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, 2004
 
 
 
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)
 
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. [    ]

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

As of December 31, 2004, there were 342,936,949 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 $32,772,664,307.

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
 
2005 Annual Meeting Proxy Statement (Proxy Statement) filed with the Securities and Exchange Commission (SEC) on February 24, 2005.
  • Parts I, II, IV
 
General and Financial Information for 2004 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 2005 Annual Meeting Proxy Statement (Appendix) on February 24, 2005, and furnished as Exhibit 13 to this Form 10-K.




TABLE OF CONTENTS
 
Part I
Business
 
 
Executive Officers of the Registrant as of December 31, 2004
 
 
Properties
 
 
Legal Proceedings
 
Part II
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
 
Selected Financial Data
 
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
Quantitative and Qualitative Disclosures About Market Risk
 
 
Financial Statements and Supplementary Data
 
 
Controls and Procedures
 
Part III
Directors and Executive Officers of the Registrant
 
 
Executive Compensation
 
 
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
 
Certain Relationships and Related Transactions
 
 
Principal Accountant Fees and Services
 
Part IV
Exhibits and Financial Statement Schedules
 

 
i

 
 
PART I
 
Item 1. Business.

Principal Lines of Business / Nature of Operations
We operate in three principal lines of business:
 

1.
 
Machinery - This principal line of business includes the design, manufacture, marketing and sales of construction, mining, and forestry machinery - track and wheel tractors, track and wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, telescopic handlers, skid steer loaders and related parts. We also include logistics services for other companies in this line of business.
 
2.
 
Engines - This principal line of business includes the design, manufacture, marketing and sales of engines for Caterpillar machinery; electric power generation systems; on-highway vehicles and locomotives; marine, petroleum, construction, industrial, agricultural and other applications; and related parts. Reciprocating engines meet power needs ranging from 5 to over 22,000 horsepower (4 to over 16 200 kilowatts). Turbines range from 1,200 to 20,500 horsepower (900 to 15 000 kilowatts).
 
3.
 
Financial Products - This principal line of business consists primarily of Caterpillar Financial Services Corporation (Cat Financial), Caterpillar Insurance Holdings, Inc. (Cat Insurance), Caterpillar Power Ventures Corporation (Cat Power Ventures), and their respective subsidiaries. Cat Financial provides a wide range of financing alternatives to customers and dealers for Caterpillar machinery and engines, Solar gas turbines, as well as other equipment and marine vessels. Cat Financial also extends loans to customers and dealers. Cat Insurance provides various forms of insurance to customers and dealers to help support the purchase and lease of our equipment. Cat Power Ventures is an active investor in independent power projects using Caterpillar power generation equipment and services.
 

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 reportable segments for financial reporting purposes. Information about our reportable segments, including geographic information, appears in Note 25 on pages A-29 through A-33 of the Appendix.

Other information about our operations in 2004 and outlook for 2005, including risks associated with foreign operations is incorporated by reference from "Management's Discussion and Analysis" on pages A-36 through A-61 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 $30 billion, making Caterpillar the largest manufacturer in its industry. Caterpillar is also a leading U.S. exporter, with more than one-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.
 
Page 1
 
 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 (part of the Volvo Group AB), CNH Global, Hitachi Construction Machinery, John Deere (part of Deere & Co.), Terex, JCB, and Ingersoll-Rand. Each has particular regional pockets of strength. John Deere Construction and Forestry Division (part of Deere & Co.), for example, is a principal competitor in North America. Some competitors have broad ranges of products which compete with Caterpillar. Others, like Ingersoll-Rand, only offer a limited range of products that compete with Caterpillar.

During 2004, the machinery business in general enjoyed an increase in industry demand. Most of our competitors saw sales and operating profits improve from years of stagnant sales and difficult profitability. The sharp industry upturn created supply chain challenges in addition to the material cost challenges of high commodity prices for all competitors. Several competitors continued to face distribution channel challenges. Asia-based competitors were impacted the most by the industry slowdown in China. Europe-based competitors were most impacted by the strong euro. Most North America-based competitors benefited from the very strong North American industry upturn. While the competitive environment in the machinery business continued to be intense, the financial health of the industry as a whole improved.
 
 
 Engines

Caterpillar operates in a very 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 - as well as for a wide array of stationary applications - and manufactures industrial turbines for the oil and gas and power generation markets. In North America, on-highway heavy-duty and mid-range diesel engine competitors include but are not limited to Cummins Inc., Volvo Group AB, Mack Trucks, Inc. (part of the Volvo Group AB), Detroit Diesel Corp. and Mercedes-Benz (both part of DaimlerChrysler AG), Isuzu Motors, Ltd. and Navistar International Corp. Overseas on-highway diesel engine competitors include but are not limited to Mercedes-Benz (part of DaimlerChrysler AG), Volvo Group AB, Mitsubishi Fuso Truck & Bus Corp. (part of Daimler Chrysler AG), Scania AB, MAN Aktiengesellschaft, Iveco Motors, Isuzu Motors, Ltd., Hino Motors, Ltd. and MWM Motores Diesel.

In the North America off-highway mobile and stationary markets, domestic-based competitors include but are not limited to Cummins Inc., John Deere Power Systems (part of Deere & Co.), Detroit Diesel Corp., Ford Power Products (part of Ford Motor Co.), General Electric Co. and Waukesha (part of Dresser Inc.). Overseas-based off-highway mobile and stationary application competitors include but are not limited to Wartsila NSD, MAN B&W Diesel AG, MTU Friedrichshafen GmbH (part of DaimlerChrysler AG), Volvo Penta (part of the Volvo Group AB), Mitsubishi Heavy Industries, Ltd., Deutz AG, GE Jenbacher (part of General Electric Co.), Kubota Corp., Isuzu Motors, Ltd., Kawasaki Heavy Industries Ltd., Yanmar Diesel Engine Co. Ltd., Bergen (part of Rolls Royce plc), Rolls-Royce plc, Siemens AG and Alstom.

In the packaging area, Caterpillar also faces a wide variety of generator set packagers and other engine and turbine-related packaging competitors. North America-based packagers include but are not limited to General Electric Co., Cummins Inc., Kohler Co., Katolight Corp., Generac Power Systems, Inc., Multiquip Inc., Detroit Diesel Corp., Stewart & Stevenson Services, Inc., Hanover Compressor Co. and other regional companies. Overseas-based packagers include but are not limited to Alstom, Siemens AG, Rolls Royce plc, Wartsila NSD, MAN B&W Diesel AG, GE Jenbacher, SDMO, Himoinsa s.l., Mitsubishi Heavy Industries, Ltd., Atlas Copco AB, Kawasaki Heavy Industries, Ltd., AKSA Power Generation (Kazanci Holding) and many other regional packagers dispersed around the world. These packagers source emission compliant as well as non-compliant engines and turbines and other components from domestic and international suppliers, and market their products regionally and internationally through a variety of company owned, independent, on-line and multi-brand distribution channels.     
 
    Page 2
 
In the North America market, heavy-duty and midrange on-highway truck engine competitors continued to market emission certified engines meeting the January 1, 2004 United States Environmental Protection Agency (EPA) emission limits using cooled exhaust gas re-circulation technology (EGR). In addition, the industry continued to invest heavily in new technology to meet future on- and off-highway emission regulations in North America, Europe, and Asia. Furthermore, competitors formed or continued joint ventures and partnerships in an effort to share development costs, strengthen customer relationships, reach new markets and leverage core competencies. Moreover, key component suppliers such as Delphi Corp., Bosch GmbH, Denso Corp., Stanadyne Corp. and Fleetguard Inc. (part of Cummins Inc.) continued to play visible roles as emission technology drivers, partners, and key suppliers to the reciprocating engine business.

During 2004, Caterpillar completed the introduction of its full line of ACERT® engines into the North America on-highway truck market, and continued to maintain its leadership position in this market. In addition, Caterpillar established itself as a leading provider of truck engines for the specialty, bus and recreational vehicle (RV) markets. Customer acceptance of Caterpillar ACERT engine performance, quality and reliability is strong. As a result of strong industry growth, Caterpillar experienced some heavy-duty ACERT engines capacity constraints in 2004.

Caterpillar also focused 2004 investment and resources on leveraging its success with ACERT engines in on-highway truck markets into off-road markets, as well as the remainder of its engine platforms. The building blocks for ACERT Technology are very flexible and scaleable, and are being applied as needed based on engine platform and application. We have announced that 13 Caterpillar machine models are being upgraded to ACERT engine technology, and 6 of these 13 models are already shipping. A full line of seven ACERT industrial engines has been released, and plans are in place to leverage ACERT Technology throughout Caterpillar's businesses and engine platforms. We expect this to establish Caterpillar as the first company to offer a full line of Tier 3/Stage 3a emission compliant off-highway engines.

We believe ACERT provides Caterpillar a competitive advantage now and in the future to meet emission and performance requirements, and we plan to continue investing in developing and leveraging ACERT Technology systems and components. While Caterpillar is able to leverage its ACERT Technology directly into its off-highway businesses, our competitors must pursue alternative technologies or further develop their existing technologies to meet off-highway market needs and emission requirements.


Financial Products

Cat Financial, incorporated in Delaware, is a wholly owned finance subsidiary of Caterpillar. Cat Financial's primary business is to provide retail-financing alternatives for Caterpillar products to customers and Caterpillar dealers around the world. Such retail financing is primarily comprised of financing of Caterpillar equipment, machinery and engines. In addition, Cat Financial also provides financing for vehicles, power generation facilities and marine vessels that, in most cases, incorporate Caterpillar products. In addition to retail financing, Cat Financial provides wholesale financing to Caterpillar dealers and purchases short-term dealer receivables from Caterpillar. The various financing plans offered by Cat Financial are designed to increase the opportunity for sales of Caterpillar products and generate financing income for Cat Financial. Cat Financial's activity is conducted primarily in the United States, with additional offices and subsidiaries in Asia, Australia, Canada, Europe and Latin America.

Cat Financial has over 20 years of experience in providing financing in the various markets in which it participates, contributing to its knowledge of asset values, industry trends, product structuring and customer needs. As of December 31, 2004, Cat Financial had 1,399 full-time employees.

In certain instances, Cat Financial's operations are subject to supervision and regulation by state, federal and various foreign government authorities, and may be subject to various laws and judicial and administrative decisions imposing various 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 a borrower's credit experience.
Page 3

 
Cat Financial's retail financing leases and installment sale contracts (total 58 percent*) include:

·  
Tax leases that are classified as either operating or finance leases for financial accounting purposes, depending on the characteristics of the lease. For tax purposes, Cat Financial is considered the owner of the equipment (19 percent*).
 
·  
Finance (non-tax) leases where the lessee is considered the owner of the equipment during the term of the lease 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 (24 percent*).
 
·  
Governmental lease-purchase plans in the United States that offer low interest rates and flexible terms to qualified non-federal government agencies (1 percent*).
 
Retail notes receivable includes:
·  
Loans that allow customers and dealers to use their Caterpillar equipment as collateral to obtain financing (20 percent*).
 
Wholesale notes receivable, finance leases, and installment sale contracts (total 22 percent*) include:
·  
Inventory/rental programs which provide assistance to dealers by financing their inventory, rental fleets and rental facilities (6 percent*).
 
·  
Short-term dealer receivables Cat Financial purchases from Caterpillar and subsidiaries at a discount (16 percent*).

 
*Indicates the percentage of Cat Financial's total portfolio at December 31, 2004. For more information on the above and Cat Financial's concentration of credit risk, please refer to Note 21 on pages A-26 and A-27 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, General Electric Capital Corporation and local banks. In addition, many of our competitor 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 its debt portfolio largely matches the interest rate profile of its receivable portfolio plus retained interests in securitized wholesale receivables within established guidelines. In connection with that policy, Cat Financial uses interest rate derivative instruments to modify the debt structure to match these assets. 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 3 on pages A-12 and A-13 of the Appendix.

In managing foreign currency risk for Cat Financial's operations, the objective is to minimize earnings volatility resulting from conversion and the remeasurement of net foreign currency balance sheet positions. This policy allows the use of foreign currency forward contracts to offset the risk of currency mismatch between the receivable and debt portfolio. None of these foreign currency forward contracts are designated as a hedge.
 
Page 4

 
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. Transaction processing time and the supporting technologies continue to drive Cat Financial in its efforts to respond quickly to customers and improve internal processing efficiencies. We believe Cat Financial's web-based Cat FinancExpressSM transaction processing and information tool currently available in the United States, France, Canada and Australia helps to give Cat Financial a competitive advantage in those areas. Cat FinancExpress collects information on-line to provide finance quotes and credit decisions and then prints the related documents, all in a very short time frame.

Caterpillar Insurance Company, a wholly owned subsidiary of Cat Insurance (Cat Insurance and its subsidiaries are referred to herein collectively as Cat Holdings), 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-eight states and the District of Columbia, and as such, is regulated in those jurisdictions as well. The state of Missouri acts as the lead regulatory authority and monitors the company's 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 Life Insurance Company, a wholly owned subsidiary of Caterpillar, 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 Life and Accident and Health Insurance business in fourteen 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 Co. Ltd., a wholly owned subsidiary of Cat Insurance is a captive insurance 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.

Caterpillar Product Services Corporation, a wholly owned subsidiary of Caterpillar, is a warranty company domiciled in Missouri. It is regulated as a special purpose warranty company in a limited number of jurisdictions and conducts the Caterpillar engine extended service contract business (parts and labor) in all states except Virginia, Washington and Wisconsin. It also conducts the machine extended service contract program in Italy, France and Germany.

Caterpillar Insurance Services Corporation, a wholly owned subsidiary of Cat Insurance is a Tennessee insurance brokerage company licensed in all fifty states and the District of Columbia. It provides brokerage services for all property and casualty and life and health lines of business.
 
Cat Holdings provides protection for claims under the following programs:

·    
Contractual Liability Insurance to Caterpillar dealers and Original Equipment Manufacturers (OEM) for extended service contracts (parts and labor) offered by third party dealers and OEMs.
·    
Reinsurance for the worldwide cargo risks of Caterpillar products.
·    
Contractors' Equipment physical damage insurance to equipment manufactured by Caterpillar, which is leased, rented, or sold by third party dealers.
·    
Inventory Protection Insurance for Caterpillar dealer floor-plan property risks.
·    
Insurance for Caterpillar general liability, employer's liability, auto liability, property, and retiree medical stop loss insurance.
·    
Brokerage services for property and casualty and life and health business.
 
Page 5


Cat Power Ventures, a wholly owned subsidiary of Caterpillar, primarily invests equity and takes an ownership interest in power generation projects throughout the world that utilize Caterpillar power generation equipment. In some cases, these projects also utilize construction and operations and maintenance services that are provided by other Caterpillar subsidiaries. Currently, Cat Power Ventures has investments in power projects in Poland, the Dominican Republic, Tunisia, Cambodia, India and Sri Lanka. Cat Power Ventures has created direct and indirect subsidiaries and affiliates to hold these investments.

Business Developments in 2004
2004 was a year of many milestones, accomplishments and celebrations for Caterpillar. We reached the $30 billion sales and revenues milestone we set in 1997 ahead of schedule. We delivered record sales and revenues and profits. We celebrated our 50th year of operations in Brazil, 20th in Indonesia and 10th in Xuzhou, China. Cat Financial was one of seven recipients of the Malcolm Baldrige National Quality Award feted by President George W. Bush at the White House in March. This award is given to U.S. organizations with exemplary achievements in seven areas - leadership, strategic planning, customer and market focus, information and analysis, human resource focus, process management and results. November of 2004 marked the 100-year anniversary of the introduction of our signature track-type tractor design. In December, our Chairman and CEO James W. Owens rang the closing bell at the New York Stock Exchange to commemorate the 75th anniversary of our listing on the Exchange.

We continued to make progress on our strategy to establish a market leadership position in China in 2004. In January, Caterpillar shipped the 10,000th Cat hydraulic excavator from Caterpillar Xuzhou Ltd. This achievement demonstrated the company's commitment to maintaining a strong presence in China and its excellent execution by committed people. In April, the Chinese Ministry of Commerce granted Caterpillar (China) Financial Leasing Co., Ltd. a business license to provide leasing services in China. By November, Caterpillar (China) Financial Leasing Co., Ltd. had announced the signing of its first customer lease contracts. Also in November, Caterpillar announced the signing of a definitive agreement to acquire an equity interest in Shandong SEM Machinery Co., Ltd. (SEM), one of China's key wheel loader manufacturers. Caterpillar Logistics Services Inc., a wholly owned subsidiary of Caterpillar, launched a project to develop a parts distribution center based in China to serve the company's dealers and their branches. Each accomplishment in China continued Caterpillar's rapid implementation of its business model in China, including financing, logistics, distribution, procurement, rental and used equipment.

2004 also marked Caterpillar's announcement of the expansion of Caterpillar Remanufacturing Services' business to provide services for manufacturers and customers in industries beyond those Caterpillar currently serves. This expansion of Caterpillar's remanufacturing strategy builds on our successful services business model, which includes Caterpillar Logistics Services and Financial Products. In August, we announced the acquisitions of Williams Technologies, Inc. - a leading remanufacturer of automatic transmissions, torque converters, and engines for automotive and medium- and heavy-duty truck applications, located in Summerville, South Carolina - and Wealdstone Engineering Ltd., one of Europe's leading remanufacturers of gasoline and diesel engines located in the United Kingdom. These two acquisitions provide Caterpillar the opportunity to leverage our core remanufacturing strengths to provide remanufacturing services to original equipment manufacturers in the diesel engine and automotive industries.
 
We also continued to leverage our award-winning ACERT Technology to solidify our position as the emissions reduction leader in both on- and off-highway applications. In July, shortly after two Caterpillar employees, Jim Weber and Scott Leman, received the national Inventors of the Year award from the Intellectual Property Owners Association, Caterpillar became the first company to offer a full line of EPA Tier 3 compliant engines in the 175-300 horsepower range. ACERT Technology enabled us to meet this requirement ahead of the January 2005 and January 2006 planned implementation dates. In November, our new D8T track-type tractor powered by a Caterpillar engine using ACERT Technology became the first machine to meet EPA Tier 3 standards, and 6 of an additional 12 machine upgrades to ACERT Technology have already begun shipping. These milestones continue to establish the importance of our ACERT Technology, demonstrating the competitive advantage it provides to Caterpillar and the value it provides to our customers and the public at large.
Page 6

 
Acquisitions
Information about charges related to Turbomach S.A., MG Rover Ltd. and Williams Technology, Inc. appears in Note 26 on page A-32 of the Appendix.

Order Backlog
The dollar amount of backlog believed to be firm was approximately $9.1 billion at December 31, 2004 and $4.9 billion at December 31, 2003. Of the total backlog, approximately $613 million at December 31, 2004 and $320 million at December 31, 2003, 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), 53 located in the United States and 145 located outside the United States. Worldwide, these dealers serve 178 countries and operate  3,324 places of business, including 1,437 dealer rental outlets. Reciprocating engines are sold principally through the dealer network and to other manufacturers for use in their products. Some of the reciprocating engines manufactured by Perkins are also sold through a worldwide network of 170 distributors located in 150 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.

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 Turbines 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 its 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.

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.
Page 7


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 2004, 2003, and 2002, we spent $928 million, $669 million, and $656 million, or 3.1 percent, 2.9 percent, and 3.3 percent of our sales and revenues, respectively, on our research and development programs.

Employment
As of December 31, 2004, we employed 76,920 persons of whom 38,792 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 38,128 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, 2004, there were 11,465 U.S. hourly production employees who were covered by collective bargaining agreements with various labor unions. The United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) represents 9,450 Caterpillar employees under a six-year central labor agreement that will expire March 1, 2011. The International Association of Machinists (IAM) represents 1,999 employees under labor agreements expiring on April 30, 2005, and May 29, 2005. Based on our historical experience during periods when labor unrest or work stoppage by union-represented 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 United States, the company enters into 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 54 percent of consolidated sales for 2004, 56 percent for 2003, and 55 percent for 2002.

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.

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-7 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 several 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 at any individual site or at all sites in the aggregate will be required.
 
Page 8

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 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 introduction of fully compliant ACERT engines in 2003 and by the end of 2003 Caterpillar was only producing fully compliant engine models. As a result, NCPs were not payable for any engines built in 2004. NCPs of $153 million were paid in 2003.

In addition, 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 are $34.9 million, of which $5.9 million was made during 2004. Caterpillar expects to reach the $35 million requirement during the first quarter of 2005. 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.

Available Information 
The company files electronically with the SEC 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 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 (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, Worldwide Code of Business Conduct, and other corporate governance information are available on our Internet site (www.CAT.com/governance), or upon written request to the Corporate Secretary at 100 NE Adams Street, Peoria, Illinois 61629.
 
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 facsimile 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 9

 
 Item 1A. Executive Officers of the Registrant as of December 31, 2004 (except as otherwise noted)
 
 
Name and Age
Present Caterpillar Inc. position and date of
initial election
Principal positions held during the
past five years if other than
Caterpillar Inc. position currently held
James W. Owens (58)
Chairman and Chief Executive Officer (2004)
  • Group President (1995-2003)
  • Vice Chairman (2003-2004)
Stuart L. Levenick (51)
Group President (2004)
  • General Manager, Commonwealth of Independent States (1998-2000)
  • Chairman, Shin Caterpillar Mitsubishi Ltd. (2000-present)
  • Vice President (2000-2004)
Douglas R. Oberhelman (51)
Group President (2001)
  • Vice President (1995-2001)
Gerald L. Shaheen (60)
Group President (1998)
 
Gérard R. Vittecoq (56)
Group President (2004)
  • Managing Director, Caterpillar Belgium S.A. (1998-2000)
  • Vice President (2000-2004)
Steven H. Wunning (53)
Group President (2004)
  • Vice President (1998-2004)
Kent M. Adams (50) (1)
Vice President (2005)
  • Vice President, Caterpillar Financial Services Corporation (1998-2000)
  • Corporate Support Vice President, Caterpillar Financial Services Corporation (2001-2003)
  • Executive Vice President, Caterpillar Financial Services Corporation (2004)
Ali M. Bahaj (51)
Vice President (2002)
  • Director, Division Services, Engine Products Division (1998-2001)
  • Director, Business Development & Consulting Services (2001-2002)
Sidney C. Banwart (59)
Vice President (1998)
  • Chief Information Officer (2001- 2004)
Michael J. Baunton (53)
Vice President (1998)
  • President, Perkins Engine Company Limited (1998 - 2004)
James S. Beard (63) (2)
Vice President (1990)
  • President, Director and Principal Executive Officer, Caterpillar Financial Services Corporation (1987-present)
Rodney C. Beeler (47)
Vice President (2004)
  • Customer Segments Manager, Caterpillar Overseas, S.A. (1999-2000)
  • Manager, Rental and Used Equipment Services Department, North American Commercial Division (2000-2004)
Mary H. Bell (44)
Vice President (2004)
  • 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 (61) (3)
Vice President (1989)
 
James B. Buda (57)
Vice President, General Counsel and Secretary
(2001)
  • Associate General Counsel, UK (1999-2001)
David B. Burritt (49)
Vice President and Chief Financial Officer (2004)
  • General Manager, Strategic & Business Services - Europe, Caterpillar Overseas S.A. (1999-2001)
  • Corporate 6 Sigma Champion (2001-2002)
  • Controller (2002 - 2004)
Rodney L. Bussell (58)
Vice President (2001)
  • General Manager, Large Engine Products & Fuel Systems Division (1998-2001)
Christopher C. Curfman (52)
Vice President (2004)
  • Managing Director, Caterpillar of Australia Ltd. (1999-2001)
  • Managing Director-Marketing, Caterpillar of Australia Ltd. (2001)
  • Managing Director-Marketing, Asia-Pacific Division (2001-2004)
  • Alliance Development Director, Global Mining Division (2004)
Paolo Fellin (50)
Vice President (2004)
  • General Manager, Caterpillar Work Tools & Services (1999-2003)
  • Marketing Manager, North American Commercial Division (2003-2004)
Thomas A. Gales (56)
Vice President (2000)
  • Managing Director, Caterpillar France, S.A. (1998-2000)
Stephen A. Gosselin (47)
Vice President (2002)
  • North American Distribution Manager, Engine Products Division (1999-2000)
  • Regional Manager, North American Commercial Division (2000-2002)
Page 10

Hans A. Haefeli (46)
Vice President (2004)
  • Managing Director Product Supply, Perkins Engines Company Limited (1999-2002)
  • General Manager, Building Construction Products Division (2002-2003)
  • President, Perkins Engine Company Limited (01/2004 to present)
John S. Heller (50)
Vice President (2004)
  • Engine Division Technology Manager, Engine Products Division (2000-2001)
  • Engine Division Technology Manager, Systems & Processes Division (2001-2001)
  • Director, Corporate Information Services, Systems & Processes Division (2001-2002)
  • Director, Global IT Solutions, Systems & Processes Division (2002-2004)
  • Chief Information Officer (2004 - Present)
Richard P. Lavin (52)
Vice President (2001)
  • Director, Compensation & Benefits (1999-2001)
Robert R. Macier (56)
Vice President (1998)
  • President, Solar Turbines Incorporated (2002-present)
F. Lynn McPheeters (62) (3)
Vice President and Chief Financial Officer (1998)
 
Daniel M. Murphy (57)
Vice President (1996)
 
Gerald Palmer (59)
Vice President (1992)
 
James J. Parker (54)
Vice President (2001)
  • Director, Electric Power (1998-2001)
Mark R. Pflederer (48)
Vice President (2004)
  • 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 (47)
Vice President (2000)
  • Regional Manager, Caterpillar Overseas S.A. (1998-2000)
William J. Rohner (52)
Vice President (2004)
  • CBL Managing Director, Latin America Division (2000-2004)
Christiano V. Schena (55)
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 (53)
Vice President (2002)
  • President, Caterpillar Logistics (1998-2002)
Gary A. Stroup (55)
Vice President (1992)
  • President, Solar Turbines Incorporated (1998-2002)
Donald G. Western (56)
Vice President (1995)
 
Robert T. Williams (56)
Vice President (2004)
  • General Manager, Performance Engine Products Division (1998-2002)
  • Director-Manufacturing, Operations Support & Technology, Technical Services Division (2002)
  • Director, Technical Services Division (2003-2004)
Bradley M. Halverson (44)
Controller (2004)
  • Business Resource Manager, Performance Engines Products Division (1998-2001)
  • Business Resource Manager, Large Engine Products & Fuel Systems Division (2001)
  • Business Resource Manager, Large Power Systems Division (2002)
  • Corporate Business Development Manager, Corporate Services Division (2002-2004)
Kevin E. Colgan (52)
Treasurer (2001)
  • Vice President, Caterpillar Financial Services Corporation (1997-2001)
(1) Effective February 1, 2005.
(2) Will retire effective March 1, 2005.
(3) Retired effective February 1, 2005.
 
Page 11

 
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 manufacturing of both. In addition, several plants are involved in the manufacturing 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 our Technical Center (as described below) involve both machines and engines.

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.

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, 2004, changes in our investment in property, plant and equipment were as follows (stated in millions of dollars):


     Expenditures   Acquisitions       
Disposals
 
Net Increase
       
Provision for
 
and Other
 
(Decrease)
Year
 
U.S.
 
Outside U.S.
 
U.S.
 
Outside U.S.
 
Depreciation
 
Adjustments
 
During Period








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)
   
$
(151)
   
$
438
 
2003
 
$
1,000
 
$
765
   
$
0
 
$
0
   
$
(1,332)
   
$
(191)
   
$
242
 
2004
 
$
1,212
 
$
902
   
$
10
 
$
44
   
$
(1,366)
   
$
(371)
   
$
431
 




























At December 31, 2004, the net book value of properties located outside the United States represented about 42 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-10 and Note 10 on page A-17 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 12

 

Manufacturing

Inside the U.S.
 
 
Indiana
 
Tennessee
 
France
 
Mexico
California
 
  • Lafayette
 
  • Dyersburg
 
  • Arras
 
  • Monterrey
  • Gardena
 
Kansas
 
Texas
 
  • Grenoble
 
  • Reynosa
  • San Diego
 
  • Wamego
 
  • Channelview
 
  • Rantigny
 
  • Saltillo
Florida
 
Kentucky
 
Outside the U.S.
 
Germany
 
  • Tijuana
  • Jacksonville
 
  • Danville
 
Australia
 
  • Kiel
 
  • Torreon
Georgia
 
Michigan
 
  • Burnie
 
  • Rostock
 
The Netherlands
  • Alpharetta
 
  • Menominee
 
  • Melbourne
 
Hungary
 
  • s'-Hertogenbosch
  • Griffin
 
Minnesota
 
Belgium
 
  • Gödöllö
 
Northern Ireland
  • Jefferson
 
  • Grand Rapids1
 
  • Gosselies
 
India
 
  • Larne
  • LaGrange
 
  • Minneapolis
 
Brazil
 
  • Bangalore2
 
  • Monkstown
  • Toccoa
 
  • New Ulm
 
  • Curitiba
 
  • Pondicherry
 
  • Springvale
  • Thomasville
 
Mississippi
 
  • Piracicaba
 
  • Thiruvallur
 
Peoples Republic
Illinois
 
  • Oxford
 
Canada
 
Indonesia
 
of China
  • Aurora
 
Missouri
 
  • Laval
 
  • Jakarta
 
  • Erliban1
  • Champaign1
 
  • Boonville
 
England
 
Italy
 
  • Shunde1
  • Decatur
 
  • West Plains
 
  • Barwell
 
  • Anagni1
 
  • Tianjin2
  • Dixon
 
North Carolina
 
  • Leicester
 
  • Bazzano
 
  • Xuzhou2
  • East Peoria
 
  • Clayton
 
  • Peterborough
 
  • Fano
 
Poland
  • Joliet
 
  • Franklin
 
  • Peterlee
 
  • Frosinone1
 
  • Janow Lubelski
  • Mapleton
 
  • Morganton
 
  • Skinningrove
 
  • Jesi
 
Russia
  • Mossville
 
  • Sanford
 
  • Stafford
 
  • Marignano
 
  • Tosno
  • Peoria
 
Ohio
 
  • Stockton
 
  • Milan1
 
South Africa
  • Pontiac
 
  • Dayton1
 
  • Wimborne
 
  • Minerbio
 
  • Boksburg
  • Sterling
 
South Carolina
 
  • Wolverhampton
 
Japan
 
Switzerland
  • Woodridge1
 
  • Greenville
     
  • Akashi1
 
  • Riazzino
   
  • Sumter
     
  • Sagamihara1
   

 
Remanufacturing and Overhaul

Inside the U.S.
 
Texas
 
Canada
Mexico
Louisiana
 
  • De Soto
 
  • Edmonton
  • Nuevo Laredo
  • New Orleans
 
  • Mabank
 
England
  • Tijuana
Mississippi
 
Outside the U.S.
 
  • Rushden
  • Veracruz
  • Corinth
 
Australia
 
  • Shrewsbury
Nigeria
  • Prentiss County
 
  • Melbourne
 
Indonesia
  • Port Harcourt
South Carolina
 
Belgium
 
  • Bandung2
Scotland
  • Summerville
 
  • Gosselies
 
Malaysia
  • Aberdeen
       
  • Kuala Lumpur1
 
1 Facility of affiliated company (50% or less owned)
2 Facility of partially owned subsidiary (more than 50%, less than 100%)
 
Page 13
 


 
 
We are a party to litigation matters and claims that are normal in the course of our 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 any single proceeding or all proceedings in the aggregate would not have a materially adverse effect on our consolidated financial position or results of operations or cash flows.
 
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. As of December 31, 2004, the net past due receivable from Navistar regarding the foregoing and included in "Long-term receivables - trade and other" in Statement 3 on page A-7 of the Appendix totaled $139 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. As of December 31, 2004, the net past due receivables for the foregoing, included in "Long-term receivables - trade and other" in Statement 3 on page A-7 of the Appendix totaled $13 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 fifth 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 has also asserted a claim for "unjust enrichment" related to certain revenues received by Caterpillar from another customer. International seeks damages "in an amount to be determined at trial" and injunctive relief. Caterpillar denies International's claims and has filed a counterclaim seeking a declaration that the term sheet has been effectively terminated. Caterpillar also asserts that International has released Caterpillar from certain of its claims. 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 to begin in June 2005 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.

In 2004, the European Union (EU) imposed retaliatory tariffs on certain U.S. origin goods as a result of a WTO decision that found the extraterritorial income exclusion (ETI) provisions of the FSC Repeal and Extraterritorial Income Exclusion Act of 2000 constituted a prohibited export subsidy. These tariffs, which began in March of 2004 at 5 percent, increased 1 percentage point per month. Given the makeup of the final retaliation list, some Caterpillar parts and components were subject to these tariffs. However, these tariffs have not materially impacted our financial results. In addition to the United States, the company has production facilities in the EU, Russia, Asia, and South America. Products sold into the EU from these plants were not affected by this retaliatory tariff. The American Jobs Creation Act of 2004 (Act), enacted on October 22, 2004, phases-out the ETI provisions. As a result, the EU has lifted the sanctions effective January 1, 2005 pending the outcome of a WTO review to determine whether certain provisions of the Act are compliant with the ruling against the FSC/ETI regime.
 
Page 14

 
In a letter dated November 15, 2004, the EPA proposed a civil penalty of $641,392 to Caterpillar for the alleged failure to comply with certain requirements of the Federal Clean Air Act. The EPA alleges that Caterpillar constructed a facility in Emporia, Kansas, and failed to comply with Section 112(g)(2)(B) of the Clean Air Act. Caterpillar sold the Emporia facility in December 2002. We are seeking a settlement of this matter with all concerned parties and the company believes the outcome will not have a material impact on our financial statements.
 
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-62 and from "Dividends paid per common share" on page A-51 of the Appendix.

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, 2004, those plans had approximately 9,108 participants in the aggregate. During the fourth quarter of 2004, a total of 121,086 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 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.

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, 2004
 
1,005,000
 
 
 
$
79.53
 
 
1,005,000
 
 
20,826,904
1
November 1-30, 2004
 
-
 
 
 
 
 
 
-
 
 
22,909,109
1
December 1-31, 2004
 
631,400
 
 
 
93.18
 
 
631,400
 
 
22,936,949
1







Total
 
1,636,400
 
 
$
84.80
 
 
1,636,400
 
 
 
 







 
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.

 
 
Other Purchases of Equity Securities 

Period
 
Total number
of Shares
Purchased1
 
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, 2004
 
30
   
$
72.12
   
N/A
   
N/A
 
November 1-30, 2004
 
1,261
     
80.30
   
N/A
   
N/A
 
December 1-31, 2004
 
251
     
85.90
   
N/A
   
N/A
 





Total
 
1,542
   
$
81.05
             





 

1 Represents shares delivered back to issuer for the payment of taxes resulting from the exercise of stock options.

 
Page 15

 

 
 Item 6. Selected Financial Data.
Information required by Item 6 is incorporated by reference from the "Five-year Financial Summary" on page A-35, "Contractual obligations" on page A-51, and "Supplemental consolidating data" on pages A-57 through A-59 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-36 through A-61 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
The world economy had its best recovery in years in 2004 and we expect that recovery to continue, but at a somewhat slower pace, in 2005. That outlook assumes central banks will cautiously raise interest rates so as not to slow growth too much. Low interest rates, and continued good economic growth, should encourage further growth in construction and mining. Should central banks raise interest rates aggressively, both the world economic recovery and our Machinery and Engines sales likely would be weaker.

The U.S. economy is growing at more than a three percent rate, which up to now has not created an inflation problem. While the Federal Reserve has raised interest rates, we assume the continuation of moderate growth and low inflation will result in interest rates of no more than 3.5 percent by the end of 2005. Long-term interest rates are expected to rise less than short-term rates. That environment should support further growth in construction and manufacturing, helping to keep commodity prices favorable. Should financial conditions tighten noticeably, causing economic growth to slow below 3 percent, expected improvements in Machinery and Engines sales likely would be lower than projected.

Our projection of increased sales of Machinery and Engines in Europe, Africa, Middle East (EAME) assumes that low interest rates will allow slightly faster economic growth in Europe and that favorable commodity prices will extend healthy recoveries in both Africa and Middle East (AME) and the CIS. Key risks are that the European Central Bank will raise interest rates sharply to reduce inflation or that commodity prices collapse. Those developments would negatively impact our results.

Favorable commodity prices, increased capital inflows and an improved foreign debt situation are expected to contribute to another year of economic recovery in Latin America. As a result, we project that both mining production and construction spending will increase, supporting an increase in Machinery and Engines sales. This forecast is vulnerable to a significant weakening in commodity prices, a slowing in world economic growth or widespread increases in interest rates.

In Asia/Pacific, we project sales growth in Australia, India and the developing Asian economies will offset a further decline in China. Critical assumptions are continued growth in coal demand, low domestic interest rates in most countries, further gains in exports and continued good economic growth in China. Some developments that could lower expected results include reduced demand for thermal and coking coal, significant revaluations of regional currencies, restrictions on regional exports and sharp interest rate hikes, particularly in China.

Commodity Prices
Commodities represent a significant sales opportunity, with prices and production as key drivers. Prices have improved sharply over the past year and a half and our outlook assumes continued growth in world industrial production will cause metals prices to remain high enough in 2005 to encourage further mine investment. Any unexpected weakening in world industrial production, however, could cause prices to drop sharply to the detriment of our results.
 
Page 16

 
Coal production and prices improved last year and our sales have benefited. We expect these trends to continue in 2005. Should coal prices soften, due to a slowing in world economic growth or otherwise, the ongoing sales recovery would be vulnerable.

Oil and natural gas prices increased sharply over the past two years due to strong demand and high capacity usage. Higher energy prices did not halt economic recoveries last year since a strong demand boosted prices and world production increased. High prices are encouraging more exploration and development and we expect increased production in 2005 will constrain price increases. However, should significant supply cuts occur, such as from OPEC production cuts or political unrest in a major producing country, the resulting oil shortages and price spikes could slow economies, potentially with a depressing impact on our sales.

Monetary and Fiscal Policies
For most companies operating in a global economy, monetary and fiscal policies implemented in the United States 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, excessive currency movements, and uncertainty over key policies are some factors likely to lead to slower economic growth and lower industry demand.

With economic data looking more favorable, central banks in developed countries have started raising interest rates from the lowest rates in decades. Our outlook assumes that central banks will take great care to ensure that economic recoveries continue and that interest rates will remain low throughout the forecast period. Should central banks raise interest rates more aggressively than anticipated, 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 our sales.

Political Factors
Political factors in the United States and abroad can impact global companies. Our outlook assumes that no major disruptive changes in economic policies occur in either the United States or other major economies. Significant changes in either taxing or spending policies could reduce activities in sectors important to our businesses, thereby reducing sales.

Our outlook assumes that there will be no additional significant military conflicts in either North Korea or the Middle East in the forecast period. Such military conflicts 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, potentially causing a sharp drop in economic activities and our sales. Attacks in major developed economies would be the most disruptive.

Our outlook 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. Our outlook includes a negative impact from the phase-out of the Extraterritorial Income Exclusion (ETI) as enacted by the American Jobs Creation Act of 2004 (the Act). However, our outlook does not include any impact from the provision of the Act allowing preferential tax treatment of the repatriation of non-U.S. earnings in 2005. Further, our outlook assumes any other tax law changes will not negatively impact our provision for income taxes.

Currency Fluctuations
The company has costs and revenues in many currencies and is therefore exposed to risks arising from currency fluctuations. Our outlook assumes no significant changes in currency values from current rates. Should currency rates change sharply, our results could be negatively impacted.

The company's largest manufacturing presence is in the United States, so any unexpected strengthening of the dollar tends to raise the foreign currency costs to our end users and reduce our global competitiveness.
 
 
Page 17

 
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 increase inventories in line with higher deliveries. Should dealers control inventories more tightly, our sales would be lower.

Financial Products Division Factors
Inherent in the operation of Cat Financial 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.

Other Factors
The rate of infrastructure spending, housing starts, commercial construction and mining plays 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.

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 in which the alliances conduct their operations.

As of December 31, 2004, there were 11,465 U.S. hourly production employees who were covered by collective bargaining agreements with various labor unions. The United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) represents 9,450 Caterpillar employees under a six-year central labor agreement that will expire March 1, 2011. The International Association of Machinists (IAM) represents 1,999 employees under labor agreements expiring on April 30, 2005, and May 29, 2005. Based on our historical experience during periods when labor unrest or work stoppage by union-represented 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.

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.
Page 18

 
The environment remains competitive from a pricing standpoint. Our 2005 sales outlook assumes that the company will be successful in implementing worldwide machine price increases communicated to dealers with an effective date of January 3, 2005. While we expect that the environment will absorb these price actions, delays in the marketplace acceptance would negatively impact our results. Moreover, additional price discounting to maintain our competitive position could result in lower than anticipated price realization.

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 page A-11, Note 3 on pages A-13 and A-14, Note 20 on pages A-25 and A-26 and Note 21 on pages A-26 and A-27 of the Appendix. Other information required by Item 7A is incorporated by reference from pages A-55 and A-56 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 Registered Public Accounting Firm on page A-4 and from the Financial Statements and Notes to Consolidated Financial Statements on pages A-5 through A-34 of the Appendix. Other information required by Item 8 is included in "Computation of Ratios of Earnings to Fixed Charges" filed as Exhibit 12 to this Form 10-K.
 
 Item 9A. Controls and Procedures.
 
Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Exchange Act Rule 13a-15(e). Based on this evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.
 
The management of Caterpillar Inc. (company) is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
 
Page 19

 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the company's internal control over financial reporting as of December 31, 2004. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on our assessment we concluded that, as of December 31, 2004, the company's internal control over financial reporting was effective based on those criteria.

Our management's assessment of the effectiveness of the company's internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm. Their report appears on page A-4 of the Appendix.
 
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 2008," "Directors Remaining in Office Until 2006," and "Directors Remaining in Office Until 2007" on pages 2 through 4 of the Proxy Statement.

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 Involving Officers and Directors
Information required by this SK Item 401(f) is incorporated by reference from "Legal Proceedings" on page 7 of the Proxy Statement.

Audit Committee Financial Expert
Information required by this Item is incorporated by reference from "Board Meetings, Communications and Committees" on pages 4 through 6 of the Proxy Statement.

Identification of Audit Committee
Information required by this Item is incorporated by reference from "Board Meetings, Communications and Committees" on pages 4 through 6 of the Proxy Statement.

Shareholder Recommendation of Board Nominees
Information required by this Item is incorporated by reference from "Governance Committee Report" on pages 10 and 11 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 of 1934 is incorporated by reference from "Section 16(a) Beneficial Ownership Reporting Compliance" on pages 33 and 34 of the Proxy Statement.
 
Page 20

Code of Ethics
Our Code of Worldwide Business Conduct (Code), first published in 1974 and most recently 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 incorporated by reference as Exhibit 14 to this Form 10-K. To obtain a copy of the Code at no charge, submit a written request to the Corporate 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 6, "Performance Graph" on page 13, "Compensation Committee Report on Executive Officer and Chief Executive Officer Compensation" on pages 14 through 21, and "Executive Compensation Tables" on pages 22 through 24 of the Proxy Statement.

On February 18, 2005, the Compensation Committee authorized the following with respect to the compensation of the company's named executive officers as defined in Regulation S-K Item 402(a)(3).
 
 
2005 Salary
 
2004 Bonus1
Shares of
Restricted Stock
Shares Underlying 2005 Option Grant2
 
LTCPP Payouts3
 
James W. Owens
$
1,200,000
   
$
1,649,811
 
10,000
 
230,000
   
$
1,371,886
Stuart L. Levenick
$
588,000
   
$
547,197
 
 
 
65,000
   
$
533,814
Douglas R. Oberhelman
$
700,000
   
$
764,340
 
1,000
 
70,000
   
$
708,745
Gerald L. Shaheen
$
778,000
   
$
843,739
     
70,000
   
$
788,135
Gérard L. Vittecoq
$
819,950
4
 
$
887,295
     
65,000
   
$
771,808
Steven H. Wunning
$
612,000
   
$
625,387
     
65,000
   
$
550,432
1Granted under the Executive Incentive Compensation Plan (Ex.10.5 hereto) and based on company performance versus profit per share and 6 Sigma value proposition metrics set by the Compensation Committee in February 2004 and in recognition of outstanding individual performance in 2004.
2Granted under the 1996 Stock Option and Long Term Incentive Plan (Ex. 10.1 hereto).
3Granted under the 1996 Stock Option and Long Term Incentive Plan (Ex.10.1 hereto) and based on company performance from 2002 through 2004 against profit per share and return on equity metrics set by the Compensation Committee in February 2002.
4Estimated based on exchange rate for Swiss francs as of February 18, 2005.
 
 
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, 2004)" on page 12 and "Persons Owning More than Five Percent of Caterpillar Stock (as of December 31, 2004)" on page 13 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, 2004)

   
(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
 
41,425,377
   
57.61
   
19,402,200
   
Equity compensation plans
not approved by security holders
 
n/a
   
n/a
   
n/a
   






Total
 
41,425,377
   
57.61
   
19,402,200
   


















Item 13. Certain Relationships and Related Transactions.

Information required by this item is incorporated by reference from "Certain Related Transactions" on page 7 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 7 through 9 and "Audit Fees" on page 10 of the Proxy Statement.


PART IV
 

Item 15. Exhibits and Financial Statement Schedules.

(a)  The following documents are incorporated by reference from the indicated pages of the Appendix:
1. Financial Statements:
·  
Report of Independent Registered Public Accounting Firm (A-4)
·  
Statement 1 - Results of Operations (A-5)
·  
Statement 2 - Changes in Consolidated Stockholders' Equity (A-6)
·  
Statement 3 - Financial Position (A-7)
·  
Statement 4 - Statement of Cash Flow (A-8)
·  
Notes to Consolidated Financial Statements (A-9 through A-34)
 
    2. Financial Statement Schedules:
·  
All schedules are omitted because the required information is shown in the financial statements or the notes thereto incorporated by reference from the Appendix or considered to be immaterial.
 
 
 
Page 22

 
 
 
(b)
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 February 11, 2004 (incorporated by reference from Exhibit 3.3 to the Form 10-Q filed for the quarter ended March 31, 2004).
 
 
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 August 18, 2004.**
 
 
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 January 2003.**
 
 
10.4
 
 
Supplemental Employees' Investment Plan, as amended and restated through December 1, 2002 (incorporated by reference from Exhibit 10.4 to the 2002 Form 10-K for 2002).**
 
 
10.5
 
 
Caterpillar Inc. Executive Incentive Compensation Plan, effective as of January 1, 2002 (incorporated by reference from Exhibit 10.5 to the 2002 Form 10-K).**
 
 
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 the 2002 Form 10-K).**
 
 
11
 
 
Computations of Earnings per Share (incorporated by reference from Note 19 on page A-25 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 2005 Annual Meeting Proxy Statement.
 
 
14
 
 
Caterpillar Code of Worldwide Business Conduct (incorporated by reference from Exhibit 14 to the 2003 Form 10-K).
 
 
21
 
 
Subsidiaries and Affiliates of the Registrant.
 
 
23
 
 
Consent of Independent Registered Public Accounting Firm.
 
 
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 David B. Burritt, 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 David B. Burritt, Chief Financial Officer of Caterpillar Inc., as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
99.1
 
 
Annual CEO certification to the New York Stock Exchange.
 
 
99.2
 
 
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.
 
 
 
Page 23

 
 
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)
 
            February 24, 2005
 
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.
       
           February 24, 2005
/s/James W. Owens
 
Chairman of the Board, Director
and Chief Executive Officer

 
 
 
   
            February 24, 2005
/s/Stuart L. Levenick
 
Group President

 
 
 
   
            February 24, 2005
/s/Douglas R. Oberhelman
 
Group President

 
 
 
   
            February 24, 2005
/s/Gerald L. Shaheen
 
Group President

 
 
 
   
            February 24, 2005
/s/Gerard R. Vittecoq
 
Group President

 
 
 
   
           February 24, 2005
/s/Steven H. Wunning
 
Group President

 
 
 
   
           February 24, 2005
/s/David B. Burritt
 
Vice President and
Chief Financial Officer

 
 
 
   
           February 24, 2005
/s/Bradley M. Halverson
 
Controller and
Chief Accounting Officer

     

 
 
Page 24

 
 
February 24, 2005
 
/s/W. Frank Blount
 
Director

     
         February 24, 2005
 
/s/John R. Brazil
 
Director

     
          February 24, 2005
 
/s/John T. Dillon
 
Director

 
     
           February 24, 2005
 
/s/Eugene V. Fife
 
Director

     
          February 24, 2005
 
/s/Gail D. Fosler
 
Director

     
          February 24, 2005
 
/s/Juan Gallardo
 
Director

     
           February 24, 2005
 
/s/David R. Goode
 
Director

     
           February 24, 2005
 
/s/Peter A. Magowan
 
Director

     
           February 24, 2005
 
/s/William A. Osborn
 
Director

     
            February 24, 2005
 
/s/Gordon R. Parker
 
Director

     
            February 24, 2005
 
/s/Charles D. Powell
 
Director

     
           February 24, 2005
 
/s/Edward B. Rust, Jr.
 
Director

     
            February 24, 2005
 
/s/Joshua I. Smith
 
Director

     


 
Page 25

 

EXHIBIT 10.1

CATERPILLAR INC.
1996 STOCK OPTION AND LONG-TERM INCENTIVE PLAN
(as Amended and Restated effective August 18, 2004)

Section 1. Purpose

The Caterpillar Inc. 1996 Stock Option and Long-Term Incentive Plan (“Plan”) is designed to attract and retain outstanding individuals as non-employee directors, officers and key employees of Caterpillar Inc. and its subsidiaries (collectively, the “Company”), and to furnish incentives to such individuals through awards based upon the performance of the Company and its stock. To this end, the Plan provides for grants of stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units, and performance awards, or combinations thereof, to non-employee directors, officers and other key employees of the Company, on the terms and subject to the conditions set forth in the Plan.

Section 2. Shares Subject to the Plan

2.1 Shares Reserved for Issuance

Sixty-Four Million shares of Company common stock (“Shares”) shall be available for issuance under the Plan either from authorized but unissued Shares or from Shares acquired by the Company, including Shares purchased in the open market. An additional four million Shares authorized but unissued under prior Company stock option plans shall be available for issuance under this Plan.

2.2 Reacquired Shares

If Shares subject to an award under the Plan are not acquired by participants, or Shares issued under the Plan are reacquired by the Company, because of lapse, expiration, or termination of an award, such Shares shall again become available for issuance under the Plan. Shares tendered upon exercise of an option by a Plan participant may be added back and made available solely for future awards under the Plan.

2.3 Adjustments in Authorized Shares

In the event of any corporate event or transaction (including, but not limited to, a change in the shares of the Company or the capitalization of the Company) such as a merger, consolidation, reorganization, recapitalization, separation, stock dividend, stock split, reverse stock split, split up, spin-off, or other distribution of stock or property of the Company, combination of Shares, exchange of Shares, dividend in kind, or other like change in capital structure or distribution (other than normal cash dividends) to stockholders of the Company, or any similar corporate event or transaction, the Committee, in its sole discretion, in order to prevent dilution or enlargement of Participants’ rights under the Plan, shall substitute or adjust, as applicable, the number and kind of Shares that may be issued under the Plan or under particular forms of awards, the number and kind of Shares subject to outstanding awards, the option exercise price or base price applicable to outstanding awards, the annual award limits, the limits on awards set forth in Sections 5.1(a), 6.1(b) and 8.2, and other value determinations applicable to outstanding awards.

The Committee, in its sole discretion, may also make appropriate adjustments in the terms of any awards under the Plan related to such changes or distributions and to modify any other terms of outstanding awards, including modifications of performance goals and changes in the length of Performance Periods. The determination of the Committee as to the foregoing adjustments, if any, shall be conclusive and binding on Participants under the Plan.
 
Page 1


Section 3. Administration

Unless otherwise provided in the Plan, the Committee shall have the authority to grant awards under the Plan to non-employee directors, officers, and other key employees of the Company. Except as limited by the express provisions of the Plan or by resolutions adopted by the Board, the Committee also shall have the authority and discretion to interpret the Plan, to establish and revise rules and regulations relating to the Plan, and to make any other determinations that it believes necessary or advisable for administration of the Plan, except to the extent that such authority or discretion would cause an award to fail to qualify as performance based compensation for purposes of Section 162(m) of the Code.

The Committee shall be composed solely of members of the Board that satisfy applicable tax, securities and stock exchange rules, and other requirements determined to be necessary or advisable by the Board. The Committee may delegate to one or more of its members or to one or more officers of the Company, and/or its Subsidiaries and Affiliates or to one or more agents or advisors such administrative duties or powers as it may deem advisable, and the Committee or any person to whom it has delegated duties or powers as aforesaid may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the Plan.

Section 4. Eligibility and Participation

4.1 Eligibility

Individuals eligible to participate in this Plan include non-employee directors, officers, and other key employees.

4.2 Actual Participation

Subject to the provisions of the Plan, the Committee may, from time to time, select from all eligible officers and key Employees those to whom awards shall be granted. The Committee shall determine, in its sole discretion, the nature of any and all terms (as permissible by law) and the amount of each award. Directors who are not employees shall only receive awards in accordance with the terms set forth in this Plan.

Section 5. Stock Options

5.1 Company Employees

(a) Eligibility

The Committee shall determine Company officers and key employees to whom options shall be granted, the timing of such grants, and the number of shares subject to the option; provided that the maximum number of Shares upon which options may be granted to any employee in any calendar year shall be 400,000. All Options granted under the Plan will be evidenced by an Award Agreement.

(b) Option Exercise Price

The exercise price of each option shall not be less than 100% of the fair market value of Shares underlying the option at the time the option is granted. The fair market value for purposes of determining the exercise price shall be the mean between the high and the low prices at which Shares are traded on the New York Stock Exchange on the day the option is granted. In the event this method for determining fair market value is not practicable, fair market value shall be determined by such other reasonable method as the Committee shall select.
 
 
Page 2


(c) Option Exercise

Options shall be exercisable in such installments and during such periods as may be fixed by the Committee at the time of grant. Each Option granted to a Participant shall expire at such time as the Committee shall determine at the time of grant; provided, however, no Option shall be exercisable later than the tenth (10th) anniversary date of its grant.

Payment of the exercise price shall be made upon exercise of all or a portion of any option. Payment of the exercise price may be in the form of cash utilizing the exercise method of "exercise and hold", or by tendering shares in a stock "swap" transaction, in which the fair market value of the shares tendered must equal 100% of the exercise price. The fair market value of Shares for this purpose shall be the mean between the high and low prices at which shares are traded on the New York Stock Exchange on the date of exercise. When shares are immediately exercised and sold to satisfy the option exercise price, the selling price of the shares shall be the price at which the shares are traded on the New York Stock Exchange at the time of exercise. Upon exercise of an option, any applicable taxes the Company is required to withhold shall be paid to the Company. Shares to be received upon exercise may be surrendered to satisfy withholding obligations.

(d) Termination of Employment

The Committee may require a period of continued employment before an option can be exercised. That period shall not be less than one year, except that the Committee may permit a shorter period in the event of termination of employment by retirement or death. An exception to the one year period other than retirement or death is applicable only for the 2004 year grant, of which the options may be exercised as of January 3, 2005.

Termination of employment with the Company shall terminate remaining rights under options then held; provided, however, that an option grant may provide that if employment terminates after completion of a specific period, the option may be exercised during a period of time after termination. That period may not exceed sixty months where termination of employment is caused by retirement or death or sixty days where termination results from any other cause provided that such period shall not extend beyond the original maximum term of the option. If death occurs after termination of employment but during the period of time specified, such period may be extended to not more than sixty-six months after retirement, or thirty-eight months after termination of employment for any other cause provided that such period shall not extend beyond the original maximum term of the option. In the event of termination within two years after a Change of Control as defined in Section 10.2 of the Plan, options shall be exercisable for a period of sixty months following the date of termination or for the maximum term of the option, whichever is shorter. Notwithstanding the foregoing, the Committee may change the post-termination period of exercisability of an option provided that change does not extend the original maximum term of the option.

(e) Transferability of Options

(i) Except as otherwise permitted in Section 4.1(e)(ii), options shall not be transferable other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or the Employee Retirement Income Security Act. Options are exercisable during the holder’s lifetime only by the holder, unless the holder becomes incapacitated or disabled, in which case the option may be exercised by the holder’s authorized representative. A holder may file with the Company a written designation of beneficiaries with the authority to exercise options in the event of the holder’s death.
 
 
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(ii) Notwithstanding the provisions of Section 4.1(e)(i), and in addition to the permissible transfers under that provision, options granted to persons at the level of Vice President and above, as well as directors of the Company and persons retired from those positions, may be transferred to any one or more “Permitted Transferees,” as long as those options are not incentive stock options as defined below and are fully vested. Options granted to employees below the level of Vice President may be transferred upon prior approval of the Company’s Director of Compensation and Benefits pursuant to the terms of this section.

(iii) For purposes of Section 4.1(e)(ii), the term "Permitted Transferees" shall mean the members of the group that consists exclusively of the individual to whom the option is granted, the spouse of the individual to whom the option is granted, the lineal descendants of the individual to whom the option is granted, the spouses of the lineal descendents to whom the option is granted, the lineal descendants of any spouse or former spouse of the individual to whom the option is granted, the spouses of the lineal descendants of any spouse or former spouse of the individual to whom the option is granted, the estate (and any trust that serves a distributive function of an estate) of the Permitted Transferee, all trusts that an individual who is a Permitted Transferee can revoke and all trusts, corporations, partnerships, limited liability companies and other entities in which, directly or indirectly, but for the exercise of a power of appointment or the death of the survivor of the individual who are Permitted Transferees. Each owner of an equitable interest is an individual who is a Permitted Transferee.

(f) Incentive Stock Options

Incentive stock options (“ISOs”), as defined in Section 422 of the Code, may be granted to key employees under the Plan. The decision to grant ISOs to particular persons is within the Committee’s discretion. An Option Award Agreement shall specify whether the Option is intended to be an ISO or a Non-Qualified Stock Option (“NQSO”). A NQSO is an option that does not meet the definition of an ISO. ISOs shall not be exercisable after expiration of ten years from the date of grant. The amount of ISOs vesting in a particular calendar year for an option recipient under this Plan and all incentive stock option plans of the Company or any parent or subsidiary corporation cannot exceed $100,000, based on the fair market value of the Shares subject to the options on the date of grant; provided that any portion of an option that cannot be exercised as an ISO because of this limitation may be converted by the Committee to another form of option. If any employee or former employee shall make any disposition of Shares issued pursuant to the exercise of an ISO under the circumstances described in Section 421(b) of the Code (relating to certain disqualifying dispositions), such employee or former employee shall notify the Company of such disposition within ten (10) days thereof. The Board may amend the Plan to comply with Section 422 of the Code or other applicable laws and to permit options previously granted to be converted to ISOs.

5.2 Non-Employee Directors

(a) Terms

Subject to the share ownership requirements, options with a term of ten years are granted to each non-employee director for 4,000 Shares, effective as of the close of each annual meeting of stockholders at which an individual is elected a director or following which such individual continues as a director. Options granted to non-employee directors shall become exercisable by one-third at the end of each of the three successive one-year periods since the date of grant. The exercise price of each option shall be 100% of the fair market value of Shares underlying the option on the date of grant.
 
 
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(b) Termination of Directorship

An option awarded to a non-employee director may be exercised any time within sixty months of the date the director terminates such status. In the event of a director’s death, the director’s authorized representative may exercise the option within sixty months of the date of death, provided that if the director dies after cessation of director status, the option is exercisable within sixty-six months of such cessation. In no event shall an option awarded to a non-employee director be exercisable beyond the expiration date of that option.

Section 6. Stock Appreciation Rights

6.1 Company Employees

(a) Types of SARs

The Committee may grant “tandem” and “non-tandem” SARs under the Plan. A tandem SAR shall be granted at the same time as an option and may be exercised by the recipient as an alternative to the option. The term of a tandem SAR, its exercisability and any conditions or restrictions applicable to it shall be the same as its related option, and its base price shall be equal to the exercise price of the related option. In addition, upon the exercise of the option, the tandem SAR (or the portion related to the exercise) shall expire and upon exercise of the tandem SAR, the related option (or such portion) shall expire. The terms of a non-tandem SAR shall be established by the Committee. A SAR that is not otherwise designated but is granted at the same time as an option shall be a tandem SAR.

(b) Eligibility

The Committee shall determine Company officers and employees to whom SARs shall be granted, the timing of such grants, and the number of shares subject to the SAR; provided that the maximum number of Shares upon which non-tandem SARs may be granted to any employee in any calendar year shall be 400,000.

(c) SAR Base Price

The base price of each non-tandem SAR shall not be less than one hundred percent of the fair market value of Shares underlying the SAR at the time the SAR is granted. The fair market value for purposes of determining the base price shall be the mean between the high and the low prices at which Shares are traded on the New York Stock Exchange on the day the SAR is granted. In the event this method for determining fair market value is not practicable, fair market value shall be determined by such other reasonable method as the Committee shall select.

(d) SAR Exercise

Non-tandem SARs shall be exercisable in such installments and during such periods as may be fixed by the Committee at the time of grant. Non-tandem SARs shall not be exercisable after the expiration of ten years from the date of grant.
 
 
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Upon exercise of an SAR, the recipient shall be entitled to receive from the Company that number of Shares having an aggregate fair market value as of the date of exercise equal to the product of (i) the number of Shares as to which the recipient is exercising the SAR, and (ii) the excess of the fair market value (at the date of exercise) of a Share over the base price of the SAR, provided that the Committee may elect to settle all or a portion of the Company's obligation arising out of the exercise of an SAR by the payment of cash in an amount equal to the fair market value as of the date of exercise of the Shares it would otherwise be obligated to deliver. The fair market value of Shares for this purpose shall be the mean between the high and low prices at which Shares are traded on the New York Stock Exchange on the date of exercise. Upon exercise of an SAR, any applicable taxes the Company is required to withhold shall be paid to the Company. Shares to be received upon exercise may be surrendered to satisfy withholding obligations.

(d) Termination of Employment

The Committee may require a period of continued employment before a non-tandem SAR can be exercised. That period shall not be less than one year, except that the Committee may permit a shorter period in the event of termination of employment by retirement or death.

Termination of employment with the Company shall terminate remaining rights under non-tandem SARs then held; provided, however, that a non-tandem SAR grant may provide that if employment terminates after completion of a specific period, the SAR may be exercised during a period of time after termination. That period may not exceed sixty months where termination of employment is caused by retirement or death or sixty days where termination results from any other cause provided that such period shall not extend beyond the original maximum term of the SAR. If death occurs after termination of employment but during the period of time specified, such period may be extended to not more than sixty-six months after retirement, or thirty-eight months after termination of employment for any other cause provided that such period shall not extend beyond the original maximum term of the SAR. In the event of termination within two years after a Change of Control as defined in Section 10.2 of the Plan, non-tandem SARs shall be exercisable for a period of sixty months following the date of termination or for the maximum term of the SAR, whichever is shorter. Notwithstanding the foregoing, the Committee may change the post-termination period of exercisability of a non-tandem SAR provided that change does not extend the original maximum term of the SAR.

(f) Transferability of SARs

(i) Except as otherwise permitted in Section 6(f)(ii), non-tandem SARs shall not be transferable other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or the Employee Retirement Income Security Act. Non-tandem SARs are exercisable during the holder’s lifetime only by the holder, unless the holder becomes incapacitated or disabled, in which case the SAR may be exercised by the holder’s authorized representative. A holder may file with the Company a written designation of beneficiaries with the authority to exercise non-tandem SARs in the event of the holder’s death.

(ii) Notwithstanding the provisions of Section 6(f)(i), and in addition to the permissible transfers under that provision, non-tandem SARs granted to persons at the level of Vice President and above, as well as directors of this corporation and persons retired from those positions, may be transferred to any one or more “Permitted Transferees,” as long as those SARs are fully vested. Non-tandem SARs granted to employees below the level of Vice President may be transferred upon prior approval of the Company’s Director of Compensation and Benefits pursuant to the terms of this section.
 
 
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(iii) For purposes of Section 6(f)(ii), the term "Permitted Transferees" shall mean the members of the group that consists exclusively of the individual to whom the non-tandem SAR is granted, the spouse of the individual to whom the non-tandem SAR is granted, the lineal descendants of the individual to whom the non-tandem SAR is granted, the spouses of the lineal descendents to whom the non-tandem SAR is granted, the lineal descendants of any spouse or former spouse of the individual to whom the non-tandem SAR is granted, the spouses of the lineal descendants of any spouse or former spouse of the individual to whom the non-tandem SAR is granted, the estate (and any trust that serves a distributive function of an estate) of the Permitted Transferee, all trusts that an individual who is a Permitted Transferee can revoke and all trusts, corporations, partnerships, limited liability companies and other entities in which, directly or indirectly, but for the exercise of a power of appointment or the death of the survivor of the individual who are Permitted Transferees. Each owner of an equitable interest is an individual who is a Permitted Transferee.

6.2 Non-Employee Directors

(a) Terms

The Committee may grant SARs to non-employee directors. With respect to the grant of SARs to non-employee directors and subject to any share ownership requirements, each year the Committee shall determine (i) the type of such SAR grant (i.e., tandem or non-tandem), (ii) the timing of such SAR grant and (iii) the number of shares subject to the SAR. All SARs granted under this provision of the Plan will be evidenced by an Award Agreement.

SARs granted to non-employee directors shall have a term of ten years and become exercisable by one-third at the end of each of the three successive one-year periods since the date of grant. The base price of each SAR shall be 100% of the fair market value of Shares underlying the SAR on the date the SAR is granted.

(b) Termination of Directorship

A SAR granted to a non-employee director may be exercised any time within sixty months of the date the director terminates such status. In the event of a director’s death, the director’s authorized representative may exercise the SAR within sixty months of the date of death, provided that if the director dies after cessation of director status, the authorized representative may exercise the SAR within sixty-six months of such cessation. In no event shall a SAR granted to a non-employee director be exercisable beyond the original expiration date of that SAR.

Section 7. Restricted Stock

7.1 Company Employees

(a) Eligibility

The Committee may determine whether restricted stock or restricted stock units shall be awarded to Company officers and employees, the timing of award, and the conditions and restrictions imposed on the award. Restricted stock units are similar to restricted stock except that no Shares are actually awarded to the employee on the date of grant. Shares are awarded only on the date of exercise.
 
 
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(b) Terms

With respect to restricted stock grants, during the restriction period the recipient shall have a beneficial interest in the restricted stock and all associated rights and privileges of a stockholder, including the right to vote and receive dividends, subject to any restrictions imposed by the Committee at the time of grant. The recipient shall have no voting or dividend rights with respect to any restricted stock units granted hereunder. The Committee may grant dividend equivalents on restricted stock units with such terms and conditions as the Committee shall specify.

The following restrictions will be imposed on Shares of restricted stock (and restricted stock units where specified) until expiration of the restriction period:

(i) The recipient shall not be entitled to delivery of the certificates for the Shares;

(ii) None of the restricted stock units or Shares issued as restricted stock may be transferred other than by will or by the laws of descent and distribution; and

(iii) Restricted stock units or Shares issued as restricted stock shall be forfeited if the recipient terminates employment with the Company, except for termination due to retirement after a specified age, disability, death or other special circumstances approved by the Committee.

Shares awarded as restricted stock will be issued subject to a restriction period set by the Committee of no less than two nor more than ten years. The Committee, except for restrictions specified in the preceding paragraphs, shall have the discretion to remove any or all of the restrictions on a restricted stock award whenever it determines such action appropriate. Except with respect to a maximum of five percent of the Shares authorized in Section 2, any awards of restricted stock or restricted stock units which vest on the basis of the recipient’s continued employment with or provision of service to the Company shall not provide for vesting which is any more rapid than annual pro rata vesting over a three year period and any awards of restricted stock or restricted stock units which vest upon the attainment of performance goals shall provide for a performance period of at least twelve months. Upon expiration of the restriction period, the Shares will be made available to the recipient, subject to satisfaction of applicable tax withholding requirements.

7.2 Non-Employee Directors

(a) On January 1 of each year, 400 Shares of restricted stock shall be granted to each director who is not currently an employee of the Company. The stock will be subject to a restriction period of three years from the date of grant. During the restriction period, the recipient shall have a beneficial interest in the restricted stock and all associated rights and privileges of a stockholder, including the right to vote and receive dividends.

The following restrictions will be imposed on restricted stock until expiration of the restricted period:

(i) The recipient shall not be entitled to delivery of the Shares;

(ii) None of the Shares issued as restricted stock may be transferred other than by will or by the laws of descent and distribution; and

(iii) Shares issued as restricted stock shall be forfeited if the recipient ceases to serve as a director of the Company, except for termination due to death, disability, or retirement under the Company’s Directors’ Retirement Plan.
 
 
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Upon expiration of the restriction period, the Shares will be made available to the recipient, subject to satisfaction of applicable tax withholding requirements.

(b) Each January 1st, 350 shares of restricted stock, in addition to shares described in Section 7.2(a), shall be awarded to each director who is not currently and has not been an employee of the Company. Shares awarded under this Section 7.2(b) will be held in escrow until the director terminates service with the Company. During the restriction period, the recipient shall have a beneficial interest in the restricted stock and all associated rights and privileges of a stockholder except as discussed below.

The following restrictions will be imposed on restricted stock awarded under this Section 7.2(b) until it is made available to the recipient:

(i) The recipient shall not receive dividends on the shares, but an amount equal to such dividends will be credited to the director’s stock equivalent account in the Company’s Directors’ Deferred Compensation Plan;

(ii) The recipient shall not be entitled to delivery of the shares;

(iii) None of the shares awarded may be transferred other than by will or by the laws of descent and distribution; and

(iv) The right to receive shares shall be subordinate to the claims of general creditors of the Company.

Upon termination of service, restricted shares will be made available to the recipient subject to satisfaction of applicable tax withholding requirements; provided, however, that if the recipient has not served on the Board for at least five years at the time of such termination, all restricted shares awarded under this Section 7.2(b) shall be forfeited.

Pursuant to termination of the Company’s Directors’ Retirement Plan effective December 31, 1996, each director continuing in office was awarded an amount of restricted stock equal to the accumulated value of past pension accruals as determined by the Company’s actuary. Those shares will be subject to the same restrictions as shares awarded annually pursuant to this Section 7.2(b).

(c) Effective January 1, 2002, shares of restricted stock shall no longer be granted under Section 7.2(a) of the Plan or awarded under Section 7.2(b) of the Plan. Shares of restricted stock that were granted or awarded prior to January 1, 2002, shall be subject to the same restrictions and provisions as determined in 7.2(a) and 7.2(b).

(d) With respect to the award of restricted stock units, the Committee in its sole discretion may determine (i) whether restricted stock units shall be awarded to non-employee directors, (ii) the timing of award, and (iii) the conditions and restrictions imposed on the award.
 
 
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Section 8 Performance Awards

8.1 Eligibility and Terms

The Committee may grant awards to officers and other key employees (“Performance Awards”) based upon Company performance over a period of years (“Performance Period”). The Committee shall have sole discretion to determine persons eligible to participate, the Performance Period, Company performance factors applicable to the award (“Performance Measures”), and the method of Performance Award calculation.

At the time the Committee establishes a Performance Period for a particular award, it shall also establish Performance Measures and targets to be attained relative to those measures (“Performance Targets”). Performance Measures may be based on any of the following factors, alone or in combination, as the Committee deems appropriate: (i) return on assets; (ii) return on equity; (iii) return on sales; (iv) total stockholder return; (v) cash flow; (vi) economic value added; (vii) net earnings; and (viii) earnings per share relative to a peer group. The Committee may establish the peer group referenced above and amend the peer group as the Committee determines desirable. Performance Targets may include a minimum, maximum and target level of performance with the size of Performance Awards based on the level attained. Once established, Performance Targets and Performance Measures shall not be changed during the Performance Period; provided, however, that the Committee may eliminate or decrease the amount of a Performance Award otherwise payable to a participant. Upon completion of a Performance Period, the Committee shall determine the Company’s performance in relation to the Performance Targets for that period and certify in writing the extent to which Performance Targets were satisfied.

8.2 Payment of Awards

Performance Awards may be paid in cash, stock, restricted stock (pursuant to terms applicable to restricted stock awarded to Company employees as described in the Plan), or a combination thereof as determined by the Committee. Performance Awards shall be made not later than ninety days following the end of the relevant Performance Period. The fair market value of a Performance Award payment to any individual employee in any calendar year shall not exceed Two Million Five Hundred Thousand and NO/100 Dollars ($2,500,000.00). The fair market value of Shares to be awarded shall be determined by the average of the high and low price of Shares on the New York Stock Exchange on the last business day of the Performance Period. Federal, state and local taxes will be withheld as appropriate.

8.3 Termination

To receive a Performance Award, the participant must be employed by the Company on the last day of the Performance Period. If a participant terminates employment during the Performance Period by reason of death, disability or retirement, a payout based on the time of employment during the Performance Period shall be distributed. Participants employed on the last day of the Performance Period, but not for the entire Performance Period, shall receive a payout prorated for that part of the Performance Period for which they were participants. If the participant is deceased at the time of Performance Award payment, the payment shall be made to the recipient’s designated representative.

Section 9. Election to Receive Non-Employee Director Fees in Shares

Effective April 8, 1998, non-employee directors shall have the option of receiving all or a portion of their annual retainer fees, as well as fees for attendance at meetings of the Board and committees of the Board (including any Committee Chairman stipend), in the form of Shares.
 
 
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The number of Shares that may be issued pursuant to such election shall be based on the amount of cash compensation subject to the election divided by the fair market value of one Share on the date such cash compensation is payable. The fair market value shall be the mean between the high and low prices at which Shares are traded on the New York Stock Exchange on payable date.

Shares provided pursuant to the election shall be held in book-entry form by the Company on behalf of the non-employee director. Upon request, the Company shall deliver Shares so held to the non-employee director. While held in book-entry form, the Shares shall have all associated rights and privileges, including voting rights and the right to receive dividends.

Section 10. Change of Control

10.1 Effect on Grants and Awards

Unless the Committee shall otherwise expressly provide in the agreement relating to a grant or award under the Plan, upon the occurrence of a Change of Control as defined below: (i) all options and SARs then outstanding under the Plan shall become fully exercisable as of the date of the Change of Control; (ii) all terms and conditions of restricted stock and restricted stock unit awards, and other stock-based awards for which no performance goals have been established then outstanding shall be deemed satisfied as of the date of the Change of Control; and (iii) all Performance Awards or other stock-based awards for which performance goal(s) have been established for a Performance Period not completed at the time of the Change of Control shall be payable in an amount equal to the product of the maximum award opportunity for the Performance Award or other stock-based award, and a fraction, the numerator of which is the number of months that have elapsed since the beginning of the Performance Period through the later of (A) the date of the Change of Control or (B) the date the participant terminates employment, and the denominator of which is the total number of months in the Performance Period; provided, however, that if this Plan shall remain in force after a Change of Control, a Performance Period is completed during that time, and the participant’s employment has not terminated, this provision (iii) shall not apply.

10.2 Change of Control Defined

For purposes of the Plan, a “Change of Control” shall be deemed to have occurred if:

(a) Any person becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifteen percent or more of the combined voting power of the Company’s then outstanding common stock, unless the Board by resolution negates the effect of this provision in a particular circumstance, deeming that resolution to be in the best interests of Company stockholders;

(b) During any period of two consecutive years, there shall cease to be a majority of the Board comprised of individuals who at the beginning of such period constituted the Board;

(c) The stockholders of the Company approve a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) less than fifty percent of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or

(d) Company stockholders approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of its assets.
 
 
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Section 11. Amendment and Termination

11.1 Amendment, Modification, Suspension, and Termination

Subject to Section 11.3, the Committee may, at any time and from time to time, alter, amend, modify, suspend, or terminate the Plan and any Award Agreement in whole or in part; provided, however, that, no amendment of the Plan shall be made without stockholder approval if stockholder approval is required by law, regulation, or stock exchange rule.

11.2 Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events

The Committee may make adjustments in the terms and conditions of, and the criteria included in, awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 2.3 hereof) affecting the Company or the financial statements of the Company or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent unintended dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan. The determination of the Committee as to the foregoing adjustments, if any, shall be conclusive and binding on Participants under the Plan.

11.3 Awards Previously Granted

Notwithstanding any other provision of the Plan to the contrary, no termination, amendment, suspension, or modification of the Plan or an Award Agreement shall adversely affect in any material way any award previously granted under the Plan, without the written consent of the Participant holding such award.

Section 12. Regulatory Compliance

Notwithstanding any other provision of the Plan, the issuance or delivery of any Shares may be postponed for such period as may be required to comply with any applicable requirements of any national securities exchange or any requirements under any other law or regulation applicable to the issuance or delivery of such Shares. The Company shall not be obligated to issue or deliver any Shares if such issuance or delivery shall constitute a violation of any provision of any law or regulation of any governmental authority or national securities exchange.

Section 13. Dividend Equivalents

Any participant selected by the Committee may be granted dividend equivalents based on the dividends declared of Shares that are subject to any award, to be credited as of dividend payment dates, during the period between the date the award is granted and the date the award is exercised, vests, or expires, as determined by the Committee in its sole discretion. Such dividend equivalents shall be converted to cash or additional Shares by such formula and at such time and subject to such limitations as may be determined by the Committee in its sole discretion.
 
 
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Section 14. Beneficiary Designation

Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of his or her death before he or she receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Participant, shall be in a form prescribed by the Committee, and will be effective only when filed by the Participant in writing with the Company during the Participant’s lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant’s death shall be paid to the Participant’s estate.

Section 15. Rights of Participants

15.1 Employment

Nothing in the Plan or an Award Agreement shall interfere with or limit in any way the right of the Company, its Affiliates, and/or its Subsidiaries, to terminate any Participant’s employment or service on the Board at any time or for any reason not prohibited by law, nor confer upon any Participant any right to continue his or her employment or service as a Director for any specified period of time.

Neither an award nor any benefits arising under this Plan shall constitute an employment contract with the Company, its Affiliates, and/or its Subsidiaries and, accordingly, subject to Sections 3 and 11, this Plan and the benefits hereunder may be terminated at any time in the sole and exclusive discretion of the Committee without giving rise to any liability on the part of the Company, its Affiliates, and/or its Subsidiaries.

15.2 Participation

No individual shall have the right to be selected to receive an award under this Plan, or, having been so selected, to be selected to receive a future award.

15.3 Rights as a Stockholder

Except as otherwise provided herein, a Participant shall have none of the rights of a stockholder with respect to Shares covered by any award until the Participant becomes the record holder of such Shares.

Section 16. Successors

All obligations of the Company under the Plan with respect to awards granted hereunder shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.

Section 17. Nonexclusivity of the Plan

The adoption of this Plan shall not be construed as creating any limitations on the power of the Board or Committee to adopt such other compensation arrangements as it may deem desirable for any Participant.
 
 
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Section 18. No Constraint on Corporate Action

Nothing in this Plan shall be construed to: (i) limit, impair, or otherwise affect the Company’s or a Subsidiary’s or an Affiliate’s right or power to make adjustments, reclassifications, reorganizations, or changes of its capital or business structure, or to merge or consolidate, or dissolve, liquidate, sell, or transfer all or any part of its business or assets; or, (ii) limit the right or power of the Company or a Subsidiary or an Affiliate to take any action which such entity deems to be necessary or appropriate.

Section 19. Governing Law

The Plan and each Award Agreement shall be governed by the laws of the State of Illinois, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of the Plan to the substantive law of another jurisdiction. Unless otherwise provided in the Award Agreement, recipients of an award under the Plan are deemed to submit to the exclusive jurisdiction and venue of the federal or state courts of Illinois, to resolve any and all issues that may arise out of or relate to the Plan or any related Award Agreement.

Section 20. Duration of the Plan

Unless sooner terminated as provided herein, the Plan shall terminate ten years from the date it was initially adopted. After the Plan is terminated, no awards may be granted but awards previously granted shall remain outstanding in accordance with their applicable terms and conditions and the Plan’s terms and conditions.

Section 21. Effective Date

This Plan Restatement shall be effective January 1, 2004.
 
 
 
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EXHIBIT 10.3

SUPPLEMENTAL PENSION BENEFIT PLAN
as Amended and Restated as of January 1, 2003



SECTION 1. INTRODUCTION

1.1 Background. Caterpillar Inc. has amended the Retirement Income Plan to limit the monthly amount payable to employees, retired employees and former employees who are receiving pension benefits under that plan so that benefits payable under that plan cannot exceed the maximum pension benefit limitations imposed by Sections 401(a)(17) and 415 of the Internal Revenue Code of 1986, as amended (the "Code"). This Supplemental Pension Benefit Plan (the "Plan"), as set forth in the succeeding Sections of this document, provides additional pension benefits to persons hereinafter described who are eligible for benefits under this Plan and supplements monthly amounts of retirement income payable under such Retirement Income Plan. The Plan has also been amended to provide benefits that would have accrued under the Retirement Income Plan but for the employee’s election to defer salary or incentive compensation under the Company’s Supplemental Employees’ Investment Plan or Deferred Employees’ Investment Plan.

1.2 Use of Terms. Certain terms, as used in this Plan, are defined in Section 8 or elsewhere in this Plan, and are capitalized, and when so used shall have the defined meanings given to them in this Plan.

SECTION 2. ELIGIBILITY

2.1 Eligibility for and Accrual of Benefits. The Plan, as set forth below, applies only to persons who from time to time are receiving, are eligible to receive or are accruing retirement income on or after the Effective Date under the Retirement Income Plan. An employee shall accrue benefits under this Plan in accordance with the provisions of subsections 3.1, 3.2 and 3.4 hereof so long as he remains covered under the Retirement Income Plan and 1) his compensation exceeds the limitation imposed by Code Section 401(a)(17), as adjusted for cost-of-living pursuant to that Section, 2) his benefits under that plan are limited by Code Section 415, as adjusted for cost-of-living pursuant to that Section, or 3) he loses benefits that would have accrued under the Retirement Income Plan but for his election to defer salary or incentive compensation under the Company’s Supplemental Employees’ Investment Plan or Deferred Employees’ Investment Plan.

SECTION 3. PAYMENT OF BENEFITS

3.1 Benefit Formula. A monthly supplemental pension benefit will be payable under this Plan to an Eligible Person in each month equal to the excess of (a) the amount of retirement income that would be payable to such person for that month under the Retirement Income Plan but for the limitations contained in subsections 4.6 and 4.8 of the Retirement Income Plan, as amended, over (b) the amount actually paid to such person for that month under the Retirement Income Plan.

For all purposes of the Plan, the amount of retirement income under the Retirement Income Plan shall be calculated as if any lump sum base salary adjustment (including any variable base pay) or discretionary award were included in determining an Eligible Person's Total Earnings.
 
Page 1


 
3.2 Future Adjustments. Supplemental pension benefit amounts payable under this Plan may be adjusted to take into account future amendments to the Retirement Income Plan, increases in retirement income that are granted under the Retirement Income Plan due to cost-of-living increases or other factors and adjustments made by the Secretary of the Treasury (in regulations or otherwise) to the limitations under Code Sections 401(a)(17) and 415 such that the total amount payable to an Eligible Person under this Plan and the Retirement Income Plan shall equal the monthly amount of retirement income that would be payable under the Retirement Income Plan in the absence of subsections 4.6 and 4.8 of the Retirement Income Plan.

3.3 Commencement of Benefits. Benefits shall commence under this Plan on the first day of the month on or after the Effective Date that benefits become payable to an Eligible Person in accordance with subsection 3.1 hereof and shall continue thereafter so long as benefits are payable in accordance with subsections 3.1 and 3.2 hereof.

3.4 Elective Deferrals. A monthly supplemental pension benefit shall be payable under this Plan to an Eligible Person in an amount equal solely to the amount of benefits that he would have accrued under the Retirement Income Plan but for his election to defer salary or incentive compensation under the Company’s Supplemental Employees’ Investment Plan or Deferred Employees’ Investment Plan; provided, however, that such benefit shall not duplicate any benefit provided pursuant to subsections 3.1 or 3.2 hereof.

SECTION 4. OPTIONAL RETIREMENT BENEFITS

If, in lieu of monthly normal retirement income payable under the Retirement Income Plan, an Eligible Person receives optional retirement benefits under that plan, then optional pension benefits (to the extent not otherwise payable under the Retirement Income Plan because of the limitations contained in subsections 4.6 and 4.8 thereof) will also be payable in the same form under this Plan; except that the joint and survivor annuity described in subsection 6.3 of the Retirement Income Plan, as amended, shall be applicable solely to benefits payable under that plan and shall not be available under this Plan.

SECTION 5. FINANCIAL PROVISIONS

No funding of benefits shall be required, and any benefits payable under this Plan shall be payable by the Company.

SECTION 6. AMENDMENT AND TERMINATION

While the Company expects and intends to continue the Plan, it must necessarily reserve the right to modify, amend or terminate the Plan in whole or in part, at any time. Accordingly, the Company reserves the right to amend, modify, suspend or terminate the Plan, in whole or in part, at any time by action of its Board of Directors; provided, however, that the Vice-President of Human Services Division, acting together with the Chairman of the Board of the Company, may amend this Plan if such amendment does not involve an annual cost to the employers under this Plan of more than $500,000 per year and if such amendment does not change the duties and responsibilities of the committees and persons designated to administer this Plan.
 
Page 2

 

SECTION 7. MISCELLANEOUS PROVISIONS APPLICABLE TO THE PLAN

7.1 Vested Rights. Any Eligible Person who is fully vested in his retirement income benefits under the Retirement Income Plan shall be fully vested in his right to receive his accrued additional pension benefits under this Plan upon his retirement under the Retirement Income Plan; and any such pension benefits so vested and accrued shall be non-forfeitable.

7.2 Benefits Not Assignable. Except insofar as may be contrary to federal law or to the laws of any state and jurisdiction in the premises and except as further provided hereunder, benefits under the Plan are not in any way subject to the debts or other obligations of the persons entitled to such benefits, and may not be voluntarily or involuntarily sold, transferred or assigned; except that

(a) any person who is entitled to benefits under this Plan may assign his benefits hereunder to the Company for the sole purpose of repaying (in whole or in part) the amount of any overpayment made under this Plan;

(b) any person entitled to benefits under this Plan also may assign any portion of such benefits otherwise due hereunder to any lawful taxing authority for the purpose of payment of any taxes which are due or may become due on account of such benefits; and

(c) any person entitled to benefits under this Plan may assign such benefits to a bank for the purpose of depositing them in his account in such bank, provided such assignment is pursuant to and in accordance with a current applicable bank agreement between such person and the bank and is filed with the Company.

Any assignment made in accordance with the foregoing, except one made pursuant to paragraph (a) above, shall be revocable at any time by the person who shall have authorized it, and any payment pursuant to any such assignment will constitute a complete discharge of any liability under the Plan for payment of such amount.

7.3 Plan Administered by Company. The Plan will be administered by the Company, and the Company reserves the power to adopt such rules of procedure and regulations, which shall be applied in a uniform and nondiscriminatory manner, as it deems necessary to administer the Plan and to determine all questions arising under the Plan; provided, however, that the Company, by resolution of its Board of Directors, may designate any person, committee, board or similar body to act as named fiduciary or fiduciaries under the Plan and allocate any and all of its duties and responsibilities under the Plan to such named fiduciary or fiduciaries. If the Board of Directors allocates any of its duties and responsibilities under the Plan to a named fiduciary, such named fiduciary shall be substituted for the Company wherever such term appears under the Plan with respect to any duties and responsibilities so allocated. Such named fiduciary or fiduciaries may designate other persons to carry out its fiduciary responsibilities under the Plan.

7.4 Facility of Payment. If the Company shall receive evidence satisfactory to it (1) that a payee entitled to receive any payment provided for in the Plan is physically or mentally incompetent to receive such payment and to give a valid release therefor, (2) that another person or an institution is then maintaining or has custody of such payee, and (3) that no guardian, committee or other representative of the estate of such payee shall have been duly appointed, the Company, in its discretion, may make the payment to such other person or institution and the release of such other person or institution shall be a valid and complete discharge for the payment. In the absence of the appointment of a legal guardian, any minor's share may be paid to such adult or adults as have, in the opinion of the Company, assumed the custody and principal support of such minor.
 
Page 3

 
 
7.5 Company Action. Any action (to the extent not allocated under subsection 7.3) required or permitted to be taken by the Company under the Plan (other than to amend or terminate the Plan) may be taken by the Vice-President of Human Services Division or the Chairman of the Board of the Company or any other person designated by either or both of them. The Plan shall be amended or terminated in accordance with the provisions of Section 6.

7.6 Small Payments. If the monthly amount of supplemental pension benefits to which any person is entitled under the provisions of this Plan at any time shall be less than twenty dollars ($20) per month but more than nine dollars and ninety-nine cents ($9.99), pension payments may be made quarterly, each such quarterly payment to be in an amount equal to the sum of the monthly amounts that would otherwise have been payable during the same quarter, and to be made on the first day of the third month of such quarter. If the monthly benefits to which any person would otherwise be entitled under the plan at any time shall be less than ten dollars ($10) per month, there may be paid to such person, in lieu of monthly pension payments, a cash payment in an amount which is the actuarial equivalent (as determined by the Actuary) of such monthly pension benefits.

SECTION 8. DEFINITIONS

As used herein:

8.1
"Actuary" means an actuary selected by the Company who is not an employee of the Company and who is a Fellow of the Society of Actuaries, or a firm of actuaries selected by the Company, at least one of the members or officers of which is a Fellow of the Society of Actuaries.

8.2
“Company" means Caterpillar Inc. or any successor to it by merger, consolidation, reorganization or otherwise.

8.3
"Effective Date" means January 1, 1976.

8.4
"Eligible Person" means a person described in subsection 2.1 of the Plan.

8.5
"Plan" when used without any modification or qualification thereof means this Supplemental Pension Benefit Plan.

8.6
"Retirement Income Plan" means the Retirement Income Plan which has been adopted by Caterpillar Inc. and certain of its subsidiaries.
 
Page 4



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,
     
2004
 
2003
 
2002
 
2001
 
2000





Profit
 
$
2,035
 
$
1,099
 
$
798
 
$
805
 
$
1,053
Add:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for income taxes
 
 
699
 
 
384
 
 
314
 
 
359
 
 
439










Profit before taxes
 
 
2,734
 
 
1,483
 
 
1,112
 
 
1,164
 
 
1,492
Fixed charges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest and other costs related to borrowed funds(1)
 
 
753
 
 
720
 
 
805
 
 
948
 
 
988
 
Rentals at computed interest factors(2)
 
 
92
 
 
82
 
 
81
 
 
86
 
 
90










Total fixed charges:
 
 
845
 
 
802
 
 
886
 
 
1,034
 
 
1,078










Profit before provision for income
taxes and fixed charges
 
$
3,579
 
$
2,285
 
$
1,998
 
$
2,198
 
$
2,570










Ratio of profit to fixed charges
   
4.2
   
2.9
   
2.3
   
2.1
   
2.4
___________
                             
(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

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Table of Contents – Financial Appendix

APPENDIX



CATERPILLAR INC.

GENERAL AND FINANCIAL INFORMATION

2004


TABLE OF CONTENTS

 
Management's Report on Internal Control Over Financial Reporting

Report of Independent Registered Public Accounting Firm

Consolidated Financial Statements and Notes

Five-year Financial Summary

Management's Discussion and Analysis (MD&A)
 
Overview
 
2004 Compared with 2003
 
Fourth Quarter 2004 Compared with Fourth Quarter 2003
 
Supplemental Information
 
2003 Compared with 2002
 
Glossary of Terms
 
Liquidity & Capital Resources
 
Critical Accounting Policies
 
Employment
 
Other Matters
 
Supplemental Consolidating Data
 
Outlook

Supplemental Stockholder Information

Directors and Officers

A-2


MANAGEMENT'S REPORT ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
  Caterpillar Inc.

        The management of Caterpillar Inc. (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2004. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework. Based on our assessment we concluded that, as of December 31, 2004, the Company's internal control over financial reporting was effective based on those criteria.

        Our management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears on page A-4.

   
        James W. Owens
Chairman of the Board
   

 

 

        David B. Burritt
Chief Financial Officer
   

 

 

 

 

February 24, 2005

 

 

A-3



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

        We have completed an integrated audit of Caterpillar Inc.'s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the accompanying statements of consolidated financial position and the related statements of consolidated results of operations, changes in stockholders' equity and consolidated cash flow, including pages A-5 through A-34, present fairly, in all material respects, the financial position of Caterpillar Inc. and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements 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.

Internal control over financial reporting

Also, in our opinion, management's assessment, included in Management's Report on Internal Control Over Financial Reporting appearing on page A-3, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by COSO. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Peoria, Illinois
February 24, 2005

A-4


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

 
  2004
  2003
  2002
 
Sales and revenues:                    
  Sales of Machinery and Engines   $ 28,336   $ 21,048   $ 18,648  
  Revenues of Financial Products     1,915     1,715     1,504  
   
 
 
 
    Total sales and revenues     30,251     22,763     20,152  
Operating costs:                    
  Cost of goods sold     22,420     16,945     15,146  
  Selling, general and administrative expenses     3,072     2,470     2,094  
  Research and development expenses     928     669     656  
  Interest expense of Financial Products     520     470     521  
  Other operating expenses     578     521     411  
   
 
 
 
    Total operating costs     27,518     21,075     18,828  
   
 
 
 
Operating profit     2,733     1,688     1,324  
  Interest expense excluding Financial Products     230     246     279  
  Other income (expense)     204     35     69  
   
 
 
 
Consolidated profit before taxes     2,707     1,477     1,114  
  Provision for income taxes     731     398     312  
   
 
 
 
  Profit of consolidated companies     1,976     1,079     802  
  Equity in profit (loss) of unconsolidated affiliated companies     59     20     (4 )
   
 
 
 
Profit   $ 2,035   $ 1,099   $ 798  
   
 
 
 
Profit per common share   $ 5.95   $ 3.18   $ 2.32  
Profit per common share—diluted(1)   $ 5.75   $ 3.13   $ 2.30  
Weighted-average common shares outstanding (millions)                    
  —Basic     342.3     345.2     344.0  
  —Diluted(1)     353.7     351.4     346.9  
Cash dividends declared per common share   $ 1.60   $ 1.44   $ 1.40  
   
 
 
 
(1)
Diluted by assumed exercise of stock options, using the treasury stock method.

See accompanying Notes to Consolidated Financial Statements.

A-5


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

 
  2004
  2003
  2002
 
Common stock:                                      
  Balance at beginning of year   $ 1,059         $ 1,034         $ 1,043        
  Shares issued from treasury stock     172           25           (9 )      
   
       
       
       
  Balance at year-end     1,231           1,059           1,034        
   
       
       
       
Treasury stock:                                      
  Balance at beginning of year     (2,914 )         (2,669 )         (2,696 )      
  Shares issued: 2004—6,108,309; 2003—4,956,973; 2002—878,623     176           160           27        
  Shares repurchased: 2004—6,933,400; 2003—5,450,000     (539 )         (405 )                
   
       
       
       
  Balance at year-end     (3,277 )         (2,914 )         (2,669 )      
   
       
       
       
Profit employed in the business:                                      
  Balance at beginning of year     8,450           7,849           7,533        
  Profit     2,035   $ 2,035     1,099   $ 1,099     798   $ 798  
  Dividends declared     (548 )         (498 )         (482 )      
   
       
       
       
  Balance at year-end     9,937         $ 8,450           7,849        
   
       
       
       
Accumulated other comprehensive income:                                      
  Foreign currency translation adjustment:                                      
    Balance at beginning of year     348           86           (17 )      
    Aggregate adjustment for year     141     141     262     262     103     103  
   
       
       
       
    Balance at year-end     489           348           86        
   
       
       
       
  Minimum pension liability adjustment—consolidated companies:                                      
    Balance at beginning of year (net of tax of: 2004—$460; 2003—$383; 2002—$82)     (934 )         (771 )         (161 )      
    Aggregate adjustment for year (net of tax of: 2004—$25; 2003—$77; 2002—$301)     (59 )   (59 )   (163 )   (163 )   (610 )   (610 )
   
       
       
       
    Balance at year-end (net of tax of: 2004—$485; 2003—$460; 2002—$383)     (993 )         (934 )         (771 )      
   
       
       
       
  Minimum pension liability adjustment—unconsolidated companies:                                      
    Balance at beginning of year     (48 )         (37 )         (41 )      
    Aggregate adjustment for year             (11 )   (11 )   4     4  
   
       
       
       
    Balance at year-end     (48 )         (48 )         (37 )      
   
       
       
       
  Derivative financial instruments:                                      
    Balance at beginning of year (net of tax of: 2004—$54; 2003—$5; 2002—$17)     104           11           (26 )      
    Gains deferred during year (net of tax of: 2004—$48; 2003—$29; 2002—$10)     90     90     53     53     15     15  
    (Gains)/losses reclassified to earnings during year (net of tax of: 2004—$44; 2003—$20; 2002—$11)     (84 )   (84 )   40     40     22     22  
   
       
       
       
    Balance at year-end (net of tax of: 2004—$58; 2003—$54; 2002—$4)     110           104           11        
   
       
       
       
  Available-for-sale securities:                                      
    Balance at beginning of year (net of tax of: 2004—$7; 2003—$17; 2002—$13)     13           (31 )         (24 )      
    Gains/(losses) deferred during year (net of tax of: 2004—$3; 2003—$12; 2002—$16)     6     6     23     23     (29 )   (29 )
    (Gains)/losses reclassified to earnings during year (net of tax of: 2004—$1; 2003—$11; 2002—$12)     (1 )   (1 )   21     21     22     22  
   
 
 
 
 
 
 
    Balance at year-end (net of tax of: 2004—$10; 2003—$7; 2002—$17)     18           13           (31 )      
   
       
       
       
Total accumulated other comprehensive income     (424 )         (517 )         (742 )      
   
       
       
       
Comprehensive income         $ 2,128         $ 1,324         $ 325  
         
       
       
 
Stockholders' equity at year-end   $ 7,467         $ 6,078         $ 5,472        
   
       
       
       

See accompanying Notes to Consolidated Financial Statements.

A-6


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

 
  2004
  2003
  2002
 
Assets                    
  Current assets:                    
    Cash and short-term investments   $ 445   $ 342   $ 309  
    Receivables—trade and other     7,616     4,025     3,192  
    Receivables—finance     6,510     5,508     5,066  
    Retained interests in securitized trade receivables         1,550     1,145  
    Deferred and refundable income taxes     398     707     781  
    Prepaid expenses     1,369     1,424     1,224  
    Inventories     4,675     3,047     2,763  
   
 
 
 
  Total current assets     20,856     16,603     14,480  
  Property, plant and equipment—net     7,682     7,251     7,009  
  Long-term receivables—trade and other     764     510     433  
  Long-term receivables—finance     8,575     7,394     6,347  
  Investments in unconsolidated affiliated companies     517     800     747  
  Deferred income taxes     674     616     711  
  Intangible assets     315     239     281  
  Goodwill     1,450     1,398     1,402  
  Other assets     2,258     1,895     1,295  
   
 
 
 
Total assets   $ 43,091   $ 36,706   $ 32,705  
   
 
 
 
Liabilities                    
  Current liabilities:                    
    Short-term borrowings:                    
      —Machinery and Engines   $ 93   $ 72   $ 64  
      —Financial Products     4,064     2,685     2,111  
    Accounts payable     3,990     2,568     1,790  
    Accrued expenses     1,847     1,638     1,620  
    Accrued wages, salaries and employee benefits     1,730     1,802     1,779  
    Customer advances     555     305     259  
    Dividends payable     141     127     120  
    Deferred and current income taxes payable     259     216     70  
    Long-term debt due within one year:                    
      —Machinery and Engines     6     32     258  
      —Financial Products     3,525     2,949     3,654  
   
 
 
 
  Total current liabilities     16,210     12,394     11,725  
  Long-term debt due after one year:                    
      —Machinery and Engines     3,663     3,603     3,581  
      —Financial Products     12,174     10,943     8,193  
  Liability for postemployment benefits     2,986     3,172     3,333  
  Deferred income taxes and other liabilities     591     516     401  
   
 
 
 
Total liabilities     35,624     30,628     27,233  
   
 
 
 
Stockholders' equity                    
  Common stock of $1.00 par value:                    
    Authorized shares: 900,000,000
Issued shares (2004, 2003 and 2002—407,447,312) at paid-in amount
    1,231     1,059     1,034  
  Treasury stock (2004—64,510,363 shares; 2003—63,685,272 shares; and 2002—63,192,245 shares) at cost     (3,277 )   (2,914 )   (2,669 )
  Profit employed in the business     9,937     8,450     7,849  
  Accumulated other comprehensive income     (424 )   (517 )   (742 )
   
 
 
 
Total stockholders' equity     7,467     6,078     5,472  
   
 
 
 
Total liabilities and stockholders' equity   $ 43,091   $ 36,706   $ 32,705  
   
 
 
 

See accompanying Notes to Consolidated Financial Statements.

A-7


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

 
  2004
  2003
  2002
 
Cash flow from operating activities:                    
  Profit   $ 2,035   $ 1,099   $ 798  
  Adjustments for non-cash items:                    
    Depreciation and amortization     1,397     1,347     1,220  
    Other     (113 )   (69 )   350  
  Changes in assets and liabilities:                    
    Receivables—trade and other (see non-cash item below)     (7,616 )   (8,115 )   (6,323 )
    Inventories     (1,391 )   (286 )   162  
    Accounts payable and accrued expenses     1,457     542     97  
    Other—net     240     (129 )   (266 )
   
 
 
 
Net cash used for operating activities     (3,991 )   (5,611 )   (3,962 )
   
 
 
 
Cash flow from investing activities:                    
  Capital expenditures—excluding equipment leased to others     (926 )   (682 )   (728 )
  Expenditures for equipment leased to others     (1,188 )   (1,083 )   (1,045 )
  Proceeds from disposals of property, plant and equipment     673     761     561  
  Additions to finance receivables     (8,930 )   (6,868 )   (5,933 )
  Collections of finance receivables     6,216     5,251     4,569  
  Proceeds from sale of finance receivables     700     661     613  
  Collections of retained interests in securitized trade receivables     5,722     7,129     5,917  
  Investments and acquisitions (net of cash acquired)     (290 )   (268 )   (294 )
  Proceeds from sale of partnership investment     290          
  Other—net     (190 )   (17 )   (40 )
   
 
 
 
Net cash provided by investing activities     2,077     4,884     3,620  
   
 
 
 
Cash flow from financing activities:                    
  Dividends paid     (534 )   (491 )   (481 )
  Common stock issued, including treasury shares reissued     317     157     10  
  Treasury shares purchased     (539 )   (405 )    
  Proceeds from long-term debt issued:                    
    —Machinery and Engines     9     128     248  
    —Financial Products     5,079     5,506     3,889  
  Payments on long-term debt:                    
    —Machinery and Engines     (35 )   (463 )   (225 )
    —Financial Products     (2,973 )   (3,774 )   (3,114 )
  Short-term borrowings—net     550     87     (102 )
   
 
 
 
Net cash provided by financing activities     1,874     745     225  
   
 
 
 
Effect of exchange rate changes on cash     143     15     26  
   
 
 
 
Increase (decrease) in cash and short-term investments     103     33     (91 )
Cash and short-term investments at beginning of period     342     309     400  
   
 
 
 
Cash and short-term investments at end of period   $ 445   $ 342   $ 309  
   
 
 
 

See accompanying Notes to Consolidated Financial Statements.

A-8


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, marketing and sales of construction, mining and forestry machinery—track and wheel tractors, track and wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, 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, marketing and sales of engines for Caterpillar machinery, electric power generation systems; on-highway vehicles and locomotives; marine, petroleum, construction, industrial, agricultural and other applications; and related parts. Reciprocating engines meet power needs ranging from 5 to over 22,000 horsepower (4 to over 16 200 kilowatts). Turbines range from 1,200 to 20,500 horsepower (900 to 15 000 kilowatts).

(3)   Financial Products—A principal line of business consisting primarily of Caterpillar Financial Services Corporation (Cat Financial), Caterpillar Insurance Holdings, Inc. (Cat Insurance), Caterpillar Power Ventures Corporation (Cat Power Ventures) and their 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. Cat Power Ventures is an active investor in independent power projects using Caterpillar power generation equipment and services.

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), 53 located in the United States and 145 located outside the United States. Worldwide, these dealers serve 178 countries and operate 3,324 places of business, including 1,437 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 170 distributors located in 150 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 40 plants in the United States; nine 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, Germany, Brazil, and Japan; and one each in Belgium, Canada, Hungary, Indonesia, The Netherlands, Poland, Russia, South Africa and Switzerland. Thirteen parts distribution centers are located in the United States and twelve 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.

See Note 2 on page A-12 for discussion of the reclassification of certain receivables and related cash flows.

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 11 on page A-18). 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. These reclassifications had no impact on operating profit.

In the second quarter of 2003, we revised our policy regarding the classification of certain costs related to distributing replacement parts. Previously, these costs had been 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 2003 and 2002, the amounts reclassified from selling, general and administrative expenses to cost of goods sold were $443 million and $437 million, respectively.

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. When a sale is made to a dealer, 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. Our policy is to not forgive this interest. In 2004,

A-9


2003 and 2002, terms were extended to not more than one year for $15 million, $54 million and $193 million of receivables, respectively. For 2004 and 2003, these amounts represent less than 1% of consolidated sales. For 2002, this amount represents approximately 1% of consolidated sales.

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

 
  2004
  2003
  2002
 
Payment Terms
(months)

  Sales
  Percent
of Sales

  Sales
  Percent
of Sales

  Sales
  Percent
of Sales

 
 
  (Dollars in millions)

 
2   $ 96   0.3 % $ 116   0.6 % $ 62   0.3 %
3     175   0.6 %   27   0.1 %   118   0.6 %
4     117   0.4 %   28   0.1 %   11   0.1 %
5     750   2.6 %   594   2.8 %   447   2.4 %
6     6,172   21.9 %   4,104   19.5 %   3,503   18.8 %
7-12     831   2.9 %   671   3.2 %   465   2.5 %
   
 
 
 
 
 
 
    $ 8,141   28.7 % $ 5,540   26.3 % $ 4,606   24.7 %
   
 
 
 
 
 
 

We establish a bad debt allowance for Machinery and Engines receivables when it becomes probable that the receivable will not be collected. Our allowance for bad debts is not significant. No significant write-offs of Machinery and Engines receivables were made during 2004, 2003 or 2002.

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. Cat Financial provides wholesale inventory financing to dealers. Please refer to Note 7 on page A-16 for more information.

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, 2004, 2003 and 2002.

If the FIFO (first-in, first-out) method had been in use, inventories would have been $2,124 million, $1,863 million and $1,977 million higher than reported at December 31, 2004, 2003 and 2002, respectively.

E. Securitized receivables

When retail 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, prepayment speeds, forward yield curves and discount rates. Please refer to Note 8 on Page A-17 for more information.

When trade receivables are securitized, we retain interests in the receivables in the form of certificates. The fair value of these certificated retained interests approximates carrying value due to their short-term nature. Please refer to Note 6 on Page A-16 for more information.

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 2004, 2003 and 2002, Financial Products depreciation on equipment leased to others was $575 million, $527 million and $415 million, respectively, and was included in "Other operating expenses" in Statement 1. Amortization of purchased intangibles is computed using the straight-line method, generally not to exceed a period of 20 years. Accumulated amortization was $91 million, $44 million and $47 million at December 31, 2004, 2003 and 2002, 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" in Statement 3.

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 Consolidated 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.

A-10


This process includes linking all derivatives that are designated as fair value hedges to specific liabilities on the Consolidated Financial Position 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 "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). Please refer to Note 3 on pages A-13 to A-14 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 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 in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). 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. New accounting standards

In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151 (SFAS 151), "Inventory Costs an amendment of ARB No. 43, Chapter 4." SFAS 151 discusses the general principles applicable to the pricing of inventory. Paragraph 5 of ARB 43, Chapter 4 provides guidance on allocating certain costs to inventory. This Statement amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of production facilities. As required by SFAS 151, we will adopt this new accounting standard on January 1, 2006. The adoption of SFAS 151 is not expected to have a material impact on our financial statements.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153 (SFAS 153), "Exchanges of Nonmonetary Assets—an amendment of APB Opinion No. 29." SFAS 153 addresses the measurement of exchanges of nonmonetary assets. It eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29 "Accounting for Nonmonetary Transactions" and replaces it with an exception for exchanges that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. As required by SFAS 153, we will adopt this new accounting standard effective July 1, 2005. The adoption of SFAS 153 is not expected to have a material impact on our financial statements.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R (SFAS 123R) "Share-Based Payment." SFAS 123R requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. SFAS 123R also establishes fair value as the measurement method in accounting for share-based payments to employees. As required by SFAS 123R, we will adopt this new accounting standard effective July 1, 2005. We will transition to the new guidance using the modified prospective method. In anticipation of delaying vesting until three years after the grant date for future grants, the 2004 employee stock option grant (issued in June) fully vested on December 31, 2004. In order to better align our employee stock option program with the overall market, the number of options granted in 2005 (issued in February) was significantly reduced from the previous year. In response to this decrease, we elected to immediately vest the 2005 option grant. We expect the application of the expensing provisions of SFAS 123R will result in a pretax expense of approximately $20 million in the second half of 2005. As a result of the vesting decisions discussed above, a full complement of expense related to stock options will not be recognized in our results of operations until 2009. Based on the same assumptions used to calculate our 2004 stock option grant, we estimate our pretax expense associated with our stock option grants will range from $50 million in 2006 to $150 million in 2009.

M. Stock based compensation

We currently 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." Therefore, no compensation expense is recognized in association with our options.

The fair value of the options granted in 2004 was estimated using the binomial option-pricing model. We believe this model more accurately reflects the value of the options than using the

A-11


Black-Scholes option-pricing model. Previous years grants continue to be valued using the Black-Scholes model. Please refer to Note 18 on page A-25 for additional information on our stock based compensation plans.

Pro forma net profit and profit per share using the binomial option-pricing model for the 2004 grant and the Black-Scholes option-pricing model for 2003 and previous grants were:

 
  Years ended December 31,
 
 
  2004
  2003
  2002
 
 
  (Dollars in millions except per share data)

 
Profit, as reported   $ 2,035   $ 1,099   $ 798  
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects     (161 )   (69 )   (65 )
   
 
 
 
Pro forma net income   $ 1,874   $ 1,030     733  
   
 
 
 
Profit per share of common stock:                    
  As reported:                    
    Basic   $ 5.95   $ 3.18   $ 2.32  
    Diluted   $ 5.75   $ 3.13   $ 2.30  
  Pro forma:                    
    Basic   $ 5.48   $ 2.98   $ 2.13  
    Diluted   $ 5.30   $ 2.93   $ 2.13  

Pro forma net profit and profit per share in 2004 using the Black-Scholes option-pricing model would have been:

 
  Years ended
December 31,
2004

 
 
  (Dollars in millions except per share data)

 
Profit, as reported   $ 2,035  
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects     (202 )
   
 
Pro forma net income   $ 1,833  
   
 
Profit per share of common stock:        
  As reported:        
    Basic   $ 5.95  
    Diluted   $ 5.75  
  Pro forma:        
    Basic   $ 5.35  
    Diluted   $ 5.18  

2. Reclassification of certain receivables and related cash flows

A. Consolidated financial position

Our Machinery and Engines operations generate trade receivables from the sale of inventory to dealers and customers. Certain of these receivables are sold to Cat Financial. Cat Financial holds the receivables and periodically securitizes a portion of the dealer receivables using a revolving securitization structure. Cat Financial's portion of the securitized trade receivables is represented by certificated retained interests. Cat Financial also generates wholesale inventory receivables from its direct financing of inventory purchases by dealers. Previously, the certificated retained interests as well as the wholesale inventory receivables were classified as Finance Receivables in our Consolidated Financial Position. In the fourth quarter of 2004, we reclassified the certificated retained interests from Finance Receivables to Retained Interests in Securitized Trade Receivables and the wholesale inventory receivables from Finance Receivables to Trade and Other Receivables in our Consolidated Financial Position. These changes were made to align the financial position with the cash flow changes discussed below.

B. Consolidated statement of cash flow

During the fourth quarter of 2004, the staff of the Securities and Exchange Commission expressed concern regarding the classifications of certain cash flows by companies with captive finance subsidiaries. As a result of this concern, management decided to make reclassifications to the 2003 and 2002 Consolidated Statements of Cash Flow as described below.

Securitized trade receivables

Previously, we reported an increase in cash flow from operating activities in the Consolidated Statement of Cash Flow when Machinery and Engines sold receivables to Cat Financial that were subsequently securitized. Concurrently, Cat Financial's entire purchase of these receivables was included in Additions to Finance Receivables (investing activity) in the Consolidated Statement of Cash Flow. The receivables were immediately securitized and the portion sold to a third party was included in Proceeds from Sale of Finance Receivables (investing activity) in the Consolidated Statement of Cash Flow. Subsequently, collection of the certificated retained interests was included in Collection of Finance Receivables (investing activity) in the Consolidated Statement of Cash Flow. This cash flow treatment followed our principal lines of business reporting, however, when we reported an increase in cash flow from operating activities and a corresponding outflow from investing activities there was no increase in cash on a consolidated basis from the sale of inventory to our dealers and customers.

        In the fourth quarter of 2004, we made a reclassification to eliminate the offsetting non-cash intercompany transactions in the Consolidated Statement of Cash Flow. In addition, we reclassified the proceeds from sale of trade receivables to operating activities. The reclassification properly classifies cash receipts from the sale of inventory as operating activities and reflects that these cash flows, although held and managed by Cat Financial, arise from our sale of Machinery and Engines inventory.

        The securitization structure mentioned above involves a securitization trust. During 2002 and 2003, the trust was a qualifying special purpose entity (QSPE) and thus, in accordance with Statement of Financial Accounting Standards No. 140 (SFAS 140), "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities", was not consolidated. (See Note 6 on page A-16 for discussion of the 2004 QSPE status of the trust.) When receivables were placed into the trust, we received cash for the portion sold to third party purchasers and the portion retained by Cat Financial was represented by certificated retained interests. Placing receivables into a securitization trust changes their nature and the receipt of certificated retained interests is considered a non-cash transaction. We have noted this non-cash transaction on the Consolidated Statement of Cash Flow and quantified the receivables decrease resulting from this transaction and thus excluded from operating activities. This reflects that certificated retained interests, not cash, were received for these sales. The certificated retained interests are considered held-to-maturity securities as defined by SFAS 115. SFAS 115 requires that collection

A-12


of held-to-maturity securities be classified as an investing activity. We have therefore reclassified the collection of the certificated retained interests from Collection of Finance Receivables to Collections of Retained Interests in Securitized Trade Receivables within the investing activities section of the Consolidated Statement of Cash Flow. The impact of these changes is a significant reduction to cash flow from operating activities and a significant increase in cash flow from investing activities. This reflects that although inventory was sold, the nature of the receivable was changed to a security. The subsequent collection of that security is shown as an investing activity.

Wholesale inventory receivables

Previously, we reported an increase in cash flow from operating activities when a dealer remitted payment for a trade receivable that was subsequently financed with the issuance of a wholesale inventory receivable by Cat Financial. The issuance of a wholesale inventory receivable by Cat Financial was reported as an Addition to Finance Receivables in the Consolidated Statement of Cash Flow and the subsequent collection was reported as a Collection of Finance Receivables. Similar to securitized receivables, this cash flow treatment followed our principal lines of business reporting, however, when we reported an increase in cash flow from operating activities and a corresponding outflow from investing activities there was no increase in cash on a consolidated basis from the sale of inventory to our dealers and customers. We therefore eliminated the offsetting non-cash transaction in the Consolidated Statement of Cash Flow. In addition, we reclassified the collection of wholesale inventory receivables to operating activities. The reclassification properly classifies cash receipts from the sale of inventory as operating activities and reflects that these cash flows, although held and managed by Cat Financial, arise from our sale of Machinery and Engines inventory.

        These reclassifications had no impact on the Increase in Cash and Short-term Investments on the Statement of Consolidated Cash Flow.

        Prior amounts reported have been reclassified to conform to this presentation as follows:

 
  2003
  2002
 
 
  Previous
classification(1)

  Change
  As
Reclassified

  Previous
classification(1)

  Change
  As
Reclassified

 
 
  (Millions of dollars)

 
Consolidated Financial Position—Statement 3                                      
  Receivables—trade and other   $ 3,666   $ 359   $ 4,025   $ 2,838   $ 354   $ 3,192  
  Receivables—finance     7,417     (1,909 )   5,508     6,565     (1,499 )   5,066  
  Retained interests in securitized trade receivables         1,550     1,550         1,145     1,145  
  Long-term receivables—trade and other     82     428     510     66     367     433  
  Long-term receivables—finance     7,822     (428 )   7,394     6,714     (367 )   6,347  

Consolidated Statement of Cash Flow—Statement 4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Receivables—trade and other   $ (438 ) $ (7,677 ) $ (8,115 ) $ 5   $ (6,328 ) $ (6,323 )
  Net cash provided by (used for) operating activities     2,066     (7,677 )   (5,611 )   2,366     (6,328 )   (3,962 )
  Additions to finance receivables     (17,146 )   10,278     (6,868 )   (15,338 )   9,405     (5,933 )
  Collections of finance receivables     13,882     (8,631 )   5,251     11,866     (7,297 )   4,569  
  Proceeds from sale of finance receivables     1,760     (1,099 )   661     2,310     (1,697 )   613  
  Collections of retained interests in securitized trade receivables         7,129     7,129         5,917     5,917  
  Net cash provided by (used for) investing activities     (2,793 )   7,677     4,884     (2,708 )   6,328     3,620  
(1)
Certain amounts do not agree to prior period reported amounts due to unrelated reclassifications.

3. Derivative financial instruments and risk management

A. 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.

Our 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, 2004, $102 million of deferred net gains included in equity ("Accumulated other comprehensive income" in Statement 3), related to Machinery and Engines foreign currency contracts designated as cash flow hedges, 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 2004, 2003 or 2002.

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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 receivables and debt. All such foreign currency forward contracts are undesignated.

(Losses) included in current earnings [Other income (expense)] on undesignated contracts:

 
  2004
  2003
  2002
 
 
  (Millions of dollars)

 
Machinery and Engines:                    
  On undesignated contracts   $ (9 ) $ (1 ) $  
  Due to changes in time and volatility value on options           $ (1 )
Financial Products:                    
  On undesignated contracts   $ (46 ) $ (121 ) $ (96 )
   
 
 
 
    $ (55 ) $ (122 ) $ (97 )
   
 
 
 

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

B. 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 (fixed rate or floating rate) of their debt portfolio matches the interest rate profile of their receivables. 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 volatility of 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. To support hedge accounting, we designate fixed-to-floating interest rate swaps as fair value hedges of the fair value of our fixed rate debt at inception of the swap contract. Financial Products policy is to designate most floating-to-fixed interest rate swaps as cash flow hedges of the variability of future cash flows at inception of the swap contract. Designation as a hedge of the variability of cash flow is performed to support hedge accounting. During 2004, Financial Products operations liquidated three fixed-to-floating interest rate swaps and during 2002, Financial Products liquidated four such swaps. As a result, the fair value adjustment of the original debt is being amortized to earnings ratably over the remaining life of the hedged debt.

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

 
  2004
  2003
  2002
 
 
  (Millions of dollars)

 
Fixed-to-floating interest rate swaps                    
  Machinery and Engines:                    
    Gain on liquidated swaps   $ 5   $ 6   $ 8  
  Financial Products:                    
    Gain/(loss) on designated interest rate derivatives     (28 )   (20 )   17  
    Gain/(loss) on hedged debt     28     20     (17 )
    Gain on liquidated swaps—included in interest expense     2     2     1  
   
 
 
 
    $ 7   $ 8   $ 9  
   
 
 
 

As of December 31, 2004, $3 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 2004, 2003 or 2002 in either Machinery and Engines or Financial Products.

C. 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 minimize volatility in the price of these commodities. 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 on the undesignated contracts of $15 million, $27 million and $1 million were recorded in current earnings ["Other income (expense)"] for 2004, 2003 and 2002, respectively.

4. Other income (expense)

 
  Years ended December 31,
 
  2004
  2003
  2002
 
  (Millions of dollars)

Investment and interest income   $ 96   $ 49   $ 31
Foreign exchange gains     116     35     13
Charge for early retirement of debt         (55 )  
Miscellaneous income (loss)     (8 )   6     25
   
 
 
    $ 204   $ 35   $ 69
   
 
 

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5. Income taxes

The components of profit before taxes were:

 
  Years ended December 31,
 
  2004
  2003
  2002
 
  (Millions of dollars)

U.S   $ 1,106   $ 489   $ 343
Non-U.S     1,601     988     771
   
 
 
    $ 2,707   $ 1,477   $ 1,114
   
 
 

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,
 
 
  2004
  2003
  2002
 
 
  (Millions of dollars)

 
Current tax provision (credit):                    
  U.S. Federal   $ 136   $ 24   $ (62 )
  Non-U.S     308     196     210  
  State (U.S.)     13     10     1  
   
 
 
 
      457     230     149  
   
 
 
 
Deferred tax provision (credit):                    
  U.S. Federal     301     182     172  
  Non-U.S     (24 )   (21 )   (20 )
  State (U.S.)     (3 )   7     11  
   
 
 
 
      274     168     163  
   
 
 
 
Total provision for income taxes   $ 731   $ 398   $ 312  
   
 
 
 

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

 
  Years ended December 31,
 
 
  2004
  2003
  2002
 
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 )% (4.9 )% (4.4 )%
  Non-U.S. subsidiaries taxed at other than 35%   (3.7 )% (4.0 )% (3.4 )%
  Other—net   0.6 % 0.9 % 0.8 %
   
 
 
 
Provision for income taxes   27.0 % 27.0 % 28.0 %
   
 
 
 

We paid income taxes of $326 million, $55 million and $124 million in 2004, 2003 and 2002, 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 indefinitely reinvested. Determination of the amount of unrecognized deferred tax liability related to indefinitely reinvested 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 2004 was $2 million or less than $.01 per share and $10 million or $.03 per share in 2003.

Deferred income tax assets and liabilities:

 
  December 31,
 
 
  2004
  2003
  2002
 
 
  (Millions of dollars)

 
Deferred income tax assets:                    
  Postemployment benefits other than pensions   $ 1,092   $ 1,147   $ 1,130  
  Warranty reserves     212     163     204  
  Unrealized profit excluded from inventories     153     136     109  
  Tax carryforwards     480     370     230  
  Inventory valuation method     35     37     60  
  Pension             39  
  Deferred compensation     57     48     38  
  Allowance for credit losses     73     66     55  
  Unremitted earnings of non-U.S subs         25     60  
  Other     200     158     144  
   
 
 
 
      2,302     2,150     2,069  
   
 
 
 
Deferred income tax liabilities:                    
  Capital assets     (903 )   (731 )   (597 )
  Pension     (216 )   (102 )    
  Unremitted earnings of non-U.S subs     (131 )        
   
 
 
 
      (1,250 )   (833 )   (597 )
   
 
 
 
Valuation allowance for deferred tax assets     (24 )   (37 )   (34 )