Caterpillar Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Caterpillar manufactures machinery, engines and related products and provides customer and dealer financing. Results reflect the effects of the COVID-19 pandemic and weakened demand.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Sales and revenues | $10.0 billion | $14.4 billion | $20.6 billion | $27.9 billion |
| Operating profit | $784 million | $2.213 billion | $2.188 billion | $4.420 billion |
| Operating margin | 7.8% | 15.3% | 10.6% | 15.8% |
| Profit attributable to common shareholders | $458 million | $1.620 billion | $1.550 billion | $3.501 billion |
| Diluted profit per share | $0.84 | $2.83 | $2.83 | $6.08 |
| Operating cash flow | Enterprise: $1.391 billion | Not stated here | Consolidated: $2.521 billion | $3.709 billion |
At June 30, cash and short-term investments were $8.784 billion; total assets were $76.566 billion, total liabilities $62.789 billion and shareholders’ equity $13.777 billion. Total debt was $38.62 billion, up $965 million from year-end 2019. The company reported $18.5 billion of available liquidity sources; separately, available credit under listed facilities was $13.0 billion. First-half dividends paid were $1.125 billion.
Changes versus the comparable period
- Q2 revenue fell 31% and profit fell 72%; first-half revenue declined 26% and profit declined 56%. Lower end-user demand and dealer inventory reductions were principal drivers.
- Dealers reduced machine and engine inventories by about $1.4 billion in Q2 and $1.2 billion in the first half; the comparable 2019 periods saw inventory increases of about $500 million and $1.8 billion, respectively.
- Sales declined across the three primary machinery segments and all geographic regions. Q2 segment sales were down 37% in Construction Industries, 35% in Resource Industries and 24% in Energy & Transportation.
- Lower volume and unfavorable price realization reduced operating profit. Lower manufacturing costs and SG&A/R&D expenses partly offset the decline, including from suspended short-term incentive plans and other cost reductions.
- First-half consolidated operating cash flow decreased by $1.188 billion year over year. ME&T operating cash flow was $975 million, versus $2.820 billion; ME&T free cash flow, a non-GAAP measure, was $511 million, versus $2.328 billion.
Outlook, commentary and risks
- Management expected dealer inventories to decline by more than $2.0 billion during 2020. It did not provide a clear full-year consolidated revenue or earnings forecast in the supplied filing text.
- Management expected $300–$400 million of 2020 restructuring costs and approximately $200 million of incremental operating-cost benefits from prior restructuring actions versus 2019. ME&T capital expenditures were expected to be about $1.0 billion; full-year pension and postretirement contributions approximately $280 million.
- Share repurchases were temporarily suspended; Caterpillar said it did not expect additional repurchases in the second half of 2020. The quarterly dividend was maintained at $1.03 per share.
- Nearly all primary production facilities were operating as of mid-July, but operations remained subject to changing conditions and possible COVID-related shutdowns. Management cited pandemic-related demand, supply-chain, workforce and capital-market uncertainty.
- Cat Financial reported Q2 past dues of 3.74%, versus 3.38% a year earlier, and higher expected credit losses due in part to COVID-19. Management’s discussion reports an allowance of $515 million, while the financial note’s allowance table reports $512 million; the filing text does not explain this difference clearly.
- Unusual items included Q2 pension-settlement remeasurement losses of $122 million, or $0.19 per share, and a first-half remeasurement net gain of $132 million, or $0.20 per share. First-half 2019 included a $178 million discrete tax benefit. The estimated annual tax rate, excluding specified discrete pension items, was 31% for 2020 versus 26% for 2019.
- The IRS has proposed approximately $2.3 billion of additional tax and penalties concerning 2007–2012 transactions; Caterpillar is contesting the proposal and says it cannot predict the outcome. A separate U.S. grand jury investigation remains ongoing, and the company says potential loss cannot be reasonably estimated. Caterpillar believes these matters will not materially adversely affect its financial condition, results or liquidity.
- Other risks include a $12.9 billion firm backlog, down about $1.2 billion from Q1 and $2.0 billion year over year, and exposure to economic conditions, commodity prices, currencies, credit losses, debt markets and legal or regulatory outcomes.
Most important facts for investors to verify
- Whether end-user demand stabilizes and dealer inventory reductions track management’s expectation of a decline exceeding $2.0 billion in 2020.
- Cat Financial delinquencies, credit-loss provisioning and the difference between the $515 million MD&A allowance figure and the $512 million financial-note figure.
- Liquidity and debt developments, including facility availability, upcoming maturities and the effect of weaker operating cash flow.
- Execution and cash costs of restructuring, and whether expected cost savings materialize.
- Developments in the IRS tax dispute and ongoing U.S. investigation, for which the company cannot estimate potential loss or outcome.
- Performance against the reported backlog and any subsequent full-year guidance; the filing provides no clear consolidated full-year revenue or earnings forecast.