01—Abstract
Summary
Summary of the 10-K filed February 19, 2013. Cited figures are marked; the original filing is the authoritative source.
Caterpillar's 2012 annual report shows record results: sales and revenues rose 10% to $65.875 billiona and profit per diluted share rose 15% to $8.48, both all-time highs.
Growth was driven largely by the Bucyrus acquisition (mining equipment, closed July 2011), favorable price realization of $1.5 billionb, and higher volume, while the second half of the year brought a sharp slowdown as dealers cut inventories. Fourth-quarter sales fell 7% year over year and fourth-quarter profit dropped to $697 million, pulled down by a $580 million goodwill impairment tied to the Siwei acquisition after accounting misconduct was discovered at that Chinese mining equipment subsidiary. Backlog fell to $19.6 billion from $29.8 billion a year earlier, with the steepest decline in Resource Industries, where mining customers delayed or cancelled orders amid weaker commodity prices.
Management reduced production rates and slowed capacity expansion, and Machinery and Power Systems operating cash flow dropped to $4.2 billionc from $8.0 billion, largely due to lower accounts payable. The balance sheet remains solid, with a Machinery and Power Systems debt-to-capital ratio of 37.4% (down from 42.7%), cash of $5.49 billion, and total stockholders' equity up to $17.6 billion.
For investors, the key questions are how quickly dealer inventory normalizes, whether mining demand recovers, and whether the Siwei write-down signals broader acquisition-integration or controls risk. The company also disclosed a $300 milliond tax benefit from an IRS settlement, which flatters 2012 earnings but is non-recurring.
02—Key points
Key Highlights
- Record 2012 sales and revenues of $65.875 billion (up 10%) and record profit per diluted share of $8.48 (up 15%), with profit of $5.681 billion
- Q4 2012 profit fell to $697 million from $1.547 billion, including a $580 million Siwei goodwill impairment and a $300 million one-time IRS settlement benefit
- Order backlog declined to about $19.6 billion from $29.8 billion at end-2011, mainly in Resource Industries as mining customers delayed or cancelled orders
- Machinery and Power Systems operating cash flow fell to $4.2 billion from $8.0 billion, mostly from unfavorable accounts payable changes
- Machinery and Power Systems debt-to-capital ratio improved to 37.4% from 42.7%, within the company's 30–45% target range
- Siwei (China mining equipment) acquisition was impaired after pre-acquisition accounting misconduct was found, a material governance and integration issue
- Dealer inventory reductions in H2 2012 drove a sharp Q4 sales decline of 7% (Construction Industries down 25%), with management cutting production rates and slowing capacity expansion
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2012, Caterpillar Inc kept $0.09.
- Revenue$65.88B100.0%
- Cost of revenue−$47.05B71.4%
- Gross profit$18.82B28.6%
- Operating costs−$10.25B15.6%
- Operating income$8.57B13.0%
- Interest, other & tax−$2.89B4.4%
- Net income$5.68B8.6%
Where FY2012 revenue went
$65.88B- Cost of revenue: $47.05B, 71% of revenue
- Net income: $5.68B, 8.6% of revenue
- R&D: $2.47B, 3.7% of revenue
- SG&A: $5.92B, 9.0% of revenue
- Other operating costs: $1.86B, 2.8% of revenue
- Interest, other & tax: $2.89B, 4.4% of revenue
Kept 8.6% as net incomeNet income $5.68B · 8.6%Other operating costs $1.86B · 2.8%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 19, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $65.88B$60.14B | +9.5% |
| Cost of Revenue | $47.05B$43.58B | +8.0% |
| Gross Profit | $18.82B$16.56B | +13.6% |
| R&D Expenses | $2.47B$2.30B | +7.4% |
| SG&A Expenses | $5.92B$5.20B | +13.8% |
| Operating Expenses | $57.30B$52.98B | +8.1% |
| Operating Income | $8.57B$7.15B | +19.9% |
| Net Income | $5.68B$4.93B | +15.3% |
| EPS (Basic) | $8.71$7.64 | +14.0% |
| EPS (Diluted) | $8.48$7.40 | +14.6% |
| Shares Outstanding (Basic) | 652.60M645.00M | +1.2% |
| Shares Outstanding (Diluted) | 669.60M666.10M | +0.5% |
05—Questions
Frequently Asked Questions
Why did Caterpillar's fourth-quarter 2012 profit fall so sharply?
Q4 2012 profit was $697 million versus $1.547 billion in Q4 2011. The main drivers were a $580 million goodwill impairment on Siwei, lower sales volume from dealers reducing inventory by about $600 million in the quarter, and higher manufacturing costs from production cuts. A $300 million benefit from an IRS tax settlement partly offset these hits.
How serious is the Siwei problem for investors?
Caterpillar found that Siwei engaged in accounting misconduct before its mid-2012 acquisition, including overstated profit and early or unsupported revenue recognition. The company wrote off $580 million of goodwill, leaving $45 million, and the Siwei controls were excluded from the 2012 internal control assessment. Investors should watch for further charges, remediation of controls, and whether other acquisitions face similar issues.
Is the decline in backlog and mining demand a long-term concern?
Backlog fell to $19.6 billion from $29.8 billion, and new mining orders declined significantly in 2012 as commodity prices eased. Management still believes long-term urbanization and infrastructure trends will support mining growth, and has continued some capacity investments while slowing the pace. The near-term outlook depends on commodity prices and whether dealer inventories stabilize.
Is Caterpillar's balance sheet and liquidity under pressure?
Not materially. Cash rose to $5.49 billion, the Machinery and Power Systems debt-to-capital ratio improved to 37.4%, and consolidated net worth of $24.5 billion comfortably exceeds the $9 billion covenant. Operating cash flow weakened, though, and Financial Products debt rose to about $29.7 billion, which is worth monitoring as Cat Financial grows its portfolio.
How much of 2012's earnings growth was from one-time items?
Several items affected results. The $300 million IRS settlement benefit and a $281 million pre-tax gain on the sale of a majority stake in the third-party logistics business helped profit, while the $580 million Siwei impairment and the non-deductible goodwill tax impact hurt it. Bucyrus distribution divestitures added to 2012 results as well. Excluding these, underlying growth was more modest than headline figures suggest.
06—Continue