Caterpillar Inc. — Q3 2018 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. Caterpillar operates machinery, energy and transportation businesses (ME&T) and Financial Products, which provides customer and dealer financing and insurance.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Sales and revenues | $13.510 billion | $11.413 billion | $40.380 billion | $32.566 billion |
| Operating profit | $2.135 billion | $1.509 billion | $6.410 billion | $3.073 billion |
| Operating profit margin | 15.8% | 13.2% | 15.9% | 9.4% |
| Profit attributable to common shareholders | $1.727 billion | $1.059 billion | $5.099 billion | $2.053 billion |
| Diluted earnings per share | $2.88 | $1.77 | $8.45 | $3.44 |
| Adjusted operating profit margin | 16.6% | 14.0% | 16.6% | 12.5% |
| Adjusted earnings per share | $2.86 | $1.95 | $8.66 | $4.72 |
Adjusted figures are non-GAAP measures. Q3 2018 adjusted EPS excludes restructuring costs and a net tax benefit; nine-month adjustments also exclude restructuring costs, with the 2017 comparison excluding an investment-sale gain.
Cash flow, balance sheet and capital
- For the first nine months, consolidated operating cash flow was $4.475 billion, down from $5.165 billion. ME&T operating cash flow was $3.88 billion versus $4.16 billion.
- At September 30, cash and short-term investments were $8.007 billion, compared with $8.261 billion at year-end 2017. Total debt was about $35.77 billion, up $895 million from year-end; Financial Products debt rose with its portfolio.
- Total assets were $78.209 billion and shareholders’ equity was $15.890 billion. Inventories increased to $11.814 billion from $10.018 billion at year-end.
- Available credit was $10.286 billion, including $2.750 billion allocated to ME&T; no borrowings were outstanding under the global credit facilities. The filing reports covenant compliance at quarter-end.
- Nine-month dividends paid were $1.444 billion and common-stock repurchases were $2.0 billion. The company reported a third-quarter $511 million dividend payment and a $750 million share repurchase.
Material changes versus prior period
- Third-quarter revenue grew 18%, with ME&T sales up 19%; nine-month revenue rose 24%. Management attributed growth chiefly to stronger sales volume and demand across the three primary segments. Sales rose in all regions.
- Third-quarter operating profit increased 41%. Higher volume and favorable pricing outweighed higher manufacturing, freight and SG&A/R&D costs. Steel prices and tariffs raised material costs; supply-chain inefficiencies increased freight costs.
- Construction Industries, Resource Industries and Energy & Transportation all reported higher third-quarter sales and segment profit. Financial Products revenue increased 9% in the quarter, but its nine-month segment profit fell to $476 million from $559 million, partly due to higher credit-loss provisions.
- Nine-month restructuring costs declined to $293 million from $1.011 billion, largely because 2017 included substantial Gosselies closure costs. Conversely, consolidated operating cash flow fell, reflecting higher working capital, incentive payments and a $1.0 billion discretionary pension contribution.
- Dealer machine and engine inventories rose about $800 million in Q3 and $2.1 billion over the first nine months; management said the nine-month increase reflected current end-user demand. The company also noted supply-chain constraints affecting some parts, lead times and product availability.
Outlook, commentary and risks
- Management expected 2018 restructuring costs of about $400 million, with an estimated $180 million benefit to operating costs versus 2017; it expected restructuring costs to decline in 2019. ME&T capital expenditures were forecast at $1.0–$1.5 billion for 2018, and full-year pension and postretirement contributions at approximately $1.362 billion.
- Management expected more than $750 million of share repurchases in Q4, bringing 2018 repurchases above $2.75 billion. A new $10 billion repurchase authorization takes effect January 1, 2019.
- The company estimated recently imposed tariffs would have a full-year 2018 impact at the low end of its previously stated $100–$200 million range. Short-term incentive compensation was expected to be about $1.4 billion for 2018, nearly level with 2017.
- Firm order backlog was approximately $17.3 billion at quarter-end, down about $400 million sequentially but up about $1.9 billion year over year; $3.4 billion was not expected to be filled in the next 12 months. The filing does not provide a clear full-year revenue or EPS guidance figure.
- Risks cited include global economic and end-market changes, tariffs and trade policy, materials and freight costs, supply constraints, dealer inventory decisions, currency and interest-rate movements, credit losses at Cat Financial, pension funding, liquidity and credit ratings, and execution of restructuring and acquisitions.
- Legal matters include an ongoing U.S. grand jury investigation concerning tax and export activities and a Brazilian antitrust investigation. Caterpillar said it could not predict outcomes or estimate potential losses, but did not expect either matter to materially adversely affect results, financial position or liquidity. Separately, the IRS proposed approximately $2.3 billion in additional tax and penalties for 2007–2012 transactions; Caterpillar is contesting the proposal and said it did not expect a material adverse effect.
- Unusual items include a $154 million tax benefit related to revising the provisional U.S. tax-reform charge, a $59 million tax charge to correct a prior-year deferred-tax valuation allowance error (which management deemed immaterial to prior periods), and the $1.0 billion discretionary pension contribution. The filing estimated that, if September 30 market conditions held at year-end, pension remeasurement could produce an approximately $500 million pre-tax gain; the actual amount was uncertain.
Important facts for investors to verify
- Whether sales and profit growth persists without continued dealer inventory increases, and how inventory levels compare with end-user demand.
- Whether supply-chain constraints, higher freight and material costs, and tariffs affect margins or delivery times beyond management’s estimates.
- Cash conversion and working-capital trends, including the impact of the pension contribution, inventory growth, dividends and planned buybacks.
- Cat Financial credit quality: past dues were 3.47% at Q3 2018 versus 2.73% a year earlier; review the rising provision, delinquencies and portfolio concentration, particularly Cat Power Finance.
- Final tax-reform accounting, the IRS dispute and the outcomes of the U.S. and Brazilian investigations, as well as year-end pension remeasurement.