Caterpillar Inc. — Q3 2020 Form 10-Q
Business context and period. Caterpillar designs, manufactures and sells machinery, engines and related products through Machinery, Energy & Transportation (ME&T), and provides customer and dealer financing through Financial Products. This unaudited filing covers the quarter and nine months ended September 30, 2020, compared with the corresponding 2019 periods.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Sales and revenues | $9.881 billion | $12.758 billion | $30.513 billion | $40.656 billion |
| Operating profit | $985 million | $2.020 billion | $3.173 billion | $6.440 billion |
| Operating profit margin | 10.0% | 15.8% | 10.4% | 15.8% |
| Profit attributable to shareholders | $668 million | $1.494 billion | $2.218 billion | $4.995 billion |
| Diluted profit per share | $1.22 | $2.66 | $4.05 | $8.75 |
| Operating cash flow | Enterprise: $1.734 billion | Not stated here | $4.255 billion consolidated | $4.478 billion consolidated |
Cash, debt and liquidity. At September 30, 2020, cash and short-term investments were $9.315 billion, versus $8.284 billion at year-end 2019. Total debt was approximately $38.13 billion, up $469 million from year-end; ME&T debt rose while Financial Products debt declined. Available credit was $10.888 billion, with no borrowings under the global credit facilities. Management reported more than $14 billion of available liquidity sources. Total assets were $76.741 billion and shareholders’ equity was $14.994 billion.
Material changes and operating drivers
- Q3 revenue fell 23% year over year and profit fell 55%; nine-month revenue declined 25% and profit declined 56%. Management attributed the contraction principally to lower end-user demand and dealer inventory reductions, amid COVID-19 disruption.
- Q3 sales declined in all three primary segments: Construction Industries 23%, Resource Industries 21%, and Energy & Transportation 24%. Financial Products revenue fell 16%. ME&T sales were down 23%, primarily from lower volume; unfavorable price realization also weighed on results.
- For the nine months, dealers reduced machine and engine inventories by about $1.8 billion, compared with an approximately $1.4 billion increase in the prior-year period. Caterpillar expected dealer inventory reductions of about $2.5 billion for full-year 2020.
- Lower SG&A and R&D costs, cost controls and favorable manufacturing costs partly offset weaker volume. Suspension of 2020 short-term incentive plans meant no such expense was recognized in Q3, versus about $130 million in Q3 2019; the nine-month comparison was no expense versus about $560 million.
- Financial Products segment profit was $142 million in Q3, down from $218 million, reflecting higher credit-loss provisions and lower average earning assets and net yields. Cat Financial past dues were 3.81%, compared with 3.19% a year earlier; net write-offs were $125 million versus $103 million.
Outlook, commentary, risks and unusual items
- The filing provides no full-year revenue or earnings guidance. Management said nearly all primary production facilities were operating as of mid-October, while noting operations could change with pandemic conditions and possible temporary shutdowns.
- Management expected ME&T capital expenditures of about $1.0 billion for 2020 and pension and postretirement contributions of about $250 million. The Board approved maintaining the quarterly dividend at $1.03 per share in October. Share repurchases were temporarily suspended; Caterpillar did not expect further repurchases in 2020.
- Backlog was approximately $13.4 billion at quarter-end, about $500 million above Q2 2020 but $1.2 billion below Q3 2019; approximately $3.8 billion was not expected to be filled within 12 months.
- Q3 included a $77 million pretax pension-obligation remeasurement loss, or $0.12 per diluted share; the nine-month period included a $55 million pretax remeasurement gain, or $0.08 per share. Nine-month restructuring costs were $296 million, mainly employee separation programs and strategic product-line actions.
- The estimated annual tax rate, excluding discrete items, was 31% in 2020 versus 26% in 2019. Caterpillar disclosed an unresolved IRS dispute over proposed tax and penalties of approximately $2.3 billion for 2007–2012; the company contests the proposed assessment and said it did not expect a material adverse effect.
- COVID-19-related economic weakness, dealer inventory decisions, customer credit deterioration, commodity and currency movements, market access and pension assumptions are among the stated risks. Cat Financial’s credit-loss estimates rely on economic forecasts; management said those forecasts still reflected pandemic-related economic weakness.
- Other contingencies include an ongoing U.S. grand jury investigation for which Caterpillar said it cannot estimate potential loss, and a Brazilian environmental notice proposing a fine of approximately $300,000. Management did not expect either matter to materially affect results, financial position or liquidity.
Important facts for investors to verify
- Whether end-user demand and dealer inventory reductions stabilize, and how the anticipated full-year inventory draw affects reported sales.
- Whether weaker operating results, price pressure and cost reductions continue to affect margins and cash generation.
- Cat Financial delinquencies, credit-loss provisions and recoveries as pandemic conditions evolve.
- Debt maturities, liquidity availability and compliance with credit-facility covenants; reported covenant ratios were within required limits at quarter-end.
- Developments in the IRS dispute, U.S. investigation and pension remeasurement assumptions, including the year-end pension adjustment.
- Actual full-year capital spending, pension contributions, dividend support and any resumption of share repurchases.