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CAT > SEC Filings for CAT > Form 10-Q on 1-Aug-2014All Recent SEC Filings

Show all filings for CATERPILLAR INC

Form 10-Q for CATERPILLAR INC


1-Aug-2014

Quarterly Report


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

Overview

Second-quarter 2014 sales and revenues were $14.150 billion, a 3 percent decrease from second-quarter 2013 sales and revenues of $14.621 billion. Profit per share for the second quarter of 2014 was $1.57, an 8 percent increase from second-quarter 2013 profit per share of $1.45. Profit was $999 million in the quarter, an increase of 4 percent from $960 million in the second quarter of 2013.

Sales and revenues for the six months ended June 30, 2014 were $27.391 billion, down $440 million, or 2 percent, from $27.831 billion for the six months ended June 30, 2013. Profit per share for the six months ended June 30, 2014 was $3.00, a 9 percent increase from the six months ended June 30, 2013 profit per share of $2.76. Profit was $1.921 billion in the six months ended June 30, 2014, an increase of 4 percent from $1.840 billion for the six months ended June 30, 2013.

Highlights for the second quarter of 2014 include:

? Second-quarter sales and revenues were $14.150 billion, compared with $14.621 billion in the second quarter of 2013. Decreases in Resource Industries' sales were partially offset by increases in Construction Industries' sales. Energy & Transportation's sales and Financial Products' revenues were about flat.

? Restructuring costs were $114 million in the second quarter of 2014 with an after-tax impact of $0.12 per share.

? Profit per share was $1.57 in the second quarter of 2014 and excluding restructuring costs of $0.12 per share was $1.69 per share. Profit in the second quarter of 2013 was $1.45 per share.

? Machinery, Energy & Transportation (ME&T) operating cash flow was $2.064 billion in the second quarter of 2014, compared with $3.049 billion in the second quarter of 2013.

? ME&T debt-to-capital ratio was 32.5 percent compared with 29.7 percent at the end of 2013.

? Caterpillar announced its intention to repurchase $2.5 billion of Caterpillar common stock during the third quarter of 2014. This repurchase is part of the $10 billion stock repurchase authorization previously approved by the Board of Directors in the first quarter of 2014.

Highlights for the six months ended June 30, 2014 include:
? Sales and revenues for the six months ended June 30, 2014 were $27.391 billion, compared with $27.831 billion for the six months ended June 30, 2013. Sales decreases in Resource Industries were nearly offset by increases in Construction Industries and Energy & Transportation. Financial Products' revenues were about flat.

? Restructuring costs were $263 million for the six months ended June 30, 2014 with an after-tax impact of $0.30 per share.

? Profit per share was $3.00 for the six months ended June 30, 2014 and excluding restructuring costs of $0.30 per share was $3.30 per share. Profit per share was $2.76 for the six months ended June 30, 2013.

? ME&T operating cash flow was $3.942 billion for the six months ended June 30, 2014, compared with $4.138 billion for the six months ended June 30, 2013.

Notes:
Glossary of terms is included on pages 72-74; first occurrence of terms shown in bold italics.

Information on non-GAAP financial measures is included on page 83.


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Consolidated Results of Operations

THREE MONTHS ENDED JUNE 30, 2014 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2013

CONSOLIDATED SALES AND REVENUES

[[Image Removed]]
The chart above graphically illustrates reasons for the change in Consolidated Sales and Revenues between the second quarter of 2013 (at left) and the second 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 $14.150 billion in the second quarter of 2014, down $471 million or 3 percent from the second quarter of 2013. When reviewing the change in sales and revenues, we focus on the following perspectives:
Reasons for the change: Sales volume decreased $610 million primarily due to lower volume in Resource Industries, partially offset by higher volume in Construction Industries. The sales volume decrease was partially offset by favorable price realization.

The volume decrease was primarily the result of lower end-user demand for mining equipment in Resource Industries, as customers are continuing to reduce their capital expenditures. This decrease was partially offset by the favorable impact of changes in dealer machine and engine inventories, as dealers reduced inventories about $500 million in the second quarter of 2014 compared to a decrease of more than $1 billion in the second 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. We expect that dealers will continue to decrease inventories for both construction and mining equipment in the third and fourth quarters of 2014, as dealers are satisfying more demand from inventory. 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.
Aftermarket parts sales were about flat with the second quarter of 2013.
Sales by geographic region: Sales declines in Asia/Pacific and Latin America were partially offset by an increase in North America. Asia/Pacific sales declined 14 percent as a result of weak mining sales across the region, timing of large Energy & Transportation projects and a slowing construction equipment industry in China. Sales decreased in Latin America 16 percent, primarily due to lower end-user demand for mining equipment. In North America, sales increased 6 percent, primarily due to improving demand for construction equipment in the United States. Sales into EAME were about flat as lower end-user demand was about offset by the absence of unfavorable changes in dealer inventory during the second quarter of 2013. While EAME sales were about flat, the impact from strengthening economic conditions in Europe was about offset by sales declines


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in the CIS and Africa/Middle East. We believe the sales declines in the CIS were due to the effects of ongoing political unrest on economic activity in the region, and the declines in Africa/Middle East were primarily due to lower mining sales.
Sales by segment: Sales decreases in Resource Industries were partially offset by increases in Construction Industries' sales. Resource Industries' sales decreased 29 percent, primarily due to lower end-user demand for mining equipment. Construction Industries' sales increased 11 percent, primarily due to the favorable impact of changes in dealer inventories and increases in dealer deliveries to end users. Energy & Transportation's sales and 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 second quarter of 2013 (at left) and the second 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 second quarter of 2014 was $1.475 billion, down $82 million or 5 percent from the second quarter of 2013. Restructuring costs in the second quarter of 2014 were $114 million compared with $28 million in the second quarter of 2013, an increase of $86 million. The second quarter of 2014 restructuring costs were primarily related to a reduction in workforce at our Gosselies, Belgium, facility. Excluding restructuring costs, operating profit was about flat as lower sales volume and the absence of a $135 million gain related to a settlement with previous owners of Caterpillar (Zhengzhou) Ltd. were about offset by lower manufacturing costs and favorable price realization. Manufacturing costs decreased $110 million. The improvement was primarily due to favorable changes in cost absorption as inventory decreased significantly in the second quarter of 2013 compared with a modest increase in the second quarter of 2014. Material costs were also favorable. These items were partially offset by higher period manufacturing costs and increased warranty expense. The increase in period manufacturing costs was primarily driven by higher incentive compensation expense. SG&A and R&D expenses were about flat despite an increase in incentive compensation expense.
The second-quarter short-term incentive compensation expense related to 2014 was about $360 million, and we expect the full-year expense will be about $1.2 billion. Short-term incentive compensation expense in the second quarter of 2013 was about $125 million, and the full-year 2013 was about $545 million. Short-term incentive compensation expense is directly related to financial and operational performance measured against targets set annually. Other Profit/Loss Items

Other income/expense was income of $65 million compared with expense of $84 million in the second quarter of 2013. The change was primarily due to the favorable net impact from currency translation and hedging gains and losses. Translation and hedging losses in the second quarter of 2013 totaled $134 million. In the second quarter of 2014, translation and hedging gains were $17 million.


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The provision for income taxes in the second quarter of 2014 reflects an estimated annual tax rate of 29.5 percent compared with 29 percent for the second quarter of 2013. 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.

Segment Information

Sales and Revenues by Geographic Region


                                           %         North           %          Latin          %                       %         Asia/          %
(Millions of dollars)       Total        Change      America       Change       America      Change      EAME        Change      Pacific      Change
Second Quarter 2014
Construction Industries 1 $  5,407         11  %   $  2,402         20  %     $    711          1  %   $ 1,192         14  %   $  1,102         (2 )%
Resource Industries 2        2,241        (29 )%        866         (9 )%          342        (40 )%       523        (35 )%        510        (37 )%
Energy & Transportation 3    5,175         (2 )%      2,259          2  %          470        (17 )%     1,406          4  %      1,040         (8 )%
All Other Segments 4           583         (7 )%        369          -  %           71         13  %        83        (26 )%         60        (25 )%
Corporate Items and
Eliminations                   (15 )        -           (15 )                        1                      (2 )                      1
Machinery, Energy &
Transportation Sales        13,391         (4 )%      5,881          6  %        1,595        (16 )%     3,202         (3 )%      2,713        (14 )%

Financial Products
Segment                        834          3  %        448          7  %          117          7  %       121          1  %        148         (7 )%
Corporate Items and
Eliminations                   (75 )                    (41 )                      (13 )                    (8 )                    (13 )
Financial
Products Revenues              759          3  %        407          8  %          104          5  %       113          1  %        135         (8 )%

Consolidated Sales and
Revenues                  $ 14,150         (3 )%   $  6,288          7  %     $  1,699        (15 )%   $ 3,315         (3 )%   $  2,848        (13 )%

Second Quarter 2013
Construction Industries 1 $  4,875                 $  2,008                   $    701                 $ 1,045                 $  1,121
Resource Industries 2        3,135                      948                        573                     802                      812
Energy & Transportation 3    5,263                    2,215                        568                   1,352                    1,128
All Other Segments 4           624                      369                         63                     112                       80
Corporate Items and
Eliminations                   (11 )                    (14 )                        1                       1                        1
Machinery, Energy &
Transportation Sales        13,886                    5,526                      1,906                   3,312                    3,142

Financial Products
Segment                        806                      418                        109                     120                      159
Corporate Items and
Eliminations                   (71 )                    (41 )                      (10 )                    (8 )                    (12 )
Financial
Products Revenues              735                      377                         99                     112                      147

Consolidated Sales and
Revenues                  $ 14,621                 $  5,903                   $  2,005                 $ 3,424                 $  3,289

1 Does not include inter-segment sales of $56 million and $91 million in second quarter 2014 and 2013, respectively.

2 Does not include inter-segment sales of $145 million and $126 million in second quarter 2014 and 2013, respectively.

3 Does not include inter-segment sales of $586 million and $461 million in second quarter 2014 and 2013, respectively.

4 Does not include inter-segment sales of $890 million and $830 million in second quarter 2014 and 2013, respectively.


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

Construction Industries   $    4,875     $   511     $        58     $    (37 )   $     -     $    5,407     $   532        11  %
Resource Industries            3,135        (875 )           (15 )         (4 )         -          2,241        (894 )     (29 )%
Energy & Transportation        5,263        (186 )            48           50           -          5,175         (88 )      (2 )%
All Other Segments               624         (55 )            14            -           -            583         (41 )      (7 )%
Corporate Items and              (11 )        (5 )             3           (2 )         -            (15 )        (4 )
Eliminations
Machinery, Energy &
Transportation Sales          13,886        (610 )           108            7           -         13,391        (495 )      (4 )%

Financial Products               806           -               -            -          28            834          28         3  %
Segment
Corporate Items and              (71 )         -               -            -          (4 )          (75 )        (4 )
Eliminations
Financial                        735           -               -            -          24            759          24         3  %
Products Revenues

Consolidated Sales and    $   14,621     $  (610 )   $       108     $      7     $    24     $   14,150     $  (471 )      (3 )%
Revenues




Operating Profit by Segment
                                                                                           $                %
(Millions of dollars)               Second Quarter 2014      Second Quarter 2013         Change           Change
Construction Industries            $              674       $              368       $        306             83  %
Resource Industries                               133                      524               (391 )          (75 )%
Energy & Transportation                         1,009                      953                 56              6  %
All Other Segments                                223                      208                 15              7  %
Corporate Items and Eliminations                 (722 )                   (666 )              (56 )
Machinery, Energy & Transportation              1,317                    1,387                (70 )           (5 )%

Financial Products Segment                        244                      233                 11              5  %
Corporate Items and Eliminations                  (12 )                      8                (20 )
Financial Products                                232                      241                 (9 )           (4 )%
Consolidating Adjustments                         (74 )                    (71 )               (3 )
Consolidated Operating Profit      $            1,475       $            1,557       $        (82 )           (5 )%

Construction Industries
Construction Industries' sales were $5.407 billion in the second quarter of 2014, an increase of $532 million, or 11 percent, from the second quarter of 2013. The sales increase was primarily due to higher sales volume in North America. Price realization was also favorable. Sales of new equipment increased, and sales of aftermarket parts were about flat.
The sales volume increase was primarily related to favorable changes in dealer inventories as dealers lowered their inventories more significantly in the second quarter of 2013 than in the second quarter of 2014. Generally, dealer inventories decline in the second quarter due to seasonal selling patterns. Additionally, dealer deliveries to end users increased primarily due to higher demand in North America, partially offset by lower demand in Asia/Pacific.

Sales increased in North America and EAME and were about flat in Latin America and Asia/Pacific.
In North America, the sales increase was primarily due to higher dealer deliveries to end users resulting from an increase in construction-related spending in the United States. Although still below the 2006 peak, construction-related sales are improving in the United States.

In EAME, higher sales were primarily due to favorable changes in dealer inventories as dealers increased inventory in the second quarter of 2014 and decreased inventory in the second quarter of 2013.

In Asia/Pacific, sales were about flat as lower deliveries to end users due to weaker economic conditions across the region were about offset by the favorable impact of changes in dealer inventories.

Construction Industries' profit was $674 million in the second quarter of 2014, compared with $368 million in the second quarter of 2013. The increase in profit was primarily due to higher sales volume, the favorable impact of currency, improved price realization and lower manufacturing costs.


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Manufacturing costs improved primarily due to lower material costs and favorable changes in cost absorption resulting from a significantly larger decrease in inventory during the second quarter of 2013 than in the second quarter of 2014. These favorable impacts were partially offset by increased depreciation and incentive compensation expense.
SG&A and R&D expenses were about flat despite the increase in sales volume and higher incentive compensation expense.
Resource Industries
Resource Industries' sales were $2.241 billion in the second quarter of 2014, a decrease of $894 million, or 29 percent, from the second quarter of 2013. Sales declined in all geographic regions primarily due to lower end-user demand partially offset by the favorable impact of changes in dealer inventories. While dealers continued to reduce machine inventories worldwide during the second quarter of 2014, the reductions were much less significant than in the second quarter of 2013. Although prices of most mined commodities remained above investment thresholds, 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.
Aftermarket part sales declined in Asia/Pacific and EAME and were about flat in Latin America and North America. We believe some companies are continuing to delay maintenance and rebuild activities.
Resource Industries' sales in the second quarter of 2014 were up slightly for both new equipment and aftermarket parts compared to the first quarter of 2014. We have not yet seen signs that an upturn in mining is going to occur this year. The mining industry remains weak and quoting activity and order rates remain at low levels. While we have not seen evidence of an upturn in the industry, because of the low level of sales of new equipment, we believe the likelihood of a significant decline from current levels is limited.
Resource Industries' profit was $133 million in the second quarter of 2014 compared with $524 million in the second quarter of 2013. The decrease was primarily the result of lower sales volume and the absence of a $135 million gain related to the settlement with previous owners of Caterpillar (Zhengzhou) Ltd., partially offset by an improvement in manufacturing costs.
The improvement in manufacturing costs was primarily driven by favorable changes in cost absorption as inventory remained about flat during the second quarter of 2014, compared with a decrease in inventory during the second quarter of 2013. Material costs were also favorable. These improvements were partially offset by increased warranty expense.
SG&A and R&D expenses were about flat as cost cutting measures offset higher incentive compensation expense.
Energy & Transportation
Energy & Transportation's sales were $5.175 billion in the second quarter of 2014, about flat with the second quarter of 2013. Sales decreased slightly into power generation applications and were about flat for transportation, industrial and oil and gas applications. While overall sales were about flat, sales of aftermarket parts increased.
Power Generation - Sales decreased in North America and EAME and were about flat in Latin America and Asia/Pacific. The decline in North America and EAME was due to lower end-user demand resulting primarily from the timing of large projects.

Oil and Gas - Sales were about flat, as increases in North America and EAME were about offset by decreases in Asia/Pacific and Latin America. In North America, higher sales were primarily the result of increased demand for gas compression and well servicing. The increase in sales in EAME, as well as the declines in Asia/Pacific and Latin America, were primarily due to the timing of large turbine projects.

Industrial and Transportation - Sales for both applications were about flat across all geographic regions.

Due to the large project nature of many of the Energy & Transportation end markets, the timing of these projects can vary causing volatility in our sales. Energy & Transportation's profit was $1.009 billion in the second quarter of 2014, compared with $953 million in the second quarter of 2013. The increase was primarily due to favorable price realization.
Manufacturing costs were about flat as the favorable impact of cost absorption and lower material costs were about offset by increased period manufacturing costs, including higher incentive compensation expense. The favorable impact of cost absorption resulted from an increase in inventory in the second quarter of 2014 compared to a decrease in inventory in the second quarter of 2013. SG&A and R&D expenses were about flat as reduced program spending offset higher incentive compensation expense.


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Financial Products Segment
Financial Products' revenues were $834 million, an increase of $28 million, or 3 percent, from the second quarter of 2013. The increase was primarily due to the favorable impact from higher average earning assets in North America, EAME and Latin America, partially offset by a decrease in Asia/Pacific. Financial Products' profit was $244 million in the second quarter of 2014, compared with $233 million in the second quarter of 2013. The increase was primarily due to the absence of a $23 million currency loss in the second quarter of 2013 and a $17 million favorable impact from higher average earning assets. These increases were partially offset by the absence of $23 million in favorable reserve adjustments in the second quarter of 2013 at Insurance Services.
At the end of the second quarter of 2014, past dues at Cat Financial were 2.63 percent compared with 2.44 percent at the end of the first quarter of 2014, 2.37 percent at the end of 2013 and 2.64 percent at the end of the second quarter of 2013. The increase in past dues from the first quarter of 2014 and the end of 2013 reflects higher past dues in Cat Financial's Latin American, Asia/Pacific, and European portfolios. Write-offs, net of recoveries, were $19 million for the second quarter of 2014, compared with $27 million for the second quarter of 2013.
As of June 30, 2014, Cat Financial's allowance for credit losses totaled $387 million, or 1.27 percent of net finance receivables, compared with $373 million or 1.25 percent of net finance receivables as of March 31, 2014 and $378 million or 1.30 percent of net finance receivables at year-end 2013. The allowance for credit losses as of June 30, 2013, was $422 million or 1.46 percent of net finance receivables.
Corporate Items and Eliminations
Expense for corporate items and eliminations was $734 million in the second quarter of 2014, an increase of $76 million from the second 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 and currency differences for ME&T, as segment profit is reported using annual fixed exchange rates and inter-segment eliminations.
The increase in expense from the second quarter of 2013 was primarily due to restructuring costs and the unfavorable impact of currency. Segment profit for 2014 is based on fixed exchange rates set at the beginning of 2014, while segment profit for 2013 is based on fixed exchange rates set at the beginning of 2013. The difference in actual exchange rates compared with fixed exchange rates is included in corporate items and eliminations and is not reflected in segment profit. These unfavorable items were partially offset by other methodology differences and decreased retirement benefit costs.

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