Caterpillar's (NYSE:CAT) top and bottom lines have struggled during a mining downturn overseas, and it's been ugly. Caterpillar's Resource Industries business segment -- which is linked to the mining market, and was once the company's profit machine -- has completely spiraled out of control in terms of earnings. However, despite the heavy-equipment manufacturer's struggles on the top and bottom line, investors have only sent the stock higher during the last two years.

Here's what investors should be looking at during Caterpillar's second-quarter conference call Thursday, and one reason investors are OK with waiting for a rebound in its overseas business.

Sales in the dumps
Caterpillar's business is separated into two sections: Machine, Energy & Transportation (M&ET) segment, and its finance division. The majority of its revenues and profits is driven by M&ET and, until recently, it was distributed evenly between the three components that make up M&ET.

Chart by author. Information source: Caterpillar SEC filings.

The only aspect that was worse than Resource Industries' plunge in revenues was its more-drastic decline in operating profits. What was once Caterpillar's chief money churner quickly became its bottom feeder.

Chart by author. Information source: Caterpillar's SEC filings.

Now, here's what we know going into Thursday's conference call, and what investors should be looking for during Thursday's second-quarter presentation.

Can resource industries' decline be offset?
First, we know that Caterpillar's overall three-month rolling sales data declined 12% at the end of May. While that isn't all the information that will be packed into Caterpillar's second quarter, it certainly isn't a good start, and it represents two of the three months in the second quarter. Hoping for a sales surge in June to spark revenue in the quarter isn't likely.

We also know not to expect a silver lining in Caterpillar's resource industries segment; it will remain extremely weak until mining markets gain momentum overseas. That isn't likely to change for at least a year, perhaps longer.

However, investors need to keep an eye on the other two segments: Construction Industries and Energy & Transport. Caterpillar have been limping along because these two segments have offset some of Resource Industries' decline. However, heading into the second quarter, Energy & Transport could be faltering, which would make offsetting a decline in Resource Industries even more difficult.

May's three-month rolling data was the first time this year Caterpillar's Energy & Transportation retail sales declined. The segment's 3% decline in May compares unfavorably to March and April's respective gains of 7% and 3%. If June continued that downtrend, it's likely that Caterpillar's Energy & Transport segment will falter in revenues and operating profits, which leaves only Construction industries with an improving business.

That's not a great recipe for short-term success, whether or not Caterpillar manages to beat Wall Street's estimates in the second quarter. While results in Caterpillar's M&ET will be a big focus for investors, here are a couple of other factors to look for.

Backlog, cash flow, and costs
Taking a quick look back at 2013, when Caterpillar's revenues slid $10 billion and its profit nearly $3 billion, it was able to reduce costs by a significant $1.2 billion. Recently, in Caterpillar's first quarter, cost-reduction measures lowered its SG&A and R&D expenses by $152 million. That reduction aided in Caterpillar's 5% rise in profits, while revenues remained flat compared to last year's first quarter.

Also, with sales struggling, investors would be wise to listen for Caterpillar's backlog of orders. At the end of the first quarter, its backlog checked in at $19.3 billion, which was a $1.3 billion increase from the previous quarter. Investors would cheer if the backlog grew a larger amount than witnessed during the first quarter.

Investors would also be wise to keep an eye on Caterpillar's cash flow during the second quarter. Despite Caterpillar's M&ET revenues and operating profits plunging 25% and 51%, respectively, during the last eight quarters, Caterpillar's stock has actually increased 17% since 2012. One reason behind Caterpillar's rise in share price, despite gloomy business performance, is that the company remains a cash-flow generating machine.

Consider that the company recorded its two best years of cash flow in its entire history during the last two years. Moreover, that cash flow has been returned to shareholders through dividends and share repurchases. Even during Caterpillar's rough patch during the last five quarters, it has managed to return $5 billion to shareholders through dividends and share buybacks. If, for some reason, Caterpillar loses its ability to generate this cash flow, it will be a big blow to investors.

While the weak mining industry will continue to weigh Caterpillar's earnings down for some time, the company is making huge strides in reducing costs, and will be a much stronger company when global demand for its products returns. Keep an eye on the factors discussed above, and you'll have a better idea when Caterpillar would make a nice addition to your portfolio.

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Daniel Miller has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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