Overview

We reported a loss of $0.19 per share for the first quarter of 2009, down $1.64 per share from the first quarter of 2008. Excluding redundancy costs, first quarter profit was $0.39 per share. Redundancy costs related to reducing employment were $558 million before tax or $0.58 per share in the quarter. Sales and revenues were $9.225 billion, down 22 percent from $11.796 billion in the first quarter 2008.

These results demonstrate significant reduction in our cost structure as a result of swift deployment of the economic trough strategy we introduced in 2005. We are proud of Team Caterpillar's response to these challenging economic conditions. Our business units are making the tough decisions necessary to respond to this widespread and sharp global recession. By taking aggressive and decisive actions now, we are positioning the company not only for success in the short-term, but to be even more competitive in the long-term when the global economy recovers. We were also pleased with the improvement in price realization during the quarter. It's a testament to the value customers place on our products.

In addition to cost control, we are very focused on maintaining our financial strength. We expect to lower inventory by about $3 billion in 2009 and reduced it by $789 million in the first quarter. Inventory management is a key element of the Caterpillar Production System using 6 Sigma, and we are pleased with the traction we're gaining. In this environment liquidity is a major focus, and as a result we have decided to hold more cash than usual. While we do not anticipate the need to issue additional term debt during the remainder of the year, we may do so to maintain our liquidity position. Maintaining Caterpillar's financial strength through these very difficult times will allow us to emerge a stronger company.

The first-quarter loss of $112 million was down $1.034 billion from a $922 million profit in the first quarter of 2008. The decrease was largely a result of lower sales and revenues and $558 million of redundancy costs.

This is an extremely difficult time for employees affected by this severe economic downturn, and providing them with financial assistance and transitional support is important. While redundancy costs have been a considerable expense, it's the right thing to do for our people.

Outlook

We are updating our outlook for 2009 as a result of weaker economic conditions. We are now expecting 2009 sales and revenues to be in a range of plus or minus 10 percent around a midpoint of $35 billion. The high degree of uncertainty in the global economy, the timing and impact of stimulus measures and the extent of dealer inventory reductions make it very difficult to forecast sales and revenues, making the outlook range wide.

Redundancy costs are expected to be about $0.75 per share for 2009 and, including these costs, we expect to earn about $0.50 per share at the midpoint. We expect to be profitable in 2009 throughout the sales and revenues outlook range excluding redundancy costs, and at the midpoint, expect profit of about $1.25 per share excluding redundancy costs. Despite the lower sales and revenues outlook, we expect strong cash flow for the year and expect to strengthen our balance sheet.

A great deal of uncertainty exists in the global economy, making it extremely difficult to know how our customers will respond during the remainder of 2009. One thing is clear, Team Caterpillar will remain focused on containing costs and reducing inventory. We will take action to keep Caterpillar lean, while at the same time making strategic product and operational investments to position Caterpillar for long-term success when the economy does recover.

Note:
- Information on non-GAAP financial measures, including the treatment of redundancy costs in the first quarter and in the outlook, is included on page 60.

- Glossary of terms included on pages 42-43; first occurrence of terms shown in bold italics.

Consolidated Results of Operations

THREE MONTHS ENDED MARCH 31, 2009 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2008

SALES AND REVENUES

The chart above graphically illustrates reasons for the change in Consolidated Sales and Revenues between first quarter 2008 (at left) and first quarter 2009 (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 impact of consolidation of Caterpillar Japan Ltd. (Cat Japan) sales. Caterpillar management utilizes these charts internally to visually communicate with the company's Board of Directors and employees.

Sales and revenues for first quarter 2009 were $9.225 billion, down $2.571 billion, or 22 percent, from first quarter 2008. Machinery sales volume was down $2.159 billion and Engines volume declined $254 million. Price realization improved $225 million and currency had a negative impact on sales of $281 million, primarily due to a weaker euro and British pound. In addition, Financial Products revenues decreased $102 million.

Sales and Revenues by Geographic Region


(Millions                 %       North        %                   %       Asia/        %       Latin        %
of dollars)  Total     Change    America    Change     EAME     Change    Pacific    Change    America    Change
First
Quarter
2009
Machinery   $  5,342    (29 )%   $  2,216    (30 )%   $ 1,258    (46 )%   $  1,178    (2 )%    $    690    (16 )%
Engines 1      3,168     (8 )%      1,053    (13 )%     1,235     (7 )%        614    10 %          266    (20 )%
Financial
Products 2       715    (12 )%        445    (13 )%       120    (14 )%         96    17 %           54    (34 )%
            $  9,225    (22 )%   $  3,714    (24 )%   $ 2,613    (31 )%   $  1,888     2 %     $  1,010    (18 )%
First
Quarter
2008
Machinery   $  7,548             $  3,180             $ 2,344             $  1,206             $    818
Engines 1      3,431                1,208               1,331                  559                  333
Financial
Products 2       817                  514                 139                   82                   82
            $ 11,796             $  4,902             $ 3,814             $  1,847             $  1,233

1 Does not include internal engines transfers of $436 million and $690 million in first quarter 2009 and 2008, 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 $81 million and $95 million in first quarter 2009 and 2008, respectively.

Machinery Sales - Sales of $5.342 billion decreased $2.206 billion, or 29 percent, from first quarter 2008.

† Excluding the consolidation of Cat Japan, sales volume decreased $2.450 billion, the result of the worst worldwide recession in the postwar period.

† Price realization increased $91 million.

† Currency decreased sales by $138 million.

† Geographic mix between regions (included in price realization) was $2 million unfavorable.

† The consolidation of Cat Japan sales added $291 million to sales.

† Recessionary conditions throughout much of the world caused machine demand to drop. We allowed dealers to cancel orders to bring their inventories more in line with reduced demand. Dealers reported inventory reductions of about $300 million during the first quarter. During the first quarter of 2008, dealers increased inventories about $700 million.

† Absence of the dealer inventory build that occurred in the first quarter of 2008 combined with the reduction of $300 million in the first quarter of 2009 accounted for about $1 billion of the overall decline in volume.

† Economic output in the developed economies of Europe, Japan and the United States declined substantially. Housing construction collapsed, and nonresidential construction declined.

† Developing economies, while faring better, weakened. Lower commodity prices and severe recessions in the developed countries led to large declines in exports. In addition, policy tightening last year has started to curtail domestic spending. Output slowed sharply in many countries and declined in Brazil, Mexico and Russia.

† Credit spreads on emerging market debt were very high, and international banks sharply curtailed lending to these countries. Those actions caused some delays and cancellations in major construction projects. As a result, sales volume declined in the developing regions of Latin America, Africa/Middle East, Commonwealth of Independent States (CIS) and Asia/Pacific.

† Key commodity prices held near or above investment thresholds, but producers in many countries cut production. As a result, sales of machines used in mining declined.

North America - Sales decreased $964 million, or 30 percent.

† Sales volume decreased $1.027 billion.

† Price realization increased $64 million.

† Currency decreased sales by $1 million.

† Sales volume declined as a result of the severe recession in the United States.

† Dealer-reported inventories were about even with the year-earlier amount in dollars, but months of supply increased.

† The U.S. housing industry has declined for three years. New home prices declined 15 percent over the past year, and builders held a more than one-year supply of unsold homes.

† Orders for nonresidential building construction declined 47 percent from a year earlier. Factors depressing construction included weaker business profits, reduced access to credit, lower occupancy rates and declining property prices.

† Infrastructure-related construction declined 10 percent. State and local governments have trimmed capital spending in response to rising budget deficits and increased difficulties in issuing bonds.

† Lower construction contributed to a 26-percent reduction in nonmetals mining and quarry production. The industry worked at a record-low capacity utilization, which reduced the need for machine replacements.

† Metals mines increased output 1 percent in response to favorable gold prices.

† Coal production declined about 1 percent, which appeared to result from lower utility burn, increased utility stockpiles and some slowing in exports. Spot coal prices were lower than a year earlier.

† Oil prices were down 56 percent from last year, which caused Canadian producers of nonconventional oil, which includes oil sands, to reduce planned capital expenditures.

EAME - Sales decreased $1.086 billion, or 46 percent.

† Sales volume declined $998 million.

† Price realization increased $6 million.

† Currency decreased sales by $94 million.

† Sales volume declined sharply due to the severe recession in Europe, the economic crisis in the CIS and the impact of lower commodity prices on sales in Africa and the Middle East.

† Dealers reported inventory reductions during the quarter, bringing dollar inventories about even with a year earlier. However, inventories in months of supply were much higher.

† The European economies continued to decline sharply in the first quarter. Poor economic conditions led to double-digit sales declines in most countries.

† Housing permits in the euro-zone declined through the end of last year, and U.K. housing orders dropped 52 percent in the first quarter. Mortgage interest rates remain relatively high, unemployment is rising and home prices are declining in several countries.

† Nonresidential construction decreased in both the euro-zone and the United Kingdom. Corporate bond spreads were higher than normal, business capacity utilization rates dropped and banks tightened lending standards for businesses.

† Machine sales declined in many countries in Africa and the Middle East. Problems included lower commodity prices, reduced access to international bank loans and lower oil production.

† Both Turkey and South Africa raised interest rates in 2008 to reduce inflationary pressures. As a result, both economies have weakened. Poor economic conditions caused machine sales to drop significantly.

† Sales volume in the CIS dropped by about half, the result of severe economic crises gripping Russia and Ukraine. Interest rates were higher than a year earlier, and both economies declined rapidly.

Asia/Pacific - Sales decreased $28 million, or 2 percent.

† Sales volume decreased $309 million.

† Price realization increased $12 million.

† Currency decreased sales by $22 million.

† The consolidation of Cat Japan sales added $291 million to sales.

† Dealers reported inventory reductions from year-end, but inventories at the end of the quarter were much higher than a year earlier in both dollars and months of supply.

† The regional economy slowed sharply, also contributing to reduced machine demand. Machine sales declined in most countries.

† Many economies in the region are highly dependent upon exports. Severe recessions in developed economies caused exports to decline sharply; exports fell 35 percent in Indonesia, 33 percent in China and 19 percent in India.

† In China, lower exports and the impact of last year's policy tightening caused the economy to slow. Industrial production increased only 3.8 percent, down from a 16-percent increase in mid 2008. New construction slowed, and prices of commercial properties moderated. Those factors caused machine sales to decline.

† Permits for both housing and nonresidential construction dropped in Australia, with various indicators down 20 to 40 percent.

† The Japanese economy is in a severe recession. In the first quarter, motor vehicle production dropped 49 percent, exports fell 48 percent and industrial production decreased 35 percent. Machine sales declined by more than half as the dismal economy caused businesses to cut capital goods orders 40 percent.

Latin America - Sales decreased $128 million, or 16 percent.

† Sales volume decreased $118 million.

† Price realization increased $11 million.

† Currency decreased sales by $21 million.

† While dealers reported inventory reductions from year-end, inventories remained above the end of the first quarter 2008 and were up in both dollars and months of supply.

† The decline in dealer inventories accounted for most of the decline in our sales volume.

Engines Sales - Sales of $3.168 billion decreased $263 million, or 8 percent, from first quarter 2008.

† Sales volume decreased $254 million.

† Price realization increased $134 million.

† Currency decreased sales by $143 million.

† Geographic mix between regions (included in price realization) was $6 million unfavorable.

† Dealer-reported inventories were up, and months of supply increased as dealer deliveries started to decline.

North America - Sales decreased $155 million, or 13 percent.

† Sales volume decreased $212 million.

† Price realization increased $58 million.

† Currency decreased sales by $1 million.

† Sales for on-highway truck applications decreased 46 percent as a result of the decision to exit the on-highway truck business.

† Sales for petroleum engine applications increased 29 percent due to strong shipments into gas compression and drilling applications.

† Sales for industrial applications decreased 30 percent as a result of lower demand from construction and agricultural customers.

EAME - Sales decreased $96 million, or 7 percent.

† Sales volume decreased $29 million.

† Price realization increased $55 million.

† Currency decreased sales by $122 million.

† Sales for industrial applications decreased 40 percent as a result of lower demand from construction and agricultural customers.

† Sales for petroleum applications increased 18 percent based on strong shipments of engines used in offshore drill rigs and for production applications. Turbine sales and turbine-related services revenues increased to support oil and gas production applications.

† Sales for electric power applications increased 9 percent, which was the result of turbine sales to support large power plant projects.

† Sales for marine applications decreased 7 percent due to decreased demand in workboat and commercial vessels.

Asia/Pacific - Sales increased $55 million, or 10 percent.

† Sales volume increased $56 million.

† Price realization increased $16 million.

† Currency decreased sales by $17 million.

† Sales for petroleum applications increased 31 percent as turbine sales increased for oil and gas production applications.

† Sales of electric power engines increased 37 percent due to continued success of large gas generator sets sold in India, Australia and New Zealand. In addition, generator set sales increased in Sri Lanka, Philippines and Australia.

† Sales for industrial applications decreased 36 percent, due to significantly lower demand from construction and mining customers.

† Sales for marine applications increased 13 percent, with strong demand for workboat and general-cargo vessels.

Latin America - Sales decreased $67 million, or 20 percent.

† Sales volume decreased $75 million.

† Price realization increased $11 million.

† Currency decreased sales by $3 million.

† Sales for on-highway truck applications decreased 67 percent as a result of the decision to exit the on-highway truck business.

† Sales of electric power engines decreased 28 percent as a result of worsening economic conditions and reduced availability of credit.

† Sales for petroleum applications were about the same as the first quarter of 2008.

Financial Products Revenues - Revenues of $715 million decreased $102 million, or 12 percent, from first quarter 2008.

† A decrease of $69 million due to the impact of lower interest rates on new and existing finance receivables was partially offset by growth in average earning assets of $17 million.

† Other revenues at Cat Financial decreased $37 million. The decrease was primarily due to a $22 million write-down on retained interests related to the securitized asset portfolio and a $14 million impact from returned or repossessed equipment.

OPERATING PROFIT (LOSS)

The chart above graphically illustrates reasons for the change in Consolidated Operating Profit between first quarter 2008 (at left) and first quarter 2009 (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 the company's Board of Directors and employees. The bar entitled Other/M&E Redundancy includes the operating profit impact of consolidating adjustments, consolidation of Cat Japan and Machinery and Engines other operating expenses which include Machinery and Engines redundancy costs.

The first quarter reflected an operating loss of $175 million compared to an operating profit of $1.293 billion in the first quarter of 2008. Lower sales volume and $558 million of redundancy costs were the primary reasons for the decline.

Manufacturing costs rose $330 million as a result of inefficiencies related to a sharp decline in production and higher warranty and material costs.

Selling, General and Administrative (SG&A) expenses and Research and Development (R&D) expenses declined $165 million as a result of significant cost-cutting measures.

Currency had a $57 million favorable impact on operating profit as the benefit to costs more than offset the negative impact on sales. The consolidation of Cat Japan unfavorably impacted operating profit by approximately $100 million.

Redundancy costs were $558 million in the first quarter 2009, comprised of $357 million of separation charges and $201 million of costs associated with certain pension and other post-retirement benefit plans. For further discussion, see Employee Separation Charges and Retirement Benefits included in Other Matters within Management's Discussion and Analysis.

Operating Profit (Loss) by Principal Line of Business

                          First Quarter        First Quarter           $             %
(Millions of dollars)          2009                2008              Change        Change
Machinery 1              $        (508 )      $         626        $ (1,134 )     (181 )%
Engines 1                          297                  554            (257 )      (46 )%
Financial Products                  99                  195             (96 )      (49 )%
Consolidating
Adjustments                        (63 )                (82 )            19
Consolidated Operating
Profit (Loss)            $        (175 )      $       1,293        $ (1,468 )     (114 )%

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 /Loss by Principal Line of Business

† Machinery operating loss was $508 million compared to an operating profit of $626 million in the first quarter of 2008. Sharply lower sales volume, $355 million of redundancy costs and higher manufacturing costs were partially offset by lower SG&A expenses and improved price realization.

† Engines operating profit of $297 million was down $257 million, or 46 percent, from first quarter 2008. Redundancy costs of $193 million, higher manufacturing costs and lower sales volume were partially offset by improved price realization and lower SG&A expenses. Although total engine operating profit declined in the first quarter, operating profit for turbines improved primarily due to higher sales volume and was a significantly higher proportion of total engine operating profit.

† Financial Products operating profit of $99 million was down $96 million, or 49 percent, from first quarter 2008. The decrease was primarily attributable to a $67 million impact from decreased net yield on average earning assets, a $22 million write-down on retained interests related to the securitized asset portfolio, a $14 million unfavorable impact from returned or repossessed equipment and an $11 million increase in other operating expenses primarily due to redundancy costs, partially offset by a $10 million favorable impact from higher average earning assets and a $10 million decrease in SG&A expenses.

Other Profit/Loss Items

† Interest expense excluding Financial Products increased $27 million as a result of higher debt. We have intentionally held more cash than usual as a result of capital market volatility.

† Other income/expense was income of $64 million compared with income of $122 million in first quarter 2008. The absence of a $60 million gain on the sale of our equity investment in ASV Inc. in first quarter 2008 and $17 million of losses related to Cat Insurance's investment portfolio were partially offset by a favorable currency impact of $34 million.

† The benefit for income taxes in the first quarter reflects an actual effective tax rate of 37.5 percent compared to an estimated annual tax rate of 31.3 percent for first quarter 2008 and actual tax rate for full-year 2008 of 31.3 percent excluding discrete items. A discrete calculation was used to report the first quarter tax benefit rather than an estimated annual tax rate as the estimated range of annual profit/(loss) before tax produces significant variability and makes it difficult to reasonably estimate the annual effective tax rate. The tax rate applied to the first quarter loss exceeded the U.S. rate of 35 percent primarily due to the favorable impact of the U.S. research and development tax credit offsetting an unfavorable geographic mix of profits and losses from a tax perspective.

† Equity in profit (loss) of unconsolidated affiliated companies was income of $1 million compared with income of $11 million in first quarter 2008. The decrease is primarily related to the absence of equity profit after the consolidation of Cat Japan.

† Profit (loss) attributable to noncontrolling interests (formerly minority interest) favorably impacted earnings $29 million from first quarter 2008, primarily due to adding back 33 percent of Cat Japan's losses attributable to Mitsubishi Heavy Industries.

GLOSSARY OF TERMS

1. Caterpillar Japan Ltd. (Cat Japan) - A Caterpillar subsidiary formerly known as Shin Caterpillar Mitsubishi Ltd. (SCM). SCM was a 50/50 joint venture between Caterpillar and Mitsubishi Heavy Industries Ltd. (MHI) until SCM redeemed one-half of MHI's shares on August 1, 2008. Caterpillar now owns 67 percent of the renamed entity.

2. Caterpillar Production System (CPS) - The Caterpillar Production System is the common Order-to-Delivery process being implemented enterprise-wide to achieve our safety, quality, velocity, earnings and growth goals for 2010 and beyond.

3. Consolidating Adjustments - Eliminations of transactions between Machinery and Engines and Financial Products.

4. Currency - With respect to sales and revenues, currency represents the translation impact on sales resulting from changes in foreign currency exchange rates versus the U.S. dollar. With respect to operating profit, currency represents the net translation impact on sales and operating costs resulting from changes in foreign currency exchange rates versus the U.S. dollar. Currency includes the impacts on sales and operating profit for the Machinery and Engines lines of business only; currency impacts on Financial Products revenues and operating profit are included in the Financial Products portions of the respective analyses. With respect to other income/expense, currency represents the effects of forward and option contracts entered into by the company to reduce the risk of fluctuations in exchange rates and the net effect of changes in foreign currency exchange rates on our foreign currency assets and liabilities for consolidated results.

5. Debt-to-Capital Ratio - A key measure of financial strength used by both management and our credit rating agencies. The metric is a ratio of Machinery and Engines debt (short-term borrowings plus long-term debt) and redeemable noncontrolling interest to the sum of Machinery and Engines debt, redeemable noncontrolling interest and stockholders' equity.

6. EAME - Geographic region including Europe, Africa, the Middle East and the Commonwealth of Independent States (CIS).

7. Earning Assets - Assets consisting primarily of total finance receivables net of unearned income, plus equipment on operating leases, less accumulated depreciation at Cat Financial.

8. Engines - A principal line of business including the design, manufacture, marketing and sales of engines for Caterpillar machinery; electric power . . .