01—Abstract
Summary
Summary of the 10-K filed February 22, 2006. Cited figures are marked; the original filing is the authoritative source.
Caterpillar's 2005 10-K shows a record year: total sales and revenues rose 20% to $36.339 billiona and profit per diluted share rose 40% to $4.04 (profit of $2.854 billion, up from $2.035 billion).
Growth was driven by $3.7 billionb of higher sales volume and $1.8 billion of improved price realization, with Machinery sales up 22% and Engines up 17%. Operating profit grew 41% to $3.784 billion, though core operating costs rose $1.67 billion, mainly from higher material costs (notably steel), supply chain inefficiencies, and period manufacturing costs. Balance sheet metrics also strengthened: total assets reached $47.1 billion, the order backlog climbed to $12.2 billion from $9.1 billion, and operating cash flow was $3.1 billion versus negative $4.0 billion in 2004, which was distorted by a receivables reclassification.
Management guided to 2006 sales and revenues of about $40 billionc (roughly 10% growth) and profit per share of $4.65 to $5.00, an increase of 15% to 24%. The outlook assumes continued strong demand in construction, mining and energy, offset by higher core costs, expensing of stock-based compensation beginning in 2006 (about $125 million), and a higher effective tax rate as the Extraterritorial Income exclusion phases out. Key risks disclosed include Federal Reserve tightening, metals and energy price volatility, capacity constraints that could disrupt production, competitive price discounting, and a dispute with Navistar and International Truck and Engine over fuel injector pricing and a term-sheet claim.
The company also began a $1.7 billiond share buyback program in 2005, with 671 million shares outstanding at year-end. The filing also highlights strategic moves: the "Vision 2020" enterprise strategy with 2010 goals, the expansion of remanufacturing, and the Caterpillar-branded telehandler alliance with JLG. Cat Power Ventures will wind down its power project investments by the end of 2007, and the company is expanding manufacturing capacity in the U.S. and China.
02—Key points
Key Highlights
- Record 2005 results: sales and revenues of $36.339 billion (up 20%) and diluted profit per share of $4.04 (up 40%), both all-time highs
- Operating profit rose 41% to $3.784 billion, with price realization of $1.83 billion and sales volume of $3.7 billion as the main drivers, partly offset by higher core operating costs of $1.67 billion
- 2006 outlook calls for sales and revenues of about $40 billion (about 10% growth) and profit per share of $4.65 to $5.00 (up 15% to 24%)
- Order backlog of $12.2 billion at year-end 2005, up from $9.1 billion, providing visibility into 2006 volumes
- Operating cash flow swung to $3.1 billion from negative $4.0 billion in 2004, though the comparison is distorted by a 2004 reclassification of receivables; Machinery and Engines operating cash flow was $2.8 billion
- Shareholder returns: a 2-for-1 stock split in July 2005, dividends of $0.955 per share, and $1.68 billion of share repurchases in 2005 under a program targeting 640 million shares outstanding by October 2008
- Ongoing risks include Fed rate increases, metals and energy price volatility, capacity constraints, dealer inventory practices, and litigation with Navistar and International Truck and Engine (trial scheduled for Q3 2006)
03—Questions
Frequently Asked Questions
How strong was Caterpillar's 2005 performance compared with 2004?
Very strong. Sales and revenues rose 20% to $36.339 billion, profit rose 40% to $2.854 billion, and diluted EPS reached $4.04 versus $2.88. Operating profit grew 41% to $3.784 billion, and return on average common equity improved to 35.9% from 30.0%.
What is management's outlook for 2006?
Management expects sales and revenues of about $40 billion, a record, and profit per share between $4.65 and $5.00. Machinery and Engines sales are projected to grow about 10%, led by North America (+12%) and Asia/Pacific (+11%). The outlook includes about $125 million of stock-based compensation expense and a higher effective tax rate of roughly one percentage point more than 2005.
What are the main risks to the investment case?
The filing highlights rising interest rates that could slow construction and business investment, metals and energy price volatility that could cause a sudden drop in demand, production capacity constraints that could create cost spikes and disruptions, and intense competitive price pressure. Financial Products carries credit risk on its customer portfolio, and the company faces litigation with Navistar and International, as well as an IRS dispute over tax years 1995 to 1999.
How is Caterpillar's cost structure changing?
Core operating costs rose $1.67 billion in 2005, mainly from higher material costs (particularly steel), supply chain inefficiencies, and higher period manufacturing costs to support volume. Period manufacturing costs rose 13% on a 20% sales increase. In 2006 the company begins expensing stock-based compensation under SFAS 123R, and retirement benefit costs are expected to hold flat with 2005.
What is the status of Cat Power Ventures and other strategic initiatives?
In December 2005 Cat Power Ventures decided to stop making new equity investments in power generation projects and to sell its existing portfolio, with operations expected to cease by the end of 2007. Other initiatives include the Vision 2020 strategy with 2010 goals, expansion of remanufacturing (including a minority stake in Eurenov and a Land Rover remanufacturing agreement), a global telehandler alliance with JLG, and the ACERT emissions technology program.
04—Continue