Caterpillar Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods unless noted. Financial amounts are in U.S. dollars. Caterpillar manufactures and supports construction, resource, energy and transportation equipment and provides related customer and dealer financing.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Sales and revenues | $11.331B | $10.342B | $21.153B | $19.803B |
| Operating profit | $1.251B | $785M | $1.668B | $1.279B |
| Profit attributable to common shareholders | $802M | $550M | $994M | $821M |
| Diluted earnings per share | $1.35 | $0.93 | $1.67 | $1.40 |
| Operating margin | 11.0% | 7.6% | 7.9% | 6.5% |
Revenue increased 10% in Q2 and 7% in the first half. Reported Q2 profit rose 46%; first-half profit rose 21%. Management attributed improvement mainly to higher sales volume and favorable product mix. Q2 improved pricing and lower variable manufacturing costs were largely offset by higher period costs. First-half operating profit also reflected substantially higher restructuring charges.
Management’s non-GAAP adjusted diluted EPS, excluding restructuring costs and the IronPlanet investment-sale gain, was $1.49 for Q2 versus $1.09, and $2.77 for the first half versus $1.73. The filing reports restructuring costs of $169M in Q2 and $921M in the first half; the first-half after-tax per-share impact was $1.19. Q2 included an $85M pretax gain on the IronPlanet sale, or $0.09 per share after tax.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $3.921B, up from $2.804B. Machinery, Energy & Transportation (ME&T) operating cash flow was $3.553B versus $1.387B; Financial Products operating cash flow was $678M versus $877M.
- Cash and short-term investments were $10.232B at June 30, up from $7.168B at year-end 2016. Approximately $8.7B was held by non-U.S. subsidiaries; repatriation of earnings not previously taxed in the U.S. could generally incur U.S. tax, net of available foreign tax credits.
- Total debt was approximately $37.19B, up $409M from year-end. ME&T debt-to-capital was 38.6%, down from 41.0% and within management’s 30%–45% target range.
- Available credit was $7.735B, including $2.750B allocated to ME&T; there were no borrowings under the $10.5B global credit facilities. The company met stated credit-facility covenants at quarter-end.
- Total assets were $78.510B, total liabilities $64.431B and shareholders’ equity $14.079B. Current assets were $36.991B and current liabilities $28.133B.
- First-half capital expenditures were $379M for ME&T. Dividends paid were $906M, equivalent to $0.77 per share; the Board announced a quarterly dividend increase to $0.78 per share in June. No common shares were repurchased in the first half.
Changes, outlook and management commentary
- Construction Industries, Resource Industries and Energy & Transportation sales increased in Q2; Financial Products revenue was approximately flat. Construction growth was led by China, while Resource Industries and Energy & Transportation benefited principally from aftermarket parts demand. Resource Industries returned to segment profit from a prior-year loss.
- Management cited stabilizing conditions in some Latin American markets and stronger construction-equipment demand in China, but noted that many end markets remained at low levels. Mining equipment demand depends on commodity prices staying at improved levels; rail remained affected by idle locomotives, and marine demand was weak.
- Management expected 2017 restructuring costs of about $1.2B, slightly below its prior estimate of about $1.25B, with approximately $160M of additional costs expected under the existing restructuring plan. It anticipated about $400M of 2017 operating-cost benefit from restructuring actions versus 2016.
- The Gosselies, Belgium facility closure affects about 2,000 employees. Production ended in Q2 and most remaining site operations were expected to phase out by year-end. The company estimated about $700M of total costs for this program and had recognized $667M through June.
- Management expected ME&T capital expenditures for 2017 to be about the same as 2016 and full-year pension and postretirement contributions of approximately $610M. It expected full-year price realization to be slightly positive, but less favorable in the second half; steel-related material costs were expected to rise. Higher second-half period costs were anticipated for digital capabilities and product technology investment. The filing does not provide a clear full-year revenue or EPS forecast.
- Firm order backlog was approximately $14.8B at June 30, about $3.0B higher than a year earlier; approximately $3.0B was not expected to be filled within 12 months.
Risks, contingencies and unusual items
- A U.S. grand jury investigation involving tax and export activities included federal search and seizure warrants at three company facilities in March 2017. Caterpillar is cooperating, cannot estimate potential loss, and stated it did not expect a material adverse effect.
- The IRS proposed approximately $2B in additional tax and penalties for 2007–2009 and 2010–2012, concerning certain parts transactions involving Caterpillar SARL. Caterpillar is contesting the proposed adjustments and said it did not expect a material adverse effect; it reported no anticipated significant change in unrecognized tax benefits over the next 12 months.
- Other disclosed matters include a Brazilian antitrust investigation and a Progress Rail criminal investigation concerning railcar inspections, repairs and disposal practices. For the latter, Caterpillar said a loss was probable but not expected to be material. The company could not predict outcomes or reasonably estimate potential losses for certain investigations.
- Other principal exposures include cyclical end-market and commodity demand, competitive pricing, dealer inventory decisions, currency and interest-rate movements, financing receivable credit quality, restructuring execution, pension funding, credit ratings and covenants, environmental compliance, and potential legal or tax exposures.
- Cat Financial reported customer and dealer finance receivables past due at 2.71% at Q2-end, versus 2.93% a year earlier; Q2 net write-offs were $26M versus $33M. Its allowance for credit losses was $338M, or 1.25% of finance receivables.
Important facts for investors to verify
- Whether sales growth, particularly in China and aftermarket parts, converts into sustained end-user demand rather than dealer inventory changes.
- Actual restructuring costs, remaining Gosselies-related charges and realization of the estimated cost savings.
- Mining and energy-market recovery assumptions, including commodity-price stability, and the effect of steel costs and second-half investment spending on margins.
- Developments in the U.S. investigations, IRS dispute, Brazilian matter and Progress Rail investigation, including any change in loss estimates or management’s materiality assessments.
- ME&T and Financial Products debt, access to credit, covenant headroom, pension contributions and the location and potential tax treatment of cash balances.
- Cat Financial delinquencies, non-accrual balances, impaired receivables and credit-loss allowance adequacy.