Caterpillar Inc. — Q3 2019 Form 10-Q
Business context and reporting period. Caterpillar designs, manufactures and sells construction and mining machinery, engines, turbines and locomotives, and provides customer and dealer financing through Financial Products. This unaudited filing covers the quarter and nine months ended September 30, 2019; comparisons are with the same periods of 2018 unless otherwise noted. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Sales and revenues | $12,758 | $13,510 | $40,656 | $40,380 |
| Operating profit | $2,020 | $2,135 | $6,440 | $6,410 |
| Operating profit margin | 15.8% | 15.8% | 15.8% | 15.9% |
| Profit attributable to common shareholders | $1,494 | $1,727 | $4,995 | $5,099 |
| Diluted earnings per share | $2.66 | $2.88 | $8.75 | $8.45 |
| Consolidated operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $4,478 | $4,475 |
- Q3 revenue fell 6%, primarily from lower sales volume and dealer inventory reductions; higher end-user demand, favorable pricing and Financial Products revenue partly offset the decline. Profit fell 13%, mainly on lower volume. Lower SG&A and R&D—largely from reduced short-term incentive compensation—provided partial offsets.
- For the first nine months, revenue rose 1%, while profit declined 2%; diluted EPS increased 4%, supported in part by fewer weighted-average shares following repurchases. ME&T operating cash flow was $2,632, down from $3,880.
- Segment results were mixed. Q3 sales declined 7% in Construction Industries and 12% in Resource Industries; Energy & Transportation sales were down 2%. Financial Products revenue increased 5% and segment profit increased 8%. For nine months, Resource Industries profit rose 14% and Financial Products profit rose 31%, while Construction Industries and Energy & Transportation profit declined 2% and 4%, respectively.
Financial position, cash and capital allocation
- At September 30, 2019, cash and short-term investments were $7,906, total assets $77,993, total liabilities $63,000 and shareholders’ equity $14,993. Total debt was approximately $37,906, including Financial Products debt; debt increased $1,350 from year-end 2018.
- Consolidated operating cash flow was nearly unchanged year over year for the first nine months. The company cited favorable working-capital changes offset by lower profit excluding incentive-compensation accruals, higher income-tax payments and a larger discretionary pension contribution.
- Cash flows included a $1,500 discretionary U.S. pension contribution in September, funded with debt issuance. The contribution contributed to negative ME&T operating cash flow of $188 in Q3. Nine-month dividends paid were $1,564 and share repurchases were $3,283; $6,677 remained under the $10 billion repurchase authorization at September 30.
- Available credit was $10,682, including $2,751 allocated to ME&T; no borrowings were outstanding under the $10,500 global credit facilities. Management reported covenant compliance and liquidity conditions as favorable.
Outlook, commentary and risks
- Management expected dealer inventories to increase by about $500 for full-year 2019 versus prior year-end, citing current inventory levels and global economic uncertainty. Firm order backlog was approximately $14,600 at quarter-end, down about $400 sequentially and $2,700 year over year; approximately $3,800 was not expected to be filled within twelve months.
- Management expected 2019 ME&T capital expenditures of about $1,200, pension and postretirement contributions of about $1,830, and short-term incentive compensation expense of about $750. It expected restructuring actions to provide about $300 of incremental operating-cost benefit in 2019 versus 2018. The filing does not provide a clear full-year revenue or EPS forecast.
- At September 30 market conditions, the company estimated a possible year-end pension funded-status decrease of about $1,300, implying a pretax mark-to-market loss of about $1,300, or approximately $1.00 billion after tax ($1.83 per share). This was an estimate, not a recorded Q3 charge, and could change with year-end assumptions and asset returns.
- Cat Financial past dues improved to 3.19% from 3.47% a year earlier, but Q3 net write-offs rose to $103 from $40, driven mainly by marine exposures and EAME. The reported allowance was $434, or 1.57% of finance receivables, at September 30.
- Material matters include a continuing U.S. grand jury investigation for which the company said it could not estimate potential loss; a contested IRS proposal of approximately $2.3 billion in tax and penalties for 2007–2012; and a Brazilian competition authority finding against subsidiary MGE, which intends to appeal. Management stated it did not expect these matters to materially adversely affect the company. The filing also cites exposure to global economic conditions, trade policy and tariffs, currency, commodity and material costs, credit quality, pension funding, legal proceedings and environmental regulation.
Important facts for investors to verify
- Whether dealer inventory movements, order backlog and end-user demand support the company’s stated 2019 inventory outlook.
- How lower machinery sales volumes, pricing, manufacturing costs and segment mix affect margins and full-year results.
- The size and timing of the year-end pension remeasurement, and its effect on earnings, liabilities and cash requirements.
- Cat Financial credit performance, particularly write-offs and exposures in marine, EAME and Latin America portfolios.
- Developments in the IRS matter, U.S. investigation and MGE appeal, as well as any changes in management’s loss assessments.
- Debt and liquidity trends alongside ongoing dividends, repurchases and pension contributions; consolidated cash flows include distinct ME&T and Financial Products financing activities.