Caterpillar Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. All dollar figures are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and reporting period
Caterpillar makes construction, mining, power and related equipment and provides customer and dealer financing through Financial Products. The filing reports consolidated results and compares Q3 and year-to-date 2012 with the same 2011 periods. Management cautions that interim results may not indicate full-year results.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Sales and revenues | $16.445bn | $15.716bn | $49.800bn | $42.895bn |
| Operating profit | $2.596bn | $1.759bn | $7.535bn | $5.193bn |
| Profit attributable to common stockholders | $1.699bn | $1.141bn | $4.984bn | $3.381bn |
| Diluted earnings per share | $2.54 | $1.71 | $7.44 | $5.08 |
| Operating margin | 15.8% | 11.2% | 15.1% | 12.1% |
| Net profit margin | 10.3% | 7.3% | 10.0% | 7.9% |
Margins are approximate, calculated from reported consolidated operating profit or profit divided by sales and revenues.
- Cash flow: Nine-month operating cash flow was $3.262bn, down from $5.515bn. Investing used $4.352bn, compared with $9.450bn used in 2011; financing provided $3.847bn, compared with $3.612bn. Cash and short-term investments increased $2.632bn to $5.689bn.
- Working capital and liquidity: Inventories were $17.550bn, up from $14.544bn at year-end 2011. Management attributed weaker operating cash flow chiefly to inventory growth, accounts payable, tax and incentive-compensation payments. Available credit was $8.765bn, and there were no borrowings under the global credit facilities.
- Debt: Total debt was approximately $39.85bn, up $5.26bn from year-end 2011. Machinery and Power Systems’ debt-to-capital ratio was 38.0%, versus 42.7% at year-end and within the company’s 30%–45% target range. Cat Financial’s reported covenant ratios were within required limits.
- Dividends: $937m was paid during the first nine months; management reports $0.52 per share paid in Q3. Nine-month dividends declared were $0.98 per share.
Material changes versus prior periods
- Q3 sales and revenues rose 5%; nine-month sales and revenues rose 16%. Management attributed the year-to-date increase to volume, acquisitions and divestitures, and price realization, partly offset by currency.
- Q3 operating profit increased 48%, and nine-month operating profit increased 45%. Higher volume, pricing and acquisition/divestiture effects contributed; increased manufacturing, SG&A and R&D costs partly offset gains.
- Resource Industries led Q3 segment sales growth, up 13%; its nine-month sales rose 45%, substantially reflecting the Bucyrus acquisition. Construction Industries was approximately flat in Q3, while Power Systems grew 5%.
- Results benefited from the July sale of a 65% interest in the third-party logistics business. Caterpillar recorded a $281m pretax gain; management described the Q3 pretax gain net of dealer-related costs and incremental incentive compensation as $273m. Q3 profit also included ongoing Bucyrus distribution divestiture costs.
- Inventory and dealer inventory are important pressure points: dealers increased machine inventories by about $400m in Q3, but reduced order rates substantially below deliveries to end users. Firm order backlog fell to $23.1bn from $28.2bn at June 30 and $29.8bn at year-end 2011.
Outlook, commentary, risks and unusual items
- Management cited weaker-than-expected global economic conditions, declining mining orders and commodity prices below 2012 highs. Mining orders had been reduced, delayed or cancelled. Dealers were expected to continue reducing inventories into 2013.
- Caterpillar said it was lowering production at many facilities until dealer inventories decline and orders better reflect end-user demand. The filing does not provide a clear numerical full-year sales or earnings forecast in the text provided.
- Management expected 2012 capital expenditures to be below its initial $4bn expectation. Full-year pension contributions were expected to be about $1bn, including $625m required contributions.
- The estimated annual effective tax rate was 30.5%, compared with 29% for the comparable 2011 period, excluding specified items. Management cited geographic profit mix and expiration of the U.S. R&D tax credit; the 2012 provision also included an $81m tax impact from nondeductible goodwill associated with Bucyrus distribution divestitures.
- Changes to the U.S. hourly pension plan increased the postemployment-benefit liability by $243m and produced a $153m after-tax loss in accumulated other comprehensive income. Based on then-current discount rates, the company estimated a possible $1.9bn increase in underfunded status at year-end 2012; the final amount depended on year-end assumptions and asset returns.
- Other risks identified include global economic conditions, commodity and component costs, currency movements, customer/dealer liquidity and credit quality, access to capital markets, pension funding, acquisitions and divestitures, emissions compliance, legal matters, and covenant compliance.
- Management said unresolved legal matters were not expected to have a material adverse effect; estimated environmental remediation liabilities were not material. The EPA emissions matter was resolved under a consent decree, with the remaining $0.51m penalty paid in July 2012.
Important facts for investors to verify
- How much Q3 and year-to-date profit growth remains after adjusting for the $273m net pretax logistics-sale gain and other acquisition/divestiture effects.
- Whether production cuts and dealer inventory reductions proceed as expected, and how they affect deliveries, margins and the $23.1bn backlog.
- Inventory growth, working-capital cash use and the trend in Machinery and Power Systems operating cash flow.
- Mining order trends, especially given the reported slowdown, and the contribution and integration risks of Bucyrus and Siwei.
- Year-end pension funding and liability changes, including the sensitivity to discount rates and investment returns.
- Cat Financial credit indicators: nonperforming receivables were $609m versus $472m at year-end 2011, while Q3 past dues improved to 2.80% and net write-offs declined year over year.
- Debt growth, refinancing needs and continued compliance with credit-facility covenants.