01—Abstract
Summary
Summary of the 10-K filed February 17, 2015. Cited figures are marked; the original filing is the authoritative source.
Caterpillar's 2014 10-K shows a year of top-line contraction and margin pressure, driven almost entirely by the collapse in mining demand at Resource Industries.
Total sales and revenues fell 1% to $55.184 billiona, and profit declined 2% to $3.695 billion, though profit per diluted share rose 2% to $5.88 thanks to heavy share repurchases ($4.2 billion during the year). Operating profit fell 5% to $5.328 billion, and restructuring charges of $441 million (about $0.50 per share) weighed on results. Resource Industries sales dropped 24%, offset by 8% growth at Energy & Transportation and 4% at Construction Industries.
Balance-sheet and cash-flow signals are mixed. Consolidated operating cash flow fell to $8.06 billionb from $10.19 billion, largely because 2013 benefited from a large inventory drawdown. The Machinery, Energy & Transportation debt-to-capital ratio rose sharply to 37.4% from 29.7%, reflecting $5.8 billion returned to shareholders and a $1.6 billion pension-related equity hit, though it remains within management's 30-45% target range.
Backlog declined about $700 million to $17.3 billionc, and management expects further restructuring charges of about $150 million in 2015 and continued weakness in oil, copper, coal and iron ore markets. For investors, the key issues are the durability of earnings outside mining, the cost and timing of restructuring, the leverage implied by buybacks, and open legal and tax exposure.
The 10-K discloses a grand jury subpoena, SEC inquiries, and a January 2015 IRS Revenue Agent's Report proposing roughly $1 billiond in additional taxes and penalties, which management intends to contest. Management believes none of these matters will have a material adverse effect, but the tax dispute in particular is a material contingency to monitor.
02—Key points
Key Highlights
- Sales and revenues were $55.184B (down 1%), while Resource Industries sales fell 24% on weak mining demand; Energy & Transportation rose 8% and Construction Industries rose 4%.
- Profit was $3.695B ($5.88 diluted EPS, up 2%), but operating profit fell 5% to $5.328B, and restructuring costs of $441M reduced EPS by about $0.50.
- Operating cash flow fell to $8.06B from $10.19B, and the ME&T debt-to-capital ratio rose to 37.4% from 29.7% after $5.8B in shareholder returns ($4.2B buybacks, $1.6B dividends).
- Year-end cash was $7.34B, with about $5.6B held by non-U.S. subsidiaries; total debt was $39.29B, and the company had $9.16B of available credit.
- Order backlog declined about $700M to $17.3B at year-end 2014, with roughly $3.0B not expected to be filled in 2015.
- A January 2015 IRS Revenue Agent's Report proposed roughly $1B in additional U.S. taxes and penalties for 2007-2009, including challenges to profits earned by Caterpillar SARL; the company plans to contest it.
- Management expects 2015 headwinds from lower oil prices, continued mining weakness, a strong U.S. dollar, and roughly $150M of new restructuring charges, with no recovery expected in mining orders.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, Caterpillar Inc kept $0.04.
- Revenue$55.18B100.0%
- Cost of revenue−$40.72B73.8%
- Gross profit$14.47B26.2%
- Operating costs−$11.15B20.2%
- Operating income$3.31B6.0%
- Interest, other & tax−$862.0M1.6%
- Net income$2.45B4.4%
Where FY2014 revenue went
$55.18B- Cost of revenue: $40.72B, 74% of revenue
- Net income: $2.45B, 4.4% of revenue
- R&D: $2.38B, 4.3% of revenue
- SG&A: $6.53B, 12% of revenue
- Other operating costs: $2.24B, 4.1% of revenue
- Interest, other & tax: $862.0M, 1.6% of revenue
Kept 4.4% as net incomeNet income $2.45B · 4.4%Interest, other & tax $862.0M · 1.6%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed February 17, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $55.18B$55.66B | −0.8% |
| Cost of Revenue | $40.72B$40.73B | 0.0% |
| Gross Profit | $14.47B$14.93B | −3.1% |
| R&D Expenses | $2.38B$2.05B | +16.3% |
| SG&A Expenses | $6.53B$5.55B | +17.7% |
| Operating Expenses | $51.87B$50.03B | +3.7% |
| Operating Income | $3.31B$5.63B | −41.1% |
| Net Income | $2.45B$3.79B | −35.3% |
| EPS (Basic) | $3.97$5.87 | −32.4% |
| EPS (Diluted) | $3.90$5.75 | −32.2% |
| Shares Outstanding (Basic) | 617.20M645.20M | −4.3% |
| Shares Outstanding (Diluted) | 628.90M658.60M | −4.5% |
05—Questions
Frequently Asked Questions
Why did profit per share rise even though net profit fell?
Profit fell 2% to $3.695B, but diluted EPS rose 2% to $5.88 because the weighted-average diluted share count dropped from about 658.6M to 628.9M. The reduction came from heavy share repurchases, including $4.2B of buybacks in 2014 (roughly 41.8M shares retired) and earlier ASRs. Buybacks boosted per-share results but also raised leverage.
How exposed is Caterpillar to the mining downturn?
Substantially. Resource Industries sales fell 24% to $8.921B, and segment profit dropped to $501M from $1.586B. Management expects no recovery in mining orders in 2015, citing lower commodity prices, industry capital spending cuts, and excess coal and iron ore supply. The offsetting strength in Energy & Transportation is tied partly to oil and gas, which management expects to weaken in 2015 as oil prices fall.
What is the largest legal or tax risk disclosed?
The most significant item is the IRS Revenue Agent's Report received January 30, 2015, which proposes tax increases and penalties of roughly $1 billion for 2007-2009. The main issue is whether profits from certain parts transactions by Caterpillar SARL should be taxed in the U.S. under substance-over-form or assignment-of-income doctrines. Caterpillar disputes this and expects to contest it through IRS Appeals, believing the outcome will not have a material adverse effect. Separately, the company faces a grand jury subpoena, SEC inquiries, and Brazilian antitrust and Progress Rail matters, none of which management views as material.
Is the balance sheet under pressure?
Leverage has risen. The ME&T debt-to-capital ratio increased to 37.4% from 29.7%, reflecting capital returns and a $1.6B pension-related equity charge, but it remains inside the company's 30-45% target. Cat Financial's covenant metrics are within limits (interest coverage 2.19x vs. a 1.15x minimum; leverage 7.83x vs. a 10x maximum), and Caterpillar's consolidated net worth of $22.23B exceeds the $9B covenant floor. Liquidity is supported by $7.34B of cash and credit facilities totaling $10.5B.
What should investors expect for 2015 costs and cash flow?
Management expects roughly $150M of restructuring charges and about $100M of benefits from prior actions. It expects lower manufacturing costs, partly offset by inventory-related absorption effects, and lower short-term incentive compensation (about $1.3B in 2014). Pension contributions of about $190M are expected in 2015, and R&D is expected to rise about 10%. The strong dollar is expected to hurt sales but help costs, and dealer inventories are expected to keep falling as they align with demand.
06—Continue