Caterpillar Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Comparisons are with the corresponding 2012 periods unless otherwise noted. Dollar amounts are in millions except per-share data.
Business context
Caterpillar operates across Construction Industries, Resource Industries, Power Systems and Financial Products. Results were sharply affected by the mining downturn: lower mining investment and dealer inventory reductions drove most of the equipment sales decline. Construction and Power Systems were more resilient, while Financial Products continued to contribute profit growth.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total sales and revenues | $13.423 billion | $16.445 billion | $41.254 billion | $49.800 billion |
| Operating profit | $1.401 billion | $2.596 billion | $4.176 billion | $7.535 billion |
| Profit attributable to common stockholders | $946 million | $1.699 billion | $2.786 billion | $4.984 billion |
| Diluted profit per share | $1.45 | $2.54 | $4.21 | $7.44 |
| Operating margin | 10.4% | 15.8% | 10.1% | 15.1% |
| Net profit margin | 7.0% | 10.3% | 6.8% | 10.0% |
| Operating cash flow | Not separately stated in the consolidated summary | Not separately stated | $7.611 billion | $3.218 billion |
For the first nine months, consolidated investing cash outflow was $4.078 billion and financing cash outflow was $2.628 billion. Cash and short-term investments increased to $6.357 billion at September 30 from $5.490 billion at year-end 2012. Management attributed much of the operating cash flow improvement to inventory reductions and favorable receivables changes, partly offset by lower profit.
Total debt was approximately $39.54 billion, down $606 million from year-end 2012; cash less total debt was approximately $33.18 billion. Current assets were $40.088 billion and current liabilities were $29.119 billion. Machinery and Power Systems’ debt-to-capital ratio was 34.1%, within its stated 30%–45% target range. The company reported $8.472 billion of available credit and no borrowings under its $10 billion global credit facilities.
Nine-month dividends declared were $1.12 per share. Caterpillar repurchased $2 billion of shares during the first nine months, including $1 billion in Q3; $1.7 billion remained under the $7.5 billion authorization at quarter-end.
Material changes and segment trends
- Q3 sales fell 18%; nine-month sales fell 17%. Machinery and Power Systems sales volume was the principal drag: volume reduced Q3 sales by $2.729 billion and nine-month sales by $7.945 billion.
- Resource Industries sales declined 42% in Q3 and 33% for the first nine months. Segment profit fell 63% and 61%, respectively, as mining customers curtailed capital spending and dealers reduced inventories.
- Construction Industries sales declined 7% in Q3 and 11% year to date; Power Systems sales declined 7% and 8%. Financial Products revenues increased 4% in Q3 and 5% year to date. Financial Products profit rose to $218 million in Q3 from $190 million and to $724 million year to date from $583 million.
- Lower equipment volume and an unfavorable product mix drove profit declines. Cost reductions, including lower discretionary spending and workforce actions, partially offset the impact. Weaker Japanese yen translation reduced sales, though it benefited manufacturing costs.
- Inventory decreased about $2.2 billion from year-end 2012 and approximately $500 million during Q3. The reduction supported cash flow but weighed on profit through unfavorable manufacturing cost absorption.
- The comparison was also affected by prior-year divestiture gains, especially the 2012 gain on sale of a majority interest in the third-party logistics business. In 2013, a $135 million gain from a settlement related to the Siwei acquisition partly offset other adverse items. Q3 2013 included $34 million of employee separation charges; nine-month charges were $57 million.
Outlook, risks and unusual items
- Management expected another substantial dealer inventory reduction in Q4 2013, expected lower mining sales in 2014, and forecast 2013 capital expenditures of less than $3 billion. Construction Industries production was expected to increase in Q4. The filing does not provide a clear consolidated full-year revenue or earnings-per-share forecast.
- Management cited continuing competitive pricing pressure, excess industry capacity, weak mining demand and uncertainty in global economic conditions. The order backlog was approximately $19.1 billion at September 30, flat with June but significantly below the prior-year level and down from $20.2 billion at December 2012.
- Cat Financial past dues were 2.45% at Q3-end, compared with 2.80% a year earlier. Net write-offs were $58 million in Q3, versus $29 million a year earlier, primarily associated with its European marine portfolio. Its credit-loss allowance was $404 million, or 1.40% of net finance receivables.
- Required 2013 pension contributions were estimated at approximately $500 million; $398 million had been contributed through September. Management estimated that September discount rates, if maintained at year-end, could reduce the pension underfunded liability by about $2.6 billion, but the actual year-end adjustment remained uncertain.
- On October 24, 2013, Progress Rail received a grand jury subpoena concerning alleged improper railcar inspections, repairs and disposal practices. Caterpillar said it was cooperating, could not estimate a potential loss, and did not then expect a material adverse effect.
- Other disclosed risks include environmental and product-liability matters, foreign-exchange and interest-rate exposure, credit and liquidity access, pension assumptions, and execution of cost reductions. The company said ordinary-course legal exposures and recorded environmental remediation costs were not material.
- The filing revised 2012 cash flow presentation for certain Cat Financial interest payments: operating cash flow decreased by $44 million with an equal increase in financing cash flow for the nine-month 2012 period. Management considered the effect immaterial.
Investor facts to verify
- Whether mining demand and dealer inventory reductions stabilize, and how the expected Q4 inventory decline affects production, margins and cash flow.
- Whether cost reductions can offset continued volume pressure without materially impairing capacity, product support or future growth.
- Whether the $7.611 billion nine-month operating cash flow is sustainable beyond the inventory and working-capital release.
- Developments in Cat Financial delinquencies, write-offs and credit-loss reserves, particularly in the marine portfolio.
- The outcome and potential financial impact of the Progress Rail investigation, which the company could not estimate at filing.
- Year-end pension measurements, actual contributions, and whether the estimated liability improvement materializes.