Highlights From CAT's Q3 Conference Call: Record-Breaking Third Quarter

Caterpillar, Inc. (NYSE: CAT) reported Q3 EPS of $1.71, $0.16 better than the analyst estimate of $1.55. Revenue for the quarter came in at $15.72 billion versus the consensus estimate of $15.03 billion. Shares are currently trading up 5% to $91.80.

Highlights From CAT's Q3 Conference Call:

• Raises its FY11 sales guidance from $56-$58 billion to about $58 billion. EPS move from $6.25-$6.75 to about $6.75. The Street is currently looking for sales of $57.92 billion and EPS of $6.59.
  
• (Michael DeWalt) Earlier today, we were happy to report a record-breaking third quarter. Sales and revenues were $15.7 billion and that was an all-time record, the best quarter ever in our history.
  
• Now the quarter did include $1.1 billion in sales and revenues from our recent acquisition of Bucyrus. Excluding Bucyrus, sales and revenues were $14.6 billion and that was also an all-time record.
  
• Profit was $1.71 per share in the quarter and that did include a negative impact of $0.22 a share related to Bucyrus. Excluding Bucyrus, profit was an all-time record at $1.93 per share.
  
• Because of the size of Bucyrus to keep the discussion apples-to-apples will compare our third quarter 2011 results excluding Bucyrus with our total third quarter of 2010 results. And again, at $14.6 billion without Bucyrus, it was a record quarter up 31% from $11l1 billion a year ago.
  
• Sales and revenues were up in every geographic region with North America up 25%, Latin America, 20%; Europe Africa Middle East up 41%; and Asia-Pacific up 38%. And again, those exclude Bucyrus.
  
• Now in terms of the timing of the sales increase and the backlog growth, it was reasonably consistent as we went throughout the quarter. Now speaking of the order backlog, for all products other than Bucyrus, it rose 11% from the end of the second quarter in June, from about $21.9 billion to $24.4 billion at the end of the third quarter and it's about 40% higher than it was at the end of the third quarter a year ago. Now the Bucyrus backlog grew from about $3.5 billion at the time of our acquisition in July to $4.2 billion at the end of September.
  
• Now moving onto the results, price realization was $129 million and that's up close to 1% and about as we expected. Manufacturing costs were up $330 million, and of that, period or fixed manufacturing costs were the most significant driver and the primary reasons for that increase were our volume increase, the investments that we're making in capacity and the increases in our short-term incentive compensation. In addition, to the period costs, material and freight were also somewhat higher.
  
• Now SG&A and R&D costs were up $82 million in the quarter. That's about a 6% increase in costs on our 31% increase in sales. We think that's pretty good cost control and as a percent of sales, SG&A and R&D declined.
  
• Currency impacts overall were negative, $160 million to operating profit. It's a positive impact on sales of $356 million but a negative impact on operating costs of $516 million. The most significant net negatives were from the yen and the British pound.
  
• Excluding the acquisitions, our consolidated incremental operating profit pull through was 22% in the quarter and 24% year-to-date through September.
  
• That 24% year-to-date number is a little lower than our goal which is 25% for the year and the primary reason for that is negative currency impacts. Excluding currency impacts incremental operating profit was 30% in the third quarter and is 28% year-to-date.
  
• Bottom line, we're it 24% year-to-date versus our goal of 25%. That's pretty close and operationally excluding currency return better than our goal. All in all it was a good quarter for sales and profit, costs were in good shape, margins improved. In fact, excluding Bucyrus, our year-to-date operating profit as a percent of sales is better than any full-year in more than three decades.
  
• Cash flow was also a great story. Our Machinery and Engines operating cash flow was over $6.1 billion through the first nine months of the year. That means if we stopped the year at the end of September, it would be an all-time record; the first nine months have been better then any full year in our history.
  
• Our debt-to-capital ratio continues to improve and it dropped to 41.1% at the end of the third quarter. That's down from 42.6% at the end of the second quarter.
  
• Now as we usually do at this time of year, we've provided a preliminary sales and revenue outlook for next year 2012. And for 2012, we expect our total sales and revenues to be up 10% to 20% from the outlook for 2011 of $58 billion. Now that's based on our view that the developed countries of the world will continue to grow in 2012, a little bit better than 2011 but at a slow rate and below their potential.
  
• In the developing world, we expect overall economic growth at about the same pace as 2011. In the U.S., we still expect continuing poor housing, a little better than this year but still very weak. We're also not factoring in any new highway builds, but we are encouraged. That seems to be gaining some traction in Washington.
  
• In summary, we're still predicting improving but slow economic growth. In some of our businesses, that's actually good. For many of our products we're producing full out and need more time to get more capacity in place. Despite the relatively weak economic growth so far this year in 2011, our order backlog has steadily increased throughout the year. It set a record level and that will help support next year sales.
  
• (Q&A) I'm wondering, Mike, if you might be willing to directionally help us think about how incremental margins might proceed into 2012. And you had a number of things that were headwinds this year, things like currency and price cost and some of these comp accruals and so forth. And it seems like most of those should be a little better next year. But then again we're later in the cycle with a little bit higher production levels. Just conceptually how do you think about the progression of incremental margins? (A) Well, I'll talk around it a little bit, Steve. We don't have profit guidance for next year but as you said there'll be plenty of puts and takes. On the positive side this year we've far exceeded our plan for the year. And the result of that is incentive comp is quite a bit higher than at a regular target number well higher than our outlook. So that would actually be a fairly sizable tailwind going into next year. Currency as you said has been a big negative so far this year and I guess we'll see how the currency plays out. Hopefully it won't be a be headwind next year. But we'll just have to wait and see what happens on currency next year. There are a couple of headwinds. We're increasing capacity for a lot of our product. We're producing flow out right now. As you've seen us announce over the last 18 months we have a lot of projects in place and that does drive some increase in expense. I guess I would wrap all that up and say so far this year, year-to-date even including the negative from currency we've done about 24% excluding acquisitions. Our goal leading up to 2012, through 2012 our long-term goal has been around 25%. So certainly that's our goal. But again we don't have profit guidance for next year. So it's a little tough to be more explicit then that.
  
• Understood. That's exactly what I was looking for. And then sorry to get into the weeds here but was there an interest rate swap loss? I think you were guiding to something $150 million-ish and I'm just trying to make sure I'm thinking about interest expense right maybe it's somewhere else? (A) Yeah, no. We did have about $150 million of swap losses but that was in the second quarter. That's behind us.
  
• So if I could just ask you about your guidance for 2012 in maybe a different way. Can you talk about the visibility that you have in this [indiscernible] given Caterpillar is getting more after-market focused? It's getting more backlog focused. And so I know there's a lot of macroeconomic uncertainty out there. But it seems like those two things would happen you and give you better visibility as we go forward. (A) Well, Andy, this is Mike. I think, you're right, particularly with the acquisition of Bucyrus, with relative strength of mining which is a more sort of backlog oriented business then let's say construction equipment. And kind of just going back to the earlier comments from today, from the end of June to the end of September our backlog, even without Bucyrus, went up 11%. Bucyrus went up a little bit more than that. We're up about 40% versus a year ago on backlog. So that does help. You mentioned aftermarket, again we don't break that out separately, but we've had continuing, consistent increases in the aftermarket business, which basically tells you a couple of things. On one hand, it tells you that activity levels are holding up because aftermarket is related to activity levels and that gives you some confidence. And I think there's also an impact, particularly in the developed world, where we just have a little bit of an aging fleet, and I think that gives you a little confidence in terms of the need for at least some minimal replacement. (A) It's never a sure thing. I mean as you look forward to next year, there are myriad of things that could happen but I think as we sit here right now today, when you look at aftermarket which is an indicator of activity, if you look at the backlog which is an indicator of sort of customer confidence I guess, it looks pretty good. (A) Andy, this is Ed. A couple I'd add to that, in terms of looking into next year, would be also we're seeing rental fleet utilization back to levels that are at a pre-crisis, so it tells you that rental fee utilization is there. So that's another thing that kind of gives us some confidence moving forward. The other one is we continue to seek good, strong pricing in the used equipment market which is another sign of good demand, moving forward.

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