Caterpillar Inc. — Q1 2021 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020. Caterpillar reports Machinery, Energy & Transportation (ME&T) and Financial Products, which finances and insures equipment customers and dealers. Interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total sales and revenues | $11.887 billion | $10.635 billion |
| Operating profit / margin | $1.814 billion / 15.3% | $1.404 billion / 13.2% |
| Adjusted operating profit margin | 15.8% | 13.5% |
| Profit attributable to common shareholders | $1.530 billion | $1.092 billion |
| Diluted profit per share | $2.77 | $1.98 |
| Adjusted profit per share | $2.87 | $1.65 |
| Operating cash flow, consolidated | $1.928 billion | $1.130 billion |
- Revenue rose 12%, primarily on higher sales volume, stronger end-user demand, dealer inventory increases and favorable currency effects. Dealers added about $700 million of machine and engine inventory, compared with about $100 million in Q1 2020.
- Operating profit increased 29%, mainly from higher volume and Financial Products profit, partly offset by higher SG&A and R&D, unfavorable price realization and higher manufacturing costs. Short-term incentive compensation expense was about $300 million, versus none in the prior-year quarter.
- Adjusted results exclude restructuring costs in both periods and a $254 million non-U.S. pension remeasurement gain in Q1 2020. These items materially affect comparisons; adjusted measures are non-GAAP.
- Q1 2021 sales by primary segment: Construction Industries $5.459 billion (+27%); Resource Industries $2.216 billion (+6%); Energy & Transportation $4.507 billion (+4%). Financial Products segment revenue was $761 million, down 7%, while its pretax segment profit increased to $244 million from $105 million.
Cash, debt and liquidity
- Cash and short-term investments were $11.342 billion at March 31, up from $9.352 billion at December 31, 2020. Consolidated operating cash flow increased by $798 million year over year; the company attributed the improvement mainly to lower incentive-compensation payments and higher profit, partly offset by working-capital needs.
- Total debt was approximately $38.2 billion, up about $1.0 billion from year-end. Financial Products debt increased about $1.1 billion, principally from short-term funding needs; ME&T debt declined about $127 million.
- Available credit was approximately $10.0 billion, with no borrowings under the $10.5 billion global credit facilities. The filing reported compliance with the stated facility covenants.
- ME&T operating cash flow was $1.916 billion and ME&T free cash flow, a company-defined non-GAAP measure, was $1.661 billion. Consolidated investing activities used $477 million; financing activities provided $546 million.
- Current assets were $42.6 billion and current liabilities were $26.6 billion. Financial Products finance receivables and related borrowings are significant parts of the consolidated balance sheet.
Changes, outlook and management commentary
- Sales increased in Asia/Pacific, Latin America and EAME; North America was approximately flat. Asia/Pacific growth was particularly strong against the pandemic-affected Q1 2020 comparison. Transportation sales within Energy & Transportation declined 12%, while power generation rose 13%.
- Cat Financial past-due receivables improved to 2.90% from 4.13% a year earlier. Its allowance for credit losses was $441 million, or 1.64% of finance receivables, versus $479 million, or 1.77%, at year-end 2020. Management cited improving economic conditions, but credit performance remains sensitive to economic changes.
- Firm order backlog was about $16.8 billion, up $2.7 billion from Q4 2020; about $3.8 billion was not expected to be filled within 12 months. Management did not expect a significant dealer-inventory increase from Q1 2021.
- The company expected about $400 million of restructuring costs in 2021 and approximately $150 million of incremental operating-cost benefit from prior restructuring actions versus 2020. Expected 2021 ME&T capital expenditures were about $1.2 billion; anticipated pension and postretirement contributions were about $310 million.
- The Board maintained the quarterly dividend at $1.03 per share in April 2021. Share repurchases were suspended, with no Q1 purchases; about $4.8 billion remained authorized, and the company said repurchases could resume depending on conditions and capital needs.
- COVID-19 remained a source of uncertainty. Management was monitoring pandemic developments, supply-chain disruptions and cost pressures, particularly semiconductors, transportation and raw materials. It said these factors had not significantly affected Q1 operations, while noting conditions remained fluid.
- Caterpillar acquired SPM Oil & Gas on February 1, 2021 for $356 million net of cash acquired, adding products and services to Energy & Transportation. Purchase-price allocation was preliminary.
Risks, contingencies and unusual items
- The IRS has proposed approximately $2.3 billion of additional tax and penalties concerning certain parts transactions for tax years 2007–2012, including a loss carryback to 2005. Caterpillar is contesting the proposed assessments and stated it did not expect the ultimate outcome to materially affect consolidated results, financial position or liquidity.
- A federal grand jury investigation involving tax and export matters continued; the company said it was cooperating, could not predict the outcome or reasonably estimate potential loss, and currently believed the matter would not have a material adverse effect.
- Environmental remediation accruals were described as not material. Other unresolved legal matters were considered not likely to have a material adverse effect. Dealer and other guarantees had a maximum potential payment amount of $1.436 billion, but recorded liabilities were $4 million and management reported no significant loss expected.
- Management identified risks including global economic and industry conditions, materials shortages and price increases, dealer inventory decisions, currency and interest-rate movements, credit losses, financial-market access, credit ratings, legal and tax proceedings, environmental requirements and the duration and economic effects of COVID-19. The filing reported no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether the sales rebound and backlog convert into end-user demand, rather than relying disproportionately on dealer inventory accumulation.
- How much earnings growth persists after accounting for the prior-year pension gain, restructuring charges, incentive compensation and favorable currency, hedge and investment effects.
- Whether supply-chain constraints and materials, freight and other cost pressures affect production, margins or fulfillment of backlog.
- Cat Financial receivable quality, allowance adequacy and the sustainability of lower past-due rates as economic conditions evolve.
- Debt growth, Financial Products funding needs, covenant headroom, capital spending and the company’s ability to maintain its dividend and credit profile.
- Developments in the IRS tax dispute and federal investigation, including any change in Caterpillar’s assessment of potential exposure.