Caterpillar Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise noted. Caterpillar operates machinery, energy and transportation businesses and provides customer and dealer financing through Financial Products. Dollar amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Sales and revenues | $12.702 billion | $13.241 billion | Down 4% |
| Operating profit | $1.527 billion | $1.398 billion | Up 9% |
| Profit attributable to common stockholders | $1.111 billion | $922 million | Up 20% |
| Diluted earnings per share | $1.81 | $1.44 | Up 26% |
| Operating margin | About 12.0% | About 10.6% | Improved |
| Operating cash flow | $1.270 billion | $1.897 billion | Down $627 million |
Management reported diluted EPS of $1.86 excluding restructuring costs, versus $1.61 a year earlier. The $1.81 reported EPS included a $120 million pretax gain on the sale of the company’s remaining 35% interest in its former third-party logistics business, partly offset by $36 million of restructuring costs. Restructuring reduced EPS by about $0.05; the divestiture gain contributed about $0.14 per share.
Sales fell mainly because of lower sales volume and unfavorable currency translation, partly offset by improved price realization. Operating profit increased with lower restructuring charges, improved pricing and favorable currency, partly offset by lower volume and higher selling, general and administrative and research and development expenses. Other income was $157 million, including the divestiture gain.
Segment and market developments
- Construction Industries: Sales of $4.695 billion, down 7%; segment profit of $740 million, up 8%. Lower end-user demand and unfavorable currency were partly offset by price realization and North American strength.
- Resource Industries: Sales of $1.928 billion, down 9%; segment profit of $85 million, down 41%. Weak mining demand and competitive pricing weighed on results; management said sales and new orders remained weak.
- Energy & Transportation: Sales of $4.762 billion, approximately flat; segment profit of $986 million, up 18%, reflecting higher volume, favorable mix and improved pricing.
- Financial Products: Segment revenues of $795 million, down 3%, and segment profit of $227 million, down 5%. Past-due finance receivables rose to 3.08% from 2.17% at year-end 2014, mainly reflecting Latin American and mining portfolios and seasonality. Net write-offs were $12 million, versus $38 million a year earlier.
- Consolidated sales increased 9% in North America but declined 18% in Latin America, 12% in EAME and 13% in Asia/Pacific. Dealer machine and engine inventories increased about $900 million during the quarter; management expects dealer inventory at year-end 2015 to be below year-end 2014.
Cash flow, balance sheet and capital
- Cash and short-term investments were $7.563 billion at March 31, up $222 million from year-end 2014. Approximately $5.9 billion was held by non-U.S. subsidiaries; the company said it was available for general corporate use without significant additional U.S. taxes.
- Operating cash flow was $1.270 billion. Machinery, Energy & Transportation (ME&T) operating cash flow was $1.042 billion, down from $1.878 billion, primarily due to higher short-term incentive compensation payments and less favorable working-capital movements. The filing cites about $1.3 billion of incentive payments in Q1 2015 versus about $500 million in Q1 2014.
- Total debt was $38.78 billion, down $510 million from year-end. ME&T debt-to-capital was 37.1%, versus 37.4% at year-end and within the company’s 30%–45% target range.
- Available credit was $8.611 billion, including $2.935 billion allocated to ME&T. No borrowings were outstanding under the $10.5 billion global credit facilities. Reported credit-facility covenant ratios were within required limits.
- Total assets were $82.490 billion, down from $84.681 billion at year-end; stockholders’ equity was $17.038 billion, up from $16.826 billion. The current ratio was approximately 1.45.
- Dividends paid were $424 million, or $0.70 per share. Caterpillar repurchased $400 million of stock, leaving $7.1 billion available under its $10 billion authorization. Q1 cash capital expenditures were $477 million; full-year capital expenditures were expected to be about the same as 2014, approximately $1.6 billion.
- Foreign-currency translation reduced other comprehensive income by $791 million. Comprehensive income was $444 million, versus $1.021 billion in Q1 2014.
Outlook, risks and unusual items
- Management expects profit to be lower in the remaining quarters of 2015, citing slightly lower sales, unfavorable sales mix and higher costs. It expects higher spending later in the year, including research and development expense.
- Management expects lower oil prices to pressure Energy & Transportation and Construction Industries sales, particularly later in 2015. It also cited weak economic conditions, a strong U.S. dollar and a more competitive environment. Mining demand and commodity prices remained weak.
- Management anticipated approximately $250 million of restructuring charges in 2015, or about $0.30 per share, and estimated restructuring actions would reduce costs by about $100 million in 2015 compared with 2014. Most charges were expected to be employee separation costs.
- Firm order backlog was approximately $16.5 billion at March 31, down $0.8 billion from year-end; about $3.3 billion was not expected to be filled within 12 months.
- The IRS proposed approximately $1 billion in additional tax and penalties relating primarily to the treatment of parts transactions by a non-U.S. subsidiary and certain foreign tax credits. Caterpillar is contesting the proposed adjustments through the IRS Appeals process and said it did not expect a material adverse effect.
- The company is cooperating with a U.S. grand jury investigation concerning, among other matters, subsidiary financial information and replacement-parts transactions; SEC investigations involving Caterpillar SARL and Bucyrus goodwill; a Brazilian antitrust investigation; and a criminal investigation involving Progress Rail. Outcomes and potential losses were not estimable for several matters. Caterpillar stated its current view that these matters would not materially adversely affect consolidated results, financial position or liquidity; it described a loss as probable in the Progress Rail matter.
- Other notable exposures include a $1.389 billion product warranty liability, $690 million of maximum potential future payments under various guarantees, and rising Cat Financial non-accrual customer receivables, from $468 million at year-end to $598 million.
Key facts for investors to verify
- Whether the expected sales and profit weakness in the remaining 2015 quarters materialized, particularly in oil and gas, construction and mining markets.
- How much of the EPS improvement was repeatable: reported results included a $120 million divestiture gain and substantially lower restructuring charges than in Q1 2014.
- Whether ME&T operating cash flow recovers after the large incentive-compensation payments and working-capital outflows.
- Whether Cat Financial past dues and non-accrual receivables continue to rise, especially in Latin America and mining, and whether credit-loss reserves remain adequate.
- Developments in the approximately $1 billion IRS proposal and the disclosed government investigations and legal matters.
- Actual 2015 restructuring charges, savings, capital expenditures, dealer inventories and order backlog compared with management’s expectations.