Caterpillar Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with the three months ended March 31, 2011 unless otherwise noted. Caterpillar manufactures construction, mining, power and related equipment and provides equipment financing and insurance.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Sales and revenues | $15.981 billion | $12.949 billion | +23% |
| Operating profit | $2.323 billion | $1.833 billion | +27% |
| Profit attributable to common stockholders | $1.586 billion | $1.225 billion | +29% |
| Diluted earnings per share | $2.37 | $1.84 | +29% |
| Operating margin | 14.5% | 14.2% | +0.3 percentage points |
| Operating cash flow | $330 million | $765 million | Down $435 million |
Revenue growth reflected $1.565 billion from higher sales volume, $306 million from price realization, and $1.144 billion from acquisitions, principally Bucyrus ($1.001 billion) and MWM ($143 million). Currency reduced sales by $4 million. Consolidated operating profit rose $490 million; management reported a 16% incremental operating profit rate, or about 23% excluding Bucyrus and MWM. Higher volume and pricing were partly offset by manufacturing, SG&A and R&D cost increases.
By segment, Construction Industries sales were $5.062 billion (+13%) and profit $616 million; Resource Industries sales were $4.778 billion (+73%) and profit $1.168 billion; Power Systems sales were $4.987 billion (+12%) and profit $812 million. Financial Products revenue was $693 million on the consolidated statement and segment profit was $205 million, up from $136 million. The filing attributes its profit increase chiefly to lower credit-loss provision expense and higher average earning assets and net yield.
Cash, debt and liquidity
- Cash and short-term investments were $2.864 billion at March 31, down $193 million from year-end 2011. Operating cash flow fell mainly because of inventory investment and incentive-compensation payments; inventory increased $1.967 billion from year-end.
- Investing activities used $1.536 billion and financing activities provided $976 million. Capital expenditures, excluding equipment leased to others, were $844 million; equipment leased to others required another $285 million.
- Total debt was approximately $35.95 billion, up $1.36 billion from year-end. This includes substantial Financial Products borrowing to fund its receivables portfolio. Machinery and Power Systems’ debt-to-capital ratio was 40.5%, within its 30%–45% target range, versus 42.7% at year-end.
- Current assets were $40.209 billion and current liabilities $28.849 billion. The company reported $7.095 billion of available credit; no amounts were drawn under its $8.5 billion global credit facilities.
- Dividends paid were $298 million, or $0.46 per share. The company reported no share repurchases under its program in the quarter.
Material changes, outlook and management commentary
- Management described strong global demand for most mining products and increased U.S. replacement demand, offsetting weaker construction-equipment sales in China and Brazil. Mining demand was strong, but production capacity constrained supply for some products. China dealer inventory remained relatively high in months of supply.
- Firm order backlog was approximately $30.7 billion at March 31, compared with $29.8 billion at December 31; $5.4 billion was not expected to ship within 12 months.
- Management expected 2012 capital expenditures of about $4 billion and pension contributions of approximately $1 billion, including $570 million of required contributions. The filing does not provide a clear consolidated full-year sales or earnings forecast.
- Caterpillar had made a conditional offer for ERA Mining Machinery, valued at approximately $575 million–$900 million on a fully diluted basis, with closing expected during 2012 and funding planned from non-U.S. cash. The remaining 33% interest in Cat Japan was acquired on April 2, 2012 for $444 million, funded with available cash.
- Q1 unusual items included $32 million of employee separation charges, primarily related to the announced closure of the Electro-Motive Diesel facility in Ontario. A $37 million postretirement-benefit curtailment gain and a $10 million special termination-benefit expense were also recognized; the closure eliminated a $21 million third-party benefit receivable.
- The estimated annual effective tax rate was 30%, versus 29% in Q1 2011. Management cited expected geographic profit-mix changes and expiration of the U.S. research and development tax credit.
Risks and contingencies
- Management identified exposure to global economic conditions, commodity and component availability and prices, customer and dealer liquidity, competition and pricing, currency movements, credit-market access, acquisition and divestiture execution, emissions compliance, taxes, pension funding, legal matters and financial-covenant compliance.
- Cat Financial past-due receivables were 3.19% at quarter-end, up from 2.89% at year-end but below 3.94% a year earlier. Net write-offs were $11 million versus $41 million a year earlier. Nonperforming finance receivables were $523 million, compared with $472 million at year-end.
- Guarantees had a maximum potential undiscounted payment of $346 million; the recorded related liability was $7 million. The company said no loss was anticipated under these guarantees. It characterized the aggregate reasonably possible losses from other unresolved legal actions as not material and stated that material environmental remediation losses were remote.
- Other items to monitor include $1.347 billion of product warranty liability; significant pension and postretirement actuarial losses; and Bucyrus distribution assets held for sale, with five transactions expected to close during 2012. The company incurred $31 million of Bucyrus divestiture-related costs in Q1.
Investor verification points
- Assess whether the reported sales growth and backlog translate into shipments and cash generation, particularly given inventory growth and China inventory levels.
- Track operating cash flow, working-capital needs, capital spending and the trajectory of total debt, distinguishing Machinery and Power Systems borrowing from Financial Products funding.
- Verify mining capacity expansion, Bucyrus integration and divestiture execution, and the expected timing and funding of the ERA offer.
- Monitor Cat Financial delinquencies, nonperforming receivables, credit-loss allowances and recovery trends.
- Review the assumptions behind the 2012 tax rate, pension expense and contributions, warranty reserves, and the EMD closure charges and benefits.