Caterpillar Reports Record Cash Flow in 2013 Despite $10 Billion Drop in Sales and Revenue

Caterpillar Inc. today announced fourth-quarter 2013 sales and revenues were $14.402 billion, down 10 percent from $16.075 billion in the fourth quarter of 2012. Profit per share in the fourth quarter of 2013 was $1.54, compared with profit per share of $1.04 in the fourth quarter of 2012. Fourth-quarter 2012 included two large items — profit was negatively impacted by a goodwill impairment charge of $580 million, or $0.87 per share, but was positively impacted by a $300 million tax settlement, or $0.45 per share. Excluding these two items, profit per share increased $0.08 from the fourth quarter of 2012, reflecting solid operational performance.

Sales and revenues for full-year 2013 were $55.656 billion, down 16 percent from $65.875 billion in 2012. The decline in sales and revenues was primarily driven by a sharp drop in sales of new machines for mining. Profit per share in 2013 was $5.75, down from $8.48 in 2012. Despite this challenging environment, the company reported record Machinery and Power Systems (M&PS) operating cash flow of $9 billion in 2013.

“In such a challenging environment, I am proud of the way our employees came together in 2013. Despite a sales and revenues decline of about $10 billion, we set a record for operating cash flow, strengthened our balance sheet and improved our overall market position for machines. We continued to improve safety in our facilities and the quality of the products we ship each day,” said Caterpillar Chairman and Chief Executive Officer Doug Oberhelman.

“Cost flexibility is critical to our strategy and was a significant focus in 2013 as we took substantial actions to help maintain profitability as sales declined. Excluding the impact of cost absorption our manufacturing costs and SG&A and R&D expenses were favorable by $1.2 billion compared with 2012. It wasn’t easy,especially for our employees who endured an incredibly tough year, but the actions we initiated helped us deliver strong operational performance in 2013.”

First-Quarter 2014 Stock Repurchase, Authorization for New $10 Billion Stock Repurchase Program

The company also announced its intention to repurchase approximately $1.7 billion of Caterpillar common stock during the first quarter of 2014. This repurchase is expected to complete the existing $7.5 billion repurchase authorization that was set to expire on December 31, 2015, which was originally approved by the Board of Directors in 2007. This repurchase is in addition to $2 billion that was repurchased in 2013.

With the expected completion of the current $7.5 billion stock repurchase program, the Board of Directors has approved a new $10 billion stock repurchase program, which will expire on December 31, 2018.

“The completion of our previous program and the decision to announce a new $10 billion program are a result of our record cash flow, the strength of our balance sheet and our confidence in the long-term future of Caterpillar,” Oberhelman said.

2013 In Review

Looking back on 2013, it was a year overshadowed by a substantial decline in sales of relatively high-margin mining products. Caterpillar expected there would be a decline in mining sales in 2013, and it turned out to be worse than anticipated. As a result, the company took substantial actions to reduce costs which helped mitigate the impact on profit. 

While mining was significantly negative for sales and profit in the Resource Industries segment, Caterpillar is a diverse company that serves a wide range of industries across the globe. Sales in our Construction Industries and Power Systems segments did not decline nearly as much in 2013. Caterpillar's largest segment, Power Systems, delivered profit near its 2012 record despite lower sales. The company also had a strong year in its Financial Products segment, which delivered a record profit in 2013.

From a financial standpoint, Caterpillar set a new record for M&PS operating cash flow of $9 billion. That is about $1 billion more than the previous record from 2011 and was helped by $2.9 billion of inventory reduction during 2013. Strong cash flow enabled the company to repurchase $2 billion of Caterpillar stock and increase the dividend by 15 percent in 2013. Its balance sheet ended the year stronger than it began with a debt-to-capital ratio dropping about eight points to 29.7 percent. This was the lowest debt-to-capital ratio in more than 25 years.

Caterpillar lowered inventory by $2.9 billion in 2013, and dealers lowered their inventories by more than $3 billion. While these inventory reductions were a significant sales and production headwind for Caterpillar in 2013, the company believes the significant impact on sales is largely over.

Caterpillar experienced good decremental profit pull through in 2013, despite the sales decline being heavily concentrated in high-margin mining products. The negative impact on profit from the change in the mix of sales from 2012 to 2013 was about $750 million. Full-year 2013 decremental operating profit pull through was less than 30 percent because of the company's aggressive actions to reduce costs.

Given that a significant increase in mining sales was unlikely to occur in the short term, Caterpillar turned its focus to structural cost reduction to help improve long-term results. It announced the closure of several small facilities and the downsizing of others. It is re-sourcing products to more cost-effective locations and has reduced nearly 2,000 management and support positions.

Caterpillar improved its market position for machines over the past three years and had particularly strong gains with excavators in China. In fact, total sales and revenues in China in 2013 were about $3.5 billion, up more than 20 percent from 2012.

2014 Outlook

Caterpillar expects sales and revenues in 2014 to be similar to 2013 — about $56 billion in a range of +/- 5 percent. To provide a better understanding of its expectations for 2014 profit, Caterpillar provided its outlook with and without anticipated restructuring costs. 

During 2013, the company worked on a large number of restructuring activities. Some actions have already occurred, some have been announced and are in process and some are anticipated in its outlook for 2014. In total, Caterpillar expects the cost of these restructuring actions in 2014 to be about $400 to $500 million and estimates a 2014 after tax impact of about $0.50 to $0.60 per share. With sales and revenues at $56 billion, the profit outlook for 2014 excluding restructuring costs is $5.85 per share, and including restructuring costs of $0.55 per share, the profit outlook for 2014 is $5.30 per share.

“We see some signs of improvement in the world economy, which should be positive for sales in our Construction Industries and Power Systems segments. However, despite our expectation that mine production will continue to increase, we expect mining companies to further reduce their capital expenditures in 2014. As a result, we're expecting sales in Resource Industries to decline modestly. We’ve already taken a number of restructuring actions to help improve our financial results and expect to take additional actions in 2014. We continue to be cautious and are making the tough decisions necessary to better position us down the road when economic conditions improve and our sales rebound,” Oberhelman said.

Click here or go to to view the full version of Caterpillar Inc. 4Q 2013 results release, which includes information about profit per share estimates and non-GAAP reconciliation.