Caterpillar Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with Q1 2010 unless noted. Caterpillar manufactures machinery, engines and related products and provides customer and dealer financing. Dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Sales and revenues | $12,949 | $8,238 | +57% |
| Operating profit | $1,833 | $508 | +$1,325 |
| Profit attributable to common shareholders | $1,225 | $233 | +426% |
| Diluted earnings per share | $1.84 | $0.36 | +$1.48 |
| Operating margin | 14.2% | 6.2% | +8.0 percentage points |
| Net margin | 9.5% | 2.8% | +6.7 percentage points |
| Net cash from operating activities | $765 | $716 | +$49 |
Machinery and Power Systems (M&PS) sales rose 63% to $12,277; Financial Products revenue declined 2% to $672. Segment operating profit increased across Construction Industries ($544 versus $32), Resource Industries ($796 versus $227), Power Systems ($700 versus $292) and Financial Products ($136 versus $106). Management attributed the overall improvement chiefly to higher volume; favorable price realization also helped. Consolidated operating costs rose to $11,116 from $7,730. Manufacturing costs increased $219, while SG&A and R&D expenses together increased $290, reflecting incentive compensation, product development and growth-related spending. Management reported a 28% incremental operating profit rate, or more than 29% excluding EMD.
Financial position, cash flow and liquidity
- At March 31, cash and short-term investments were $4,869, up $1,277 from year-end 2010; total assets were $66,387 and stockholders’ equity was $12,672.
- Consolidated debt was $29,590, up $1,170 from year-end. M&PS debt decreased $198, while Financial Products debt increased $1,370 with growth in its financing portfolio. M&PS debt-to-capital was 30.4%, down from 34.8% at year-end and below the company’s 35%–45% target range.
- Operating cash flow was $765. Higher profit was partly offset by a $1,185 inventory cash use and lower accrued wages and benefits. M&PS operating cash flow was $1,644, compared with $1,086 a year earlier.
- Investing activities used $434; financing activities provided $890, including $1,460 of net short-term borrowing. Dividends paid were $281, or $0.44 per share; the income statement reports no dividends declared in either comparative quarter.
- Available credit was $5,612, including $7,230 of global credit facilities, of which $4,016 supported commercial paper. There were no borrowings under the global credit facilities. Management reported compliance with relevant financial covenants.
- Inventories rose to $10,676 from $9,587 at December 31, 2010. Net finance receivables were $24,513 on the balance sheet, including current and long-term balances.
Material changes and management commentary
- Higher end-user demand and dealer inventory additions drove Machinery and Power Systems sales growth; management estimated about $800 of the volume increase came from dealers adding machine inventory. Growth occurred across all regions and segments. EMD, acquired in 2010, contributed $264 to M&PS sales.
- Mining demand benefited from economic growth and higher commodity prices. Construction sales rose substantially from depressed prior-year levels, but management said developed-market new-machine demand remained weak and excavator capacity was constrained, particularly in China.
- Financial Products past-due receivables were 3.94% at quarter-end, up from 3.87% at 2010 year-end but below 6.06% a year earlier. Net write-offs were $41. The allowance for credit losses was approximately $380, or 1.55% of net finance receivables.
- Backlog was approximately $20.8 billion, versus $18.7 billion at year-end; $3.8 billion was not expected to ship within twelve months. Backlog is typically seasonal.
- Caterpillar sold Carter Machinery in March for $358, net of a preliminary working-capital adjustment, and recorded an $18 pretax gain. Cat Financial financed the buyer with a $348 loan. The sale was not treated as discontinued operations.
- First-quarter results included $25 of losses on undesignated interest-rate swaps entered into in anticipation of debt for the planned Bucyrus acquisition. The prior-year comparison included a $90 tax charge related to U.S. health-care legislation; its absence improved the year-over-year profit comparison.
Outlook, risks and contingencies
- The filing does not provide a clear full-year sales, profit or EPS forecast. Management expected 2011 capital expenditures of about $3 billion, compared with $1.66 billion in 2010, and pension contributions of approximately $1 billion, most voluntary.
- Management expected to close the planned MWM acquisition for approximately €580 million and Bucyrus for approximately $8.6 billion in 2011. MWM was expected to be funded with available cash; Bucyrus with cash and new debt, with up to $2 billion of equity issuance contemplated. The company said its cash position could minimize or eliminate the need for new equity. It did not expect share repurchases in 2011.
- Key risks identified include global economic and market conditions; commodity and component costs and availability; customer and dealer liquidity and credit quality; access to capital markets and credit ratings; execution, regulatory approval and benefits of planned acquisitions; emissions compliance and product acceptance; foreign exchange, pension funding, legal and environmental matters, and changes in tax or regulatory requirements.
- Cat Financial guarantees had a maximum potential payment amount of $390; the recorded liability was $10. Management reported no losses experienced or anticipated under these guarantees. Product warranty liability was $1,062 at quarter-end.
- Environmental and legal matters included ongoing U.S. emissions negotiations and a Belgian wastewater investigation; management did not expect these matters to materially affect results, financial position or liquidity. The filing also discusses ordinary-course legal claims and remediation obligations, which management assessed as not materially adverse.
- The U.S. support and management pension transition began in 2011, moving eligible employees from defined-benefit accruals toward defined-contribution benefits. Management expected total defined-benefit expense to rise about $100 in 2011 versus 2010 and actuarial-loss amortization to rise about $150.
Important facts for investors to verify
- Whether strong machinery demand and dealer inventory additions persist, and whether developed-market demand and China capacity constraints change.
- Inventory growth, cash conversion and operating cash flow relative to reported earnings.
- Progress, funding, regulatory approvals and integration risks for Bucyrus and MWM, including the potential need for equity issuance.
- Cat Financial portfolio performance, past-due trends, credit-loss allowance adequacy and funding access.
- Actual capital expenditures, pension contributions and benefit costs versus management’s stated expectations.
- Developments in emissions, environmental and other legal proceedings; management’s materiality assessments are not assurances of outcomes.