What contributed to the increase in Caterpillar’s earnings per share in 2014?

Image source: http://www.caterpillar.com/en/company/brands/cat.html

Note: This article is a special guest post written by Dr. John Dexter, Jr., CPA, CGMA, Associate Professor, Edinboro University, jdexter@edinboro.edu. Thanks, John, for the contribution!

In its Form 10-K for the year ended December 31, 2014, Caterpillar Inc. (CAT) reported diluted earnings per share (EPS) of $5.88, an increase of $0.13 from the prior year’s reported EPS of $5.75. The company attributed the increased EPS to better performance in several areas of its business. Overall, however, Caterpillar’s revenues, operating profit, and net income all declined in 2014.

Caterpillar’s CEO’s year-end bonus is based on overall company performance and changes in EPS. The Board of Directors approves the CEO’s compensation package, and the CEO is the Chairman of the Board. For the year of 2014, the CEO received a $2 million performance bonus.

An analysis of Caterpillar’s 2014 Form 10-K reveals that the company increased the number of treasury stock (common) shares held in the treasury by over 31.6 million shares during 2014.

Questions

1. What effect do you think the increase in treasury stock shares had on Caterpillar’s EPS change in 2014? Explain.

2. Based on the information above, what effect do you think the company’s performance had on the CEO’s year-end bonus for 2014? Explain your answer.

3. What potential conflicts of interest can you identify in the determination of the CEO’s compensation package? How might these conflicts be managed or eliminated?

Note: This article is a special guest post written by Dr. John Dexter, Jr., CPA, CGMA, Associate Professor, Edinboro University, jdexter@edinboro.edu. Thanks, John, for the contribution!

Instructor Resources

These resources are provided to give the instructor flexibility for use of Accounting in the Headlines articles in the classroom. The blog posting itself can be assigned via a link to this site OR by distributing the student handout below. Alternatively, the PowerPoint file below contains a bullet point overview of the article and the discussion questions.

• Student handout (PDF) (word) (contains entire blog posting + discussion questions)
• PowerPoint file (brief article overview + discussion questions)

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