CATERPILLAR INC quarterly report, Q2 FY2013

Caterpillar Inc. — Q2 2013 Form 10-Q

Reporting period: Three and six months ended June 30, 2013. Financial amounts are in U.S. dollars; income statement and cash flow amounts below are in millions unless stated otherwise.

Business context and results

Caterpillar manufactures machinery, engines and power systems and provides equipment financing and insurance. Results weakened amid lower equipment demand and dealer inventory reductions, particularly in mining-related Resource Industries.

Metric	Q2 2013	Q2 2012	Six months 2013	Six months 2012
Sales and revenues	$14,621	$17,374	$27,831	$33,355
Operating profit	$1,557	$2,616	$2,775	$4,939
Profit attributable to common stockholders	$960	$1,699	$1,840	$3,285
Diluted earnings per share	$1.45	$2.54	$2.76	$4.90
Operating margin, approximately	10.6%	15.1%	10.0%	14.8%

Q2 sales declined 16% year over year; diluted EPS fell 43%. For the first half, sales declined 17% and diluted EPS fell 44%. Machinery and Power Systems sales fell 17% in Q2, while Financial Products revenue increased 7% to $735 million.

Cash flow, balance sheet and capital

First-half operating cash flow was $4.593 billion, versus $1.978 billion a year earlier; management attributed the improvement mainly to inventory reductions. Machinery and Power Systems operating cash flow was $4.138 billion.
Cash and short-term investments totaled $6.110 billion at June 30, up $620 million from year-end 2012. Total assets were $87.375 billion and stockholders’ equity was $17.678 billion.
Total debt was approximately $39.55 billion, down $592 million from year-end. Machinery and Power Systems debt-to-capital was 34.9%, within its stated 30%–45% target range. Consolidated available credit was $8.796 billion; there were no borrowings under the $10 billion global credit facilities.
First-half capital expenditures were $2.197 billion, including equipment leased to others; management expected full-year capital expenditures below $3.0 billion. Required 2013 pension contributions were expected to total approximately $480 million.
The company repurchased $1.0 billion of shares in Q2. The quarterly dividend was raised 15% to $0.60 per share in June. A further $1.0 billion accelerated share repurchase was agreed in July, after quarter-end.

Material changes and segment performance

Resource Industries was the largest source of weakness: Q2 sales fell 34% to $3.571 billion and segment profit fell 61% to $550 million. Mining customers reduced capital spending and dealers cut inventories.
Construction Industries Q2 sales declined 9% to $4.850 billion and profit fell 47% to $362 million. Power Systems sales declined 5% to $5.263 billion and profit declined 3% to $955 million.
Financial Products Q2 profit rose 24% to $233 million, supported by higher earning assets and favorable Cat Insurance claims experience, including reserve adjustments.
Dealers reduced machine inventory by about $1 billion in Q2; Caterpillar’s inventory was about $1.2 billion below Q1-end and $1.7 billion below year-end 2012. Management said roughly half of the Q2 sales decline reflected dealer inventory changes.
Q2 operating profit was pressured by lower volume and unfavorable product mix, manufacturing cost absorption and acquisition/divestiture effects. Lower SG&A and R&D expenses and favorable currency partly offset the decline.

Outlook, commentary, risks and unusual items

Management expected further dealer inventory reductions in the second half of 2013, with more than half expected from Resource Industries; mining equipment orders remained weak. The filing does not provide a clear full-year revenue or EPS forecast.
Management expected Caterpillar inventory to end 2013 near its Q2 level and did not expect significant inventory-absorption headwinds in the second half. It planned additional cost reductions, particularly in response to Resource Industries weakness.
Order backlog was approximately $19.1 billion at June 30, down from $20.4 billion at March 31 and $20.2 billion at December 31, 2012; the year-over-year decline was primarily mining-related.
Q2 included a $135 million gain from settling disputes related to the Siwei acquisition. Caterpillar also recorded $23 million of employee separation charges in the first half. Bucyrus distribution divestiture activity unfavorably affected first-half after-tax profit by $44 million.
Key exposures include global economic and end-market conditions, mining capital spending, dealer inventory decisions, foreign exchange and interest rates, customer credit quality, access to financing, pension funding, environmental compliance and legal matters. The company reported guarantee exposure with a maximum potential payment of $781 million; it said no losses were anticipated and recorded a $14 million liability.
Management said unresolved legal matters and environmental remediation were not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control reported.

Most important facts for investors to verify

Whether mining demand and dealer inventory reductions continue to depress Resource Industries sales, profits and backlog.
Whether the projected second-half inventory and cost trends materialize, and whether full-year capital spending remains below $3.0 billion.
Whether Cat Financial’s credit quality remains sound: past dues were 2.64% at Q2-end, up from 2.26% at year-end 2012; net write-offs were $27 million in Q2, versus $16 million a year earlier.
How the $135 million Siwei settlement gain, ongoing Siwei performance and Bucyrus divestiture costs affect comparable operating results.
Debt, liquidity and capital returns, including completion and final share count of the July $1.0 billion repurchase, alongside pension contributions and the increased dividend.
The filing revised the presentation of first-half 2012 operating and financing cash flows for interest-payment classification; management said the correction was not material. Confirm the revised comparative amounts when assessing cash-flow trends.