Mining and equipment behemoth Caterpillar Inc. (CAT - Analyst Report) reported a 15% increase to $1.72 per share in its third-quarter adjusted earnings on the back of continued cost management and operational execution despite a muted mining environment.

Results trumped the Zacks Consensus Estimate of $1.33 for a positive earnings surprise of 29%. Caterpillar’s shares went up 4.65% in the pre-market trading session following the release.

Including restructuring costs, earnings stood at $1.63 in the quarter, up 12% from $1.45 in the prior-year quarter.

Revenues

Revenues nudged up 1% year over year to $13.5 billion in the quarter, surpassing the Zacks Consensus Estimate of $13.4 billion. Sales in Energy & Transportation and Financial Products segments registered a year-over-year increase. Weaker results from the Resource Industries segment continued to be a deterring factor.

Sales volume decreased $187 million, affected by lower volume in Resource Industries and Construction Industries, partially offset by volume increase in Energy & Transportation.  However, favorable changes in price realization and currency along with increase in Financial Products' revenues helped offset the negative effect of sales volume decline.

Lower end-user demand for mining equipment continued to affect volumes in Resource Industries, as customers trimmed their capital expenditures. Aftermarket parts sales were slightly higher compared with the year-ago quarter.

Geographically, North America was the only saving grace where sales increased as against sales decline witnessed in the other regions. In North America, Caterpillar recorded a 15% increase in sales triggered by higher demand for oil and gas and transportation applications and construction equipment.

Latin America registered a 21% drop, mainly due to lower end-user demand. Sales in Asia/Pacific declined 7%, dragged down by lower mining construction and mining sales. Sales in Europe, Africa and Middle East (EAME) were about flat as favorable impact of changes in dealer inventories offset lower end user demand.

Costs & Operating Profit

Cost of sales declined 1% to $9.6 billion in the quarter due to favorable material costs. Gross profit increased 7% year over year to $3.92 billion in the quarter. Selling, general and administrative (SG&A) expenses increased 10% to $1.45 billion and research and development (R&D) expenses went up 14% to $533 million. Operating profit was $1.39 billion, down 1% year over year, as increased SG&A and R&D expenses resulting from higher incentive compensation expense were offset by favorable price realization.

Segment Results

Machinery and Energy & Transportation (ME&T) sales increased 1% year over year to $12.8 billion. Sales in Energy & Transportation went up 13% driven by higher demand for transportation and oil and gas applications. Sales in Resource Industries declined 19%, affected by lower end-user demand for mining equipment, partially offset by the favorable impact of changes in dealer inventories. Construction Industries' sales were about flat as lower sales volume was offset by improved price realization.

The segment’s operating profit decreased 1% to $1.24 billion in the quarter. Operating profit increased 67% in the Construction Industries’ segment, owing to favorable impacts of price realization and currency and lower manufacturing costs, partially offset by lower sales volume and increased SG&A and R&D expenses.

Operating profit went up 29% in the Energy & Transportation segment as higher sales volume and favorable price realization were partially offset by an increase in incentive compensation expense. However, operating profit in Resource Industries plunged 62%, driven by  lower sales volume, increased SG&A and R&D expenses and unfavorable price realization.

Financial Products’ net revenues increased 6% to $791 million, driven by the positive impact of higher average earning assets in North America. Financial Products’ profits increased 1% to $220 million from $218 million in the third quarter of 2013. A $23 million improvement on net yield on average earning assets and a $21 million increase in gains on sales of securities at Caterpillar Financial Insurance Services were offset by $32 million of unfavorable adjustments related to prior periods for interest rate swap contracts and the provision for credit losses.

Financial Position
 
Caterpillar ended the third quarter of 2014 with cash and short-term investments of $6.1 billion, flat compared with 2013 end. Total debt-to-capital ratio was at 68% as of Sep 30, 2014 compared with 64% as of Dec 31, 2013. The debt-to-capital ratio at ME&T was 34.7% as of Sep 30, 2014 compared with 29.7% as of Dec 31, 2013.
 
Total cash flow from operating activities in the first nine month period of fiscal 2014 was $6.2 billion compared with $7.6 billion in the prior-year comparable period. Operating cash flow at ME&T was $1.4 billion in the reported quarter, down from $2.11 billion in the prior-year quarter.
 
Caterpillar repurchased shares worth $2.5 billion in the quarter. This is part of the $10 billion stock repurchase authorization previously approved by board of directors in the first quarter of 2014.  

Backlog
 
At the end of the quarter, Caterpillar’s backlog was $19.7, up from $19.3 billion at the end of the second quarter. The increase was primarily related to an early order program for rental machines in North America and Europe with expected delivery in 2015 and an increase in the backlog for reciprocating engines, which was partially offset by declines in the backlog for locomotives.

Guidance for 2014 and Sneak Peak into 2015

Caterpillar now expects 2014 revenues in the range of $55 billion, at the midpoint of the previous guidance range of $54 to $56 billion. The company has, however, raised its earnings outlook for the year, reflecting its disciplined cost control and operational execution. Excluding restructuring costs, earnings per share are now expected at $6.50, up from the prior forecast of $6.20. Caterpillar projects ME&T capital expenditures for 2014 will be less than $2 billion.
 

For 2015, the company expects 2015 revenues to be flat to slightly up from 2014. Although there is a cautious optimism for improved global economic growth, significant risks and uncertainties looming over the 2015 growth prospects led to the outlook.  The company added geopolitical tensions, slowdown in the Chinese economy and timing of U.S. fiscal and monetary policy actions may temper business confidence.

Our Take

Caterpillar has initiated extensive cost-saving programs across its global businesses and will continue to benefit from additional restructuring actions in 2014 to optimize its cost structure and improve its operational efficiency. Caterpillar will also benefit from the ongoing recovery in the U.S. construction sector as well as from share repurchases. Backlog increased in the third quarter which bodes well for fourth-quarter results. However, a muted mining capex continues to bother this mining equipment giant.

Peoria, IL-based Caterpillar Inc. is the manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. The company is one of the few leading U.S. companies in an industry that competes globally from a principally domestic manufacturing base.

Peer Performance

Astec Industries Inc. (ASTE - Analyst Report) reported third-quarter 2014 earnings of 8 cents per share, which slumped 71% from 28 cents in the prior-year quarter due to pricing pressure, coupled with product mix and lack of a federal highway bill. Earnings also trailed the Zacks Consensus Estimate of 41 cents.

Caterpillar currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the sector include Briggs & Stratton Corp. (BGG - Snapshot Report) and Alamo Group, Inc. (ALG - Snapshot Report). While Briggs & Stratton sports a Zacks Rank #1 (Strong Buy), Alamo Group holds a Zacks Rank #2 (Buy).