Caterpillar Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited results; comparisons are with the corresponding 2018 periods. Amounts are U.S. dollars.
Business context and results
Caterpillar operates Construction Industries, Resource Industries, Energy & Transportation, and Financial Products. Q2 growth reflected favorable pricing and higher equipment volume, including dealer inventory increases; currency and weaker results in Energy & Transportation partly offset the gains.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Sales and revenues | $14.432B | $14.011B | $27.898B | $26.870B |
| Operating profit | $2.213B | $2.167B | $4.420B | $4.275B |
| Operating profit margin | 15.3% | 15.5% | 15.8% | 15.9% |
| Profit attributable to common shareholders | $1.620B | $1.707B | $3.501B | $3.372B |
| Diluted profit per share | $2.83 | $2.82 | $6.08 | $5.56 |
Financial position, cash flow and capital
- Cash and short-term investments: $7.429B at June 30, versus $7.857B at December 31, 2018. Management reported quarter-end enterprise cash of about $7.4B.
- Debt: Total debt was $36.28B, down $275M from year-end. This includes $5.27B of short-term borrowings and debt associated with Financial Products; ME&T debt declined $345M while Financial Products debt increased $70M.
- Liquidity: Available credit was $9.803B, including $2.75B allocated to ME&T. No borrowings were outstanding under the $10.5B global credit facilities. The company reported compliance with its credit-facility covenants.
- Consolidated cash flow, first half: Operating cash flow was $3.709B, compared with $3.083B; investing cash outflow was $1.079B, versus $2.068B; financing cash outflow was $3.051B, versus $573M.
- ME&T cash flow, first half: Operating cash flow was $2.820B, down from $3.032B. ME&T free cash flow, a company-defined non-GAAP measure, was $2.328B, versus $2.478B.
- Shareholder returns: First-half dividends paid were $986M and share repurchases were $2.105B. The board approved a 20% increase in the quarterly dividend to $1.03 per share beginning with the Q3 2019 payment; approximately $7.89B remained under the repurchase authorization at June 30.
Material changes and management commentary
- Q2 sales rose 3%. Construction Industries sales increased 5% and Resource Industries 11%; Energy & Transportation sales declined 4%. Financial Products revenues increased 4%.
- Q2 operating profit rose 2%, but profit fell $87M. Higher manufacturing costs—including materials and tariffs, labor and burden, and warranty expense—unfavorable product mix, and higher taxes weighed on profit. Favorable pricing and lower SG&A and R&D costs partly offset these pressures.
- For the first half, sales rose 4%, operating profit 3%, and diluted EPS 9%. Resource Industries’ profit increased 34%; Energy & Transportation’s declined 9%. Lower short-term incentive compensation expense contributed to lower SG&A/R&D costs.
- Dealer machine and engine inventories increased about $500M in Q2 and $1.8B in the first half. Management expected full-year dealer inventories to increase about $900M from prior year-end, driven by Construction and Resource Industries.
- Order backlog was about $15.0B at quarter-end, down approximately $1.9B from Q1 and $2.7B year over year; $3.6B was not expected to be filled within 12 months.
Outlook, unusual items and risks
- Management expected 2019 ME&T capital expenditures of about $1.3B and pension and postretirement contributions of about $330M. It expected short-term incentive compensation expense of about $800M in 2019, compared with $1.4B in 2018, and about $300M of incremental 2019 operating-cost benefit from restructuring actions versus 2018.
- The first-half tax provision reflected an estimated annual tax rate of 26%, versus 24% in 2018, excluding discrete items. It included a $178M discrete tax benefit related to U.S. tax reform regulations. Q2 profit comparison also reflected a higher tax rate and the absence of a prior-year tax benefit.
- Restructuring costs were $158M for the first half, versus $183M. About $20M of remaining costs under the earlier restructuring plan were expected in 2019.
- The company was cooperating with a continuing U.S. grand jury investigation concerning, among other matters, tax and export activities; it said it could not predict the outcome or reasonably estimate potential loss. The IRS proposed approximately $2.3B of additional tax and penalties for tax years 2007–2012; Caterpillar is contesting the proposal and stated it did not expect a material adverse effect.
- Brazil’s CADE found MGE and certain current and former employees liable for anticompetitive conduct on July 8, 2019; MGE intended to appeal. Caterpillar said it did not expect a material adverse effect. Other unresolved legal matters were also described as not expected to be material.
- Reported risks include global demand and economic conditions, trade policy and tariffs, commodity and material costs, dealer inventory decisions, foreign exchange, credit and interest-rate risks, Cat Financial delinquencies, pension funding, legal and tax matters, and access to capital markets. Management stated interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether dealer inventory growth and the approximately $15.0B backlog indicate durable end-user demand, particularly as backlog declined year over year.
- Whether pricing and cost control can offset tariffs, materials, labor, warranty expense, and product-mix pressure; review segment trends, especially Energy & Transportation.
- Whether first-half cash flow and liquidity remain sufficient alongside planned repurchases, dividends, capital spending, and debt obligations.
- Cat Financial credit quality: past dues were 3.38% at Q2-end versus 3.16% a year earlier; review the allowance, impaired receivables, and regional exposures.
- Developments in the IRS dispute, U.S. investigation, and Brazil CADE appeal, including any change in estimated exposure or management’s materiality assessment.
- Full-year tax rate, including the effect of discrete tax benefits, and progress against management’s capital expenditure, restructuring-savings, and dealer-inventory expectations.