It was interesting to read the last Caterpillar (CAT) conference call, made in late January to accompany the Q4 2010 results. I have highlighted some of the key bits below from the transcript of the earnings call. Given Caterpillar manufactures machines and other equipment for the construction and mining sector it is considered to be a litmus test for the state of the global economy, Caterpillar is a key company to follow. During 2009 its share price collapsed to around $20, it is now $100 - incredible for a 5 bagger with such a mega cap company!
What Doug Oberhelman and Ed Rapp say about 2011 is a good test of the likely strength of the global economy, and on the whole they are positive about growth particularly in the U.S.. Despite all the turmoil in the Middle East and Africa, lets not forget that corporate profits are strong this year and the U.S. Federal Reserve is pumping in hundreds of billions of dollars into the economy through the QE2 (quantitative easing) programme where they buy treasury bonds to aid liquidity and hence stimulate economic growth and reduce interest costs.
Chairman and CEO, Doug Oberhelman
Group President and CFO, Ed Rapp
2010 sales and revenues were $42.6 billion. That's a $10 billion or a 31% increase from 2009. Profit per share was $4.15, a significant increase from $1.43 in 2009, as we reported it, and $2.18 a share in 2009, excluding redundancy costs.
With that in mind, our outlook for 2010 sales and revenues is to exceed $50 billion and profit to be near $6 a share. Key points related to the outlook for the top line include our expectation of continued positive economic growth in the developing world overall. While we don't expect those economies to grow quite as rapidly as they did in 2010, they should still grow fast enough to support an increase in machine sales. We expect world growth and relatively tight commodity supply to continue to provide a very positive environment for our Mining customers. Demand for Mining remains strong and we would expect Mining sales to increase in 2010.
Over the past quarter, we've become somewhat more positive about economic growth in the developed economies of North America, Europe and Japan. And we're now expecting the U.S. economy to grow about 3.5% in 2011. We're expecting continued growth in our Machine sales in developed economies despite our expectation of a relatively weak recovery in construction spending. That's because we believe that customer fleets have deteriorated over the past few years. End-users in the U.S., Europe and Japan cut their machine purchases more than construction activity declined, particularly in 2008 and 2009.
While machine sales in the developed world improved in 2010, it was from a very low base, and we don't believe the increase was enough to stop the deterioration of fleets. Cat dealer rental fleets are a good example. In 2010, dealers purchased significantly more new machines for rental fleets than they did in 2009, but despite that, fleet size declined in 2010 and the average age of machines in their fleets went up. In short, for Machines, we expect continued growth in sales in 2011, continuing growth in the developing world, some economic improvement, coupled with an increasing need to refresh customer and rental fleets in the developed world and positive conditions for mining.
The outlook for Engines isn't quite as positive. We expect 2011 Engine sales to improve, but most of our top line improvement will be Machinery. We expect sales of reciprocating engines for oil and gas, electric power and industrial applications will continue to improve, but later cycle areas like turbines and engines for large marine applications are expected to decline.
We expect profit again to be near $6 a share, an increase from $4.15 in 2010 and above the 2008 record of $5.66 a share. And recall, the $5.66 from 2008 included large favorable tax items that resulted in a tax rate that year near 19%. So on a before-tax basis, we expect to do even better than the headline number would indicate relative to the prior 2008 peak.
The most significant reason for the expected profit improvement from 2009 is higher sales volume. We do, however, expect continued negative sales mix in 2011, with Machines growing faster than Engines. While we expect the mix to be negative, the year-over-year impact should be less than 2010.
We expect a small improvement in price realization, coupled with material costs that we expect to remain relatively flat in 2011.
We also expect variable labor and burden efficiency to continue to improve. We're expecting an increase in period manufacturing costs, and that's a result of higher volume and implementation of a number of initiatives to increase capacity. The capacity initiatives are programs that we announced in 2010 such as mining capacity in the U.S. and India; excavator capacity in the U.S. and China, a new engine facility in China for 3500 Series engines; and a new backhoe and loader facility in Brazil. In addition to capital, these capital investments will drive expense in 2011. We have to push them forward. We need more production capacity to be ready for 2012 and beyond.
Now in addition, R&D expense is expected to rise about 20% in 2011. And again, primarily related to the continuing implementation of emissions requirements, SG&A expense should rise modestly in 2011, and mostly activities to support higher sales, SG&A as a percent of sales should continue to decline. We expect a slightly higher tax rate, mostly from an unfavorable geographic mix of profits from a tax perspective, and we're using a 28% rate.
Finally, the outlook includes bridge financing costs of about $50 million related to Bucyrus and some additional costs related to the integration planning that I mentioned earlier. From an incremental margin standpoint, we're expecting about 25% of incremental operating profit on incremental sales and revenues in 2011. Now that 25% number excludes acquisitions, and in that context, it excludes EMD because it wasn't in our numbers in 2010 for the full year.
Okay, to summarize, 2010 was the first year of sustained recovery from a tough year in 2009. 2011 looks better and we're expecting record profits. We're investing in capacity increases around the world to be prepared for 2012 and beyond, including substantial investment in the U.S. Of the $3 billion of capital expenditures in our forecast for 2011, more than half are being invested in the United States. 2010 cash flow was also good news as well. Our Machinery and Engines operating cash flow was an all-time record at $5.6 billion. Our debt-to-capital ratio dropped from over 47% at year-end 2009 to 34.8% at year-end 2010. And we raised our dividend again in 2010. In fact, for 17 consecutive years, Caterpillar has paid higher dividends to stockholders. Machine sales to end-users improved throughout 2010 and ended the year strong. And finally, excluding acquisitions, we increased our total workforce by about 19,000 people in 2010, with about 7,500 in the U.S. In a tough employment environment, we added about 15% to our total U.S. workforce, and that includes full-time employees and our flexible workforce.
