Caterpillar Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Amounts are U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context and results
Caterpillar manufactures construction, mining and power-system equipment and provides equipment financing and insurance. Management reported record second-quarter sales and diluted earnings per share. Growth reflected higher equipment demand, pricing and acquisitions, especially Bucyrus in Resource Industries.
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Sales and revenues | $17.374B | $14.230B | $33.355B | $27.179B |
| Operating profit | $2.616B | $1.601B | $4.939B | $3.434B |
| Profit attributable to common stockholders | $1.699B | $1.015B | $3.285B | $2.240B |
| Diluted EPS | $2.54 | $1.52 | $4.90 | $3.36 |
| Operating margin | About 15.1% | About 11.3% | About 14.8% | About 12.6% |
Financial position, cash flow and liquidity
- First-half consolidated operating cash flow was $2.007B, down from $3.294B. The filing attributes the decrease primarily to inventory growth, lower increases in accounts payable and incentive compensation payments, partly offset by higher profit.
- Cash and short-term investments were $5.103B at June 30, up from $3.057B at year-end 2011. Consolidated total debt was $39.32B, up $4.72B from year-end. Debt includes both Machinery and Power Systems and Financial Products, whose funding needs differ.
- Current assets were $44.294B and current liabilities were $31.273B. Inventories rose to $17.344B from $14.544B at year-end, with management citing excess finished equipment, particularly excavators in China.
- Machinery and Power Systems debt-to-capital was 40.9%, within the company’s stated 30%–45% target range. The company had $7.474B of available credit; no borrowings were outstanding under its $8.5B global credit facilities.
- First-half investing cash use was $3.504B and financing cash inflow was $3.672B. Capital expenditures were $2.295B, including expenditures for equipment leased to others.
Changes versus comparable periods
- Q2 sales and revenues rose 22% year over year; excluding acquisitions, they increased 12%. First-half sales and revenues rose 23%.
- Q2 operating profit increased $1.015B. Higher volume and price realization were key drivers; acquisitions and divestitures added $230M to operating profit. Manufacturing costs and SG&A and R&D expenses also increased, though those expenses declined as a percentage of sales.
- For the first half, operating profit increased $1.505B. Management cited higher volume and pricing, partly offset by higher manufacturing, material, freight, SG&A and R&D costs.
- Q2 Resource Industries sales increased 68%, including $1.176B of Bucyrus sales. Construction Industries sales increased 8%; Power Systems sales increased 12%. Financial Products revenue was flat at $764M.
- Other income was $70M in Q2 versus expense of $161M a year earlier, primarily because 2011 included losses on interest-rate swaps related to Bucyrus financing.
Outlook, management commentary and notable items
- The filing does not provide a clear full-year sales or EPS forecast. Management expected 2012 capital expenditures of about $4B, compared with $2.65B in 2011, and pension contributions of about $1B, of which $570M were required.
- Firm order backlog was about $28.2B at June 30, down 8% from the prior quarter but up 11% year over year. Management cited improved delivery performance and customer caution amid global economic uncertainty. About $5.8B was not expected to be filled within 12 months.
- Management expected a gradual reduction in China finished-equipment inventory during the remainder of 2012, including lower production and exports to other regions. It said construction activity in the U.S. and other developed markets remained below prior peaks; China construction demand was weak.
- On June 6, Caterpillar completed the acquisition of ERA Mining Machinery/Siwei, expanding underground coal-mining equipment operations in China. The preliminary purchase price was about $690M; approximately 1% of shares remained unacquired at quarter-end. The remaining shares were expected to be acquired in Q3.
- Bucyrus distribution-business sales generated gains but also related costs and taxes; the divestiture activities reduced after-tax profit by $8M in Q2 and $28M in the first half. Nine further transactions were classified as held for sale at quarter-end. The third-party logistics division sale closed after quarter-end, on July 31, with Caterpillar retaining a 35% interest.
- The estimated annual effective tax rate was 30.5%, compared with 29% for the first half of 2011 and 26.5% for full-year 2011, excluding specified items. The 2012 provision included a $75M negative tax impact related to nondeductible goodwill from Bucyrus distribution divestitures.
- The quarterly dividend was increased 13% to $0.52 per share, payable August 20, 2012. Dividends declared in the reported quarters were $0.98 per share versus $0.90 a year earlier.
- Key risks include global economic and industry conditions, commodity and component costs and availability, China and European demand, customer credit quality, acquisition integration and expected benefits, currency, borrowing access and ratings, pension funding, tax exposure, emissions compliance and legal proceedings.
- Cat Financial past-due receivables were 3.35% at quarter-end, up from 2.89% at year-end, with management noting higher delinquencies in European marine and China portfolios. Nonperforming finance receivables were $648M versus $472M at year-end. Management said no losses were anticipated under disclosed guarantees; maximum potential future guarantee payments were $400M, with a related recorded liability of $15M.
Important facts for investors to verify
- Whether China equipment inventory is reduced as planned, and whether lower production or exports affect future sales and margins.
- How much revenue and profit growth is organic versus attributable to Bucyrus, MWM and the Siwei acquisition, and whether expected acquisition benefits materialize.
- Whether operating cash flow improves as inventory and working-capital needs change; first-half cash flow declined despite higher profit.
- Trends in Cat Financial delinquencies, nonperforming balances, credit-loss allowance and exposure to European marine and China customers.
- Progress against capital-spending and pension-contribution expectations, and any effect on debt, liquidity and the Machinery and Power Systems debt-to-capital ratio.
- Final purchase accounting for Siwei, remaining Bucyrus divestitures, associated gains, costs and tax effects, and the post-quarter logistics sale.
- Order-backlog conversion and the effect of global economic uncertainty, commodity prices, foreign exchange and customer caution on demand.