Caterpillar Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Caterpillar’s principal businesses are Construction Industries, Resource Industries, Energy & Transportation, and Financial Products. Unless otherwise noted, amounts are U.S. dollars.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Sales and revenues | $10.635 billion | $13.466 billion | Down 21% |
| Operating profit | $1.404 billion | $2.207 billion | Down 36% |
| Operating margin | 13.2% | 16.4% | Down 3.2 percentage points |
| Profit attributable to common shareholders | $1.092 billion | $1.881 billion | Down 42% |
| Diluted earnings per share | $1.98 | $3.25 | Down 39% |
| Operating cash flow | $1.130 billion | $1.121 billion | Approximately flat |
Management’s adjusted diluted EPS, excluding the pension remeasurement gain in 2020 and the U.S. tax-reform benefit in 2019, was $1.60 versus $2.94. This is a non-GAAP measure.
Business trends and material changes
- Machinery, Energy & Transportation sales were $9.914 billion, down 22%. Lower sales volume was the main driver; unfavorable currency and price realization also reduced sales. Dealer machine and engine inventories increased about $100 million, versus about $1.3 billion in Q1 2019.
- Sales declined across regions: North America 24%, Latin America 21%, EAME 7%, and Asia/Pacific 27% on a consolidated regional basis.
- Segment sales and profit fell across the primary businesses: Construction Industries sales were $4.306 billion and profit $640 million; Resource Industries sales were $2.084 billion and profit $304 million; Energy & Transportation sales were $4.349 billion and profit $602 million. Financial Products revenue was $721 million and segment profit was $105 million.
- Cash and short-term investments were $7.123 billion at March 31, down from $8.284 billion at year-end 2019. Total debt was approximately $37.09 billion, down about $564 million from year-end. Shareholders’ equity was $14.239 billion.
- ME&T operating cash flow was $318 million, down from $860 million; ME&T free cash flow was $16 million versus $563 million. Consolidated cash flow was supported by working-capital movements and lower incentive-compensation payments, while lower profit and higher taxes paid weighed on it.
Liquidity, capital allocation, and outlook
- At quarter-end Caterpillar reported $10.5 billion of global credit facilities and $9.921 billion of total available credit after commercial paper and utilized credit. No borrowings were outstanding under the global facilities.
- In April, the company raised $2.0 billion through 10- and 30-year bonds, added a $3.9 billion short-term credit facility, and registered $4.1 billion of U.S. and Canadian commercial-paper support programs. It reported no drawings or borrowings under these additional arrangements as of the filing date.
- Management expected COVID-19 effects to be more significant in Q2 than Q1 and to continue until global conditions improve; the full-year impact could not be reasonably estimated. The filing provides no full-year sales or EPS guidance.
- Management expected dealer inventories to decline by at least $1.5 billion during 2020. Quarter-end firm order backlog was about $14.1 billion, approximately $400 million above Q4 2019; about $4.0 billion was not expected to be filled within 12 months.
- Expected 2020 ME&T capital expenditures were about $1.0 billion. Expected pension and postretirement contributions were about $280 million. Management forecast $300–$400 million of 2020 restructuring costs and approximately $200 million of incremental operating-cost benefit from prior restructuring actions versus 2019.
- The company temporarily suspended share repurchases amid economic uncertainty. In Q1 it repurchased $1.043 billion of shares and paid $567 million in dividends. In April, the Board maintained the quarterly dividend at $1.03 per share.
Key risks, contingencies, and unusual items
- The COVID-19 pandemic created material uncertainty around demand, supply chains, facility operations, customer and dealer liquidity, and capital-market access. As of mid-April, approximately 75% of primary production facilities were operating; temporary closures could continue or expand.
- Cat Financial past dues were 4.13% at Q1 end versus 3.61% a year earlier. Its allowance for credit losses increased with the deteriorating economic forecast. The filing reports the allowance as $453 million in a note table and $457 million in MD&A; investors should verify the applicable definition or reconciliation.
- Q1 profit included a $254 million pretax gain from settlement and remeasurement of a non-U.S. pension obligation, or $0.38 per diluted share. Q1 2019 included a $178 million discrete tax benefit, or $0.31 per share. The 2020 estimated annual tax rate, excluding discrete items, was 31% versus 26% in 2019.
- The IRS has proposed approximately $2.3 billion of additional tax and penalties concerning 2007–2012 tax years and a related loss carryback. Caterpillar is contesting the proposal and says it cannot predict the outcome, while currently believing the matter will not materially affect results, financial position, or liquidity.
- Other disclosed matters include a Brazilian environmental notice with a proposed fine of about $370,000 and a Brazilian antitrust finding against subsidiary MGE, which intends to appeal. The company does not expect these matters to have a material adverse effect. It also disclosed an ongoing U.S. grand-jury investigation whose outcome and potential loss it cannot estimate.
Most important facts for investors to verify
- Whether the pandemic’s expected greater Q2 impact and uncertain full-year effects materially changed demand, production, cash flow, or liquidity after the filing date.
- The allowance-for-credit-loss figure and reconciliation ($453 million in the note table versus $457 million in MD&A), and subsequent Cat Financial delinquency and loss trends.
- Progress against the expected dealer-inventory reduction, order backlog conversion, and reported end-user demand across segments and regions.
- Whether the additional April financing remained undrawn and whether the dividend, credit ratings, or share-repurchase suspension changed.
- Developments in the $2.3 billion IRS dispute and other legal matters, plus actual restructuring costs and savings compared with management’s 2020 expectations.