Caterpillar Inc. — Q1 2010 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2010, compared with Q1 2009; balance-sheet comparisons are to December 31, 2009. Caterpillar operates machinery, engines and financial products businesses. Management cautions that interim results are not necessarily indicative of full-year performance.
Key financial metrics
| Metric | Q1 2010 | Q1 2009 / comparator |
|---|---|---|
| Sales and revenues | $8.238 billion | $9.225 billion; down 11% |
| Operating profit (loss) | $508 million | $(175) million |
| Profit (loss) attributable to common stockholders | $233 million | $(112) million |
| Diluted EPS | $0.36 | $(0.19) |
| EPS excluding specified unusual items | $0.50 excluding the $90 million health-care-law tax charge | $0.39 excluding $558 million of Q1 redundancy costs |
| Operating cash flow, consolidated | $551 million | $895 million |
| Cash and short-term investments | $3.538 billion | $4.867 billion at Dec. 31, 2009 |
| Total debt | $30.17 billion | Down $1.46 billion from year-end 2009 |
| Current assets / current liabilities | $26.412 billion / $18.417 billion | Current ratio approximately 1.43 |
| Machinery and Engines debt-to-capital | 45.2% | 47.2% at year-end 2009; company target range 35%–45% |
Machinery and Engines operating cash flow was $921 million, versus cash used of $320 million in Q1 2009. Consolidated cash declined by $1.329 billion during the quarter, primarily reflecting financing outflows. Available credit was $7.428 billion; no borrowings were outstanding under the global credit facilities. Dividends paid were $262 million, or $0.42 per share. The share repurchase program remained suspended.
Material changes and operating trends
- Revenue fell 11% year over year. Machinery sales decreased 1%, Engines sales decreased 28%, and Financial Products revenue decreased 4%.
- Regional machinery performance diverged: Asia/Pacific sales rose 40%, while North America fell 15% and EAME fell 22%. Management attributed the Asia/Pacific strength mainly to China and India.
- Operating profit improved by $683 million from the year-earlier loss. Manufacturing costs were $566 million favorable, and improved price realization contributed $172 million to sales; lower volume and unfavorable product mix partly offset these benefits.
- Q1 2009 included $558 million of redundancy costs before tax. Their absence materially improves the year-over-year comparison. Q1 2010 also included the $90 million deferred tax charge from U.S. health-care legislation, or $0.14 per share.
- Inventories increased to $6.990 billion from $6.360 billion at year-end, reflecting production ramp-up. Backlog rose to approximately $12.7 billion from $9.6 billion; about $2.3 billion was not expected to ship within 12 months.
- Financial Products operating profit was $97 million, down $2 million. Past-due accounts rose to 6.06% from 5.54% at year-end; the allowance for credit losses was $394 million, or 1.74% of net finance receivables.
Outlook, management commentary and risks
- Management raised 2010 guidance to sales and revenues of $38–$42 billion and profit of $2.50–$3.25 per share. The improved outlook reflects stronger expectations in Asia/Pacific and Latin America and continued improvement in mining and energy.
- Management expects production to increase to meet demand. The outlook assumes positive price realization of about 1%; expected offsets include unfavorable product mix, higher taxes, increased R&D and pension costs, and no repeat of 2009 LIFO inventory benefits or favorable currency effects.
- Planned 2010 capital expenditures are about $1.8 billion. Pension contributions were $248 million in Q1, with approximately $750 million more anticipated for the remainder of the year. Management expects defined-benefit expense to rise approximately $150 million in 2010 versus 2009, excluding 2009 separation-related costs.
- Management described economic recovery as improving but uneven, with developing economies stronger than developed markets. It identified risks including global economic and credit-market volatility, customer credit quality, funding access and credit ratings, commodity costs and availability, currency movements, regulation, pension funding, and execution of production increases.
- Financial Products faced elevated customer-credit risks; Q1 annualized net write-offs were 0.79% of the average retail portfolio. Management expected gradual improvement in past dues through 2010 as the economy recovered.
- Legal and environmental matters include unresolved EPA allegations concerning engine emissions and proceedings over a 2009 wastewater release at Joliet. The EPA sought $167,800 in civil penalties and the Illinois Attorney General demanded $100,000. Management did not expect these matters to materially affect results, financial position or liquidity; outcomes and potential costs remain uncertain.
- Effective January 1, 2010, new VIE consolidation guidance brought certain Cat Financial securitization entities onto the balance sheet. Management said adoption did not materially affect the financial statements. The filing also reports acquisitions of GE Transportation’s Inspection Products business for approximately $45 million and JCS for approximately $34 million.
Important facts for investors to verify
- Whether the recovery in orders and backlog translates into shipped sales and sustainable earnings, particularly given lower Engines sales and unfavorable expected product mix.
- How much of the earnings improvement reflects recurring cost and pricing performance versus the absence of Q1 2009 redundancy costs; also track the health-care tax charge and subsequent cash-tax effects beginning in 2013.
- Whether Cat Financial’s past-due rates, credit-loss allowance and write-offs improve as management expects, and how finance-portfolio contraction affects revenue and profit.
- Liquidity, debt and covenant headroom, including the refinancing needs of Cat Financial and the Machinery and Engines debt-to-capital ratio relative to its target range.
- Actual pension contributions and expense, warranty costs, and the outcomes or costs of the EPA and Joliet proceedings.