Caterpillar Inc. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010; comparisons are with the corresponding 2009 periods. Caterpillar manufactures machinery and engines and provides financing and insurance through Financial Products. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and reporting period
Results reflected a recovery in end-user demand, especially in developing markets, and a substantially smaller reduction in dealer inventories than in 2009. Machinery and Engines (M&E) sales rose sharply; Financial Products revenue declined. The August acquisition of Electro-Motive Diesel (EMD) added $216 million to Q3 sales.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Sales and revenues | $11,134 | $7,298 | $29,781 | $24,498 |
| Operating profit | $1,187 | $277 | $2,672 | $449 |
| Profit attributable to common stockholders | $792 | $404 | $1,732 | $663 |
| Diluted earnings per share | $1.22 | $0.64 | $2.68 | $1.07 |
| Operating margin, approximate | 10.7% | 3.8% | 9.0% | 1.8% |
| Net margin, approximate | 7.1% | 5.5% | 5.8% | 2.7% |
- Q3 sales increased 53%; Machinery sales rose 84%, Engines 21%, while Financial Products revenue fell 5%. Nine-month sales increased 22%; Machinery rose 41%, Engines declined 3%, and Financial Products revenue declined 4%.
- Q3 operating profit improved by $910 million, chiefly on higher volume, better price realization and lower manufacturing costs. Manufacturing costs improved $142 million, despite the absence of the prior-year $120 million LIFO inventory benefit. Higher SG&A and R&D expenses and unfavorable currency partly offset the gains.
- Nine-month operating profit increased $2.223 billion, benefiting from volume, pricing, lower manufacturing costs and the absence of $641 million in 2009 redundancy costs. SG&A and R&D expenses rose $624 million; currency reduced operating profit by $161 million.
- Consolidated operating cash flow was $2.832 billion for the first nine months, down from $4.518 billion. M&E operating cash flow was $3.215 billion, versus $1.535 billion; Financial Products operating cash flow was $623 million, versus $883 million.
- Cash and short-term investments were $2.265 billion at September 30, down $2.602 billion from year-end 2009. Total debt was approximately $28.6 billion, down $3.0 billion from year-end. M&E debt-to-capital was 39.1%, compared with 47.2% at year-end 2009 and 49.5% a year earlier.
- Total assets were $61.642 billion and total liabilities $51.310 billion. Current assets were $28.577 billion and current liabilities $20.178 billion. Inventories rose to $9.006 billion from $6.360 billion at year-end.
- Available credit was $6.745 billion, including $5.047 billion for Financial Products; there were no borrowings under the $7.23 billion global credit facilities. Management reported the applicable net-worth and Financial Products covenant ratios were within required limits.
Material changes versus the prior comparable period
- Sales growth was broad-based, with developing economies a major contributor. In Q3, sales gains reflected $3.714 billion of volume improvement and $262 million of favorable price realization, partly offset by $107 million of unfavorable currency impact.
- Q3 profit comparisons include significant 2009 items: LIFO inventory liquidations increased 2009 profit by approximately $100 million ($0.16 per share); for the nine-month comparison, the benefit was approximately $185 million ($0.30 per share). There were no LIFO liquidations in 2010. The 2009 Q3 tax benefit included $129 million relating to prior-year tax returns.
- Cash conversion changed with the recovery: higher receivables and inventory absorbed cash in 2010, while 2009 operating cash flow benefited from reductions in both. Accounts payable increased in 2010 as production and material purchases rose.
- Cat Financial past dues improved to 4.88% at Q3-end from 5.54% at year-end 2009 and 5.79% a year earlier. Q3 net write-offs were $78 million, up $13 million year over year; year-to-date annualized losses were 1.03% of the average retail portfolio.
- EMD was acquired for approximately $928 million, funded with cash. The purchase added $321 million of goodwill and $345 million of intangible assets; purchase-price allocation remained preliminary.
Guidance, outlook, commentary and risks
- 2010 outlook: Sales and revenues of $41–$42 billion, raised from a previous range of $39–$42 billion. Profit guidance increased to $3.80–$4.00 per share from $3.15–$3.85. Management cited stronger end-user demand, price realization, EMD and cost management; higher incentive compensation partly offsets the improvement.
- Preliminary 2011 outlook: Sales and revenues approaching $50 billion. Management expected stronger growth in developing economies than developed markets, improving machine and engine demand, and a slight decline in turbine sales. No 2011 profit forecast was provided.
- Management expected 2011 cost pressure from higher pension and retiree medical expense, emissions-related R&D and a higher effective tax rate. Emissions-related price increases were expected to vary by product, generally 2%–6%; excluding emissions increases, price realization was expected to be modest and likely below 1%.
- Order backlog was approximately $17.4 billion at September 30, up from $9.6 billion at year-end 2009; $3.1 billion was not expected to be filled within the next 12 months. EMD contributed approximately $1 billion to backlog.
- Key risks include a fragile recovery in developed economies, high unemployment, government austerity, trade restrictions, commodity and component costs, currency and credit-market volatility, customer credit quality, pension funding, tax changes, emissions compliance, and successful integration of acquisitions.
- U.S. support and management pension benefits are transitioning toward defined contribution plans. The August 2010 plan remeasurement increased the postemployment benefit liability by $1.32 billion and reduced AOCI by $831 million after tax. Management estimated that year-end remeasurement could further increase the underfunded status by about $1.5 billion, subject to discount rates, asset returns and other actuarial assumptions.
- Environmental and legal matters include an EPA/DOJ emissions case with a $3.2 million civil penalty demand and proposed injunctive relief, and an EPA water-related proceeding seeking $167,800. Management did not expect these matters or other disclosed unresolved litigation to materially affect consolidated results, financial position or liquidity.
Most important facts for investors to verify
- Whether 2010 sales and EPS guidance was achieved, and whether the preliminary 2011 sales outlook translated into sustainable growth and profit.
- How much reported sales growth came from end-user demand versus dealer inventory movements, and whether dealer and rental-fleet inventories remained healthy.
- Whether working-capital growth, particularly inventories and receivables, continued to constrain operating cash flow and liquidity.
- How pension assumptions, year-end remeasurement and future contributions affected liabilities, AOCI, earnings and cash requirements.
- Whether Cat Financial credit quality, past dues, write-offs and allowance levels improved as management expected.
- Final EMD purchase accounting and integration results, and any material developments in the disclosed tax, environmental or legal matters.