Caterpillar Reports Record Quarterly Sales and Revenues; Best Ever Third-Quarter Profit Per Share, Up 23 percent

PEORIA, Ill., Oct. 19 /PRNewswire-FirstCall/ -- Citing continued strength in markets outside of the United States, Caterpillar Inc. (NYSE:CAT) today announced third-quarter sales and revenues of $11.442 billion, an all-time quarterly high. The company also reported profit of $927 million, or $1.40 per share, for the quarter ended September 30, 2007. Profit and profit per share are the highest ever for a third quarter.

"These results clearly demonstrate our global reach and the stability and strength of our growing integrated service businesses. We delivered strong returns for our stockholders despite continuing severe weakness in key U.S. markets," said Chairman and Chief Executive Officer Jim Owens. "I am particularly pleased by the bottom line results of our engines business. With our extensive product offering and the continuing strength in most end markets, we were able to more than offset the impact of the dramatic drop in on-highway truck engines and report record operating profit for engines. Overall, profit per share climbed 23 percent compared to last year's third quarter, and moving forward I am confident that our deployment of the Cat Production System (CPS) will help us reach our 2010 goals for improving safety, quality, velocity, earnings and growth," said Owens.

Sales and revenues increased $925 million compared to the third quarter of last year, $385 million from higher sales volume, $267 million from improved price realization, $174 million from the effects of currency and $99 million from higher Financial Products revenues.

Third-quarter profit increased $158 million, or $0.26 per share, from third quarter 2006. The increase in profit was due to improved price realization and higher sales volume, partially offset by higher manufacturing costs, including material costs.

"Despite weakness in U.S. markets, our sales and revenues increased 9 percent. We continue to see remarkable growth outside of the United States with particular strength in key industries like mining, oil and gas, electric power and marine engines. The industries we serve are becoming increasingly global, and the investments we are making to achieve our 2010 goals have us well positioned to meet their needs," said Owens.

Outlook

The full-year outlook for 2007 is for sales and revenues of about $44 billion and profit per share in the range of $5.20 to $5.60, compared to $5.17 per share in 2006. The previous outlook for 2007 sales and revenues was about $44 billion, and profit per share was $5.30 to $5.80.

Caterpillar's preliminary outlook for 2008 reflects a sales and revenues increase of 5 to 10 percent and profit per share up 5 to 15 percent from the mid-point of the 2007 outlook range.

"I am pleased with our progress on improving safety and quality. While we continue to face capacity-related inefficiencies due to the unprecedented surge in global demand, I am confident that CPS with 6 Sigma will deliver the velocity and efficiency improvements needed to achieve our 2010 goals -- sales and revenues more than $50 billion and compound annual growth in profit per share of 15 to 20 percent from our 2005 base," said Owens.

Note: Glossary of terms included on pages 21-22; first occurrence of terms shown in bold italics.

For more than 80 years, Caterpillar Inc. has been making progress possible and driving positive and sustainable change on every continent. With 2006 sales and revenues of $41.517 billion, Caterpillar is the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines. The company also is a leading services provider through Caterpillar Financial Services, Caterpillar Remanufacturing Services, Caterpillar Logistics Services and Progress Rail Services. More information is available at: http://www.cat.com.

SAFE HARBOR

Certain statements in this release relate to future events and expectations and as such constitute forward-looking statements involving known and unknown factors that may cause actual results of Caterpillar Inc. to be different from those expressed or implied in the forward-looking statements. In this context, words such as "will," "expect," "anticipate" or other similar words and phrases often identify forward-looking statements made on behalf of Caterpillar. It is important to note that actual results of the company may differ materially from those described or implied in such forward-looking statements based on a number of factors and uncertainties, including, but not limited to, changes in economic conditions; currency exchange or interest rates; political stability; market acceptance of the company's products and services; significant changes in the competitive environment; epidemic diseases; changes in law, regulations and tax rates; and other general economic, business and financing conditions and factors described in more detail in the company's Form 10-K filed with the Securities and Exchange Commission on February 23, 2007. This filing is available on our website at http://www.cat.com/sec_filings. We do not undertake to update our forward- looking statements.



                                  Key Points

    Third Quarter 2007
    (Dollars in millions except per share data)
                                            Third     Third
                                           Quarter   Quarter      $       %
                                            2006       2007     Change  Change
    Machinery and Engines Sales            $9,842    $10,668     $826      8%
    Financial Products Revenues               675        774       99     15%
    Total Sales and Revenues               10,517     11,442      925      9%

    Profit                                   $769       $927     $158     21%

    Profit per common share - diluted       $1.14      $1.40    $0.26     23%


Machinery and Engines sales improved $826 million despite the impact of the severe drop in demand for on-highway truck engines and weakness in North American construction sales. The strength of economies outside the United States, our broad global footprint and growth in integrated service businesses, all contributed to 8 percent growth in sales. The diversity and strength of our full range of engine products more than offset the profit impact of the severe decline in on-highway truck engines.

Profit per share improved 23 percent, primarily a result of improved price realization and higher physical sales volume. The improvements were partially offset by a $294 million increase in core operating costs and an unfavorable impact from currency of about $60 million.



    2007 and Preliminary 2008 Outlooks
    (Dollars in billions except per share data)

                          2006     Previous         Current      Preliminary
                         Actual  2007 Outlook     2007 Outlook   2008 Outlook

    Sales and Revenues   $41.5     About $44       About $44      Up 5 - 10%

    Profit per common
     share - diluted     $5.17  $5.30 to $5.80  $5.20 to $5.60    Up 5 - 15%



    2007
    -- Machinery and Engines sales outside North America are expected to be up
       25 percent from 2006, or about $4.6 billion -- more than offsetting a
       $2.5 billion, or 12 percent, decline in North America.  This reflects
       solid 2007 economic and industry growth in most of the world outside
       North America.
    -- Below trend economic growth in the United States for 2007 -- Gross
       Domestic Product (GDP) of about 2 percent
    -- Weak U.S. housing starts -- 1.4 million in 2007
    -- The outlook for profit per share reflects an improvement in core
       operating cost comparisons during the fourth quarter.


    2008
    -- Sales and revenues reflect continued growth in 2008 putting us well on
       our way to achieving our goal of more than $50 billion by 2010.
    -- A weak U.S. economy is expected to continue but be more than offset by
       solid economic and industry growth in most of the world outside the
       United States.
    -- We expect a fifth consecutive year of record profit per share in 2008,
       a reflection of our broad global footprint.

A question and answer section has been included in this release starting on page 16.

    DETAILED ANALYSIS
    Third Quarter 2007 vs. Third Quarter 2006

                  Consolidated Sales and Revenues Comparison
                       3rd Qtr. 2007 vs. 3rd Qtr. 2006

To access this chart, go to http://www.cat.com for the downloadable version of Caterpillar 3Q 2007 earnings.

The chart above graphically illustrates reasons for the change in Consolidated Sales and Revenues between third quarter 2006 (at left) and third quarter 2007 (at right). Items favorably impacting sales and revenues appear as upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting sales and revenues appear as downward stair steps with dollar amounts reflected in parentheses above each bar. The bar entitled Machinery Volume includes the change in Progress Rail sales. Caterpillar management utilizes these charts internally to visually communicate with the company's Board of Directors and employees.

Sales and Revenues

Sales and revenues for third quarter 2007 were $11.442 billion, up $925 million, or 9 percent, from third quarter 2006. Machinery volume was up $397 million. Engines volume was down $12 million with on-highway truck engines down about $470 million, mostly offset by increases in electric power, petroleum and marine engines. Price realization improved $267 million. Currency had a positive impact on sales of $174 million, driven primarily by the stronger euro. In addition, Financial Products revenues increased $99 million.



    Sales and Revenues by Geographic Region

    (Millions of dollars)            %       North     %               %
    Third Quarter 2006      Total  Change   America  Change    EAME  Change
    Machinery              $6,472           $3,570            $1,510
    Engines(1)              3,370            1,561             1,078
    Financial Products(2)     675              471                95
                          $10,517           $5,602            $2,683
    Third Quarter 2007
    Machinery              $7,123   10%     $3,156    (12%)   $2,166   43%
    Engines(1)              3,545    5%      1,311    (16%)    1,362   26%
    Financial Products(2)     774   15%        520     10%       118   24%
                          $11,442    9%     $4,987    (11%)   $3,646   36%


                             Latin    %      Asia/      %
    Third Quarter 2006      America Change  Pacific   Change
    Machinery                $650             $742
    Engines(1)                249              482
    Financial Products(2)      49               60
                             $948           $1,284
    Third Quarter 2007
    Machinery                $802   23%       $999     35%
    Engines(1)                264    6%        608     26%
    Financial Products(2)      73   49%         63      5%
                           $1,139   20%     $1,670     30%

    (1) Does not include internal engines transfers of $629 million and
        $564 million in third quarter 2007 and 2006, respectively.  Internal
        engines transfers are valued at prices comparable to those for
        unrelated parties.
    (2) Does not include internal revenues earned from Machinery and Engines
        of $89 million and $126 million in third quarter 2007 and 2006,
        respectively.



                              Machinery Sales
Sales were $7.123 billion in third quarter 2007, an increase of $651 million,
                   or 10 percent, from third quarter 2006.

    --  Machinery volume increased $397 million.  Sales volume decreased in
        North America but increased in all other regions.

    --  Price realization increased $131 million.

    --  Currency benefited sales by $123 million.

    --  Geographic mix between regions (included in price realization) was
        $30 million unfavorable.

    --  Dealers outside the United States experienced increased demand, and
        they reported higher inventories compared to third quarter 2006.
        North American dealers continued reducing inventories, although the
        pace slowed significantly from the second quarter 2007.  Overall,
        reductions in dealer-reported inventories had a mild negative impact
        on sales volume.  Inventories were lower than a year earlier both in
        dollars and in months of supply.

    --  Sales in North America remained weak, the result of unfavorable
        economic conditions facing key industries and dealer inventory
        reductions.

    --  As in the first two quarters, sales volume increased in all regions
        outside North America.  Developing economies accounted for most of
        that volume growth.  Interest rates were favorable, most economies
        grew rapidly and many governments increased spending.  Those factors
        contributed to rapid growth in construction, often 10 percent or
        more.

    --  International coal prices were higher than a year earlier, in part
        due to problems Australian ports experienced in moving coal to users.
        In other countries, including China, Russia and Indonesia, production
        increased.  Coal exports from the United States also increased
        sharply.

    --  Higher oil and natural gas prices drove increased drilling and
        pipeline construction.  Oil sands development in Canada also
        benefited machinery sales.

    --  Increased metals mining investment contributed to higher volume.
        Prices in the quarter were significantly higher than last year,
        exploration budgets this year increased and mine output increased in
        a number of countries, including Australia, Brazil, Canada, Chile,
        China and the United States.


    North America - Sales decreased $414 million, or 12 percent.

    --  Sales volume decreased $465 million.

    --  Price realization increased $51 million.

    --  Dealer-reported inventories declined about $250 million in the third
        quarter compared to a decrease of about $100 million in the year
        earlier quarter. Dealer inventories at the end of the quarter were
        well below a year earlier in both dollars and months of supply.

    --  An unfavorable economic environment in many key industries in the
        United States depressed dealer deliveries.  Housing, nonresidential
        construction contracting, quarrying and coal mining declined, causing
        users to curtail fleet expansions.

    --  As a result of the weak economic environment, dealers added fewer
        units to their rental fleets and let existing fleets age.

    --  Output prices for some industries, such as housing and coal mining,
        softened and credit tightened.  Those factors likely caused some
        users to delay replacement purchases.

    --  The housing industry deteriorated further in the third quarter with
        new starts 24 percent below a year earlier.  Prices of new
        single-family homes declined, the number of unsold homes remained near
        record highs and mortgage lenders tightened standards.

    --  Nonresidential construction spending remains strong but contracting
        for new projects declined almost 6 percent in the third quarter when
        compared to last year.  The decline occurred in institutional
        building. However, contracting for both highway construction and
        commercial and industrial building increased.

    --  Coal production declined more than 2.5 percent from third quarter
        2006 in response to reduced electric utility usage and lower prices
        in some coal markets.  Coal stocks were also higher than last year.
        More positively, coal exports rebounded almost 20 percent this year,
        the result of U.S. prices falling well below international prices.

    --  Metals, oil and natural gas prices were higher than last year and
        were very favorable for investment.   Metals mine output increased
        almost 3 percent, and pipeline activity strengthened, with shipments
        of line pipe up 19 percent so far this year.  Pipeline construction
        is benefiting from changes in supply locations and two decades of
        under-investment.


    EAME - Sales increased $656 million, or 43 percent.

    --  Sales volume increased $516 million.

    --  Price realization increased $60 million.

    --  Currency benefited sales by $80 million.

    --  Dealers experienced significant increases in demand during the
        quarter, particularly in Africa/Middle East and Commonwealth of
        Independent States (CIS).  Dealers had to maintain higher inventories
        to support that stronger demand, a further positive for sales volume.
        Dealer inventories in months of supply ended the quarter about even
        with a year ago.

    --  Increased construction contributed to higher sales volume in Europe.
        Construction in the Eurozone increased 3 percent, benefiting from more
        government spending for infrastructure and growth in building
        construction.  Business profitability improved, and companies
        increased borrowings 13 percent.  Past increases in interest rates
        caused housing permits to decline.  Construction increased rapidly in
        most Central European economies, often in excess of 20 percent,
        another positive for machinery sales.

    --  Africa/Middle East accounted for the largest share of Europe, Africa
        and the Middle East (EAME) volume growth.   Higher commodity prices
        and strong economic growth boosted government revenues, enabling them
        to spend more on construction.  Year-to-date construction increased
        17 percent in South Africa and 12 percent in Egypt.  Infrastructure
        booms are underway in the Middle East.  Other positives were a
        9 percent increase in drill rig activity and more investment in
        mining.  Metals exploration budgets have increased an average
        43 percent the past two years.

    --  Sales volume in the CIS increased rapidly, with large gains occurring
        in Russia, Ukraine and Kazakhstan.  All three governments increased
        spending more than 15 percent year to date allocating large sums for
        construction.  Russia, the world's largest oil producer, increased
        production almost 3 percent this year.  The country also benefited
        from higher metals and coal prices, increasing mine output almost
        2 percent in the first half of 2007.


    Latin America - Sales increased $152 million, or 23 percent.

    --  Sales volume increased $116 million.

    --  Price realization increased $22 million.

    --  Currency benefited sales by $14 million.

    --  Dealers reported higher demand during the quarter, requiring them to
        build inventory.  Although dollar inventories at the end of the
        quarter were higher than in 2006, months of supply declined slightly.

    --  Brazil reduced interest rates 850 basis points from the 2005 peak, an
        action that led to a 4 percent increase in construction.  Large
        construction gains occurred in many other countries, often in excess
        of 10 percent.  Interest rates were favorable, and governments
        increased foreign exchange reserves 36 percent, allowing them to spend
        more for construction.

    --  Regional oil production declined more than 4 percent in the quarter as
        a result of past under-investment.  Companies are now investing more,
        and drill rig activity increased 9 percent, a positive for machinery
        sales.

    --  Increased mine production and higher metals prices contributed to
        volume growth.  Brazil increased mine output 7 percent compared to
        last year, with iron ore production up 13 percent.  Chile increased
        copper production 4 percent this year.


    Asia/Pacific - Sales increased $257 million, or 35 percent.

    --  Sales volume increased $200 million.

    --  Price realization increased $28 million.

    --  Currency benefited sales by $29 million.

    --  Dealers faced strong demand for machines, causing them to report a
        decline in inventories.  As a result, inventories in months of supply
        were well below those at the end of third quarter 2006.

    --  Economic conditions in the region were favorable.  Inflation was
        generally low so central banks had little need to raise interest
        rates.  Several central banks, including those in Indonesia and
        Thailand, made sizable reductions.  Economies grew rapidly, and trade
        surpluses produced more than a 25 percent increase in foreign exchange
        holdings.

    --  Good economic growth, increased government spending and booming stock
        markets benefited business investment and construction.  Construction
        increased more than 20 percent in China, 11 percent in India and
        9 percent in Australia.

    --  Australian thermal coal spot prices were 36 percent higher than a year
        ago partly due to problems the country experienced exporting coal.
        Demand was also strong, with the top 13 importing countries taking
        about 7 percent more coal so far this year.  Indonesia raised exports
        in response to a 40 percent increase in its coal price.  Increased
        coal production and prices contributed to a substantial sales gain in
        Indonesia.

    --  Higher metals prices and increased production benefited sales volume
        growth.  China increased iron ore production 18 percent.  Australia
        increased exploration spending for base metals by 67 percent, iron ore
        by 79 percent and uranium by more than 100 percent.  India increased
        mine production 5 percent.


                                Engines Sales
Sales were $3.545 billion in third quarter 2007, an increase of $175 million,
                    or 5 percent, from third quarter 2006.


    --  Sales volume decreased $12 million.

    --  Price realization increased $136 million.

    --  Currency benefited sales by $51 million.

    --  Geographic mix between regions (included in price realization) was
        $5 million favorable.

    --  Dealer reported inventories in dollars were up; months of supply were
        nearly flat as it was supported by strong delivery rates.


    North America - Sales decreased $250 million, or 16 percent.

    --  Sales volume decreased $283 million.

    --  Price realization increased $33 million.

    --  Sales for on-highway truck applications declined 59 percent as the
        truck industry demand for new trucks was down due to the reduction in
        tonnage hauled and freight rates realized by on-highway carriers.

    --  Sales for petroleum applications increased 29 percent due to strong
        demand in gas compression, which overcame a small reduction in new
        drill rig build rates.  Turbine sales benefited from increased
        customer spending for natural gas pipelines and compression equipment.

    --  Sales for electric power applications increased 20 percent supported
        by data center installations. Turbines and turbine-related services
        increased to support power generation.


    EAME - Sales increased $284 million, or 26 percent.

    --  Sales volume increased $186 million.

    --  Price realization increased $47 million.

    --  Currency benefited sales by $51 million.

    --  Sales for petroleum applications increased 64 percent based on
        strong demand for engines used in drilling and production.  Turbines
        and turbine-related services increased to support rising oil
        production and gas transmission demand.

    --  Sales for electric power applications increased 20 percent with
        strong demand for small- and medium-sized units.

    --  Sales for marine applications increased 21 percent with higher
        demand for workboats, commercial oceangoing vessels and cruise
        ships.

    --  Sales for industrial applications increased 9 percent with strong
        demand for agriculture and other types of original equipment
        manufacturers (OEM) equipment driven by good economic conditions and
        several new OEM accounts.


    Latin America - Sales increased $15 million, or 6 percent.

    --  Sales volume increased $6 million.

    --  Price realization increased $8 million.

    --  Currency benefited sales by $1 million.

    --  Sales for electric power engines increased 53 percent from investment
        in infrastructure as energy shortages continued in several key
        markets. These investments were supported by strong oil and commodity
        prices.

    --  Sales into truck applications declined 42 percent reflecting reduced
        demand.  Latin American truck facilities decreased exports of trucks
        destined for North America.


    Asia/Pacific - Sales increased $126 million, or 26 percent.

    --  Sales volume increased $84 million.

    --  Price realization increased $43 million.

    --  Currency reduced sales by $1 million.

    --  Sales for petroleum applications increased 40 percent as Chinese
        drill rig builders continue to manufacture at record high levels for
        domestic and export use.  Turbines and turbine-related services
        increased to support oil production demand.

    --  Sales for marine applications increased 34 percent with continued
        strong demand for workboat and offshore shipbuilding.  Large diesel
        demand grew in the offshore and general cargo industries.

    --  Sales for industrial applications increased 80 percent with
        widespread demand for engines used in OEM applications driven by
        strong growth in industrial production.

    --  Sales of electric power engines increased 10 percent with higher
        power demands driven by good economic conditions.


                          Financial Product Revenues
Revenues were $774 million in third quarter 2007, an increase of $99 million,
                   or 15 percent, from third quarter 2006.


    --  Growth in average earning assets increased revenues $73 million.

    --  Revenues from earned premiums at Cat Insurance increased $15 million.

    --  The impact of higher interest rates on new and existing finance
        receivables added $7 million.

    --  Tight credit markets in the quarter did not negatively impact
        Financial Products' ability to fund new business.


                   Consolidated Operating Profit Comparison
                       3rd Qtr. 2007 vs. 3rd Qtr. 2006

To access this chart, go to http://www.cat.com for the downloadable version of Caterpillar 3Q 2007 earnings.

The chart above graphically illustrates reasons for the change in Consolidated Operating Profit between third quarter 2006 (at left) and third quarter 2007 (at right). Items favorably impacting operating profit appear as upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting operating profit appear as downward stair steps with dollar amounts reflected in parentheses above each bar. Caterpillar management utilizes these charts internally to visually communicate with its Board and employees. The bar titled Consolidating Adjustments/M&E Other Operating Expense includes the operating profit impact of Progress Rail.

Operating Profit

Operating profit in third quarter 2007 increased $235 million, or 22 percent, from last year, driven by higher price realization and sales volume, partially offset by increased core operating costs.

Core operating costs rose $294 million from third quarter 2006. This increase was attributable to higher manufacturing costs. The increase in manufacturing costs was primarily due to operating inefficiencies and higher material costs. Operating inefficiencies were the result of selected supply chain challenges, capacity increases and a significant decline in on-highway truck engine production. Our manufacturing costs were also up from last year's levels due to transitional costs associated with the launch of the Cat Production System.

Third quarter 2007 selling, general and administrative (SG&A) expenses were $49 million lower than a year ago primarily due to the absence of approximately $70 million of expense related to a settlement of various legal disputes with Navistar.



    Operating Profit by Principal Line of Business

                                  Third Quarter  Third Quarter   $       %
                                      2006           2007      Change  Change
    (Millions of dollars)
    Machinery(1)                      $626           $681       $55      9%
    Engines(1)                         398            529       131     33%
    Financial Products                 171            178         7      4%
    Consolidating Adjustments         (117)           (75)       42
    Consolidated Operating Profit   $1,078         $1,313      $235     22%


    (1) Caterpillar operations are highly integrated; therefore, the company
        uses a number of allocations to determine lines of business operating
        profit for Machinery and Engines.



    Operating Profit by Principal Line of Business

    --  Machinery operating profit of $681 million was up $55 million, or
        9 percent, from third quarter 2006. Improved price realization and
        higher sales volume more than offset the unfavorable impact of higher
        core operating costs.

    --  Engines operating profit of $529 million was up $131 million, or
        33 percent, from third quarter 2006.  The favorable impact of improved
        price realization, positive mix of product and the absence of a
        settlement of various legal disputes were partially offset by higher
        core operating costs.  Growth in demand for electric power, petroleum,
        marine and industrial applications more than offset the decline in
        on-highway truck demand.

    --  Financial Products operating profit of $178 million was up $7 million,
        or 4 percent, from third quarter 2006. The increase was primarily
        attributable to a $9 million impact from higher average earning assets
        and the absence of an $11 million impairment charge at Cat Power
        Ventures, partially offset by an $8 million decrease in operating
        profit at Cat Insurance due to higher claims experience and a
        $6 million increase in the provision for credit losses at Cat
        Financial.


    Other Profit/Loss Items

    --  Other income/(expense) was $51 million of income compared with
        $72 million of income in third quarter 2006.  The change was primarily
        due to the unfavorable impacts of currency, partially offset by the
        absence of an expense related to a legal dispute.

    --  The provision for income taxes in the third quarter reflects an
        estimated annual tax rate of 31.5 percent for 2007 compared to
        31 percent for the third quarter 2006 and 29 percent for the full-year
        2006.  The increase over 2006 is primarily due to the repeal of
        Extraterritorial Income Exclusion (ETI) benefits in 2007.

    --  The third quarter provision for income taxes includes a favorable
        adjustment of $12 million related to the first six months of 2007
        resulting from a decrease in the estimated annual tax rate from 32 to
        31.5 percent. The change was primarily due to an increase in our
        estimated tax benefits from the domestic production activities
        deduction.

Employment

Caterpillar's worldwide employment was 99,777 at the end of the third quarter, an increase of 6,544, or 7 percent, from a year ago. Of the increase, approximately 3,500 employees were the result of acquisitions. The remaining increase of approximately 3,000 employees primarily supported growth and new product introductions.

2007 Outlook

We are maintaining our projection of 2007 sales and revenues at about $44 billion, or a 6 percent increase from 2006. The expected improvement is from increased volume outside North America, price realization, the impact of Progress Rail and currency impacts. North American machinery and engines sales volume, net of Progress Rail, is expected to be down.

Sales outside North America are expected to be up about $4.6 billion, or 25 percent -- more than offsetting a $2.5 billion, or 12 percent, decline in North America. This improvement reflects continued strong economic performance outside North America.

We expect continued growth in Financial Products for 2007. Revenues are expected to increase approximately 13 percent versus 2006, primarily due to higher average earning assets and interest rates at Cat Financial and increased premiums at Cat Insurance.

We expect profit per share to be in the range of $5.20 to $5.60. 2007 is expected to benefit from improved price realization and sales volume, partially offset by higher core operating costs and a higher effective tax rate.

From an overall economic standpoint, we anticipate that trends will change little from those prevailing in the first three quarters. North America should continue to face difficulties while sales in other regions should increase more than enough to compensate.

    -- The rebound in the U.S. economy that occurred in the second quarter
       should fade in the second half, with full-year growth of about
       2 percent.  Monthly employment gains diminished over the year, and the
       latest business surveys signal slower growth.

    -- The Fed's 50 basis point reduction in the Federal Funds rate has not
       removed all financial market stresses, and banks tightened lending
       standards on many loans.  As a result, we expect the Fed will cut its
       interest rate target another 25 basis points this year.

    -- Many U.S. industries important to our sales are in recession.  Through
       the first nine months of this year, housing starts were down
       26 percent, and we expect housing starts for the full year 2007 to be
       1.4 million.  Nonmetals mining and quarrying is down 18 percent; coal
       mining, 4 percent; nonresidential construction contracting, more than
       2 percent; and freight movements, 2 percent.  We expect further
       deterioration in most of these industries in the fourth quarter.

    -- The North American machinery industry has decreased month-to-month
       since early 2006; reduced activity in key industries and tighter credit
       conditions should continue a downward trend in the fourth quarter.
       In addition, we expect the on-highway truck industry to remain
       depressed.

    -- Credit turmoil in Europe caused major central banks to halt, at least
       temporarily, plans to raise interest rates.  The European economy had
       good growth in the first half and should slow only moderately in the
       second half.  We project more than 2.5 percent economic growth in 2007,
       with continued growth in nonresidential construction.

    -- Developing economies boomed throughout the first three quarters, and we
       expect strong performances in the fourth quarter.  Governments are
       increasing spending, and interest rates are low; both should keep
       construction growing rapidly.  We forecast more than 5 percent economic
       growth in Latin America this year, 8 percent in Asia Pacific,
       5.5 percent in Africa/Middle East and more than 7.5 percent in CIS.
       Those growth rates are near those in 2006 and should continue the
       strongest period of growth for these economies since the 1960s.

    -- Prices for oil and gas should support continued strong growth in
       pipeline construction and sales of engines used in drilling and well
       servicing.

    -- Metals prices should average about 40 percent higher this year than in
       2006, and exploration budgets have increased substantially.  We expect
       the mining industry will remain strong for the rest of the year.

    -- The Australian spot coal price should increase more than 20 percent
       this year.  Annual contract prices increased as well.  Coal mining
       should remain positive for machinery sales in the fourth quarter.



    Sales and Revenues Outlook -
     Midpoint of Range(1)
    (Millions of dollars)             2006            2007              %
                                     Actual          Outlook          Change
    Machinery and Engines
      North America                 $20,155         $17,700           (12%)
      EAME                           10,287          13,300            29%
      Latin America                   3,646           4,200            15%
      Asia/Pacific                    4,781           5,800            21%

    Total Machinery and Engines      38,869          41,000             5%

    Financial Products(2)             2,648           3,000            13%

    Total                           $41,517         $44,000             6%


    (1) The Consolidated Operating Profit chart below reflects sales and
        revenues at $44 billion.
    (2) Does not include revenues earned from Machinery and Engines of
        $360 million and $466 million in 2007 and 2006, respectively.



                 Consolidated Operating Profit Comparison (1)
                            2007 Outlook vs. 2006

To access this chart, go to http://www.cat.com for the downloadable version of Caterpillar 3Q 2007 earnings.

    (1) The profit per share outlook is between $5.20 and $5.60. The above
        chart illustrates operating profit at the midpoint of this profit
        range.  Each of the stair steps in the chart may individually vary
        within the  outlook range.
    (2) Other includes the impact of currency, consolidating adjustments, M&E
        other operating expenses, operating profit of Progress Rail and the
        effects of rounding.

Preliminary 2008 Outlook

Our preliminary outlook for 2008 is for sales and revenues to increase 5 to 10 percent and profit per share to increase 5 to 15 percent from the mid-point of the 2007 outlook range.

Our preliminary outlook for 2008 assumes a continuation of economic patterns we've seen since 2006. The North American economy will grow well below potential, but that poor performance will be offset by better growth elsewhere. World economic growth should slow from 3.7 percent in 2007 to 3.3 percent in 2008.

We expect 2008 to be the sixth consecutive year of sales and revenues growth, despite a U.S. economy near to, or even in, recession. Expectations for 2008 reflect the easing of two significant negative factors that impacted 2007 results -- dealer machine inventory reductions and the collapse in the North American on-highway truck industry. In addition, the almost unprecedented booms in emerging economies as well as metals and energy investments should continue throughout 2008.

    The August financial crisis revealed new risks for the world economy,
particularly the developed economies.  While we'll be watching developments
closely, following are key assumptions related to our preliminary outlook for
2008.

    --  United States - We expect that the U.S. economy will grow at about
        1.5 percent in 2008, even slower than in 2007.  The weak economy will
        encourage the Fed to reduce interest rates further. Our outlook
        reflects U.S. housing, nonresidential contracting and quarrying
        declining further.  For the major U.S. machinery end markets, only
        coal mining shows a reasonable possibility of improvement from 2007.

    --  Developing regions - Latin America, Africa/Middle East, CIS and Asia
        Pacific should maintain good economic growth in 2008.  Low interest
        rates, increased foreign exchange reserves and more government
        spending should result in another good year for construction.

    --  Europe - Past interest rate increases and the recent financial crisis
        will likely slow European economic growth in 2008.  However, both
        business and government spending should remain healthy enough to
        increase construction spending.

    --  Metals mining - Inventories remain extremely tight, and production has
        not yet caught up with consumption.  While we expect a modest easing
        in metals prices, they should remain well above levels that would
        encourage mining companies to increase exploration budgets again in
        2008.

    --  Coal - Good economic growth in Asia should further increase coal
        demand next year, encouraging further mine development.  Port limits
        in Asia Pacific producing countries, plus price differentials, could
        shift some demand to South Africa, Russia and North America.

    --  Oil and Gas - The world's spare oil production capacity remains low;
        we expect oil prices to remain strong with the West Texas Intermediate
        crude oil price averaging about $67 per barrel in 2008.  That price
        will be attractive for increased exploration, drilling, pipeline
        expenditures and tar sands development, which should benefit both
        machinery and engines sales.

    --  Electric Power - Rapid economic growth in the developing countries,
        plus increased business investment in Europe, should increase demand
        for generator sets.

    --  Marine - Oceangoing vessel rates are up sharply this year, and
        increased world trade, port delays and some lengthening in transit
        routes should keep rates high throughout 2008.  Shipyards are
        contracting for 2009 berths and beyond so marine engine demand should
        be strong in 2008.


    Questions and Answers

    Sales and Revenues / Economy & Industry

    Q1:   Can you comment on the recent rate cut by the Fed?  Do you
          expect that it will have a positive impact on 2007 or 2008?

    A:    The rate cut was a welcome change in policy, particularly since the
          Fed identified increased risks to economic growth.  The cut was too
          late to have a meaningful impact on 2007, and we believe more rate
          cuts will be needed to move economic growth back to nearer the
          economy's potential.  Rate decreases are part of our preliminary
          2008 outlook.

    Q2:   Are you seeing any significant changes in your sales related to
          U.S. housing?  What are you expecting for 2008 housing starts?

    A:    Machinery sales related to residential construction continue to
          decline, reflecting the severe recession in the housing industry.
          We forecast that housing starts will fall from 1.4 million units in
          2007 to 1.2 million units in 2008.  Total housing units supplied
          (including mobile home shipments) should be about 1.3 million units
          in 2008, one of the lowest figures in almost 50 years.  Units
          supplied were slightly lower in 1991 (end of a recession) and about
          the same in 1982 (during a severe recession).  These comparisons
          suggest housing construction has been driven well below the
          long-term needs of a growing population.

    Q3:   Can you comment on your machinery sales related to nonresidential
          construction, both in the United States and outside the United
          States?

    A:    Machinery sales related to nonresidential construction are declining
          in the United States at a rate similar to residential construction.
          Tighter credit conditions, some flattening in office and industrial
          vacancy rates, a decline in machines going into rental fleets and a
          decline in corporate net cash flows compared to last year appear to
          be contributing to this weakness.

          Nonresidential construction outside the United States continues to
          do well.  Many governments are increasing spending on
          infrastructure.  Good economic growth and favorable interest rates
          are encouraging businesses to invest more in buildings.

    Q4:   Your view of overall economic activity, and your preliminary
          sales outlook for 2008, continue to be positive.  How long can the
          world economy and Caterpillar sales continue to increase in the face
          of a U.S. economy that's continuing to weaken?

    A:    The U.S. economy accounts for less than 30 percent of the
          world economy and has been underperforming the rest of the world for
          more than a year.  Three factors lead us to believe that disparity
          will continue in 2008.

          First, European countries raised interest rates later than the Fed
          and did not increase as much as in the United States.  Therefore,
          the European business cycle is lagging that in the United States.
          Eurozone exports to the United States account for a little more than
          2 percent of its output.  Slower U.S. growth does not have a large
          impact on the European economy.

          Second, developing economies collectively are experiencing the best
          growth in years.  Factors contributing to that performance -- low
          inflation, low interest rates, highly competitive exports, high
          commodity prices and much improved government budgets -- remain in
          place.  For many of these countries, the 1980s and 1990s were very
          difficult years, and they curtailed investments in housing,
          nonresidential building and infrastructure.  Much improved economic
          conditions have allowed these countries to correct some of these
          past shortfalls, but more work remains.  In addition, growing
          populations are increasing the demand for new housing units and
          infrastructure.

          Third, metals mining and energy industries curtailed investments
          throughout the 1980s and 1990s.  The current worldwide economic
          recovery revealed that production capacities were inadequate.
          Producers have increased investment but have not yet caught up with
          needs.  More than 90 percent of both worldwide metals exploration
          spending and oil production occurs outside the United States.

    Q5:   Mining and Oil and Gas have been very strong industries for the past
          few years. Can you comment on your expectations going forward from
          here?

    A:    Production in these industries has struggled to keep up with demand,
          leaving worldwide metals inventories very low and spare oil
          production capacity tight.  We expect demand for these commodities
          will increase further in 2008, and prices will remain very favorable
          for producers to invest more.  Our preliminary 2008 outlook assumes
          these industries will remain positive for both machinery and engine
          sales.

    Q6:   Are you seeing any turn around in U.S. coal mining?

    A:    We believe some positive signs are emerging.  First, coal
          prices are improving; Central Appalachian prices (a benchmark price
          for Eastern coal) increased from less than $41 per ton this past
          January to more than $50 in early October.  Powder River Basin coal
          prices (Western coal) increased from about $7.50 per ton to nearly
          $10 over the same period.  Second, U.S. prices are at a discount to
          international prices, and that is boosting exports.  The Department
          of Energy reported that July exports were almost 75 percent
          (2.5 million tons) higher than in July 2006.

    Q7:   You said you were expecting dealer machine inventories to decline in
          2007, particularly in North America.  Can you comment on the status
          during the third quarter? What are your expectations for the
          full-year 2007?  Do you expect further reductions in 2008?

    A:    North American dealers reduced inventories about $250 million during
          the third quarter and have reduced inventories about $1.1 billion
          thus far in 2007.  Collectively, dealers outside the United States
          increased reported inventories slightly to respond to the stronger
          demand they faced.  We expect some inventory reductions in most
          regions in fourth quarter 2007.

          Our preliminary 2008 outlook assumes that North American dealers
          will make some further inventory reductions, and dealers outside the
          United States will make a net reduction as well.  However, overall
          inventory declines should be substantially less than in 2007.


    Engines

    Q8:   Can you comment on the strength of your overall engines business
          when you consider the severe weakness in sales of on-highway truck
          engines?

    A:    We are very pleased with the overall strength of our engines
          business.  Over the past several years we've increased our focus on
          Electric Power, Petroleum, Marine and Industrial markets.  They have
          grown in importance to our overall engines business as the
          importance of truck engines has declined.  Results so far this year,
          and in the third quarter in particular, have demonstrated that this
          has been positive for our overall business.  In a period with a
          severe cyclical decline in truck engines we have been able to
          significantly improve the profitability of our total engines
          business.

    Q9:   Can you comment on how your program to increase production of large
          3500 series engines is coming?

    A:    The capacity increase program continues to be on schedule.  Capacity
          began to increase in the third quarter and will continue to grow
          during the next few years.

    Q10:  There has been quite a bit of speculation on the direction of your
          on-highway engine business post 2010.  When will you be ready to
          talk about your plans?

    A:    We are investigating our full range of strategic options going
          forward, and we should soon be able to make our direction clear.


    Costs / Profit

    Q11:  In your release you mentioned currency impacts in several places.
          Can you summarize the net impact of currency on your profit before
          tax in the quarter?

    A:    In total, currency-related impacts had a negative impact of about
          $60 million compared with the third quarter of 2006.  About
          two-thirds was below operating profit and was primarily a result of
          translation losses on machinery and engines assets and liabilities
          denominated in currencies other than the U.S. dollar.  About
          one-third of the net impact was in machinery and engines operating
          profit, as the impact of a weaker U.S. dollar on costs was more
          unfavorable than the positive impact on sales.

    Q12:  Your outlook for core operating costs for 2007 has increased again
          this quarter.  Why are costs continuing to go up when sales and
          revenues are close to what you expected?

    A:    Our outlook for 2007 core operating costs has increased to
          $1.0 billion over 2006.  Manufacturing inefficiencies related to
          supply chain disruption, our focus on improving Order-to-Delivery
          processes and capacity expansion initiatives essential to achieving
          our strategic goals have resulted in higher costs than we previously
          anticipated.  We anticipate that the implementation of CPS will have
          a positive effect on manufacturing costs.  The fourth quarter of
          2006 included cost increases, therefore the comparison with last
          year's fourth quarter should be more favorable.

    Q13:  Can you break down your change in third quarter core operating costs
          in more detail?

    A:    The following table summarizes the increase in core operating costs
          in third quarter 2007 versus third quarter 2006:


                Core Operating Cost Change           3rd Quarter 2007
                                                           vs.
                (Millions of dollars)                3rd Quarter 2006
                Manufacturing Costs                       $320
                SG&A                                       (49)
                R&D                                         23
                  Total                                   $294


    Cash Flow / Financing

    Q14:  Can you comment on operating cash flow through the third quarter of
          2007?

    A:    Our year-to-date operating cash flow has improved.  Through the end
          of September, Machinery and Engines operating cash flow was
          $3,017 million -- $243 million more than the first three quarters of
          2006.

          The strong cash flow in Machinery and Engines was primarily used
          for:

          -- Capital Expenditures - $956 million -- primarily to replace and
             upgrade existing production assets, support new product programs
             and facilitate additional expansion of manufacturing capacity
          -- Acquisitions - $138 million -- primarily for Franklin Power
             Products, Inc. and International Fuel Systems, Inc.
          -- Dividends - $617 million -- the quarterly dividend is currently
             36 cents per share, up 20 percent from a year ago.
          -- Stock repurchase - $1,485 million -- 20.9 million shares were
             repurchased through open market transactions.  In August, the
             Board of Directors approved the use of derivative contracts for
             stock repurchases under the current stock repurchase program.


    Q15:  What are basic shares outstanding at the end of the quarter?

    A:    Basic shares outstanding at the end of the third quarter were
          636 million.

    Q16:  Have tight credit markets had any significant impact on your
          borrowing?

    A:    No, due to Caterpillar's strong credit rating we were able to
          maintain normal operations and fund our needs.

    Q17:  Has Cat Financial's past due ratio increased much this year?  How
          about credit losses?

    A:    At the end of the third quarter, past dues were 2.52 percent,
          compared with 1.89 percent at the end of the third quarter last
          year.  Most of this increase is related to North America and is
          specifically related to the downturn in the housing market.
          Write-offs, net of recoveries, are $41 million year-to-date 2007
          compared with $31 million for year-to-date 2006.  This increase also
          has been driven by the downturn in the U.S. housing market.
          Although past dues and write-offs have increased from 2006, by
          historical standards Cat Financial's portfolio continues to perform
          well.  In the preceding five years, Cat Financial's third quarter
          past dues have averaged about 2.6 percent, and our 2007 year-to-date
          rate of write-off's was about 30 percent lower than the average
          we've experienced during the last five years.


    Other

    Q18:  Can you comment on your progress in implementing the Cat Production
          System?

    A:    Extensive benchmarking of world-class production systems completed
          in 2006 enabled us to define the Caterpillar Production System (CPS)
          recipe for more than 300 manufacturing facilities throughout the
          world.  This recipe was rolled out to all our manufacturing
          operations during the first half of 2007; the first year of what we
          believe will be a three-year journey.  The CPS rollout included
          extensive training of 6 Sigma black belts to conduct value stream
          mapping and rapid improvement workshops.

          In our benchmarking we learned that safety improvements usually
          precede quality, velocity and cost benefits. We have been pleased
          with the steadily improving safety results across the company, and
          we are also seeing improvements in product quality.  We expect
          safety and quality to continue to improve and modest improvements in
          velocity and costs to begin in 2008, with more to be realized in
          2009 and 2010.

    Q19:  During the first quarter you announced discussions with MHI and SCM
          that you expected to result in Caterpillar owning a majority stake
          in SCM.  Do you expect it to occur this year?

    A:    Discussions between Caterpillar and MHI are continuing.  However,
          due to the complexity of the transaction, the ownership change is
          not likely to occur until the first half of 2008.

    Q20:  You mentioned that the strength of your integrated service
          businesses helps drive strong returns for Caterpillar.  Can you tell
          us more?

    A:    Our integrated service businesses -- aftermarket parts, Cat
          Financial, Progress Rail, Cat Logistics, Cat Reman and
          others -- continue to deliver profitable growth and earnings
          stability.  In the third quarter, integrated service businesses
          delivered more than a third of our total sales and revenues.
          Progress Rail is exceeding our expectations, demand for service
          parts continues to grow as a result of large field populations and
          both Cat Logistics and Cat Reman continue to perform well.
          Financial Products continues to grow profits despite slowing demand
          for machinery in the United States.

Source: Caterpillar Inc.

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