I have read and understand the plagiarism policy as outlined in the syllabus and the sections in the Student Bulletin relating to the IWU Honesty/Cheating Policy. By affixing this statement to the title page of my paper, I certify that I have not cheated or plagiarized in the process of completing this assignment. I also certify that the work submitted is original work specific for this course.
If it is found that cheating and/or plagiarism did take place in the writing of this paper, I understand the possible consequences of the act/s, which could include expulsion from Indiana Wesleyan University. Caterpillar Caterpillar generates revenues through nine business segments: North America Marketing (14. 9% of the total revenues during fiscal year 2006), construction and mining products (13. 9%), large power products (10. 2%), power systems marketing (6. 9%), European marketing (6. 5%), Latin America (5. 8%), financing and insurance (4. %), electric power (3. 4%), Asia-Pacific marketing (3. 3%), and all others (31. 0%). The company recorded revenues of $44,958 million during fiscal year ended December 2007, an increase of 8. 2%, and $41,517 million during the fiscal year ended December 2006, and an increase of 14. 2% over 2005. For the fiscal year 2006, North America, the company’s largest geographic market, accounted for 53% of the total revenues. During the fiscal year 2006, the North America marketing division recorded revenues of $12,118 million in fiscal year 2006, an increase of 6. % over 2005. The construction and mining products division recorded revenues of $1 1,280 million in fiscal year 2006, an increase of 13. 6% over 2005. The inter-segment sales for this division amounted to $1 1,332 million in 2006. The large power products division recorded revenues of $8,345 million in fiscal year 2006, an increase of 17% over 2005. The inter-segment sales for this division amounted to $8,517 million in 2006. The power systems marketing division recorded revenues of $5,591 million in fiscal year 2006, an increase of 18. 4% over 2005. The European
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Marketing division recorded revenues of $5,287 million in fiscal year 2006, an increase of 20. 1% over 2005. The Latin America division recorded revenues of $4,717 million in fiscal year 2006, an increase of 19. 6% over 2005. The financing and insurance division recorded revenues of $3,360 million in fiscal year 2006, an increase of 17. 2% over 2005. The electric power division recorded revenues of $2,797 million in fiscal year 2006, an increase of 20. 4% over 2005. The Asia-Pacific marketing division recorded revenues of $2,682 million, an increase of 8. 8% over 2005.
The all others division recorded revenues of $25,241 million in fiscal year 2006, an increase of 14% over 2005. North America, Caterpillars largest geographical market, accounted for 53% of the total revenues in the fiscal year 2006. Revenues from North America reached $22,007 million in 2006, an increase of 13. 6% over 2005. European accounted for 25. 7% of the total revenues in the fiscal year 2006. Revenues from European reached $10,664 million in 2006, an increase of 15. 6% over 2005. Latin America accounted for 9. 3% of the total revenues in the fiscal year 2006.
Revenues from Latin America reached $3,841 million in 2006, an increase of 21. 9% over 2005. Asia-Pacific accounted for 12. 1% of the total revenues in the fiscal year 2006. Revenues from Asia-Pacific reached $5,005 million in 2006, an increase of 8. 9% over 2005. Caterpillar is the world’s largest manufacturer of earthmoving machinery; and construction and mining equipment. It is also a leading supplier of agricultural equipment. A strong market position increases the bargaining leverage of the company and its access to wide end markets increases the cross selling opportunities for the company.
However, reduced demand from the US and Euro zone as a result of economic slow down could have a significant impact on the company’s total revenues. Caterpillar is the world’s largest manufacturer of earth moving machinery. It is also one of the largest manufacturers of construction and mining equipment and a leading supplier of agricultural equipment. It has the highest revenue generation ($41,517 million) and market capitalization (approximately $51,343. 3 million) in its sector. The company’s machines are distributed principally through more than 200 independent Caterpillar dealers worldwide.
Worldwide, these dealers serve 182 countries and operate through a network of 3,500 outlets. In addition, the company manufactures products which serve a variety of industries like mining, marine, construction, oil and gas, agriculture, and power. A strong market position increases the bargaining leverage of the company and its access to a variety of end markets provides it with increased cross selling opportunities. Caterpillar has reported consistent increase in its revenue and profits since 2002. The company’s revenue has grown at a compounded annual growth rate (CAGR) of 20% during the period 2002-2006.
Also during fiscal 2006, the company recorded revenues of $41,517 million, an increase of 14. 2% over 2005. This was fueled by strong performance of EUROPEAN marketing, electric power, and power systems marketing divisions which recorded revenue growth of 20. 1%, 20. 4%, and 18. 4%, respectively over the previous year. Also Caterpillar’s operating and net profits have shown a similar trend. The company’s operating profits have increased at a compounded annual growth rate of 38. 8% from $1,324 million in 2002 to $4,921 million in 2006.
Similarly, the company’s net profits have also grown from $798 million in 2002 to $3,537 million in 2006. The average operating and net profit margins for the period 2002-2006 were 9% and 6. 4%, respectively. Strong financial performance facilitates financial stability and enhances the market position of the company. The Company’s average returns have been high compared to its industry peers. Its return on average assets, return on average investments, and return on average equity for the period 2002-2006 were 29. 1%, 4. 6%, and 9%, respectively, considerably higher its competitor Komatsu’s averages of 11. %, 4. 4%, and 9%, respectively, for the same period. Strong returns reflect the ability of the management to deploy assets in profitable avenues, which in turn enhances investor confidence. Caterpillar Relatively weak growth in Asia-Pacific the Company recorded weak growth in Asia-Pacific operations in 2006. While other mature markets like North America, Latin America, and European has increased at a rate 13. 5%, 21. 9%, and 15. 6% respectively in 2006; the Asia/Pacific market registered a relatively weak growth of 8. 9% for the same period.
This growth was lower than the growth registered by the company in 2004, during which the companies revenues increased by approximately 40% from $2,390 million in 2003 to $4,063 million in 2004. In last few years, Asia /Pacific has emerged as one of the main construction markets driven by the growth in China and India. A weak performance in a growing market may indicate a loss of business to competitors in these regions. High debt level, The Company’s total debts have been increasing sharply in the recent past. The total debt has increased from $17,861 million in 2002 to $27,296 million in 2006 at a CAGR of 11. %. Further, the company’s interest expense has also been stagnant in the last five year, with mounting debt. The company’s debt to equity ratio was higher at 2. 6% in 2006. A further increase in the company’s debt would place pressures on the company’s cash flows and would weaken the company’s position in the debt market. Lower asset turnover, Caterpillar has been recording lower turnover on its assets. In 2006, the company generated revenues of $41,517 million with an asset base of $50,879 million. This was lower than its competitor Komatsu, which generated higher revenues $16,055. million with an asset base of $15,637 million for the same period. The company’s average asset turnover ratio for the period 2002-2006 was 0. 9, lower than Komatsu’s average of 2. 8 for the same period. Lower asset turnover indicates firm’s inefficiency at using its assets in generating sales at higher prices. Caterpillar Positive outlook for the global oil and gas sector, Exploration and production companies worldwide are expected to increase their capital spending by 13% on an average in 2007 compared to 2006, with deepwater projects in the Gulf of Mexico helping to lead the way in the US spending.
Also, with funds released for more E&P, expenditures for deepwater oil and gas production have been increasing rapidly and are expected to reach $20 billion per year by 2010. Caterpillar is one of the leading providers of drilling and pumping equipment for the oil and gas sector. Hence, the company’s engine division is expected to post a strong earnings growth in the short to medium term. The US construction market has witnessed a growth in last few years. Total construction market in 2006 was $1,192. 2 billion, registering a growth of 5. 3% over previous year. This is expected to grow to reach $1,278. 4 billion in 2008.
Further, non-building and heavy engineering is expected to grow at an average of 12. 5% during 2007 and 2008 to reach $257. 3 billion from the existing $202. 9 billion in 2006. Furthermore, the value of transportation contract awards was up 9. 1% through August 2007, with state Department of Transportation (DOT) awarding $41. 6 billion in contracts during 2007. The introduction of the Transportation Equity Act is likely to provide a positive impetus to the construction industry. The new act is expected to provide over $286 billion in authorized funding for construction of federal highway, transit and safety programs through 2009.
The company is one of the leading suppliers of construction equipment in the US and it is well positioned to benefit from the positive outlook for the US construction market. In Asia, rapid urbanization and rising home ownership aspirations as a result of economic growth continued to drive demand for quality housing and well-planned townships in countries such as China, India, Vietnam, Indonesia, and Thailand. India is expected to see the highest rate of global construction spending growth in the 2006-2008, estimated at about 10% per annum.
Also, construction spending in China is expected to continue to expand rapidly with an estimated growth of 9% per annum in 2006-2008. Foreign direct investment, exports, public infrastructure spending, 2008 Olympics in Beijing, and the 2010 World Expo in Shanghai would drive Chinas strong expansion. Further, Caterpillar has witnessed strong growth of 17% in 2006 for its machinery and engines sales in China. The growing residential sector in Asia would provide new opportunities to the company’s construction division. Economic slowdown in the US and Euro zone The US and European Union are the two key markets for Caterpillar.
According to the Organization for Economic Cooperation and Development (OECD), GDP growth in the Euro zone and is expected to slowdown in 2007. While the GDP growth of the US economy is forecast to slow down from an estimated 3. 2% in 2006 to 2. 8% in 2007, the GDP growth in the Euro zone is forecast to decline from an estimated 2. 2% in 2006 to 2% in 2007. A weak economic outlook for Euro zone and the US, two key markets, would put pressure on the top line of Caterpillar. Increasing raw material prices Commodity-based raw materials, including steel, copper, and aluminum, account for a significant part of raw materials used by the company.
Steel prices have increased rapidly in the recent past and the trend is expected to continue. Factors such as high demand from China, fuel price hikes, and the ongoing consolidation in the industry have resulted in higher steel prices. The price of cold rolled steel coil rose from $613 per metric ton in January 2006 to $704 per metric ton in August 2006, which reduced to $665 per metric ton in December 2006. While the fluctuation in steel prices has stabilized in 2007, they increased to $696 per metric ton by the end of May 2007.
The price of copper, another key raw material for caterpillar, has increased sharply in recent years. Copper prices increased five times in 2005 compared with the fiscal 2001 levels. During the first nine months of 2007, copper prices averaged $3. 30 per pound (Lbs), nearly 10% higher than in the corresponding period of 2006. The average copper price is expected to be about $3. 2 per lbs in 2008. Since copper, aluminum, and steel are important raw materials for the company, a rise in their prices is likely to adversely affect the company’s operating margins in the medium term.
Environmental regulations The company’s is obliged to follow regulations set by federal, state, and international environmental laws governing the use of substances and control of emissions. In addition to governing the company’s manufacturing and other operations, these laws also impact the development of company’s products, as they have to adhere to compliance set with respect to air emission standards applicable to internal combustion engines. With the increase in global warming, environmental regulations have become more rigid in recent years.
In 2005, one of the most important developments in this area has been the introduction of the Kyoto Protocol for the reduction of greenhouse gases. The protocol calls on industrialized countries to reduce their greenhouse gas emissions level by 5. 2% on an annual average during the 2008 to 2012, as compared to the emissions level in 1990. Another important development in 2005 took place when the US environmental protection agency (EPA) issued a clean air interstate rule (CAIR), according to which, states have to reduce the allowable S02 emissions by 70% and reduce nitrogen oxides emissions by 60%, by 2015 as compared to the 2003 levels.
The stringent environmental regulations may impose new liabilities or increase operating expenses, either of which could result in a decline in profitability. TOP COMPETITORS The following companies are the major competitors of Caterpillar, Inc. Cummins, Inc. Ford Motor Company Isuzu Motors Limited Kawasaki Heavy Industries, Ltd. Komatsu Ltd. Navistar International Corporation Detroit Diesel Corporation John Deere-Lanz Verwaltungs-Aktiengesell Scania AB CNH Global N. y. ABVolvo Bosch Corporation Citigroup Inc. DaimlerChrysler AG
Deere & Company Delphi Corporation Mitsubishi Heavy Industries, Ltd. COMPANY VIEW A statement by Jim Owens, Chairman and Chief Executive Officer of Caterpillar is given below. The statement has been taken from the companys 2006 Annual Report. Caterpillar people are relentless. Case in point: we entered 2006 celebrating the best year in our companys history. Sales and revenues were up 20 percent. Earnings were up 40 percent. Explosive growth was the norm across almost all our businesses. How did our people respond to the successes of 2006?
By immediately going back to work to make 2006 and beyond even better — identifying opportunities and staking out aggressive improvement plans to drive success. 2006 marked a good start on our journey. It was our fourth straight year of double-digit profitability. We took advantage of our financial success — including strong cash flow — to fund growth in capacity, continue aggressive new product development, complete the strategic acquisition of Progress Rail, increase the dividend rate by 20 percent and buy back more than $3 billion in stock.
All these actions will deliver long-term benefits for our customers, employees and investors. We feel good about our performance, not just in 2006 but over the past several years. Since 1990, our sales and revenues have grown from just over $1 1 billion to $41. 5 billion in 2006, a compound annual growth rate of 8 percent. Profit per share is up significantly as well, reaching $5. 17 in 2006. Over the past five years, Caterpillars compound annual profit per share growth is 35 percent — compared to 27 percent for the S&P 500. Looking head, were well-positioned to deliver similar results through the end of the decade.
Our product lineup is the strongest in our history. Weve added capacity to meet demand and continue to invest in new products, technologies and services. The near-term outlook is strong in many key industries we serve. Mining, oil and gas production, large infrastructure projects, non-residential construction, marine engines and distributed power. We expect two pockets of market weakness in 2007 in the United States. First, the on-highway truck engine business will drop significantly as new emissions regulations take effect.
Second, housing-related sectors will be down after several years of rapid growth. Given the diversity of our business, however, were projecting another record year in 2007. Sales and revenues should be in the $41. 5 to $43. 6 billion range, with profit per share of $5. 20 to $5. 70 and we have a good line of sight to our 2010 sales and revenues goal of $50 plus billion. Our focus now is on execution relentless execution of the strategy we unveiled to all employees in late200S and to our worldwide dealers and strategic suppliers in early 2006.
This strategy clearly articulates our bold goals in the areas of people, product and process performance and profitable growth. Achieving it will require breakthrough changes in several areas of our business. A Never-Ending Focus on Safety and Engagement In 2000, we examined our enterprise safety performance and were disappointed to discover how far we were from our goal of an injury-free workplace. One injured employee is one too many and our performance six years ago was unacceptable. But bringing our poor safety numbers to light has led to significant changes in our physical work environment and our culture.
Today, our people know that nothing, not production or profits, is more important than safety. Weve made safety excellence the highest priority for our leaders. And weve set the expectation that each of us has a personal responsibility to improve our own heath and safety and that of our coworkers. T he results are encouraging. Recordable injuries have dropped by 66 percent since 2000. In 2006, 548 fewer people were injured on the job than in 2005, despite working 18 million more hours. More than 50 facilities ended the year without a single recordable injury.
And 87 facilities representing approximately 23,500 employees have achieved world-class safety performance. Their success is proof that we can reach our ultimate goal of zero injuries as a company. But we still have much work to do. Were upping our investment in training, increasing our focus on ergonomics to address the “strains and sprains” that comprise a significant portion of our injuries and deploying Vision Zero our uniform, standardized safety process across the company. Making safety our top priority is really about putting people first, and were making positive strides in this area.
Employee engagement is how we measure our peoples commitment, work effort and desire to stay at Caterpillar. In 2002, just three of our divisions had engagement scores higher than 70 percent. Today, 17 divisions comprising more than 31,000 employees do, and eight have topped 80 percent. To reach our 2010 goal of 90 percent engagement company-wide, well continue to focus on building the values-based culture described in Our Values in Action, the update to our Worldwide Code of Conduct published in 2005.
A Constant Push for Higher Levels of Quality and Velocity Delivering the highest quality products when and where customers need them has been the hallmark of Caterpillars success for more than 80 years. But we cant rest on our reputation. Exploding demand and supply constraints have caused us to hit a plateau in product quality. And our velocity performance — our ability to serve customers better and faster with less inventory tied up in the supply chain — also needs improvement. Our customers dont want excuses; they want and deserve excellence.
Were committed to achieving the high levels of performance they demand. In late 2006, we established a corporate product quality organization to help drive common processes, metrics and simplification across our diverse organization, with 6 Sigma at the foundation. Time and again, our people using 6 Sigma methodology have found solutions to tough problems, and were confident that refocusing our 6 Sigma human resources on quality will deliver the results we need. Weve also merged three of our largest U. S. acilities Aurora, Decatur and East Peoria, Illinois into one organization and restructured three product-focused divisions into two industry-focused divisions. These organizational shifts will enable us to share technology and processes, build consistency among products and create closer connections with customers leading to higher quality, improved velocity and lower product development costs. An Unrelenting Quest to Get Better Ultimately, we believe the Caterpillar Production System holds the key to breakthrough improvement in safety, quality, velocity and cost. In 2007, our focus is on worldwide deployment.
Each of our facilities will implement an operating system that eliminates waste, a cultural system that improves the way we work together and a management system that creates measurement and structure to support continuous improvement. The Caterpillar Production System is the driving force behind our efforts to produce the highest quality products as efficiently and safely as possible. We expect it to have a profound positive impact on our results financial and otherwise over the 2007 to 2010 deployment period. Another key to our success is continued growth on the service side of our business.
Our service-related businesses aftermarket parts, Cat Financial, Cat Insurance, Cat Logistics, Cat Reman, OEM Solutions, Solar Turbine Customer Services and our newest acquisition, Progress Rail deliver profitable growth and earnings stability. They also contribute to greater price realization, increased parts sales, improved asset utilization and stronger customer relationships. As we grow in the services area, were looking for opportunities to leverage our product and process knowledge, our global distribution network and our ability to develop integrated solutions.
We have a focused strategy to pursue markets where Caterpillar is uniquely qualified and where we can offer a differentiated, high-value service to customers. In 2006, our service-related businesses delivered approximately a third of our total sales and revenues. We plan to grow that contribution to 37 to 40 percent by 2010. A Renewed Commitment to Taking “Our Turn” While our business grows and changes, the values that guide our behavior and our relationships with those around us do not. Integrity, excellence, teamwork and commitment are at the oundation of our success past, present and future. We know that generations of Caterpillar people before us built an honorable reputation and an exceptional culture through their words and deeds. And we know its our turn now to carry the banner. I have every confidence in Team Caterpillars ability to do so, and I look forward to taking “our turn” together in 2007. Relentless execution is the focus as we work to achieve the challenging goals weve set for ourselves—and deliver on the promises weve made to our customers, our investors, and one another.