Caterpillar Inc. — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019; the filing also compares fourth-quarter 2019 with fourth-quarter 2018. Filed February 19, 2020. Caterpillar manufactures construction and mining equipment, engines, turbines and locomotives, and provides customer and dealer financing through Cat Financial.
Financial performance
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Sales and revenues | $53.800 billion | $54.722 billion | Down 2%; lower sales volume was partly offset by pricing and Financial Products revenue. |
| Profit attributable to common shareholders | $6.093 billion | $6.147 billion | Down slightly; higher tax expense was the main factor despite operating profit being about flat. |
| Diluted profit per share | $10.74 | $10.26 | Reported EPS rose; adjusted EPS was $11.06 versus $11.22. |
| Operating profit / margin | $8.290 billion / 15.4% | $8.293 billion / 15.2% | Profit was essentially flat; margin improved 0.2 percentage point. |
| Operating cash flow | $6.912 billion | $6.558 billion | Up, largely reflecting favorable working-capital changes. |
| Cash and short-term investments | $8.284 billion | $7.857 billion | Up $427 million. |
| Total debt | $37.657 billion | $36.553 billion | Up $1.104 billion; includes $28.495 billion attributed to Financial Products. |
Other 2019 measures: total assets were $78.453 billion; shareholders’ equity was $14.629 billion; capital expenditures were $1.056 billion for property, plant and equipment and $1.613 billion for equipment leased to others. Dividends declared were $3.95 per share. The company repurchased approximately $4.05 billion of shares.
Fourth quarter
Sales and revenues were $13.144 billion, down 8% from $14.342 billion. Profit was $1.098 billion and diluted EPS was $1.97, versus $1.048 billion and $1.78 a year earlier. Operating profit was $1.850 billion, down 2%, while operating margin increased to 14.1% from 13.1%. Dealer machine and engine inventories fell about $700 million in the quarter, compared with an increase of about $200 million in fourth-quarter 2018.
Segments and key drivers
- Construction Industries: 2019 sales of $22.649 billion, down 3%; segment profit of $3.931 billion, down 6%. Lower volume and unfavorable product mix and manufacturing costs weighed on results.
- Resource Industries: Sales of $10.276 billion, approximately flat; profit of $1.629 billion, up 2%. End-user mining demand and pricing were offset by dealer inventory changes and currency effects.
- Energy & Transportation: Sales of $22.097 billion, down 3%; profit of $3.910 billion, down 1%. Lower oil and gas sales and inter-segment engine sales contributed to the decline.
- Financial Products: Revenue of $3.434 billion, up 5%; segment profit of $832 million, versus $505 million. Higher profit mainly reflected lower credit-loss provisions and improved yields, though net write-offs increased to $237 million from $189 million.
Material changes and financial position
- Annual sales declined as dealer inventory increases were smaller than in 2018; management said higher end-user demand partly offset the effect. Backlog fell to approximately $13.7 billion from $16.5 billion, with about $3.8 billion not expected to be filled in 2020.
- Favorable price realization, lower SG&A and R&D costs, and stronger Financial Products profit largely offset lower volume, higher manufacturing costs and unfavorable currency effects. Higher warranty expense, labor and material costs, and unfavorable cost absorption were cited as cost pressures.
- Reported 2019 profit included $468 million of pension and other postretirement benefit mark-to-market losses. Adjusted EPS excludes these losses and certain other specified items; it is a non-GAAP measure and should be considered alongside GAAP results.
- ME&T operating cash flow was $4.871 billion, down from $6.347 billion. ME&T free cash flow, as defined by the company and adding back discretionary pension contributions, was $5.297 billion versus $6.126 billion.
- Caterpillar issued $1.5 billion of long-term notes in 2019, principally to finance a $1.5 billion discretionary U.S. pension contribution. It reported $10.084 billion of available credit and no borrowings under its global credit facilities at year-end; covenant requirements were met.
- All U.S. defined-benefit pension benefits were frozen effective December 31, 2019. The company reported a $6.599 billion postemployment-benefit liability on its balance sheet.
Outlook, risks and contingencies
- Management expected dealer inventories to decline approximately $1.0–$1.5 billion in 2020. It also expected lower manufacturing costs and about $800 million of short-term incentive compensation expense, compared with about $700 million in 2019.
- For 2020, Caterpillar expected ME&T capital expenditures of about $1.2 billion, pension and OPEB contributions of approximately $280 million, and restructuring costs of about $300–$400 million. It estimated prior restructuring actions would reduce 2020 operating costs by about $200 million versus 2019. The filing does not provide a clear full-year 2020 sales or EPS forecast.
- Key business risks include cyclical global demand, commodity-price and customer-investment swings, dealer inventory decisions, competition and pricing, supply constraints, material costs, currency movements, trade restrictions, emissions regulation, cybersecurity, and Cat Financial funding, credit and residual-value risks. The filing also notes the COVID-19 outbreak as a potential disruption risk; it does not quantify its effect.
- The IRS proposed approximately $2.3 billion of additional tax and penalties relating to Caterpillar SARL parts transactions for 2007–2012 tax years, including a loss carryback to 2005. Caterpillar contests the proposal, records no amount for these adjustments in unrecognized tax benefits, and says it cannot predict the investigation’s outcome; management believes the matter will not materially adversely affect the company.
- Other disclosed matters include a U.S. grand jury investigation concerning tax and export activities, and a Brazilian antitrust finding against subsidiary MGE that it intends to appeal. Management stated it did not expect these matters to have a material adverse effect. Environmental remediation accruals were described as not material.
Important facts for investors to verify
- Whether the expected 2020 dealer inventory reduction occurs and how much of reported sales weakness reflects dealer ordering versus end-user demand.
- Whether segment margins and manufacturing costs hold up as volume changes, particularly in Construction and Resource Industries.
- Cat Financial credit quality and reserves: the MD&A cites an allowance of $424 million, while the detailed allowance rollforward reports $420 million at year-end 2019; verify the intended comparable balance and definitions.
- Developments in the approximately $2.3 billion IRS tax dispute and the related ongoing investigation, including any change in Caterpillar’s assessment or disclosures.
- Execution of the 2020 restructuring and cost outlook, pension funding needs, debt and liquidity plans, and capital returns under the company’s stated mid-A credit-rating priority.