-Earnings up from $65 million in 1995 to $159 million in 2000
・ Cat Logistics expanding global business with both new and existing clients-Expected revenues of more than $600 million by 2006
LEVERAGING DISTRIBUTION CAPABILITIES
◆Must have most efficient, cost-effective distribution systems
・ Independent dealers continue as foundation of distribution system
・ Represent significant competitive advantage
・ Combine local customer relationship with unmatched global product support capacity
・ Continued success essential to enterprise growth objectives
・ Developing alternatives where appropriate to maximize customer relationships, coverage and after-market opportunities-such as the new, forest-products-only dealer, Pioneer Machinery in southeastern U.S.
・ Reducing costs throughout distribution channel; reducing dealer inventories; enhancing dealer e-business capabilities
2001 OUTLOOK
◆Global economic growth is expected to moderate in 2001 with GDP decreasing from 4% in 2000 to about 2.5% in 2001 and industrial production declining from 8% to about 3.5%
◆2001 sales and revenues expected to be about flat with 2000, with relatively weaker first half; declines in North America balanced by higher sales in Europe and emerging markets. North American industry decline approaching 25% since 1998.
◆Full-year profit projected to be down about 5-10% due to the challenging industry environment, expenses associated with long-term cost reductions and higher income taxes
◆Industry environment characterized by excess capacity and competitive pricing following the Asian economic crisis in 1997...most plants not running at optimum levels again this year-opportunity for substantial volume leverage in a cyclical recovery
◆Spending for SG&A, R&D and software has been essentially flat for past 3 years and is increasing slightly in 2001 to address lower engine emission requirements and achieve longterm reductions in cost structure.
SHAREHOLDER VALUE CREATION
◆Successful cash flow deployment is key to growing business and rewarding shareholders. Over past 8 years:
・ Generated $15.4 billion in cash flow-an average of $1.9 billion annually
・ Used $1.1 billion to reduce debt-to-capital ratio below 40%
・ Invested $7.4 billion to grow businesses with acquisitions and capital investments
・ Used $1.1 billion to complete funding of retiree pensions and medical plans on taxadvantaged basis
・ Restored and raised dividends-currently $1.36 with yield over 3%;establishing record with seven consecutive annual increases
・ Used additional funds to reward shareholders with share buy-back-repurchased more than 63 million shares since 1995
STRATEGIC PLANNING
◆Over last decade, Cat doubled in size with broadest, most-diversified product line ever and leadership in most market segments-now dealing with rapidly changing business climate characterized by:
・ More aggressive competitors (survival/consolidation issues)
・ Distribution opportunities (emergence of rental/market segmentation)
・ Emergence of e-business
・ Cost structure issues
◆Our key initiatives are aimed at realizing profitable growth, leveraging distribution capabilities, developing e-business, aggressively reducing costs and improving quality
DEVELOPING E-BUSINESS
◆Intend to be industry leader where e-business is concerned and strengthen e-business capabilities to drive consistency, efficiency and velocity throughout the entire value chain
・ Created Systems and Processes Division to fuel industry leadership; more than 65 e-business initiatives underway
・ Use e-business to improve customer relations, integrate supply chain and achieve other business process improvements; for example, strategic alliance formed with i2-allows us to market Cat-developed software and use i2 expertise to transform Cat's supply chain, logistics, planning and customer management business processes
・ Use also to improve reach of distribution system, add value to products and services and further enable sale of Cat components to OEMs
・ Make it easier for traditional customers to go online and encourage online customers to visit dealer stores using the dealer storefront
・ More than 140 dealers with active storefronts-nearly half of those utilizing PartStore for online parts business; dealer storefront initiative leveraging common template around the world with strategy called eLINK
・ More than 1,000 internal intranet websites-web-enabled company offers Cat engineers real-time online dialog with counterparts anywhere in the world
AGGRESSIVELY REDUCING COSTS
◆Spending for SG&A, R&D and software has been relatively flat for past 3 years...will increase in 2001 to achieve long-term reductions in cost structure and meet new emissions regulations
◆Setting new targets for significant cost reduction with plans to take more than $1 billion out of cost base
・ Committed to improve profitability even if prices remain virtually flat for next several years with each business unit responsible for reduction target
・ Demonstrated success already-material costs are 3% lower today than in 1996 and aggressive efforts continue
・ Progress in variable cost flexibility-through effective management practices, supplier partnerships and labor contract negotiations
・ Will focus on period costs-goal is cost increases significantly below sales growth rate
・ Total management commitment to cost reduction effort
・ Support only strategically-aligned businesses which add value to organization
・ Exit businesses not performing to expectation unless clear path exists to establish viability
・ Continue emphasis on cost control by launching comprehensive, company-wide 6 Sigma initiative to better align our cost structure with market realities and to enhance shareholder value
IMPROVING QUALITY
◆Committing to a quantum leap in quality, reliability and cost reduction
・ Adopting 6 Sigma methodologies with goal of breakthrough performance and significant profit improvement
・ Each business unit has 6 Sigma champion and is training black belts
・ Many major manufacturing units already ISO certified
・ Class A certification efforts underway with goal of all manufacturing facilities certified by end 2001
・ Class A gauges how we run business;6 Sigma brings impact of quality to bottom line
◆Ultimate quality improvement goal
・ Involve all aspects of value chain
・ Achieve significant improvements in customer service, productivity, inventory management and costs within next three to four years
・ Continue to nurture passion for quality that drives Cat employees at all organizational levels-with greater emphasis on training and development; continual learning
SUMMARY
◆Sharpened focus from strategic planning
・ Fully committed to developing solutions for market segments we serve
・ Drive more value into customer offerings
・ Improve financial performance
◆Focus on goal of $30 billion in sales & revenues by 2006
・ Deliver solid financial results...bottom line growing at twice the rate of top line
・ Produce technologically-superior, high-quality products
・ Add value and reduce costs throughout the enterprise
◆Commitment to cost reduction targets and improved earnings performance over medium-and long-term horizons
・ Impressive cash flow performance
・ Additional shareholder value through growth funding, increased dividends and share repurchase programs
・ Show the compelling value of Cat stock
"Caterpillar has officially launched its pursuit of 6 Sigma levels of performance across the corporation. During 2001 and beyond, we expect to see dramatic bottom-line impact from the growth benefits, cost savings, efficiencies and quality improvements achieved through our efforts. That's good news for customers, employees and shareholders. 6 Sigma has the power to provide us with an energetic new direction and raise our business services to unprecedented levels, further solidifying our leadership position in the industries we serve."
Glen A. Barton
6 Sigma Kickoff Letter to All Employees
January 12,2001
This information should not be construed as an offer to sell or solicitation of an offer to buy Caterpillar securities and is qualified in its entirety by Caterpillar's most recent filings on Form 10-K, Form 10-Q, Form 8-K.
Information included herein is forward-looking and involves risks and uncertainties that could significantly impact expected results. A discussion of those risks and uncertainties is contained in a Form 8-K filed with the Securities and Exchange Commission on April 17, 2001.
