Financial Performance: Caterpillar Caterpillar, the Preeminent Leader

Financial Performance: Caterpillar Caterpillar, the preeminent leader in the manufacture and supplier of earth moving equipment is the quintessential growth success story in the rapid economic globalization of the past three decades. Caterpillar's growth engine relies not just on the stable and dependability of the developed G-8 economies, but also in the inchoate opportunities presented by rapidly increasing developing economies such as Brazil, China, and South Africa.

The Caterpillar narrative is one of competitive drive and dedication in providing superior manufacturing and industrial equipment to customers from small business to corporate giants to governmental entities. As global economic demand has increased tremendously over the past decades (notwithstanding the last years of the Great Recession), Caterpillar had delivered exceptional results for its customers, employees, and shareholders. Company Overview The Caterpillar name is synonymous with heavy-duty, rugged, and dependable earth-moving and industrial equipment.

The company which has a presence on every continent "is the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives" (Cat 2010). The company which had its start in the late century as a supplier of steam powered construction equipment, quickly branched out to incorporate multiple lines of business and product offerings.

At the start of the second decade of the 21st century, Caterpillar has continued the growth which started over a century ago, and now has over 25 brands in their stable: from clean energy solar, to transportation rail logistics, to the ubiquitous backhoe and construction equipment seen at construction sites worldwide. The company "operates in three principal lines of business: Machinery, Engines and Financial products" (CNBC.com.

May 16, 2011) and is without question the dominant player in the construction and farm machinery industry; with revenues exceeding 42 billion in 2010 easily surpassing rivals Deere Cummins, and Komatsu with 26, 25, and 13 billion in revenues respectively (CNNMoney.com. 2011). The lines of business respectively generated revenue in 2010: machinery 27.7 billion, 12.1 billion engines, and 2.7 billion financial services (CNNMoney.com. 2011). With operations around the globe, Caterpillar remains a U.S. based multinational and is one of the country's leading exporters, accounting in 2010 for 13.4 billion dollar value (Caterpillar.com.

2010) The company's global presence is reflected in their strong revenue generation from developed and developing economic regions: North America 16 billion, Latin America six billion, Asia/Pacific 10.5 billion, and Europe/Africa, and Middle East 10.2 billion (Caterpillar.com. 2010). Caterpillar's performance is driven by a variety of factors across a myriad of economic demographics: "higher demand for goods & services, increased urbanization rising energy consumption, higher demand for commodities, increased need for infrastructure, finite energy resources, more mining of commodities, increased construction equipment, and new energy solutions" (Caterpillar.com. 2010).

Caterpillar has capitalized on these factors by positioning itself in developed and developing markets with emphasis on "delivering valued, quality products, services and solutions to our customers that provide the lowest total owning lifecycle costs. This, along with our unmatched customer support, creates the largest field population, highest customer loyalty and attractive profitability throughout the business cycle" (Caterpillar.com. 2010). Like the inexorable churn and advance of the global economy, so too will Caterpillar benefit from the continued demand cycles of an expanding global footprint.

As CEO Doug Oberhelman articulates: As we look to the future, a few things are clear -- the world's energy needs will continue to grow, countries and cities around the world will continue to develop and we will need ways to efficiently transport goods and services around the world. No matter what else happens, these needs will be there, and Caterpillar will be positioned to take advantage of growth and progress in our changing world (Caterpillar.com. 2010). Ratio Analysis From a financial perspective Caterpillar is a resoundingly profitable enterprise.

On revenues of 42.5 billion the company generated operating profit of 3.9 billion and after tax profit of 2.7 billion (Caterpillar.com. 2010). In order to generate such high levels of revenue and profit the company must invest heavily in cap-ex and R&D, this spending accounting for 1.5 and 1.9 billion respectively (Caterpillar.com. 2010). The revenue generation is also concomitant with high COGS and expense levels: 28.7 and 6.6 billion respectively (Caterpillar.com. 2010).

The financial health of an organization however, cannot be judged just by the top line revenues or bottom line profits, rather a ratio analysis covering key measures: valuation, financial strength, assets, and profitability can provide greater perspicuity into the company's position. As indicated below the company has strong financial metrics. The valuation shows a company with a strong price to earnings ratio 18.92, in line with the overall market as referenced by the S&P 500 of 19.50.

A price to sales ratio significantly higher than its competitors and the broad index which is indicative of strong stock performance, Lastly, a price to book ratio which outperforms the broader market, indicative of financial strength and asset value (CNBC.com. May 16, 2011). The financial strength evidenced by a favorable quick and current ratio indicates solid liquidity. The long-term debt to equity is considerably higher than the industry average which may be a cause for concern however; liabilities do not dwarf assets which stand at 61 billion assets and 50 billion liabilities.

Perhaps most impressive is a strong return on equity evidenced by outstanding net income results (CNBC.com. May 16, 2011). Asset strength is evident by asset turnover "the efficiency with which assets are used to generate sales" and is in line with industry average. Inventory turnover looks at the firm's inventory management efficiency; in this case the figure demonstrates a fairly quick turn of inventories into sales (CNBC.com. May 16, 2011). On profitability EBITDA (Earnings before Interest, Taxes, and Depreciation) is quite strong given total revenues and COGS.

Most impressive is the gross profit margin which reflects profit after accounting for COGS. The figure is above industry standards (CNBC.com. May 16, 2011). The recession of the last three years affected the metric trends of Caterpillar, as it did for most companies. From the financial statements 2011 should see a return to the revenues of 2007 prior to the recession, along with returns to pre-recession levels of net income and Earnings per Share.

As the global economy continues its nascent recovery, Caterpillar will continue to improve on their financial ratios, strengthening them against industry rivals and the S&P 500 overall.

Key Measures Select View VALUATION CAT Industry Average Sector Average S&P 500 Price/Earnings (TTM) 18.92 20.66 18.75 19.50 Price/Cash Flow 10.64 13.13 12.09 11.17 Price/Sales (TTM) 1.52 0.26 0.32 0.48 Price/Book 5.96 4.77 3.93 4.36 FINANCIAL STRENGTH Quick Ratio (MRQ) 0.93 Current Ratio (MRQ) 1.44 1.89 1.76 1.79 LT Debt to Equity (MRQ) 35.59 89.04 38.67 Total Debt to Capital (MRQ) 94.29 46.55 Return On Equity 27.54 1.00 1.00 1.00 Return On Assets 5.86 4.98 5.94 9.00 Return On Invested Capital 8.64 9.93 11.60 14.39 ASSETS Asset Turnover 0.69 0.81 0.88 0.77 Assets per Employee $588.8K $582.3K $655.4K $2.4M Inventory Turnover 3.61 5.10 16.69 14.34 PROFITABILITY EBITDA $4.9B $994.2M $1.8B $3.6B Operating Margin 11.5% 10.3% 13.1% 20.0% Profit Margin 6.3% 5.6% 6.4% 13.2% Gross Profit Margin 27.1% 25.9% 32.3% 44.2% Loading..

Balance Sheet Quarterly Annual 2010 12/31/10 2009 12/31/09 2008 12/31/08 2007 12/31/07 Cash 3,683 ASSETS Cash & Short-Term Investments 3,683 4,867 2,736 1,122 Receivables - Net 16,792 13,912 18,128 15,752 Raw Materials 2,766 1,979 3,652 2,759 Work in Progress 1,483 1,107 1,215 Finished Goods 5,098 3,465 4,022 3,230 Progress Payments Other 0 0 Inventories - Total 9,587 6,360 8,781 7,204 Prepaid Expenses Other Current Assets 1,748 1,650 1,988 1,399 CURRENT ASSETS - TOTAL 31,810 26,789 31,633 25,477 Land Buildings 5,174 4,914 4,647 3,625 Machinery & Equipment 13,163 12,917 12,173 9,756 Rental/Leased Property 4,444 4,717 3,996 4,460 Property, Plant, & Equipment under Capitalized Leases 96 Property, Plant and Equipment - Gross 24,906 24,221 23,487 19,208 Accumulated Depreciation (12,367) (11,835) (10,963) (9,211) Property, Plant and Equipment - Net 12,539 12,386 12,524 9,997 Long-Term Receivables 11,808 12,931 15,743 14,147 Investments in Associated Companies 94 Other Investments 1,619 1,641 1,132 1,287 Other Tangible Assets Total Intangible Other Assets - Net 3,419 2,734 2,772 2,438 Other Assets - Total 6,080 6,186 6,656 4,626 TOTAL ASSETS 61,527 57,324 64,471 54,579 LIABILITIES Accounts Payable 5,856 2,993 4,827 4,723 Short-Term Debt & Current Portion of Long-Term Debt 7,981 9,784 12,701 10,600 Accrued Payroll 1,670 1,242 1,126 Income Taxes Payable 7 11 9 8 Dividends Payable Other Current Liabilities 6,225 5,445 7,037 5,563 CURRENT LIABILITIES - TOTAL 22,020 19,292 26,069 22,245 Capitalized Lease Obligations 81 0 Long-Term Debt 21,847 22,834 17,829 Provision for Risks and Charges 7,584 7,420 9,975 5,059 Deferred Taxes - Credit Deferred Taxes - Debit 2,493 2,714 3,311 1,553 DEFERRED TAXES (2,352) (2,576) (3,181) (1,446) Other Liabilities 2,513 2,041 2,163 2,009 TOTAL LIABILITIES 50,202 48,024 57,860 45,696 EQUITY Non-Equity Reserves 0 0 0 0 Minority Interest 0 Preferred Stock 0 0 0 0 Common Stock 3,888 3,439 3,057 2,744 Other Appropriated Reserves (4,695) (4,442) (5,849) (2,594) Retained Earnings 21,384 19,711 19,826 17,398 Unrealized Foreign Exchange Gain/Loss Unrealized Gain/Loss on Marketable Securities 48 15 9 37 Treasury Stock (10,397) (10,646) (11,217) (9,451) COMMON EQUITY 10,824 8,740 6,087 8,883 TOTAL LIABILITIES & SHAREHOLDERS' EQUITY 61,527 57,324 64,471 54,579 SHARE INFORMATION Common Shares Outstanding Income Statement Quarterly Annual 2010 12/31/10 2009 12/31/09 2008 12/31/08 2007 12/31/07 NET SALES OR REVENUES 42,588 32,430 51,324 44,958 Cost of Goods Sold (Excl Depreciation) 28,761 22,263 37,159.