CATERPILLAR INC quarterly report, Q2 FY2023

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Caterpillar Inc. — Q2 2023 Form 10-Q

Business context and reporting period. Caterpillar reported the quarter and six months ended June 30, 2023. Its businesses comprise Machinery, Energy & Transportation (ME&T) and Financial Products, which finances customers and dealers. Comparisons below are with the corresponding 2022 periods unless noted.

Financial performance

  • Second-quarter revenue: $17.318 billion, up 22% from $14.247 billion. ME&T sales were $16.545 billion (+22%); Financial Products revenue was $773 million (+9%). Growth reflected higher sales volume and favorable price realization, partly offset by unfavorable currency.
  • Second-quarter profit: GAAP profit attributable to common shareholders was $2.922 billion, up 75%; diluted EPS was $5.67 versus $3.13. Operating profit was $3.652 billion, up 88%, and operating margin was 21.1% versus 13.6%.
  • Adjusted second-quarter results: Adjusted operating margin was 21.3% and adjusted EPS was $5.55, compared with 13.8% and $3.18 in Q2 2022. Adjustments include restructuring costs and, in 2023, an $88 million discrete tax benefit.
  • First-half revenue and profit: Revenue was $33.180 billion, up 19%; GAAP profit was $4.865 billion, and diluted EPS was $9.41 versus $5.99. Operating profit was $6.383 billion (+68%) and margin was 19.2% versus 13.6%. Adjusted margin was 21.2% and adjusted EPS was $10.46 versus 13.8% and $6.06.
  • Cash flow and investment: First-half operating cash flow was $4.822 billion, up from $2.546 billion. ME&T free cash flow, a non-GAAP measure, was $3.982 billion versus $695 million. Capital expenditures were $1.457 billion, including equipment leased to others.
  • Liquidity and debt: Cash and cash equivalents were $7.387 billion at June 30, versus $7.004 billion at year-end 2022. Total debt was $37.70 billion, up $706 million from year-end; the increase was concentrated in Financial Products. Available credit was $8.564 billion, with no borrowings under the $10.5 billion global credit facilities. The company reported covenant compliance.
  • Other metrics: Total assets were $85.427 billion and shareholders’ equity $18.256 billion. Inventory was $17.746 billion, up from $16.270 billion at year-end. First-half dividends paid were $1.238 billion; shares repurchased cost $1.829 billion.

Material changes and segment results

  • Sales and profits increased across Construction Industries, Resource Industries and Energy & Transportation. Favorable price realization and higher equipment sales drove gains; higher material and other manufacturing costs, plus increased SG&A and R&D, partly offset them.
  • In Q2, Construction Industries sales rose 19% and segment profit 82%; Resource Industries sales rose 20% and profit 108%; Energy & Transportation sales rose 27% and profit 93%. Financial Products revenue rose 16% and segment profit 11%, helped by higher financing rates and lower credit-loss provisions.
  • Dealers’ inventory increased by $600 million in Q2 2023, compared with a $400 million decrease in Q2 2022. For the first half, dealer inventory rose about $2.2 billion, versus $900 million in the prior-year period.
  • First-half operating cash flow benefited from higher profit and non-cash adjustments, including the Longwall divestiture loss, and lower working-capital requirements. Inventory growth remained a cash use.

Outlook, commentary and risks

  • Management expected strong full-year 2023 top-line performance, supported by price realization and higher equipment sales to end users, and expected operating profit to increase versus 2022. It expected year-end dealer inventory to be slightly above year-end 2022.
  • For the second half, management expected higher sales and revenue than in the second half of 2022, but expected dealer inventory to decrease; Q3 sales were expected above Q3 2022 but below Q2 2023 on typical seasonality. Management anticipated price realization and manufacturing-cost benefits to moderate year over year, while SG&A/R&D investment would continue.
  • Management described demand as healthy across most end markets, with strength in North American construction, mining, gas compression and power generation, including data centers. It cited weakness in China’s larger excavator market, expected softer Europe and Latin America construction activity, and continued customer capital discipline in mining.
  • Management identified supply-chain disruption, inflationary material and labor costs, and component and transportation availability as areas of focus. Other disclosed risks include economic and end-market conditions, commodity and currency movements, interest rates, dealer inventory decisions, credit quality and delinquencies, access to financing, credit ratings, covenants, regulation, legal matters and cybersecurity.
  • Unusual item: The February 2023 Longwall business divestiture generated a pretax loss of approximately $586 million, primarily non-cash from releasing accumulated foreign-currency translation. Full-year restructuring costs were expected to be about $700 million, including that loss.
  • Backlog: Firm order backlog was approximately $30.7 billion at quarter-end, about flat with Q1; $5.9 billion was not expected to be filled within 12 months.
  • The company said unresolved environmental and legal matters were not expected to have a material adverse effect; recorded environmental remediation costs were not material. It reported no material changes to previously disclosed risk factors.

Most important facts for investors to verify

  • Whether the strong reported revenue and margin growth persists as price-realization benefits moderate and manufacturing costs remain elevated.
  • How much sales growth reflects end-user demand versus dealer inventory changes, and whether the expected second-half inventory decline and year-end level occur.
  • The underlying earnings effect of the $586 million Longwall loss and discrete tax benefits; compare GAAP results with management’s non-GAAP adjustments.
  • Cash conversion and working-capital needs, particularly inventory, alongside debt growth and Financial Products’ funding requirements.
  • Whether end-market outlook and Cat Financial credit conditions hold, given management’s warning of rising industry delinquencies amid inflation and slower global growth.
  • Progress on the backlog, supply-chain constraints, capital spending, dividends and share repurchases, and continued compliance with financing covenants.