Overview

We reported a second-quarter 2009 profit of $0.60 per share, down $1.14 per share from the second quarter of 2008. Excluding redundancy costs, profit was $0.72 per share. Redundancy costs related to reducing employment were $85 million before tax or $0.12 per share in the quarter. Sales and revenues of $7.975 billion were down 41 percent from $13.624 billion in the second quarter 2008.

Our profit this quarter, despite the sharp decline in sales, is a tribute to Team Caterpillar's response to this severe global recession and the continued deployment of our economic trough strategy. There is still a great deal of economic uncertainty in the world, but we are seeing signs of stabilization that we hope will set the foundation for an eventual recovery. Credit markets have improved significantly. Fiscal policy and monetary stimulus have been introduced around the world, and we are seeing signs, particularly in China, that they are beginning to work. In addition, we have seen many key commodity prices increase from their lows in the first quarter, and they are holding in a range that is usually positive for investment.

With our dedicated employees, strong dealer network and supply base, great lineup of products and the increasing impact of integrated service businesses, we are more confident than ever that we will strengthen our industry leadership as we work through this recession.

The second-quarter profit of $371 million was down $735 million from $1.106 billion in the second quarter of 2008. The decline was largely a result of lower sales volume and $85 million of redundancy costs. These negative impacts were partially offset by lower Selling, General and Administrative (SG&A) and Research and Development (R&D) expenses, favorable price realization, LIFO inventory decrement benefits and a lower tax rate.

In addition to profit, we are highly focused on delivering positive cash flow in 2009 and are committed to our $3 billion inventory reduction goal for the year. Utilizing the Caterpillar Production System (CPS) with 6 Sigma, the company reduced inventory in the second quarter by more than $800 million, and through the first half of the year inventory has declined by more than $1.6 billion.

In addition to our ability to generate solid profits in this economic climate, we are pleased with our work to generate positive cash flow and maintain considerable financial strength during this challenging period.

Outlook

We are updating our outlook for 2009 by tightening the sales and revenues range and improving profit expectations. For sales and revenues, the range has been tightened to $32 billion to $36 billion. The 2009 profit outlook is a range of $0.40 to $1.50 per share including redundancy costs of about $0.75 per share. Excluding redundancy costs, profit is forecast to be between $1.15 and $2.25 per share.

We are now halfway through one of the most challenging years in the company's history. Our 2009 sales have been hurt by weak end-user demand and significant reductions in dealer inventory. In fact, dealers have reduced their machine inventories by about $1.5 billion through the first half of the year and could reach close to $3 billion by year-end. As tough as this year has been, the improved profit outlook is a tangible sign of what happens when the entire team is pulling in the same direction and deploying the trough strategy we put in place over the past four years. We are very pleased with the way our people have stepped up and responded to this extraordinary period of economic turmoil.

Note:
- Information on non-GAAP financial measures, including the treatment of redundancy costs in the second quarter and in the outlook, is included on page 67.

- Glossary of terms is included on pages 55-57; first occurrence of terms shown in bold italics.

Consolidated Results of Operations

THREE MONTHS ENDED JUNE 30, 2009 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2008

SALES AND REVENUES

The chart above graphically illustrates reasons for the change in Consolidated Sales and Revenues between second quarter 2008 (at left) and second 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 second quarter 2009 were $7.975 billion, down $5.649 billion, or 41 percent, from second quarter 2008. Machinery sales volume was down $4.183 billion, and Engines sales volume declined $1.394 billion. Price realization improved $259 million, and currency had a negative impact on sales of $225 million, primarily due to a weaker euro and British pound. In addition, Financial Products revenues decreased $106 million.

Our integrated service businesses tend to be more stable through the business cycle than new machines and engines. Although volume declined for these businesses during the second quarter, it was much less than the decline in sales and revenues for the company in total. Integrated service businesses represented more than 45 percent of total company sales and revenues in the second quarter of 2009.

Sales and Revenues by Geographic Region
(Millions of                  %        North       %                    %        Asia/       %        Latin       %
dollars)         Total      Change    America    Change     EAME      Change    Pacific    Change    America    Change
Second Quarter
2009
Machinery      $  4,338     (49)%    $ 1,730     (51)%    $ 1,010     (61)%    $ 1,061     (25)%    $   537     (47)%
Engines 1         2,916     (32)%      1,020     (30)%      1,090     (36)%        551     (26)%        255     (31)%
Financial
Products 2          721     (13)%        431     (15)%        124     (21)%         91      11%          75      (9)%
               $  7,975     (41)%    $ 3,181     (42)%    $ 2,224     (50)%    $ 1,703     (24)%    $   867     (41)%
Second Quarter
2008
Machinery      $  8,530              $ 3,511              $ 2,593              $ 1,414              $ 1,012
Engines 1         4,267                1,458                1,693                  745                  371
Financial
Products 2          827                  506                  157                   82                   82
               $ 13,624              $ 5,475              $ 4,443              $ 2,241              $ 1,465

1 Does not include internal engines transfers of $319 million and $748 million in second 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 $93 million and $83 million in second quarter 2009 and 2008, respectively.

Machinery Sales - Sales of $4.338 billion decreased $4.192 billion, or 49 percent, from second quarter 2008.

† Excluding the consolidation of Cat Japan, sales volume decreased $4.473 billion.

† Price realization increased $100 million.

† Currency decreased sales by $109 million.

† Geographic mix between regions (included in price realization) was $28 million unfavorable.

† The consolidation of Cat Japan added $290 million to sales.

† Over the past three quarters, dealers reported declines in deliveries to end users at rates unprecedented in the more than 30 years of available data. Nearly all countries and all industries were impacted.

† Some signs of moderation appeared late in the quarter, especially in the developing economies. However, the multi-quarter declines in activity mean that year-over-year comparisons show large percentage decreases in all regions.

† Dealers responded to steep declines in their business by sharply reducing inventories. They reported reductions in the quarter of almost $1.2 billion, which also contributed to lower sales volume. However, inventories in months of supply were higher than a year ago in all regions.

† Home prices declined in North America and Europe, and banks generally tightened qualifications for home mortgages. As a result, housing construction declined. Nonresidential construction also declined in both regions.

† Sales volume decreased in the developing regions of Africa/Middle East, the Commonwealth of Independent States (CIS), Asia/Pacific and Latin America, although the percentage declines were usually not as severe as in the developed economies.

North America - Sales decreased $1.781 billion, or 51 percent.

† Sales volume decreased $1.821 billion.

† Price realization increased $41 million.

† Currency decreased sales by $1 million.

† Severe recessions in both the United States and Canada caused most industries that use our equipment to reduce purchases drastically. Dealers also reported lower inventories, which contributed to the volume decline.

† U.S. housing starts were 47 percent lower than a year earlier. Factors depressing construction included high inventories of unsold homes, lower selling prices and continued stringent standards for mortgage qualification.

† Orders for nonresidential building construction were down almost 40 percent. Problems were rising vacancy rates, tight lending standards and lower commercial property prices.

† Contracts for infrastructure-related construction dropped 15 percent. Highway construction contracts were about even with a year earlier, reflecting improvement late in the quarter.

† Sharp declines in construction caused nonmetals mining and quarry production to drop 20 percent. The industry continued to reduce capacity during the quarter, and the usage of remaining capacity dropped to a record-low rate.

† Metals prices were 44 percent lower than second quarter 2008, and metals mining production dropped 14 percent.

† Coal production declined 8 percent, and prices were much lower. Electric utilities cut production, and exports were down more than 50 percent.

† Crude oil prices fell 52 percent, prompting oil companies in Canada to reduce nonconventional oil extraction development, which includes tar sands, by 31 percent.

EAME - Sales decreased $1.583 billion, or 61 percent.

† Sales volume decreased $1.531 billion.

† Price realization increased $27 million.

† Currency decreased sales by $79 million.

† The steep drop in sales volume resulted from the deep recession in Europe, collapses in most CIS economies, and a less favorable environment for energy and mining industries in Africa/Middle East. Dealers reported much lower deliveries in most countries and across most industries.

† Dealers responded to reduced deliveries by cutting inventories well below a year earlier; however, months of supply increased.

† The housing industry remained depressed in most European countries. Permits for new construction in the early months of this year declined 7 percent in Germany, 15 percent in France and 64 percent in Spain. U.K. housing orders were down 38 percent in the second quarter. Home prices declined in many European countries, and euro-zone banks continued to tighten lending standards for home purchases.

† Nonresidential building construction also contracted. Negative factors included stringent standards for new loans, reduced bank lending and a sharp drop in capacity utilization. Infrastructure construction increased slightly.

† In Africa/Middle East, dealer efforts to reduce inventories were the most important reason for lower sales volume. Other contributors were a 10-percent decrease in oil production, a 14-percent drop in South African construction permits and a severe decline in Turkish industrial production from a year earlier.

† Sales volume in the CIS dropped more than 80 percent due to sharp reductions in economic activity. Russian interest rates were higher than a year earlier, and the money supply declined. As a result, industrial production was down 15 percent, and construction was down 20 percent. Ukrainian industrial production declined more than 30 percent.

Asia/Pacific - Sales decreased $353 million, or 25 percent.

† Excluding the consolidation of Cat Japan, sales volume decreased $676 million.

† Price realization increased $41 million.

† Currency decreased sales by $8 million.

† The consolidation of Cat Japan added $290 million to sales.

† Economies throughout the region were weaker than a year earlier, causing dealers to report lower deliveries to end users. In response, dealers aggressively drew down their inventories, which was the most significant cause of lower sales volume. Reported dealer inventories increased in months of supply.

† In China, growth in industrial production slowed from 16 percent last year to 8 percent this year, and exports dropped 25 percent. Building starts declined 10 percent. Although comparisons against a year earlier are negative, economic activity improved during the quarter.

† The Australian economy slowed in response to a long period of high interest rates. Approvals for housing construction declined 23 percent, and those for nonresidential construction fell 50 percent.

† The Reserve Bank of India maintained tight economic policies through most of last year, causing industrial production growth to slow.

† The Japanese economy suffered from a 41-percent decline in exports and a sharp reduction in business investment. Housing orders dropped 53 percent, and commercial building starts fell 41 percent.

Latin America - Sales decreased $475 million, or 47 percent.

† Sales volume decreased $473 million.

† Price realization increased $19 million.

† Currency decreased sales by $21 million.

† Dealers reported reductions in inventories, accounting for much of the decline in sales volume. However, inventory in months of supply increased from a low year-earlier level.

† Economies in the region weakened due to declining exports and tight economic policies through much of last year. Industrial production declined 9 percent in Mexico, 13 percent in Brazil and 15 percent in both Chile and Colombia.

† Construction sectors deteriorated in most countries, and lower commodity prices and sharp declines in industrial production throughout the world hurt the important mining industry. Mining output declined 13 percent in Brazil and nearly 2 percent in Chile, depressing our sales of machines used in mining.

Engines Sales - Sales of $2.916 billion decreased $1.351 billion, or 32 percent, from second quarter 2008.

† Sales volume decreased $1.394 billion.

† Price realization increased $159 million.

† Currency decreased sales by $116 million.

† Geographic mix between regions (included in price realization) was $10 million unfavorable.

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

North America - Sales decreased $438 million, or 30 percent.

† Sales volume decreased $526 million.

† Price realization increased $89 million.

† Currency decreased sales by $1 million.

† Sales for petroleum applications decreased 18 percent primarily due to a decrease in turbine sales, partially offset by slightly increased sales into petroleum engine applications for gas compression and drilling.

† Sales for industrial applications decreased 54 percent based on substantially lower demand in construction and agricultural applications due to economic uncertainty and tight credit conditions.

† Sales for electric power applications were about the same as the second quarter of 2008.

EAME - Sales decreased $603 million, or 36 percent.

† Sales volume decreased $547 million.

† Price realization increased $42 million.

† Currency decreased sales by $98 million.

† Sales for electric power applications decreased 47 percent due to weak economic conditions and reduced availability of credit combined with dealers beginning to work down inventory to align with the reduced demand.

† Sales for industrial applications decreased 48 percent based on significantly lower demand in construction and agricultural applications due to weak economic conditions and reduced availability of credit.

† Sales for petroleum applications decreased 14 percent primarily due to a slowdown in engines and turbines used in offshore drill rigs and production applications.

† Sales for marine applications decreased 25 percent due to weak economic conditions, partially offset by increased demand for engines used in general cargo, container and offshore applications due to increased availability.

Asia/Pacific - Sales decreased $194 million, or 26 percent.

† Sales volume decreased $206 million.

† Price realization increased $27 million.

† Currency decreased sales by $15 million.

† Sales for petroleum applications decreased 38 percent primarily due to a slowdown in Chinese land-based drill activity. Deliveries to Asian shipyards for deep offshore drilling rigs remained strong, about the same as the second quarter of 2008.

† Sales of electric power engines decreased 26 percent due to cancelled and delayed projects in China and India.

† Sales for industrial applications decreased 41 percent due to significantly lower demand in construction and mining support applications.

† Sales for marine applications increased 23 percent, with strong demand for workboat and general cargo vessels.

Latin America - Sales decreased $116 million, or 31 percent.

† Sales volume decreased $125 million.

† Price realization increased $11 million.

† Currency decreased sales by $2 million.

† Sales for on-highway truck applications decreased 84 percent as a result of the decision to exit the on-highway truck business.

† Sales for petroleum applications decreased 22 percent due to a slowdown in land-based drill rig and production applications.

† Sales of electric power engines decreased 36 percent due to worsening economic conditions and reduced availability of credit.

Financial Product Revenues - Revenues of $721 million decreased $106 million, or 13 percent, from second quarter 2008.

† A decrease of $55 million was due to a $39 million impact of lower interest rates on new and existing finance receivables and a decrease in average earning assets of $16 million.

† Other revenues at Cat Financial decreased $33 million. The decrease was primarily due to a $17 million impact from returned or repossessed equipment and the absence of a $12 million gain related to the sale of receivables in the second quarter of 2008.

OPERATING PROFIT

The chart above graphically illustrates reasons for the change in Consolidated Operating Profit between second quarter 2008 (at left) and second 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 second-quarter operating profit was $347 million compared to an operating profit of $1.525 billion in the second quarter of 2008. Lower sales volume was the primary reason for the decline. Sales volume includes the impact of a favorable mix of products for both Machinery and Engines.

Manufacturing costs decreased $85 million. Significant inventory reduction has resulted in $110 million ($0.14 per share) of LIFO inventory decrement benefits. Excluding decrement benefits, manufacturing costs increased $25 million.

SG&A and R&D expenses declined $291 million as a result of significant cost-cutting measures.

Currency had an $89 million favorable impact on operating profit as the benefit to costs more than offset the negative impact on sales.

Redundancy costs were $85 million, and the consolidation of Cat Japan unfavorably impacted operating profit by approximately $80 million.

Operating Profit by Principal Line of Business

                               Second Quarter     Second Quarter        $            %
(Millions of dollars)               2009               2008           Change       Change
Machinery 1                     $       (252 )    $        719      $   (971 )   (135 ) %
Engines 1                                555               711          (156 )    (22 ) %
Financial Products                       127               166           (39 )    (23 ) %
Consolidating Adjustments                (83 )             (71 )         (12 )
Consolidated Operating Profit   $        347      $      1,525      $ (1,178 )    (77 ) %

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 loss was $252 million compared to an operating profit of $719 million in the second quarter of 2008. Sharply lower sales volume, losses at Cat Japan and $74 million of redundancy costs were partially offset by lower SG&A and R&D expenses, improved price realization and LIFO inventory decrement benefits.

† Engines operating profit of $555 million was down $156 million, or 22 percent, from the second quarter 2008. Significantly lower sales volume and $11 million of redundancy costs were partially offset by improved price realization and lower SG&A expenses. Although total engines operating profit declined from the second quarter 2008, operating profit for turbines was about the same and was a significantly higher proportion of total engines operating profit.

† Financial Products operating profit of $127 million was down $39 million, or 23 percent, from the second quarter 2008. The decrease was primarily attributable to a $28 million impact from decreased net yield on average earning assets, a $17 million unfavorable impact from returned or repossessed equipment, the absence of a $12 million gain related to the sale of receivables in the second quarter of 2008 and a $7 million unfavorable impact from lower average earning assets, partially offset by a $27 million decrease in SG&A expenses.

Other Profit/Loss Items

† Interest expense excluding Financial Products increased $39 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 $163 million compared with income of $83 million in second quarter 2008. The improvement was primarily related to a favorable currency impact of $93 million.

† The provision for income taxes in the second quarter reflects an actual (discrete period) effective tax rate of 10 percent compared to an estimated annual tax rate of 31.3 percent for second quarter 2008 excluding discrete benefits of $47 million in the second quarter 2008. The decrease is primarily attributable to a more favorable geographic mix of profits and losses from a tax perspective along with a larger percentage benefit from U.S. permanent differences and credits including the research and development tax credit. We are currently unable to reliably estimate the 2009 annual effective tax rate and are recording taxes on an actual basis. This approach results in more volatility in the quarterly effective tax rate, particularly with the reduced overall profit levels.

† Equity in profit/(loss) of unconsolidated affiliated companies was a loss of $1 million compared with income of $10 million in the second 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 $19 million from second quarter 2008, primarily due to adding back 33 percent of Cat Japan's losses attributable to Mitsubishi Heavy Industries.

SIX MONTHS ENDED JUNE 30, 2009 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2008

SALES AND REVENUES

The chart above graphically illustrates reasons for the change in Consolidated Sales and Revenues between June YTD 2008 (at left) and June YTD 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 the six months ended June 30, 2009 were $17.200 billion, down $8.220 billion, or 32 percent, from the six months ended June 30, 2008. Machinery sales volume was down $6.342 billion, and Engines volume declined $1.648 billion. Price realization improved $484 million, and currency had a negative impact on sales of $506 million, primarily due to a weaker euro and British pound. In addition, Financial Products revenues decreased $208 million.

Our integrated service businesses tend to be more stable through the business cycle than new machines and engines. Although volume declined for these businesses during the first six months of 2009, it was much less than the decline in sales and revenues for the company in total. Integrated service businesses represented about 43 percent of total company sales and revenues in the first half of 2009.

Sales and Revenues by Geographic Region

(Millions of                    %        North        %                    %        Asia/        %         Latin        %
dollars)           Total      Change    America     Change     EAME      Change    Pacific     Change     America     Change
Six months ended
June 30, 2009
Machinery         $  9,680    (40 ) %   $  3,946    (41 ) %   $ 2,268    (54 ) %    $ 2,239    (15 ) %     $ 1,227    (33 ) %
Engines 1            6,084    (21 ) %      2,073    (22 ) %     2,325    (23 ) %      1,165    (11 ) %         521    (26 ) %
Financial
Products 2           1,436    (13 ) %        876    (14 ) %       244    (18 ) %        187     14   %         129    (21 ) %
                  $ 17,200    (32 ) %   $  6,895    (34 ) %   $ 4,837    (41 ) %    $ 3,591    (12 ) %     $ 1,877    (30 ) %

Six months ended
. . .