Caterpillar Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also compares fourth-quarter 2018 results with fourth-quarter 2017. Caterpillar manufactures construction and mining equipment, engines, turbines and locomotives, and provides customer and dealer financing.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Sales and revenues | $54.722 billion | $45.462 billion |
| Profit attributable to common shareholders | $6.147 billion | $754 million |
| Diluted profit per share | $10.26 | $1.26 |
| Operating profit | $8.293 billion | $4.460 billion |
| Operating profit margin | 15.2% | 9.8% |
| Adjusted operating profit margin (non-GAAP) | 15.9% | 12.5% |
| Operating cash flow | $6.558 billion | $5.706 billion |
- Revenue rose 20%, primarily on higher sales volume and improved demand across all three machinery segments and regions, with favorable price realization and currency also contributing. Dealer machine and engine inventories increased about $2.3 billion, compared with about $100 million in 2017.
- Profit growth reflected higher volume, lower restructuring costs and improved pricing, as well as lower tax expense. These benefits were partly offset by higher manufacturing, selling, general and administrative, and research and development costs, and weaker Financial Products profit.
- Adjusted diluted profit per share, a non-GAAP measure, was $11.22 versus $6.88. The company’s reconciliation excludes specified restructuring, pension/OPEB mark-to-market, tax valuation allowance and tax reform items, and, for 2017, an investment-sale gain.
- By reportable machinery segment, sales were $23.237 billion in Construction Industries, $10.270 billion in Resource Industries and $22.785 billion in Energy & Transportation. Segment profit increased in each; Financial Products profit fell to $505 million from $792 million.
- At year-end, cash and short-term investments were $7.857 billion, total debt was $36.553 billion and total assets were $78.509 billion. Debt included $8.015 billion in Machinery, Energy & Transportation and $28.538 billion in Financial Products. Available credit was $9.146 billion; the company reported no borrowings under its global credit facilities.
- ME&T operating cash flow was $6.347 billion, exceeding its capital expenditures and dividends. Consolidated capital expenditures were $2.916 billion, dividends paid were $1.951 billion and share repurchases were $3.798 billion. Total debt increased $1.68 billion, mainly reflecting Financial Products’ funding needs.
Fourth-quarter results and changes
- Fourth-quarter sales and revenues were $14.342 billion, up 11%; profit was $1.048 billion, or $1.78 per diluted share, versus a loss of $1.299 billion, or $2.18 per diluted share, in fourth-quarter 2017.
- Fourth-quarter operating profit rose 36% to $1.883 billion; operating margin was 13.1%, compared with 10.8%. Higher volume, pricing and lower restructuring costs were partly offset by increased material and freight costs and lower Financial Products profit.
- Full-year sales increased across all primary segments. Resource Industries had the largest percentage increase, with sales up 31%; higher mining activity, equipment demand and aftermarket parts contributed. Energy & Transportation sales rose 18%, including growth in oil and gas and power generation.
- Financial Products’ year-end past-due rate rose to 3.55% from 2.78%; net write-offs increased to $189 million from $114 million. Its allowance for credit losses increased to $511 million, or 1.80% of finance receivables, from $365 million, or 1.33%, primarily due to weakness in the Cat Power Finance portfolio.
Outlook, risks and unusual items
- Management expected restructuring costs to be lower in 2019 than in 2018 and forecast about $300 million of 2019 cost reductions from lower operating costs. It expected ME&T capital expenditures of about $1.4 billion and pension/OPEB contributions of approximately $315 million.
- Management expected 2019 short-term incentive compensation expense to be significantly below 2018, and expected favorable price realization to about offset higher costs excluding that compensation. It also expected a higher annual effective tax rate in 2019.
- Management described 2019 demand expectations as favorable for North American construction, mining investment, and heavy construction, quarry and aggregate equipment; it expected China construction demand to be about flat following two years of strong growth. These are forward-looking expectations, not guarantees.
- Tariffs increased 2018 material costs by about $110 million; the company expected a larger expense in 2019 from their full-year impact. Supplier and freight constraints persisted amid strong demand and could affect deliveries and sales.
- 2018 included $495 million of pension and other postemployment benefit mark-to-market losses, mainly reflecting U.S. pension asset returns below assumptions. Fourth-quarter other expense also included unfavorable pension/OPEB and equity-security valuation impacts.
- U.S. tax reform drove a $2.371 billion charge in 2017; Caterpillar recorded 2018 measurement-period adjustments that reduced the estimated charge by $104 million. A $59 million 2018 tax charge corrected a prior-year deferred-tax valuation allowance error; management said the error was not material to periods presented.
- The IRS has proposed approximately $2.3 billion in additional tax and penalties concerning certain Caterpillar SARL parts transactions for tax years 2007–2012, which Caterpillar is contesting. The company also disclosed an ongoing U.S. grand jury investigation related to tax and export matters and a Brazilian antitrust investigation. It said it could not predict outcomes or estimate potential losses for the investigations, but did not expect a material adverse effect.
- Other key risks include cyclical end-market demand and commodity prices, competition and pricing pressure, tariffs and input costs, supplier constraints, foreign exchange and trade-policy changes, Cat Financial credit losses and funding access, pension obligations, environmental compliance, and legal and regulatory matters.
Important facts for investors to verify
- How much of 2018’s sales growth and future demand depends on dealer inventory rebuilding versus end-user demand; dealer inventories rose about $2.3 billion during 2018.
- Whether higher material, freight and tariff costs are offset by pricing, productivity and the projected incentive-compensation decline.
- Whether Cat Financial’s rising past dues, write-offs and credit-loss allowance—especially in Cat Power Finance—stabilize or worsen.
- How much of reported versus adjusted earnings reflects restructuring, pension/OPEB remeasurement and tax-related items; review the company’s non-GAAP reconciliations alongside GAAP results.
- Developments in the IRS tax dispute and the disclosed investigations, including any change in the company’s assessment of potential financial exposure.
- Debt maturities, liquidity and credit-facility covenant headroom, together with cash deployment through buybacks, dividends, acquisitions and pension funding.