Caterpillar Inc. — Q1 2014 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2014; comparisons are with Q1 2013 unless otherwise noted. Caterpillar manufactures machinery, engines and related products and provides customer and dealer financing through Financial Products. Amounts are in U.S. dollars.
Financial results and position
- Total sales and revenues were $13.241 billion, up $31 million (about flat). Machinery, Energy & Transportation (ME&T) sales were $12.493 billion; Financial Products revenue was $748 million.
- Operating profit rose to $1.398 billion from $1.218 billion. Operating margin was approximately 10.6%, versus 9.2% (calculated from reported figures).
- Profit attributable to common stockholders was $922 million, up 5%; diluted EPS was $1.44, up from $1.31. Excluding restructuring costs, disclosed non-GAAP EPS was $1.61; restructuring reduced EPS by $0.17.
- Consolidated operating cash flow was $1.897 billion, versus $1.424 billion. Investing cash flow was negative $948 million and financing cash flow negative $1.651 billion. Cash and short-term investments ended at $5.345 billion, down $736 million from year-end.
- Total debt was approximately $38.09 billion, up $341 million from December 31, 2013; the increase was in Financial Products. ME&T debt-to-capital was 30.2%, compared with 29.7% at year-end and within the company’s 30%–45% target range. Available credit was $9.374 billion; there were no borrowings under the $10 billion global credit facilities.
- At March 31, total assets were $84.397 billion, total liabilities $64.028 billion and stockholders’ equity $20.369 billion. Current assets were $37.968 billion and current liabilities $27.295 billion.
- Declared dividends were $0 per share during the quarter, while $383 million of dividends were paid (60 cents per share). The company repurchased about 18.1 million shares for approximately $1.74 billion.
Changes versus the prior comparable period
- Sales volume added $156 million, largely reflecting dealer inventory increases of about $700 million in Q1 2014, versus a reduction of about $800 million in Q1 2013. Unfavorable currency reduced sales by $143 million.
- Construction Industries sales increased 20% and Energy & Transportation increased 8%; Resource Industries fell 37%, primarily on weaker mining demand. Consolidated sales were nearly unchanged.
- Operating profit improved mainly on lower manufacturing costs, reduced SG&A and R&D, and favorable currency, partly offset by lower sales volume/mix and $149 million of restructuring costs. Financial Products profit fell to $240 million from $273 million, principally because Q1 2013 included favorable insurance reserve adjustments.
- Cash from operations increased, supported by lower incentive-compensation payments, higher accounts payable and customer advances; inventory and receivables movements were unfavorable. Capital expenditures were $469 million versus $913 million.
- Reported EPS benefited from lower average diluted shares (639.3 million versus 671.6 million). Q1 2013 also included an $87 million tax benefit, primarily related to the U.S. research and development tax credit.
Outlook, commentary, risks and unusual items
- Management expected 2014 capital expenditures to be slightly below 2013’s $2.6 billion. It anticipated approximately $510 million of required pension contributions for 2014 and about $1.0 billion of short-term incentive compensation expense, versus $545 million in 2013.
- Full-year restructuring costs were expected to total approximately $400 million–$500 million. The Gosselies, Belgium plan accounts for an estimated $300 million of pretax employee separation costs; $128 million was recorded in Q1, with substantially all charges expected during 2014. Most remaining separation liabilities were expected to be paid in 2014.
- Firm order backlog was approximately $19.3 billion at March 31, up from $18.0 billion at year-end; about $3.2 billion was not expected to ship within 12 months. The increase was concentrated in Energy & Transportation, particularly locomotives. Management described mining orders and demand as weak, with customers delaying investment and some aftermarket maintenance.
- Q1 included a $55 million tax charge correcting prior-year tax liabilities, partly offset by a $33 million benefit from an IRS settlement relating to 1992–1994. The company said the prior-year error was not material to any affected period. The IRS was examining 2007–2009 returns and had proposed adjustments that the company disputed; management did not expect a material adverse effect.
- Disclosed legal matters include a Brazilian antitrust investigation, a potential California air-emissions enforcement action and a U.S. criminal investigation involving Progress Rail. Outcomes and potential losses were not estimable for some matters; management believed they would not materially affect consolidated results, financial position or liquidity.
- Key risks include mining and broader economic demand, dealer inventory decisions, currency and commodity movements, customer credit quality, access to capital and credit ratings, restructuring execution, pensions, environmental compliance, litigation and tax uncertainty. Management reported disclosure controls were effective and no material Q1 change in internal control over financial reporting.
Important facts for investors to verify
- Whether dealer inventory growth and the backlog increase translate into sustainable end-user demand, especially given the sharp decline in Resource Industries and mining orders.
- Actual restructuring charges, cash payments and realized savings from the Belgium plan and other cost actions, against the $400 million–$500 million 2014 estimate.
- Whether ME&T operating cash flow and margins remain resilient as inventory, incentive compensation and production levels change.
- Financial Products credit performance: past dues were 2.44% versus 2.37% at year-end; net write-offs were $38 million versus $10 million a year earlier. Review portfolio exposures and allowance assumptions, including Latin American marine loans.
- Progress on the new $10 billion share-repurchase authorization and the effect of repurchases on leverage, liquidity and per-share results.
- Developments in the IRS examination, Brazilian antitrust investigation and Progress Rail matters, including any revised loss estimates or material consequences.