Caterpillar Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Caterpillar designs, manufactures and sells machinery, engines and related products, and provides customer and dealer financing. Financial amounts below are in U.S. dollars; “billion” and “million” are used for readability.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Sales and revenues | $12.317 billion | $14.150 billion | $25.019 billion | $27.391 billion |
| Operating profit | $1.130 billion | $1.475 billion | $2.657 billion | $2.873 billion |
| Profit attributable to common stockholders | $710 million | $999 million | $1.821 billion | $1.921 billion |
| Diluted earnings per share | $1.16 | $1.57 | $2.98 | $3.00 |
| Operating margin, approximately | 9.2% | 10.4% | 10.6% | 10.5% |
Q2 revenue fell 13%, operating profit fell 23% and diluted EPS fell 26% year over year. For the first half, revenue declined 9% and profit 5%; diluted EPS declined 1%. Q2 diluted EPS excluding restructuring costs was $1.27, versus $1.69 a year earlier; first-half adjusted EPS was $3.12 versus $3.30. These adjusted figures are non-GAAP.
- Drivers: Lower sales volume and unfavorable foreign exchange weighed on results. First-half ME&T sales included an $834 million adverse currency impact. Price realization was favorable overall, while weaker material costs and lower incentive compensation partly offset volume and cost-absorption pressures.
- Segments: Q2 Construction Industries sales declined 18%, Resource Industries 11%, and Energy & Transportation 12%. Resource Industries reported break-even segment profit versus $114 million a year earlier. Financial Products profit fell to $184 million from $244 million.
- Unusual item: First-half other income included a $120 million pretax gain on sale of Caterpillar’s 35% interest in a third-party logistics business.
Cash flow, financial position and liquidity
- First-half consolidated operating cash flow was $3.358 billion, down from $4.134 billion. Management attributed the decrease principally to higher incentive-compensation payments and unfavorable accounts-payable changes; inventory reductions partly offset the decline.
- Cash and short-term investments were $7.821 billion at June 30, up $480 million from year-end 2014. Total assets were $82.242 billion; total liabilities were $65.081 billion; stockholders’ equity was $17.161 billion.
- Total debt was $38.32 billion, down $965 million from year-end. Machinery, Energy & Transportation (ME&T) debt-to-capital was 35.8%, within the stated 30%–45% target range, versus 37.4% at year-end.
- Available credit was $7.784 billion; no borrowings were outstanding under the $10.5 billion global credit facilities. The 364-day facility was due to expire in September 2015. Management reported covenant compliance at June 30.
- First-half dividends paid were $846 million. The board announced a 10% increase in the quarterly dividend rate to $0.77 per share in June. Caterpillar repurchased $525 million of shares in the first half; a $1.5 billion accelerated share repurchase agreement was announced in July.
Outlook, commentary and risks
- Management expected lower profit in the second half of 2015, citing lower sales volume, unfavorable product mix—particularly in Energy & Transportation—seasonal costs and unfavorable inventory cost absorption. It expected further inventory reductions.
- Management expected oil-price weakness to reduce second-half oil-and-gas sales, especially reciprocating engines and products for well servicing and drilling; it also expected no second-half sales-volume improvement in Resource Industries. Backlog was $14.8 billion at June 30, down from $16.5 billion at March 31 and $17.3 billion at December 31, 2014.
- For 2015, management anticipated about $250 million of restructuring costs, approximately $830 million of short-term incentive compensation expense, capital expenditures about in line with 2014’s $1.6 billion, and required pension contributions of approximately $180 million.
- Cat Financial past-due receivables were 2.97% at quarter-end versus 2.63% a year earlier; non-performing finance receivables rose to $618 million from $468 million at year-end. The allowance for credit losses was reported at $405 million, or 1.42% of net finance receivables, in management’s discussion.
- The IRS proposed approximately $1 billion of tax increases and penalties for 2007–2009 returns, primarily involving transactions by Caterpillar SARL; Caterpillar is contesting the proposals. The filing also describes ongoing U.S. grand jury and SEC investigations, a Brazilian competition investigation, and a Progress Rail criminal investigation. The company said it could not predict outcomes or reasonably estimate potential losses for several matters; it believed they would not materially adversely affect consolidated results, financial position or liquidity.
- Other disclosed exposures include environmental compliance and remediation, product warranty, pension assumptions, currency and commodity movements, customer credit risk, and dealer inventory decisions. The company reported effective disclosure controls and no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether second-half demand, backlog and dealer inventory trends validate management’s cautious outlook, especially in mining and oil-and-gas markets.
- Whether credit delinquencies and non-performing finance receivables continue to rise, and how credit-loss provisions compare with portfolio performance.
- The outcome and potential financial impact of the IRS tax dispute and the disclosed government investigations; several potential losses are not reasonably estimable in the filing.
- The actual cost, timing and savings from the expected $250 million 2015 restructuring program, and the effect of inventory reductions on manufacturing cost absorption.
- The final share count and price impact of the July $1.5 billion accelerated repurchase, alongside dividends, debt and cash-flow needs.