Caterpillar Inc. — Q2 2014 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2014, compared with the corresponding 2013 periods. Caterpillar reports machinery, energy and transportation operations (ME&T) separately from its customer and dealer financing business (Financial Products).
Financial results and key metrics
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Sales and revenues | $14.150B | $14.621B | $27.391B | $27.831B |
| Operating profit | $1.475B | $1.557B | $2.873B | $2.775B |
| Profit attributable to common stockholders | $999M | $960M | $1.921B | $1.840B |
| Diluted earnings per share | $1.57 | $1.45 | $3.00 | $2.76 |
| Operating margin | 10.4% | 10.6% | 10.5% | 10.0% |
| Net margin | 7.1% | 6.6% | 7.0% | 6.6% |
Cash flow and liquidity. First-half consolidated operating cash flow was $4.134B, down from $4.593B, primarily reflecting inventory growth versus a substantial inventory reduction in the prior-year period. ME&T operating cash flow was $3.942B versus $4.138B; Q2 ME&T operating cash flow was $2.064B versus $3.049B. Cash and short-term investments were $7.927B at June 30, up from $6.081B at year-end 2013. Available credit was $8.349B, with no borrowings under the global credit facilities.
Debt and capital allocation. Total debt was $40.24B, up $2.49B from year-end; the balance includes Financial Products borrowings. ME&T debt-to-capital was 32.5%, compared with 29.7% at year-end and within the company’s 30%–45% target range. The company issued $2.0B of ME&T senior notes in May. First-half dividends paid were $757M; the Board raised the quarterly dividend rate 17% to $0.70 per share in June. Caterpillar repurchased about $1.74B of shares in Q1, completing its prior authorization.
Material changes versus prior periods
- Q2 sales and revenues fell 3%; first-half sales fell 2%. Mining weakness drove Resource Industries sales down 29% in Q2 and 33% in the first half.
- Construction Industries sales rose 11% in Q2 and 15% in the first half, supported by North American demand and dealer inventory movements. Energy & Transportation was roughly flat in Q2 and up 3% for the first half.
- Q2 profit rose 4% and diluted EPS rose 8% despite lower revenue. First-half profit rose 4% and diluted EPS rose 9%. Lower manufacturing costs, price realization and improved other income helped, while Q2 restructuring costs and weak mining sales weighed on results.
- Q2 other income was $65M versus an expense of $84M a year earlier, mainly reflecting a favorable change in currency translation and hedging results. First-half other income was $119M versus an expense of $55M.
- First-half Financial Products profit declined to $484M from $506M, including the absence of prior-year favorable insurance reserve adjustments and higher credit-loss provisions.
Outlook, management commentary, risks and unusual items
- Demand and inventory: Management reported continued weak mining demand, low order and quoting activity, and no expected mining upturn in 2014; it viewed the likelihood of a significant further decline from current low levels as limited. Dealers were expected to reduce construction and mining equipment inventories in the third and fourth quarters. Backlog was about $19.3B at June 30, unchanged from March 31 and above $18.0B at year-end 2013.
- Other market outlook: Management expected weaker construction equipment demand in China in the second half, and identified political unrest in the CIS and Africa/Middle East as potential risks to trade and demand. Timing of large projects may cause volatility in Energy & Transportation sales.
- Restructuring: Charges were $114M in Q2 and $263M in the first half, with diluted EPS impacts of $0.12 and $0.30, respectively. Excluding these costs, non-GAAP diluted EPS was $1.69 for Q2 and $3.30 for the first half. Full-year restructuring costs were expected to be about $400M, revised from the prior $400M–$500M range; some costs were shifted into 2015. The Gosselies, Belgium plan was expected to incur about $300M in pretax employee separation costs, substantially all during 2014.
- Other spending and benefits: 2014 capital expenditures were expected to be about $2B. Required pension contributions were expected to total about $510M for 2014. Management expected total pension and other postretirement benefit expense to decrease about $290M in 2014.
- Share repurchases: In July, Caterpillar agreed to repurchase $2.5B of stock through accelerated transactions, with approximately 22M shares delivered initially; completion was expected in September 2014. This is a subsequent event, not a Q2 repurchase.
- Unusual items: Q2 2013 included a $135M gain from settlement related to former owners of Caterpillar (Zhengzhou) Ltd.; its absence reduced the 2014 comparison. First-half 2014 income taxes included a $55M prior-year tax-liability correction, partly offset by a $33M IRS settlement benefit. Management described the underlying error as not material to any affected period.
- Credit and legal risks: Cat Financial past dues were 2.63% at Q2-end, up from 2.37% at year-end; net write-offs were $19M versus $27M a year earlier. Non-performing finance receivables were $473M, up from $425M at year-end. Disclosed matters include a Brazilian antitrust investigation, a potential California emissions enforcement action, and a U.S. criminal investigation involving Progress Rail; Caterpillar said it could not predict outcomes or reasonably estimate potential losses, but did not expect material adverse effects. It also cited tax audits, environmental compliance, currency and market risks, and cybersecurity threats.
Most important facts for investors to verify
- Whether mining orders, aftermarket demand and dealer inventory reductions continue to weaken or stabilize.
- Whether construction demand in China and other developing markets, and the expected second-half margin pressure, evolve as management described.
- Actual restructuring costs, timing of the Gosselies workforce actions, and realization of the expected cost savings.
- Cat Financial delinquency, non-performing receivables, credit-loss allowance and portfolio growth trends.
- Debt and liquidity following the July $2.5B repurchase, and progress against the $10B authorization and capital-spending plans.
- Developments in the disclosed legal investigations and IRS examination; management’s loss assessments are not a guarantee of outcome.
- The filing provides operational and spending expectations but no clear full-year consolidated sales or EPS guidance value.