Caterpillar Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Caterpillar manufactures machinery, engines and related products and provides customer and dealer financing through Financial Products.
Financial performance and position
- Sales and revenues: $13.466 billion, up 5% from $12.859 billion. Higher sales volume and favorable pricing more than offset unfavorable foreign exchange.
- Profit and margins: Operating profit was $2.207 billion, up 5%; operating margin was 16.4%, unchanged year over year. Profit attributable to common shareholders was $1.881 billion versus $1.665 billion. Diluted EPS was $3.25 versus $2.74; adjusted diluted EPS, excluding specified items, was $2.94 versus $2.82.
- Cash flow: Consolidated operating cash flow was $1.121 billion versus $935 million. ME&T operating cash flow was $860 million versus $948 million; ME&T free cash flow was $563 million versus $625 million.
- Liquidity and debt: Cash and short-term investments were $7.128 billion at March 31. Total debt was $35.78 billion, down $771 million from year-end 2018. Available credit was $9.443 billion; no borrowings were outstanding under the global credit facilities.
- Capital returns: Caterpillar repurchased $751 million of shares and paid $494 million in dividends during the quarter. The Board approved a 20% quarterly dividend increase, to $1.03 per share beginning in Q3 2019.
Changes versus Q1 2018
- Resource Industries sales rose 18% and segment profit rose 52%, reflecting stronger equipment and services demand, including mining and quarry activity.
- Construction Industries sales rose 3%, but segment profit fell 3%; higher manufacturing costs outweighed some benefit from pricing.
- Energy & Transportation sales were approximately flat and segment profit declined 4%, mainly from higher manufacturing and warranty costs.
- Financial Products segment profit increased 50%, helped by a favorable equity-securities mark, higher net yield and lower credit-loss provision. Cat Financial past dues increased to 3.61% from 3.17% a year earlier.
- Dealer machine and engine inventories increased about $1.3 billion during the quarter, versus about $1.2 billion in Q1 2018. Caterpillar expects dealer inventories to be about flat for full-year 2019.
Outlook, commentary and risks
- Management expects 2019 ME&T capital expenditures of about $1.4 billion and pension and postretirement contributions of about $315 million. It expects restructuring actions to reduce operating costs by about $300 million in 2019 versus 2018. The filing does not provide a clear full-year revenue or EPS guidance figure.
- Management expects favorable pricing to offset higher manufacturing costs, excluding lower short-term incentive compensation expense. Short-term incentive compensation expense is expected to be about $900 million in 2019, compared with $1.4 billion in 2018.
- Firm backlog was approximately $16.9 billion, about $300 million above Q4 2018; $3.4 billion was not expected to be filled within the next 12 months. Management cited supportive mining fundamentals and strong expected demand for heavy construction, quarry and aggregate equipment; China construction demand was expected to be about flat for 2019.
- Unusual item: Q1 2019 diluted EPS included a $178 million, or $0.31 per-share, discrete tax benefit related to U.S. tax reform. Excluding this benefit, adjusted diluted EPS was $2.94. The 2018 comparison included restructuring costs of $0.08 per share.
- Risks include tariffs and material, freight and labor cost increases; global and regional demand and currency movements; dealer inventory decisions; credit and delinquency trends at Cat Financial; and access to capital markets. The company also disclosed ongoing U.S. grand jury investigations and a Brazilian competition investigation; it could not predict their outcomes or estimate potential losses, but believed neither would materially affect consolidated results, financial position or liquidity.
- The IRS has proposed approximately $2.3 billion in additional tax and penalties relating to 2007–2012 transactions involving Caterpillar SARL. Caterpillar is contesting the proposal and said it believes ultimate resolution will not materially affect its consolidated results, financial position or liquidity.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring operations versus the $178 million discrete tax benefit and other non-operating items.
- Whether dealer inventory growth and the stated expectation of full-year inventory stability align with end-user demand and backlog conversion.
- Whether pricing continues to offset manufacturing-cost inflation, including tariffs, freight, labor and materials.
- Whether Cat Financial delinquencies, particularly in marine-related financing, and its credit-loss allowance remain manageable.
- Developments in the IRS tax dispute and ongoing U.S. and Brazilian investigations, including any change in estimated exposure.
- Whether cash generation supports planned investment, the higher dividend and further share repurchases while maintaining credit metrics.