Caterpillar Inc. is the world's largest construction equipment manufacturer with headquarters in Peoria, Illinois. In addition to construction machinery, Caterpillar also manufactures diesel engines, gas engines and industrial gas turbines.
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended June 30, 2000
OR
For the transition period from to
CATERPILLAR INC. (Exact name of registrant as specified in its charter)
Delaware(State or other jurisdiction of incorporation)
Registrant's telephone number, including area code: (309) 675-1000
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /
At June 30, 2000, 345,714,523 shares of common stock of the Registrant were outstanding.
This summary page highlights selected information and may not contain all of the information that is important to you. For a detailed analysis of the company's results for the second quarter, you should read the entire document.
SUMMARY OF RESULTS
On July 20, 2000 Caterpillar Inc. reported second-quarter sales and revenues of $5.36 billion, $262 million or 5 percent higher than second-quarter 1999. The increase was primarily due to higher physical volume. Financial Products revenues increased $27 million or 10 percent from second quarter 1999.
Profit of $315 million was $32 million or 11 percent higher than second-quarter 1999. The increase was due primarily to improved manufacturing efficiencies and the higher physical volume. These favorable changes were partially offset by unfavorable other income, mostly due to discounts on the securitization of receivables and foreign exchange losses. Profit per share was 90 cents, up 15 percent.
"Through the first half of 2000, customer demand for Cat products in total remained solid, though in the U.S., higher interest rates and other factors have softened the market for construction equipment and truck engines," said Chairman and CEO Glen Barton. "Our global diversification, broad product line and the variety of businesses in which we compete continue to create a broad base of opportunities. Sales increased in all regions of the world. Strong demand for quality power in telecommunications, process manufacturing and internet service operations in North America and Europe is driving a dramatic increase in Caterpillar's electric power business. Although there have been changes in components of our outlook and we are concerned about the interest rate environment for the rest of the year, the overall outlook for 2000 remains unchanged — sales are expected to be up slightly and profit to be up moderately."
HIGHLIGHTS — SECOND-QUARTER 2000 COMPARED WITH SECOND-QUARTER 1999
OUTLOOK
We continue to expect full-year 2000 sales and revenues to be slightly higher than 1999 and profit to increase moderately. (Complete outlook begins on page 14.)
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Caterpillar Inc. Statement of Results of Operations (Unaudited) (Millions of dollars except per share data)
The supplemental consolidating data is presented for the purpose of additional analysis. Transactions between Machinery & Engines and Financial Products have been eliminated to arrive at the consolidated data.
See accompanying notes to Consolidated Financial Statements
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Caterpillar Inc.Statement of Changes in Stockholders' EquityFor the Six Months Ended(Unaudited)(Dollars in millions)
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Caterpillar Inc.Statement of Financial Position *(Dollars in millions)
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Caterpillar Inc. Statement of Cash Flow for the Six Months Ended (Unaudited) (Dollars in millions)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions except per share data)
Combined financial information of the unconsolidated affiliated companies was as follows:
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The write-down of property, plant, and equipment establishes a new cost basis for assets that have been permanently impaired. Employee severance benefits (e.g., pension, medical, and supplemental unemployment benefits) are provided to employees affected by plant closings and consolidations. The reserve for such benefits is reduced as the benefits are provided.
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As amended by SFAS 137, which defers the implementation of SFAS 133, we are required to adopt this new accounting standard for the fiscal year beginning January 1, 2001. While we are still analyzing the impact that the adoption of SFAS 133 will have on our financial statements, we do not believe that the impact will be material.
Caterpillar is organized based on a decentralized structure that has established accountabilities to continually improve business focus and increase our ability to react quickly to changes in both the global business cycle and competitors' actions. Our current structure uses a product, geographic matrix organization comprised of multiple profit center and service center divisions.
We have developed an internal measurement system, which is not based on generally accepted accounting principles (GAAP), that is intended to motivate desired behavior and drive performance rather than measure a division's contribution to enterprise results. It is the comparison of actual results to budgeted results that makes our internal reporting valuable to management. Consequently, we believe that segment disclosure based on Statement of Financial Accounting Standards No. 131 (SFAS 131) "Disclosures about Segments of an Enterprise and Related Information" has limited value to our external readers. As a result, in addition to the required SFAS 131 compliant segment information presented below, we are continuing to disclose GAAP-based financial results for our three lines of business (Machinery, Engines, and Financial Products) in our Management's Discussion and Analysis beginning on page 11.
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Business Segments
Three months ended June 30,
Six months ended June 30,
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Item 2. Management's Discussion and Analysis of Results of Operations and Liquidity and Capital Resources
A. Consolidated Results of Operations
THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1999
Sales and revenues for the second-quarter 2000 were $5.36 billion, 5 percent higher than second-quarter 1999. A 7 percent increase in physical sales volume and a 10 percent increase in Financial Products revenue were partially offset by the unfavorable impact of the stronger U.S. dollar on sales denominated in currencies other than U.S. dollars (primarily the euro). Profit of $315 million or 90 cents per share was $32 million or 11 percent higher than second-quarter 1999. The increase was due primarily to improved manufacturing efficiencies and higher physical volume. These favorable changes were partially offset by unfavorable other income, mostly due to discounts on the securitization of receivables and foreign exchange losses. The negative impact of the U.S. dollar on sales was mostly offset by the U.S. dollar's positive impact on costs.
MACHINERY AND ENGINES
Sales
Refer to table on page 19 for reconciliation of Machinery and Engine Sales by Geographic Region to External Sales by Marketing Segment.
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Machinery sales were $3.32 billion, an increase of $103 million or 3 percent from second-quarter 1999. The higher sales resulted from a 7 percent increase in physical sales volume. Price realization was lower, primarily due to the unfavorable impact of the stronger U.S. dollar on sales denominated in currencies other than U.S. dollars (primarily the euro).
Sales in North America remained near year-earlier levels as lower dealer sales to end users were offset by a slower pace of dealer inventory reduction. The lower dealer sales to end users reflected both a drop in industry demand and a lower share of industry sales. Sales in EAME were higher due to improved dealer sales to end users and an increase in dealer inventories. Sales in Latin America increased as dealer sales to end users stabilized and dealers held inventories steady through the quarter compared to reducing them a year ago. Sales in the Asia/Pacific region were up slightly from second-quarter 1999 as higher dealer sales to end users more than offset dealer inventory reduction.
Engine sales were $1.74 billion, an increase of $132 million or 8 percent from second-quarter 1999. The higher sales resulted from a 6 percent increase in physical sales volume. Price realization was also higher.
The majority of the quarterly sales gain came from stronger sales into power generation as demand for electric power products increased in most areas of the world. It has been particularly strong in North America and Europe where Caterpillar's power solutions help meet peak power needs and provide premium quality power for telecommunications, process manufacturing and internet service operations. Sales of electric power products also benefited from the addition of revenues from F.G. Wilson, converted from an affiliated company to a consolidated subsidiary in July 1999.
Operating Profit
Caterpillar operations are highly integrated; therefore, the company uses a number of allocations to determine lines of business operating profit.
Machinery operating profit increased $81 million, or 28 percent from second-quarter 1999. Margin (sales less cost of goods sold) improved primarily due to the higher sales volume and improved manufacturing efficiencies, partially offset by the slightly negative impact of currency. Selling, general & administrative (SG&A) expenses were lower.
Engine operating profit increased $54 million, or 46 percent, from second-quarter 1999 due to better price realization (primarily geographic mix), improved manufacturing efficiencies and higher sales volume. These were partially offset by higher SG&A.
Interest expense was $9 million higher than a year ago.
Other income/expense was expense of $50 million compared with income of $15 million last year. The adverse change was mostly due to discounts taken on the sale of trade receivables and unfavorable foreign exchange gains and losses.
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FINANCIAL PRODUCTS
Revenues for the second quarter were $359 million, up $44 million or 14 percent compared with second-quarter 1999 (excluding revenue transactions with Machinery and Engines, revenues increased $27 million or 10 percent). The increase resulted primarily from continued growth in Cat Financial's portfolio.
Before tax profit decreased $9 million or 15 percent from second-quarter 1999. The decrease resulted primarily from a reduction in favorable reserve adjustments at Caterpillar Insurance Company Ltd
INCOME TAXES
Second-quarter tax expense reflects an estimated annual tax rate of 32 percent for both 2000 and 1999.
UNCONSOLIDATED AFFILIATED COMPANIES
The company's share of unconsolidated affiliated companies' results declined $5 million from second quarter a year ago, primarily due to weaker results at Shin Caterpillar Mitsubishi Ltd. and the conversion of F.G. Wilson from an affiliated company to a consolidated subsidiary in July 1999.
SUPPLEMENTAL INFORMATION
Dealer Machine Sales to End Users
Sales (including both sales to end users and deliveries to dealer rental operations) in North America were lower compared to second-quarter 1999. This was due to weaker sales in the United States resulting from a decline in industry demand and lower share of industry sales. Sales in Canada were higher. For the region, sales into general construction, industrial, quarry & aggregates, waste and agriculture were lower. Sales rose in mining and forestry. Sales in heavy construction were down slightly compared to second-quarter 1999 as sales to pipeline construction declined, while highway construction remained near year-earlier levels.
Sales increased in EAME as a result of growing demand throughout the region. In Europe, economic growth supported higher sales in France and Spain. Reconstruction efforts boosted sales in Central Europe. Sales in the United Kingdom and Italy remained near year-earlier levels while sales in Germany declined. In Africa & Middle East, sales were higher in Turkey and Saudi Arabia, which more than offset declines in United Arab Emirates, Egypt and South Africa. Sales in the Commonwealth of Independent States (CIS) increased. For the EAME region, sales were higher to heavy construction, mining, industrial, quarry & aggregates and forestry. Sales into general construction, agriculture and waste were lower.
In Latin America, sales declined from year-earlier levels. Sales were lower in Colombia, Mexico and Argentina, more than offsetting gains in Brazil and Peru. For the region, sales were lower in industrial, general construction and mining sectors. Sales increased into heavy construction and forestry.
In Asia/Pacific, sales increased due to growth in China, Australia, Korea, Malaysia and Indonesia. Sales in India and the Philippines were lower. For the region, sales increased into heavy construction, mining, general construction and forestry. Sales into the quarry & aggregates sector were lower.
Dealer Inventories of New Machines
Worldwide dealer new machine inventories at the end of the second quarter were lower than a year ago. Declines in North America and Asia/Pacific more than offset increases in EAME and Latin America.
Inventories compared to current selling rates were lower than a year earlier in all regions.
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Engine Sales to End Users and OEMs
Higher sales in North America resulted from surging demand for electric power products to help meet electric utilities' peak power requirements and increased customer needs for high quality power. Demand for larger engine product to support network operation centers (sometimes referred to as internet service providers) was particularly robust. Sales were also higher in the petroleum sector due to the impact of higher crude oil and natural gas prices. Sales of on-highway truck engines declined as expected due to weakening industry demand, however Caterpillar's market leadership position in this industry continued to grow. Sales into marine and industrial were also lower.
Sales in the rest of the world were lower as sales declined in all sectors except power generation which benefited from the acquisition of F.G. Wilson.
EMPLOYMENT
At the end of second-quarter 2000, Caterpillar's worldwide employment was 66,836 compared with 66,545 one year ago. Employment outside the United States grew by approximately 1,300 as we expanded operations to meet increased demand.
Summary
Company sales and revenues are forecast to increase slightly in 2000 as higher sales in EAME and Asia/Pacific more than offset lower sales in North America. Company sales will benefit from better worldwide economic growth and higher prices for most commodities. Oil prices in particular are forecast to remain high, averaging $25-$30 per barrel for the year, while agricultural prices are expected to remain under pressure due to crop surpluses in the United States. Company sales also will benefit from less dealer inventory reduction. The competitive environment, however, remains particularly challenging with pressure on both share of industry sales and price realization. Further, we continue to be concerned about the interest rate environment for the rest of the year.
In North America, machine sales are expected to decline due to a drop in industry demand and a slightly lower share of industry sales. Engine sales are expected to exceed 1999 levels as robust power generation sales and higher petroleum sales more than offset lower industry demand for on-highway truck engines. In EAME and Asia/Pacific, good economic growth and higher commodity prices should lead to higher retail demand and higher company sales for machines and engines. In Latin America, company sales are forecast to be flat as higher machine sales are offset by lower engine sales.
In summary, company sales and revenues are forecast to increase slightly in 2000 due to higher engine sales and increased financial revenues. Machinery sales are forecast to remain near 1999 levels as lower sales in the United States are offset by higher sales elsewhere. Profit is forecast to increase moderately.
North America
In the United States, retail industry demand for construction equipment is forecast to decline 10 percent to 15 percent despite Gross Domestic Product (GDP) growth of about 4.5 percent. While such strong economic growth would usually lead to increased demand, higher interest rates, lower housing starts and a drop in replacement buying are causing industry demand to continue to fall from the 1998 peak. Heavy construction could provide a partial offset to the drop in general construction, but recent highway spending increases have continued to favor bridge repair and resurfacing which are not as heavy equipment intensive. Sales into most other sectors are likely to be down for the year including mining, quarry & aggregates, industrial, forestry and waste. Sales of agricultural equipment also are unlikely to exceed 1999 levels due to a drop in industry demand. Company machine sales are still forecast to benefit from higher sales of compact equipment and less dealer inventory reduction, but this will not be enough to offset lower industry demand and a slightly lower share of industry sales.
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Company engine sales in the United States are forecast to exceed 1999 levels as strong demand for power generation, higher sales into petroleum and higher share of industry sales for heavy and medium-duty truck engines should more than offset lower industry demand for on-highway truck engines.
In Canada, good economic growth should lead to higher sales for both machines and engines.
For the North American region as a whole, company sales are forecast to be slightly below last year's level as lower machine sales more than offset higher engine sales.
EAME
In Western Europe, GDP growth is expected to accelerate from 2.3 percent in 1999 to 3.3 percent in 2000 leading to a 5 percent to 10 percent increase in machine industry demand as well as stronger engine sales. Growth is also expected to improve in Africa & Middle East with double-digit gains in machine industry demand. Higher commodity prices, particularly oil and natural gas, are driving increased demand for both machines and engines. Sales in Russia and elsewhere in the CIS, however, are likely to remain depressed. For the EAME region as a whole, better growth and improved business confidence should lead to higher company sales, despite the weak euro's unfavorable impact on the translation of European sales from euros to dollars.
Asia/Pacific
In developing Asia, economic recovery is forecast to continue with GDP growth of about 6 percent. This growth should result in considerably higher engine sales than last year, particularly for power generation. Even though the construction sector remains very weak, machine sales are forecast to increase somewhat from last year's depressed level as higher dealer sales to end users, especially in China, more than offset a reduction in dealer inventories. In Australia, good economic growth should continue although there is also some uncertainty about the impact on the economy of the implementation of the new goods and services tax on July 1. Machine sales volume is forecast to be higher for the year, but lower engine sales and a weak Australian dollar are likely to result in lower overall US dollar sales for Australia. For the Asia/Pacific region in total, company sales of both engines and machines should exceed 1999 levels.
Latin America
GDP growth is forecast to improve from 0.4 percent in 1999 to 4 percent in 2000 as most of the region recovers from last year's recession. Combined with higher commodity prices, this improved growth should result in higher machine and reciprocating engine sales. Sales of turbine engines, however, are likely to be lower, resulting in company sales remaining near 1999 levels.
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SIX MONTHS ENDED JUNE 30, 2000 VS. SIX MONTHS ENDED JUNE 30, 1999
Sales and revenues for the six months ended June 30, 2000 were $10.28 billion, $314 million or 3 percent higher than the first six months of 1999. A 4 percent increase in physical volume and a 9 percent increase in Financial Products revenue were partially offset by the unfavorable impact of the stronger U.S. dollar on sales denominated in currencies other than U.S. dollars (primarily the euro). Profit of $573 million was $85 million or 17 percent higher than the first six months of 1999. The increase was due primarily to improved manufacturing efficiencies, higher physical volume, and lower selling, general and administrative (SG&A) expenses. These favorable changes were partially offset by unfavorable other income, mostly due to discounts on the securitization of receivables. The negative impact of the U.S. dollar on sales was partially offset by the U.S. dollar's positive impact on costs.
Machinery sales were $6.29 billion, a decrease of $221 million or 3 percent from the first six months of 1999. The lower sales resulted primarily from lower price realization, due to the continued effect of the stronger U.S. dollar on sales denominated in currencies other than U.S. dollars (primarily the euro) combined with unfavorable geographic mix.
Sales declines in North America more than offset sales increases in EAME and Asia/Pacific. Lower sales in North America reflected weaker industry demand in the United States and lower share of industry sales throughout North America. In EAME, sales increased due to improved demand and an increase in dealer inventories. In Asia/Pacific, higher dealer sales to end users more than offset lower dealer inventories. Sales in Latin America were near year-earlier levels as the slower pace of inventory reduction offset lower sales to end users.
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Engine sales were $3.40 billion, an increase of $483 million or 17 percent from the first six months of 1999 reflecting higher physical sales volume of 12 percent and higher price realization.
Sales increased primarily due to strong worldwide sales into power generation and higher sales of truck engines in North America, where Caterpillar continues to extend its market leadership. Sales also benefited, especially in EAME, from the addition of revenues from F.G. Wilson, converted from an affiliated company to a consolidated subsidiary in July 1999.
Machinery operating profit increased $34 million, or 6 percent from the first six months of 1999. Margin (sales less cost of goods sold) declined primarily due to lower price realization resulting from the unfavorable impact of the stronger U.S. dollar on sales denominated in currencies other than U.S. dollars (primarily the euro) combined with unfavorable geographic mix. These unfavorable items were more than offset by lower SG&A expenses.
Engine operating profit increased $176 million from the first six months of 1999 due to higher sales volume, better price realization and improved manufacturing efficiencies. These were partially offset by higher SG&A and R&D expenses.
Interest expense was $13 million higher than a year ago due to higher average debt levels.
Other income/expense reflects a net increase in expense of $40 million, primarily due to discounts taken on the sale of trade receivables.
Revenues were $689 million, up $71 million or 11 percent compared with the first six months of 1999 (excluding revenue transactions with Machinery and Engines, revenues increased $52 million or 9 percent). The increase resulted primarily from continued growth in Cat Financial's portfolio.
Before tax profit decreased $20 million or 15 percent from the first six months of 1999. Less favorable reserve adjustments and lower investment income at Caterpillar Insurance Company Ltd. more than offset higher profit at Cat Financial from continued portfolio growth.
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Tax expense reflects an effective annual tax rate of 32 percent in both periods.
The company's share of unconsolidated affiliated companies' results declined $10 million from a year ago, primarily due to weaker results at Shin Caterpillar Mitsubishi Ltd. and the conversion of F.G. Wilson from an affiliated company to a consolidated subsidiary in July 1999.
B. Liquidity & Capital Resources
Consolidated operating cash flow was $1.19 billion through the second quarter of 2000, compared with $619 million through the second quarter of 1999. Total debt as of June 30, 2000 was $14.74 billion, an increase of $934 million from year-end 1999. During the first six months of 2000, debt related to Machinery and Engines decreased $40 million, to $3.28 billion, while debt related to Financial Products, including intercompany debt with Machinery and Engines, increased $1.17 billion to $11.96 billion.
In 1998, the board of directors authorized a share repurchase program to reduce the number of outstanding shares to 320 million over a three to five year period. During the second quarter of 2000, 3.06 million shares were repurchased under the plan. The number of shares outstanding at June 30, 2000, was 345.7 million.
Machinery and Engines
Operating cash flow was $1.03 billion through the second quarter of 2000, compared with $694 million for the same period a year ago. This increase was primarily due to a favorable change in working capital and higher profits during the first six months of 2000 compared to the first six months of 1999.
Capital expenditures through the second quarter of 2000, excluding equipment leased to others, were $246 million compared with $262 million for the same period a year ago. Total debt decreased by $40 million during the first six months of 2000. Our debt to debt plus equity ratio as of June 30, 2000 was 38%.
Financial Products
Operating cash flow was $200 million through the second quarter 2000, compared with a negative $39 million through the second quarter of 1999. The increase is primarily due to a favorable change in accounts payable and accrued expenses during the first six months of 2000. Cash used to purchase equipment leased to others was $312 million in 2000. In addition, net cash used for finance receivables was $2.3 billion through the second quarter of 2000, compared with $2.0 billion through the second quarter of 1999.
Financial Products' debt was $11.96 billion at June 30, 2000, an increase of $1.17 billion from December 31, 1999, and primarily comprised $8.36 billion of medium term notes, $503 million of notes payable to Caterpillar, $56 million of notes payable to banks and $2.88 billion of commercial paper. June 30, 2000, finance receivables past due over 30 days were 3.16%, compared with 2.21% at the end of the same period one year ago. The ratio of debt to equity of Cat Financial was 8.4:1 at June 30, 2000, compared with 7.8:1 at December 31, 1999.
Financial Products had outstanding credit lines totaling $4.94 billion at June 30, 2000, which included $2.60 billion of shared revolving credit agreements with Machinery and Engines. These credit lines are with a number of banks and are considered support for the company's outstanding commercial paper, commercial paper guarantees, the discounting of bank and trade bills and bank borrowings. Also included are variable-amount lending agreements with Caterpillar. Under these agreements, Financial Products (Cat Financial) may borrow up to $830 million from Machinery and Engines (Caterpillar Inc.).
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Reconciliation of Machinery and Engine Sales by Geographic Region toExternal Sales by Marketing Segment
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C. Safe Harbor Statement Under The Securities Litigation Reform Act of 1995
Certain statements contained in our Management's Discussion and Analysis are forward looking and involve uncertainties that could significantly impact results. The words "believes," "expects," "estimates," "anticipates," "will be" and similar words or expressions identify forward-looking statements made on behalf of Caterpillar. Uncertainties include factors that affect international businesses, as well as matters specific to the Company and the markets it serves.
World Economic Factors
Our current outlook calls for recovery to continue in Latin America. North America, Europe, Africa & Middle East should register improved growth, while strong growth is expected to continue in Asia. If, for any reason, these projected growth rates falter, sales would likely be lower than anticipated in the affected region. In general, renewed currency speculation, significant declines in the stock markets, political disruptions or much higher interest rates could result in weaker than anticipated economic growth and sales. Economic recovery could also be delayed or weakened by growing budget or current account deficits or inappropriate government policies.
In particular, our outlook assumes that the Japanese government remains committed to stimulating the economy and that the Brazilian government follows through with promised reforms. A reversal by either government could result in economic uncertainty and a weaker economy. Our outlook also assumes that currency and stock markets remain relatively stable. If currency or stock markets were to decline significantly, uncertainty would increase and interest rates could move higher, both of which would probably result in slower economic growth and lower sales.
The Russian economy has improved, but political and economic uncertainty remains high and a further deterioration could impact worldwide stock or currency markets, which in turn could weaken Company sales.
Commodity Prices
The outlook for our sales also depends on commodity prices, most of which are expected to trend slightly higher through 2000. Oil prices have moved up considerably since the start of last year and are expected to remain high, averaging $25-$30 per barrel for the year. Agricultural prices are likely to be weak while most metals prices should be up slightly. Based on this forecast of only modest improvement in most commodity prices, equipment sales into sectors that are sensitive to commodity prices are likely to remain relatively weak for 2000.
Weaker than anticipated world economic growth could lead to a further drop in commodity prices and lower than expected sales. Europe plays a key role in this forecast and our current outlook is for improvement leading to annual average GDP growth of about 3.3%. If Europe falters, then commodity prices could be weaker.
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 raises interest rates significantly, the U.S. economy could slow abruptly leading to an unanticipated decline in sales. The United States, in particular, is vulnerable to higher interest rates as it completes the tenth year of expansion— the longest in U.S. history. Our outlook assumes the Federal Reserve will raise interest rates 125-150 basis points in 2000, which will contribute to lower industry demand. If the Federal Reserve raises rates significantly more than anticipated, then industry demand could be even lower, potentially resulting in lower company sales.
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 2000 and not recession. If, for
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whatever reason, the U.S. were to enter a recession, then demand for Company products could fall in the U.S. and Canada and could also be lower throughout the rest of the world.
Political Factors
Political factors in the U.S. and abroad 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. There are also a number of presidential elections scheduled to take place in 2000 which could affect economic policy, particularly in Latin America.
Currency Fluctuations
Currency fluctuations are also an unknown for global companies. The Company has facilities in major sales areas throughout the world and significant costs and revenues in most major currencies. This diversification greatly reduces the overall impact of currency movements on results. However, if the U.S. dollar strengthens against foreign currencies, the conversion of net non-U.S. dollar proceeds to U.S. dollars would somewhat adversely impact the Company's results. Further, since the Company's largest manufacturing presence is in the U.S., a sustained overvalued dollar could have an unfavorable impact on our global competitiveness.
Dealer Practices
A majority of the Company's sales are made through its independent 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 the appropriate level of inventory) and may have a significant positive or negative impact on our results. In particular, the outlook assumes that inventory to sales ratios will be somewhat lower at the end of 2000 than at the end of 1999. If dealers reduce inventory levels more than anticipated, company sales will be adversely impacted.
Other Factors
The rate of infrastructure spending, housing starts, commercial construction and mining 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. In 1999, the six-year Federal highway bill did not boost U.S. sales as much as anticipated due to delays in getting major capital projects for highways underway. If funding continues to be delayed or concentrated on bridge repair, sales could be negatively impacted.
Results may be impacted positively or negatively by changes in the sales mix. Our outlook assumes a certain geographic mix of sales as well as a product mix of sales.
The Company operates in a highly competitive environment and our outlook depends on a forecast of the Company's share of industry sales. A reduction in that share 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 environment also remains very competitive from a pricing standpoint. Additional price discounting 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.
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PART II. OTHER INFORMATION
Item 2. Changes in Securities
Non-U.S. Employee Stock Purchase Plans
We have twenty-two employee stock purchase plans administered outside the United States for our non-U.S. employees. These plans are not registered with the Securities and Exchange Commission and are exempt from such registration pursuant to Regulation S under the Securities Act. As of June 30, 2000, these plans had approximately 5,300 participants in the aggregate. During the second quarter of 2000, a total of 26,729 shares of Caterpillar common stock or foreign denominated equivalents were distributed under these plans.
Put Options
In conjunction with its stock repurchase program, Caterpillar sells put options to independent third parties on a private basis. These put options entitle the holder to sell shares of Caterpillar common stock to the Company on certain dates at specified prices. On June 30, 2000, 600,000 put options were outstanding with strike prices ranging from $36.50 to $41.375 per share. The put warrants expire between July 7, 2000 and August 24, 2000, and are exercisable only at maturity. During the quarter, Caterpillar received $1.1 million in proceeds from the sale of put options.
Item 6. Exhibits and Reports on Form 8-K
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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.
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EXHIBIT INDEX
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