10-K
CATERPILLAR INC filed this Form 10-K on 03/10/2004
Entire Document
 
SECURITIES AND EXCHANGE COMMISSION

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

   

[X]

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003

OR

 

[  ]

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.

Commission File No. 1-768

CATERPILLAR INC.
(Exact name of Registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation)

1-768
(Commission File Number)

37-0602744
(IRS Employer I.D. No.)

100 NE Adams Street, Peoria, Illinois
(Address of principal executive offices)

61629
(Zip Code)

Registrant's telephone number, including area code: (309) 675-1000



Securities registered pursuant to Section 12(b) of the Act:

 


Title of each class

 

Name of each exchange
  on which registered
  

 

Common Stock ($1.00 par value)

 

Chicago Stock Exchange
New York Stock Exchange
Pacific Exchange, Inc.

 

Preferred Stock Purchase Rights

 

Chicago Stock Exchange
New York Stock Exchange
Pacific Exchange, Inc.

 

9% Debentures due April 15, 2006

 

New York Stock Exchange

 

9 3/8% Debentures due August 15, 2011

 

New York Stock Exchange

 

9 3/8% Debentures due March 15, 2021

 

New York Stock Exchange

 

8% Debentures due February 15, 2023

 

New York Stock Exchange

       

Securities registered pursuant to Section 12(g) of the Act: None

       

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 [ ü  ] No [    ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [   ]

As of December 31, 2003, there were 343,762,040 shares of common stock of the Registrant outstanding, and the aggregate market value of the voting stock held by non-affiliates of the Registrant (assuming only for purposes of this computation that directors and officers may be affiliates) was $28,128,435,330.

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes [ ü  ] No [    ]


Documents Incorporated by Reference

Portions of the documents listed below have been incorporated by reference into the indicated parts of this Form 10-K, as specified in the responses to the item numbers involved.

  • Part III

2004 Annual Meeting Proxy Statement (Proxy Statement) filed with the Securities and Exchange Commission (SEC) on February 24, 2004.

  • Parts I, II, IV

General and Financial Information for 2003 containing the information required by SEC Rule 14a-3 for an annual report to security holders filed with the SEC as an appendix to the 2004 Annual Meeting Proxy Statement (Appendix) on February 24, 2004, and furnished as Exhibit 13 to this Form 10-K.



TABLE OF CONTENTS

Part I

Item 1.

Business

 

Item 1A.

Executive Officers of the Registrant as of December 31, 2003

 

Item 2.

Properties

 

Item 3.

Legal Proceedings

Part II

Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Item 6.

Selected Financial Data

 

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

 

Item 8.

Financial Statements and Supplementary Data

 

Item 9A.

Controls and Procedures

Part III

Item 10.

Directors and Executive Officers of the Registrant

 

Item 11.

Executive Compensation

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

Item 13.

Certain Relationships and Related Transactions

 

Item 14.

Principal Accountant Fees and Services

Part IV

Item 15.

Exhibits, Financial Statement Schedules, and Reports on Form 8-K


PART I

Item 1. Business.

Principal Lines of Business / Nature of Operations
Caterpillar operates in three principal lines of business:

  1. Machinery - design, manufacture and marketing of construction, mining, agricultural and forestry machinery - track and wheel tractors, track and wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, mining shovels, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, telescopic handlers, skid steer loaders and related parts. Also includes logistics services for other companies.

  2. Engines - design, manufacture and marketing 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. Reciprocating engines meet power needs ranging from 5 to over 22,000 horsepower (4 to over 16 200 kilowatts). Turbines range from 1,600 to 19,500 horsepower (1 000 to 14 500 kilowatts).

  3. Financial Products - consists primarily of Caterpillar Financial Services Corporation (Cat Financial), Caterpillar Insurance Holdings, Inc. (Cat Insurance) and their subsidiaries. Cat Financial provides a wide range of financing alternatives 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.


Due to financial information required by Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, we have also divided our business into eight operating segments for financial reporting purposes. Information about our operating segments, including geographic information, appears in Note 22 on page A-26 of the Appendix.

Company Strengths
Caterpillar is the leader in construction and mining equipment, diesel and natural gas engines and industrial gas turbines in our size range. Annual sales and revenues top $22 billion, making Caterpillar the largest manufacturer in its industry. Caterpillar is also a leading U.S. exporter, with more than half of its sales outside the United States. Through a global network of independent dealers, Caterpillar builds long-term relationships with customers around the world. For over 75 years, the Caterpillar name has been associated with the highest level of quality products and services.

Competitive Environment
Caterpillar products and product support services are sold worldwide into a variety of highly competitive markets. In all markets, we compete on the basis of product performance, customer service, quality and price. From time to time, the intensity of competition results in price discounting in a particular industry or region. Such price discounting puts pressure on margins and can negatively impact operating profit.

Outside of the United States, certain competitors enjoy competitive advantages inherent to operating in their home countries.

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Machinery

The competitive environment for Caterpillar's machinery business consists of global competitors, regional competitors, and specialized local competitors. Principal global competitors include Komatsu, Volvo Construction Equipment, CNH Global, Hitachi Construction Machinery, John Deere, Terex, JCB, and Ingersoll-Rand. Each has particular regional pockets of strength. John Deere Construction and Forestry Division, for example, is a principal competitor in the Americas. Some competitors have broad ranges of product competitive to Caterpillar. Others, like Ingersoll-Rand, only offer limited product that is competitive to Caterpillar. The machinery business in total has been characterized in recent years by consolidations, marketing alliances, and overcapacity resulting in strong competition and difficult financial conditions.

During 2003, most competitors saw some financial recovery after several years of struggle as business volumes began to improve - especially in North America and Asia. New and improved products continued to be introduced, and cost reduction efforts through process improvements continued. Many competitors continued to experience significant pressure on their distribution channels - either directly or indirectly through marketing alliances.

Japanese and Korean-based competitors experienced benefits from significant sales increases in China. European-based global competitors, on the other hand, were negatively impacted by the strength of the Euro and slow European economies. Overall, continued excess industry capacity drove intense competition for the available customers and their business.

Engines

Caterpillar operates in a very highly competitive engine/turbine manufacturing and packaging environment. The company manufactures diesel, heavy fuel and natural gas reciprocating engines for the on- and off-highway mobile markets and a wide array of stationary applications, and industrial turbines for the oil & gas and power generation applications. In North America, on-highway diesel engine competitors include Cummins Inc., Volvo Group AB, Mack Trucks, Inc. (part of Volvo), Detroit Diesel Corporation and Mercedes Benz (both part of DaimlerChrysler Corporation) and Navistar International Corporation. Overseas on-highway diesel engine competitors include Mercedes Benz (part of DaimlerChrysler Corporation), Volvo, Mitsubishi Heavy Industries, Scania, MAN B&W, Iveco Diesel Engines, Isuzu Motors, Ltd., Hino Motors and MWM Brazil.

North America off-highway mobile and stationary application diesel and natural gas engine/turbine competitors include Cummins Inc., John Deere Power Systems, Ford Power Products, GE, and Waukesha. Overseas off-highway mobile and stationary application diesel, natural gas and heavy-fuel engine/turbine competitors include Wartsila NSD, MAN B&W, MTU Friedrichshafen (part of DaimlerChrysler), Volvo Penta (part of Volvo), Mitsubishi Heavy Industries, Deutz, Daewoo, Jenbacher, Kubota, Isuzu, Kawasaki Heavy Industries, Yanmar, Bergen (part of Rolls Royce), and Alstom.

Electric power packaging and other engine/turbine-related packaging business remained fragmented. North American packagers include GE, Cummins, Kohler, Katolight, Generac, Multiquip, Detroit Diesel, Stuart & Stevenson, Hanover, and other regional packagers. Overseas packagers include Alstom, Rolls Royce, Wartsila NSD, MAN B&W, Jenbacher, SDMO, Himoinsa, Mitsubishi Heavy Industries, Daewoo, Denyo, Atlas Copco, Kawasaki Heavy Industries and many other local and regional packagers dispersed around the world. These packagers leveraged engine/turbine over-capacity and off-the-shelf technology to expand operations and product lines, and to enter new markets. They also used flexible/global sourcing and flexible distribution channels to reach new customers, maximize volumes and keep costs down.

In 2003, competitors formed or continued joint ventures and partnerships in an effort to share development costs, secure customer bases, reach new markets, and/or leverage core competencies. In addition, component suppliers such as Delphi Automotive Systems, Bosch GmbH, Denso, and Stanadyne Automotive played more visible roles as technology drivers, partners, and key suppliers to the engine business.

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Competitors in North America introduced new on-highway truck diesel engines utilizing cooled exhaust re-circulation technology (EGR) to meet lower emission standards mandated pursuant to a United States Environmental Protection Agency (EPA) consent decree which required the company and other engine manufacturers to meet certain emission standards by October 2002 and January 2004. The industry continues to invest in new technology to meet emission deadlines in North America, Europe, and Asia.

Prior to the implementation of the consent decree in October 2002, Caterpillar's share of NAFTA industry sales of heavy-duty engines increased 5 percentage points in 2002. Caterpillar maintained this strong competitive position during 2003 with the bridge and Advanced Combustion Emission Reduction Technology (ACERTR) engines. We believe this is occurring because the consent decree motivated most of our competitors to accelerate their production of EGR engines in advance of the October 2002 deadline. This new technology had not been previously used or tested and has large amounts of new content. The technology that Caterpillar developed and uses, however, is an outgrowth of existing technology and requires significantly less new content than our competitors' products. We employ a phased introduction of new technology that assures customers of only limited new technology in any given engine model. We have been phasing in the technological components for our ACERT engines since we made the decision to abandon EGR in early 2001. For example, we introduced aftertreatment technology into our medium heavy-duty product in early 2001, one of the four major components used in our ACERT product. Similarly, our October 2002 heavy-duty bridge engines phased in ACERT fuels systems and aftertreatment technology. We believe that this phased in approach has helped our competitive position, as lower new content is recognized to carry a lower risk in new developments. The NAFTA heavy-duty truck engine industry became more comfortable with Caterpillar engines as the year 2003 ended.

Further, we believe that Caterpillar's development of one technology that can be used for both on-highway and off-highway purposes may give us a further competitive advantage in non-truck engine applications. One competitor has already announced that it will not be using its EGR technology for off-highway and stationary applications. Therefore, this competitor will need to develop new technology for off-highway and stationary applications, while Caterpillar is able to use its on-highway technology for off-highway engines.

We believe we were, at year-end, the only engine manufacturer with a full product line (C7, C9, C11, C13, and C15) that was fully compliant with the January 2004 EPA emissions requirements. Certain engine manufacturers who were not part of the October 2002 consent decree will have to make additional product changes to satisfy the January 2004 emission requirements and other manufacturers who were subject to the consent decree will also be required to make product changes to fully satisfy the January 2004 requirements. We believe that all of our competitors, who are subject to consent decree requirements, have certified at least one engine model as fully compliant with the consent decree requirements, as have we. However, it is our understanding that some competitive engine manufacturers have chosen to reduce the number of engine models for which they are seeking certification.

Additional information about the consent decree appears in this Item 1 under "Environmental Matters."

Financial Products

Caterpillar Financial Services Corporation (Cat Financial), incorporated in Delaware, is a wholly owned finance subsidiary of Caterpillar Inc. Cat Financial provides retail financing alternatives for Caterpillar machinery and engines as well as other equipment and marine vessels to customers and dealers around the world and provides wholesale financing to Caterpillar dealers. It has over 20 years of experience in providing financing in these markets, contributing to knowledge of asset values, industry trends, product structuring, and customer needs. Cat Financial emphasizes prompt and responsive service and offers various financing plans to meet customer requirements, increase Caterpillar sales, and generate financing revenue. As of December 31, 2003, Cat Financial had 1,282 employees.

Cat Financial offers various financing plans designed to increase the opportunity for sales of our products and generate financing income for our company. Its activity is conducted primarily in the United States, with additional offices in Asia, Australia, Canada, Europe and Latin America.

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In certain instances, Cat Financial's operations are subject to supervision and regulation by state, federal, and various foreign government authorities as well as laws and judicial and administrative decisions imposing requirements and restrictions, which, among other things, (i) regulate credit granting activities, (ii) establish maximum interest rates, finance charges, and other charges, (iii) require disclosures to customers, (iv) govern secured transactions, (v) set collection, foreclosure, repossession, and other trade practices, (vi) prohibit discrimination in the extension of credit and administration of loans, and (vii) regulate the use and reporting of information related to borrower's credit experience.

Cat Financial's retail financing plans include:

Finance leases and installment sale contracts - retail:

    • Leases that, for tax purposes, Cat Financial is considered the owner of the equipment, but depending on the characteristics of the lease, are classified as either operating or finance leases for financial reporting purposes (20 percent*).

    • Finance (non-tax) leases where the lessee is considered the owner of the equipment during the term of the contract and that either require or allow the customer to purchase the equipment for a fixed price at the end of the term (14 percent*).

    • Installment sale contracts, which are equipment loans that enable customers to purchase equipment with a down payment or trade-in and structure payments over time (22 percent*).

    • Governmental lease-purchase plans in the U.S. that offer low interest rates and flexible terms to qualified non-federal government agencies (1 percent*).

Retail notes receivable:

    • Loans that allow customers and dealers to use their Caterpillar equipment as collateral to obtain financing (25 percent*).

Cat Financial's wholesale financing plans (18 percent*) include wholesale notes receivable, finance leases and installment sale contracts - wholesale that are secured by the assets of the dealers.


* Indicates the percentage of Cat Financial's total portfolio (total net finance receivables plus equipment on operating leases, less accumulated depreciation) at December 31, 2003. For more information on the above and Cat Financial's concentration of credit risk, please refer to Note 18 on pages A-22 and A-23 of the Appendix.

The retail financing business is highly competitive, with financing for users of Caterpillar equipment available through a variety of sources, principally commercial banks and finance and leasing companies. Cat Financial's competitors include CIT Group, Citibank, GECC, and local banks. Competitive manufacturers use below-market interest rate programs (subsidized by the manufacturer) to assist machine sales. Caterpillar and Cat Financial work together to provide a broad array of financial merchandising programs around the world to meet these competitive offers.

Cat Financial's results are largely dependent upon Caterpillar dealers' ability to sell equipment and customers' willingness to enter into financing or leasing agreements with it. It is also affected by the availability of funds from its financing sources and general economic conditions such as inflation and market interest rates.

Cat Financial has a "match funding" policy whereby the interest rate profile (fixed rate or floating rate) of their debt portfolio largely matches the interest rate profile of their receivable portfolio within established guidelines. In connection with that policy, Cat Financial uses interest rate derivative instruments to modify the debt structure to match the receivable portfolio. This "match funding" reduces the volatility of margins between interest-bearing assets and interest-bearing liabilities, regardless of which direction interest rates move. Cat Financial also uses these instruments to gain an economic and/or competitive advantage through a lower cost of borrowed funds. This is accomplished by changing the characteristics of existing debt instruments or entering into new agreements in combination with the issuance of new debt. For more information regarding match funding, please see Note 2 on pages A-11 and A-12 of the Appendix.

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In managing foreign currency risk for Cat Financial's operations, our objective is to minimize earnings volatility resulting from conversion and the remeasurement of net foreign currency balance sheet positions. Our policy allows the use of foreign currency forward contracts to offset the risk of currency mismatch between our receivable and debt portfolio.

Cat Financial provides financing only when acceptable criteria are met. Credit decisions are based on, among other things, the customer's credit history, financial strength, and equipment application. Cat Financial typically maintains a security interest in retail financed equipment and requires physical damage insurance coverage on financed equipment.

Cat Financial finances a significant portion of Caterpillar dealers' sales and inventory of Caterpillar equipment, especially in North America. Cat Financial's competitive position is improved by marketing programs, subsidized by Caterpillar and/or Caterpillar dealers, which allow it to offer below-market interest rates. Under these programs, Caterpillar, or the dealer, subsidizes an amount at the outset of the transaction, which Cat Financial then recognizes as revenue over the term of the financing.

Caterpillar Insurance Company, a wholly owned subsidiary of Caterpillar Insurance Holdings Inc. (Cat Insurance), is a U.S. insurance company domiciled in Missouri and primarily regulated by the Missouri Department of Insurance. The insurance company is licensed to conduct Property and Casualty Insurance business in forty-six states and the District of Columbia, and as such, is regulated in those jurisdictions as well. As the state of Missouri acts as the lead regulatory authority, it monitors the financial status to ensure that the company is in compliance with minimum solvency requirements, as well as other financial ratios prescribed by the National Association of Insurance Commissioners.

Caterpillar Insurance Company Ltd., a wholly owned subsidiary of Caterpillar Insurance is a reinsurance company domiciled in Bermuda and regulated by the Bermuda Monetary Authority. The company is a Class 2 insurer (as defined by the Bermuda Insurance Amendment Act of 1995), which primarily insures affiliates and as such the Bermuda Monetary Authority requires an Annual Financial Filing for purposes of monitoring compliance with solvency requirements.

Cat Insurance provides protection for claims under the following programs:

  • Extended service contracts (parts and labor) offered by third party dealers to purchasers of eligible categories of machines and engines manufactured by Caterpillar.

  • Reinsurance for the worldwide cargo risks of Caterpillar products.

  • Reinsurance for the risks of physical damage to equipment manufactured by Caterpillar, which is leased, rented, or sold by third party dealers.


Transaction processing time and the supporting technologies continue to drive us in our efforts to respond quickly to customers, improve internal processing efficiencies and reduce costs. Our web-based Cat FinancExpressSM transaction processing and information tool currently available in the U.S., France, Canada and Australia gives us a competitive advantage. Cat FinancExpress collects information on-line to provide finance quotes, credit decisions, and print documents, all in a very short time frame.

Other information about our operations in 2003 and outlook for 2004, including risks associated with foreign operations is incorporated by reference from "Management's Discussion and Analysis" on pages A-33 through A-54 of the Appendix.


Business Developments in 2003
As key markets recovered in 2003, the company made progress on growth goals, held firm on cost reduction targets and continued to serve customers with innovative products such as our new models of engines with the company's proprietary ACERT technology. The new Caterpillar engine line with ACERT technology offers five engines, the C7, C9, C11, C13 and C15, all of which received EPA certification in 2003. Each of these engines meet 2004 EPA emission regulations without sacrificing engine performance. We are in full production of all of the engines, in accordance with our announced timeline. As a result Caterpillar expects to pay no non-conformance penalties (NCPs) on any engines sold in 2004. Market acceptance of our ACERT engines has been strong. As reported in the Ward's year to date data through November 2003, Caterpillar maintained its leadership position in the North American on-highway truck and bus industry.

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We anticipate that this technology will also provide us with a significant competitive advantage well into the future. ACERT will provide a technology platform for our engines through the end of the decade. Off-highway equipment engines must meet emissions regulations starting in 2005, and European machine noise directives in 2006. Over 100 ACERT engines have already been shipped for continued application testing and exposure in off-highway applications. We are on track to introduce machines and industrial engines with the ACERT technology prior to the effective dates of the emissions and noise regulations.

In November, the company announced a multi-year framework for investments in China, which we expect to provide the basis for the company to significantly expand our business there. In the first concrete milestone toward implementation for this expansion, the company signed a non-binding memorandum of understanding with the PRC's Shandong Engineering Machinery - the seventh largest wheel loader producer in China. Subject to approval from China's government officials and the companies' satisfactory completion of due diligence, these negotiations are expected to pave the way for Caterpillar to increase its presence in China, which the company has identified as a key emerging market for the future.

In December, the company announced that the board of directors had selected James W. Owens to succeed Glen A. Barton as Chairman and Chief Executive Officer, effective upon Mr. Barton's retirement on January 31, 2004. The company also announced the retirement of two other officers and the appointment of new officers to fill vacancies created by the retirements. We believe that the right team is in place to lead our employees worldwide in the effort to achieve $30 billion in sales and revenues by the end of this decade.

Charges
Information about charges related to the sale of the MT series of our Challenger line of high-tech tractors, planned U.S. salaried and management employment reductions and plant closings appears in Note 23 on page A-31 of the Appendix.

Order Backlog
The dollar amount of backlog believed to be firm was approximately $4.91 billion and $2.90 billion at December 31, 2003, and December 31, 2002, respectively. Of the total backlog, approximately $320 million and $310 million at December 31, 2003, and December 31, 2002, respectively, was not expected to be filled in the following year. Our backlog is generally highest in the first and second quarters because of seasonal buying trends in our industry.

Dealers
Our machines are distributed principally through a worldwide organization of dealers (dealer network), 56 located in the United States and 151 located outside the United States. Worldwide, these dealers serve 178 countries and operate 3,263 places of business, including 1,391 dealer rental outlets. Reciprocating engines are sold principally through the dealer network and to other manufacturers for use in products manufactured by them. Some of the reciprocating engines manufactured by Perkins are also sold through a worldwide network of 166 distributors located in 148 countries. Most of the electric power generations systems manufactured by FG Wilson are sold through a worldwide network of 250 dealers located in 170 countries.

These dealers do not deal exclusively with our products; however, in most cases sales and servicing of our products are the dealers' principal business. Turbines and large marine reciprocating engines are sold through sales forces employed by Solar and MaK, respectively. Occasionally, these employees are assisted by independent sales representatives.

The company's relationship with each independent dealer within the dealer network is memorialized in a standard sales and service agreement. Pursuant to this agreement, the company grants the dealer the right to purchase and sell its products and to service the products in a specified geographic region. Prices to dealers are established by the company after receiving input from dealers on transactional pricing in the marketplace. The company also agrees to defend the company's intellectual property and to provide warranty and technical support to the dealer. The agreement further grants the dealer a non-exclusive license to the company's trademarks, service marks and brand names.

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In exchange for these rights, the agreement obligates the dealer to develop and promote the sale of the company's products to current and prospective customers in the dealer's region. Each dealer specifically agrees to employ adequate sales and support personnel to market, sell and promote the company's products, demonstrate and exhibit the products, perform the company's product improvement programs, inform the company concerning any features that might affect the safe operation of any of the company's products and maintain detailed books and records of the dealer's financial condition, sales and inventories and make these books and records available at the company's reasonable request.

These sales and service agreements are terminable at will by either party upon 90 days written notice and terminate automatically if the dealer files for bankruptcy protection or upon the occurrence of comparable action seeking protection from creditors.

Patents and Trademarks
Our products are sold primarily under the brands "Caterpillar," "Cat," design versions of "Cat" and "Caterpillar," "Solar Turbines," "MaK," "Perkins," "FG Wilson" and "Olympian." We own a number of patents and trademarks relating to the products we manufacture, which have been obtained over a period of years. These patents and trademarks have been of value in the growth of our business and may continue to be of value in the future. We do not regard any of our business as being dependent upon any single patent or group of patents.

Research and Development
We have always placed strong emphasis on product-oriented research and development relating to the development of new or improved machines, engines and major components. In 2003, 2002, and 2001, we spent $669 million, $656 million, and $696 million, respectively, on our research and development programs.

Employment
As of December 31, 2003, we employed 69,169 persons of whom 33,909 were located outside the United States. From a global, enterprise perspective, we believe our relationship with our employees is very good. We build and maintain a productive, motivated workforce by treating all employees fairly and equitably.

In the United States, most of our 35,260 employees are at-will employees and, therefore, not subject to any type of employment contract or agreement. At select business units, certain highly specialized employees have been hired under employment contracts that specify a term of employment and specify pay and other benefits.

As of December 31, 2003, there were 11,390 hourly U.S. employees who were covered by collective bargaining agreements with various labor unions. Of these, United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) represented 8,840 Caterpillar employees under a six-year central labor agreement that will expire April 1, 2004. Negotiations on a successor contract began December 10, 2003. The International Association of Machinists (IAM) represented 2,371 employees under various labor agreements expiring on October 30, 2004, December 5, 2004, April 30, 2005, and May 29, 2005. Based on our historical experience during periods when labor unrest or work stoppage by union employees has occurred, we do not expect that the occurrence of such events, if any, arising in connection with the expiration of these agreements will have a material impact on our operations or results.

Outside the U.S., the company enters employment contracts and agreements in those countries in which such relationships are mandatory or customary. The provisions of these agreements correspond in each case with the required or customary terms in the subject jurisdiction.

Sales
Sales outside the United States were 56 percent of consolidated sales for 2003, 55 percent for 2002, and 51 percent for 2001.

Environmental Matters
The company is regulated by federal, state, and international environmental laws governing our use of substances and control of emissions in all our operations. Compliance with these existing laws has not had a material impact on our capital expenditures, earnings, or competitive position.

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We are cleaning up hazardous waste at a number of locations, often with other companies, pursuant to federal and state laws. When it is likely we will pay clean-up costs at a site and those costs can be estimated, the costs are charged against our earnings. In doing that estimate, we do not consider amounts expected to be recovered from insurance companies and others.

The amount recorded for environmental clean-up is not material and is included in Statement 3 on page A-6 of the Appendix under "Accrued expenses." If a range of liability estimates is available on a particular site, we accrue at the lower end of that range.

We cannot estimate costs on sites in the very early stages of clean-up. Currently, we have five sites in the very early stages of clean-up, and there is no more than a remote chance that a material amount for clean-up will be required.

Pursuant to a consent decree Caterpillar entered with the EPA, the company was required to meet certain emission standards by October 2002. The decree provides that if engine manufacturers were unable to meet the standards at that time, they would be required to pay a NCP on each engine sold that did not meet the standard. The amount of the NCP would be based on how close to meeting the standard the engine came - the more out of compliance the higher the penalty. The company began shipping lower emission engines in October 2002 as a bridge until fully compliant ACERT engines were introduced in 2003.

The consent decree also provided the ability to "bank" emissions credits prior to October 2002 that could be used to offset non-conforming engines produced after December 31, 2002. That is, if a company was able to produce and sell engines that were below the applicable standard prior to October 2002, then the company could apply the emission credits created by those engines to engines produced after December 31, 2002 that did not meet the consent decree standard. For example, an engine produced and sold prior to October 2002 that produced 3.5 grams of NOx as compared to a 4.0 gram standard would create an emissions credit. This credit would be "banked" to be used to offset the NOx deficiency of an engine produced after December 31, 2002, that did not meet the consent decree standard. Given this scenario, a company could produce and sell a 3.0 gram engine in 2003 without paying an NCP even though the engine exceeds the 2.5 gram standard. Caterpillar had a legal right, as described in the consent decree, to use its banked credits as offsets against NCPs for non-compliant engines produced after December 31, 2002. The EPA has approved the process by which the credits are calculated.

In a final report to the EPA filed during the third quarter of 2003, we identified 70,018 medium heavy-duty engines produced and sold prior to October 2002 that yielded emissions below the applicable standard for that period, resulting in 20,868 Mg of medium heavy-duty banked credits. This is 381 engines and 120 Mg less than had been identified at the end of 2002. The number of engines generating emissions credits in our final report to the EPA was lowered for a variety of reasons including a more detailed analysis of engines actually produced that were eligible to generate credits and the identification of engines shipped to customers outside the United States which were not eligible to generate emissions credits. During 2003, banked credits offset the NCPs on all but approximately 600 of the approximately 31,000 non-conforming medium heavy-duty engines we produced.
We paid NCPs of $2,485 per engine, or $1.5 million, on the 600 medium heavy-duty engines produced in 2003 in excess of those for which we could use banked credits. We also identified 731 heavy-duty engines built prior to October 1, 2002, that generated banked credits totaling 969 Mg. This is 227 engines and 261 Mg less than had been identified at the end of 2002; the reasons for the reduction are similar to those resulting in the adjustments to medium heavy-duty engines and credits. Banked credits offset the NCPs on approximately 2,000 of the 45,000 non-conforming heavy-duty engines we built during 2003. We paid NCPs of approximately $3,555 per engine, or $153 million on the remaining 43,000 heavy-duty engines produced in 2003 in excess of those for which we could use banked credits.

We began production of medium heavy-duty ACERT engines that were fully-compliant with the EPA emissions standards in early 2003, and in mid-2003 began producing fully-compliant heavy-duty ACERT engines. During 2003, Caterpillar received certification from the EPA for its C7 and C9 medium heavy-duty ACERT engines and its C11, C13 and C15 heavy-duty ACERT engines. By the end of 2003 Caterpillar was producing all of these engine models, and as a result, does not expect to pay NCPs on engines built during 2004.

Page 8


The certification process is described in the consent decree and the regulations, and includes the following:

  • The durability of the engine is established through testing to determine if the engine emissions change with time. An emissions deterioration factor is determined that represents the amount of emission deterioration that would be expected over the useful life of the engine.

  • An emission data engine is tested according to the regulations. Emission levels are determined on various steady state and transient tests.

  • The results from the emissions tests are submitted to the EPA in a certification application as proof that the engine meets the requirements along with additional information and a request that a certificate be granted.

  • The EPA reviews the application and if all the regulatory requirements are met, a certificate is issued.

  • If the engine exceeds the standard, the EPA issues a certificate for either a banked or an NCP engine. The NCP engine certificate requires Production Compliance Auditing (PCA) testing.


After receipt of the EPA certificate, manufacturing and shipment of the certified engines can begin. Each engine is labeled to indicate that it is certified.

Our expense for NCPs was $40 million in 2002 and $153 million in 2003. NCP expense recorded in 2002 was based on our engineering estimates at that time of the expected results of EPA emissions testing that began and was completed in 2003. NCP expense recorded in 2003 reflects the results of the completed tests, including a reduction of approximately 3 percent to the NCP expense recorded for 2002. During the fourth quarter of 2003, we re-tested one configuration of our heavy-duty bridge engine models, averaging the results with an earlier test. Our 2003 NCP expense includes a $10 million fourth quarter benefit from the re-test related to all bridge engines of that configuration produced since October 2002, including $1.3 million for engines produced in the fourth quarter of 2002 and $7.4 million for engines produced during the first three quarters of 2003. For 2002, we paid NCPs on approximately 6,200 heavy-duty units and 7,200 medium heavy-duty units, and for 2003 we paid NCPs on approximately 43,000 heavy-duty units and 600 medium heavy-duty units.

Aside from $142 million in customary research and development expenses, emissions standard changes negatively impacted our 2002 financial results by $24 million ($17 million after tax) as NCPs ($40 million pre-tax), product cost increases and ramp-up production costs ($4 million pre-tax) were partially offset by price increases for these engines
($20 million pre-tax). NCPs were deposited in an escrow account prior to completion of emissions testing for each engine model throughout 2003, and were paid to the EPA, either from the escrow account or directly, after completion of testing of a particular model. On January 30, 2004, Caterpillar paid NCPs to the EPA for engines built during the fourth quarter of 2003, ending its payments to the EPA for NCPs for engines built during 2002 and 2003. NCP expense for 2003 reflects this payment.

The following table reflects the 2002 impact of the emission standard changes:

2002
(millions of dollars)


Price (Engines sold x bridge price increase)

 

$

20 

 

Incremental costs (Cost of additional materials and production costs)

 

 

(4)

 

NCPs (Engines sold x projected NCP per engine)

   

(40)

 
   
 

Net effect pre-tax

 

$

(24)

 

Tax

   

 
   
 

Net effect after tax

 

$

(17)

 
   
 


Aside from $115 million in customary research and development expenses, emissions standard changes negatively impacted our 2003 financial results by $46 million ($34 million after-tax). The net unfavorable impact of emission standard changes was greater in 2003 than in 2002 as significantly higher NCPs (approximately $153 million pre-tax), product cost increases and ramp-up production costs (approximately $84 million pre-tax), were partially offset by price increases for bridge and ACERT engines (approximately $191 million pre-tax). The following table reflects the 2003 impact of the emission standard changes:

Page 9


2003
(millions of dollars)


Price (Engines sold x bridge or ACERT price increase)

$

191 

Incremental costs (Cost of additional materials and production costs)

 

(84)

NCPs (Engines sold x NCP per engine - banked credits)

(153)


Net effect pre-tax

$

(46)

Tax

12 


Net effect after tax

$

(34)

 

   
 


In addition to the above, the consent decree required Caterpillar to pay a fine of $25 million, which was expensed in 1998 and to make investments totaling $35 million in environmental-related products by July 7, 2007. Total qualifying investments to date for these projects is $29 million, of which $10 million was made in 2002 and $19 million in 2003. A future benefit is expected to be realized from these environmental projects related to Caterpillar's ability to capitalize on the technologies it developed in complying with its environmental project obligations. In short, Caterpillar expects to receive a positive net return on the environmental projects by being able to market the technology it developed.

NCPs were approximately $3,500 per heavy-duty engine subject to NCPs, based on the results of the completed EPA testing. Our net price increase for heavy-duty bridge engines was successfully implemented on October 1, 2002; this increase was competitive with price increases implemented by other engine manufacturers on that date. With the introduction of ACERT engines in 2003, we implemented an additional price increase to truck manufacturers that purchase our heavy-duty engines, and on January 1, 2004, we implemented a price increase for medium heavy-duty ACERT engines. These increases are based on the additional value that we expect truck owners to receive from ACERT engines compared to engines of our competitors as a result of better fuel economy, less maintenance and greater durability. The ultimate net price increase we are able to achieve for our ACERT engines in the future is dependent upon marketplace acceptance of these engines versus competitive alternatives.

Available Information
The company files electronically with the Securities and Exchange Commission required reports on Form 8-K, Form 10-Q and Form 10-K; proxy materials; ownership reports for insiders as required by Section 16 of the Securities and Exchange Act of 1934; and registration statements on Forms S-3 and S-8, as necessary. The public may read and copy any materials the company has filed with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports filed with the SEC are available free of charge through our Internet site (www.CAT.com/secfilings) as soon as reasonably practicable after filing with the SEC. Copies of our board committee charters, our board's Guidelines on Corporate Governance Issues, and other corporate governance information are available on our Internet site (www.CAT.com/governance). Additional company information may be obtained as follows:

Current information -

  • phone our Information Hotline - 800-228-7717 (U.S. or Canada) or 858-244-2080 (outside U.S. or Canada) to request company publications by mail, listen to a summary of Caterpillar's latest financial results and current outlook, or to request a copy of results by fax or mail

  • request, view, or download materials on-line or register for email alerts at www.CAT.com/materialsrequest

Historical information -

  • view/download on-line at www.CAT.com/historical

Page 10


Item 1A. Executive Officers of the Registrant as of December 31, 2003 (except as otherwise noted)

Name and Age

Present Caterpillar Inc. position and date of initial election

 

Principal positions held during the past five years other than Caterpillar Inc. position currently held

Glen A. Barton (64)

Chairman and Chief Executive 
Officer (1999)1

  • Group President (1990-1998)

James W. Owens (57)

Chairman and Chief Executive 
Officer (2004)
2

  • Group President (1995-2003)

  • Vice Chairman (2003-2004)

Vito H. Baumgartner (63)

Group President (2000)1

  • Chairman, Caterpillar Overseas S.A. (1990-2004)

  • Vice President (1990-2000)

Douglas R. Oberhelman (50)

Group President (2001)

  • Vice President (1995-2001)

Gerald L. Shaheen (59)

Group President (1998)

Richard L. Thompson (64)

Group President (1995)

 

Gérard R. Vittecoq (55)

Group President (2004)3

  • Managing Director, Caterpillar Belgium S.A. (1998-2000)

  • Vice President (2000-2004)

Steven H. Wunning (52)

Group President (2004)3

  • Vice President (1998-2004)

Ali M. Bahaj (50)

Vice President (2002)

  • Director, Division Services, Engine Products Division (1998-2001)

  • Director, Business Development & Consulting Services (2001-2002)

Sidney C. Banwart (58)

Vice President (1998)

  • Chief Information Officer (2001- present)

Michael J. Baunton (52)

Vice President (1998)

  • President, Perkins Engine Company Limited (1998 - 01/2004)

James S. Beard (62)

Vice President (1990)

  • President, Director and Principal Executive Officer, Caterpillar Financial Services Corporation (1987-present)

Mary H. Bell (43)

Vice President (2004)3

  • Service Support Department Manager, Parts & Service Support Division (1999-2000)

  • Service Support Department Manager, Product Support Division (2000)

  • Dealer Capability Department Manager, Product Support Division (2000-2002)

  • Cat Distribution Services General Manager, Logistics Division (2002-2003)

Richard A. Benson (60)

Vice President (1989)

 

James B. Buda (56)

Vice President, General Counsel 
and Secretary (2001)

  • Associate General Counsel (1996-1999)

  • Associate General Counsel, UK (1999-2001)

Rodney L. Bussell (57)

Vice President (2001)

  • General Manager, Large Engine Products & Fuel Systems Division (1998-2001)

Thomas A. Gales (55)

Vice President (2000)

  • Managing Director, Caterpillar France, S.A. (1998-2000)

Stephen A. Gosselin (46)

Vice President (2002)

  • Regional Engine Manager, Engine Products Division (1998-1999)

  • North American Distribution Manager, Engine Products Division
    (1999-2000)

  • Regional Manager, North American Commercial Division (2000-2002)

Hans A. Haefeli (45)

Vice President (2004)3

  • Director & General Manager, Perkins Engines Peterborough Limited
    (1998-1999)

  • Managing Director Product Supply, Perkins Engines Company Limited (1999-2002)

  • Managing Director, Compact Power Systems Division (2001-2002)

  • General Manager, Building Construction Products Division (2002-2003)

  • President, Perkins Engine Company Limited (01/2004 to present)

Page 11


 

Name and Age

Present Caterpillar Inc. position and date of initial election

 

Principal positions held during the past five years other than Caterpillar Inc. position currently held

Donald M. Ings (55)

Vice President (1993)

Richard P. Lavin (51)

Vice President (2001)

  • Director, Corporate Human Relations (1998-1999)

  • Director, Compensation & Benefits (1999-2001)

Stuart L. Levenick (50)

Vice President (2000)

  • General Manager, Commonwealth of Independent States (1998-2000)

  • Chairman, Shin Caterpillar Mitsubishi Ltd. (2000 - present)

Robert R. Macier (55)

Vice President (1998)

  • President, Solar Turbines Incorporated (2002-present)

F. Lynn McPheeters (61)

Vice President and Chief 
Financial Officer (1998)

Daniel M. Murphy (56)

Vice President (1996)

 

Gerald Palmer (58)

Vice President (1992)

James J. Parker (53)

Vice President (2001)

  • Director, Electric Power (1998-2001)

Mark R. Pflederer (47)

Vice President (2004)3

  • Engineering Manager, Building Construction Products Division (1996-1999)

  • Electronics & Electrical Business Unit Manager, Control Systems Products Division (1999-2001)

  • Electronics & Electrical Business Unit Manager, Component Products & Control Systems Division (2001-2003)

Edward J. Rapp (46)

Vice President (2000)

  • Regional Manager, Caterpillar Overseas S.A. (1998-2000)

Christiano V. Schena (54)

Vice President (2002)

  • Managing Director, Caterpillar Brasil Ltda. (1996-2000)

  • Managing Director, Caterpillar France S.A. (2000)

  • General Manager, EAME Product Development Division (2000-2002)

  • Managing Director, Building Construction Products Europe (2002)

William F. Springer (52)

Vice President (2002)

  • President, Caterpillar Logistics (1998-2002)

Gary A. Stroup (54)

Vice President (1992)

  • President, Solar Turbines Incorporated (1998-2002)

Sherril K. West (56)

Vice President (1995)1

 

Donald G. Western (55)

Vice President (1995)

David B. Burritt (48)

Controller (2002)

  • Director, Strategy & Planning, Caterpillar Overseas S.A. (1998-1999)

  • General Manager, Strategic & Business Services - Europe, Caterpillar Overseas S.A. (1999-2001)

  • Corporate 6 Sigma Champion (2001-2002)

Kevin E. Colgan (51)

Treasurer (2001)

  • Vice President, Caterpillar Financial Services Corporation (1997-2001)

1 Retired effective January 31, 2004.

2 Effective January 31, 2004.

3 Effective January 1, 2004.

 

Item 2. Properties.

General Information
Caterpillar's operations are highly integrated. Although the majority of our plants are involved primarily in the production of either machines or engines, several plants are involved in the manufacture of both. In addition, several plants are involved in the manufacture of components which are used in the assembly of both machines and engines. Caterpillar's parts distribution centers are involved in the storage and distribution of parts for machines and engines. Also, the research and development activities carried on at the Technical Center involve both machines and engines.

Page 12


Properties we own are believed to be generally well maintained and adequate for present use. Through planned capital expenditures, we expect these properties to remain adequate for future needs. Properties we lease are covered by leases expiring over terms of generally 1 to 10 years. We anticipate no difficulty in retaining occupancy of any leased facilities, either by renewing leases prior to expiration or by replacing them with equivalent leased facilities.

Plant Closings
Information about charges relating to plant closings appears in Note 23 on page A-31 of the Appendix.

Headquarters
Our corporate headquarters are in Peoria, Illinois. Additional marketing headquarters are located both inside and outside the United States. The Financial Products Division is headquartered in leased offices located in Nashville, Tennessee.

Distribution
Distribution of our parts is conducted from parts distribution centers inside and outside the United States. Caterpillar Logistics Services, Inc. distributes other companies' products utilizing certain of our distribution facilities as well as other non-Caterpillar facilities located both inside and outside the United States. We also own or lease other storage facilities that support distribution activities.

Changes in Fixed Assets
During the five years ended December 31, 2003, changes in our investment in property, plant and equipment were as follows (stated in millions of dollars):


               

Disposals

 

Net Increase

   

Expenditures

 

Acquisitions

 

Provision for

 

and Other

 

(Decrease)

Year

 

U.S.

 

Outside U.S.

 

U.S.

 

Outside U.S.

 

Depreciation

 

Adjustments

 

During Period


 
 
 
 
 
 
 

1999

 

$

950

 

$

453

   

$

3

 

$

103

   

$

(888)

   

$

(196)

   

$

425

 

2000

 

$

1,067

   

$

526

   

$

0

   

$

9

   

$

(969)

   

$

(62)

   

$

571

 

2001

 

$

1,345

 

$

623

   

$

2

 

$

32

   

$

(1,070)

   

$

(280)

   

$

652

 

2002

 

$

1,030

   

$

743

   

$

15

   

$

0

   

$

(1,199)

   

$

(146)

   

$

443

 

2003

 

$

1,000

 

$

765

   

$

0

 

$

0

   

$

(1,332)

   

$

(189)

   

$

244

 


At December 31, 2003, the net book value of properties located outside the United States represented about 40.7 percent of the net book value of all properties reflected in our consolidated financial position. Additional information about our investment in property, plant, and equipment appears in Note 1F on page A-9 and Note 7 on page A-15 of the Appendix.

Technical Center, Training Centers, Demonstration Areas, and Proving Grounds
We own a Technical Center located in Mossville, Illinois, and various other training centers, demonstration areas, and proving grounds located both inside and outside the United States.

Manufacturing, Remanufacturing, and Overhaul
Manufacturing, remanufacturing, and overhaul of our products are conducted at the following locations. These facilities are believed to be suitable for their intended purposes with adequate capacities for current and projected needs for existing products.

Page 13


Manufacturing

 

Inside the U.S.

Kansas

Tennessee

France

Mexico

California

* Wamego

* Dyersburg

* Arras

* Monterrey
* Gardena

Kentucky

* Rockwood

* Grenoble

* Reynosa
* San Diego

* Danville

Texas

* Rantigny

* Saltillo

Florida

Michigan

* Houston

Germany

* Tijuana
* Jacksonville

* Menominee

* Waco

* Kiel

* Torreon

Georgia

* Mt. Clemens

Outside the U.S.

* Rostock

The Netherlands

* Alphretta

Minnesota

Australia

Hungary

& s'-Hertogenbosch
* Griffin

* Grand Rapids1

* Burnie

* Gödöllö

Northern Ireland

* Jefferson

* Minneapolis

* Melbourne

India

* Larne
* LaGrange

* New Ulm

Belgium

* Bangalore2

* Monkstown
* Toccoa

Mississippi

* Gosselies

* Pondicherry

* Springvale
* Thomasville

* Oxford

Brazil

* Thiruvallur

Peoples Republic

Illinois

Missouri

* Curitiba

Indonesia

of China

* Aurora

* Boonville

* Piracicaba

* Jakarta

* Erliban1
* Champaign1

* West Plains

Canada

Italy

* Shunde1
* Decatur

North Carolina

* Laval

* Anagni1

* Tianjin2
* Dixon

* Clayton

* Montreal

* Bazzano

* Xuzhou2
* East Peoria

* Franklin

England

* Fano

Poland

* Joliet

* Morganton

* Barwell

* Frosinone1

* Janow Lubelski
* Mapleton

* Sanford

* Leicester

* Jesi

Russia

* Mossville

Ohio

* Peterborough

* Marignano

* Tosno
* Peoria

* Dayton1

* Peterlee

* Milan1

South Africa

* Pontiac

* Marion

* Skinningrove

* Minerbio

* Boksburg
* Sterling

South Carolina

* Stafford

Japan

Sweden

* Woodridge1

* Greenville

* Stockton

* Akashi1

* Söderhamn

Indiana

* Sumter

* Wimborne

* Sagamihara1

* Lafayette

* Wolverhampton


1
Facility of affiliated company (50% or less owned)
2 Facility of partially owned subsidiary (more than 50%, less than 100%)

Remanufacturing and Overhaul

 

Inside the U.S.

Outside the U.S.

Mississippi

Australia

England

Malaysia

Nigeria

* Corinth

* Melbourne

* Shrewsbury * Kuala Lumpur

* Port Harcourt
* Prentiss County

Belgium

Indonesia

Mexico

Texas

* Gosselies

* Bandung * Nuevo Laredo

* De Soto

Canada

Ireland

* Tijuana

* Mabank

* Edmonton

* Dublin * Veracruz

Page 14


Item 3. Legal Proceedings.

The company is a party to litigation matters and claims that are normal in the course of its operations, and, while the results of such litigation and claims cannot be predicted with certainty, management believes, based on the advice of counsel, the final outcome of such matters will not have a materially adverse effect on our consolidated financial position.

On January 16, 2002, Caterpillar commenced an action in the Circuit Court of the Tenth Judicial Circuit of Illinois in Peoria, Illinois, against Navistar International Transportation Corporation and International Truck and Engine Corporation (collectively Navistar). The lawsuit arises out of a long-term purchase contract between Caterpillar and Navistar effective May 31, 1988, as amended from time to time (the Purchase Agreement). The pending complaint alleges that Navistar breached its contractual obligations by: (i) paying Caterpillar $8.08 (whole dollars) less per fuel injector than the agreed upon price for new unit injectors delivered by Caterpillar; (ii) refusing to pay contractually agreed upon surcharges owed as a result of Navistar ordering less than planned volumes of replacement unit injectors; and (iii) refusing to pay contractually agreed upon interest stemming from Navistar's late payments. At December 31, 2003, the past due receivable from Navistar regarding the foregoing was $132 million. The pending complaint also has claims alleging that Franklin Power Products, Inc., Newstream Enterprises, and Navistar, collectively and individually, failed to pay the applicable price for shipments of unit injectors to Franklin and Newstream. At December 31, 2003, the past due receivables for the foregoing totaled $12 million. The pending complaint further alleges that Sturman Industries, Inc. and Sturman Engine Systems, Inc. colluded with Navistar to utilize technology that Sturman Industries, Inc. misappropriated from Caterpillar to help Navistar develop its G2 fuel system, and tortiously interfered with the Purchase Agreement and Caterpillar's prospective economic relationship with Navistar. The pending complaint further alleges that the two parties' collusion led Navistar to select Sturman Engine Systems, Inc., and another company, instead of Caterpillar, to develop and manufacture the G2 fuel system.

On May 7, 2002, International Truck and Engine Corporation (International) commenced an action against Caterpillar in the Circuit Court of DuPage County, Illinois, that alleges Caterpillar breached various aspects of a long-term agreement term sheet. In its fourth amended complaint, International seeks a declaration from the court that the term sheet constitutes a legally binding contract for the sale of heavy-duty engines at specified prices through the end of 2006, alleges that Caterpillar breached the term sheet by raising certain prices effective October 1, 2002, and also alleges that Caterpillar breached an obligation to negotiate a comprehensive long-term agreement referenced in the term sheet. International further claims that Caterpillar improperly restricted the supply of heavy-duty engines to International from June through September 2002, and claims that Caterpillar made certain fraudulent misrepresentations with respect to the availability of engines during this time period. International seeks damages "in an amount to be determined at trial" and injunctive relief. Caterpillar filed an answer denying International's claims and has filed a counterclaim seeking a declaration that the term sheet has been effectively terminated. Caterpillar denies International's claims and will vigorously contest them. On September 24, 2003, the Appellate Court of Illinois, ruling on an interlocutory appeal, issued an order consistent with Caterpillar's position that, even if the court subsequently determines that the term sheet is a binding contract, it is indefinite in duration and was therefore terminable at will by Caterpillar after a reasonable period. Caterpillar anticipates that a trial currently scheduled for the third quarter of 2004 will address all remaining issues in this matter.
This matter is not related to the breach of contract action brought by Caterpillar against Navistar currently pending in the Circuit Court of Peoria County, Illinois.

On August 30, 2002, a World Trade Organization (WTO) arbitration panel determined that the European Union (EU) may impose up to $4.04 billion per year in retaliatory tariffs if the U.S. tax code is not brought into compliance with an August 2001 WTO decision that found the extraterritorial tax (ETI) provisions of the FSC Repeal and Extraterritorial Income Exclusion Act of 2000 constitute an export subsidy prohibited by the WTO Agreement on Subsidies and Countervailing Measures. Since August 2002, the EU has developed a list of U.S. origin products on which the EU could impose tariffs as high as 100 percent of the value of the product. Negotiations among EU Member States, the European Commission, and the private sector over which products would be listed were intense. The EU finalized the list in December 2003 and stated that in March 2004 it will begin imposing retaliatory tariffs of 5 percent on certain U.S. origin goods. If imposed, the tariffs would increase 1 percentage point per month to a maximum of 17 percent after one year. The gradual increase in tariffs is designed to place increasing pressure on the U.S. government to bring its tax laws into compliance with its WTO obligations. Given the makeup of the final retaliation list, some Caterpillar parts and components will be subjected to these additional tariffs. Based on what we know today, we do not believe these tariffs will materially impact our financial results. The company has production facilities in the EU, Russia, Asia, and South America that would not be affected by a retaliatory tariff aimed at U.S. origin products. When the EU implements its proposed tariffs, increased pressure will be placed on Congress to repeal ETI, possibly during the current session. It is not possible to predict how the U.S. legislative process will affect the company's 2004 income tax liability, but based on what we know today, we do not believe the impact, if any, will be material.

Page 15


PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Information required by Item 5 is incorporated by reference from "Price Ranges" and "Number of Stockholders" on page A-55 and from "Dividends declared per share of common stock" on page A-45 of the Appendix.

Issuer Purchases of Equity Securities

Period

 

Total number
of Shares
Purchased

 

Average Price
Paid per Share

 

Total Number
of Shares Purchased Under the Program

 

Maximum Number
of Shares that May
Yet Be Purchased
Under the Program


 
 
 
 

October 1-31, 2003

 

0

   

n/a

   

n/a

   

27,912,802

1

November 1-30, 2003

 

3,700,000

   

$72.94

   

3,700,000

   

24,774,885

1

December 1-31, 2003

 

1,750,000

   

$77.04

   

1,750,000

   

23,762,040

1

   
 
 
   

Total

 

5,450,000

   

$74.26

   

5,450,000

       
   
 
 
   

1 On October 8, 2003, the board of directors approved an extension of the share repurchase program (through October 2008) with the goal of reducing the company's outstanding shares to 320,000,000. Amount represents the shares outstanding at the end of the period less 320,000,000.


Non-U.S. Employee Stock Purchase Plans
We have 27 employee stock purchase plans administered outside the United States for our foreign employees. As of December 31, 2003, those plans had approximately 8,160 participants in the aggregate. During the fourth quarter of 2003, a total of 71,390 shares of Caterpillar common stock or foreign denominated equivalents were distributed under the plans. Participants in some foreign plans have the option of receiving non-U.S. share certificates (foreign-denominated equivalents) in lieu of U.S. shares of Caterpillar Inc. common stock upon withdrawal from the plan. These equivalent certificates are tradable only on the local stock market and are included in our determination of shares outstanding.

Item 6. Selected Financial Data.

Information required by Item 6 is incorporated by reference from the "Five-year Financial Summary" on page A-32, "Committed funds" on page A-44, and "Supplemental consolidating data" on pages A-51 through A-53 of the Appendix.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Information required by Item 7 is incorporated by reference from pages A-33 to A-54 of the Appendix.

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", "should" 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
A worldwide economic recovery is now underway and further strengthening should occur this year. Economic growth is expected to exceed 3.5 percent in 2004, or about 1 percentage point more than in 2003. Low interest rates initiated economic recoveries and low inflation rates likely will encourage central bankers to be cautious about implementing any interest rate hikes. If, however, central bankers decide to raise interest rates significantly, the recovery would be less robust than assumed, likely weakening machinery and engine sales.

Page 16


The U.S. economy ended 2003 on a strong note and the continuation of low interest rates in 2004 should ensure a very good year for the economy. We project U.S. growth of at least 4.5 percent and the Canadian economy should rebound from 2003's slowdown, growing more than 3 percent in 2004. This environment should allow the recovery in Machinery and Engines sales that developed last year to strengthen further this year. Low interest rates, the tax cuts and the favorable impact of a weaker dollar have all helped the economy and our sales. Should any of these factors change substantially, such as a significant increase in interest rates, both economic growth and our sales probably would be weaker than assumed.

European economies recovered slowly in the last half of 2003 and current low interest rates should allow further strengthening this year. We expect the European economies will grow 2 percent in 2004, fast enough to allow some improvement in construction activity. Favorable energy prices, plus much higher commodity prices, will promote another year of good economic growth in both Africa/Middle East and the CIS. As a result, we project some improvement in EAME sales in 2004. However, the European recovery is fragile and developments such as a much stronger euro or modest interest rate hikes could cause economic growth to falter. In that case, the modest recovery in sales would be in jeopardy.

The Japanese economy has grown for seven consecutive quarters and our outlook assumes that measures employed by the Bank of Japan - zero interest rates, the maintenance of high levels of reserves in the banking system and the purchase of long-term government bonds - will allow this recovery to strengthen. We project economic growth of 3 percent in 2004, up more than 1/2 percentage point from 2003 and the best year since 1996. The economy remains vulnerable to any tightening in financial conditions and should that occur, the recovery could stall. Slower economic growth would further reduce our sales in that country and could have a negative impact on other economies, particularly those in the region.

Our outlook assumes that the Asia/Pacific region will again lead the world in economic growth, improving to over 6 percent growth in 2004. We expect China's booming economy will slow a bit in response to modest tightening in economic policies, but better growth in most other countries will more than pick up the slack. Strong domestic economies and low local interest rates will boost construction and the region's sizeable mining sector will benefit from higher prices. The principal risks that could disrupt economic growth and our sales are significant policy tightening in China and intensified trade frictions that slow exports from the region.

We expect Latin American economic growth to improve to about 3.5 percent in 2004, much better than the 1.5 percent rate experienced in 2003. We expect that the region will benefit from the worldwide economic recovery, reductions in local interest rates and a rebound in foreign direct investment inflows. Better economic growth should boost our sales; however, should the economic recovery not materialize as expected, our sales could continue to decline.

Commodity Prices
Commodities represent a significant sales opportunity, with prices and production as key drivers. Prices have improved sharply over production the past year and our outlook assumes continued growth in the world economy will cause metals prices to increase further in 2004. Any unexpected weakening in world industrial production, however, could cause prices to drop sharply to the detriment of our results.

While coals stocks are high and prices have been soft, our outlook assumes production and prices will improve in 2004. If coal production and prices do not improve, our results could be negatively affected.

Oil and natural gas prices have continued fairly high into 2004 due to strong demand and tight inventories. Our outlook assumes that increased production will ease shortages in both oil and natural gas, allowing prices to ease some. We do not yet view higher energy prices as a threat to economies since it is strong demand that is boosting prices. However, should significant supply cuts occur, such as from OPEC production cuts or political unrest in a major producing country, the resulting price spikes likely would slow economies, potentially with a depressing impact on our sales.

Page 17


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. In general, higher than expected 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.

While economic data are looking more favorable, central banks in most developed countries are still holding interest rates steady. Two (Reserve Bank of Australia and Bank of England) have implemented modest interest rate increases. Our outlook assumes that central banks will take great care to ensure that economic recoveries continue and that interest rates will remain low throughout 2004. Should central banks raise interest rates too aggressively, both economic growth and our sales could suffer.

Budget deficits in many countries have increased, which has limited the ability of governments to boost economies with tax cuts and more spending. Our outlook assumes that governments will not aggressively raise taxes and slash spending to deal with their budget imbalances. Such actions could disrupt growth and negatively affect sales to public construction.

Political Factors
Political factors in the United States and abroad have a major impact on global companies.

Our outlook assumes that there will be no significant military conflict in North Korea or the Middle East in the forecast period. Such a military conflict could severely disrupt sales into countries affected, as well as nearby countries.

Our outlook also assumes that there will be no major terrorist attacks. If there is a major terrorist attack, confidence could be undermined, causing a sharp drop in economic activities and our sales. Attacks in major developed economies would be the most disruptive.

Our outlook further assumes that efforts by countries to increase their exports will not result in retaliatory countermeasures by other countries to block such exports, particularly in the Asia/Pacific region.

Currency Fluctuations
The company has costs and revenues in many currencies and is therefore exposed to risks arising from currency fluctuations. Many currency positions are fairly closely balanced, which, along with the diversity of currency positions, helps diminish exchange rate risks.

The company's largest manufacturing presence is in the United States. So any unexpected strengthening of the dollar tends to raise the foreign currency value of costs and reduce our global competitiveness.

The stronger euro had a favorable impact on translating European sales into U. S. dollars for the full year. The outlook assumes similar benefits in the future. Should the euro collapse, our results could be negatively impacted.

Dealer Practices
The company sells primarily through an independent dealer network. Dealers carry inventories of both new and rental equipment and adjust those inventories based on their assessments of future needs. Such adjustments can impact our results either positively or negatively. The current outlook assumes dealers will reduce inventories slightly in 2004; more drastic reductions would adversely affect sales.

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 United States or abroad, demand for our products may be significantly impacted.

The U.S. government is under pressure by the World Trade Organization to repeal extraterritorial (ETI) income tax benefits. Our outlook assumes that if ETI is repealed, we will not be materially impacted in 2004 due to the transition relief currently included in all bills under consideration by Congress.

Page 18


Pursuant to a Consent Decree Caterpillar entered into with the EPA, the company was required to meet certain emission standards by October 2002. The Consent Decree provided for the possibility that diesel engine manufacturers may not be able to meet these standards exactly on that date, and allows companies to continue selling non-compliant engines if they pay NCPs on those engines. The company began shipping lower emission on-highway engines in October 2002 as a "bridge" until the fully compliant ACERT engines were introduced in 2003. These "bridge" engines required the payment of NCPs. At year-end 2003, Caterpillar was in production of all models of its medium heavy-duty and heavy-duty compliant ACERT engines. Therefore, our outlook for 2004 assumes that we will not pay NCPs beyond 2003.

Our outlook is also subject to assumptions regarding price increases and sales volumes. Our net price increase for heavy-duty on-highway bridge engines was successfully implemented on October 1, 2002; this increase was competitive with price increases implemented by other engine manufacturers on that date. We implemented an additional price increase in 2003 to truck manufacturers that purchase our heavy-duty ACERT engines and implemented a price increase on January 1, 2004, for medium heavy-duty ACERT engines. These increases are based on the additional value that we expect truck owners to receive from ACERT engines compared to our competitors as a result of better fuel economy, less maintenance and greater durability. The ultimate net price increase we are able to achieve for our ACERT engines is dependent upon marketplace acceptance of these engines versus competitive alternatives. While we estimate volume to the best of our ability, industry volume is an issue out of our control. If our assumptions regarding NCPs, market acceptance of the price increases and/or engine volume are not realized, company performance could be negatively impacted.

Projected cost savings or synergies from alliances with new partners could also be negatively impacted by a variety of factors. These factors could include, among other things, higher than expected wages, energy and/or material costs, and/or higher than expected financing costs due to unforeseen changes in tax, trade, environmental, labor, safety, payroll or pension policies in any of the jurisdictions where the alliances conduct their operations.

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. If actual results vary from this projected geographic and product mix of sales, our results could be negatively impacted.

The company operates in a highly competitive environment and our outlook depends on a forecast of the company's share of industry sales. An unexpected 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, leading to severe downward pressure on machine rental rates and/or used equipment prices.

The environment also remains very competitive from a pricing standpoint. Additional price discounting would result in lower than anticipated price realization.

Inherent in the operation of the Financial Products Division is the credit risk associated with its customers. The creditworthiness of each customer, and the rate of delinquencies, repossessions and net losses on customer obligations are directly impacted by several factors, including, but not limited to, relevant industry and economic conditions, the availability of capital, the experience and expertise of the customer's management team, commodity prices, political events, and the sustained value of the underlying collateral. Additionally, interest rate movements create a degree of risk to our operations by affecting the amount of our interest payments and the value of our fixed rate debt. Our match funding policy manages interest rate risk by matching the interest rate profile (fixed rate or floating rate) of our debt portfolio with the interest rate profile of our receivables portfolio within certain parameters. To achieve our match funding objectives, we issue debt with similar interest rate profile to our receivables and also use interest rate swap agreements to manage our interest rate risk exposure to interest rate changes and in some cases to lower our cost of borrowed funds. If interest rates move upward more sharply than anticipated, our financial results could be negatively impacted. With respect to our insurance and investment management operations, changes in the equity and bond markets could cause an impairment of the value of our investment portfolio, thus requiring a negative adjustment to earnings.

Page 19


In general, our results are sensitive to changes in economic growth, particularly those originating in construction, mining and energy. Developments reducing such activities also tend to lower our sales. In addition to the factors mentioned above, our results could be negatively impacted by any of the following:

  • Any sudden drop in consumer or business confidence

  • Delays in legislation needed to fund public construction

  • Regulatory or legislative changes that slow activity in key industries; and/or

  • Unexpected collapses in stock markets.

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.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Information required by Item 7A appears in Note 1 under "Impairment of available-for-sale securities" on pages A-9 and A-10, Note 2 on pages A-11 and A-12, Note 17 on page A-22 and Note 18 on pages A-22 and A-23 of the Appendix. Other information required by Item 7A is incorporated by reference from page A-50 of the Appendix under "Sensitivity."

Item 8. Financial Statements and Supplementary Data.

Information required by Item 8 is incorporated by reference from the Report of Independent Auditors on page A-3 and from the Financial Statements and Notes to Consolidated Financial Statements on pages A-4 through A-31 (or A-32 if 5 year summary included) of the Appendix. Other information required by Item 8 is included in "Computation of Ratios of Profit to Fixed Charges" filed as Exhibit 12 to this Form 10-K.

Item 9A. Controls and Procedures.

An evaluation was performed under the supervision and with the participation of the company's management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the company's disclosure controls and procedures as of the end of the period covered by this annual report. Based on that evaluation, the company's management, including the CEO and CFO, concluded that the company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of this evaluation, there have been no significant changes in the company's internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, the company's internal controls over financial reporting. Although the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote, management's evaluation provided reasonable assurance that these controls will be effective.


PART III

Item 10. Directors and Executive Officers of the Registrant.

Identification of Directors and Business Experience

Information required by this Item is incorporated by reference from "Directors Up For Election This Year for Terms Expiring in 2007," "Directors Remaining in Office Until 2006," and "Directors Remaining in Office Until 2005" on pages 3 and 4 of the Proxy Statement.

Page 20


Identification of Executive Officers and Business Experience
Information required by this Item appears in Item 1A of this Form 10-K.

Family Relationships
There are no family relationships between the officers and directors of the company. All officers serve at the pleasure of the board of directors and are regularly elected at a meeting of the board in April of each year.

Legal Proceedings
Information required by this Item is incorporated by reference from "Legal Proceedings" on page 8 of the Proxy Statement.

Identification of Audit Committee
Information required by this Item is incorporated by reference from "Board Meetings and Committees" on pages 5 through 7 of the Proxy Statement.

Audit Committee Financial Expert
Information required by this Item is incorporated by reference from "Board Meetings and Committees" on pages 5 through 7 of the Proxy Statement.

Shareholder Recommendation of Board Nominees
Information required by this Item is incorporated by reference from "Governance Committee Report" on pages 11 and 12 of the Proxy Statement.

Compliance with Section 16(a) of the Exchange Act
Information required by this Item relating to compliance with Section 16(a) of the Securities Exchange Act is incorporated by reference from "Section 16(a) Beneficial Ownership Reporting Compliance" on page 38 of the Proxy Statement.

Code of Ethics
Our Code of Worldwide Business Conduct, first published in 1974 and last amended in 2000, sets a high standard for honesty and ethical behavior by every employee, including the principal executive officer, principal financial officer, and principal accounting officer/controller. The Code is posted on our website at www.CAT.com under About CAT - Company Information and is filed as Exhibit 14 to this Form 10-K. To obtain a copy of the Code at no charge, submit a written request to the Company Secretary at 100 NE Adams Street, Peoria, Illinois 61629-7310.  We will post on our website any required amendments to or waivers granted under our Code pursuant  to SEC or New York Stock Exchange disclosure rules.

Item 11. Executive Compensation.

Information required by this item is incorporated by reference from "Director Compensation" on page 7, "Performance Graph" on page 14, "Compensation Committee Report on Executive Officer and Chief Executive Officer Compensation" on pages 15 through 23, and "Executive Compensation Tables" on pages 24 through 26 of the Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Information required by this item relating to security ownership of certain beneficial owners and management is incorporated by reference from "Caterpillar Stock Owned by Officers and Directors (as of December 31, 2003)" on page 13 and "Persons Owning More than Five Percent of Caterpillar Stock (as of December 31, 2003)" on page 14 of the Proxy Statement.

Page 21


Information required by this item relating to securities authorized for issuance under equity compensation plans is included in the following table:


Equity Compensation Plan Information
(as of December 31, 2003)


   

(a)

 

(b)

 

(c)

 

Plan category

 

Number of securities to be issued upon exercise of outstanding options, warrants and rights

 

Weighted-average exercise price of outstanding options, warrants and rights

 

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))

 

 
 
 
 

Equity compensation plans
approved by security holders

 

39,735,411

   

51.38

   

2,460,249

   

Equity compensation plans
not approved by security holders

 

n/a

   

n/a

   

n/a

   
   
 
 
 

Total

 

39,735,411

   

51.38

   

2,460,249

   



                     

Item 13. Certain Relationships and Related Transactions.

Information required by this item is incorporated by reference from "Certain Related Transactions" on page 8 of the Proxy Statement.

Item 14. Principal Accountant Fees and Services.

Information required by this Item is incorporated by reference from "Audit Committee Report" on pages 8 through 10 and "Audit Fees" on page 11 of the Proxy Statement.


PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a) The following documents are incorporated by reference from the indicated pages of the Appendix:

1.  Financial Statements:
  • Report of Independent Auditors (A-3)
  • Statement 1 - Results of Operations (A-4)
  • Statement 2 - Changes in Consolidated Stockholders' Equity (A-5)
  • Statement 3 - Financial Position (A-6)
  • Statement 4 - Statement of Cash Flow (A-7)
  • Notes to Consolidated Financial Statements (A-8 through A-31)

 

2.  Financial Statement Schedules:
  • All schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto incorporated by reference from the Appendix.

 

(b) There were 4 reports (dated October 8, October 16, December 10, and December 11, 2003) filed on Form 8-K pursuant to Item 5 and 1 report (dated October 16, 2003) filed on Form 8-K pursuant to Item 12 during the last quarter of 2003.  Four additional reports (dated January 27, February 12, and two dated March 2, 2004) were filed on Form 8-K pursuant to Item 5 and one additional report (dated January 27, 2004) was filed on Form 8-K pursuant to Item 12. No financial statements were filed as part of those reports.

 

Page 22


(c) Exhibits:

 

3.1

 

Restated Certificate of Incorporation (incorporated by reference from Exhibit 3(i) to the Form 10-Q filed for the quarter ended March 31, 1998).

 

3.2

 

Certificate of Designation, Preferences and Rights of the Terms of the Series A Junior Participating Preferred Stock (incorporated by reference from Exhibit 2 to Form 8-A filed December 11, 1996).

 

3.3

 

Bylaws, amended and restated as of December 10, 2003.

 

4

 

Third Amended and Restated Rights Agreement dated as of June 12, 2003, between Caterpillar Inc. and Mellon Investor Services LLC (incorporated by reference from Exhibit 4 to Form 10-K/A for 2002 filed July 17, 2003).

 

10.1

 

Caterpillar Inc. 1996 Stock Option and Long-Term Incentive Plan, amended and restated as of April 10, 2002 (incorporated by reference from Exhibit 10.1 to Form 10K for 2002 filed March 31, 2003).

 

10.2

 

Caterpillar Inc. 1987 Stock Option Plan, as amended and restated and Long Term Incentive Supplement, amended and restated as of December 31, 2000 (incorporated by reference from Exhibit 10.2 to Form 10-K for 2002 filed March 31, 2003). **

 

10.3

 

Supplemental Pension Benefit Plan, as amended and restated (incorporated by reference from Exhibit 10.3 to the Form 10-K for the year ended December 31, 1999).

 

10.4

 

Supplemental Employees' Investment Plan, as amended and restated through December 1, 2002 (incorporated by reference from Exhibit 10.4 to Form 10-K for 2002 filed March 31, 2003).**

 

10.5

 

Caterpillar Inc. Executive Incentive Compensation Plan, effective as of January 1, 2002 (incorporated by reference from Exhibit 10.5 to Form 10-K for 2002 filed March 31, 2003).**

 

10.6

 

Directors' Deferred Compensation Plan, as amended and restated through April 12, 1999 (incorporated by reference from Exhibit 10.6 to the 1999 Form 10-K).**

 

10.7

 

Directors' Charitable Award Program (incorporated by reference from Exhibit 10(h) to the 1993 Form 10-K).**

 

10.8

 

Deferred Employees' Investment Plan, as amended and restated through December 1, 2002 (incorporated by reference from Exhibit 10.8 to Form 10-K for 2002 filed March 31, 2003).**

 

11

 

Computations of Earnings per Share (incorporated by reference from Note 16 on page A-21 of the Appendix).

 

12

 

Computation of Ratios of Earnings to Fixed Charges.

 

13

 

Annual Report to Security Holders attached as an Appendix to the company's 2004 Annual Meeting Proxy Statement.

 

14

 

Caterpillar Code of Worldwide Business Conduct.

 

21

 

Subsidiaries and Affiliates of the Registrant.

 

23

 

Consent of Independent Auditors.

 

31.1

 

Certification of James W. Owens, Chairman and Chief Executive Officer of Caterpillar Inc., as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2

 

Certification of F. Lynn McPheeters, Chief Financial Officer of Caterpillar Inc., as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32

 

Certification of James W. Owens, Chairman and Chief Executive Officer of Caterpillar Inc. and F. Lynn McPheeters, Chief Financial Officer of Caterpillar Inc., as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

99.1

 

Form 11-K for Caterpillar Foreign Service Employees' Stock Purchase Plan.

       
 

** Compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(c) of this Form 10-K.


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2
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Form 10-K

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

CATERPILLAR INC.

(Registrant)


March 9, 2004

 

 
By:

 
/s/ James B. Buda


   

 

James B. Buda, Secretary

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the company and in the capacities and on the dates indicated.


March 9, 2004
 


/s/ James W. Owens


 

Chairman of the Board, Director and Chief Executive Officer

   

(James W. Owens)

 

   
March 9, 2004  

/s/ Douglas R. Oberhelman


 

Group President

   

(Douglas R. Oberhelman)

 

   
March 9 , 2004  

/s/ Gerald L. Shaheen


 

Group President

   

(Gerald L. Shaheen)

 

   
March 9 , 2004  

/s/ Richard L. Thompson


 

Group President

   

(Richard L. Thompson)

 

   
March 9 , 2004  

/s/ Gerard R. Vittecoq


 

Group President

   

(Gerard R. Vittecoq)

 

   
March 9 , 2004  

/s/ Steven H. Wunning


 

Group President

   

(Steven H. Wunning)

 

   

March 9 , 2004
 


/s/ F. Lynn McPheeters


 

Vice President and
Chief Financial Officer

   

(F. Lynn McPheeters)

   

March 9 , 2004
 


/s/ David B. Burritt


 

Controller and
Chief Accounting Officer

   

(David B. Burritt)

   


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4


March 9 , 2004  

/s/ W. Frank Blount


 

Director

(W. Frank Blount)

March 9 , 2004  

/s/ John R. Brazil


 

Director

(John R. Brazil)

March 9 , 2004  

/s/ John T. Dillon


 

Director

(John T. Dillon)

March 9 , 2004  

/s/ Eugene V. Fife


 

Director

(Eugene V. Fife)

March 9 , 2004  

/s/ Gail D. Fosler


 

Director

(Gail D. Fosler)

March 9 , 2004  

/s/ Juan Gallardo


 

Director

(Juan Gallardo)

March 9 , 2004  

/s/ David R. Goode


 

Director

(David R. Goode)

March 9 , 2004  

/s/ Peter A. Magowan


 

Director

(Peter A. Magowan)

March 9 , 2004  

/s/ William A. Osborn


 

Director

(William A. Osborn)

March 9 , 2004  

/s/ Gordon R. Parker


 

Director

(Gordon R. Parker)

March 9 , 2004  

/s/ Charles D. Powell


 

Director

(Charles D. Powell)

March 9 , 2004  

/s/ Edward B. Rust, Jr.


 

Director

(Edward B. Rust, Jr.)

March 9 , 2004  

/s/ Joshua I. Smith


 

Director

(Joshua I. Smith)


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CATERPILLAR INC

EXHIBIT 3.3

 

CATERPILLAR INC.

BYLAWS
(as amended and restated as of December 10, 2003)


Article I
Offices

Section 1. Registered Office.

The registered office of the corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle, State of Delaware.


Section 2. Other Offices.

The corporation may also have offices at such other places both within and without the State of Delaware as the board of directors may from time to time determine or the business of the corporation may require.


Article II
Stockholders

Section 1. Stockholder Meetings.

(a) Place of Meetings. Meetings of stockholders shall be held at such places, within or without the State of Delaware, as may from time to time be designated by the board of directors.

(b) Annual Meeting.

(i) The annual meeting of stockholders shall be held on the second Wednesday in April in each year at a time designated by the board of directors, or at such a time and date as may be designated by the board.


Page 1


(ii) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors, (b) otherwise properly brought before the meeting by or at the direction of the board of directors, or (c) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation, not less than 45 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 60 days' notice of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the fifteenth (15th) day following the date on which such notice of the date of the annual meeting was mailed. A stockholder's notice to the secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting, (b) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (c) the class and number of shares of the corporation which are beneficially owned by the stockholder and (d) any material interest of the stockholder in such business. Notwithstanding anything in the bylaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 1(b)(ii). The presiding officer of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 1, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted.

(c) Special Meetings. Special meetings of the stockholders of this corporation for any purpose or purposes may be called at any time by the chairman of the board or the vice chairman, or by the board of directors pursuant to a resolution approved by a majority of the entire board of directors, but such special meetings may not be called by any other person or persons.

(d) Notice of Meetings. Notice of every meeting of the stockholders shall be given in the manner prescribed by law.

(e) Quorum. Except as otherwise required by law, the certificate of incorporation and these bylaws, the holders of not less than one-third of the shares entitled to vote at any meeting of the stockholders, present in person or by proxy, shall constitute a quorum and the act of the majority of such quorum shall be deemed the act of the stockholders. If a quorum shall fail to attend any meeting, the chairman of the meeting may adjourn the meeting to another place, date or time. If a notice of any adjourned special meeting of stockholders is sent to all stockholders entitled to vote thereat, stating that it will be held with those present constituting a quorum, then, except as otherwise required by law, those present at such adjourned meeting shall constitute a quorum and all matters shall be determined by a majority of votes cast at such meeting.


Section 2. Determination of Stockholders Entitled to Vote.

To determine the stockholders entitled to notice of any meeting or to vote, the board of directors may fix in advance a record date as provided in Article VI, Section 1 hereof, or if no record date is fixed by the board a record date shall be determined as provided by law.


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Section 3. Voting.

(a) Subject to the provisions of applicable law, and except as otherwise provided in the certificate of incorporation, each stockholder present in person or by proxy shall be entitled to one vote for each full share of stock registered in the name of such stockholder at the time fixed by the board of directors or by law as the record date of the determination of stockholders entitled to vote at a meeting.

(b) Every stockholder entitled to vote may do so in person or by one or more agents authorized by proxy. Such authorization may be in writing or by transmission of an electronic communication, as permitted by law and in accordance with procedures established for the meeting.

(c) Voting may be by voice or by ballot as the chairman of the meeting shall determine.

(d) In advance of any meeting of stockholders the board of directors may appoint one or more persons (who shall not be candidates for office) as inspectors of election to act at the meeting. If inspectors are not so appointed, or if an appointed inspector fails to appear or fails or refuses to act at a meeting, the chairman of any meeting of stockholders may, and on the request of any stockholder or his proxy shall, appoint inspectors of election at the meeting.

(e) Any action required or permitted to be taken by the stockholders of the corporation must be effected at a duly called annual or special meeting of such holders and may not be effected by any consent in writing by such holders.


Article III
Board of Directors

Section 1. Election of Directors.

(a) Number. The authorized number of directors of the corporation shall be fixed from time to time by the board of directors but shall not be less than three (3). The exact number of directors shall be determined from time to time either by a resolution or bylaw duly adopted by the board of directors.

(b) Classes of Directors. The board of directors shall be and is divided into three classes: Class I, Class II and Class III, which shall be as nearly equal in number as possible. Each director shall serve for a term ending on the date of the third annual meeting of stockholders following the annual meeting at which the director was elected; provided, however, that each initial director in Class I shall hold office until the annual meeting of stockholders in 1987; each initial director in Class II shall hold office until the annual meeting of stockholders in 1988; and each initial director in Class III shall hold office until the annual meeting of stockholders in 1989. Notwithstanding the foregoing provisions of this subsection (b), each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal.


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(c) Newly Created Directorships and Vacancies. In the event of any increase or decrease in the authorized number of directors, the newly created or eliminated directorships resulting from such increase or decrease shall be apportioned by the board of directors among the three classes of directors so as to maintain such classes as nearly equal in number as possible. No decrease in the number of directors constituting the board of directors shall shorten the term of any incumbent director. Newly created directorships resulting from any increase in the number of directors and any vacancies on the board of directors resulting from death, resignation, disqualification, removal or other cause shall be filled by the affirmative vote of a majority of the remaining directors then in office (and not by stockholders), even though less than a quorum of the board of directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified.

(d) Nomination of Directors. Candidates for director shall be nominated either

(i) by the board of directors or a committee appointed by the board of directors or

(ii) by nomination at any such stockholders' meeting by or on behalf of any stockholder entitled to vote at such meeting provided that written notice of such stockholder's intent to make such nomination or nominations has been given, either by personal delivery or by United States mail, postage prepaid, to the secretary of the corporation not later than (1) with respect to an election to be held at an annual meeting of stockholders, ninety (90) days in advance of such meeting, and (2) with respect to an election to be held at a special meeting of stockholders for the election of directors, the close of business on the tenth (10th) day following the date on which notice of such meeting is first given to stockholders. Each such notice shall set forth: (a) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission, had the nominee been nominated, or intended to be nominated, by the board of directors; and (e) the consent of each nominee to serve as a director of the corporation if so elected. The presiding officer of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure.

(e) Removal. Any director may be removed from office without cause but only by the affirmative vote of the holders of not less than seventy-five percent (75%) of the outstanding stock of the corporation entitled to vote generally in the election of directors, voting together as a single class.

(f) Preferred Stock Provisions. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of stock issued by this corporation having a preference over the common stock as to dividends or upon liquidation, shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies, nominations, terms of removal and other features of such directorships shall be governed by the terms of Article FOURTH of the certificate of incorporation and the resolution or resolutions establishing such class or series adopted pursuant thereto and such directors so elected shall not be divided into classes pursuant to Article SIXTH of the certificate of incorporation unless expressly provided by such terms.


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Section 2. Meetings of the Board of Directors.

(a) Regular Meetings. Regular meetings of the board of directors shall be held without call at the following times:

(i) 8:30 a.m. on the second Wednesday in February, April, June, August, October and December;

(ii) one-half hour prior to any special meeting of the stockholders, and immediately following the adjournment of any annual or special meeting of the stockholders.

Notice of all such regular meetings is hereby dispensed with.

(b) Special Meetings. Special meetings of the board of directors may be called by the chairman of the board, any two (2) directors or by any officer authorized by the board. Notice of the time and place of special meetings shall be given by the secretary or an assistant secretary, or by any other officer authorized by the board. Such notice shall be given to each director personally or by mail, messenger, telephone or telegraph at his business or residence address. Notice by mail shall be deposited in the United States mail, postage prepaid, not later than the third (3rd) day prior to the date fixed for the meeting. Notice by telephone or telegraph shall be sent, and notice given personally or by messenger shall be delivered, at least twenty-four (24) hours prior to the time set for the meeting. Notice of a special meeting need not contain a statement of the purpose of the meeting.

(c) Adjourned Meetings. A majority of directors present at any regular or special meeting of the board of directors, whether or not constituting a quorum, may adjourn from time to time until the time fixed for the next regular meeting. Notice of the time and place of holding an adjourned meeting shall not be required if the time and place are fixed at the meeting adjourned.

(d) Place of Meetings. Unless a resolution of the board of directors, or the written consent of all directors given either before or after the meeting and filed with the secretary, designates a different place within or without the State of Delaware, meetings of the board of directors, both regular and special, shall be held at the corporation's offices at 100 N.E. Adams Street, Peoria, Illinois.

(e) Participation by Telephone. Members of the board may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another, and such participation shall constitute presence in person at such meeting.

(f) Quorum. At all meetings of the board one-third of the total number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action is approved by at least a majority of the required quorum for such meeting. Less than a quorum may adjourn any meeting of the board from time to time without notice.


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Section 3. Action Without Meeting.

Any action required or permitted to be taken by the board of directors may be taken without a meeting if all members of the board consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of the board.


Section 4. Compensation of Directors.

The directors may be paid such compensation for their services as the board shall from time to time determine. Directors who receive salaries as officers or employees of the corporation shall not receive additional compensation for their services as directors.


Section 5. Committees of the Board.

There shall be such committees of the board of directors each consisting of two or more directors with such authority, subject to applicable law, as a majority of the board shall by resolution determine. Committees of the board shall meet subject to the call of the chairman of each committee and shall prepare and file with the secretary minutes of their meetings. Unless a committee shall by resolution establish a different procedure, notice of the time and place of committee meetings shall be given by the chairman of the committee, or at his request by the chairman of the board or by the secretary or an assistant secretary. Such notice shall be given to each committee member personally or by mail, messenger, telephone or telegraph at his business or residence address at the times provided in subsection (b) of Section 2 of this Article for notice of special meetings of the board of directors. One-third of a committee but not less than two members shall constitute a quorum for the transaction of business. Except as a committee by resolution may determine otherwise, the provisions of Section 3 and of subsections (c), (d) and (e) of Section 2 of this Article shall apply, mutatis mutandis, to meetings of board committees.


Article IV
Officers

Section 1. Officers.

The officers of the corporation shall be a chairman of the board, who shall be the chief executive officer, a vice chairman, one or more group presidents, one or more vice presidents (one of whom shall be designated the chief financial officer), a secretary and a treasurer, together with such other officers as the board of directors shall determine. Any two or more offices may be held by the same person.


Section 2. Election and Tenure of Officers.

Officers shall be elected by the board of directors, shall hold office at the pleasure of the board, and shall be subject to removal at any time by the board. Vacancies in office may be filled by the board.


Section 3. Powers and Duties of Officers.

Each officer shall have such powers and duties as may be prescribed by the board of directors or by an officer authorized so to do by the board.


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Section 4. Compensation of Officers.

The compensation of officers shall be determined by the board of directors; provided that the board may delegate authority to determine the compensation of any assistant secretary or assistant treasurer, with power to redelegate.


Article V
Indemnification

The corporation shall indemnify to the full extent permitted by, and in the manner permissible under, the laws of the State of Delaware any person made, or threatened to be made, a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate is or was a director or officer of the corporation or any predecessor of the corporation, or served any other enterprise as a director or officer at the request of the corporation or any predecessor of the corporation.

The foregoing provisions of this Article V shall be deemed to be a contract between the corporation and each director and officer who serves in such capacity at any time while this bylaw is in effect, and any repeal or modification thereof shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought based in whole or in part upon any such state of facts.

The foregoing rights of indemnification shall not be deemed exclusive of any other rights to which any director or officer may be entitled apart from the provisions of this Article.

The board of directors in its discretion shall have power on behalf of the corporation to indemnify any person, other than a director or officer, made a party to any action, suit or proceeding by reason of the fact that he, his testator or intestate, is or was an employee of the corporation.


Article VI
Miscellaneous

Section 1. Record Date.

(a) In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days prior to the date of such meeting nor more than sixty (60) days prior to any other action. If not fixed by the board, the record date shall be determined as provided by law.


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7


(b) A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting unless the board fixes a new record date for the adjourned meeting.

(c) Stockholders on the record date are entitled to notice and to vote or to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided by agreement or by applicable law.


Section 2. Stock Certificates.

(a) Every holder of shares in the corporation shall be entitled to have a certificate signed in the name of the corporation by the chairman of the board or the vice chairman or a vice president and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary, certifying the number of shares and the class or series of shares owned by the stockholder. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue.

(b) The corporation may issue a new share certificate or a new certificate for any other security in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate or the owner's legal representative to give the corporation a bond (or other adequate security) sufficient to indemnify it against any claim that may be made against it (including any expense or liability) on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate.


Section 3. Corporate Seal.

The corporation shall have a corporate seal in such form as shall be prescribed and adopted by the board of directors.


Section 4. Construction and Definitions.

Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the General Corporation Law of Delaware shall govern the construction of these bylaws.


Section 5. Amendments.

Subject to the provisions of the certificate of incorporation, these bylaws may be altered, amended or repealed at any regular meeting of the stockholders (or at any special meeting thereof duly called for that purpose) by a majority vote of the shares represented and entitled to vote at the meeting; provided that in the notice of such special meeting notice of such purpose shall be given. Subject to the laws of the State of Delaware, the certificate of incorporation and these bylaws, the board of directors may by majority vote of those present at any meeting at which a quorum is present amend these bylaws, or enact such other bylaws as in their judgment may be advisable for the regulation of the conduct of the affairs of the corporation.


Page 8


EXHIBIT 12
                 

EXHIBIT 12

CATERPILLAR INC.,
CONSOLIDATED SUBSIDIARY COMPANIES,
AND 50%-OWNED UNCONSOLIDATED AFFILIATED COMPANIES

COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Millions of dollars)

YEARS ENDED DECEMBER 31,


     

2003

 

2002

 

2001

 

2000

 

1999

     
 
 
 
 

Profit

 

$

1,099

 

$

798

 

$

805

 

$

1,053

 

$

946

Add:

                             
 

Provision for income taxes

   

384

   

314

   

359

   

439

   

448






Profit before taxes

   

1,483

   

1,112

   

1,164

   

1,492

   

1,394

Fixed charges:

                             
 

Interest and other costs related to borrowed funds(1)

   

720

   

805

   

948

   

988

   

835

 

Rentals at computed interest factors(2)

   

82

   

81

   

86

   

90

   

83






Total fixed charges:

   

802

   

886

   

1,034

   

1,078

   

918

     
 
 
 
 

Profit before provision for income taxes and fixed charges

  $

2,285

  $

1,998

  $

2,198

  $

2,570

  $

2,312






Ratio of profit to fixed charges

   

2.9

   

2.3

   

2.1

   

2.4

   

2.5

___________

                             

(1) Interest expense as reported in Consolidated Results of Operations plus the Company's proportionate share of 50 percent-owned unconsolidated affiliated companies' interest expense.

(2) Amounts represent those portions of rent expense that are reasonable approximations of interest costs.

EXHIBIT 13


APPENDIX



CATERPILLAR INC.

GENERAL AND FINANCIAL INFORMATION

2003

A-1



TABLE OF CONTENTS

 
Report of Management

Report of Independent Auditors

Consolidated Financial Statements and Notes

Five-year Financial Summary

Management's Discussion and Analysis (MD&A)
 
Overview
 
2003 Compared with 2002
 
Fourth Quarter 2003 Compared with Fourth Quarter 2002
 
Supplemental Information
 
Glossary of Terms
 
2002 Compared with 2001
 
Other Charges
 
Liquidity & Capital Resources
 
Critical Accounting Policies
 
Employment
 
Other Matters
 
Supplemental Consolidating Data
 
Outlook

Supplemental Stockholder Information

Directors and Officers

A-2



REPORT OF MANAGEMENT
Caterpillar Inc.

        The management of Caterpillar Inc. has prepared the accompanying financial statements for the years ended December 31, 2003, 2002 and 2001, and is responsible for their integrity and objectivity. The statements were prepared in conformity with generally accepted accounting principles, applying certain estimates and judgments as required.

        Management maintains a system of internal accounting controls which has been designed to provide reasonable assurance that: transactions are executed in accordance with proper authorization, transactions are properly recorded and summarized to produce reliable financial records and reports, assets are safeguarded and the accountability for assets is maintained.

        The system of internal controls includes statements of policies and business practices, widely communicated to employees, which are designed to require them to maintain high ethical standards in their conduct of company affairs. The internal controls are augmented by careful selection and training of supervisory and other management personnel, by organizational arrangements that provide for appropriate delegation of authority and division of responsibility and by an extensive program of internal audit with management follow-up. The company's adoption of 6 Sigma has improved processes leading to enhanced internal controls.

        The financial statements have been audited by PricewaterhouseCoopers LLP, independent auditors, in accordance with auditing standards generally accepted in the United States of America. They have made similar annual audits since the initial incorporation of our company. Their role is to render an opinion on management's financial statements. Their report appears below.

        Through its Audit Committee, the board of directors reviews our financial and accounting policies, practices and reports. The Audit Committee consists exclusively of six directors who are not salaried employees and who are, in the opinion of the board of directors, free from any relationship that would interfere with the exercise of independent judgment as a committee member. The Audit Committee meets several times each year with representatives of management, including the internal auditing department and the independent auditors to review the activities of each and satisfy itself that each is properly discharging its responsibilities. Both the independent auditors and the internal auditors have free access to the Audit Committee and meet with it periodically, with and without management representatives in attendance, to discuss, among other things, their opinions as to the adequacy of internal controls and to review the quality of financial reporting.

    SIGNATURE
    Chairman of the Board
    SIGNATURE
    Chief Financial Officer

 

 

January 27, 2004


REPORT OF INDEPENDENT AUDITORS

LOGO

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF CATERPILLAR INC.:

        In our opinion, the accompanying statements of consolidated financial position and the related statements of consolidated results of operations, changes in consolidated stockholders' equity and consolidated cash flow present fairly, in all material respects, the financial position of Caterpillar Inc. and its subsidiaries at December 31, 2003, 2002 and 2001, and the results of their operations and their cash flow for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        As discussed in Note 9 to the consolidated financial statements, effective January 1, 2002 the Company changed the manner in which it accounts for goodwill and other intangible assets upon the adoption of Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets."

LOGO

Peoria, Illinois
January 27, 2004

A-3


STATEMENT 1
Consolidated Results of Operations for the Years Ended December 31
(Dollars in millions except per share data)

 
  2003
  2002
  2001
Sales and revenues:                  
  Sales of Machinery and Engines   $ 21,048   $ 18,648   $ 19,027
  Revenues of Financial Products     1,715     1,504     1,423
   
 
 
    Total sales and revenues     22,763     20,152     20,450
Operating costs:                  
  Cost of goods sold     16,945     15,146     15,179
  Selling, general and administrative expenses     2,470     2,094     2,140
  Research and development expenses     669     656     696
  Interest expense of Financial Products     470     521     657
  Other operating expenses     521     411     467
   
 
 
    Total operating costs     21,075     18,828     19,139
   
 
 
Operating profit     1,688     1,324     1,311
  Interest expense excluding Financial Products     246     279     285
  Other income (expense)     35     69     143
   
 
 
Consolidated profit before taxes     1,477     1,114     1,169
  Provision for income taxes     398     312     367
   
 
 
  Profit of consolidated companies     1,079     802     802
  Equity in profit (loss) of unconsolidated affiliated companies     20     (4 )   3
   
 
 
Profit   $ 1,099   $ 798   $ 805
   
 
 
Profit per common share   $ 3.18   $ 2.32   $ 2.35
Profit per common share—diluted(1)   $ 3.13   $ 2.30   $ 2.32
Weighted-average common shares (millions)     345.2     344.0     343.3
Weighted-average common shares—diluted (millions)(1)     351.4     346.9     347.1
Cash dividends declared per common share   $ 1.420   $ 1.400   $ 1.390
   
 
 
(1)
Diluted by assumed exercise of stock options, using the treasury stock method.

See accompanying Notes to Consolidated Financial Statements.

A-4


STATEMENT 2
Changes in Consolidated Stockholders' Equity for the Years Ended December 31
(Dollars in millions)

 
  2003
  2002
  2001
 
Common stock:                                      
  Balance at beginning of year   $ 1,034         $ 1,043         $ 1,048        
  Shares issued from treasury stock     25           (9 )         (5 )      
   
       
       
       
  Balance at year-end     1,059           1,034           1,043        
   
       
       
       
Treasury stock:                                      
  Balance at beginning of year   $ (2,669 )       $ (2,696 )       $ (2,676 )      
  Shares issued: 2003—4,956,973; 2002—878,623; 2001—916,634     160           27           23        
  Treasury shares purchased: 2003—5,450,000; 2001—937,000     (405 )                   (43 )      
   
       
       
       
  Balance at year-end     (2,914 )         (2,669 )         (2,696 )      
   
       
       
       
Profit employed in the business:                                      
  Balance at beginning of year     7,849           7,533           7,205        
  Profit     1,099   $ 1,099     798   $ 798     805   $ 805  
  Dividends declared     (498 )         (482 )         (477 )      
   
       
       
       
  Balance at year-end     8,450           7,849           7,533        
   
       
       
       
Accumulated other comprehensive income:                                      
  Foreign currency translation adjustment:                                      
    Balance at beginning of year     86           (17 )         55        
    Aggregate adjustment for year     262     262     103     103     (72 )   (72 )
   
       
       
       
    Balance at year-end     348           86           (17 )      
   
       
       
       
  Minimum pension liability adjustment—consolidated companies:                                      
    Balance at beginning of year (net of tax of: 2003—$383; 2002—$82; 2001—$1)     (771 )         (161 )         (1 )      
    Aggregate adjustment for year (net of tax of: 2003—$77; 2002—$301; 2001—$81)     (163 )   (163 )   (610 )   (610 )   (160 )   (160 )
   
       
       
       
    Balance at year-end (net of tax of: 2003—$460; 2002—$383; 2001—$82)     (934 )         (771 )         (161 )      
   
       
       
       
  Minimum pension liability adjustment—unconsolidated affiliates:                                      
    Balance at beginning of year     (37 )         (41 )         (31 )      
    Aggregate adjustment for year     (11 )   (11 )   4     4     (10 )   (10 )
   
       
       
       
    Balance at year-end     (48 )         (37 )         (41 )      
   
       
       
       
  Derivative financial instruments:                                      
    Balance at beginning of year (net of tax of: 2003—$5; 2002—$17)     11           (26 )                
    Gains/(losses) deferred during year (net of tax of: 2003—$29; 2002—$10; 2001—$24)     53     53     15     15     (39 )   (39 )
    (Gains)/losses reclassified to earnings during year (net of tax of: 2003—$20; 2002—$11; 2001—$7)     40     40     22     22     13     13  
   
       
       
       
    Balance at year-end (net of tax of: 2003—$54; 2002—$4; 2001—$17)     104           11           (26 )      
   
       
       
       
  Available-for-sale securities:                                      
    Balance at beginning of year (net of tax of: 2003—$17; 2002—$13)     (31 )         (24 )                
    Gains/(losses) deferred during year (net of tax of: 2003—$12; 2002—$16; 2001—$14)     23     23     (29 )   (29 )   (26 )   (26 )
    (Gains)/losses reclassified to earnings during year (net of tax of: 2003—$11; 2002—$12; 2001—$1)     21     21     22     22     2     2  
   
 
 
 
 
 
 
    Balance at year-end (net of tax of: 2003—$7; 2002—$17; 2001—$13)     13           (31 )         (24 )      
   
       
       
       
Total accumulated other comprehensive income     (517 )         (742 )         (269 )      
   
       
       
       
Comprehensive income         $ 1,324         $ 325         $ 513  
         
       
       
 
Stockholders' equity at year-end   $ 6,078         $ 5,472         $ 5,611        
   
       
       
       

See accompanying Notes to Consolidated Financial Statements.

A-5


STATEMENT 3
Consolidated Financial Position at December 31
(Dollars in millions)

 
  2003
  2002
  2001
 
Assets                    
  Current assets:                    
    Cash and short-term investments   $ 342   $ 309   $ 400  
    Receivables—trade and other     3,666     2,838     2,592  
    Receivables—finance     7,605     6,748     5,849  
    Deferred and refundable income taxes     707     781     434  
    Prepaid expenses     1,424     1,224     1,139  
    Inventories     3,047     2,763     2,925  
   
 
 
 
  Total current assets     16,791     14,663     13,339  
  Property, plant and equipment—net     7,290     7,046     6,603  
  Long-term receivables—trade and other     82     66     55  
  Long-term receivables—finance     7,822     6,714     6,267  
  Investments in unconsolidated affiliated companies     800     747     787  
  Deferred income taxes     616     711     927  
  Intangible assets     239     281     274  
  Goodwill     1,398     1,402     1,397  
  Other assets     1,427     1,117     936  
   
 
 
 
Total assets   $ 36,465   $ 32,747   $ 30,585  
   
 
 
 
Liabilities                    
  Current liabilities:                    
    Short-term borrowings:                    
      —Machinery and Engines   $ 72   $ 64   $ 219  
      —Financial Products     2,685     2,111     1,961  
    Accounts payable     3,100     2,269     2,123  
    Accrued expenses     1,638     1,620     1,419  
    Accrued wages, salaries and employee benefits     1,802     1,779     1,403  
    Dividends payable     127     120     120  
    Deferred and current income taxes payable     216     70     11  
    Long-term debt due within one year:                    
      —Machinery and Engines     32     258     73  
      —Financial Products     2,949     3,654     3,058  
   
 
 
 
  Total current liabilities     12,621     11,945     10,387  
  Long-term debt due after one year:                    
      —Machinery and Engines     3,367     3,403     3,492  
      —Financial Products     10,711     8,193     7,799  
  Liability for postemployment benefits     3,172     3,333     2,920  
  Deferred income taxes and other liabilities     516     401     376  
   
 
 
 
Total liabilities     30,387     27,275     24,974  
   
 
 
 
Contingencies (Note 21)                    
Stockholders' equity                    
  Common stock of $1.00 par value:                    
    Authorized shares: 900,000,000
Issued shares (2003, 2002 and 2001—407,447,312) at paid-in amount
    1,059     1,034     1,043  
  Treasury stock (2003—63,685,272 shares; 2002—63,192,245 shares; and 2001—64,070,868 shares) at cost     (2,914 )   (2,669 )   (2,696 )
  Profit employed in the business     8,450     7,849     7,533  
  Accumulated other comprehensive income     (517 )   (742 )   (269 )
   
 
 
 
Total stockholders' equity     6,078     5,472     5,611  
   
 
 
 
Total liabilities and stockholders' equity   $ 36,465   $ 32,747   $ 30,585  
   
 
 
 

See accompanying Notes to Consolidated Financial Statements.

A-6


STATEMENT 4
Consolidated Statement of Cash Flow for the Years Ended December 31
(Millions of dollars)

 
  2003
  2002
  2001
 
Cash flow from operating activities:                    
  Profit   $ 1,099   $ 798   $ 805  
  Adjustments for non-cash items:                    
    Depreciation and amortization     1,347     1,220     1,169  
    Other charges             153  
    Other     (15 )   363     245  
  Changes in assets and liabilities:                    
    Receivables—trade and other     (521 )   (50 )   99  
    Inventories     (286 )   162     (211 )
    Accounts payable and accrued expenses     617     164     (160 )
    Other—net     (175 )   (291 )   (113 )
   
 
 
 
Net cash provided by operating activities     2,066     2,366     1,987  
   
 
 
 
Cash flow from investing activities:                    
  Capital expenditures—excluding equipment leased to others     (682 )   (728 )   (1,100 )
  Expenditures for equipment leased to others     (1,083 )   (1,045 )   (868 )
  Proceeds from disposals of property, plant and equipment     761     561     356  
  Additions to finance receivables     (17,146 )   (15,338 )   (16,284 )
  Collections of finance receivables     13,882     11,866     12,367  
  Proceeds from sale of finance receivables     1,760     2,310     3,079  
  Investments and acquisitions     (36 )   (294 )   (405 )
  Other—net     (17 )   (40 )   (72 )
   
 
 
 
Net cash used for investing activities     (2,561 )   (2,708 )   (2,927 )
   
 
 
 
Cash flow from financing activities:                    
  Dividends paid     (491 )   (481 )   (474 )
  Common stock issued, including treasury shares reissued     157     10     6  
  Treasury shares purchased     (405 )       (43 )
  Proceeds from long-term debt issued:                    
    —Machinery and Engines     128     248     681  
    —Financial Products     5,274     3,889     3,381  
  Payments on long-term debt:                    
    —Machinery and Engines     (463 )   (225 )   (354 )
    —Financial Products     (3,774 )   (3,114 )   (2,599 )
  Short-term borrowings—net     87     (102 )   420  
   
 
 
 
Net cash provided by financing activities     513     225     1,018  
   
 
 
 
Effect of exchange rate changes on cash     15     26     (12 )
   
 
 
 
Increase (decrease) in cash and short-term investments     33     (91 )   66  
Cash and short-term investments at beginning of period     309     400     334  
   
 
 
 
Cash and short-term investments at end of period   $ 342   $ 309   $ 400  
   
 
 
 

    All short-term investments, which consist primarily of highly liquid investments with original maturities of three months or less, are considered to be cash equivalents.

See accompanying Notes to Consolidated Financial Statements.

A-7


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Operations and summary of significant accounting policies

A. Nature of operations

We operate in three principal lines of business:

(1)   Machinery—A principal line of business which includes the design, manufacture and marketing of construction, mining, agricultural and forestry machinery—track and wheel tractors, track and wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, mining shovels, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, telescopic handlers, skid steer loaders and related parts. Also includes logistics services for other companies.

(2)   Engines—A principal line of business including the design, manufacture and marketing 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. Reciprocating engines meet power needs ranging from 5 to over 22,000 horsepower (4 to over 16 200 kilowatts). Turbines range from 1,600 to 19,500 horsepower (1 000 to 14 500 kilowatts).

(3)   Financial Products—A principal line of business consisting primarily of Caterpillar Financial Services Corporation (Cat Financial), Caterpillar Insurance Holdings, Inc. (Cat Insurance) and their subsidiaries. Cat Financial provides a wide range of financing alternatives 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.

Our Machinery and Engines operations are highly integrated. Throughout the Notes, Machinery and Engines represents the aggregate total of these principal lines of business.

Our products are sold primarily under the brands "Caterpillar," "Cat," "Solar Turbines," "MaK," "Perkins," "FG Wilson" and "Olympian."

We conduct operations in our Machinery and Engines lines of business under highly competitive conditions, including intense price competition. We place great emphasis on the high quality and performance of our products and our dealers' service support. Although no one competitor is believed to produce all of the same types of machines and engines that we do, there are numerous companies, large and small, which compete with us in the sale of each of our products.

Machines are distributed principally through a worldwide organization of dealers (dealer network), 56 located in the United States and 151 located outside the United States. Worldwide, these dealers serve 178 countries and operate 3,263 places of business, including 1,391 dealer rental outlets. Reciprocating engines are sold principally through the dealer network and to other manufacturers for use in products manufactured by them. Some of the reciprocating engines manufactured by Perkins are also sold through a worldwide network of 166 distributors located in 148 countries. Most of the electric power generation systems manufactured by FG Wilson are sold through a worldwide network of 250 dealers located in 170 countries. Our dealers do not deal exclusively with our products; however, in most cases sales and servicing of our products are the dealers' principal business. Turbines and large marine reciprocating engines are sold through sales forces employed by Solar and MaK, respectively. Occasionally, these employees are assisted by independent sales representatives.

Manufacturing activities of the Machinery and Engines lines of business are conducted in 44 plants in the United States; 10 in the United Kingdom; eight in Italy; five in Mexico; four in China; three each in France, India and Northern Ireland; two each in Australia, Canada, Germany, Brazil and Japan; and one each in Belgium, Hungary, Indonesia, The Netherlands, Poland, Russia, South Africa and Sweden. Fourteen parts distribution centers are located in the United States and 12 are located outside the United States.

The Financial Products line of business also conducts operations under highly competitive conditions. Financing for users of Caterpillar products is available through a variety of competitive sources, principally commercial banks and finance and leasing companies. We emphasize prompt and responsive service to meet customer requirements and offer various financing plans designed to increase the opportunity for sales of our products and generate financing income for our company. Financial Products activity is conducted primarily in the United States, with additional offices in Asia, Australia, Canada, Europe and Latin America.

B. Basis of consolidation

The financial statements include the accounts of Caterpillar Inc. and its subsidiaries. Investments in companies that are owned 20% to 50% or are less than 20% owned and for which we have significant influence are accounted for by the equity method (see Note 8 on page A-15). We consolidate all variable interest entities where Caterpillar Inc. is the primary beneficiary.

Certain amounts for prior years have been reclassified to conform with the current-year financial statement presentation. In the second quarter of 2003, we revised our policy regarding the classification of certain costs related to distributing replacement parts. Previously, these costs were included in selling, general and administrative expenses and now are included in cost of goods sold. This classification is more consistent with industry practice. The parts distribution costs include shipping and handling (including warehousing) along with related support costs such as information technology, purchasing and inventory management. Prior period amounts have been revised to conform to the new classification. In 2002 and 2001, the amounts reclassified from selling, general and administrative expenses to cost of goods sold were $437 million and $427 million, respectively. This amount was $443 million for 2003. The reclassification had no impact on operating profit.

C. Sales and revenue recognition

Sales of Machinery and Engines are recognized when title transfers and the risks and rewards of ownership have passed to customers or independently owned and operated dealers.

Our standard invoice terms are established by marketing region. The dealer is responsible for payment even if the product is not sold to an end customer and must make payment within the standard terms to avoid interest costs. Interest at or above prevailing market rates is charged on any past due balance. Interest is not forgiven. In 2003, 2002 and 2001, terms were extended to not more than one year for $54 million, $193 million and $224 million of receivables, respectively. For 2003, this amount represents less than 1% of consolidated sales. For 2002 and 2001, these amounts represent approximately 1% of consolidated sales.

A-8


Sales with payment terms of two months or more were as follows:

 
  2003
  2002
  2001
 
Payment Terms
(months)

  Sales
  Percent
of Sales

  Sales
  Percent
of Sales

  Sales
  Percent
of Sales

 
 
  (Dollars in millions)

 
2   $ 116   0.6 % $ 62   0.3 % $ 28   0.2 %
3     27   0.1 %   118   0.6 %   177   0.9 %
4     28   0.1 %   11   0.1 %   6   0.0 %
5     594   2.8 %   447   2.4 %   422   2.2 %
6     4,104   19.5 %   3,503   18.8 %   4,056   21.3 %
7-12     671   3.2 %   465   2.5 %   218   1.2 %
   
 
 
 
 
 
 
    $ 5,540   26.3 % $ 4,606   24.7 % $ 4,907   25.8 %
   
 
 
 
 
 
 

Revenues of Financial Products represent primarily finance and lease revenues of Cat Financial. Finance revenues are recognized over the term of the contract at a constant rate of return on the scheduled uncollected principal balance. Lease revenues are recognized in the period earned. Recognition of income is suspended when collection of future income is not probable. Accrual is resumed, and previously suspended income is recognized, when the receivable becomes contractually current and/or collection doubts are removed.

D. Inventories

Inventories are stated at the lower of cost or market. Cost is principally determined using the last-in, first-out (LIFO) method. The value of inventories on the LIFO basis represented about 80% of total inventories at December 31, 2003, 2002 and 2001.

If the FIFO (first-in, first-out) method had been in use, inventories would have been $1,863 million, $1,977 million and $1,923 million higher than reported at December 31, 2003, 2002 and 2001, respectively.

E. Securitized receivables

When finance receivables are securitized, we retain interest in the receivables in the form of interest-only strips, servicing rights, cash reserve accounts and subordinated certificates. Gains or losses on the securitization are dependent on the purchase price being allocated between the carrying value of the securitized receivables and the retained interests based on their relative fair value. We estimate fair value based on the present value of future expected cash flows using key assumptions for credit losses, pre-payment speeds, forward yield curves and discount rates (see Note 5 on pages A-13 to A-15).

F. Depreciation and amortization

Depreciation of plant and equipment is computed principally using accelerated methods. Depreciation on equipment leased to others, primarily for Financial Products, is computed using the straight-line method over the term of the lease. The depreciable basis is the original cost of the equipment less the estimated residual value of the equipment at the end of the lease term. In 2003, 2002 and 2001, Financial Products depreciation on equipment leased to others was $527 million, $415 million and $314 million, respectively, and was included in "Other operating expenses" in Statement 1. Amortization of purchased intangibles is computed using the straight-line method, generally over a period of 15 years or less. Accumulated amortization was $44 million, $47 million and $32 million at December 31, 2003, 2002 and 2001, respectively.

G. Foreign currency translation

The functional currency for most of our Machinery and Engines consolidated companies is the U.S. dollar. The functional currency for most of our Financial Products and equity basis companies is the respective local currency. Gains and losses resulting from the translation of foreign currency amounts to the functional currency are included in "Other income (expense)" in Statement 1. Gains and losses resulting from translating assets and liabilities from the functional currency to U.S. dollars are included in "Accumulated other comprehensive income."

H. Derivative financial instruments

Our earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates, interest rates and commodity prices. Our Risk Management Policy (policy) allows for the use of derivative financial instruments to prudently manage foreign currency exchange rate, interest rate and commodity price exposure. Our policy specifies that derivatives are not to be used for speculative purposes. Derivatives that we use are primarily foreign currency forward and option contracts, interest rate swaps and commodity forward and option contracts. Our derivative activities are subject to the management, direction and control of our financial officers. Risk management practices, including the use of financial derivative instruments, are presented to the Audit Committee of the board of directors at least annually.

All derivatives are recognized on the financial position at their fair value. On the date the derivative contract is entered, we designate the derivative as (1) a hedge of the fair value of a recognized liability ("fair value" hedge), (2) a hedge of a forecasted transaction or the variability of cash flow to be paid ("cash flow" hedge), or (3) an "undesignated" instrument. Changes in the fair value of a derivative that is qualified, designated and highly effective as a fair value hedge, along with the gain or loss on the hedged liability that is attributable to the hedged risk, are recorded in current earnings. Changes in the fair value of a derivative that is qualified, designated and highly effective as a cash flow hedge are recorded in other comprehensive income until earnings are affected by the forecasted transaction or the variability of cash flow and are then reported in current earnings. Changes in the fair value of undesignated derivative instruments and the ineffective portion of designated derivative instruments are reported in current earnings.

We formally document all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair value hedges to specific liabilities on the balance sheet and linking cash flow hedges to specific forecasted transactions or variability of cash flow.

We also formally assess, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flow of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, we discontinue hedge accounting prospectively, in accordance with Statement of Financial Accounting Standards No. 133 (SFAS 133). Please refer to Note 2 on pages A-11 to A-12 for more information on derivatives.

I. Impairment of available-for-sale securities

Available-for-sale securities are reviewed monthly to identify market values below cost of 20% or more. If a decline for a debt security is in excess of 20% for six months, the investment is

A-9


evaluated to determine if the decline is due to general declines in the marketplace or if the investment has been impaired and should be written down to market value pursuant to Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities (SFAS 115)." After the six-month period, debt securities with declines from cost in excess of 20% are evaluated monthly for impairment. For equity securities, if a decline from cost of 20% or more continues for a 12-month period, an other than temporary impairment is recognized without continued analysis.

J. Income taxes

The provision for income taxes is determined using the asset and liability approach for accounting for income taxes. Tax laws require items to be included in tax filings at different times than the items are reflected in the financial statements. A current liability is recognized for the estimated taxes payable for the current year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. Deferred taxes are adjusted for enacted changes in tax rates and tax laws. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

K. Estimates in financial statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts. The more significant estimates include: residual values for leased assets, fair market values for goodwill impairment tests, and reserves for warranty, product liability and insurance losses, postemployment benefits, post-sale discounts, credit losses and income taxes.

L. Accounting changes

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 143 (SFAS 143), "Accounting for Asset Retirement Obligations." SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible, long-lived assets and the associated asset retirement costs. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred by capitalizing it as part of the carrying amount of the long-lived assets. As required by SFAS 143, we adopted this new accounting standard on January 1, 2003. The adoption of SFAS 143 did not have any impact on our financial statements.

In November 2002, the FASB issued Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the disclosures to be made by a guarantor about its obligations under certain guarantees. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. As required by FIN 45, on January 1, 2003, we adopted the initial recognition and measurement provisions on a prospective basis for guarantees issued or modified after December 31, 2002. The adoption of the recognition/measurement provisions did not have any impact on our financial statements.

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities—an Interpretation of ARB No. 51." FIN 46 addresses consolidation by business enterprises of variable interest entities that have certain characteristics. Transferors to qualifying special-purpose entities and "grandfathered" qualifying special-purpose entities subject to the reporting requirements of SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," are excluded from the scope of FIN 46. FIN 46 is applicable immediately to variable interest entities created or obtained after January 31, 2003 (none created or obtained in 2003). For variable interest entities, which we acquired before February 1, 2003, FIN 46 is applicable to us as of December 31, 2003. In December 2003, the FASB issued Interpretation No. 46—revised 2003 (FIN 46R). We adopted FIN 46 and FIN 46R during 2003. The adoption of these interpretations did not have a material impact on our financial statements.

In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 (SFAS 149), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS 149 amends SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" to provide clarification on the financial accounting and reporting for derivative instruments and hedging activities and requires similar accounting treatment for contracts with comparable characteristics. The adoption of SFAS 149, effective primarily for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003, had no impact on our financial statements.

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (SFAS 150), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS 150 addresses financial accounting and reporting for certain financial instruments with characteristics of both liabilities and equity. This statement requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. As required by SFAS 150, we adopted this new accounting standard effective July 1, 2003. The adoption of SFAS 150 did not have any impact on our financial statements.

In December 2003, the FASB issued Statement of Financial Accounting Standards No. 132 (revised 2003) "Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS 132 (revised 2003) retains the disclosure requirements of SFAS 132, which it replaces, and addresses the need for additional annual disclosures related to a company's pensions and other postretirement benefits. SFAS 132 (revised 2003) does not change the measurement or recognition criteria of SFAS 87, "Employers' Accounting for Pensions," SFAS 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," or SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS 132 (revised 2003) requires new annual disclosures about the types of plan assets, investment strategy, measurement date, plan obligations and cash flows related to a company's pensions and other postretirement benefits. It also requires disclosure of the components of net periodic benefit cost recognized in interim periods and, if significantly different from previously

A-10


disclosed amounts, the projected contributions to fund pension and other postretirement benefit plans. We adopted the disclosure requirements of SFAS 132 (revised 2003) in December 2003.

M. Stock based compensation

We use the intrinsic value method of accounting for stock-based employee compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." No compensation expense is recognized in association with our options. We adopted the disclosure requirements of SFAS 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," in December 2002.

Pro forma net income and earnings per share were:

 
  Years ended December 31,
 
 
  2003
  2002
  2001
 
 
  (Dollars in millions except per share data)

 
Net income, as reported   $ 1,099   $ 798   $ 805  
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects     (69 )   (65 )   (57 )
   
 
 
 
Pro forma net income   $ 1,030   $ 733   $ 748  
   
 
 
 
Profit per share of common stock:                    
  As reported:                    
    Basic   $ 3.18   $ 2.32   $ 2.35  
    Assuming dilution   $ 3.13   $ 2.30   $ 2.32  
  Pro forma:                    
    Basic   $ 2.98   $ 2.13   $ 2.18  
    Assuming dilution   $ 2.93   $ 2.13   $ 2.17  

2. Derivative financial instruments and risk management

A. Adoption of SFAS 133

We adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," and Financial Accounting Standards No. 138 effective January 1, 2001. Adoption of these new accounting standards resulted in cumulative after-tax reductions to profit and accumulated other comprehensive income of $2 million and $12 million, respectively, in the first quarter of 2001. The adoption also immaterially impacted both assets and liabilities recorded on the balance sheet. During 2002 and 2001, we reclassified $1 million and $5 million of the transition adjustment from accumulated other comprehensive income to current earnings, respectively.

B. Foreign currency exchange rate risk

Foreign currency exchange rate movements create a degree of risk by affecting the U.S. dollar value of sales made and costs incurred in foreign currencies. Movements in foreign currency rates also affect our competitive position as these changes may affect business practices and/or pricing strategies of non-U.S.-based competitors. Additionally, we have balance sheet positions denominated in foreign currency, thereby creating exposure to movements in exchange rates.

Machinery and Engines operations purchase, manufacture and sell products in many locations around the world. As we have a diversified revenue and cost base, we manage our future foreign currency cash flow exposure on a net basis. We use foreign currency forward and option contracts to manage unmatched foreign currency cash inflow and outflow. Our objective is to minimize the risk of exchange rate movements that would reduce the U.S. dollar value of our foreign currency cash flow. Our policy allows for managing anticipated foreign currency cash flow for up to four years.

We generally designate as cash flow hedges at inception of the contract any Australian dollar, Brazilian real, British pound, Canadian dollar, euro, Japanese yen, Mexican peso or Singapore dollar forward or option contracts that exceed 90 days in duration. Designation is performed on a specific exposure basis to support hedge accounting. The remainder of Machinery and Engines foreign currency contracts are undesignated.

As of December 31, 2003, $70 million of deferred net gains included in equity ("Accumulated other comprehensive income" in Statement 3), related to Machinery and Engines foreign currency contracts, is expected to be reclassified to current earnings ["Other income (expense)"] over the next twelve months. There were no circumstances where hedge treatment was discontinued during 2003, 2002 or 2001.

In managing foreign currency risk for our Financial Products operations, our objective is to minimize earnings volatility resulting from conversion and the remeasurement of net foreign currency balance sheet positions. Our policy allows the use of foreign currency forward contracts to offset the risk of currency mismatch between our receivable and debt portfolio. All such foreign currency forward contracts are undesignated.

Gains/(losses) included in current earnings [Other income (expense)]:

 
  2003
  2002
  2001
 
 
  (Millions of dollars)

 
Machinery and Engines:                    
  On undesignated contracts   $ (1 ) $   $ (2 )
  Due to changes in time and volatility value on options       $ (1 ) $  
Financial Products:                    
  On undesignated contracts   $ (121 ) $ (96 ) $ 43  
   
 
 
 
    $ (122 ) $ (97 ) $ 41  
   
 
 
 

Gains and losses on the Financial Products contracts above are substantially offset by balance sheet remeasurement and conversion gains and losses.

C. Interest rate risk

Interest rate movements create a degree of risk by affecting the amount of our interest payments and the value of our fixed rate debt. Our policy is to use interest rate swap agreements and forward rate agreements to manage our exposure to interest rate changes and lower the cost of borrowed funds.

Machinery and Engines operations generally use fixed rate debt as a source of funding. Our objective is to minimize the cost of borrowed funds. Our policy allows us to enter fixed-to-floating interest rate swaps and forward rate agreements to meet that objective with the intent to designate as fair value hedges at inception of the contract all fixed-to-floating interest rate swaps. Designation as a hedge of the fair value of our fixed rate debt is performed to support hedge accounting. During 2001, our Machinery and Engines operations liquidated all fixed-to-floating interest rate swaps. Deferred gains on liquidated fixed-to-floating interest rate swaps, which were previously designated as fair value hedges, are being amortized to earnings ratably over the remaining life of the hedged debt. We designate as cash flow hedges at inception of the contract all forward rate agreements. Designation as a hedge of the anticipated issuance of debt is performed to support hedge accounting. Machinery and Engines forward rate agreements are 100% effective.

Financial Products operations have a "match funding" objective whereby, within specified boundaries, the interest rate profile

A-11


(fixed rate or floating rate) of their debt portfolio largely matches the interest rate profile of their receivable, or asset, portfolio. In connection with that objective, we use interest rate derivative instruments to modify the debt structure to match the receivable portfolio. This "match funding" reduces the risk of deteriorating margins between interest-bearing assets and interest-bearing liabilities, regardless of which direction interest rates move. We also use these instruments to gain an economic and/or competitive advantage through a lower cost of borrowed funds. This is accomplished by changing the characteristics of existing debt instruments or entering into new agreements in combination with the issuance of new debt.

Our policy allows us to issue floating-to-fixed, fixed-to-floating and floating-to-floating interest rate swaps to meet the "match funding" objective. We designate as fair value hedges, at inception of the contract, all fixed-to-floating interest rate swaps. Designation as a hedge of the fair value of our fixed rate debt is performed to support hedge accounting. As Financial Products fixed-to-floating interest rate swaps are 100% effective, gains on designated interest rate derivatives were offset completely by losses on hedged debt. Financial Products policy is to designate as cash flow hedges, at inception of the contract, most floating-to-fixed interest rate swaps. Designation as a hedge of the variability of cash flow is performed to support hedge accounting. During the second quarter of 2002, Financial Products liquidated four fixed-to-floating interest rate swaps. Deferred gains on these swaps, which were previously designated as fair value hedges, are being amortized to earnings ratably over the remaining life of the hedged debt.

Gains (losses) included in current earnings [Other income (expense)]:

 
  2003
  2002
  2001
 
 
  (Millions of dollars)

 
Fixed-to-floating interest rate swaps                    
  Machinery and Engines:                    
    Gain/(loss) on designated interest rate derivatives   $   $   $ 23  
    Gain/(loss) on hedged debt             (18 )
    Gain/(loss) on liquidated swaps     6     8     6  
  Financial Products:                    
    Gain/(loss) on designated interest rate derivatives     (20 )   17     44  
    Gain/(loss) on hedged debt     20     (17 )   (44 )
    Gain/(loss) on liquidated swaps—included in interest expense     2     1      
Floating-to-fixed interest rate swaps                    
  Financial Products:                    
    Gain/(loss) due to ineffectiveness   $   $   $ (1 )
   
 
 
 
    $ 8   $ 9   $ 10  
   
 
 
 

As of December 31, 2003, $16 million of deferred net losses included in equity ("Accumulated other comprehensive income" in Statement 3), related to Financial Products floating-to-fixed interest rate swaps, is expected to be reclassified to current earnings ("Interest expense of Financial Products") over the next twelve months. There were no circumstances where hedge treatment was discontinued during 2003, 2002 or 2001 in either Machinery and Engines or Financial Products.

D. Commodity price risk

Commodity price movements create a degree of risk by affecting the price we must pay for certain raw material. Our policy is to use commodity forward and option contracts to manage the commodity risk and reduce the cost of purchased materials.

Our Machinery and Engines operations purchase aluminum, copper and nickel embedded in the components we purchase from suppliers. Our suppliers pass on to us price changes in the commodity portion of the component cost.

Our objective is to reduce the cost of purchased materials. Our policy allows us to enter commodity forward and option contracts to lock in the purchase price of the commodities within a four-year horizon. All such commodity forward and option contracts are undesignated. Gains/(losses) on the undesignated contracts of $27 million, $1 million and $(8) million were recorded in current earnings ["Other income (expense)"] for 2003, 2002 and 2001, respectively.

3. Other income (expense)

 
  Years ended December 31,
 
 
  2003
  2001
  2002
 
 
  (Millions of dollars)

 
Investment and interest income   $ 49   $ 31   $ 96  
Foreign exchange (losses) gains     35     13     (29 )
Charge for early retirement of debt     (55 )        
Miscellaneous income     6     25     76  
   
 
 
 
    $ 35   $ 69   $ 143  
   
 
 
 

4. Income taxes

The components of profit before taxes were:

 
  Years ended December 31,
 
  2003
  2001
  2002
 
  (Millions of dollars)

U.S.   $ 489   $ 343   $ 741
Non-U.S.     988     771     428
   
 
 
    $ 1,477   $ 1,114   $ 1,169
   
 
 

Profit before taxes, as shown above, is based on the location of the entity to which such earnings are attributable. However, since such earnings are subject to taxation in more than one country, the income tax provision shown below as U.S. or non-U.S. may not correspond to the earnings shown above.

The components of the provision for income taxes were:

 
  Years ended December 31,
 
 
  2003
  2002
  2001
 
 
  (Millions of dollars)

 
Current tax provision:                    
  U.S. Federal   $ 24   $ (62 ) $ 150  
  Non-U.S.     196     210     174  
  State (U.S.)     10     1     11  
   
 
 
 
    $ 230   $ 149   $ 335  
   
 
 
 
Deferred tax provision (credit):                    
  U.S. Federal     182     172     65  
  Non-U.S.     (21 )   (20 )   (34 )
  State (U.S.)     7     11     1  
   
 
 
 
      168     163     32  
   
 
 
 
Total provision for income taxes   $ 398   $ 312   $ 367  
   
 
 
 

Reconciliation of the U.S. federal statutory rate to effective rate:

 
  Years ended December 31,
 
 
  2003
  2002
  2001
 
U.S. statutory rate   35.0 % 35.0 % 35.0 %
(Decreases) increases in taxes resulting from:              
  Benefit of foreign sales corporation/extraterritorial income exclusion   (4.9 )% (4.4 )% (4.9 )%
  Non-U.S. subsidiaries taxed at other than 35%   (4.0 )% (3.4 )% (0.1 )%
  Other—net   0.9 % 0.8 % 1.4 %
   
 
 
 
Provision for income taxes   27.0 % 28.0 % 31.4 %
   
 
 
 

A-12


We paid income taxes of $55 million, $124 million and $379 million in 2003, 2002 and 2001, respectively.

We have recorded income tax expense at U.S. tax rates on all profits, except for undistributed profits of non-U.S. companies which are considered permanently invested. Determination of the amount of unrecognized deferred tax liability related to permanently invested profits is not feasible.

Certain subsidiaries operating in China qualify for holidays from income tax, which consist of a two-year full exemption from tax followed by a three-year 50% reduction in the applicable tax rate. The tax holiday begins the first year the subsidiary generates taxable income after utilization of any carryforward losses. The dollar effect in 2003 was $10 million or $.03 per share.

Deferred income tax assets and liabilities:

 
  December 31,
 
 
  2003
  2002
  2001
 
 
  (Millions of dollars)

 
Deferred income tax assets:                    
  Postemployment benefits other than pensions   $ 1,147   $ 1,130   $ 1,112  
  Warranty reserves     163     204     186  
  Unrealized profit excluded from inventories     242     219     212  
  Tax carryforwards     370     230     130  
  Inventory valuation method     37     60     50  
  Pension         39      
  Other     133     128     275  
   
 
 
 
      2,092     2,010     1,965  
   
 
 
 
Deferred income tax liabilities:                    
  Capital assets     (673 )   (538 )   (437 )
  Pension     (102 )       (182 )
   
 
 
 
      (775 )   (538 )   (619 )
   
 
 
 
Valuation allowance for deferred tax assets     (37 )   (34 )   (27 )
   
 
 
 
Deferred income taxes—net   $ 1,280   $ 1,438   $ 1,319  
   
 
 
 

SFAS 109 requires that individual tax-paying entities of the company offset all current deferred tax liabilities and assets within each particular tax jurisdiction and present them as a single amount in the Statement of Financial Position. A similar procedure is followed for all noncurrent deferred tax liabilities and assets. Amounts in different tax jurisdictions cannot be offset against each other. The amount of deferred income taxes at December 31, included on the following lines in Statement 3, are as follows:

 
  2003
  2002
  2001
 
  (Millions of dollars)

Assets:                  
  Deferred and refundable income taxes   $ 702   $ 777   $ 434
  Deferred income taxes     616     711     927
   
 
 
    $ 1,318   $ 1,488   $ 1,361
Liabilities:                  
  Deferred and current income taxes payable   $ 18   $ 8   $ 6
  Deferred income taxes and other liabilities     20     42     36
   
 
 
Deferred income taxes—net   $ 1,280   $ 1,438   $ 1,319
   
 
 

A valuation allowance has been recorded at certain non-U.S. subsidiaries that have not yet demonstrated consistent and/or sustainable profitability to support the recognition of net deferred tax assets.

As of December 31, 2003, amounts and expiration dates of net operating loss carryforwards in various non-U.S. taxing jurisdictions were:

2004
  2005
  2006
  2007
  2008-2014
  Unlimited
  Total
(Millions of dollars)

$ 7   $ 9   $ 8   $ 13   $ 123   $ 528   $ 688

As of December 31, 2003, approximately $365 million of state tax net operating loss carryforwards were available. Of these, 82% expire after 2014.

As of December 31, 2003, approximately $148 million of regular foreign tax credits and $18 million of credit for increasing research activities were available to carry forward in the United States. Of the foreign tax credits, $108 million will expire in 2008, and $40 million will expire in 2009. The research credits will begin to expire in 2023.

5. Finance receivables

Finance receivables are receivables of Cat Financial, which generally can be repaid or refinanced without penalty prior to contractual maturity. Total finance receivables reported in Statement 3 are net of an allowance for credit losses. The average interest rate on these receivables was 6.3%, 7.1% and 8.7% for 2003, 2002 and 2001, respectively.

Caterpillar Inc. utilizes inventory merchandising programs for its North American dealers. Certain dealer receivables, which arise from the sale of goods, are sold to Cat Financial. Some of these receivables are then securitized by Cat Financial into private-placement, revolving securitization facilities. Cat Financial services the dealer receivables, which are held in a securitization trust and receives an annual servicing fee of 1% of the average outstanding principal balance. Securitization of receivables is a cost-effective means of financing the business. Consolidated net discounts of $6 million, $10 million and $24 million were recognized on securitization of dealer receivables during 2003, 2002 and 2001, respectively, and are included in "Other income (expense)" in Statement 1. Significant assumptions used to estimate the fair value of dealer receivables securitized during 2003, 2002 and 2001 include a discount rate of 4.1%, 4.8% and 7.2%, respectively. These rates reflect declining market interest rates. Other assumptions include a one-month weighted-average maturity, a weighted-average prepayment rate of 0% and expected credit losses of 0% for 2003, 2002 and 2001. Expected credit losses are assumed to be 0% because dealer receivables have historically had no losses and none are expected in the future. The net dealer receivables retained were $1,550 million, $1,145 million and $772 million as of December 31, 2003, 2002 and 2001, respectively, and are included in "Receivables—finance" in Statement 3 and "Wholesale Notes" in Table I on page A-14.

During 2003, 2002 and 2001, Cat Financial securitized retail installment sale contracts and finance leases into public asset-backed securitization facilities. These finance receivables, which are being held in securitization trusts, are secured by new and used equipment. Cat Financial retained servicing responsibilities and subordinated interests related to these securitizations. For 2003, subordinated interests included $9 million in subordinated certificates, an interest in certain future cash flow (excess) with an initial fair value of $14 million and a reserve account with an initial fair value of $10 million. For 2002, subordinated interests included $8 million in subordinated certificates, an interest in certain future cash flow (excess) with an initial fair value of $11 million and a reserve account with an initial fair value of $10 million. For 2001, subordinated interests included $10 million in subordinated certificates, an interest in certain future cash flow (excess) with an initial fair value of $20 million and a reserve account with an initial fair value of $5 million. The company's retained interests

A-13


generally are subordinate to the investors' interests. Net gains of $22 million, $18 million and $21 million were recognized on these transactions in 2003, 2002 and 2001, respectively.

Significant assumptions used to estimate the fair value of the subordinated certificates were:

 
  2003
  2002
  2001
 
Discount rate   5.0 % 4.8 % 6.3 %
Weighted-average prepayment rate   14.0 % 14.0 % 14.0 %
Expected credit losses   1.0 % 1.0 % 0.6 %

Significant assumptions used to estimate the fair value of the excess and the reserve accounts were:

 
  2003
  2002
  2001
 
Discount rate   14.0 % 14.0 % 13.6 %
Weighted-average prepayment rate   14.0 % 14.0 % 14.0 %
Expected credit losses   1.0 % 1.0 % 0.6 %

The company receives annual servicing fees of approximately 1% of the unpaid note value.

As of December 31, 2003, 2002 and 2001, the subordinated retained interests in the public securitizations totaled $73 million, $47 million and $51 million, respectively. Key assumptions used to determine the fair value of the retained interests were:

 
  2003
  2002
  2001
 
Cash flow discount rates on subordinated tranches   4.8-6.3 % 4.8-6.3 % 6.3-6.9 %
Cash flow discount rates on other retained interests   13.6-14.0 % 13.6-14.0 % 13.6 %
Weighted-average maturity   27 months   29 months   27 months  
Average prepayment rate   14.0 % 14.0 % 14.0 %
Expected credit losses   1.0 % 1.0 % 0.5 %

The investors and the securitization trusts have no recourse to Cat Financial's other assets for failure of debtors to pay when due.

TABLE I—Finance Receivables Information (Millions of dollars)

Contractual maturities of outstanding receivables:

 
  December 31, 2003
Amounts Due In

  Installment
Contracts

  Wholesale
and Retail
Finance
Leases

  Wholesale
and Retail
Notes

  Total
2004   $ 1,848   $ 1,664   $ 3,704   $ 7,216
2005     1,310     1,136     918     3,364
2006     818     683     567     2,068
2007     399     345     303     1,047
2008     157     159     517     833
Thereafter     44     174     784     1,002
   
 
 
 
      4,576     4,161     6,793     15,530
Residual value         932         932
Less: Unearned income     287     467     40     794
   
 
 
 
Total   $ 4,289   $ 4,626   $ 6,753   $ 15,668
   
 
 
 

Impaired loans and leases:

 
  2003
  2002
  2001
Average recorded investment   $ 321   $ 292   $ 323
   
 
 
At December 31:                  
  Recorded investment   $ 275   $ 366   $ 259
  Less: Impaired loans/finance leases for which there is no related allowance for credit losses (due to the fair value of underlying collateral)     177     233     167
   
 
 
Impaired loans/finance leases for which there is a related allowance for credit losses   $ 98   $ 133   $ 92
   
 
 

Allowance for credit loss activity:

 
  2003
  2002
  2001
 
Balance at beginning of year   $ 207   $ 177   $ 163  
Provision for credit losses     101     109     97  
Receivables written off     (104 )   (103 )   (82 )
Recoveries on receivables previously written off     22     18     10  
Other—net     15     6     (11 )
   
 
 
 
Balance at end of year   $ 241   $ 207   $ 177  
   
 
 
 

In estimating the allowance for credit losses, we review accounts that are past due, non-performing or in bankruptcy.

Cat Financial's net investment in financing leases:

 
  December 31,
 
  2003
  2002
  2001
Total minimum lease payments receivable   $ 4,161   $ 3,794   $ 3,607
Estimated residual value of leased assets:                  
  Guaranteed     369     306     272
  Unguaranteed     563     604     682
   
 
 
      5,093     4,704     4,561
Less: Unearned income     467     479     514
   
 
 
Net investment in financing leases   $ 4,626   $ 4,225   $ 4,047
   
 
 
 
  2003
  2002
  2001
 
  Dealer
Receivables

  Finance
Receivables

  Dealer
Receivables

  Finance
Receivables

  Dealer
Receivables

  Finance
Receivables

Cash flow from securitizations:                                    
Proceeds from initial sales of receivables   $   $ 661   $   $ 614   $   $ 600
Proceeds from subsequent sales of receivables into revolving facility     1,099         1,696         2,479    
Servicing fees received     2     8     3     7     5     6

Characteristics of securitized receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
At December 31:                                    
  Total securitized principal balance   $ 240   $ 813   $ 240   $ 726   $ 500   $ 616
  Loans more than 30 days past due         34         32         31
  Weighted average maturity (in months)     1     27     1     28     1     26
For the year ended December 31:                                    
  Average securitized principal balance     240     1,073     324     619     504     836
  Net credit losses         6         5         3

A-14


We estimated the impact of individual 10% and 20% changes to the key economic assumptions used to determine the fair value of residual cash flow in retained interests on our income. An independent, adverse change to each key assumption had an immaterial impact on the fair value of residual cash flow.

The securitization facilities involved in Cat Financial's securitizations are qualifying special purpose entities and thus, in accordance with Statement of Financial Standards No. 140 (SFAS 140), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," are not consolidated.

We consider an account past due if any portion of an installment is due and unpaid for more than 30 days. Recognition of income is suspended when management determines that collection of future income is not probable (generally after 120 days past due). Accrual is resumed, and previously suspended income is recognized, when the receivable becomes contractually current and/or collection doubts are removed. Investment in loans/finance leases on non-accrual status were $233 million and $370 million and past due over 90 days and still accruing were $25 million and $72 million as of December 31, 2003 and 2002, respectively.

Cat Financial provides financing only when acceptable criteria are met. Credit decisions are based on, among other things, the customer's credit history, financial strength and intended use of equipment. Cat Financial typically maintains a security interest in retail financed equipment and requires physical damage insurance coverage on financed equipment.

Please refer to Table I on page A-14 for additional finance receivables information and Note 17 and Table III on pages A-22 to A-23 for fair value information.

6. Inventories

 
  December 31,
 
  2003
  2002
  2001
 
  (Millions of dollars)

Raw materials   $ 1,105   $ 900   $ 954
Work-in-process     377     311     214
Finished goods     1,381     1,365     1,575
Supplies     184     187     182
   
 
 
    $ 3,047   $ 2,763   $ 2,925
   
 
 

We had long-term material purchase obligations of approximately $857 million at December 31, 2003.

7. Property, plant and equipment

 
   
  December 31,
 
  Useful
Lives
(Years)

 
  2003
  2002
  2001
 
   
  (Dollars in millions)

Land     $ 149   $ 149   $ 149
Buildings and land improvements   20-45     3,006     3,039     3,077
Machinery, equipment and other   3-10     7,039     7,015     6,658
Equipment leased to others       3,648     3,033     2,270
Construction-in-process       487     305     636
       
 
 
Total property, plant and equipment, at cost         14,329     13,541     12,790
Less: Accumulated depreciation         7,039     6,495     6,187
       
 
 
Property, plant and equipment—net       $ 7,290   $ 7,046   $ 6,603
       
 
 

We had commitments for the purchase or construction of capital assets of approximately $218 million at December 31, 2003.

Assets recorded under capital leases(1):

 
  December 31,
 
  2003
  2002
  2001
 
  (Millions of dollars)

Gross capital leases(2)   $ 321   $ 259   $ 444
Less: Accumulated depreciation     213     170     318
   
 
 
Net capital leases   $ 108   $ 89   $ 126
   
 
 
(1)
Included in Property, plant and equipment table above.

(2)
Consists primarily of machinery and equipment.

Equipment leased to others (primarily by Financial Products):

 
  December 31,
 
  2003
  2002
  2001
 
  (Millions of dollars)

Equipment leased to others—at original cost   $ 3,648   $ 3,033   $ 2,270
Less: Accumulated depreciation     1,074     809     629
   
 
 
Equipment leased to others—net   $ 2,574   $ 2,224   $ 1,641
   
 
 

At December 31, 2003, scheduled minimum rental payments to be received for equipment leased to others were:

2004
  2005
  2006
  2007
  2008
  After
2008

(Millions of dollars)

$ 565   $ 398   $ 237   $ 116   $ 47   $ 22

8. Investment in unconsolidated affiliated companies

The company's investment in affiliated companies accounted for by the equity method consists primarily of a 50% interest in Shin Caterpillar Mitsubishi Ltd. (SCM) located in Japan. Combined financial information of the unconsolidated affiliated companies accounted for by the equity method (generally on a three-month lag, e.g., SCM results reflect the periods ending September 30) was as follows:

 
  Years ended December 31,
 
  2003
  2002
  2001
 
  (Millions of dollars)

Results of Operations:                  
  Sales   $ 2,946   $ 2,734   $ 2,493
  Cost of sales     2,283     2,168     1,971
   
 
 
  Gross profit     663     566     522
  Profit (loss)   $ 48   $ (1 ) $ 9
   
 
 
  Caterpillar's profit (loss)   $ 20   $ (4 ) $ 3
   
 
 
 
    
December 31,

 
  2003
  2002
  2001
 
  (Millions of dollars)

Financial Position:                  
  Assets:                  
    Current assets   $ 1,494   $ 1,389   $ 1,451
    Property, plant and equipment—net     961     1,209     986
    Other assets     202     493     290
   
 
 
      2,657     3,091     2,727
   
 
 
  Liabilities:                  
    Current liabilities   $ 1,247   $ 1,117   $ 1,257
    Long-term debt due after one year     343     808     414
    Other liabilities     257     249     281
   
 
 
      1,847     2,174     1,952
   
 
 
  Ownership   $ 810   $ 917   $ 775
   
 
 

Caterpillar's investment in unconsolidated affiliated companies:

Investment in equity method companies   $ 432   $ 437   $ 437
Plus: Investment in cost method companies     368     310     350
   
 
 
Investment in unconsolidated affiliated companies   $ 800   $ 747   $ 787
   
 
 

A-15


At December 31, 2003, consolidated "Profit employed in the business" in Statement 2 included $70 million representing undistributed profit of the unconsolidated affiliated companies. In 2003, 2002 and 2001, we received $25 million, $4 million and $4 million, respectively, in dividends from unconsolidated affiliated companies.

Certain investments in unconsolidated affiliated companies are accounted for using the cost method. During first quarter 2001, Cat Financial invested for a limited partnership interest in a venture financing structure associated with Caterpillar's rental strategy in the United Kingdom.

9. Intangible assets and goodwill

In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Other Intangible Assets." SFAS 142 addresses financial accounting and reporting for intangible assets and goodwill. The Statement requires that goodwill and intangible assets having indefinite useful lives not be amortized, but rather be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives. As required by SFAS 142, we adopted this new accounting standard on January 1, 2002. Upon adoption, we performed the required transitional impairment tests of goodwill and indefinite-lived intangible assets. Application of the transitional impairment provisions of SFAS 142 did not result in an impairment loss.

Intangible assets

 
  2003
  2002
 
 
  (Millions of dollars)

 
Intellectual property   $ 126   $ 137  
Pension-related     157     191  
   
 
 
Total intangible assets—gross     283     328  
Less: Accumulated amortization of intellectual property     (44 )   (47 )
   
 
 
Intangible assets—net   $ 239   $ 281  
   
 
 

Amortization expense was $15 million and $13 million for 2003 and 2002, respectively.

Amortization expense related to intangible assets is expected to be:

2004
  2005
  2006
  2007
  2008
  Thereafter
(Millions of dollars)

$ 15   $ 14   $ 13   $ 12   $ 8   $ 20

During the years ended December 31, 2003 and 2002, no goodwill was acquired or impaired. During the year ended December 31, 2003, we disposed of assets with related goodwill of $3 million. No goodwill was disposed of during 2002. Goodwill amortization expense was $85 million for 2001. Excluding goodwill amortization expense, profit for 2001 was $863 million ($2.51 per share-basic, $2.49 per share-diluted).

10. Available-for-sale securities

Cat Insurance and Caterpillar Investment Management Ltd. had investments in certain debt and equity securities at December 31, 2003, 2002 and 2001, that have been classified as available-for-sale in accordance with Statement of Financial Accounting Standards No. 115 (SFAS 115) and recorded at fair value based upon quoted market prices. These fair values are included in "Other assets" in Statement 3. Gains and losses arising from the revaluation of available-for-sale securities are included, net of applicable deferred income taxes, in equity ("Accumulated other comprehensive income" in Statement 3). Realized gains and losses on sales of investments are determined using the average cost method for debt instruments and the FIFO method for equity securities.

 
  December 31, 2003
 
  Cost
Basis

  Pre-Tax Net
Gains (Losses)

  Fair
Value

 
  (Millions of dollars)

Government debt   $ 102   $   $ 102
Corporate bonds     288     3     291
Equity securities     191     21     212
   
 
 
    $ 581   $ 24   $ 605
   
 
 
 
    
December 31, 2002

 
  Cost
Basis

  Pre-Tax Net
Gains (Losses)

  Fair
Value

 
  (Millions of dollars)

Government debt   $ 89   $   $ 89
Corporate bonds     208     1     209
Equity securities     220     (51 )   169
   
 
 
    $ 517   $ (50 ) $ 467
   
 
 
 
    
December 31, 2001

 
  Cost
Basis

  Pre-Tax Net
Gains (Losses)

  Fair
Value

 
  (Millions of dollars)

Government debt   $ 80   $   $ 80
Corporate bonds     157     1     158
Equity securities     200     (40 )   160
   
 
 
    $ 437   $ (39 ) $ 398
   
 
 

Investments in an unrealized loss position that are not other-than-temporarily impaired

 
  December 31, 2003
 
 
  Less than
12 months(1)

  More than
12 months(1)

  Total
 
 
  Fair
Value

  Unrealized
Losses

  Fair
Value

  Unrealized
Losses

  Fair
Value

  Unrealized
Losses

 
 
  (Millions of dollars)

 
Corporate bonds     93     (2 )   13     (1 )   106     (3 )
Equity securities             25     (1 )   25     (1 )
   
 
 
 
 
 
 
  Total   $ 93   $ (2 ) $ 38   $ (2 ) $ 131   $ (4 )
   
 
 
 
 
 
 
(1)
Indicates length of time that individual securities have been in a continuous unrealized loss position.

The fair value of available-for-sale debt securities at December 31, 2003, by contractual maturity, is shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations.

 
  Fair
Value

 
  (Millions of dollars)

Due in one year or less   $ 7
Due after one year through five years   $ 229
Due after five years through ten years   $ 14
Due after ten years   $ 143

Proceeds from sales of investments in debt and equity securities during 2003, 2002 and 2001 were $329 million, $288 million and $246 million, respectively. Gross gains of $3 million, $9 million and $2 million and gross losses of $2 million, $2 million and $5 million have been included in current earnings as a result of these sales for 2003, 2002 and 2001, respectively.

During 2003 and 2002, we recognized pretax charges in accordance with the application of SFAS 115 for "other than temporary" declines in the market value of securities in the Cat Insurance and Caterpillar Investment Management Ltd. investment portfolios of $33 million and $41 million, respectively.

A-16


11. Postemployment benefit plans

We have both U.S. and non-U.S. pension plans covering substantially all of our employees. Our defined benefit plans provide a benefit based on years of service and/or the employee's average earnings near retirement. Our defined contribution plans allow employees to contribute a portion of their salary to help save for retirement and, in certain cases, we provide a matching contribution.

We also have defined benefit retirement health care and life insurance plans covering substantially all of our U.S. employees. Plan amendments made in 2002 included an increase in retiree cost sharing of health care benefits, elimination of company payments for Medicare part B premiums and significant reductions in retiree life insurance.

Our U.S. postretirement health care plans provide for prescription drug benefits. On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. The Act introduces a prescription drug benefit under Medicare (Medicare part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare part D. In accordance with FASB Staff Position FAS 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" any measures of our accumulated postretirement benefit obligation or net periodic postretirement benefit cost in the financial statements and accompanying notes do not reflect the effects of the Act on the plans. Specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, could require us to change previously reported information.

We use a November 30th measurement date for our U.S. pension and other postretirement benefit plans and a September 30th measurement date for substantially all of our non-U.S. pension plans. Year-end asset and obligation amounts are disclosed as of the plan measurement dates.

A. Benefit obligations

 
  U.S. Pension Benefits
  Non-U.S. Pension Benefits
  Other Postretirement Benefits
 
 
  2003
  2002
  2001
  2003
  2002
  2001
  2003
  2002
  2001
 
 
  (Millions of dollars)

 
Change in benefit obligation:                                                        
  Benefit obligation, beginning of year   $ 7,844   $ 7,382   $ 6,921   $ 1,517   $ 1,229   $ 1,168   $ 4,465   $ 4,514   $ 3,869  
  Service cost     122     115     99     43     38     35     70     80     72  
  Interest cost     554     529     516     83     70     65     298     292     289  
  Business combinations                         2              
  Plan amendments     (27 )       2             2     (6 )   (474 )   16  
  Actuarial losses (gains)     1,148     395     389     118     135     (17 )   474     340     528  
  Foreign currency exchange rates                 137     100     21     4     2     2  
  Participant contributions                 10     10     9     25     5     4  
  Benefits paid     (648 )   (611 )   (545 )   (72 )   (65 )   (56 )   (326 )   (294 )   (266 )
  Special termination benefits(1)         34                              
   
 
 
 
 
 
 
 
 
 
  Benefit obligation, end of year   $ 8,993   $ 7,844   $ 7,382   $ 1,836   $ 1,517   $ 1,229   $ 5,004   $ 4,465   $ 4,514  
   
 
 
 
 
 
 
 
 
 
  Accumulated benefit obligation, end of year   $ 8,379   $ 7,482   $ 7,079   $ 1,660   $ 1,355   $ 1,107                    
   
 
 
 
 
 
                   
Weighted-average assumptions used to determine benefit obligations, end of year:                                                        
  Discount rate(2)     6.2 %   7.0 %   7.3 %   5.1 %   5.4 %   5.7 %   6.1 %   7.0 %   7.2 %
  Rate of compensation increase(2)     4.0 %   4.0 %   4.0 %   3.2 %   3.3 %   3.3 %   4.0 %   4.0 %   4.0 %
(1)
Amount recognized as expense in 2001 in conjunction with the U.S. salaried and management employee reduction. Please refer to Note 23 on page A-31 for additional information.

(2)
End of year rates are used to determine net periodic cost for the subsequent year. See Note 11E on page A-19.

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:

 
  One-percentage-
point increase

  One-percentage-
point decrease

 
 
  (Millions of dollars)

 
Effect on 2003 service and interest cost components of other postretirement benefit cost   $ 24   $ (22 )
Effect on accumulated postretirement benefit obligation   $ 251   $ (224 )

B. Plan assets

 
  U.S. Pension Benefits
  Non-U.S. Pension Benefits
  Other Postretirement Benefits
 
 
  2003
  2002
  2001
  2003
  2002
  2001
  2003
  2002
  2001
 
 
  (Millions of dollars)

 
Change in plan assets:                                                        
  Fair value of plan assets, beginning of year   $ 6,443   $ 7,431   $ 8,203   $ 1,024   $ 1,050   $ 1,287   $ 849   $ 1,109   $ 1,324  
  Actual return on plan assets     1,290     (512 )   (230 )   120     (87 )   (217 )   140     (113 )   (71 )
  Business combinations                         2              
  Foreign currency exchange rates                 96     72     12              
  Company contributions     643     135     3     84     44     13     179     142     118  
  Participant contributions                 10     10     9     25     5     4  
  Benefits paid     (648 )   (611 )   (545 )   (72 )   (65 )   (56 )   (326 )   (294 )   (266 )
   
 
 
 
 
 
 
 
 
 
  Fair value of plan assets, end of year   $ 7,728   $ 6,443   $ 7,431   $ 1,262   $ 1,024   $ 1,050   $ 867   $ 849   $ 1,109  
   
 
 
 
 
 
 
 
 
 

A-17


The asset allocation for our pension and other postretirement benefit plans at the end of 2003, 2002 and 2001, and the target allocation for 2004, by asset category, are as follows:

 
  Target
Allocation

  Percentage of Plan Assets
at Year End

 
 
  2004
  2003
  2002
  2001
 
U.S. pension:                  
  Equity securities   70 % 75 % 70 % 72 %
  Debt securities   30 % 25 % 29 % 27 %
  Real estate       1 % 1 %
   
 
 
 
 
  Total   100 % 100 % 100 % 100 %
   
 
 
 
 
Non-U.S. pension:                  
  Equity securities   56 % 56 % 54 % 60 %
  Debt securities   38 % 39 % 41 % 36 %
  Real estate   6 % 4 % 3 % 3 %
  Other     1 % 2 % 1 %
   
 
 
 
 
  Total   100 % 100 % 100 % 100 %
   
 
 
 
 
Other postretirement benefits:                  
  Equity securities   80 % 84 % 79 % 79 %
  Debt securities   20 % 16 % 21 % 21 %
   
 
 
 
 
  Total   100 % 100 % 100 % 100 %
   
 
 
 
 

Our target asset allocations reflect our investment strategy of maximizing the rate of return on plan assets and the resulting funded status, within an appropriate level of risk. The U.S. plans are rebalanced to plus or minus five percentage points of the target asset allocation ranges on a monthly basis. The frequency of rebalancing for the non-U.S. plans varies depending on the plan.

Equity securities within plan assets include Caterpillar Inc. common stock in the amounts of:

 
  U.S. Pension Benefits(1)
  Other Postretirement Benefits
 
  2003
  2002
  2001
  2003
  2002
  2001
 
  (Millions of dollars)

Caterpillar Inc. common stock   $ 245   $ 154   $ 153   $ 2   $ 1   $ 4
   
 
 
 
 
 
(1)
Amounts represent 3% of total plan assets for 2003 and 2% for 2002 and 2001.

C. Funded status

The funded status of the plans, reconciled to the amount reported on the Statement of Financial Position, is as follows:

 
  U.S. Pension Benefits
  Non-U.S. Pension Benefits
  Other Postretirement Benefits
 
End of Year

 
  2003
  2002
  2001
  2003
  2002
  2001
  2003
  2002
  2001
 
 
  (Millions of dollars)

 
Fair value of plan assets   $ 7,728   $ 6,443   $ 7,431   $ 1,262   $ 1,024   $ 1,050   $ 867   $ 849   $ 1,109  
Benefit obligations     8,993     7,844     7,382     1,836     1,517     1,229     5,004     4,465     4,514  
Over (under) funded status     (1,265 )   (1,401 )   49     (574 )   (493 )   (179 )   (4,137 )   (3,616 )   (3,405 )
Amounts not yet recognized:                                                        
  Unrecognized prior service cost (benefit)     202     278     327     31     33     36     (280 )   (283 )   167  
  Unrecognized net actuarial loss     2,518     2,009     318     677     547     198     1,381     976     413  
  Unrecognized net obligation existing at adoption of SFAS 87                 6     9     7              
  Contributions made after measurement date     1             14     22     4     57     20     17  
   
 
 
 
 
 
 
 
 
 
Net amount recognized in financial position   $ 1,456   $ 886   $ 694   $ 154   $ 118   $ 66   $ (2,979 ) $ (2,903 ) $ (2,808 )
   
 
 
 
 
 
 
 
 
 

Components of net amount recognized in financial position:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Prepaid benefit costs   $ 1,136   $ 1,071   $ 953   $ 61   $ 52   $ 34   $   $   $  
Accrued benefit liabilities     (548 )   (735 )   (349 )   (127 )   (89 )   (61 )   (2,979 )   (2,903 )   (2,808 )
Intangible assets     127     156     185     30     35     25              
Liability for postemployment benefits     (136 )   (361 )   (233 )   (327 )   (279 )   (37 )            
Accumulated other comprehensive income (pretax)     877     755     138     517     399     105              
   
 
 
 
 
 
 
 
 
 
Net asset (liability) recognized   $ 1,456   $ 886   $ 694   $ 154   $ 118   $ 66   $ (2,979 ) $ (2,903 ) $ (2,808 )
   
 
 
 
 
 
 
 
 
 

A-18


The following amounts relate to our pension plans with projected benefit obligations in excess of plan assets:

 
  U.S. Pension Benefits
  Non-U.S. Pension Benefits
 
 
  at Year-end
  at Year-end
 
 
  2003
  2002
  2001
  2003
  2002
  2001
 
 
  (Millions of dollars)

 
Projected benefit obligation   $ (8,993 ) $ (7,844 ) $ (3,311 ) $ (1,800 ) $ (1,497 ) $ (1,211 )
Accumulated benefit obligation   $ (8,379 ) $ (7,482 ) $ (3,289 ) $ (1,633 ) $ (1,338 ) $ (1,093 )
Fair value of plan assets   $ 7,728   $ 6,443   $ 2,743   $ 1,216   $ 995   $ 1,021  

The following amounts relate to our pension plans with accumulated benefit obligations in excess of plan assets:

 
  U.S. Pension Benefits
  Non-U.S. Pension Benefits
 
 
  at Year-end
  at Year-end
 
 
  2003
  2002
  2001
  2003
  2002
  2001
 
 
  (Millions of dollars)

 
Projected benefit obligation   $ (3,785 ) $ (3,439 ) $ (3,011 ) $ (1,761 ) $ (1,490 ) $ (1,203 )
Accumulated benefit obligation   $ (3,751 ) $ (3,416 ) $ (3,010 ) $ (1,601 ) $ (1,334 ) $ (1,088 )
Fair value of plan assets   $ 3,083   $ 2,345   $ 2,462   $ 1,181   $ 990   $ 1,015  

The accumulated postretirement benefit obligation exceeds plan assets for all of our other postretirement benefit plans.

D. Expected cash flow

Information about the expected cash flow for the pension and other postretirement benefit plans follows:

 
  U.S. Pension
Benefits

  Non-U.S. Pension
Benefits

  Other Postretirement
Benefits

 
  (Millions of dollars)

Employer contributions:                  
  2004 (expected)   $ 500   $ 90   $ 340
Expected benefit payments:                  
  2004     630     60     340
  2005     640     60     350
  2006     650     70     360
  2007     650     70     370
  2008     660     70     380
  2009-2013     3,400     400     1,920
   
 
 
Total   $ 6,630   $ 730   $ 3,720
   
 
 

The above table reflects the total benefits expected to be paid from the plan or from company assets and does not include the participants' share of the cost.

E. Net periodic cost

 
  U.S. Pension Benefits
  Non-U.S. Pension Benefits
  Other Postretirement Benefits
 
 
  2003
  2002
  2001
  2003
  2002
  2001
  2003
  2002
  2001
 
 
  (Millions of dollars)

 
Components of net periodic benefit cost:                                                        
  Service cost   $ 122   $ 115   $ 99   $ 43   $ 38   $ 35   $ 70   $ 80   $ 72  
  Interest cost     554     529     516     83     70     65     298     292     289  
  Expected return on plan assets     (680 )   (783 )   (806 )   (94 )   (94 )   (90 )   (88 )   (115 )   (136 )
  Amortization of:                                                        
    Net asset existing at adoption of SFAS 87                 3     (2 )   (1 )            
    Prior service cost(1)     49     50     49     5     5     5     (47 )   (22 )   21  
    Net actuarial loss (gain)     27     (1 )   (34 )   14         (1 )   36     5     (9 )
   
 
 
 
 
 
 
 
 
 
  Total cost (benefit) included in results of operations   $ 72   $ (90 ) $ (176 ) $ 54   $ 17   $ 13   $ 269   $ 240   $ 237  
   
 
 
 
 
 
 
 
 
 
Weighted-average assumptions used to determine net cost:                                                        
  Discount rate     7.0 %   7.3 %   7.8 %   5.4 %   5.7 %   5.9 %   7.0 %   7.2 %   7.8 %
  Expected return on plan assets(2)     9.0 %   9.8 %   10.0 %   7.1 %   7.6 %   7.6 %   9.0 %   9.8 %   10.0 %
  Rate of compensation increase     4.0 %   4.0 %   4.0 %   3.3 %   3.3 %   3.7 %   4.0 %   4.0 %   4.0 %
(1)
Prior service costs are amortized using the straight-line method over the average remaining service period to the full retirement eligibility date of employees expected to receive benefits from the plan amendment.

(2)
The weighted-average rates for 2004 are 9.0% and 7.4% for U.S. and non-U.S. plans, respectively.

A-19


Our U.S. expected long-term rate of return on plan assets is based on our estimate of long-term passive returns for equities and fixed income securities weighted by the allocation of our pension assets. Based on historical performance, we increase the passive returns due to our active management of the plan assets. To arrive at our expected long-term return, the amount added for active management was 1% for 2003, 2002 and 2001. A similar process is used to determine this rate for our non-U.S. plans.

The assumed health care trend rate represents the rate at which health care costs are assumed to increase. To calculate the 2003 benefit expense, we assumed an increase of 9.0% for 2003. This rate was assumed to decrease gradually to the ultimate health care trend rate of 4.5% in 2009. This rate represents 2.5% general inflation plus 2.0% additional health care inflation. Based on our recent expenses and our forecast of changes, we expect an increase of 8.5% during 2004 with no change to the ultimate trend rate.

F. Other postemployment benefit plans

We offer long-term disability benefits, continued health care for disabled employees, survivor income benefits insurance and supplemental unemployment benefits to substantially all eligible U.S. employees.

G. Summary of long-term liability:

 
  December 31,
 
  2003
  2002
  2001
 
  (Millions of dollars)

Pensions:                  
  U.S. pensions   $ 136   $ 361   $ 233
  Non-U.S. pensions     327     279     37
   
 
 
Total pensions     463     640     270
Postretirement benefits other than pensions     2,638     2,614     2,578
Other postemployment benefits     71     79     72
   
 
 
    $ 3,172   $ 3,333   $ 2,920
   
 
 

H. Defined contribution plans

We have both U.S. and non-U.S. employee defined contribution plans to help employees save for retirement. In January 2003, we introduced a company match to our U.S. 401(k) plan. This plan allows eligible employees to contribute a portion of their salary to the plan on a tax-deferred basis, and we provide a matching contribution equal to 100% of employee contributions to the plan up to 6% of their compensation.

Various other U.S. and non-U.S. defined contribution plans allow eligible employees to contribute a portion of their salary to the plans and, in some cases, we provide a matching contribution to the funds.

Total company costs related to U.S. and non-U.S. defined contribution plans were the following:

 
  2003
  2002
  2001
 
  (Millions of dollars)

U.S. plans   $ 106   $ 28   $ 35
Non-U.S. plans     11     7     6
   
 
 
    $ 117   $ 35   $ 41
   
 
 

12. Short-term borrowings

 
  December 31,
 
  2003
  2002
  2001
 
  (Millions of dollars)

Machinery and Engines:                  
  Notes payable to banks   $ 72   $ 64   $ 219
Financial Products:                  
  Notes payable to banks     183     174     126
  Commercial paper     2,087     1,682     1,715
  Other     415     255     120
   
 
 
      2,685     2,111     1,961
   
 
 
Total short-term borrowings   $ 2,757   $ 2,175   $ 2,180
   
 
 

The weighted average interest rates on external short-term borrowings outstanding were:

 
  December 31,
 
 
  2003
  2002
  2001
 
Notes payable to banks   6.5 % 5.7 % 5.6 %
Commercial paper   2.1 % 2.5 % 2.5 %
Other   2.3 % 2.8 % 3.4 %

Please refer to Note 17 on page A-22 and Table III on page A-23 for fair value information on short-term borrowings.

13. Long-term debt

 
  December 31,
 
  2003
  2002
  2001
 
  (Millions of dollars)

Machinery and Engines:                  
  Notes—6.000% due 2003   $   $   $ 253
  Notes—6.550% due 2011     250     249     249
  Debentures—9.000% due 2006     208     209     211
  Debentures—6.000% due 2007         189     180
  Debentures—7.250% due 2009     315     318     321
  Debentures—9.375% due 2011     123     123     123
  Debentures—9.375% due 2021     236     236     236
  Debentures—8.000% due 2023     199     199     199
  Debentures—6.625% due 2028     299     299     299
  Debentures—7.300% due 2031     348     348     348
  Debentures—6.950% due 2042     249     249    
  Debentures—7.375% due 2097     297     297     297
  Medium-term notes         25     26
  Capital lease obligations     611     538     467
  Commercial paper supported by revolving credit agreements (Note 14)     45         130
  Other     187     124     153
   
 
 
Total Machinery and Engines     3,367     3,403     3,492
Financial Products:                  
  Commercial paper supported by revolving credit agreements (Note 14)   $ 1,825   $ 1,825   $ 1,755
  Medium-term notes     8,775     6,298     5,972
  Other     111     70     72
   
 
 
Total Financial Products     10,711     8,193     7,799
   
 
 
Total long-term debt due after one year   $ 14,078   $ 11,596   $ 11,291
   
 
 

All outstanding notes and debentures are unsecured. The capital lease obligations are collateralized by leased manufacturing equipment and/or security deposits.

The 6% debentures due in 2007 were sold at significant original issue discounts ($144 million). This issue was carried net of the unamortized portion of its discount, which was amortized as interest expense over the life of the issue. These debentures had a principal at maturity of $250 million and an effective annual rate of 13.3%. The debentures were redeemed in August 2003.

We may redeem the 6.55% notes and the 7.25%, 6.625%, 7.3%, 6.95% and 7.375% debentures in whole or in part at our option at any time at a redemption price equal to the greater of 100% of the principal amount of the debentures to be redeemed or the sum of the present value of the remaining scheduled payments.

A-20


The terms of other notes and debentures do not specify a redemption option prior to maturity.

The medium-term notes are offered on a continuous basis through agents and are primarily at fixed rates. At December 31, 2003, Machinery and Engines medium-term notes had a weighted average interest rate of 8.1% and mature in January 2004. Financial Products medium-term notes have a weighted average interest rate of 3.0% with remaining maturities up to 15 years at December 31, 2003.

The aggregate amounts of maturities of long-term debt during each of the years 2004 through 2008, including amounts due within one year and classified as current, are:

 
  December 31,
 
  2004
  2005
  2006
  2007
  2008
 
  (Millions of dollars)

Machinery and Engines   $ 32   $ 62   $ 291   $ 33   $ 20
Financial Products     2,949     3,510     4,726     1,064     857
   
 
 
 
 
    $ 2,981   $ 3,572   $ 5,017   $ 1,097   $ 877
   
 
 
 
 

Interest paid on short-term and long-term borrowings for 2003, 2002 and 2001 was $718 million, $815 million and $1,009 million, respectively.

Please refer to Note 17 on page A-22 and Table III on page A-23 for fair value information on long-term debt.

14. Credit commitments

 
  December 31, 2003
 
 
  Consolidated
  Machinery
and Engines

  Financial
Products

 
 
  (Millions of dollars)

 
Credit lines available:                    
  Global credit facility   $ 4,675 (1) $ 600 (1) $ 4,075 (1)
  Other external     1,549     683     866  
   
 
 
 
Total credit lines available     6,224     1,283     4,941  
Less: Global credit facility supporting commercial paper     3,957     45     3,912  
Less: Utilized credit     255     72     183  
   
 
 
 
Available credit   $ 2,012   $ 1,166   $ 846  
   
 
 
 
(1)
We have two global credit facilities with a syndicate of banks totaling $4,675 million available in the aggregate to both Machinery and Engines and Financial Products to support commercial paper programs. Based on management's allocation decision, which can be revised at any time during the year, the portion of the facility available to Cat Financial at December 31, 2003 was $4,075 million. The five-year facility of $2,125 million expires in September 2006. The 364-day facility of $2,550 million expires in September 2004. The facility expiring in September 2004 has a provision that allows Caterpillar or Cat Financial to obtain a one-year loan in September 2004 that would mature in September 2005.

Based on long-term credit agreements, $1,870 million, $1,825 million and $1,885 million of commercial paper outstanding at December 31, 2003, 2002 and 2001, respectively, was classified as long-term debt due after one year.

15. Capital stock

A. Stock options

In 1996, stockholders approved the Stock Option and Long-Term Incentive Plan (the Plan) providing for the granting of options to purchase common stock to officers and other key employees, as well as non-employee directors. The Plan reserves 47 million shares of common stock for issuance (39 million under the Plan and 8 million under prior stock option plans). Options vest at the rate of one-third per year over the three year period following the date of grant, and have a maximum term of 10 years. Common shares issued under stock options, including treasury shares reissued, totaled 4,925,496 for 2003, 882,580 for 2002 and 693,444 for 2001.

The Plan grants options which have exercise prices equal to the average market price on the date of grant. As required by SFAS 148, a summary of the pro forma net income and profit per share amounts is shown in Item M of Note 1 on page A-11. The fair value of each option grant is estimated at the date of grant using the Black-Scholes option-pricing model.

Please refer to Table II on page A-22 for additional financial information on our stock options.

B. Restricted stock

The Plan permits the award of restricted stock to officers and other key employees. Prior to January 1, 2002, the plan also permitted awards to non-employee directors. During 2003, 2002 and 2001, officers and other key employees were awarded 42,210 shares, 52,475 shares and 143,686 shares, respectively, of restricted stock. Restricted shares (in phantom form) awarded to officers and other key employees totaled 4,425 and 8,450 in 2003 and 2002, respectively. During 2001, non-employee directors were granted an aggregate of 9,750 shares of restricted stock.

C. Stockholders' rights plan

We are authorized to issue 5,000,000 shares of preferred stock, of which 2,000,000 shares have been designated as Series A Junior Participating Preferred Stock of $1 par value. None of the preferred shares have been issued.

Stockholders would receive certain preferred stock purchase rights if someone acquired or announced a tender offer to acquire 15% or more of outstanding Caterpillar stock. In essence, those rights would permit each holder (other than the acquiring person) to purchase one share of Caterpillar stock at a 50% discount for every share owned. The rights, designed to protect the interests of Caterpillar stockholders during a takeover attempt, expire December 11, 2006.

16. Profit per share

Computations of profit per share:

 
  2003
  2002
  2001
 
  (Dollars in millions except per share data)

Profit for the period (A)   $ 1,099   $ 798   $ 805
Determination of shares (millions):                  
  Weighted average number of common shares outstanding (B)     345.2     344.0     343.3
  Shares issuable on exercise of stock options, net of shares assumed to be purchased out of proceeds at average market price     6.2     2.9     3.8
  Average common shares outstanding for fully diluted computation (C)     351.4     346.9     347.1
Profit per share of common stock:                  
  Assuming no dilution (A/B)   $ 3.18   $ 2.32   $ 2.35
  Assuming no dilution (A/C)   $ 3.13   $ 2.30   $ 2.32
Shares outstanding as of December 31 (in millions)     343.8     344.3     343.4

Stock options to purchase 27,881,279 and 19,886,054 shares of common stock at a weighted-average price of $54.34 and $55.79 were outstanding during 2002 and 2001, respectively, but were not included in the computation of diluted profit per share because the options' exercise price was greater than the average market price of the common shares. In 2003, all stock options were included in the computation of diluted profit per share.

A-21


TABLE II—Financial Information Related to Capital Stock

Changes in the status of common shares subject to issuance under options:

 
  2003
  2002
  2001
 
  Shares
  Weighted-
Exercise
Average
Price

  Shares
  Weighted-
Average
Exercise
Price

  Shares
  Weighted-
Average
Exercise
Price

Fixed Options:                                    
  Outstanding at beginning of year     38,721,364   $ 48.91     32,295,230   $ 47.34     26,336,074   $ 44.49
  Granted to officers and key employees     8,418,100   $ 54.29     8,050,864   $ 50.72     7,512,206   $ 53.53
  Granted to outside directors     56,000   $ 52.06     52,000   $ 58.87     52,000   $ 45.51
  Exercised     (7,629,020 ) $ 42.04     (1,580,754 ) $ 26.41     (1,273,361 ) $ 23.64
  Lapsed     (66,772 ) $ 50.18     (95,976 ) $ 50.28     (331,689 ) $ 47.13
   
       
       
     
  Outstanding at end of year     39,499,672   $ 51.38     38,721,364   $ 48.91     32,295,230   $ 47.34
   
       
       
     
  Options exercisable at year-end     23,650,987   $ 50.28     23,909,130   $ 48.23     19,062,802   $ 45.74
  Weighted-average fair value of options granted during the year   $ 12.82         $ 14.85         $ 14.56      

Stock options outstanding and exercisable:

 
 
  Options Outstanding
  Options Exercisable
 
Exercise Prices

  # Outstanding
at 12/31/03

  Weighted-Average
Remaining
Contractual Life
(Years)

  Weighted-Average
Exercise Price

  # Outstanding
at 12/31/03

  Weighted-Average
Exercise Price

  $ 26.77-$39.19   6,317,138   4.9   $ 36.11   6,317,138   $ 36.11
  $ 43.75-$62.34   33,182,534   7.3   $ 54.29   17,333,849   $ 55.44
       
           
     
        39,499,672   6.9   $ 51.38   23,650,987   $ 50.28
       
           
     

Weighted-average assumptions used in determining fair value of option grants:

 
  Grant Year
 
 
  2003
  2002
  2001
 
Dividend yield   2.75 % 2.55 % 2.49 %
Expected volatility   29.6 % 35.0 % 30.1 %
Risk-free interest rates   2.52 % 4.13 % 4.88 %
Expected lives   6 years   5 years   5 years  

17. Fair values of financial instruments

We used the following methods and assumptions to estimate the fair value of our financial instruments:

Cash and short-term investments—carrying amount approximated fair value.

Long-term investments (other than investments in unconsolidated affiliated companies)—fair value was estimated based on quoted market prices.

Foreign currency forward and option contracts—fair value of forward contracts was determined by discounting the future cash flow resulting from the differential between the contract price and the forward rate. Fair value of option contracts was determined by using the Black-Scholes model.

Finance receivables—fair value was estimated by discounting the future cash flow using current rates, representative of receivables with similar remaining maturities. Historical bad-debt experience also was considered.

Short-term borrowings—carrying amount approximated fair value.

Long-term debt—for Machinery and Engines notes and debentures, fair value was estimated based on quoted market prices. For Financial Products, fair value was estimated by discounting the future cash flow using our current borrowing rates for similar types and maturities of debt, except for floating rate notes and commercial paper supported by revolving credit agreements for which the carrying amounts were considered a reasonable estimate of fair value.

Interest rate swaps—fair value was estimated based on the amount that we would receive or pay to terminate our agreements as of year-end.

Please refer to Table III on page A-23 for the fair values of our financial instruments.

18. Concentration of credit risk

Financial instruments with potential credit risk consist primarily of trade and finance receivables and short-term and long-term investments. Additionally, to a lesser extent, we have a potential credit risk associated with counterparties to derivative contracts.

A-22


Trade receivables are primarily short-term receivables from independently owned and operated dealers which arise in the normal course of business. We perform regular credit evaluations of our dealers. Collateral generally is not required, and the majority of our trade receivables are unsecured. We do, however, when deemed necessary, make use of various devices such as security agreements and letters of credit to protect our interests. No single dealer or customer represents a significant concentration of credit risk.

Finance receivables primarily represent receivables under installment sales contracts, receivables arising from leasing transactions and notes receivable. Receivables from customers in construction-related industries made up approximately one-third of total finance receivables at December 31, 2003, 2002 and 2001. We generally maintain a secured interest in the equipment financed. No single customer or region represents a significant concentration of credit risk.

Short-term and long-term investments are held with high quality institutions and, by policy, the amount of credit exposure to any one institution is limited. Long-term investments, included in Other Assets in Statement 3, are comprised of investments which collateralize capital lease obligations (see Note 13) and investments of Cat Insurance supporting insurance reserve requirements.

Outstanding derivative instruments, with notional amounts totaling $8,625 million, $6,983 million and $5,872 million, and terms generally ranging up to five years, were held at December 31, 2003, 2002 and 2001, respectively. Collateral is not required of the counterparties or of our company. We do not anticipate nonperformance by any of the counterparties. Our exposure to credit loss in the event of nonperformance by the counterparties is limited to only those gains that we have recorded, but have not yet received cash payment. At December 31, 2003, 2002 and 2001, the exposure to credit loss was $336 million, $176 million and $80 million, respectively.

Please refer to Note 17 on page A-22 and Table III below for fair value information.

19. Operating leases

We lease certain computer and communications equipment, transportation equipment and other property through operating leases. Total rental expense for operating leases was $242 million, $240 million and $256 million for 2003, 2002 and 2001, respectively.

Minimum payments for operating leases having initial or remaining non-cancelable terms in excess of one year are:

 
Years ended December 31,
 
2004
  2005
  2006
  2007
  2008
  After
2008

  Total
 
(Millions of dollars)

  $ 194   $ 146   $ 118   $ 71   $ 54   $ 305   $ 888

20. Guarantees and product warranty

We have guaranteed to repurchase loans of certain Caterpillar dealers from the Dealer Capital Asset Trust (DCAT) in the event of default. These guarantees arose in conjunction with Cat Financial's relationship with third party dealers who sell Caterpillar equipment. These guarantees have terms ranging from one to four years and are secured primarily by dealer assets. At December 31, 2003 and 2002, the total amount outstanding under these guarantees was $380 million and $290 million, respectively, and the related book value was $5 million for 2003 and zero for 2002.

Our product warranty liability is determined by applying historical claim rate experience to the current field population and dealer inventory. Generally, historical claim rates are developed using a 12-month rolling average of actual warranty payments. These rates are applied to the field population and dealer inventory to determine the liability.

 
  2003
  2002
  2001
 
 
  (Millions of dollars)

 
Warranty liability, January 1   $ 693   $ 652   $ 615  
Payments     (484 )   (494 )   (478 )
Provision for warranty     413     535     515  
   
 
 
 
Warranty liability, December 31   $ 622   $ 693   $ 652  
   
 
 
 

TABLE III—Fair Values of Financial Instruments

 
  2003
  2002
  2001
   
 
  Carrying
Amount

  Fair
Value

  Carrying
Amount

  Fair
Value

  Carrying
Amount

  Fair
Value

  Reference #
 
  (Millions of dollars)

   
Asset (Liability) at December 31                                        
  Cash and short-term investments   $ 342   $ 342   $ 309   $ 309   $ 400   $ 400   Statement 3, Note 18
  Long-term investments     1,057     1,057     874     874     791     791   Note 18
  Foreign currency contracts     167     167     47     47     2     2   Note 2
  Finance receivables—net (excluding finance type leases(1))     13,881     13,915     12,093     12,177     10,931     10,957   Note 5
  Short-term borrowings     (2,757 )   (2,757 )   (2,175 )   (2,175 )   (2,180 )   (2,180 ) Note 12
  Long-term debt
    (including amounts due within one year)
                                       
    Machinery and Engines     (3,399 )   (3,873 )   (3,661 )   (4,185 )   (3,565 )   (3,749 ) Note 13
    Financial Products     (13,660 )   (13,846 )   (11,847 )   (12,118 )   (10,857 )   (11,048 ) Note 13
  Interest rate swaps
    Financial Products—
                                       
      in a net receivable position     87     87     84     84     58     58   Note 2
      in a net payable position     (59 )   (59 )   (85 )   (85 )   (71 )   (71 ) Note 2
(1)
Excluded items have a net carrying value at December 31, 2003, 2002 and 2001 of $1,546 million, $1,369 million and $1,185 million, respectively.

A-23


21. Environmental and legal matters

The company is regulated by federal, state and international environmental laws governing our use of substances and control of emissions in all our operations. Compliance with these existing laws has not had a material impact on our capital expenditures, earnings or competitive position.

We are cleaning up hazardous waste at a number of locations, often with other companies, pursuant to federal and state laws. When it is likely we will pay clean-up costs at a site and those costs can be estimated, the costs are charged against our earnings. In making that estimate, we do not consider amounts expected to be recovered from insurance companies and others.

The amount recorded for environmental cleanup is not material and is included in "Accrued expenses" in Statement 3. If a range of liability estimates is available on a particular site, we accrue the lower end of that range.

We cannot estimate costs on sites in the very early stages of cleanup. Currently, we have five sites in the very early stages of cleanup, and there is no more than a remote chance that a material amount for cleanup will be required.

Pursuant to a consent decree Caterpillar entered with the United States Environmental Protection Agency (EPA), the company was required to meet certain emission standards by October 2002. The decree provided that if engine manufacturers were unable to meet the standards at that time, they would be required to pay a non-conformance penalty (NCP) on each engine sold that did not meet the standard. The amount of the NCP would be based on how close to meeting the standard the engine came—the more out of compliance the higher the penalty. The company began shipping lower emission engines in October 2002 as a bridge until fully compliant Advanced Combustion Emission Reduction Technology (ACERT®) engines were introduced in 2003.

The consent decree also provided the ability to "bank" emissions credits prior to October 2002 that could be used to offset non-conforming engines produced after December 31, 2002. That is, if a company was able to produce and sell engines that were below the applicable standard prior to October 2002, then the company could apply the emission credits created by those engines to engines produced after December 31, 2002 that did not meet the consent decree standard. For example, an engine produced and sold prior to October 2002 that produced 3.5 grams of NOx as compared to a 4.0 gram standard would create an emissions credit. This credit would be "banked" to be used to offset the NOx deficiency of an engine produced after December 31, 2002 that did not meet the consent decree standard. Given this scenario, a company could produce and sell a 3.0 gram engine in 2003 without paying an NCP even though the engine exceeds the 2.5 gram standard. Caterpillar had a legal right, as described in the consent decree, to use its banked credits as offsets against NCPs for non-compliant engines produced after December 31, 2002. The EPA has approved the process by which the credits are calculated.

In a final report to the EPA filed during the third quarter of 2003, we identified 70,018 medium heavy-duty engines produced and sold prior to October 2002 that yielded emissions below the applicable standard for that period, resulting in 20,868 Mg of medium heavy-duty banked credits. This is 381 engines and 120 Mg less than had been identified at the end of 2002. The number of engines generating emissions credits in our final report to the EPA was lowered for a variety of reasons including a more detailed analysis of engines actually produced that were eligible to generate credits and the identification of engines shipped to customers outside the United States which were not eligible to generate emissions credits. During 2003, banked credits offset the NCPs on all but approximately 600 of the approximately 31,000 non-conforming medium heavy-duty engines we produced. We paid NCPs of $2,485 per engine, or $1.5 million, on the 600 medium heavy-duty engines produced in 2003 in excess of those for which we could use banked credits. We also identified 731 heavy-duty engines built prior to October 1, 2002, that generated banked credits totaling 969 Mg. This is 227 engines and 261 Mg less than had been identified at the end of 2002; the reasons for the reduction are similar to those resulting in the adjustments to medium heavy-duty engines and credits. Banked credits offset the NCPs on approximately 2,000 of the 45,000 non-conforming heavy-duty engines we built during 2003. We paid NCPs of approximately $3,555 per engine, or $153 million on the remaining 43,000 heavy-duty engines produced in 2003 in excess of those for which we could use banked credits.

We began production of medium heavy-duty ACERT engines that were fully-compliant with the EPA emissions standards in early 2003, and in mid-2003 began producing fully-compliant heavy-duty ACERT engines. During 2003, Caterpillar received certification from the EPA for its C7 and C9 medium heavy-duty ACERT engines and its C11, C13 and C15 heavy-duty ACERT engines. By the end of 2003 Caterpillar was producing all of these engine models, and as a result, does not expect to pay NCPs on engines built during 2004.

The certification process is described in the consent decree and the regulations, and includes the following:

    The durability of the engine is established through testing to determine if the engine emissions change with time. An emissions deterioration factor is determined that represents the amount of emission deterioration that would be expected over the useful life of the engine.

    An emission data engine is tested according to the regulations. Emission levels are determined on various steady state and transient tests.

    The results from the emissions tests are submitted to the EPA in a certification application as proof that the engine meets the requirements along with additional information and a request that a certificate be granted.

    The EPA reviews the application and if all the regulatory requirements are met, a certificate is issued.

    If the engine exceeds the standard, the EPA issues a certificate for either a banked or an NCP engine. The NCP engine certificate requires Production Compliance Auditing (PCA) testing.

After receipt of the EPA certificate, manufacturing and shipment of the certified engines can begin. Each engine is labeled to indicate that it is certified.

Our expense for NCPs was $40 million in 2002 and $153 million in 2003. NCP expense recorded in 2002 was based on our engineering estimates at that time of the expected results of EPA emissions testing that began and was completed in 2003. NCP expense recorded in 2003 reflects the results of the completed tests, including a reduction of approximately 3% to the NCP expense recorded for 2002. During the fourth quarter of 2003, we re-tested one configuration of our heavy-duty bridge engine models, averaging the results with an earlier test. Our 2003 NCP expense includes a $10 million fourth-quarter benefit from the re-test related to all

A-24


bridge engines of that configuration produced since October 2002, including $1.3 million for engines produced in the fourth quarter of 2002 and $7.4 million for engines produced during the first three quarters of 2003. For 2002, we paid NCPs on approximately 6,200 heavy-duty units and 7,200 medium heavy-duty units, and for 2003 we paid NCPs on approximately 43,000 heavy-duty units and 600 medium heavy-duty units.

Aside from $142 million in customary research and development expenses, emissions standard changes negatively impacted our 2002 financial results by $24 million ($17 million after tax) as NCPs ($40 million pre-tax), product cost increases and ramp-up production costs ($4 million pre-tax) were partially offset by price increases for these engines ($20 million pre-tax). NCPs were deposited in an escrow account prior to completion of emissions testing for each engine model throughout 2003, and were paid to the EPA, either from the escrow account or directly, after completion of testing of a particular model. On January 30, 2004 Caterpillar paid NCPs to the EPA for engines built during the fourth quarter of 2003, ending its payments to the EPA for NCPs for engines built during 2002 and 2003. NCP expense for 2003 reflects this payment.

The following table reflects the 2002 impact of the emission standard changes:

 
  2002
 
 
  (Millions
of dollars)

 
Price (Engines sold × bridge price increase)   $ 20  
Incremental costs (Cost of additional materials and production costs)     (4 )
NCPs (Engines sold × projected NCP per engine)     (40 )
   
 
Net effect pre-tax   $ (24 )
Tax     7  
   
 
Net effect after tax   $ (17 )
   
 

Aside from $115 million in customary research and development expenses, emissions standard changes negatively impacted our 2003 financial results by $46 million ($34 million after-tax). The net unfavorable impact of emission standard changes was greater in 2003 than in 2002 as significantly higher NCPs (approximately $153 million pre-tax), product cost increases and ramp-up production costs (approximately $84 million pre-tax), were partially offset by price increases for bridge and ACERT engines (approximately $191 million pre-tax). The following table reflects the 2003 impact of the emission standard changes:

 
  2003
 
 
  (Millions
of dollars)

 
Price (Engines sold × bridge or ACERT price increase)   $ 191  
Incremental costs (Cost of additional materials and production costs)     (84 )
NCPs (Engines sold × NCP per engine—banked credits)     (153 )
   
 
Net effect pre-tax   $ (46 )
Tax     12  
   
 
Net effect after tax   $ (34 )
   
 

In addition to the above, the consent decree required Caterpillar to pay a fine of $25 million, which was expensed in 1998 and to make investments totaling $35 million in environmental-related products by July 7, 2007. Total qualifying investments to date for these projects is $29 million, of which $10 million was made in 2002 and $19 million in 2003. A future benefit is expected to be realized from these environmental projects related to Caterpillar's ability to capitalize on the technologies it developed in complying with its environmental project obligations. In short, Caterpillar expects to receive a positive net return on the environmental projects by being able to market the technology it developed.

NCPs were approximately $3,500 per heavy-duty engine subject to NCPs, based on the results of the completed EPA testing. Our net price increase for heavy-duty bridge engines was successfully implemented on October 1, 2002; this increase was competitive with price increases implemented by other engine manufacturers on that date. With the introduction of ACERT engines in 2003, we implemented an additional price increase to truck manufacturers that purchase our heavy-duty engines, and on January 1, 2004, we implemented a price increase for medium heavy-duty ACERT engines. These increases are based on the additional value that we expect truck owners to receive from ACERT engines compared to engines of our competitors as a result of better fuel economy, less maintenance and greater durability. The ultimate net price increase we are able to achieve for our ACERT engines in the future is dependent upon marketplace acceptance of these engines versus competitive alternatives.

On January 16, 2002, Caterpillar commenced an action in the Circuit Court of the Tenth Judicial Circuit of Illinois in Peoria, Illinois, against Navistar International Transportation Corporation and International Truck and Engine Corporation (collectively Navistar). The lawsuit arises out of a long-term purchase contract between Caterpillar and Navistar effective May 31, 1988, as amended from time to time (the Purchase Agreement). The pending complaint alleges that Navistar breached its contractual obligations by: (i) paying Caterpillar $8.08 less per fuel injector than the agreed upon price for new unit injectors delivered by Caterpillar; (ii) refusing to pay contractually agreed upon surcharges owed as a result of Navistar ordering less than planned volumes of replacement unit injectors; and (iii) refusing to pay contractually agreed upon interest stemming from Navistar's late payments. At December 31, 2003, the past due receivable from Navistar regarding the foregoing was $132 million. The pending complaint also has claims alleging that Franklin Power Products, Inc., Newstream Enterprises, and Navistar, collectively and individually, failed to pay the applicable price for shipments of unit injectors to Franklin and Newstream. At December 31, 2003, the past due receivables for the foregoing totaled $12 million. The pending complaint further alleges that Sturman Industries, Inc., and Sturman Engine Systems, Inc., colluded with Navistar to utilize technology that Sturman Industries, Inc., misappropriated from Caterpillar to help Navistar develop its G2 fuel system, and tortiously interfered with the Purchase Agreement and Caterpillar's prospective economic relationship with Navistar. The pending complaint further alleges that the two parties' collusion led Navistar to select Sturman Engine Systems, Inc., and another company, instead of Caterpillar, to develop and manufacture the G2 fuel system.

On May 7, 2002, International Truck and Engine Corporation (International) commenced an action against Caterpillar in the Circuit Court of DuPage County, Illinois, that alleges Caterpillar breached various aspects of a long-term agreement term sheet. In its fourth amended complaint, International seeks a declaration from the court that the term sheet constitutes a legally binding contract for the sale of heavy-duty engines at specified prices through the end of 2006, alleges that Caterpillar breached the term sheet by raising certain prices effective October 1, 2002, and also alleges that Caterpillar breached an obligation to negotiate a comprehensive long-term agreement referenced in the term sheet.

A-25


International further claims that Caterpillar improperly restricted the supply of heavy-duty engines to International from June through September 2002, and claims that Caterpillar made certain fraudulent misrepresentations with respect to the availability of engines during this time period. International seeks damages "in an amount to be determined at trial" and injunctive relief. Caterpillar filed an answer denying International's claims and has filed a counterclaim seeking a declaration that the term sheet has been effectively terminated. Caterpillar denies International's claims and will vigorously contest them. On September 24, 2003, the Appellate Court of Illinois, ruling on an interlocutory appeal, issued an order consistent with Caterpillar's position that, even if the court subsequently determines that the term sheet is a binding contract, it is indefinite in duration and was therefore terminable at will by Caterpillar after a reasonable period. Caterpillar anticipates that a trial currently scheduled for the third quarter of 2004 will address all remaining issues in this matter. This matter is not related to the breach of contract action brought by Caterpillar against Navistar currently pending in the Circuit Court of Peoria County, Illinois.

On August 30, 2002, a World Trade Organization (WTO) arbitration panel determined that the European Union (EU) may impose up to $4.04 billion per year in retaliatory tariffs if the U.S. tax code is not brought into compliance with an August 2001 WTO decision that found the extraterritorial tax (ETI) provisions of the FSC Repeal and Extraterritorial Income Exclusion Act of 2000 constitute an export subsidy prohibited by the WTO Agreement on Subsidies and Countervailing Measures. Since August 2002, the EU has developed a list of U.S. origin products on which the EU could impose tariffs as high as 100% of the value of the product. Negotiations among EU Member States, the European Commission and the private sector over which products would be listed were intense. The EU finalized the list in December 2003 and stated that in March 2004 it will begin imposing retaliatory tariffs of 5% on certain U.S. origin goods. If imposed, the tariffs would increase 1 percentage point per month to a maximum of 17% after one year. The gradual increase in tariffs is designed to place increasing pressure on the U.S. government to bring its tax laws into compliance with its WTO obligations. Given the makeup of the final retaliation list, some Caterpillar parts and components will be subjected to these additional tariffs. Based on what we know today, we do not believe these tariffs will materially impact our financial results. The company has production facilities in the EU, Russia, Asia and South America that would not be affected by a retaliatory tariff aimed at U.S. origin products. When the EU implements its proposed tariffs, increased pressure will be placed on Congress to repeal ETI, possibly during the current session. It is not possible to predict how the U.S. legislative process will affect the company's 2004 income tax liability, but based on what we know today, we do not believe the impact, if any, will be material.

22. Segment information

A. Basis for segment information

The company 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 and service center divisions.

Caterpillar is a highly integrated company. The majority of our profit centers are product focused. They are primarily responsible for the design, manufacture and ongoing support of their products. However, some of these product-focused profit centers also have marketing responsibilities. We also have geographically-based profit centers that are focused primarily on marketing. However, most of these profit centers also have some manufacturing responsibilities. One of our profit centers provides various financial services to our customers and dealers. The service center divisions perform corporate functions and provide centralized services.

We have developed an internal measurement system to evaluate performance and to drive continuous improvement. This measurement system, which is not based on generally accepted accounting principles (GAAP), is intended to motivate desired behavior of employees and drive performance. It is not intended to measure a division's contribution to enterprise results. The sales and cost information used for internal purposes varies significantly from our consolidated, externally reported information resulting in substantial reconciling items. Each division has specific performance targets and is evaluated and compensated based on achieving those targets. Performance targets differ from division to division; therefore, meaningful comparisons cannot be made among the profit or service center divisions. It is the comparison of actual results to budgeted results that makes our internal reporting valuable to management. Consequently, we feel that the financial information required by Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information" has limited value for our external readers.

Due to Caterpillar's high level of integration and our concern that segment disclosures based on SFAS 131 requirements have limited value to external readers, we are continuing to disclose financial results for our three principal lines of business (Machinery, Engines and Financial Products) in our Management's Discussion and Analysis beginning on page A-33.

B. Description of segments

The profit center divisions meet the SFAS 131 definition of "operating segments;" however, the service center divisions do not. Several of the profit centers have similar characteristics and have been aggregated. The following is a brief description of our seven reportable segments and the business activities included in the All Other category.

Asia/Pacific Marketing:    Primarily responsible for marketing products through dealers in Australia, Asia (excluding Japan) and the Pacific Rim. Also includes the regional manufacturing of some products which also are produced by Construction & Mining Products.

Construction & Mining Products:    Primarily responsible for the design, manufacture and ongoing support of small, medium and large machinery used in a variety of construction and mining applications. Also includes the design, manufacture, procurement and marketing of components and control systems that are consumed primarily in the manufacturing of our machinery.

EAME Marketing:    Primarily responsible for marketing products (excluding Power Products) through dealers in Europe, Africa, the Middle East and the Commonwealth of Independent

A-26


States. Also includes the regional manufacturing of some products which are also produced by Construction & Mining Products and Power Products.

Financing & Insurance Services:    Provides financing to customers and dealers for the purchase and lease of Caterpillar and other equipment, as well as some financing for Caterpillar sales to dealers. Financing plans include operating and finance leases, installment sale contracts, working capital loans and wholesale financing plans.The division also provides various forms of insurance to customers and dealers to help support the purchase and lease of our equipment.

Latin America Marketing:    Primarily responsible for marketing products through dealers in Latin America. Also includes the regional manufacturing of some products that also are produced by Construction & Mining Products and Power Products.

Power Products:    Primarily responsible for the design, manufacture, marketing and ongoing support of reciprocating and turbine engines along with related systems. These engines and related systems are used in products manufactured in other segments, on-highway trucks and locomotives; and in a variety of construction, electric power generation, marine, petroleum and industrial applications.

North America Marketing:    Primarily responsible for marketing products (excluding Power Products) through dealers in the United States and Canada.

All Other:    Primarily includes activities such as: service support and parts distribution to Caterpillar dealers worldwide; the design, manufacture and ongoing support of paving products; logistics services for other companies; service tools for Caterpillar dealers; and the remanufacture of Caterpillar engines and components and remanufacturing services for other companies.

C. Segment measurement and reconciliations

Please refer to Table IV on pages A-28 to A-30 for financial information regarding our segments. There are several accounting differences between our segment reporting and our GAAP-based external reporting. Our segments are measured on an accountable basis; therefore, only those items for which divisional management is directly responsible are included in the determination of segment profit/(loss) and assets. The following is a list of the more significant accounting differences:

    Generally, liabilities are managed at the corporate level and are not included in segment operations. Segment accountable assets generally include inventories, receivables, property, plant and equipment.

    We account for intersegment transfers using a system of market-based prices. With minor exceptions, each of the profit centers either sells or purchases virtually all of its products to or from other profit centers within the company. Our high level of integration results in our internally reported sales being approximately double that of our consolidated, externally reported sales.

    Segment inventories and cost of sales are valued using a current cost methodology.

    Postretirement benefit expenses are split; segments are generally responsible for service and prior services costs, with the remaining elements of net periodic benefit cost included as a methodology difference.

    Interest expense is imputed (i.e., charged) to profit centers based on their level of accountable assets.

    Accountable profit is determined on a pretax basis.

Reconciling items are created based on accounting differences between segment reporting and our consolidated, external reporting. Please refer to Table IV on pages A-28 to A-30 for financial information regarding significant reconciling items. Most of our reconciling items are self-explanatory given the above explanations of accounting differences. However, for the reconciliation of profit, we have grouped the reconciling items as follows:

    Corporate costs:    Certain corporate costs are not charged to our segments. These costs are related to corporate requirements and strategies that are considered to be for the benefit of the entire organization.

    Methodology differences:    See previous discussion of significant accounting differences between segment reporting and consolidated, external reporting.

A-27


TABLE IV—Segment Information
(Millions of dollars)

Business Segments:

 
  Machinery and Engines
   
   
 
  Asia/
Pacific
Marketing

  Construction
& Mining
Products

  EAME
Marketing

  Latin
America
Marketing

  Power
Products

  North
America
Marketing

  All
Other

  Total
  Financing
& Insurance
Services

  Total
2003                                            
External sales and revenues   $ 1,990   274   3,181   1,284   6,377   6,433   1,466   21,005   2,020   $ 23,025
Intersegment sales and revenues   $ 5   7,497   2,326   241   5,654   205   1,642   17,570     $ 17,570
Total sales and revenues   $ 1,995   7,771   5,507   1,525   12,031   6,638   3,108   38,575   2,020   $ 40,595
Depreciation and amortization   $ 13   205   63   24   292     80   677   530   $ 1,207
Imputed interest expense   $ 31   127   61   27   223   121   122   712   472   $ 1,184
Accountable profit (loss)   $ 115   538   177   62   (87 ) 177   350   1,332   339   $ 1,671
Accountable assets at Dec. 31   $ 637   2,127   1,114   548   3,795   2,198   2,251   12,670   20,234   $ 32,904
Capital Expenditures   $ 22   148   73   24   212   8   103   590   1,220   $ 1,810
   
 
 
 
 
 
 
 
 
 
2002                                            
External sales and revenues   $ 1,652   217   2,825   1,261   5,800   5,571   1,257   18,583   1,779   $ 20,362
Intersegment sales and revenues   $ 4   6,755   1,981   182   4,989   152   1,585   15,648     $ 15,648
Total sales and revenues   $ 1,656   6,972   4,806   1,443   10,789   5,723   2,842   34,231   1,779   $ 36,010
Depreciation and amortization   $ 12   209   53   25   293     68   660   436   $ 1,096
Imputed interest expense   $ 26   142   59   28   222   98   125   700   539   $ 1,239
Accountable profit (loss)   $ 83   254   85   41   (145 ) (4 ) 233   547   270   $ 817
Accountable assets at Dec. 31   $ 436   2,214   991   470   3,757   1,574   2,297   11,739   17,417   $ 29,156
Capital Expenditures   $ 13   179   65   13   236   2   80   588   1,177   $ 1,765
   
 
 
 
 
 
 
 
 
 
2001                                            
External sales and revenues   $ 1,405   207   2,844   1,452   5,890   5,874   1,244   18,916   1,717   $ 20,633
Intersegment sales and revenues   $ 12   7,195   2,020   146   5,659   219   1,779   17,030   1   $ 17,031
Total sales and revenues   $ 1,417   7,402   4,864   1,598   11,549   6,093   3,023   35,946   1,718   $ 37,664
Depreciation and amortization   $ 12   210   62   26   351     65   726   335   $ 1,061
Imputed interest expense   $ 23   140   57   29   219   112   119   699   672   $ 1,371
Accountable profit (loss)<