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CAT > SEC Filings for CAT > Form 10-Q on 2-May-2014All Recent SEC Filings

Show all filings for CATERPILLAR INC

Form 10-Q for CATERPILLAR INC


2-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

First-quarter 2014 sales and revenues were $13.241 billion, compared with sales and revenues of $13.210 billion in the first quarter of 2013. Profit per share for the first quarter of 2014 was $1.44, a 10 percent increase from first-quarter 2013 profit per share of $1.31. Profit was $922 million in the quarter, an increase of 5 percent from $880 million in the first quarter of 2013.

Highlights for the first quarter of 2014 include:

? First-quarter sales and revenues of $13.241 billion were about flat with the first quarter of 2013. Increases in Construction Industries and Energy & Transportation were offset by declines in Resource Industries.

? Restructuring costs were $149 million in the first quarter of 2014 with an after-tax impact of $0.17 per share.

? Profit per share was $1.44 in the first quarter of 2014 and excluding restructuring costs of $0.17 per share was $1.61 per share. Profit in the first quarter of 2013 was $1.31 per share.

? Machinery, Energy & Transportation (ME&T) operating cash flow was $1.878 billion in the first quarter of 2014, compared with $1.089 billion in the first quarter of 2013.

? ME&T debt-to-capital ratio was 30.2 percent compared with 29.7 percent at the end of 2013.

? The company repurchased $1.7 billion of Caterpillar common stock in the first quarter of 2014.

Notes:
Glossary of terms is included on pages 56-58; first occurrence of terms shown in bold italics.

Information on non-GAAP financial measures is included on page 67.


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Consolidated Results of Operations

THREE MONTHS ENDED MARCH 31, 2014 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2013

CONSOLIDATED SALES AND REVENUES

[[Image Removed]]
The chart above graphically illustrates reasons for the change in Consolidated Sales and Revenues between the first quarter of 2013 (at left) and the first quarter of 2014 (at right). Items favorably impacting sales and revenues appear as upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting sales and revenues appear as downward stair steps with dollar amounts reflected in parentheses above each bar. Caterpillar management utilizes these charts internally to visually communicate with the company's Board of Directors and employees.

Sales and Revenues
Total sales and revenues were $13.241 billion in the first quarter of 2014, about flat with the first quarter of 2013. When reviewing the change in sales and revenues, we focus on the following perspectives:
Reasons for the change: Sales volume increased $156 million due to higher volume in Construction Industries and Energy & Transportation, partially offset by lower volume in Resource Industries. The sales volume increase was partially offset by an unfavorable currency impact of $143 million primarily due to the Japanese yen and Brazilian real, as sales in yen and real translated into fewer U.S. dollars.

The volume increase was primarily the result of changes in dealer machine and engine inventories, as dealers increased inventories about $700 million in the first quarter of 2014 compared to a decrease of about $800 million in the first quarter of 2013. Dealers are independent, and there could be many reasons for changes in their inventory levels. In general, dealers adjust inventory based on their expectations of future demand and product delivery times. Dealers' demand expectations take into account seasonal changes, macroeconomic conditions and other factors. Delivery times can vary based on availability of product from Caterpillar factories and product distribution centers. This volume increase was partially offset by lower end-user demand for mining equipment in Resource Industries, as customers are continuing to reduce their capital expenditures. Aftermarket parts sales also declined primarily for mining, as we believe some companies are delaying maintenance and rebuild activities.
Sales by geographic region: While overall sales were about flat, sales increased in North America, were about flat in EAME and declined in Asia/Pacific and Latin America. In North America, sales increased 16 percent primarily due to the favorable impact of changes in dealer machine inventory and higher deliveries to end users. While sales were about flat in EAME, the escalation of geo-political events in the region could negatively impact trade overall and the demand for our products. Asia/Pacific declined 12 percent primarily related to lower sales in Australia, where the most significant decrease was in mining sales due to continued low demand. While sales in Asia/Pacific declined overall, sales in China, primarily in Construction Industries, increased more than 30 percent due to increased dealer deliveries to end users and the favorable impact of dealer inventory changes. Sales declined 15 percent in Latin America primarily due to lower end-user demand for mining equipment.


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Sales by segment: Sales increases in Construction Industries and Energy & Transportation were offset by decreases in Resource Industries. Construction Industries' sales increased 20 percent primarily due to changes in dealer inventories and increased end-user demand. Energy & Transportation's sales were 8 percent higher primarily due to increased end-user demand and changes in dealer inventories. Resource Industries' sales declined 37 percent, resulting primarily from weaker demand for mining products. Financial Products segment revenues were about flat.

CONSOLIDATED OPERATING PROFIT

[[Image Removed]]
The chart above graphically illustrates reasons for the change in Consolidated Operating Profit between the first quarter of 2013 (at left) and the first quarter of 2014 (at right). Items favorably impacting operating profit appear as upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting operating profit appear as downward stair steps with dollar amounts reflected in parentheses above each bar. Caterpillar management utilizes these charts internally to visually communicate with the company's Board of Directors and employees. The bar entitled Other includes consolidating adjustments and Machinery, Energy & Transportation other operating (income) expenses.

Operating profit for the first quarter of 2014 was $1.398 billion, an increase of $180 million from the first quarter of 2013. The increase was primarily the result of lower manufacturing costs, decreased SG&A and R&D expenses and the favorable impact of currency. These favorable impacts were partially offset by higher restructuring costs of $142 million and lower sales volume. Additionally, Financial Products' operating profit was lower primarily due to the absence of favorable reserve adjustments at Caterpillar Financial Insurance Services. The unfavorable operating profit impact from the change in sales volume was due to an unfavorable mix of products primarily related to a decline in Resource Industries' sales and an increase in Construction Industries' sales, which traditionally have lower margins.
Manufacturing costs decreased $230 million. The decrease was primarily due to lower material costs, favorable changes in cost absorption resulting from an increase in inventory during the first quarter of 2014 compared to a decrease in the first quarter of 2013 and increased efficiencies resulting from higher production primarily in Construction Industries. These favorable impacts were partially offset by increased warranty expense.
Decreases in SG&A and R&D expenses were primarily due to cost reduction measures, partially offset by higher incentive compensation expense. In addition, bad debt expense was lower at Caterpillar (Zhengzhou) Ltd. SG&A and R&D expenses are expected to be higher during the remainder of 2014 as the first quarter is generally low for these costs. We expect increases throughout the year as approved programs are implemented and annual wage increases take effect. The favorable impact of currency was mostly due to the Japanese yen. We have a sizeable manufacturing presence in Japan, and while some of this production is sold in Japan, we are a net exporter, and therefore, a weaker yen provides a benefit.
First-quarter 2014 restructuring costs of $149 million were primarily related to a reduction in workforce at our Gosselies, Belgium, facility.


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The first-quarter short-term incentive compensation expense related to 2014 was about $260 million, and we expect the full-year expense will be about $1.0 billion. Short-term incentive compensation expense in the first quarter of 2013 was about $120 million, and the full-year 2013 was about $545 million. Other Profit/Loss Items

Other income/expense was income of $54 million compared with income of $29 million in the first quarter of 2013. The change was primarily due to the net impact from currency translation and hedging. Although both periods included unfavorable impacts from currency translation and hedging, losses were more significant in the first quarter of 2013 than in the first quarter of 2014.

The provision for income taxes reflects an estimated annual tax rate of 29.5 percent for both the first quarter of 2014 and 2013, excluding the items discussed below. The increase from the full-year 2013 rate of 28.5 percent is primarily due to the expiration of the U.S. research and development tax credit.

The provision for income taxes in the first quarter of 2014 also includes a charge of $55 million to correct for an error which resulted in an understatement of tax liabilities for prior years. This error had the effect of overstating profit by $27 million and $28 million for the years ended December 31, 2013 and 2012, respectively. These amounts are not material to the financial statements of any affected period. This charge was offset by a $33 million benefit to reflect a settlement with the U.S. Internal Revenue Service related to 1992 through 1994 which resulted in a $16 million benefit to remeasure previously unrecognized tax benefits and a $17 million benefit to adjust related interest, net of tax. The first quarter of 2013 tax provision also included a benefit of $87 million primarily related to the U.S. research and development tax credit that was extended for 2012.


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Segment Information

Sales and Revenues by Geographic Region


                                          %         North          %         Latin          %                       %         Asia/          %
(Millions of dollars)      Total        Change      America      Change      America      Change      EAME        Change      Pacific      Change
First Quarter 2014
Construction Industries
1                        $  5,064         20  %   $  2,092         36  %   $    586         (2 )%   $ 1,144         20  %   $  1,242         10  %
Resource Industries 2       2,123        (37 )%        725        (14 )%        402        (44 )%       532        (39 )%        464        (50 )%
Energy & Transportation
3                           4,776          8  %      2,082         15  %        471         11  %     1,329          8  %        894         (4 )%
All Other Segments 4          554          7  %        337          1  %         55         12  %       103         21  %         59         23  %
Corporate Items and
Eliminations                  (24 )        -           (17 )                     (2 )                    (3 )                     (2 )
Machinery, Energy &
Transportation Sales       12,493          -  %      5,219         16  %      1,512        (15 )%     3,105         (1 )%      2,657        (12 )%

Financial Products
Segment                       817          3  %        437          8  %        109         (1 )%       131          5  %        140        (11 )%
Corporate Items and
Eliminations                  (69 )                    (39 )                    (11 )                    (6 )                    (13 )
Financial
Products Revenues             748          3  %        398          9  %         98         (6 )%       125          5  %        127         (7 )%

Consolidated Sales and
Revenues                 $ 13,241          -  %   $  5,617         15  %   $  1,610        (15 )%   $ 3,230         (1 )%   $  2,784        (12 )%

First Quarter 2013
Construction Industries
1                        $  4,219                 $  1,540                 $    596                 $   956                 $  1,127
Resource Industries 2       3,353                      839                      717                     867                      930
Energy & Transportation
3                           4,405                    1,815                      425                   1,236                      929
All Other Segments 4          517                      335                       49                      85                       48
Corporate Items and
Eliminations                  (10 )                    (12 )                      -                       1                        1
Machinery, Energy &
Transportation Sales       12,484                    4,517                    1,787                   3,145                    3,035

Financial Products
Segment                       795                      403                      110                     125                      157
Corporate Items and
Eliminations                  (69 )                    (37 )                     (6 )                    (6 )                    (20 )
Financial
Products Revenues             726                      366                      104                     119                      137

Consolidated Sales and
Revenues                 $ 13,210                 $  4,883                 $  1,891                 $ 3,264                 $  3,172

1 Does not include inter-segment sales of $75 million and $99 million in first quarter 2014 and 2013, respectively.

2 Does not include inter-segment sales of $113 million and $128 million in first quarter 2014 and 2013, respectively.

3 Does not include inter-segment sales of $550 million and $396 million in first quarter 2014 and 2013, respectively.

4 Does not include inter-segment sales of $832 million and $803 million in first quarter 2014 and 2013, respectively.


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Sales and Revenues by Segment
                               First          Sales          Price                                    First            $           %
(Millions of dollars)       Quarter 2013     Volume       Realization     Currency       Other     Quarter 2014     Change       Change

Construction Industries     $    4,219     $     982     $       (17 )   $    (120 )   $     -     $    5,064     $     845        20  %
Resource Industries              3,353        (1,190 )           (21 )         (19 )         -          2,123        (1,230 )     (37 )%
Energy & Transportation          4,405           341              32            (2 )         -          4,776           371         8  %
All Other Segments                 517            37               3            (3 )         -            554            37         7  %
Corporate Items and                (10 )         (14 )            (1 )           1           -            (24 )         (14 )
Eliminations
Machinery, Energy &
Transportation Sales            12,484           156              (4 )        (143 )         -         12,493             9         -  %

Financial Products Segment         795             -               -             -          22            817            22         3  %
Corporate Items and                (69 )           -               -             -           -            (69 )           -
Eliminations
Financial Products Revenues        726             -               -             -          22            748            22         3  %

Consolidated Sales and      $   13,210     $     156     $        (4 )   $    (143 )   $    22     $   13,241     $      31         -  %
Revenues




Operating Profit by Segment
                                                                                         $                %
(Millions of dollars)               First Quarter 2014      First Quarter 2013         Change           Change
Construction Industries            $             688       $             228       $        460            202  %
Resource Industries                              149                     459               (310 )          (68 )%
Energy & Transportation                          827                     591                236             40  %
All Other Segments                               235                     205                 30             15  %
Corporate Items and Eliminations                (660 )                  (480 )             (180 )
Machinery, Energy & Transportation             1,239                   1,003                236             24  %

Financial Products Segment                       240                     273                (33 )          (12 )%
Corporate Items and Eliminations                 (15 )                     9                (24 )
Financial Products                               225                     282                (57 )          (20 )%
Consolidating Adjustments                        (66 )                   (67 )                1
Consolidated Operating Profit      $           1,398       $           1,218       $        180             15  %

Construction Industries
Construction Industries' sales were $5.064 billion in the first quarter of 2014, an increase of $845 million, or 20 percent, from the first quarter of 2013. The sales increase was due to higher sales volume, partially offset by the unfavorable impact of currency. Price realization was slightly unfavorable primarily due to continuing sales from a large government order in Brazil. Sales of new equipment increased, and sales of aftermarket parts were about flat.
The increase in sales volume was primarily related to changes in dealer inventories. Dealer inventories increased in the first quarter of 2014 in anticipation of seasonal increases in end-user demand and were about flat in the first quarter of 2013. Additionally, deliveries to end users increased in all regions except EAME.

The unfavorable currency impact was primarily from a weaker Japanese yen and Brazilian real, as sales in yen and real translated into fewer U.S. dollars.

Sales increased in all geographic regions except Latin America where they were about flat.
In North America, higher sales were primarily due to the impact of dealer inventory changes, as dealers increased inventory more in the first quarter of 2014 than in the first quarter of 2013. The remaining sales increase was primarily due to higher end-user demand resulting from an increase in construction-related spending in the United States. Although still below prior peaks, construction-related spending continues to improve.

In EAME, higher sales were primarily due to the impact of dealer inventory changes. Dealer-reported machine inventory increased in the first quarter of 2014 and was about flat during the first quarter of 2013. This increase was partially offset by lower dealer deliveries to end users as political unrest in several countries in the region, including Saudi Arabia and Turkey, was unfavorable to demand.


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In Asia/Pacific, the sales increase was primarily in China due to both increased dealer deliveries to end users due to increased building and infrastructure investment and the favorable impact of dealer inventory changes. These items were partially offset by unfavorable currency impacts primarily from the weaker Japanese yen.

Construction Industries' profit was $688 million in the first quarter of 2014, compared with $228 million in the first quarter of 2013. The increase in profit was primarily due to higher sales volume, favorable manufacturing costs and the favorable impact of currency primarily due to the Japanese yen. Manufacturing costs improved primarily due to favorable changes in cost absorption resulting from a significantly larger decrease in inventory during the first quarter of 2013 than in the first quarter of 2014. In addition, higher production volumes resulted in increased efficiencies. SG&A and R&D expenses were about flat despite the increase in sales volume. SG&A and R&D expenses are expected to be higher during the remainder of 2014 as the first quarter is generally low for these costs. We expect increases throughout the year as approved programs are implemented and annual wage increases take effect.
While margins on Construction Industries' sales in the first quarter of 2014 were strong, lower margins are expected on Construction Industries' sales for the remainder of 2014 due to unfavorable product mix resulting from increased sales of smaller, lower margin equipment and seasonally higher costs. Resource Industries
Resource Industries' sales were $2.123 billion in the first quarter of 2014, a decrease of $1.230 billion, or 37 percent, from the first quarter of 2013 - nearly all from lower sales volume. Price realization was slightly unfavorable primarily due to discounting on one project. The sales volume decline was primarily due to lower end-user demand across all geographic regions. Aftermarket part sales also declined world-wide, as we believe some companies are delaying maintenance and rebuild activities. The declines from the first quarter of 2013 were partially offset by favorable changes in dealer machine inventory. While dealers continued to reduce machine inventories worldwide during the first quarter of 2014, the reductions were much less significant than during the first quarter of 2013. Although prices of most mined commodities remained above investment thresholds and mine production has improved, customers in all geographic regions have reduced spending across the mining industry. We believe that mining companies are increasing productivity at existing mines, rather than investing in expansions or new mine openings, which results in lower demand for our mining products. New orders for mining equipment continued to be weak in the quarter.
Resource Industries' profit was $149 million in the first quarter of 2014 compared with $459 million in the first quarter of 2013. The decrease was primarily the result of lower sales volume, partially offset by a decline in manufacturing costs and SG&A and R&D expenses.
The decrease in manufacturing costs was primarily driven by favorable changes in cost absorption resulting from a relatively small increase in inventory during the first quarter of 2014, compared with a relatively small decrease in inventory during the first quarter of 2013, lower period manufacturing costs resulting from cost cutting measures and favorable material costs. SG&A and R&D expenses were lower primarily due to cost cutting measures implemented in response to lower volumes, including decreased spending for new product introduction programs. In addition, bad debt expense was lower at Caterpillar (Zhengzhou) Ltd.
Energy & Transportation
Energy & Transportation's sales were $4.776 billion in the first quarter of 2014, an increase of $371 million, or 8 percent, from the first quarter of 2013. The sales increase was primarily due to higher sales into power generation, oil and gas and industrial applications. Sales into transportation applications were about flat.
Sales into power generation applications increased across all regions except EAME, where they were about flat. The higher sales were mostly due to increased end-user demand for prime applications resulting from strengthening economic conditions.

Sales into oil and gas applications increased in all regions except Asia/Pacific. In North America, higher sales were primarily the result of increased demand for drilling and well servicing and favorable changes in dealer inventory for oil and gas applications. Sales increased in EAME due to the timing of large projects. Sales in Latin America were slightly higher due to favorable changes in dealer inventory. The decline in sales in Asia/Pacific was primarily due to the timing of large projects, partially offset by increased sales resulting from favorable dealer inventory changes.

Sales into industrial applications increased in all regions except Latin America where they were about flat. The increase in sales was primarily due to higher demand for engines used by original equipment manufacturers.

Energy & Transportation's profit was $827 million in the first quarter of 2014 compared with $591 million in the first quarter of 2013. The increase was primarily due to higher sales volume and lower manufacturing costs. The decrease in manufacturing costs was primarily driven by lower losses on a power-generation project in EAME and lower material costs, partially offset by increased incentive compensation.


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Financial Products Segment
Financial Products' revenues were $817 million, an increase of $22 million, or 3 percent, from the first quarter of 2013. The increase was primarily due to the favorable impact from higher average earning assets in North America and EAME, partially offset by decreases in Asia/Pacific.
Financial Products' profit was $240 million in the first quarter of 2014, compared with $273 million in the first quarter of 2013. The decrease was primarily due to the absence of $45 million in favorable reserve adjustments in the first quarter of 2013 at Insurance Services and a $17 million increase in the provision for credit losses at Cat Financial. These decreases were partially offset by a $13 million increase in gains on sales of securities at Insurance Services and a $10 million favorable impact from higher average earning assets. At the end of the first quarter of 2014, past dues at Cat Financial were 2.44 percent compared with 2.37 percent at the end of 2013. The slight increase in past dues compared to year-end 2013 was primarily due to seasonality impacts. At the end of the first quarter of 2013, past dues were 2.52 percent. Write-offs, net of recoveries, were $38 million for the first quarter of 2014, compared with $10 million for the first quarter of 2013. The increase was primarily related to higher write-offs in Cat Financial's Latin American marine portfolio that were previously provided for in the allowance for credit losses.
As of March 31, 2014, Cat Financial's allowance for credit losses totaled $373 million or 1.25 percent of net finance receivables, compared with $378 million or 1.30 percent of net finance receivables at year-end 2013. The allowance for credit losses as of March 31, 2013, was $429 million or 1.49 percent of net finance receivables.
Corporate Items and Eliminations
Expense for corporate items and eliminations was $675 million in the first quarter of 2014, an increase of $204 million from the first quarter of 2013. Corporate items and eliminations include: corporate-level expenses; restructuring costs; timing differences, as some expenses are reported in segment profit on a cash basis; retirement benefit costs other than service cost; currency differences for ME&T, as segment profit is reported using annual fixed exchange rates and inter-segment eliminations. . . .

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