Caterpillar Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Amounts are U.S. dollars; financial statement amounts are in millions unless noted. The filing was signed August 4, 2011.
Business context and results
Caterpillar manufactures construction, resource and power equipment and provides related financing and insurance. Management said global customer demand continued to improve and Q2 sales and revenues were the highest of any quarter to date. Comparatives for 2010 were retrospectively adjusted for changes to reportable segments.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Sales and revenues | $14.230bn | $10.409bn | $27.179bn | $18.647bn |
| Operating profit | $1.601bn | $977m | $3.434bn | $1.485bn |
| Profit attributable to common stockholders | $1.015bn | $707m | $2.240bn | $940m |
| Diluted EPS | $1.52 | $1.09 | $3.36 | $1.46 |
| Operating margin, calculated | 11.3% | 9.4% | 12.6% | 8.0% |
| Net margin, calculated | 7.1% | 6.8% | 8.2% | 5.0% |
Q2 revenues increased 37%, operating profit 64%, and net profit 44% year over year. First-half revenues rose 46%, operating profit 131%, and net profit 138%. Machinery and Power Systems sales grew 39% in Q2 and 49% in the first half; Financial Products revenues were nearly flat year over year for the first half. Segment sales increased broadly, led by Resource Industries and Construction Industries.
Cash flow, financial position and liquidity
- First-half consolidated operating cash flow was $3.294bn, versus $1.911bn a year earlier. Higher profit and accounts payable supported cash generation; inventory growth was a significant offset.
- Cash and short-term investments were $10.715bn at June 30, up $7.123bn from year-end. Management said cash was above normal operating needs in preparation for the Bucyrus purchase, which closed after quarter-end.
- Total debt was approximately $34.38bn, up $5.96bn from year-end, including $4.5bn of long-term debt issued in May to fund Bucyrus. Machinery and Power Systems debt-to-capital was 42.6%, versus 34.8% at year-end and within management’s 35–45% target range.
- Available credit was $6.713bn; no borrowings were outstanding under the $7.23bn global credit facilities. Cat Financial met its disclosed interest-coverage and leverage covenants at quarter-end.
- Total assets were $73.611bn and stockholders’ equity was $13.436bn. Inventories rose to $11.359bn from $9.587bn at year-end.
- Capital expenditures were $975m for Machinery and Power Systems in the first half; the company’s consolidated cash-flow statement reported $924m of capital expenditures excluding equipment leased to others, plus $580m for leased equipment.
Material changes and notable items
- Revenue growth primarily reflected higher sales volume: $2.985bn in Q2 and $7.058bn in the first half. Price realization and currency also helped; EMD, acquired in 2010, contributed $342m of Q2 sales and $606m in the first half.
- Operating profit benefited from volume and pricing, partly offset by higher manufacturing, freight, material, SG&A and R&D costs. Currency reduced operating profit by $102m in Q2 and $126m in the first half, primarily due to the Japanese yen.
- The Japan disaster reduced sales by about $200m and operating profit by nearly $60m, due mainly to factory and supply-chain disruptions.
- Bucyrus acquisition-related costs were $204m in Q2 and $249m for the first half; management reported diluted EPS excluding these costs of $1.72 and $3.60, respectively. Costs included losses on interest-rate swaps, bridge financing and advisory, legal and debt-related expense. Other income/expense shifted to a $161m expense in Q2 from $50m income a year earlier, primarily reflecting these items.
- Bucyrus was acquired July 8, 2011 for approximately $8.8bn, funded with cash, commercial paper and May debt issuance. The purchase accounting was incomplete at filing. The company also expected to complete the MWM acquisition in 2011 for approximately €580m, funded with cash.
- Carter Machinery was sold in March for $358m; Caterpillar recorded an $18m pretax gain and Cat Financial provided $348m of financing to the buyer.
Outlook, risks and contingencies
- Management expected 2011 capital expenditures of about $3bn, compared with $1.66bn in 2010, and pension contributions of approximately $1bn, most voluntary. It did not provide a full-year revenue or EPS forecast in the supplied filing text.
- Firm backlog was about $21.9bn at June 30, up from $18.7bn at December 31; $3.9bn was not expected to ship within twelve months. Management noted strong mining demand, improving demand in developing markets, and continuing weakness in developed-country construction versus prior peaks. Capacity constrained supply of some excavator models.
- Management did not expect share repurchases in 2011, citing Bucyrus and MWM acquisitions and planned capital expenditures. The quarterly dividend was increased 4.5% to $0.46 per share, payable in August; dividends declared in each of the first two quarters were $0.90 per share in total.
- Key exposures include global economic and commodity conditions, steel and component availability and costs, foreign exchange, customer and dealer credit, access to capital markets and credit ratings, acquisition integration, emissions requirements, pension funding, and natural disasters. Cat Financial past dues improved to 3.73% from 5.33% a year earlier; net write-offs were $29m in Q2 versus $52m.
- EPA/DOJ filed a consent decree on July 28 concerning alleged Clean Air Act violations. Caterpillar agreed to a $2.55m penalty, retirement of some emissions credits and expanded defect reporting; court approval was still pending. Other disclosed legal and environmental matters were not expected by management to have a material adverse effect.
- The company’s 2010 cash-flow presentation was revised for accrued but unpaid capital expenditures: operating cash flow increased and investing cash flow decreased by $168m, with no material impact according to management. Management stated disclosure controls were effective and reported no material second-quarter change in internal control over financial reporting.
Most important facts for investors to verify
- Whether demand, backlog conversion and production capacity support continued sales growth, particularly in mining and construction equipment.
- The realized financing, debt and liquidity effects of the July Bucyrus acquisition, including final purchase accounting and integration results; also the status and funding of MWM.
- Whether rising manufacturing, freight, steel, incentive-compensation and R&D costs continue to pressure margins, and how currency movements affect costs and sales.
- Whether Cat Financial credit quality, past dues, allowances and funding access remain stable as finance receivables grow.
- Actual 2011 capital spending and pension contributions versus management’s stated expectations, and the effect of pension assumptions on expense and obligations.
- Final court approval and implementation of the emissions consent decree, alongside any material change in other legal, environmental or regulatory exposures.