Caterpillar Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; includes fourth-quarter results. Caterpillar manufactures construction and mining equipment, engines, turbines and locomotives, and provides customer and dealer financing through Financial Products.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Sales and revenues | $45.462 billion | $38.537 billion |
| Operating profit | $4.406 billion | $498 million |
| Profit (loss) attributable to common shareholders | $754 million | $(67) million |
| Diluted earnings (loss) per share | $1.26 | $(0.11) |
| Adjusted profit per share, non-GAAP | $6.88 | $3.42 |
| Operating cash flow | $5.702 billion | $5.636 billion |
| Cash and short-term investments at year-end | $8.261 billion | $7.168 billion |
| Total debt at year-end | $34.878 billion | $36.783 billion |
| Total assets at year-end | $76.962 billion | $74.704 billion |
Sales and revenues rose 18%, primarily on stronger end-user demand, more favorable dealer inventory changes and improved price realization. Operating profit was about 9.7% of sales and revenues, versus about 1.3% in 2016. The reported profit includes a provisional $2.371 billion charge from U.S. tax reform; adjusted results exclude specified unusual items and are non-GAAP.
Machinery, Energy & Transportation (ME&T) generated $5.459 billion of operating cash flow. Consolidated investing cash flow was $(994) million and financing cash flow was $(3.653) billion. Capital expenditures were $898 million, excluding equipment leased to others. Dividends paid were $1.831 billion; no common shares were repurchased in 2017. ME&T’s debt-to-capital ratio was 36.7%, down from 41.0%.
Year-end current assets were $36.244 billion and current liabilities $26.931 billion. Caterpillar reported $9.932 billion of available credit and no borrowings under its global credit facilities. These consolidated measures include the finance business, whose balance sheet differs from the manufacturing operations.
Fourth quarter
Sales and revenues were $12.896 billion, up 35% from $9.574 billion. Operating profit was $1.161 billion versus an operating loss of $1.262 billion. Net loss was $1.299 billion, or $2.18 per diluted share, compared with a $1.171 billion loss, or $2.00 per share, a year earlier. The fourth-quarter 2017 result was heavily affected by the tax-reform charge; adjusted profit per share was $2.16 versus $0.83 in fourth-quarter 2016.
Material changes and segment trends
- Construction Industries sales increased 23% to $19.133 billion; segment profit rose to $3.258 billion from $1.650 billion. Demand improved broadly, particularly in China and North America, and price realization improved.
- Resource Industries sales increased 31% to $7.504 billion. Segment profit was $690 million, compared with a $1.047 billion loss in 2016, reflecting stronger mining equipment and aftermarket demand and the absence of the prior-year $595 million goodwill impairment.
- Energy & Transportation sales increased 11% to $15.964 billion and segment profit rose 30% to $2.883 billion, mainly on higher oil-and-gas and industrial demand.
- Financial Products revenues increased 3% to $3.093 billion and segment profit rose to $792 million from $702 million. Cat Financial past dues increased to 2.78% from 2.38%; net write-offs declined to $114 million from $123 million.
- Firm order backlog increased to approximately $15.8 billion from $12.1 billion; about $2.9 billion was not expected to be filled in 2018.
Outlook, risks and unusual items
- Management expected improved end-user demand to continue in 2018 and indicated sales growth across key markets. It anticipated stronger China construction sales, with a strong first half and seasonal moderation later in the year. The filing does not provide a clear consolidated 2018 sales or earnings forecast in the supplied text.
- Management expected approximately $400 million of restructuring costs in 2018 and about $250 million of cost reductions from lower operating costs. ME&T capital expenditures were forecast at $1.0–$1.5 billion, and pension and OPEB contributions at approximately $365 million.
- U.S. tax reform produced a provisional $2.371 billion charge, including $596 million to remeasure deferred tax assets and $1.775 billion primarily for deemed repatriation of non-U.S. earnings. The tax accounting was incomplete and the estimate could change; management expected a lower effective tax rate in 2018.
- Restructuring costs were $1.256 billion in 2017, including about $653 million related to closing the Gosselies, Belgium facility, which affects approximately 2,000 employees. Supplier constraints remained on some products and could limit 2018 growth; steel and other material costs were also expected to rise.
- Key business risks include cyclical demand and commodity prices, dealer inventory swings, competitive pricing, supply constraints, foreign exchange and interest rates, Cat Financial credit and funding risks, pension funding, regulatory and environmental costs, and cyber threats.
- The company is contesting approximately $2.3 billion of proposed IRS tax and penalties related to Caterpillar SARL parts transactions for tax years 2007–2012. It also disclosed an ongoing U.S. grand jury investigation involving tax and export matters and a Brazilian competition investigation; outcomes and potential losses were not estimable. A subsidiary paid $25 million in fines and restitution following a guilty plea for a misdemeanor environmental violation.
Investor verification priorities
- Reconcile reported 2017 earnings with adjusted earnings, especially the provisional tax-reform charge and the other excluded items.
- Track whether stronger end-user demand translates into sustainable orders and sales, separately from dealer inventory restocking and the $15.8 billion backlog.
- Monitor supplier capacity, inventory growth, material costs and the execution and savings from restructuring.
- Review Cat Financial delinquencies, impaired receivables, credit-loss allowances and funding access.
- Follow developments in the IRS dispute, the grand jury investigation and the Brazilian competition matter, including any changes to Caterpillar’s loss estimates or disclosures.
- Assess cash conversion, debt and liquidity alongside pension contributions and the company’s dividend and capital-allocation commitments.