Caterpillar Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Comparisons are with 2010 unless stated otherwise.
Business context and results
Caterpillar manufactures construction, mining and power equipment and provides equipment financing and insurance. Results reflected improving global equipment demand and higher deliveries, alongside the July acquisition of Bucyrus. Management said quarterly sales and revenues were the highest of any prior quarter; excluding Bucyrus, quarterly profit was a company record.
| Metric | Q3 2011 | Q3 2010 | Change |
|---|---|---|---|
| Sales and revenues | $15.716bn | $11.134bn | +41% |
| Operating profit | $1.759bn | $1.187bn | +48% |
| Profit attributable to common shareholders | $1.141bn | $792m | +44% |
| Diluted earnings per share | $1.71 | $1.22 | +40% |
| Approx. operating margin | 11.2% | 10.7% | +0.5 percentage points |
For the first nine months, sales and revenues were $42.895bn (+44%), operating profit $5.193bn (+94%), profit $3.381bn (+95%) and diluted EPS $5.08 versus $2.68. Approximate operating margin rose to 12.1% from 9.0%.
Management’s non-GAAP figures excluding Bucyrus were Q3 sales and revenues of $14.581bn and EPS of $1.93, compared with $1.71 reported. Nine-month figures excluding Bucyrus were $41.760bn and $5.54 EPS. These adjustments are not GAAP measures.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $5.515bn, up from $2.947bn. Machinery and Power Systems (M&PS) operating cash flow was $6.148bn; Financial Products contributed $891m.
- Investing cash outflow was $9.450bn, including $7.413bn for investments and acquisitions. Financing provided $3.612bn. Cash and short-term investments ended at $3.229bn, down $363m from year-end 2010.
- At September 30, total debt was $34.29bn, up $5.87bn from year-end 2010. M&PS debt increased primarily due to debt issued for Bucyrus; Financial Products debt also rose with its portfolio. M&PS debt-to-capital was 41.1%, within the company’s 30%–45% target range.
- Total assets were $77.767bn and stockholders’ equity $14.213bn. Current assets were $36.864bn versus current liabilities of $25.218bn; inventory increased to $14.412bn from $9.587bn, including inventory acquired with Bucyrus.
- Global credit facilities totaled $8.5bn, with no borrowings under the facilities. Reported available credit was $8.388bn. Cat Financial met its stated interest-coverage and leverage covenants.
- Dividends paid during the first nine months were $862m. The quarterly dividend was raised to $0.46 per share in June. No shares were repurchased in Q3; management did not expect buybacks in 2011 given acquisitions and planned capital spending.
Material changes and unusual items
- Bucyrus acquisition: Completed July 8 for approximately $8.8bn, including assumed debt and net of acquired cash. Bucyrus added $1.135bn of Q3 sales but had a $200m pretax loss for the quarter, including deal and integration costs. The disclosed Q3 EPS impact was negative $0.22; year-to-date impact was negative $0.46 per share. Purchase accounting was preliminary, including $5.263bn of goodwill and $3.901bn of identifiable intangible assets.
- Acquisition-related costs included $149m of interest-rate-swap losses and $54m of bridge financing costs in the first half, plus $122m of additional Q3 deal and integration costs. Bucyrus inventory fair-value step-up contributed $160m of expense.
- Other transactions: Caterpillar acquired Pyroban for approximately $69m and a U.K. trackwork business for approximately $60m. It sold Carter Machinery for $358m, recording an $18m pretax gain while financing $348m of the buyer’s purchase. The NC2 joint venture became wholly owned by Navistar on September 29.
- Subsequent event: On October 31, 2011, Caterpillar completed its acquisition of MWM for approximately €580m (about $800m), funded with cash. Acquisition accounting was incomplete at filing.
- Other income/expense was a $157m expense for the nine months, versus $114m income in 2010, mainly reflecting Bucyrus-related swap losses and bridge financing costs.
Outlook, management commentary and risks
- Management described global customer demand as improving and said it was investing to support expected long-term growth. Firm order backlog was approximately $28.6bn at quarter-end, including about $4.2bn added by Bucyrus; $4.4bn was not expected to ship within twelve months. The filing text does not provide a clear quantified full-year sales or EPS guidance figure.
- Mining demand benefited from commodity prices management considered supportive of investment. Construction activity continued to grow in many developing markets, while developed-market construction remained weak. Management noted Chinese government tightening had reduced industry demand there, and capacity constraints limited supply of some excavator models.
- Higher manufacturing, steel, freight and capacity-expansion costs, and unfavorable currency effects—particularly from the yen and pound—partly offset volume and pricing gains. Dealer-reported machine inventories rose more than $650m in Q3 and about $1.8bn year to date.
- Cat Financial past dues improved to 3.54% from 4.88% a year earlier; Q3 net write-offs were $50m versus $78m. Customer non-performing finance receivables were $627m at September 30. These indicators remain sensitive to customer credit and equipment collateral values.
- Management estimated that year-end pension remeasurement could increase the underfunded status by about $4.0bn, with an approximately $2.6bn after-tax reduction to accumulated other comprehensive income; the actual amount depends on year-end discount rates, asset returns and other assumptions. Full-year 2011 pension contributions were expected to be about $440m, and defined-benefit expense was expected to rise about $100m versus 2010.
- Disclosed risks include global economic and commodity conditions, raw-material availability and costs, foreign exchange, customer and dealer liquidity, access to capital and credit ratings, acquisition integration and synergies, pension funding, environmental and product compliance, and legal, tax and regulatory matters. A Clean Air Act consent decree required a $2.55m penalty, emissions-credit retirement and expanded reporting; the penalty was paid. Management said other unresolved legal matters were not expected to be material.
Important facts for investors to verify
- Separate underlying operating performance from Bucyrus’s acquired revenue, purchase-accounting charges and integration costs; assess the final purchase-price allocation and realization of expected synergies.
- Track whether backlog converts to sales, particularly given the portion scheduled beyond twelve months, dealer inventory growth, and demand and capacity trends by region and segment.
- Monitor cash conversion and working capital, especially inventory growth, acquisition-related cash outflows, and the distinction between M&PS cash flow and consolidated cash flow.
- Review debt growth, refinancing needs, credit-facility availability and covenant headroom, while distinguishing industrial-company borrowing from Financial Products financing debt.
- Assess Cat Financial delinquencies, non-performing receivables, allowance coverage and collateral values, along with the estimated pension remeasurement and contribution requirements.