The CAT is out of the bag

US stock indices are surging back to their old record highs (or even higher), thanks to some deft intervention by central bankers. Yesterday, in particular, it was supposed to be stellar guidance of ‘Caterpillar’ that had lit a fire under US stock indices. I do not analyse company results much. But, I have, every once in a while, looked at Caterpillar’s results since it is an equipment company and is some sort of a leading indicator. This time, I looked at the company results for signs of financial engineering, if any. I was not disappointed.

Sales were about flat in the quarter ending 30th September 2014, compared to the quarter ending 30th September 2013. Operating profits were very slightly lower actually – by 9 million USD. Sales had been strong only in North America. Asia and Latin America trends were disappointing (cue China and Brazil and more in LatAm?). One wonders if the lower oil price is sustainned, will the Shale extraction industry in the US cut back on CapEx and how would it impact Caterpillar? Shale extraction is profitable as long as the price of crude oil is at least around USD80 per barrel.

Shareholder equity was lower, long-term (more than one year) debts were up and net fixed assets were lower on 30th September compared to December 2013. Of course, there were some 7154 fewer employees compared to a year earlier. Company’s revenue guidance for 2014 was not different from earlier ones. The company is in the middle of a USD10.0bn share buyback programme. Sales at Construction and Resources Divisions were lower and yet profits were strongly up in the Construction Division. One of the reasons mentioned is ‘currency effects’.

On China, the company expects the ‘Chinese construction machinery industry to remain challenged in the near future.’

If one looked at the first nine months of 2014 compared to the first nine months of 2013, the sales revenues were lower (USD40.94bn vs. USD41.25bn).  Yet, it now projects a full-year sales of USD55bn. Second, its operating profits were higher than last year’s for the same nine-month period only because of the entry, ‘Other income’ amounting to USD236mn of which USD179mn came from ‘Consolidating Adjustments’. Here goes the explanation for the same:

Elimination of discount recorded by Machinery, Energy & Transportation on receivables sold to Financial Products and of interest earned between Machinery, Energy & Transportation and Financial Products.

Try figuring that out. I hope some analyst asked. Well, actually, fat chance, they did.

Hence, but for this lovely intra-company adjustment of USD179mn, the Profit for the nine months of 2014 at USD2.938bn would have been lower than the last year’s (same period) USD2.786bn. Of course, the company would have still reported higher EPS because the number of shares outstanding on Sept. 2014 compared to Sept. 2013 seems to be about 30 million shares less.

The joy of financial engineering! It is all here, if you care to look and go through the 28 pages.


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