Caterpillar Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2014; comparisons are primarily with the third quarter and first nine months of 2013. Financial statements are unaudited. Dollar amounts are in millions unless otherwise stated.
Business context and financial performance
Caterpillar operates through Machinery, Energy & Transportation (ME&T) and Financial Products. Third-quarter results were broadly stable in revenue, with stronger Energy & Transportation performance offset by a pronounced downturn in mining equipment. For the first nine months, revenue declined modestly while profit and diluted earnings per share increased.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Sales and revenues | $13,549 | $13,423 | $40,940 | $41,254 |
| Operating profit | $1,392 | $1,401 | $4,265 | $4,176 |
| Profit attributable to common stockholders | $1,017 | $946 | $2,938 | $2,786 |
| Diluted earnings per share | $1.63 | $1.45 | $4.64 | $4.21 |
| Operating margin (approx.) | 10.3% | 10.4% | 10.4% | 10.1% |
| Cash dividends per share declared | — | — | $1.30 | $1.12 |
Margins shown are calculated from reported revenue and operating profit. Q3 revenue rose about 1%; operating profit was nearly unchanged, while profit rose 8% and diluted EPS rose 12%. Nine-month revenue fell about 1%, while operating profit rose 2%, profit rose 5%, and diluted EPS rose 10%.
Segment trends and material changes
- Q3: Energy & Transportation sales rose 13% and segment profit increased to $1,125 from $875. Construction Industries sales were about flat, but profit rose to $483 from $289. Resource Industries sales fell 19% and profit declined to $147 from $386, reflecting weak mining demand, unfavorable pricing and higher expenses.
- First nine months: Construction Industries sales increased 9% and profit more than doubled to $1,845. Energy & Transportation sales rose 6% and profit increased to $2,961. Resource Industries sales declined 29% and profit fell to $429 from $1,369.
- Management attributed mining weakness to customers cutting capital spending, excess commodity supply and low or uneconomic prices for some commodities. Resource Industries also had lower aftermarket parts sales as customers extended maintenance schedules.
- Q3 sales gains in North America were offset by declines in Latin America and Asia/Pacific. Nine-month growth in North America was offset by declines in Latin America and Asia/Pacific; EAME was approximately flat.
Cash flow, financial position and capital allocation
- Nine-month consolidated operating cash flow was $6,186, down from $7,611. ME&T operating cash flow was $5,384 versus $6,247; Financial Products operating cash flow was $1,141 versus $919. Management cited inventory and receivables movements as key reasons for the consolidated decline.
- Cash and short-term investments were $6,082 at September 30, 2014, essentially unchanged from year-end 2013. Total assets were $84,488; total liabilities were $65,592; stockholders’ equity was $18,896.
- Total debt was approximately $39.28 billion, up $1.53 billion from year-end. ME&T debt-to-capital was 34.7%, versus 29.7% at year-end and within the stated 30%–45% target range. Financial Products borrowing principally funds its financing portfolio.
- Available credit was $9.56 billion; there were no borrowings under the $10.5 billion global credit facilities. The company reported compliance with credit-facility covenants.
- Cash used for investing was $3,003 and cash used for financing was $3,059 during the first nine months. The company repurchased $4.2 billion of shares during that period, including $2.5 billion in Q3; $7.5 billion remained under the $10 billion authorization. Dividends paid totaled $1,197.
- ME&T capital expenditures were $1,133 for the first nine months. Management expected full-year 2014 capital expenditures below $2 billion.
Outlook, management commentary and risks
- Management expected full-year 2014 restructuring costs of about $450 million, increased from its prior estimate of about $400 million, primarily due to mining-related programs. The Q3 charge was $81 million; the nine-month charge was $344 million. Reported diluted EPS excluding restructuring costs was $1.72 for Q3 and $5.03 for nine months, a non-GAAP measure.
- Management expected full-year short-term incentive compensation expense of about $1.3 billion, compared with about $545 million in 2013. It anticipated approximately $510 million of 2014 pension contributions, all required.
- Management expected dealers to continue reducing inventories, particularly construction equipment, in Q4, citing seasonal patterns and greater use of product distribution centers. Firm order backlog was about $19.7 billion at September 30, up $0.4 billion from June 30.
- Management said it did not expect the then-recent decline in oil prices to have a significant impact on 2014 sales, and did not expect the timing of its Tier 4 locomotive offering to significantly affect Energy & Transportation sales. It anticipated unfavorable Q4 product mix from a large EAME power-generation project.
- Cat Financial past-due accounts rose to 2.81% at Q3 end from 2.63% at Q2 end and 2.37% at year-end 2013. Non-performing finance receivables increased to $563 from $425 at year-end. The credit-loss allowance was $405, or 1.37% of net finance receivables.
- Warranty liability was $1,396 at September 30. The filing reports a $107 increase in the liability from revised estimates for pre-existing warranties due to higher-than-expected claims, mainly a watch item given the mining-related warranty commentary.
- Management identified risks from weak mining markets, global economic conditions, political unrest and trade disruption, currency and commodity movements, credit quality, pension funding, dealer inventory decisions, restructuring execution and legal or regulatory proceedings. It estimated that lower September 2014 pension discount rates could increase the year-end underfunded status by approximately $1.7 billion; the actual measurement was not yet known.
- The SEC issued a subpoena in September 2014 concerning accounting for goodwill from the 2011 Bucyrus acquisition and related matters. Caterpillar said it was cooperating and believed the matter would not materially affect results, financial position or liquidity. Other disclosed matters include a Brazilian antitrust investigation, a California emissions enforcement matter, and a U.S. criminal investigation involving Progress Rail; outcomes or potential losses were not estimable for some matters. Management stated it did not expect these matters to have a material adverse effect.
Important facts for investors to verify
- Whether mining demand, order rates and Resource Industries’ margins stabilized or deteriorated after Q3.
- Whether dealer inventory reductions and the $19.7 billion backlog translated into end-user sales, rather than shipment timing effects.
- Actual full-year restructuring charges and savings, incentive compensation expense, capital spending and pension contributions versus management’s estimates.
- Cat Financial delinquencies, non-performing receivables, credit-loss provisions and allowance coverage, particularly in Latin America, Asia/Pacific and Europe.
- Year-end pension measurements and the potential balance-sheet effect of discount-rate and asset-return changes.
- Developments in the SEC Bucyrus goodwill inquiry and other legal or regulatory matters, including any resulting charges or disclosures.
- The filing notes immaterial corrections to prior-period cash-flow classifications and immaterial prior-period adjustments affecting derivative-related income and credit-loss provisions; investors may wish to review the related notes and their effects.