Obama is Bush part 3

Caterpillar's Troubling Bond Issue

User 251880: there is nothing speculative about my description of CAT. I only gave a simplified illustration involving a single bulldozer to illustrate what is going on en mass within CAT's accounting. CAT is a bank.

It took the market quite a while to realize that GE was a bank -- and even after a lot of re-morphing, Imelt today acknowledged that GE is still mostly a bank (he said finance is back up to 53% of the total earnings).

People still think GM is a car company -- but a more thorough analysis of their books show that over 100% of GM's earnings in the last decade came from Dietech and GMAC. The auto manufacturing divisions lost money every single year.

Now before you get all upset: yes, I know GM reported positive SUV earnings on an **accounting** basis a few of those years... however, that was the result of very dubious pension fund assumptions that allowed GM to claim a pension related gain and to avoid making the normal contribution. If you back out the pension shananigans, GM's auto manufacture divisions lost money every single year.

As for CAT... the overwhelming majority of their "sales" are actually leases done through their captive finance subsidiary -- exactly the same as GMAC. CAT also provides financing for dealer inventories.

CAT is a bank

Caterpillar's Troubling Bond Issue

There have been a lot of articles in trade publications, and a few academic articles written, about the problems of analyzing companies with "captive finance subsidiaries".

Consider an extreme example:
CAT goes and makes a bulldozer for $60K, and "sells" this to the finance subsidiary for $100K, booking a $40K "profit". The finance subsidiary goes and borrows the $100K at 6% (lets say we are looking at this before the credit crisis), and depreciates the bulldozer over 10 years, or $10K per year. The finance subsidiary tries to lease the bulldozer out for at least what it costs them to finance it. Lets look at the case where they are unable to lease it first:

So year one, the accounting books show:
machinery and engines: $40K profit
Finance $16K loss ($10k depreciation + $6K interest)

And CAT as a whole reports a $24K "profit" even though they didnt sell anything.

If the finance subsidiary manages to lease the bulldozer for $18K per year, they would make 2% ROA (which would actually be well above average for financing deals). In this case the accounting books say:
machinery and engines +$40K
Finance +$2K

This is roughly speaking what CAT's books are showing right now, which is why some people **think** CAT is a bulldozer company... most of the earnings **appear** to be coming from machinery, with only a small amount coming from finance.

But what happens if the home builder industry collapses and the finance division cannot lease the bulldozer for all 10yrs? What happens if the cost of financing goes up by more than the lease?

It quickly becomes obvious that the $40K "profits" on the machinery side is nothing more than an **advance** from the finance division. The actual profitability of producing the bulldozer is completely dependent on how well the financial division can finance their assets vs liabilities.

In other words, CAT is a bank

Caterpillar's Troubling Bond Issue

User 251880,

You can cook the books to make them say anything you want-- you haven't been paying much attention the past 10yrs if you haven't seen that.

Caterpillar makes its money from finance. GE is another "industrial" company that makes almost 40% of its money from finance (down from 55% a few years ago). GM, another supposed industrial, makes **ALL** its money from Dietech and GMAC.

Caterpillar provides vendor financing for a majority of its sales -- and they book the "revenue" (which came from themselves) as sales of machinery. The cash, was was booked as a "machinery and engine" sale upfront, trickles in over several years. From an accounting standpoint, you can book this revenue as machinery sales or as financing.

CAT sold a lot of their accounts receivable, at a discount, which causes the financial products number to be understated. Also, when a customer fails to pay, the cost is assigned only to financial products (which understates financial products) -- the alleged "sale" of machinery / engines is never unwound.

Caterpillar's Troubling Bond Issue

Mr Jansen -- Caterpillar is NOT an industrial company. Yes, I know the SIC code says that CAT makes bulldozers and front loaders and such.

But their biggest division is Caterpillar Financial.

They make far more money financing bulldozers than they do manufacturing bulldozers.

Caterpillar is a bank in drag