Caterpillar Reports All-Time Record Quarter Driven by Strong Growth Outside North...

Caterpillar Reports All-Time Record Quarter Driven by Strong Growth Outside
North America
Sales and revenues up 20 percent and profit per share up 40 percent compared
with the second quarter of 2007

PEORIA, Ill., July 22 /PRNewswire-FirstCall/ -- Driven by robust growth in
emerging markets and strength in key industries like energy and mining,
Caterpillar Inc. (NYSE: CAT) today reported all-time records for sales and
revenues and profit per share. Profit per share for the second quarter of
2008 was $1.74, a 40 percent increase from $1.24 per share in the second
quarter of 2007. Sales and revenues of $13.624 billion were 20 percent higher
than second quarter 2007 sales and revenues of $11.356 billion.
"Team Caterpillar has delivered another remarkable quarter," said Chairman
and Chief Executive Officer Jim Owens. "While North America remains depressed
and we've seen softening in Western Europe and Japan, Caterpillar continues to
grow in emerging markets and in global industries like energy and mining ...
and we continue to see good growth in our integrated service businesses. It's
gratifying to see the positive impact of being such a diverse company in terms
of products, services, geography and the industries we serve," Owens said.
Sales and revenues were up $2.268 billion from the second quarter of 2007.
Sales volume improved $1.402 billion, price realization was up $398 million,
the impact of currency added $384 million and Financial Products revenues were
$84 million higher. The geographic mix of sales continued to shift outside
North America with sales and revenues increasing 30 percent outside North
America compared with 7 percent inside North America. Sales and revenues
outside North America represented 60 percent of total sales and revenues in
the second quarter -- up from 55 percent of the total a year ago.
Second-quarter profit of $1.106 billion was up $283 million, or 34
percent, from second quarter 2007 profit of $823 million. The increase was
primarily a result of improved price realization and higher sales volume,
partially offset by higher material and freight costs and increases in
Selling, General and Administrative (SG&A) and Research and Development (R&D)
expenses. While SG&A and R&D costs increased to support growth and product
development, they were both lower as a percent of sales.
"We are seeing significant improvements in safety and quality from the
deployment of the Caterpillar Production System (CPS) with 6 Sigma, and I am
confident that CPS will improve product delivery, inventory turnover, plant
capacity and manufacturing costs as we continue to aggressively deploy it
throughout the company," Owens said.
Outlook
The full-year outlook for 2008 reflects sales and revenues of about $50
billion and profit of about $6.00 per share. The previous outlook expected
2008 sales and revenues of $47.2 to $49.5 billion and profit per share of
$5.64 to $6.18.
"Never in my 35 plus years with the company have I seen Caterpillar do so
well in the face of such a difficult economic climate in the United States,"
Owens said. "We are on track to deliver our fifth straight year of record
profits despite very tough conditions in the United States, declines in Europe
and significantly higher material costs, particularly in the second half of
the year. Still, for many of our products, supply is very tight, and we are
producing as much as we can. That's why in June we announced capacity
expansions in the United States, China and India. We need to bring additional
capacity on line to support world demand for infrastructure, energy and
mining, and to be prepared for the upturn in the United States when it comes.
Together with the best dealer network in our industry, Team Caterpillar is
well positioned to meet our goals for 2010 and beyond."
Note: Glossary of terms included on pages 19-20; first occurrence of terms
shown in bold italics.
For more than 80 years, Caterpillar Inc. has been making progress possible
and driving positive and sustainable change on every continent. With 2007
sales and revenues of $44.958 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://www.cat.com.
SAFE HARBOR
Certain statements in this release relate to future events and
expectations and as such constitute forward-looking statements involving known
and unknown factors that may cause actual results of Caterpillar Inc. to be
different from those expressed or implied in the forward-looking statements.
In this context, words such as "will," "would," "expect," "anticipate,"
"should" or other similar words and phrases often identify forward-looking
statements made on behalf of Caterpillar. It is important to note that actual
results of the company may differ materially from those described or implied
in such forward-looking statements based on a number of factors and
uncertainties, including, but not limited to, changes in economic conditions;
currency exchange or interest rates; political stability; market acceptance of
the company's products and services; significant changes in the competitive
environment; epidemic diseases; changes in law, regulations and tax rates; and
other general economic, business and financing conditions and factors
described in more detail in the company's Form 10-Q filed with the Securities
and Exchange Commission on May 2, 2008. This filing is available on our
website at http://www.cat.com/sec_filings. We do not undertake to update our
forward-looking statements.
Key Points

Second Quarter 2008

-- Second-quarter sales and revenues of $13.624 billion were the
highest for any quarter in company history and were 20 percent
higher than the second quarter of 2007.

-- Second-quarter profit of $1.106 billion was the highest for any
quarter in company history, and record profit per share of $1.74 was
40 percent higher than the second quarter of 2007.

-- The percent of sales and revenues outside North America continued to
increase, with 60 percent of total sales and revenues outside North
America this quarter compared with 55 percent in the second quarter
last year.

(Dollars in millions except per share data)
Second Second
Quarter Quarter
2008 2007 $ Change % Change
Machinery and Engines
Sales $12,797 $10,613 $2,184 21%
Financial Products
Revenues 827 743 84 11%
Total Sales and
Revenues 13,624 11,356 2,268 20%

Profit After Tax $1,106 $823 $283 34%
Profit per common share
- diluted $1.74 $1.24 $0.50 40%

Machinery and Engine sales improved $2.184 billion driven by growth in
emerging markets, our broad global footprint in industries like energy and
mining and growth in integrated service businesses. Machinery sales increased
17 percent, and Engines sales increased 28 percent.
Profit per share improved 40 percent primarily driven by improved price
realization and higher sales volume, partially offset by higher costs.
Machinery and Engines operating cash flow was $1.480 billion for the first
six months of 2008.
2008 Outlook
-- The outlook for sales and revenues is about $50 billion -- a slight
improvement from the previous outlook of $47.2 to $49.5 billion and
the sixth consecutive record year. The outlook reflects
considerable strength in sales to the developing world, partially
offset by continued weakness in North America and weaker conditions
in Europe.

-- The outlook for profit is about $6.00 per share, which would result
in the fifth consecutive record year for profit per share. The
prior outlook reflected a range of $5.64 to $6.18 per share with a
mid-point of $5.91.

-- As compared with the prior profit outlook, the positive impacts of
higher sales volume and better price realization are about offset by
higher costs, primarily commodity-related material costs.

A question and answer section has been included in this release starting on
page 14.

DETAILED ANALYSIS
Second Quarter 2008 vs. Second Quarter 2007 Consolidated
Sales and Revenues Comparison
2nd Qtr. 2008 vs. 2nd Qtr. 2007

To access this chart, go to http://www.cat.com for the downloadable
version of Caterpillar 2Q2008 earnings.
The chart above graphically illustrates reasons for the change in
Consolidated Sales and Revenues between second quarter 2007 (at left) and
second quarter 2008 (at right). Items favorably impacting sales and revenues
appear as upward stair steps with the corresponding dollar amounts above each
bar, while items negatively impacting sales and revenues appear as downward
stair steps with dollar amounts reflected in parentheses above each bar.
Caterpillar management utilizes these charts internally to visually
communicate with the company's Board of Directors and employees.
Sales and Revenues
Sales and revenues for second quarter 2008 were $13.624 billion, up $2.268
billion, or 20 percent, from second quarter 2007. Machinery volume was up
$787 million, and Engines volume was up $615 million, both driven by strength
in economies outside the United States. Price realization improved $398
million, and currency had a positive impact on sales of $384 million,
primarily due to a stronger euro. In addition, Financial Products revenues
increased $84 million.

Sales and Revenues by Geographic Region

(Millions of
dollars) % North % %
Total Change America Change EAME Change
Second Quarter 2007
Machinery $7,275 $3,250 $2,260
Engines(1) 3,338 1,338 1,263
Financial
Products(2) 743 508 109
$11,356 $5,096 $3,632

(Millions of
dollars) Asia/Pacific %Change Latin America %Change
Second Quarter 2007
Machinery $942 $823
Engines(1) 475 262
Financial Products(2) 60 66
$1,477 $1,151

(Millions of
dollars) % North % %
Total Change America Change EAME Change
Second Quarter 2008
Machinery $8,530 17% $3,511 8% $2,593 15%
Engines(1) 4,267 28% 1,458 9% 1,693 34%
Financial
Products(2) 827 11% 506 0% 157 44%
$13,624 20% $5,475 7% $4,443 22%

(Millions of
dollars) Asia/Pacific %Change Latin America %Change
Second Quarter 2008
Machinery $1,414 50% $1,012 23%
Engines(1) 745 57% 371 42%
Financial Products(2) 82 37% 82 24%
$2,241 52% $1,465 27%

(1) Does not include internal engines transfers of $748 million and $647
million in second quarter 2008 and 2007, 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 $83 million and $103 million in second quarter 2008 and 2007,
respectively.

Machinery Sales
Sales of $8.530 billion increased $1.255 billion, or 17 percent, from second
quarter 2007.

-- Sales volume increased $787 million, with most of the gain coming
from outside the United States.

-- Price realization increased $191 million.

-- Currency benefited sales by $277 million.

-- Geographic mix between regions (included in price realization) was
$6 million unfavorable.

-- Dealers reported higher inventories in all regions, which was a
positive for sales volume. However, inventories in months of supply
were lower than a year earlier, with North America the only region
to show an increase.

-- Sales volume increased in North America largely because dealers did
not reduce their inventories as much as a year earlier. Coal
mining and oil and natural gas development were positive sectors.
Both benefited from much higher output prices and increased
investment.

-- Sales volume in Europe, Africa/Middle East (EAME) increased due to
strong growth in Africa/Middle East and the Commonwealth of
Independent States (CIS). Volume declined in Europe due to a slowing
economy and a drop in housing permits.

-- Sales increased in the developing regions of Asia/Pacific and Latin
America. Factors that supported this growth included expansive
economic policies, increased revenues from commodity exports, good
economic growth and increased investment in construction, mining and
energy.

-- Coal, oil and some metals prices increased sharply during the
quarter, reflecting concerns about supplies. These higher prices
contributed to increased sales of machines used to produce or
develop capacity for these commodities.

North America - Sales increased $261 million or 8 percent.

-- Sales volume increased $163 million.

-- Price realization increased $98 million.

-- The sales volume increase was the result of a lower reduction in
dealer-reported inventory than in second quarter 2007. Dealer
inventories at the end of the quarter were higher than a year
earlier in both dollars and months of supply.

-- Dealers reported the eighth consecutive quarter of year-over-year
declines in deliveries. Economic conditions in construction and
quarrying continued to deteriorate, offsetting some improvements in
commodity sectors.

-- U.S. housing faced the worst environment since the 1930s. Starts
fell 30 percent from a year earlier, new home sales plunged more
than 40 percent and homebuilders held almost an 11-month supply of
unsold homes. Home repossessions soared, and the decline in home
prices appeared to worsen.

-- Employment in the nonresidential construction sector declined more
than 4 percent from second quarter 2007. Banks tightened lending
standards for commercial and industrial loans, property prices
softened and vacancy rates increased.

-- As a result of decreased construction, quarry and aggregate
production declined 10 percent from last year.

-- Metals mining output increased only slightly in both the United
States and Canada, a factor in dealers reporting lower deliveries to
that sector.

-- Higher international coal prices caused the Central Appalachian spot
coal price to more than double from last year. U.S. coal exports
soared 42 percent in the first quarter, and production in both the
United States and Canada increased. Sales of products used in coal
mining increased.

-- Higher oil and natural gas prices benefited tar sands investment,
pipeline construction and drilling. Sales of machinery used in
those activities also increased.

EAME - Sales increased $333 million, or 15 percent.

-- Sales volume increased $112 million. Volume increased in
Africa/Middle East and the CIS, but declined in Europe.

-- Price realization increased $21 million.

-- Currency benefited sales by $200 million.

-- Dealers added less to reported inventories than a year earlier,
bringing inventories in months of supply slightly lower.

-- The European economy slowed in the second quarter, with consumer
spending and housing most affected. Year to date, euro-zone housing
permits declined 20 percent, and housing orders in the United
Kingdom dropped 26 percent. Reports indicate home prices are
declining in the United Kingdom, Ireland and Germany.
Nonresidential construction also started to decline in the second
quarter.

-- Sales volume increased significantly in Africa/Middle East,
particularly in the oil producing countries. The 80 percent rise in
the Organization of the Petroleum Exporting Countries (OPEC) crude
oil reference price caused countries to increase production 6
percent and increase operating drill rigs 7 percent. Increased oil
revenues and expansive economic policies sustained construction
booms.

-- The CIS was the biggest contributor to the growth in sales volume.
Large gains occurred in Russia, Ukraine and Kazakhstan. Low
interest rates, rapid money growth and increased government spending
caused rapid growth in construction. Mining and oil production
also increased in response to higher prices.

Asia/Pacific - Sales increased $472 million, or 50 percent.

-- Sales volume increased $382 million.

-- Price realization increased $43 million.

-- Currency benefited sales by $47 million.

-- Dealers reported much higher inventories to manage increased
deliveries, however months of supply declined from a year earlier.

-- Sales volume increased substantially in China, the result of the
addition of locally produced wheel loaders and expansive economic
policies. Housing construction increased 35 percent, and
nonresidential construction was up 14 percent. Mine output
increased, with coal up 16 percent and iron ore up 25 percent.

-- Sales increased significantly in Indonesia, primarily due to much
higher coal prices and good growth in construction. Data suggest
construction is increasing about 8 percent.

-- Economic policies in India, despite some tightening, remain very
expansive. Construction increased almost 13 percent, industrial
production increased 5 percent and mining was up 6 percent. As a
result, sales increased rapidly.

Latin America - Sales increased $189 million, or 23 percent.

-- Sales volume increased $124 million.

-- Price realization increased $35 million.

-- Currency benefited sales by $30 million.

-- Dealers reported slightly higher inventories than a year ago, but
inventories in months of supply remained below a year earlier.

-- Volume growth resulted from sharply higher dealer-reported
deliveries. Large sales gains occurred in Brazil, Chile, Colombia
and Mexico.

-- Most countries increased interest rates during the past year, but
money growth was rapid. As a result, industrial production
increased in most countries, often by more than 5 percent.

-- Oil production declined 4 percent, primarily in Venezuela and
Mexico. However, much higher prices increased revenues, and the
number of operating drill rigs increased 7 percent.

-- Brazil benefited from much higher iron ore prices, increasing
production almost 6 percent and export revenues 33 percent. Copper
production declined in Chile, and copper export revenues declined 5
percent.

Engines Sales
Sales of $4.267 billion increased $929 million, or 28 percent, from second
quarter 2007.

-- Sales volume increased $615 million.

-- Price realization increased $207 million.

-- Currency benefited sales $107 million.

-- Geographic mix between regions (included in price realization) was
$22 million favorable.

-- Dealer-reported inventories were up, and months of supply were down
as the inventory increase was supported by stronger delivery rates.

North America - Sales increased $120 million, or 9 percent.

-- Sales volume increased $58 million.

-- Price realization increased $62 million.

-- Sales for on-highway truck applications increased 13 percent
compared to a very weak second quarter 2007. Demand remains below
historic norms due to the slowing U.S. economy that has resulted in
a reduction in freight tonnage.

-- Sales for petroleum applications increased 7 percent with an
increase in turbine sales, which reflected increased customer
spending in natural gas pipeline and compression equipment.

-- Sales for marine applications increased 39 percent, with strong
demand for supply vessels in support of petroleum offshore drilling.

-- Sales for industrial applications increased 16 percent in small and
medium-sized product, with strong demand in agricultural
applications as a result of high agricultural commodity prices.

-- Sales for electric power applications were about the same as the
second quarter of 2007.

EAME - Sales increased $430 million, or 34 percent.

-- Sales volume increased $245 million.

-- Price realization increased $93 million.

-- Currency benefited sales by $92 million.

-- Sales for petroleum applications increased 106 percent based on
strong demand for engines used in drilling and production. Turbine
and turbine-related services increased to support gas transmission
applications in Europe and the Middle East and for oil and gas
applications in Africa.

-- Sales for electric power applications increased 25 percent, with
strong demand for small to medium-sized units selling into
Africa/Middle East. High oil prices drove sales in Nigeria, Saudi
Arabia and other Persian Gulf states. The power crisis in South
Africa has also generated increased sales for power generation.

-- Sales for industrial applications increased 19 percent, with strong
demand for agriculture and other types of Original Equipment
Manufacturers (OEM) machines. This demand has been driven by good
economic conditions and high agricultural commodity prices.

-- Sales for marine applications increased 15 percent, with higher
demand for workboats and commercial vessels.

Asia/Pacific - Sales increased $270 million, or 57 percent.

-- Sales volume increased $230 million.

-- Price realization increased $25 million.

-- Currency benefited sales by $15 million.

-- Sales for petroleum applications increased 80 percent as Chinese
drill rig builders continued to manufacture at record levels for
domestic and export use and to support increased demand from Asian
shipyards in support of offshore drilling.

-- Sales of electric power engines increased 45 percent, with strong
demand in gas generator sets for industrial power producers in
Bangladesh and other Southeast Asia countries.

-- Sales for industrial applications increased 75 percent driven by
sales in Australia into mining and irrigation sectors and by sales
in New Zealand into compressed natural gas applications. Smaller
product benefited from sales to Chinese and Korean industrial OEMs.

-- Sales for marine applications increased 6 percent, with continued
strong demand for workboat and offshore shipbuilding. Large diesel
demand grew in the offshore and general cargo industries.

Latin America - Sales increased $109 million, or 42 percent.

-- Sales volume increased $104 million.

-- Price realization increased $5 million.

-- Sales for petroleum applications increased 98 percent driven by the
energy crisis in Argentina, which increased demand for on-site power
generation to support oil production. Demand in Venezuela also
increased to support drilling and production. Turbines and
turbine-related services increased for oil and gas production and
gas transmission applications in South America.

-- Sales of electric power engines increased 14 percent as delivery
began on projects in Chile and Brazil.

-- Sales for on-highway truck applications increased 48 percent as
industry demand strengthened in advance of the mid-year 2008
emissions changes in the region.

Financial Products Revenues
Revenues of $827 million increased $84 million, or 11 percent, from the second
quarter 2007.

-- Growth in average earning assets increased revenues $109 million,
which was partially offset by a decrease of $58 million due to lower
interest rates on new and existing finance receivables.

-- Revenues from earned premiums at Cat Insurance increased $21
million.

Consolidated Operating Profit Comparison
2nd Qtr. 2008 vs. 2nd Qtr. 2007

To access this chart, go to http://www.cat.com for the downloadable
version of Caterpillar 2Q2008 earnings.

The chart above graphically illustrates reasons for the change in
Consolidated Operating Profit between second quarter 2007 (at left) and second
quarter 2008 (at right). Items favorably impacting operating profit appear as
upward stair steps with the corresponding dollar amounts above each bar, while
items negatively impacting operating profit appear as downward stair steps
with dollar amounts reflected in parentheses above each bar. Caterpillar
management utilizes these charts internally to visually communicate with the
company's Board of Directors and employees. The bar entitled Other includes
the operating profit impact of consolidating adjustments and Machinery and
Engines other operating expenses.
Operating Profit
Operating profit in second quarter 2008 of $1.525 billion was $312 million
higher than second quarter 2007 as improved price realization and higher sales
volume were partially offset by higher costs and the unfavorable impact of
currency. Sales volume includes the impact of a negative mix of product.
Manufacturing costs rose $143 million, or about 1.5 percent, compared with
second quarter 2007, primarily due to higher material and freight costs. The
increase in material was due to higher steel and commodity prices, and freight
increased primarily due to higher fuel costs. We continue to experience
capacity-related challenges in our manufacturing operations and supply chain.
SG&A and R&D costs were up $113 million to support growth and significant
new product programs. While SG&A and R&D have increased, they were lower as a
percentage of sales.
Currency had a $62 million unfavorable impact on operating profit as the
benefit to sales was more than offset by the negative impact on costs.

Operating Profit by Principal Line of Business

Second Second
Quarter Quarter $ %
(Millions of dollars) 2008 2007 Change Change

Machinery(1) $719 $741 $(22) (3%)
Engines(1) 711 379 332 88%
Financial Products 166 184 (18) (10%)
Consolidating Adjustments (71) (91) 20
Consolidated Operating
Profit $1,525 $1,213 $312 26%

(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 $719 million was down $22 million, or
3 percent, from second quarter 2007. Improved price realization and
higher sales volume were more than offset by higher costs and the
unfavorable impact of currency. Sales volume includes the impact of
a negative mix of product.

-- Engines operating profit of $711 million was up $332 million, or
88 percent, from second quarter 2007. The favorable impacts of
improved price realization, higher sales volume and the absence of a
second quarter 2007 charge of $44 million to recognize previously
unrecorded liabilities related to a subsidiary pension plan were
partially offset by higher costs.

-- Financial Products operating profit of $166 million was down
$18 million, or 10 percent, from second quarter 2007. The decrease
was primarily attributable to a $23 million impact from lower net
yield on average earning assets, a $21 million increase in the
provision for credit losses at Cat Financial and a $13 million
unfavorable impact from various other operating items, partially
offset by a $39 million favorable impact from higher average earning
assets.

Other Profit/Loss Items

-- Other income/expense was income of $75 million compared with income
of $70 million in second quarter 2007.

-- The provision for income taxes in the second quarter of 2008
reflects an estimated annual tax rate of 31.5 percent, excluding the
discrete item discussed below, compared to 32 percent for the second
quarter 2007 and 30 percent for the full-year 2007. The increase
over 2007 is attributable to expected changes in our geographic mix
of profits from a tax perspective and the expiration of the U.S.
research and development tax credit.

The provision for income taxes in the second quarter of 2008 also
includes a discrete benefit of $47 million due to a change in tax
status of a non-U.S. subsidiary, allowing indefinite reinvestment of
undistributed profits and reversal of U.S. tax previously recorded.

-- Equity in profit/(loss) of unconsolidated affiliated companies was
income of $10 million compared with income of $5 million in the
second quarter of 2007. The change reflects the absence of a $13
million after-tax charge for net adjustments that were identified
during 2007 due diligence procedures related to a transaction that
would result in Caterpillar owning a majority stake in Shin
Caterpillar Mitsubishi Ltd. (SCM), partially offset by reduced
profit at SCM.

Employment
Caterpillar's worldwide employment was 105,322 at the end of second
quarter 2008, up 9,007 from a year ago. Of the increase, approximately 3,400
were the result of acquisitions. The remaining increase of approximately
5,600 employees primarily supported growth, increased volumes and new product
introductions.
2008 Outlook
We expect world economic growth to average less than 3 percent this year,
the slowest growth rate since 2003. We expect that developing economies
will continue with strong growth, offsetting much of the weakness in North
America and Europe.
-- Most developed countries shifted their focus to inflation and are
holding or raising interest rates. Economies are slowing, and
financial markets remain distressed. Eventually central banks will
return to cutting interest rates, but it will likely be too late to
help economies this year. Growth in the developed economies
should average about 1.5 percent, the slowest pace since 2002.

-- Many developing economies are experiencing increased inflation, and
some have tightened economic policies. However, most countries have
moved cautiously, and policies remain expansive. We expect strong
growth in construction to continue.

-- The West Texas Intermediate oil price hit a new high this year, and
we assume the price will average $120 per barrel for the year. We
expect that oil prices will average about 16 percent higher in the
last half of 2008 as compared with the first half, and that should
have a continuing positive impact on drilling activity and pipeline
construction.

-- We expect the Australian thermal coal price will average almost $140
dollars per metric ton this year, with about a 16 percent increase
from the first half to the second half of 2008. Australian prices
have been setting the tone for other regional coal prices, so coal
miners worldwide should invest to increase production.

-- Most metals prices advanced in the first half due to strong demand
and supply disruptions. We expect some improvement in supplies in
the second half, but prices overall should remain attractive for new
investment.

North American economies should grow about 1 percent in 2008.

-- Employment reports, manufacturing and service surveys and sales of
large consumer items suggest more distress in the economy than do
gross domestic product (GDP) accounts. Employment likely will
decline further making it difficult for the economy to avoid a
recession. We expect the U.S. economy will grow about 1 percent
this year.

-- Continued financial market distress and the weak economy suggest the
Fed will eventually need to shift its focus back to addressing those
problems. We are assuming at least one more rate cut later this
year.

-- We see no sign of a recovery in housing. Starts averaged a
1.03 million unit rate in the first half, with permits even lower.
For the full year, we expect starts to be slightly under one million
units -- the lowest level since 1945.

-- Nonresidential construction starts should decline about 1 percent
this year in response to rising vacancy rates, declining capacity
utilization and tighter lending standards. Declines in commercial
property values will likely create additional problems for banks.

-- Coal mining and oil and natural gas should remain positive for the
rest of the year, since we assume prices will average higher in the
second half than in the first half.

-- The Canadian economy unexpectedly declined in the first quarter, the
second quarter of weak activity. Despite the possibility of
recession, high metals and energy prices should benefit mining and
the oil sands.

Economic growth in Europe should slow to below 2 percent this year, the
slowest growth since 2003.
-- Inflation concerns prompted the European Central Bank (ECB) to raise
interest rates to 4.25 percent and the Bank of England (BoE) to hold
its target rate at 5 percent. We assume a weakening economy will
cause the ECB to reverse policy and cut rates by at least 25 basis
points before year-end. We also expect that the BoE will cut rates
25 basis points.

-- Interest rates at 4 percent for the past year have taken a toll on
euro-zone economies, with surveys suggesting a very weak second
quarter. We expect euro-zone economic growth of 1.6 percent this
year and economic growth of 1.7 percent for the United Kingdom.

-- Higher interest rates and some softening in home prices caused
residential building permits to decline. We assume the two-year
decline in housing permits will continue for the rest of this year.

-- Growth in nonresidential construction slowed in the first quarter,
and surveys suggest further slowing will occur. Infrastructure
construction should hold up better than building construction.

Economic growth in the developing economies should be slightly below 6.5
percent in 2008, a percentage point lower than last year.
-- Growth in Africa/Middle East should be 5.5 percent, slightly higher
than last year. We expect most governments will maintain expansive
policies, which will benefit economic growth at the cost of higher
inflation. The recent surge in oil prices will sustain construction
booms in the oil producing countries.

-- We expect the CIS economy will grow at 7.5 percent, down from 9
percent in 2007. Inflation is a growing problem, but central banks
have reacted slowly. Expansive economic policies and high commodity
prices should benefit construction, mining and energy development.

-- Growth in the Latin American economies should be 4.5 percent this
year, a percentage point lower than last year. Most countries
raised interest rates to address higher inflation, but we do not
expect significant impacts on growth this year. Higher metals
prices should encourage more investment in mining.

-- The Asia/Pacific region should grow 7.5 percent this year, down from
more than 8 percent last year. Both China and India tightened
economic policies numerous times, but impacts on growth have been
quite small. We project more than 10 percent growth in China and
more than 8 percent growth in India. Growth in most other
countries should slow slightly. Construction and mining should
continue to do well throughout the region.

Sales and Revenues Outlook
The 2008 outlook for sales and revenues reflects another record year for
2008, with sales and revenues at about $50 billion. The outlook reflects
continuing weakness in North America and a decline in expectations for Europe.
Sales and Revenues 2008 vs. 2007

To access this chart, go to http://www.cat.com for the downloadable version of
Caterpillar 2Q2008 earnings.
We expect that North America will be the weakest region for growth this
year, with sales and revenues flat to up 3 percent. The overall economy and
construction activity will likely remain weak throughout 2008, and dealer
sales of new machines are expected to decline substantially in 2008. The
factors that are helping offset the impact of very difficult economic
conditions in North America are:
-- In 2007, dealers reduced their machine inventories by about
$1.1 billion, resulting in company sales to North American dealers
lower than dealer sales to end customers. While we expect dealer
sales to end users to decline again in 2008, company sales will
benefit as a result of substantially lower forecasted changes to
dealer inventories than we experienced in 2007.

-- Sales related to energy and mining remain strong and are expected to
improve again in 2008. Coal mining in the United States is
particularly strong, with rising coal prices and increasing exports
driving the improvement.

-- While the industry for on-highway truck engines is still very weak
as a result of very slow growth in the U.S. economy, we expect our
sales to improve from the depressed levels of 2007.

Strong sales outside North America are being driven by solid economic
growth in the developing world, continued investment in infrastructure
throughout much of the world and commodity prices for metals, minerals and
energy at levels that encourage our customers to invest.
Profit Outlook
We expect profit of about $6.00 per share in 2008, up from $5.37 in 2007,
and our fifth consecutive year of record profit per share. The prior outlook
was a range of $5.64 to $6.18 per share with a mid-point of $5.91. During the
past quarter, the elements that make up the profit forecast have changed
somewhat. The outlook for sales volume and price realization has improved, but
the impact on profit has been about offset by higher costs, primarily
commodity-related material cost increases.
Questions and Answers

Sales and Revenues / Economy and Industry

Q1: How has your outlook for the U.S. economy changed since your
first-quarter release? Has your view of the U.S. housing industry
changed?

A: We continue to hold a negative view of the U.S. economy and expect
U.S. GDP growth of about 1 percent in 2008. That's slightly higher
than our previous forecast of 0.5 percent because first-half growth
has been slightly stronger than we had expected. Employment
declines that have occurred this year, and the likelihood of further
declines, signal economic weakness, possibly recession. In
addition, other indicators used to assess the overall health of the
economy also suggest weakness.

We continue to be pessimistic about the U.S. housing industry and
have slightly lowered our starts forecast from 1 million to about
980,000 units. At that level, housing starts would be the lowest
since 1945 and reflect declining home prices and continuing trouble
in the home mortgage sector.

Overall, we have not seen signs of recovery in the U.S. machine
industry in the first half of the year and are not forecasting
improvement during the second half.

Q2: It appears that Europe continues to show signs of economic weakness.
How is weakness in Europe impacting your 2008 sales growth
expectations for the EAME region? Has your outlook for EAME growth
changed since your first-quarter financial release?

A: European economies showed more weakness in the second quarter than
we expected, and machinery sales volume fell below the year earlier
level for the first time since early 2006. High interest rates in
the euro-zone and the United Kingdom impacted housing, which was a
concern we identified in our first-quarter financial release.
Compared to recent peaks, euro-zone housing permits declined 27
percent, U.K. permits fell 28 percent and U.K. home prices dropped
10 percent. The European Central Bank's recent rate increase likely
will make euro-zone problems even worse in the second half. We
expect to lower production schedules, particularly for smaller
equipment, in response to the decline in Europe.

Our overall outlook for the EAME region is up slightly as economies
in Africa, the Middle East and the CIS are very robust. Sales in
those areas are stronger than expected, and we believe this strength
will continue in the second half. Many of these countries benefit
from higher commodity prices, and many of these prices should
average even higher in the second half than the first half.

Q3: Mining and Oil and Gas have been very strong industries for the past
few years. Can you comment on your expectations for 2008?

A: Prices of most commodities in the first half increased more than
anticipated, particularly in those facing supply problems, such as
coal, oil, aluminum and copper. Our forecasts assume that coal and
oil prices will average even higher in the second half than in the
first half. Metals prices should remain very attractive for
investments in additional production capacity. These factors should
benefit sales of large machines and engines during the next two
quarters, much as they have during the past few years.

Q4: Growth in emerging markets like China, India, the Middle East, Latin
America and Africa have been very positive for Caterpillar sales
over the past few years. Do you expect emerging market growth to
continue in the near term?

A: Many of these countries have experienced increases in inflation and
have implemented some measures to slow growth. In general, past
actions have not had much impact, and current economic policies
remain very expansive. Many of these countries will also benefit
further from increases in commodity prices that occurred earlier
this year.

The sales declines that are occurring in the developed economies
obviously create concerns that similar problems could strike in the
developing economies, particularly as these governments raise
interest rates. We closely monitor activity in these countries and,
at the moment, see no reason why sales should not continue to
increase rapidly in the last half of this year.

Q5: Can you comment on how dealer inventory changed from the first
quarter?

A: North American dealers reduced machine inventories about $200
million from the end of the first quarter. During last year's
second quarter, North America dealers lowered inventories about $800
million. As a result of robust sales growth, dealers outside North
America added nearly $400 million of machine inventory during the
quarter, which was about the same as the increase during the second
quarter of 2007.

In terms of months of supply, worldwide dealer inventories were
lower at the end of the second quarter of 2008 than they were at the
end of the second quarter last year.

Q6: You mentioned continued growth in "Integrated Service Businesses" as
having a positive impact. What are "Integrated Service Businesses"
and how are they doing?

A: They are Caterpillar businesses that primarily provide services, or
are businesses that contain an important service component. The most
significant are aftermarket parts, Cat Financial, Cat Insurance,
Progress Rail, Solar Turbines Customer Services, Cat Logistics, OEM
Solutions and Cat Reman. These businesses have a history of solid
growth and tend to be more stable through the business cycle than
new machines and engines. We've grown our portfolio of Integrated
Service Businesses organically and through acquisition. The most
significant acquisition was Progress Rail, which was acquired in
June of 2006. Progress Rail has been a great addition and has
exceeded our growth expectations.

Engines

Q7: Has your decision to not produce a 2010 EPA compliant on-highway
engine had an impact on your 2008 outlook and profit per share?

A: We expect that this decision will not have much of an impact on our
full year 2008 results.

Q8: Since you announced that you would not be producing a 2010 EPA
compliant on-highway engine, have you seen any significant reaction
from customers in terms of demand for 2008 truck engines?

A: We have not seen any reduction in 2008 orders linked to this
announcement. Caterpillar remains committed to continue supporting
the engines sold to our on-highway customers beyond 2010.

Q9: During the second quarter, you announced that you were in
discussions with Navistar on a range of cooperation initiatives.
Have you continued to make progress and have you signed any
definitive agreements yet?

A: We are continuing to work cooperatively with Navistar on a broad
range of strategic initiatives. We are still in the process of
finalizing definitive agreements.

Costs / Profit

Q10: Are increasing steel prices expected to impact your material costs
in 2008 more than you expected in the 2008 outlook you provided in
April?

A: Yes. We are continuing to experience increased pressure on material
costs due largely to very high steel and iron-related material
prices. Some of the key elements that impact iron-based materials
are energy, iron ore, steel scrap, nickel and metallurgical coals
(also known as coking coals). In recent months, there have been a
variety of economic factors that have driven up these costs. We and
our suppliers are aggressively working on cost reduction initiatives
to mitigate the impact of commodity-related price increases. In
our original outlook, issued on January 25, 2008, we expected
material costs to be up 1 to 1.5 percent, and in our outlook issued
on April 18, 2008 we expected somewhat higher material costs. Our
current expectation is even higher, at 2.5 to 3 percent.

Q11: Can you break down your gross margin in more detail?

A: The following table summarizes the change in gross margin in second
quarter 2008 versus second quarter 2007:

Gross Margin Change
(Millions of dollars)

Second Quarter 2007 Gross Margin $2,313
Change due to:
Volume $231
Price Realization 398
Manufacturing Costs (143)
Currency (38)
Total Change 448
Second Quarter 2008 Gross Margin $2,761

Cash Flow / Financing

Q12: Are credit markets having any significant negative impact at Cat
Financial Services? Has Cat Financial's past due ratio increased
much this year? How about credit losses?

A: Recent global credit market conditions have not had a significant
impact on Cat Financial's access to liquidity but have resulted in
market-wide increased credit spreads on new term debt issuance.
Term debt issuance has continued to attract strong investor demand.
Commercial paper market access has remained favorable overall, with
consistent demand and attractive pricing for our issuance in the
United States. Internationally, Cat Financial commercial paper
demand and overall pricing levels have been acceptable.

At the end of the second quarter, past dues were 3.35 percent
compared with 2.36 percent at the end of 2007 and 2.09 percent at
the end of second quarter 2007. The increase is primarily due to
the continued softening of the U.S. housing industry. We expect
there will be continued upward pressure on U.S. past dues throughout
2008.

Write-offs net of recoveries were $19 million for the second quarter
of 2008 compared with $12 million for the second quarter of 2007.
This increase has been driven by the downturn in U.S. housing
industry and 18 percent growth in Cat Financial's average retail
finance receivable portfolio. For the first six months of 2008, bad
debt write-offs net of recoveries were $39 million compared with
$27 million for the first six months of 2007. As a percentage of Cat
Financial's retail finance receivable portfolio, we expect that bad
debt write-offs through the remainder of 2008 will be higher than
2007 but near five-year historical averages.

At the end of the second quarter 2008, Cat Financial's allowance for
credit losses totaled $391 million, an increase of $56 million from
the second quarter of 2007. The increase is mostly attributable to
growth in the retail finance receivable portfolio and also includes
$6 million from increasing the allowance rate from 1.39 percent to
1.41 percent of net finance receivables.

As a historical comparison, Cat Financial past dues during the last
U.S. recession were 4.78 percent at their peak at the end of the
first quarter of 2002. Total write-offs net of recoveries, for the
full-year of 2002 were 0.69 percent of our average retail portfolio,
or more than double the annualized second quarter 2008 rate of 0.32
percent. Cat Financial's allowance for credit losses, totaling $391
million at the end of the second quarter of 2008, is appropriate for
the current and expected global economic environment. The second
quarter 2008 allowance for credit losses of 1.41 percent of net
finance receivables compares with 1.46 percent in second quarter
2002.

Q13: Can you comment on 2008 operating cash flow?

A: In the first half of 2008, Machinery and Engines generated $1.480
billion of operating cash flow that helped support:

* Capital Expenditures - $804 million -- primarily to replace and
upgrade existing production assets, facilitate additional
expansion of manufacturing capacity and support new product
programs.

* Acquisitions - $111 million.

* Dividends - $444 million. The quarterly dividend rate was
increased 17 percent to $0.42 per share in June; this is our
fourth consecutive year of a 17 percent or greater dividend
increase. We have paid higher annual dividends in each of the
last 14 years.

* Stock Repurchase - $1.4 billion -- used to repurchase 19.4
million shares.

Q14: Can you comment on the strength of your financial position?

A: The debt-to-capital ratio for Machinery and Engines was 31.7 percent
at the end of the second quarter, better than our current target
range of 35 to 45 percent. We are in a strong financial position
that provides us flexibility to take advantage of future
opportunities.

Q15: How much stock was repurchased in the first six months? Also, how
many shares were outstanding at the end of the quarter?

A: Our continued stock buy back is in support of our Board-authorized
$7.5 billion stock repurchase program which expires on December 31,
2011. During the first half of the year we repurchased 19.4 million
shares at a cost of $1.4 billion. Through June 2008, we have spent
$3.3 billion of the $7.5 billion authorized. Basic shares
outstanding as of June 30, 2008 were 608.7 million.

GLOSSARY OF TERMS

1. Caterpillar Production System (CPS) -- The Caterpillar Production
System is the common Order-to-Delivery process being implemented
enterprise-wide to achieve our safety, quality, velocity, earnings
and growth goals for 2010 and beyond.

2. Consolidating Adjustments -- Eliminations of transactions between
Machinery and Engines and Financial Products.

3. Currency -- With respect to sales and revenues, currency represents
the translation impact on sales resulting from changes in foreign
currency exchange rates versus the U.S. dollar. With respect to
operating profit, currency represents the net translation impact on
sales and operating costs resulting from changes in foreign currency
exchange rates versus the U.S. dollar. Currency includes the
impacts on sales and operating profit for the Machinery and Engines
lines of business only; currency impacts on Financial Products
revenues and operating profit are included in the Financial Products
portions of the respective analyses. With respect to other
income/expense, currency represents the effects of forward and
option contracts entered into by the company to reduce the risk of
fluctuations in exchange rates and the net effect of changes in
foreign currency exchange rates on our foreign currency assets and
liabilities for consolidated results.

4. Debt-to-Capital Ratio -- A key measure of financial strength used by
both management and our credit rating agencies. The metric is a
ratio of Machinery and Engines debt (short-term borrowings plus
long-term debt) to the sum of Machinery and Engines debt and
stockholders' equity.

5. EAME -- Geographic region including Europe, Africa, the Middle East
and the Commonwealth of Independent States (CIS).

6. Earning Assets -- Assets consisting primarily of total finance
receivables net of unearned income, plus equipment on operating
leases, less accumulated depreciation at Cat Financial.

7. Engines -- A principal line of business including the design,
manufacture, marketing and sales of engines for Caterpillar
machinery; electric power generation systems; on-highway vehicles
and locomotives; marine, petroleum, construction, industrial,
agricultural and other applications and related parts. Also
includes remanufacturing of Caterpillar engines and a variety of
Caterpillar machinery and engine components and remanufacturing
services for other companies. Reciprocating engines meet power
needs ranging from 5 to 21,500 horsepower (4 to more than 16 000
kilowatts). Turbines range from 1,600 to 30,000 horsepower (1 200
to 22 000 kilowatts).

8. Financial Products -- A principal line of business consisting
primarily of Caterpillar Financial Services Corporation (Cat
Financial), Caterpillar Insurance Holdings, Inc. (Cat Insurance),
Caterpillar Power Ventures Corporation (Cat Power Ventures) and
their respective subsidiaries. Cat Financial provides a wide range
of financing alternatives to customers and dealers for Caterpillar
machinery and engines, Solar gas turbines as well as other equipment
and marine vessels. Cat Financial also extends loans to customers
and dealers. Cat Insurance provides various forms of insurance to
customers and dealers to help support the purchase and lease of our
equipment. Cat Power Ventures is an investor in independent power
projects using Caterpillar power generation equipment and services.

9. Gross Margin -- Sales of machinery and engines minus cost of goods
sold.

10. Integrated Service Businesses -- A service business or a business
containing an important service component. These businesses
include, but are not limited to, aftermarket parts, Cat Financial,
Cat Insurance, Progress Rail, Solar Turbines Customer Services, Cat
Logistics, OEM Solutions and Cat Reman.

11. Latin America -- Geographic region including Central and South
American countries and Mexico.

12. Machinery -- A principal line of business which includes the design,
manufacture, marketing and sales of construction, mining and
forestry machinery-track and wheel tractors, track and wheel
loaders, pipelayers, motor graders, wheel tractor-scrapers, track
and wheel excavators, backhoe loaders, log skidders, log loaders,
off-highway trucks, articulated trucks, paving products, skid steer
loaders and related parts. Also includes logistics services for
other companies and the design, manufacture, remanufacture,
maintenance and services of rail-related products.

13. Machinery and Engines (M&E) -- Due to the highly integrated nature
of operations, it represents the aggregate total of the Machinery
and Engines lines of business and includes primarily our
manufacturing, marketing and parts distribution operations.

14. Manufacturing Costs -- Represent the volume-adjusted change for
manufacturing costs. Manufacturing costs are defined as material
costs and labor and overhead costs related to the production
process. Excludes the impact of currency.

15. Machinery and Engines Other Operating Expenses -- Comprised
primarily of gains (losses) on disposal of long-lived assets and
long-lived asset impairment charges.

16. Price Realization -- The impact of net price changes excluding
currency and new product introductions. Consolidated price
realization includes the impact of changes in the relative weighting
of sales between geographic regions.

17. Sales Volume -- With respect to sales and revenues, sales volume
represents the impact of changes in the quantities sold for
machinery and engines as well as the incremental revenue impact of
new product introductions. With respect to operating profit,
sales volume represents the impact of changes in the quantities sold
for machinery and engines combined with product mix -- the net
operating profit impact of changes in the relative weighting of
machinery and engines sales with respect to total sales.

18. 6 Sigma -- On a technical level, 6 Sigma represents a measure of
variation that achieves 3.4 defects per million opportunities. At
Caterpillar, 6 Sigma represents a much broader cultural philosophy
to drive continuous improvement throughout the value chain. It is a
fact-based, data-driven methodology that we are using to improve
processes, enhance quality, cut costs, grow our business and deliver
greater value to our customers through Black Belt-led project teams.
At Caterpillar, 6 Sigma goes beyond mere process improvement -- it
has become the way we work as teams to process business information,
solve problems and manage our business successfully.

NON-GAAP FINANCIAL MEASURES
The following definition is provided for "non-GAAP financial measures" in
connection with Regulation G issued by the Securities and Exchange Commission.
This non-GAAP financial measure has no standardized meaning prescribed by U.S.
GAAP and therefore is unlikely to be comparable to the calculation of similar
measures for other companies. Management does not intend this item to be
considered in isolation or as a substitute for the related GAAP measure.
MACHINERY AND ENGINES
Caterpillar defines Machinery and Engines as it is presented in the
supplemental data as Caterpillar Inc. and its subsidiaries with Financial
Products accounted for on the equity basis. Machinery and Engines information
relates to the design, manufacture and marketing of our products. Financial
Products information relates to the financing to customers and dealers for the
purchase and lease of Caterpillar and other equipment. The nature of these
businesses is different, especially with regard to the financial position and
cash flow items. Caterpillar management utilizes this presentation
internally to highlight these differences. We also believe this presentation
will assist readers in understanding our business. Pages 25-30 reconcile
Machinery and Engines with Financial Products on the equity basis to
Caterpillar Inc. Consolidated financial information.
Caterpillar's latest financial results and current outlook are also
available via:
Telephone:
(800) 228-7717 (Inside the United States and Canada)
(858) 244-2080 (Outside the United States and Canada)

Internet:
http://www.cat.com/investor
http://www.cat.com/irwebcast
(live broadcast/replays of quarterly conference call)

SOURCE Caterpillar Inc.

Jim Dugan, Corporate Public Affairs of Caterpillar Inc., +1-309-494-4100,
mobile, +1-309-360-7311, Dugan_Jim@cat.com/ /FIRST AND FINAL ADD -- TABULAR
MATERIAL -- TO FOLLOW