Caterpillar Inc. — Q3 2009 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2009. Caterpillar designs, manufactures and sells machinery and engines and provides customer and dealer financing and insurance. The filing describes a severe global recession, sharply lower end-user demand and continued dealer inventory reductions. Results cover three and nine months ended September 30, 2009, compared with the corresponding 2008 periods.
Key financial metrics
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Sales and revenues | $7.298 billion | $12.981 billion | $24.498 billion | $38.401 billion |
| Operating profit | $277 million | $1.173 billion | $449 million | $3.991 billion |
| Profit attributable to common shareholders | $404 million | $868 million | $663 million | $2.896 billion |
| Diluted earnings per share | $0.64 | $1.39 | $1.07 | $4.57 |
| Operating margin | 3.8% | 9.0% | 1.8% | 10.4% |
Q3 Machinery and Engines sales were $6.583 billion, down 46%; Financial Products revenue was $715 million, down 14%. Consolidated cash from operations was $4.518 billion for the first nine months, versus $3.280 billion a year earlier. Cash and short-term investments were $4.188 billion at September 30, up from $2.736 billion at December 31, 2008.
Total debt was $32.1 billion, down $3.4 billion from year-end 2008, principally reflecting lower short-term borrowings at Cat Financial. Total liabilities were $52.325 billion and stockholders’ equity was $8.082 billion. Current assets were $26.223 billion and current liabilities were $17.957 billion. Machinery and Engines debt-to-capital was 49.5%, above the company’s 35%–45% target range.
Material changes versus prior periods
- Q3 revenue fell 44% year over year; nine-month revenue fell 36%. Management attributed the decline primarily to lower machinery and engine sales volumes and dealer inventory reductions. Q3 sales fell in every reported geographic region.
- Q3 operating profit declined $896 million year over year. Lower volume was partly offset by lower costs, $227 million of favorable price realization and a $90 million favorable currency impact.
- For the first nine months, operating profit fell $3.542 billion. Lower volume, $641 million of redundancy costs, and the unfavorable effect of consolidating Cat Japan weighed on results; SG&A and R&D reductions and favorable pricing provided offsets.
- Dealer-reported machine inventories declined about $2.6 billion year to date. Caterpillar reported reducing its own inventory by about $2 billion since year-end 2008.
- Financial Products past dues rose to 5.79% at quarter-end from 3.64% a year earlier; Q3 net bad-debt write-offs were $65 million versus $22 million.
Outlook, management commentary, risks and unusual items
- Management expected 2009 sales and revenues of $32–$33 billion and diluted profit per share of $1.10–$1.30, including approximately $0.75 per share of redundancy costs. Excluding those costs, its EPS outlook was $1.85–$2.05.
- Preliminary 2010 sales and revenues outlook was growth of 10%–25% from the midpoint of the 2009 range. No 2010 profit outlook was provided. Management cautioned that higher R&D and pension expense, reduced LIFO benefits and nonrecurring 2009 tax benefits could pressure profit.
- Management believed Q3 might mark the low point for sales and revenues, citing early recovery signals, but emphasized uncertainty about the timing and strength of recovery. It expected further dealer inventory reductions in Q4.
- Q3 profit included an estimated $100 million, or $0.16 per share, benefit from LIFO inventory liquidation. Nine-month LIFO liquidation benefits were about $185 million, or $0.30 per share; additional Q4 liquidation was possible.
- The nine-month tax benefit included $129 million of benefits related to prior-year tax returns. The company used a discrete-period tax calculation because it could not reliably estimate its annual effective tax rate.
- Warranty estimates for pre-existing warranties increased $190 million year to date due to higher-than-expected claims. Cat Financial recorded $33 million of net securitization impairment losses in earnings for the first nine months and added $80 million to supplemental securitization reserve accounts during Q2.
- Caterpillar reported $988 million of pension contributions through September, including $650 million in company stock, and anticipated about $60 million of additional cash contributions in 2009. Employee reductions and related pension and postretirement charges materially affected year-to-date results.
- Liquidity access remained available; no borrowings were outstanding under the cited global credit facilities at September 30. Management reported covenant compliance, while warning that downgrades, market disruption or further economic deterioration could raise funding costs or constrain access. Financial Products expected continued pressure on delinquencies.
- Legal matters included an EPA Clean Air Act proceeding and state and federal proceedings concerning a wastewater release at the Joliet facility. Penalties were not precisely estimable; management did not expect either matter to materially affect results, financial position or liquidity. Other ordinary-course litigation and environmental remediation were also disclosed.
Most important facts for investors to verify
- Whether the 2009 sales, EPS and redundancy-cost outlooks were achieved, and whether the preliminary 2010 sales growth expectation translated into actual demand and production.
- How much reported profit depended on LIFO liquidation and prior-year tax benefits, and the sustainability of underlying operating margins without those items.
- Trends in dealer inventories, end-user demand, order backlog (about $8.4 billion at September 30 versus $14.7 billion at year-end 2008), and regional recovery.
- Cat Financial credit quality, allowance adequacy, securitization retained-interest values, funding access and upcoming debt maturities.
- Machinery and Engines leverage versus its target range, liquidity and covenant headroom, pension funding needs, and potential effects of warranty claims and legal or environmental contingencies.