01—Abstract
Summary
Summary of the 10-K filed February 23, 2007. Cited figures are marked; the original filing is the authoritative source.
Caterpillar's fiscal 2006 annual report (10-K filed February 23, 2007) shows a company at a cyclical high: sales and revenues rose 14% to a record $41.517 billiona, operating profit climbed 30% to $4.921 billion, and profit reached $3.537 billion, or $5.17 per diluted share, up 28% year over year.
Growth was driven by a 22% increase in sales volume and a $1.464 billionb improvement in price realization, with Progress Rail (acquired June 2006 for roughly $1.0 billion) adding to Machinery volume and the company's Financial Products segment revenues rising 14% to $2.648 billion. Management highlighted a fourth straight year of double-digit profit growth and a long-term Vision 2020 target of $50+ billion in sales by 2010. The balance sheet and capital-return picture are notable for investors.
Total assets reached $50.9 billion, but total debt rose to $27.3 billionc and stockholders' equity fell to $6.9 billion, largely because adopting SFAS 158 reduced equity by about $2.7 billion. Machinery and Engines debt-to-capital rose to 38.6% (versus 31.1% excluding the SFAS 158 effect). Caterpillar repurchased $3.2 billion of stock in 2006, raised the dividend to $1.15 per share declared, and in February 2007 authorized a new $7.5 billion buyback through 2011.
Cash flow from operations was $5.8 billiond. The outlook for 2007 is more cautious. The company guided sales and revenues of $41.5 to $43.6 billion, with Machinery and Engines volume down 2 to 3 percent, North American Machinery and Engines sales down 8 percent, and on-highway truck engine units expected to fall roughly 50 percent following U.S. emissions changes.
Profit per share is projected at $5.20 to $5.70, and the effective tax rate is expected to rise to about 32% as extraterritorial income benefits phase out. Risks flagged include U.S. housing weakness, tightening global liquidity, dependence on engine outsourcing by truck OEMs, and an unresolved IRS transfer-pricing dispute.
02—Key points
Key Highlights
- Record 2006 sales and revenues of $41.517 billion (+14%), with operating profit up 30% to $4.921 billion and profit of $3.537 billion ($5.17 diluted EPS, +28%).
- Growth was driven by sales volume (+$3.3 billion) and price realization (+$1.46 billion); the Progress Rail acquisition (~$1.0 billion, June 2006) contributed to Machinery volume.
- Total debt rose to $27.3 billion and stockholders' equity fell to $6.9 billion, largely due to a ~$2.7 billion reduction from SFAS 158 pension/OPEB accounting; Machinery and Engines debt-to-capital rose to 38.6%.
- Capital returns were strong: $3.2 billion of 2006 share repurchases, a 2006 dividend of $1.15 per share (up ~20%), and a new $7.5 billion buyback authorized in February 2007 running through 2011.
- 2007 guidance calls for sales and revenues of $41.5–$43.6 billion and profit per share of $5.20–$5.70, reflecting an expected 2–3% decline in Machinery and Engines volume and a higher effective tax rate of about 32%.
- Headwinds for 2007 include a roughly 50% expected decline in North American on-highway truck engine units after emissions rules change, a sharp drop in U.S. housing-related machine sales, and reduced dealer inventory builds.
- Operating cash flow was $5.8 billion, and Vision 2020 targets $50+ billion in sales and 15–20% annual profit-per-share growth through 2010.
03—Questions
Frequently Asked Questions
What drove Caterpillar's record 2006 earnings?
Earnings growth came mainly from higher sales volume across regions, broad price realization improvements of about $1.46 billion, and strong demand in mining, construction, and petroleum applications. Engines sales also rose 16%, and Financial Products revenues increased 14%. Partly offsetting these gains were higher core operating costs, including manufacturing and R&D spending, and a $70 million charge related to the Navistar litigation settlement.
Why did stockholders' equity decline despite higher profits?
Equity fell from $8.4 billion to $6.9 billion mainly because Caterpillar adopted SFAS 158 at year-end 2006, which reduced equity by roughly $2.7 billion by recognizing previously unrecorded pension and retiree health obligations in accumulated other comprehensive income. Share buybacks of about $3.2 billion also reduced equity, though these were partly offset by net income of $3.5 billion and stock issuance.
What does management expect for 2007?
Management guided to sales and revenues of $41.5 to $43.6 billion, with profit per share of $5.20 to $5.70. Machinery and Engines volume is expected to decline 2 to 3 percent, driven chiefly by a roughly 50% drop in North American on-highway truck engine demand after new emissions standards and by weaker U.S. housing. Offsetting strength is expected in mining, petroleum, and outside North America, along with a full year of Progress Rail sales.
How is Caterpillar returning cash to shareholders?
In 2006 the company repurchased $3.2 billion of stock (about 46 million shares) and paid $726 million in dividends, with the dividend rate increased about 20% and declared dividends totaling $1.15 per share. In February 2007 the board authorized a new $7.5 billion share repurchase program running through December 2011, to be funded from strong operating cash flow.
What are the main risks highlighted in the filing?
Key risks include cyclicality tied to construction, mining, and energy spending; interest rate and currency movements; commodity and steel price increases; reliance on truck OEMs continuing to outsource engine production; competitive pricing pressure; and risks from global operations, acquisitions integration, and Cat Financial credit exposure. The company also notes an unresolved IRS dispute over 1995–1999 tax returns and a pending IRS assessment related to transfer pricing.
04—Continue