Overview

We reported a third-quarter 2009 profit of $0.64 per share, down $0.75 per share from the third quarter of 2008. Sales and revenues of $7.298 billion were down 44 percent from $12.981 billion in the third quarter of 2008.

We are pleased with this quarter's profit given the severe economic environment and with our sales well below end-user demand as dealers continue to aggressively draw down inventories.

During the quarter, our primary focus continued to be on trough management and operational execution. We lowered production as dealers continued to cut inventories. We reduced costs, maintained positive price realization, lowered inventory, delivered positive operating cash flow and improved our financial position. We are confident that Team Caterpillar, supported by our strong dealers and suppliers, can leverage our comprehensive lineup of products and services to improve our leadership position as we move from recession to growth.

Third-quarter 2009 profit of $404 million was down $464 million from $868 million in the third quarter of 2008. The decline was primarily due to significantly lower sales volume. The negative impact of lower volume was partially offset by lower costs, a favorable effective tax rate, favorable price realization and pre-tax LIFO inventory decrement benefits of $120 million or $0.16 per share. Manufacturing costs, selling, general and administrative and research and development expenses were all significantly lower than a year ago. The favorable effective tax rate included $129 million of current period tax benefits related to prior year tax returns. Utilizing the Caterpillar Production System with 6 Sigma, the company has reduced inventory by about $2 billion since the end of 2008 and expects continued reduction through the remainder of the year.

We believe the third quarter marked the low point for Caterpillar sales and revenues in what has been the toughest recession since the 1930s. We are seeing encouraging signs that indicate a recovery may be underway. However, the world economy is still facing significant challenges. There is uncertainty about the timing and strength of recovery.

2009 Outlook

We expect 2009 sales and revenues of $32 to $33 billion. The 2009 profit outlook range has improved to $1.10 to $1.30 per share compared to the previous range of $0.40 to $1.50 per share. The 2009 profit outlook includes redundancy costs of about $0.75 per share. Excluding redundancy costs, the profit forecast for 2009 is $1.85 to $2.05 per share compared to the previous range of $1.15 to $2.25 per share.

Our improved profit outlook for 2009 is a clear demonstration of our ability to implement our economic trough plans, which we announced as part of our corporate strategy in 2005. While we are still navigating through a very difficult environment in 2009, we see signs of improving economic conditions throughout most of the world.

Preliminary 2010 Sales and Revenues Outlook

The preliminary outlook for 2010 sales and revenues is an increase of 10 to 25 percent from the midpoint of the 2009 outlook range, in part driven by the end of dealer inventory reductions which significantly impacted sales in 2009.

While 2010 will still be a difficult year, we expect improvement in our top line from the lows of 2009, and it is critical that we manage on the way up as well as we did in the face of declining volume. As a result, we have already started planning for an upturn. When it comes, it can come quickly, and we, our dealers and our suppliers will be prepared.

- Information on non-GAAP financial measures, including the treatment of redundancy costs during 2009, 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 SEPTEMBER 30, 2009 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 2008

SALES AND REVENUES

The chart above graphically illustrates reasons for the change in Consolidated Sales and Revenues between third quarter 2008 (at left) and third 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 third quarter 2009 were $7.298 billion, down $5.683 billion, or 44 percent, from third quarter 2008. Machinery sales volume was down $4.195 billion, and Engines sales volume declined $1.459 billion. Price realization improved $227 million, and currency had a negative impact on sales of $138 million, primarily due to a weaker euro and British pound. In addition, Financial Products revenues decreased $118 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 from the third quarter of 2008, it was much less than the decline in sales and revenues for the company in total. Integrated service businesses represented about half of total company sales and revenues in the third quarter of 2009, up from about 35 percent in the third quarter of 2008.

Sales and Revenues by Geographic Region
(Millions of                  %        North       %                    %        Asia/       %        Latin       %
dollars)         Total      Change    America    Change     EAME      Change    Pacific    Change    America    Change
Third Quarter
2009
Machinery      $  3,904     (52)%    $ 1,490     (54)%    $   882     (61)%    $ 1,005     (30)%    $   527     (52)%
Engines 1         2,679     (35)%        828     (41)%        957     (41)%        591     (22)%        303      (6)%
Financial
Products 2          715     (14)%        418     (15)%        123     (18)%        103      (5)%         71     (15)%
               $  7,298     (44)%    $ 2,736     (47)%    $ 1,962     (51)%    $ 1,699     (26)%    $   901     (40)%
Third Quarter
2008
Machinery      $  8,051              $ 3,245              $ 2,270              $ 1,437              $ 1,099
Engines 1         4,097                1,400                1,617                  757                  323
Financial
Products 2          833                  491                  150                  108                   84
               $ 12,981              $ 5,136              $ 4,037              $ 2,302              $ 1,506

1 Does not include internal engines transfers of $370 million and $738 million in third 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 $73 million and $64 million in third quarter 2009 and 2008, respectively.

MACHINERY SALES - Sales of $3.904 billion decreased $4.147 billion, or 52 percent, from third quarter 2008.

† Excluding the consolidation of Cat Japan, sales volume decreased $4.475 billion.

† Price realization increased $114 million.

† Currency decreased sales by $66 million.

† Geographic mix between regions (included in price realization) was $8 million favorable.

† The consolidation of Cat Japan added $280 million to sales.

† The effects of the recession continued to be felt, and most industries throughout the world operated far below last year.

† Last year, dealers reported near-record delivery rates so limited recoveries in the third quarter left deliveries well below last year. Lower end-user demand for machines, as reported by dealers, accounted for the majority of the sales volume decline.

† Dealers continued to reduce reported inventories, with the world total down about $2.6 billion so far this year. Dealer inventories were below last year in dollars and slightly higher in months of supply.

† Continued inventory reductions, along with weakness in both Australia and Japan, were the primary reasons volume declined in the Asia/Pacific region.

† Dealer-reported inventory reductions accounted for more than half the sales volume decline in Latin America. Construction was well below last year, but mining improved in both Chile and Mexico.

† Output in most key industries in the United States remained well below last year. As a result, sales volume was off sharply.

† Europe's third-quarter economic activity was well below last year. Most construction was down sharply, which caused a significant decline in sales volume.

† Sales volume in Africa/Middle East declined in response to reported reductions in dealer inventories and weak construction in both Turkey and South Africa.

† Economic activity in the Commonwealth of Independent States (CIS) was far below last year, and the CIS experienced the worst percentage decline in sales volume of any major area of the world.

North America - Sales decreased $1.755 billion, or 54 percent.

† Sales volume decreased $1.805 billion.

† Price realization increased $51 million.

† Currency decreased sales by $1 million.

† Industrial production in the United States recovered in July, and surveys indicate growth resumed in the service sector. However, output in most key industries was well below a year earlier.

† Dealer-reported deliveries of machines to end users showed signs of stabilizing in response to slight improvements in economic conditions. However, sales remain well below year-earlier levels. Weak end-user demand was the most significant cause for much lower sales volume than last year.

† Dealers reported inventory reductions of more than $400 million during the quarter, which further reduced sales volume. Dollar inventories were lower than last year, but months of supply increased.

† U.S. housing starts increased from the April low but were down 33 percent from a year earlier. Housing affordability was near a record high, but high unemployment discouraged home purchases.

† Nonresidential building contracts declined 31 percent from last year as a result of high vacancy rates, falling prices and rising loan defaults.

† Contracts for U.S. highway construction, benefiting from the stimulus package, began to improve in May. Contracts in the third quarter increased 13 percent from last year.

† Nonmetals mining and quarrying continued to struggle with soft output prices and weak demand from construction. Production was down 14 percent, and the industry's operating rate was near a record low.

† Metals prices recovered during the quarter but remained well below last year. Production of base metals fell 12 percent, and gold production was off 12 percent. Canadian metals production dropped 37 percent.

† U.S. coal production declined 8 percent in response to reduced export opportunities, low utility burn and high inventory levels. However, unfavorable conditions eased late in the quarter, and coal prices increased. Canadian production was up slightly from a year ago.

† Crude oil prices steadily improved but were still well below peak prices of last year. Oil companies in Canada reduced tar sands development about 30 percent.

EAME - Sales decreased $1.388 billion, or 61 percent.

† Sales volume decreased $1.342 billion.

† Price realization increased $8 million.

† Currency decreased sales by $54 million.

† Steep declines in output over the past year caused most industries to compare very unfavorably with last year's third quarter.

† Lower end-user demand was the most significant factor underlying the sharp drop in sales volume.

† Dealers continued to report inventory reductions during the quarter, further depressing sales volume. Reported inventories were below last year in both dollars and months of supply.

† Housing was depressed in Europe due to strict credit standards and declining home prices in many countries. Permits in the euro-zone were down 17 percent in July, and housing orders in the United Kingdom were off 8 percent in the first two months of the quarter.

† Nonresidential construction developments were mostly negative. U.K. orders declined 14 percent, and euro-zone infrastructure-related construction was down 28 percent. However, building construction in the euro-zone rose 6 percent.

† Dealers continued to reduce inventories aggressively in Africa/Middle East, contributing to lower sales volume. Oil production declined 10 percent, oil drilling declined 15 percent and there were sizable declines in construction permits in both South Africa and Turkey.

† Sales volume in the CIS experienced the largest percentage decline of any region. Over the past year, Russia and Ukraine suffered severe recessions due to credit difficulties and lower commodity prices.

Asia/Pacific - Sales decreased $432 million, or 30 percent.

† Excluding the consolidation of Cat Japan, sales volume decreased $752 million.

† Price realization increased $26 million.

† Currency increased sales by $14 million.

† The consolidation of Cat Japan added $280 million to sales.

† Dealers reduced reported inventories sharply during the quarter, which accounted for much of the decrease in sales volume. Inventories declined in both dollars and months of supply.

† Dealer-reported machine deliveries in the emerging markets of Asia have recovered from recession lows. China, which implemented aggressive economic recovery policies, is leading the recovery, and deliveries hit a new third-quarter high.

† Sales volume declined in India, Indonesia, Malaysia and Thailand. Gains occurred in Taiwan and Vietnam.

† Sales volume in Australia was down sharply despite some improvement in nonresidential construction and coal mining. Housing remained depressed, and output in metals mining declined.

Latin America - Sales decreased $572 million, or 52 percent.

† Sales volume decreased $568 million.

† Price realization increased $21 million.

† Currency decreased sales by $25 million.

† Dealers reported further sharp reductions in inventories, accounting for the majority of the sales volume decline. Inventories were below last year in both dollars and months of supply.

† Dealers reported lower deliveries to end users but that largely reflects the accumulated impact of steep declines over the past year and the comparison against a robust third quarter 2008. Industrial production has already begun to recover from recession lows in the larger economies.

† Construction sectors declined in most countries. Building permits dropped 52 percent in Chile, 37 percent in Argentina and 34 percent in Colombia.

† Continued increases in commodity prices and recovery in world industrial production had mixed impact on regional mining. Mining output declined 10 percent in Brazil but increased 2 percent in Chile and 1 percent in Mexico.

ENGINE SALES - Sales of $2.679 billion decreased $1.418 billion, or 35 percent, from third quarter 2008.

† Sales volume decreased $1.459 billion.

† Price realization increased $113 million.

† Currency decreased sales by $72 million.

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

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

North America - Sales decreased $572 million, or 41 percent.

† Sales volume decreased $603 million.

† Price realization increased $32 million.

† Currency decreased sales by $1 million.

† Sales for petroleum applications decreased 6 percent primarily due to a decrease in sales for petroleum engine applications used for gas compression and drilling, partially offset by an increase in turbine sales.

† Sales for industrial applications decreased 59 percent based on substantially lower demand in construction and agricultural applications due to economic uncertainty and tight credit conditions.

† Sales for electric power applications decreased 67 percent due to weak economic conditions and reduced availability of credit combined with dealer efforts to reduce inventory.

EAME - Sales decreased $660 million, or 41 percent.

† Sales volume decreased $650 million.

† Price realization increased $48 million.

† Currency decreased sales by $58 million.

† Sales for electric power applications decreased 35 percent due to weak economic conditions and reduced availability of credit.

† Sales for industrial applications decreased 53 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 27 percent primarily due to a slowdown in engines used in production applications and land-based drilling, partially offset by an increase in turbine sales.

† Sales for marine applications decreased 41 percent due to weak economic conditions, especially in container applications, combined with dealer efforts to reduce inventories.

Asia/Pacific - Sales decreased $166 million, or 22 percent.

† Sales volume decreased $183 million.

† Price realization increased $27 million.

† Currency decreased sales by $10 million.

† Sales for petroleum applications decreased 24 percent primarily due to a slowdown in Chinese land-based drill activity, partially offset by an increase in turbine sales.

† Sales of electric power applications decreased 19 percent due to cancelled and delayed projects in China and India, partially offset by higher turbine sales.

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

† Sales for marine applications decreased 7 percent due to dealer efforts to reduce inventories, partially offset by a strong order backlog for workboat and general cargo vessels.

Latin America - Sales decreased $20 million, or 6 percent.

† Sales volume decreased $25 million.

† Price realization increased $8 million.

† Currency decreased sales by $3 million.

† Sales for petroleum applications increased 23 percent primarily due to an increase in turbine sales that was partially offset by a slowdown in production power applications, especially in Argentina.

† Sales of electric power applications decreased 34 percent due to weak economic conditions and reduced availability of credit.

FINANCIAL PRODUCT REVENUES - Revenues of $715 million decreased $118 million, or 14 percent, from third quarter 2008.

† The decrease was due to lower average earning assets of $57 million and an $11 million impact of lower interest rates on new and existing finance receivables.

† Other revenues at Cat Financial decreased $25 million, primarily due to the unfavorable impact from returned or repossessed equipment.

OPERATING PROFIT

The chart above graphically illustrates reasons for the change in Consolidated Operating Profit between third quarter 2008 (at left) and third 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 (income) expenses, which include Machinery and Engines redundancy costs.

The third-quarter operating profit was $277 million compared to an operating profit of $1,173 million in the third 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. Price realization improved $227 million.

Manufacturing costs improved $284 million, of which $120 million ($0.16 per share) was related to LIFO inventory decrement benefits. Excluding decrement benefits, manufacturing costs improved $164 million. About two-thirds was from lower labor and overhead costs, and about one-third was from lower material costs.

Selling, general and administrative (SG&A) and research and development (R&D) expenses declined $362 million as a result of significant cost-cutting measures.

Currency had a $90 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 $79 million.

Operating Profit (Loss) by Principal Line of Business

                               Third Quarter     Third Quarter       $           %
(Millions of dollars)              2009              2008          Change      Change
Machinery 1                     $      (124 )    $        464     $ (588 )   (127 ) %
Engines 1                               370               616       (246 )    (40 ) %
Financial Products                       92               144        (52 )    (36 ) %
Consolidating Adjustments               (61 )             (51 )      (10 )
Consolidated Operating Profit   $       277      $      1,173     $ (896 )    (76 ) %

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 $124 million compared to an operating profit of $464 million in the third quarter 2008. Sharply lower sales volume and losses at Cat Japan were partially offset by lower SG&A and R&D expenses, a decrease in manufacturing costs, LIFO inventory decrement benefits and improved price realization.

† Engines operating profit of $370 million was down $246 million, or 40 percent, from the third quarter 2008. Significantly lower sales volume was partially offset by lower SG&A and R&D expenses and improved price realization. Although total engines operating profit declined from the third quarter 2008, operating profit for turbines increased due to higher sales volume and improved price realization and was a significantly higher proportion of total engines operating profit.

† Financial Products operating profit of $92 million was down $52 million, or 36 percent, from the third quarter 2008. The decrease was primarily attributable to a $29 million unfavorable impact from lower average earning assets, a $29 million increase in the provision for credit losses at Cat Financial and a $23 million unfavorable impact from returned or repossessed equipment, partially offset by a $25 million decrease in SG&A expenses (excluding the provision for credit losses).

Other Profit/Loss Items

† Interest expense excluding Financial Products increased $32 million due to higher debt. As a result of the weak economic environment and uncertain capital markets, we have held more cash than usual.

† Other income (expense) was income of $66 million compared with income of $146 million in third quarter 2008. The decline was primarily related to the unfavorable impact from net currency exchange gains and losses.

† The provision (benefit) for income taxes reflected a significantly more favorable effective tax rate than the third quarter of 2008. The improvement is primarily attributable to the current period recognition of tax benefits related to prior year tax returns of $129 million, along with a more favorable geographic mix of profits and losses from a tax perspective and a larger percentage benefit from U.S. permanent differences and credits including the research and development tax credit. The prior year tax benefits primarily resulted from the U.S. settlement of tax years 1995 to 1999 and the true-up of estimated amounts used in the 2008 tax provision to the U.S. tax return as filed in September 2009. We are currently unable to reliably estimate the 2009 annual effective tax rate and are recording taxes on an actual (discrete period) 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 $1 million of income compared with income of $11 million in the third 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 profit by $20 million compared with the third quarter of 2008, primarily due to adding back 33 percent of Cat Japan's losses attributable to Mitsubishi Heavy Industries.

NINE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2008

SALES AND REVENUES

The chart above graphically illustrates reasons for the change in Consolidated Sales and Revenues between nine months ended September 30, 2008 (at left) and nine months ended September 30, 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 nine months ended September 30, 2009 were $24.498 billion, down $13.903 billion, or 36 percent, from the nine months ended September 30, 2008. Machinery sales volume was down $10.537 billion, and Engines volume declined $3.107 billion. Price realization improved $711 million, and currency had a negative impact on sales of $644 million, primarily due to a weaker euro and British pound. In addition, Financial Products revenues decreased $326 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 nine months of 2009, it was much less than the decline in sales and revenues for the company in total. Integrated service businesses represented about 45 percent of total company sales and revenues in the first nine months of 2009, up from about 35 percent during the first nine months of 2008.

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