Caterpillar Inc.

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Caterpillar Inc.

also known as: cat

founded: 1925

Contact Information:

headquarters: 100 ne adams st.
peoria, il 61629 phone: (309)675-1000 fax: (309)675-4457 toll free: (800)228-7717 email: [email protected] url: http://www.caterpillar.com http://www.cat.com

OVERVIEW

Caterpillar Inc. manufactures construction, mining, and agricultural machinery. It also manufactures diesel and gas engines for trucks, locomotives, and ships, as well as electrical power generation systems. Caterpillar is a top manufacturer of earthmoving machinery, construction equipment, natural gas engines, and industrial gas turbines. The company also provides financial services for its customers. Caterpillar's focus on quickly bringing new products to market and expanding its clientele has helped increase company profits.

Chairman and CEO Donald V. Fites has stated that the "fundamental building blocks for continued success and future growth are in place." These building blocks consist of modern factories, new technology, an effective organizational structure and culture, and new products to reach expanding markets. The financial results from 1993 through 1997 demonstrate the effectiveness of the company's strategy: sales grew 63 percent, profit increased 155 percent, and profit per share increased 176 percent. Caterpillar exported a record $6.12 billion worth of products during 1997, marking an 11-percent increase over 1996. Caterpillar anticipates sales growth to customers outside the United States to increase to 75 percent of total sales and anticipates sales and revenues to climb to $30 billion by the year 2010.

COMPANY FINANCES

Profits for 1996 totaled $1.36 billion, or $3.54 per share of common stock, compared to 1995 profits of $1.14 billion, or $2.86 per share. Revenues for 1996 were $16.52 billion, which was an increase of $450 million over 1995 revenues.

Caterpillar reported that 1997 was a "record setter" for the company. Revenues for 1997 were $18.93 billion, up 15 percent from 1996. Profits were $1.67 billion, up 22 percent from 1996. Profit per share of common stock was $4.44, up 25 percent from 1996 and recorded as the best ever in Caterpillar's history. This reflected the impact of the higher profit and the company's ongoing share repurchase program.

The second fiscal quarter of 1998 was the company's second-best quarter ever for revenues and profits. Revenues totaled $5.6 billion and profits reached $446 million. As of second quarter 1998, the company had recorded profits in 16 of the previous 18 quarters.

ANALYSTS' OPINIONS

Some financial analysts have expressed surprise over Caterpillar's financial success in the late 1990s. The 11-percent sales increase in 1996 was achieved with only a 2-percent increase in prices. However, some analysts have cautioned investors to remember that they closely link Caterpillar's financial success to the health of the economy.

Other analysts and investors have expressed concern over the labor issues at Caterpillar in the late 1990s. Labor strikes by the United Auto Workers (UAW) and legal action taken against the company for various workers' rights issues have plagued Caterpillar. The dispute ended in March 1998 with a six-year ratified agreement that gave UAW represented employees some of the best wages and benefits in the industry.

Another area of possible concern is Caterpillar's $1.8 billion capital-investment program. The company has been investing in new equipment in order to increase the flexibility of its manufacturing operations. While this may be a wise strategic move, some say such an expenditure is risky and the company could feel a negative impact if the health of the economy takes a turn for the worse.

HISTORY

In 1904 Benjamin Holt sought to create a machine that moved over dirt easily. He altered a tractor by replacing its steam engine with a gas engine and replacing its iron wheels with crawler tracks. He called his invention a "caterpillar." During World War I, the British armed forces imitated these adaptations when they designed their armored tanks.

Holt merged his operation with Best Tractor in 1925, and in 1928 the company was renamed Caterpillar. Its headquarter was located in Peoria, Illinois. In an effort to expand, the company sought foreign markets in the 1930s and formed an international dealer network. Caterpillar continued to grow in the 1940s, and the company supplied its earthmoving machinery to the U.S. Army during World War II. Sales more than tripled at this time. Even after the war, the company continued to enjoy large profits and increasing demand for its machinery. The company's first overseas plant was established in the United Kingdom in 1951. By 1963 Caterpillar had also established a joint venture with the Japanese giant, Mitsubishi.

By 1981 Caterpillar's sales had reached nearly $9.2 billion. However, the company's 50-year span of ceaseless profits ended when it racked up $953 million in losses between 1982 and 1984. Demand for the company's products had fallen while the level of foreign competition had risen to an all-time high. Caterpillar expanded its product line in order to remain competitive with such global players as Japan's Komatsu, and in 1987 Caterpillar launched a $1.8 billion program to update its factories.

STRATEGY

Chairman Fites has put in place a strategy designed to make Caterpillar globally competitive using predominately United States-based manufacturing operations. One element of this strategy includes implementing a six-year capital-investment program aimed at cultivating more flexible manufacturing operations. Another strategic ingredient is a focus on new product development. Also, the company is a strong supporter of the General Agreement on Tariffs and Trade (GATT) and the North American Free Trade Agreement (NAFTA), which stands to reason since a large portion of Caterpillar's revenues come from its exports to foreign countries. Through these international trade agreements, governments define their rules for exporting and importing products to and from foreign countries. The ultimate goal is to reduce or eliminate government restrictions on imports and exports.

Caterpillar has also expanded its operations by acquiring other companies that strategically fit into its own line of business. One such move was the acquisition of Perkins Engines—Perkins is one of Caterpillar's major suppliers. Caterpillar acquired Kato Engineering from Rockwell Automation in 1998, which will further Cater-pillar's growth in the electric power generation business. Since 1991 Caterpillar has entered into 38 acquisitions and joint ventures ranging from partial to 100 percent ownership.

To emphasize its focus on customer needs, Caterpillar began offering financial services to its customers in the late 1990s. Caterpillar Financial Services now serves customers in 60 countries. The company has instituted profit centers as well. These aim to mold the company into a more flexible organization that is able to do whatever is necessary to meet customer demands.

INFLUENCES

Caterpillar's upward climb to success dates back to World War I, when Benjamin Holt's track-type tractors were in high demand since they could pull artillery and supply vehicles through rough terrain. The company's profits and recognition grew tremendously during this time, as well as during World War II.

The company's expansion into foreign markets began in the postwar period. In 1950 Caterpillar Tractor Co. Ltd. was established in the United Kingdom, marking the first of many operations abroad. By choosing strategic locations around the world for its manufacturing operations, the company was less disadvantaged by tariffs, foreign exchange deficiencies, and import restrictions.

FAST FACTS: About Caterpillar Inc.

Ownership: Caterpillar Inc. is a publicly owned company traded on the New York, Pacific, and Chicago Stock Exchanges in the United States and on stock exchanges in Belgium, France, Germany, Great Britain, and Switzerland.

Ticker symbol: CAT

Officers: Donald V. Fites, Chmn. & CEO, 63, 1997 base salary $3,356,650; Glen A. Barton, Group Pres., 57, 1997 base salary $1,116,299; Gerald S. Flaherty, Group Pres., 58, 1997 base salary $1,119,600; Richard L. Thompson, Group Pres., 57, 1997 base salary $920,233

Employees: 65,947

Principal Subsidiary Companies: Caterpillar Inc. has operations and subsidiary companies around the world. Caterpillar's chief subsidiaries include: Balderson Inc., Caterpillar Financial Services Corp., Caterpillar China Investment Co., Caterpillar Inc. Engines Div., Caterpillar Insurance Services Inc., Caterpillar Investment Management Ltd., Caterpillar Paving Products Inc., Caterpillar World Trading Corp., Engine Service Specialists Inc., Solar Turbines Inc., and Caterpillar Logistics Services, Inc.

Chief Competitors: Primary competitors include: AGCO; Allied Products; Case; Core Industries; Cummins Engine; Daimler-Benz; Deere; Ford; Krupp; Hitachi; Hyundai; Ingersoll-Rand; Isuzu; Komatsu America; Penske; Peterson Tractor; Rolls-Royce; Stewart & Stevenson; Terex; Thermo Power; and Volvo.

Caterpillar's overseas success reached new heights when the company signed an agreement with Mitsubishi in 1963 to conduct joint manufacturing operations in Japan. This joint venture, renamed Shin Caterpillar Mitsubishi Ltd. in 1987, has grown to become the number-two manufacturer of construction and mining equipment in Japan and one of the most successful United States-Japanese joint ventures to date. However, not all of Cater-pillar's overseas ventures are so successful. Caterpillar's joint venture with China's Shanghai Diesel Engine Company Ltd. lost $3.6 million in 1996. By the end of 1997, Caterpillar was considering pulling out of the venture.

The economic recession and globally competitive environment of the 1980s forced Caterpillar to cut costs. The company cut jobs and analyzed how to restructure itself in order to avoid similar economic impacts in the future. In 1987 the company underwent a $1.8 billion modification program aimed at making its manufacturing plants flexible enough to produce various types of products. By doing so, the company could offer double the amount of products offered a decade earlier.

CURRENT TRENDS

One of Caterpillar's strategic moves is its trend toward setting up more joint ventures and acquisitions, particularly involving foreign markets. Among these joint ventures is Caterpillar's involvement with the Asian Strategic Investments Corporation (ASIMCO) and CITIC Machinery Manufacturing Incorporated (CMMI). Initiated in early 1997 and located in Ahanxi Province in north central China, this joint operation, called Shanxi International Castings Co., Ltd., produces engine-related castings for medium- and heavy-duty diesel engines. Caterpillar provides its casting technology and expertise, while ASIMCO and CMMI provide the funding, operation sites, machines, supplies, and staff.

In response to growth in the agricultural equipment industry, Caterpillar has established a joint venture with a German company, Claas KgaA, to manufacture and sell combine harvesters and rubber-belted agricultural tractors in Europe and North America. The manufacturing facility for this venture is under construction and set to be completed in 1999. By combining their products and efforts, the two companies seek to better serve the growing need for efficiency on large farms.

Another foreign venture for Caterpillar is its acquisition of the Swedish manufacturer, Skogsjan AB. This company manufactures forestry machinery and supplies that compliment Caterpillar's line of forestry equipment. Skogsjan markets its products in Sweden, Norway, Germany, Austria, Switzerland, and the United Kingdom.

PRODUCTS

The mining industry also plays an important role in Caterpillar's business—Caterpillar is the world leader in sales of mining trucks. The company is designing a greater-capacity mining truck and plans to introduce the first mechanical-drive mining truck with a capacity of more than 150 tons.

A joint venture between Caterpillar and Finland's Tamrock Corp. was established in March 1998. The new company, Caterpillar Impact Products Limited, is located in Slough, England. According to Seppo Karkkainen, managing director of the partnership, "By combining Tamrock's hydraulic hammer expertise with Caterpillar's position as a world leader in construction and mining equipment, they will ideally position the new company to develop new business and new products." Also in early 1998, Caterpillar introduced a new line of compact construction equipment at a trade show in Germany.

CHRONOLOGY: Key Dates for Caterpillar Inc.

1904:: Benjamin Holt invents the first Caterpillar by modifying a tractor
1915:: British armed forces imitate his track designs in creating their armored tanks
1925:: Holt merges his company with Best Tractor, renaming the company Caterpillar Tractor Company
1942:: Caterpillar equipment and designs are used in the M4 tanks during World War II
1961:: The first Diesel Sixty tractor rolls off the assembly line
1950:: Establishes the first overseas plant in the United Kingdom
1963:: Mitsubishi and Caterpillar form a joint venture
1981:: Caterpillar Financial Services Corporation is formed to offer equipment financing
1997:: The company acquires Perkins Engines and becomes the world leader in diesel engine manufacturing

CORPORATE CITIZENSHIP

In the late 1990s Caterpillar assisted the Pines of Carolina Girl Scout Council with repair costs incurred by Hurricane Fran. The Clayton Caterpillar plant is near the Girl Scout camp that suffered almost $200,000 in damages, and Caterpillar donated $10,000 for repairs.

Caterpillar was named 1996 Employer of the Year by the Industry-Labor Council. The award recognizes the company for its efforts to integrate disabled workers into its workforce. Caterpillar was cited for its "barrier-free, cost-effective initiatives to return injured workers [to the job], and active outreach to recruit workers with disabilities."

GLOBAL PRESENCE

Caterpillar is the leading U.S. exporter in its industry. With about half of its sales coming from outside the United States, Caterpillar is highly dependent upon international markets. The markets in developing countries are especially important to the company—they accounted for 36 percent of Caterpillar's 1997 sales. The machinery and equipment that Caterpillar manufactures are used by these developing countries to improve their infrastructure and industrial capacity. In the Asia/Pacific region, Africa, and the Middle East, combined sales rose 37.7 percent in 1995.

Caterpillar continues to have a strong presence in Australia, Belgium, Brazil, China, France, Germany, Hungary, India, Indonesia, Italy, Japan, Mexico, Poland, Russia, and the United Kingdom. The company has 197 dealer networks that together service almost every country in the world. Caterpillar is one of the world's top three manufacturers of diesel engines. The company also ranks as a leader in many of its other businesses, including construction and mining machinery, natural gas engines, and gas turbines.

EMPLOYMENT

Caterpillar values teamwork among its employees. The company's many divisions (engineering, manufacturing, marketing, distribution, finance, product support, and customer service) operate on a "pay for performance" philosophy. In other words, rewards are given to those who do outstanding work. The company hired more than 200 college graduates in both 1996 and 1997 to fill full-time positions in such areas as engineering, information services, accounting, and marketing.

However, discord between Caterpillar and its blue-collar workforce has had a negative impact on the company. Between 1992 and 1996 the National Labor Relations Board (NLRB) found Caterpillar to be guilty of unfair labor practices a total of 230 times. This stemmed from a long-term labor dispute between the United Auto Workers (UAW) and Caterpillar. The union and the company eventually hammered out a new agreement, which is effective until April 1, 2004.

In 1996 the Occupational Safety and Health Administration (OSHA) recommended that Caterpillar be fined $27,125 for health and safety violations. According to UAW Vice President Richard Shoemaker, Cater-pillar's top management had been "putting production and other considerations before the lives and the health of workers."

SOURCES OF INFORMATION

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