Caterpillar Financial Projections

Reece Lehman

Dr. Muoghalu

November 20, 2011

Table of Contents

Executive Summary…………………………………………………………………………...pg. 3

Overview………………………………………………………………………………………pg. 4

Objective………………………………………………………………………………………pg. 5

Assumptions…………………………………………………………………………………...pg. 6

Analysis………………………………………………………………………………………..pg. 7

SWOT Analysis……………………………………………………………………………...pg. 10

Conclusion and Recommendation…………………………………………………………...pg. 11

Bibliography…………………………………………………………………………………pg. 13

Appendix……………………………………………………………………………………..pg. 14

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Executive Summary

Caterpillar, Inc. has historically been a good financial bet for investors, either in the stock market

or in the bond market. They have been known as a steady growth stock and have little variance

in their stock price and they have never been bankrupt. After looking at the different financial

statements and doing a ratio analysis on the projections for the next five years using FisCAL

software, Caterpillar, Inc. has been found to have low profitability, low liquidity, high amounts

of debt, and a very low z-score, causing concern and worry to arise. Caterpillar, Inc. has a high

chance of bankruptcy according to its projected average z-score of 0.11 over the next five years,

with a score of 0 meaning a 50% chance of bankruptcy. The z-score has successfully predicted

72% of bankruptcies, causing a high level of concern for Caterpillar, Inc. A low quick ratio and a

low current ratio were found and projected causing there to be concern about Caterpillar, Inc. to

have the ability to pay back a creditor if a long-term multimillion loan was applied for.

Profitability was projected to decrease over the next five years because sales growth is projected

to be negative and expenses are projected to go up. The amount of long-term debt Caterpillar has

already is gigantic in comparison to the industry average. This large amount of debt has a huge

toll on the company overall, and is another reason profits are low. Caterpillar is going to have to

adopt a new financial strategy going forward to change their current and future financial state or

there could be a bankrupt company before long.

3

Overview

Caterpillar, Inc. is a diverse company that ranges from equipment for construction and

mining to engines and turbines that are diesel or natural gas powered. Caterpillar also has

financing alternatives for customers to use. Benjamin Holt and C.L. Best started Caterpillar, Inc.

with the use of steam-powered tractors. The problem with steam-powered tractors was they got

stuck in damp soil and could not move. Holt was the first to come up with the idea to put steel

planks and wheels together, an idea that is still being used today. Caterpillar has over 104,000

employees and operates in 180 countries. Caterpillar has a few different sub brands in its arsenal.

They are Caterpillar (or Cat as it is commonly referred), Cat Power Ventures, Cat Logistics,

Perkins, and Cat Financial. These brands combined with several buyouts of competitors and

mergers have given Caterpillar the industry lead in construction, mining, and logging equipment

and also in the diesel and natural gas engine and turbine industries. Since the beginning,

Caterpillar has always been a global company, and this global presence has given them a global

network that is not easily matched and has lead them to there ability to be the industry leader.

Caterpillar tractors were used in both World Wars and have been used by the United States as

well as other governments because of their durability and reliability.

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Objective

The objective of this report is to see whether or not Caterpillar has the ability to take out and

afford a long-term multimillion-dollar loan. What the loan would be used for does not really

matter in this because this report is meant to see if Caterpillar has the room and/or the ability to

take on such a large loan and then show why they can or cannot and what they could do to

change their current state.

5

Assumptions

One assumption that is being made is that all revenue was due to sales in NAICS coded industry

333120, Construction Machinery Manufacturing. This is not accurate because some revenue

came from their financial alternatives, which accounted for an average of 7.2% annually.

Another assumption being made is that Caterpillar is only in the construction machinery

manufacturing industry. This is not accurate as Caterpillar has a range of products and services,

not just one individual product. This will skew the comparisons with the industry average a bit.

Another assumption is that the last three years contain and make trends that can be projected

forward. This is not right because we have had and are still in a recession and a recession is not

the normal state of the economy. This will cause the numbers to be low and could cause a bad

projection if the economy starts to rise back up. Another assumption is that sales will go down by

an equal amount each year over the next five projected years. Sales growth or the declining of

sales has never been consistent from one year to the next, so assuming that this is what will

happen over a five year period is in no way going to happen and will cause a big variation from

projection to what will happen.

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Analysis

Caterpillar, Inc. has a bit of a bumpy road going forward according to projections using FisCAL

software. One of the problems is profitability, as shown in table 1. Profitability is projected to go

up for the first two years and year four, but in year three and year five profitability is projected to

take huge hits. Year three profitability is projected to take a -414.2% dive and year five is

projected to take a -674.9% dive. Revenues and sales are projected to go down -10.4%, annually,

while expenses are projected to go up by an average of 8.0%, annually. Even though the

projected overall sales per year for Caterpillar, Inc. over the next five years is above the industry

average, negative sales growth is not a sustainable situation for them keep up.

Table 1Year 2010 2011 2012 2013 2014 2015Sales 42,588 38,172 34,214 30,666 27,486 24,636Percentage Change

-10.4% -10.4% -10.4% -10.4% -10.4%

Another problem for Caterpillar, Inc. is their liquidity, as shown in table 2. At the end of

2010, Caterpillar had a quick ratio and a current ratio of 0.93 and 1.44, respectively. The industry

average for the quick ratio was 1.4 and the current ratio was 2.2. This means that Caterpillar, Inc.

is not as liquid as the rest of their competitors. The projected quick ratios and current ratios are

supposed to get even worse over the next five years. The quick ratio is projected to go down by

an average of -24.8%, annually, while the current ratio is projected to go down by an average of -

23.7%, annually. This is due to the amount of current assets Caterpillar, Inc. has is projected to

go down by an average of -9.1%, annually. Another key in the liquidity problem for Caterpillar,

Inc. is that the cost of goods sold compared to the amount of inventory is projected to go down

by an average of about -1.0%, annually, but it is still supposed to be above the industry average.

This means that it is projected to cost Caterpillar, Inc. an average of $3.60 for each $1 of

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inventory while the rest of the industry is only paying $2.90 for $1 of inventory. This $0.70

difference is still too high and causes Caterpillar’s inventory to cost too much to get built.

Table 2Year 2011 2012 2013 2014 2015 Ind. Avg.QuickRatio

0.89 0.80 0.56 0.62 0.19 1.4

Current Ratio

1.34 1.22 0.86 0.97 0.30 2.2

COG/Inventory

3.68 3.64 3.60 3.57 3.53 2.90

Another problem for Caterpillar, Inc. is the amount of debt they have. At the end of 2010,

Caterpillar, Inc. had over $31.1 billion in long-term debt, which was gigantic in comparison to

the industry average of $6.7 billion. Caterpillar’s current liabilities, or short-term debt, in 2010 of

$22 million was still above the industry average of $21.2 billion. The amount of long-term debt

is projected to go down by an average of -19.3%, annually, which is a good trend, but means that

Caterpillar, Inc. is going to be paying a huge chunk each year on that debt. The debt ratio for

Caterpillar, Inc. is projected to go up by an average of 95.23%, annually, for the next five years

as shown in table 3. The debt ratio tells how much debt is used for $1 of assets. The debt ratio in

2010 was 0.83, meaning that it costs $0.83 of debt for each $1 of assets.

Year 2010 2011 2012 2013 2014 2015Debt Ratio 0.83 0.80 0.76 0.84 0.70 1.47Percentage Change

-3.61% -5.0% 10.53% -16.67% 110.0%

Another problem with Caterpillar, Inc. is the z-score they will have. The z-score is a

bankruptcy indicator The average z-score for Caterpillar, Inc. over the next five years is

projected to be 0.11 and is projected to drop an average of -34.9%, annually. The lower the z-

score, the bigger the chance a company will go into bankruptcy. The low z-score has

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successfully predicted 72% of bankruptcies. Companies with a z-score of 3 or higher are said to

be ok and companies with a score of 1.8 to 3 are said to be in a grey area and could go either

way. Companies like Caterpillar, Inc. with a score of less than 1.8 are said to be in trouble.

Caterpillar had a z-score of 1.33 in 2010, which is not good to begin with and it is projected to

get even worse causing a very bad outlook going forward.

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SWOT Analysis

A SWOT analysis is shown in chart 1. The strengths of Caterpillar, Inc. are that they have a

great, not just good, research and development department and they manufacture their products

in the United States. Caterpillar, Inc. also has a huge dealership network all over the world,

allowing for a competitive advantage over others in the industry. Some of their weaknesses are

the changes in commodities and their labor relations. Another weakness is that they are heavily

influenced by the business cycle because they are hand-in-hand with the construction industry.

This means that when times are good, things are going crazy and profits are flying in, but when

things are bad, things add up in a hurry and times get tough quick. Some opportunities that

Caterpillar, Inc. has in front of them are that they could acquire another business to gain more

market share and they are already in emerging markets. They can keep making strides in those

emerging markets along with going into new ones. Some of the threats Caterpillar, Inc. has is

that they are in a highly competitive industry and the government keeps making tougher and

stricter regulations that either directly or subsequently affect them.

Chart 1

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Conclusion and Recommendation

Caterpillar, Inc. was hit hard by the recession just like all other companies associated with the

construction industry. Their financials over the last three years show this. With a projected

decline in sales, poor liquidity, high amount of debt, and a very poor z-score, I would not give or

recommend giving Caterpillar, Inc. a multimillion dollar loan nor would I even say Caterpillar,

Inc. has the ability to take out a large loan. Caterpillar, Inc. had $24.4 billion more than the

industry average in long-term loans in 2010. That is a huge amount of money and cash tied up in

loans. The quick ratio shows the true liquidity of a company because it shows the companies

ability to pay off short-term debt without having to sell inventory, the least liquid of the current

assets. The quick ratio for Caterpillar, Inc. is below the industry average, and even if the value of

inventory is added back in, which makes the current ratio, Caterpillar, Inc. still falls short

compared to the industry average. This means that Caterpillar, Inc. needs to increase their current

assets, either by increasing the amount of cash or marketable securities, while decreasing the

amount of short-term debt, either by paying off what they owe to suppliers or by paying off

short-term loans, in order to get to the industry average. Profitability is projected to decrease

while expenses are expected to increase. This is a huge problem that is being projected.

Caterpillar, Inc. is going to have to find ways to fix the projected profit margin annual drop of

-139.1%, as shown in table 4. This drop in profitability can be taken care of by increasing sales

or cutting expenses, assuming the price level of the products and services do not change. The z-

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score is another huge problem for Caterpillar, Inc. Some strategies that could be used to raise the

z-score and lower the chances of bankruptcy are to increase the earnings before taxes and

interest, sell some assets and pay off debt, increase sales without increasing the amount of assets

or debt, increasing the market value of equity by using retained earnings or gaining outside

capital from outside investors, reducing the amount of total debt, retain all the profits, or by

increasing the working capital.

At this moment, the future of Caterpillar looks very bleak at best according to these

projected numbers, but there are a few assumptions that are causing the projections to be messed

up and wrong. Even if these assumptions were accounted for, Caterpillar still has too much debt

and pays too much for their inventory. They need to become more liquid and somehow get sales

growth to become positive rather than the negative projection.

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Bibliography

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Appendix

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