Caterpillar Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless otherwise noted. Dollar amounts are in millions except per-share data.
Business context and results
Caterpillar manufactures machinery, engines, turbines, and rail-related products, and provides customer and dealer financing. Management attributed the quarter’s substantial improvement chiefly to higher end-user demand and favorable dealer inventory changes across its principal machinery businesses.
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Sales and revenues | $12,859 | $9,822 |
| Operating profit | $2,108 | $380 |
| Profit attributable to common shareholders | $1,665 | $192 |
| Diluted earnings per share | $2.74 | $0.32 |
| Operating cash flow | $935 | $1,542 |
Revenue increased 31%; operating profit was approximately 16.4% of revenue, versus 3.9% in Q1 2017. Diluted EPS excluding restructuring costs, a non-GAAP measure, was $2.82 versus $1.28. Restructuring costs were $69, compared with $752 in the prior-year quarter, making the reported profit comparison materially affected by lower restructuring charges.
Segment performance and changes
- Construction Industries: Sales of $5,677, up 38%; segment profit of $1,117, up 76%. Higher volume and favorable pricing led the improvement.
- Resource Industries: Sales of $2,309, up 31%; segment profit of $378, up 136%. Management cited stronger mining, quarry and aggregates demand, and improved commodity-market conditions.
- Energy & Transportation: Sales of $5,219, up 26%; segment profit of $874, up 60%. Sales rose across oil and gas, power generation, industrial and transportation applications.
- Financial Products: Revenue of $793, up 4%, but segment profit fell 23% to $141, primarily due to a higher credit-loss provision.
Consolidated sales gains reflected $2,526 of higher volume, $308 of favorable currency effects and $186 of favorable price realization. Dealer inventories increased about $1.2 billion in Q1 2018, compared with about $200 million in Q1 2017. Management said the increase appeared consistent with end-user demand, while noting dealers are independent and inventory movements can also reflect expectations and delivery timing.
Cash flow, balance sheet and capital allocation
- Operating cash flow declined to $935 from $1,542, mainly due to higher incentive-compensation payments and working-capital needs as production increased. Machinery, Energy & Transportation operating cash flow was $948.
- Cash and short-term investments were $7,888 at March 31, down from $8,261 at year-end 2017. Total assets were $78,014 and shareholders’ equity was $15,272.
- Total debt was approximately $35.3 billion, up $437 from year-end; management attributed most of the increase to Financial Products portfolio funding. Available credit was $9,348, and no borrowings were outstanding under the $10.5 billion global credit facilities.
- Investing cash outflow was $800, including $340 for acquisitions. Financing cash outflow was $538; Caterpillar paid $467 in dividends and repurchased $500 of shares. The quarterly dividend paid was $0.78 per share.
- Inventories increased to $10,947 from $10,018 at year-end. Accounts payable rose to $6,938 from $6,487.
Outlook, commentary and risks
- No full-year revenue or EPS guidance is stated in the provided filing text. Management expected 2018 restructuring costs of about $400, unchanged from its prior estimate, and about $150 of lower operating costs from restructuring actions versus 2017.
- Management expected ME&T capital expenditures to be about the same as 2017 and full-year pension and postretirement contributions of approximately $365. It expected short-term incentive compensation of about $1.4 billion, nearly the 2017 level.
- For the remainder of 2018, management anticipated unfavorable cost absorption as inventory levels decline, higher steel and other commodity costs, and increased targeted investment spending. It expected full-year favorable price realization to more than offset higher material costs.
- Order backlog was approximately $17.5 billion, up about $1.7 billion from year-end; approximately $3.2 billion was not expected to be filled within twelve months.
- Cat Financial past-due accounts were 3.17%, versus 2.64% a year earlier. Net write-offs were $30 versus $15. Management cited higher credit-loss provisions, particularly in Caterpillar Power Finance and Latin America.
- Material uncertainties include the ongoing U.S. grand-jury investigation concerning tax and export matters, and the Brazilian antitrust investigation. Caterpillar said it could not predict the outcomes or estimate potential losses, but did not expect either matter to materially adversely affect consolidated results, financial position or liquidity.
- The IRS proposed approximately $2.3 billion in additional taxes and penalties related to 2007–2012 transactions involving Caterpillar SARL. Caterpillar is contesting the proposal and said it did not anticipate a material adverse effect; the filing also notes U.S. tax reform’s provisional $2.371 billion charge could be affected by further analysis and guidance.
- Guarantees had a maximum potential payment amount of $2,134, although the company reported an $8 liability and said no significant losses were anticipated. The filing identifies broad risks including demand and commodity swings, dealer inventory decisions, input shortages and costs, credit quality, foreign exchange, interest rates, restructuring execution, taxes, legal matters and access to capital markets.
Important facts for investors to verify
- How much of the sales growth and backlog reflects sustainable end-user demand versus dealer inventory accumulation and delivery timing.
- Whether higher production, inventory reductions and supply constraints affect cash conversion, cost absorption and margins in subsequent quarters.
- Whether pricing offsets rising steel and other input costs, and whether planned restructuring savings and 2018 cost expectations are achieved.
- Trends in Cat Financial delinquencies, write-offs and credit-loss reserves, particularly in Caterpillar Power Finance and Latin America.
- Developments in the IRS tax dispute, U.S. tax-reform accounting, and the U.S. and Brazilian investigations, including any changed loss estimates or disclosures.
- Debt, liquidity and shareholder-return priorities as share repurchases continue; note that Financial Products borrowing supports its finance receivables portfolio.