Caterpillar Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Caterpillar manufactures and supports machinery, engines and related products through Machinery, Energy & Transportation (ME&T), and provides customer and dealer financing and insurance through Financial Products.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Sales and revenues | $12.889B | $9.997B | $24.776B | $20.632B |
| Operating profit | $1.789B | $0.784B | $3.603B | $2.188B |
| Operating profit margin | 13.9% | 7.8% | 14.5% | 10.6% |
| Profit attributable to common shareholders | $1.413B | $0.458B | $2.943B | $1.550B |
| Diluted profit per share | $2.56 | $0.84 | $5.33 | $2.83 |
| Adjusted diluted profit per share | $2.60 | $1.27 | $5.47 | $2.92 |
Adjusted measures exclude restructuring costs and, for 2020, pension-obligation remeasurement gains or losses. Q2 adjusted operating profit margin was 14.1% versus 9.3%; the six-month comparison was 14.9% versus 11.5%.
- Revenue drivers: Q2 sales and revenues rose 29%, mainly on higher end-user demand and sales volume, dealer-inventory changes, favorable price realization and currency. ME&T sales rose 31%; Financial Products revenues rose 1%. For the first half, total sales and revenues increased 20% and ME&T sales increased 22%, while Financial Products revenues declined 1%.
- Segments: Q2 sales increased in Construction Industries 40%, Resource Industries 41% and Energy & Transportation 20%. Financial Products segment profit increased to $243M from $148M. For the first half, segment profit rose across all three primary machinery and engine businesses; Financial Products segment profit was $487M versus $253M.
- Cash flow: First-half consolidated operating cash flow was $4.046B, compared with $2.521B. ME&T operating cash flow was $3.799B versus $0.975B; ME&T free cash flow, a non-GAAP measure, was $3.369B versus $0.511B. Consolidated cash flow benefited from higher profit and incentive-compensation accruals, partly offset by working-capital needs, including higher receivables and inventory.
- Liquidity and debt: Cash and short-term investments were $10.831B at June 30, up from $9.352B at year-end 2020. Total debt was approximately $37.6B, up $422M from year-end; Financial Products debt increased while ME&T debt declined. Available credit was $10.262B, with no borrowings under the global credit facility. Total assets were $81.697B and shareholders’ equity was $16.880B.
- Margins and costs: Higher volume and pricing drove profit growth, while higher manufacturing costs and SG&A/R&D expenses—particularly reinstated short-term incentive compensation—partly offset gains. Q2 incentive-compensation expense was about $400M; first-half expense was about $700M.
Changes, outlook and notable items
- Management attributed year-over-year improvement in part to recovery from the weaker 2020 comparison. Dealers reduced inventories by $1.4B in Q2 2020 versus $0.4B in Q2 2021; over the first half, dealers reduced inventories by about $1.2B in 2020 and increased them by about $0.3B in 2021. Caterpillar did not expect a significant dealer inventory increase in 2021.
- Firm order backlog was approximately $18.4B at quarter-end, up about $1.5B sequentially; approximately $3.7B was not expected to be filled within twelve months.
- The filing does not provide a specific full-year sales or EPS forecast. Management expected about $1.5B of short-term incentive-compensation expense in 2021, compared with none in 2020; about $250M in 2021 restructuring costs; and approximately $200M of incremental operating-cost benefits from prior restructuring actions versus 2020.
- ME&T capital expenditures were expected to be approximately $1.0B–$1.2B for 2021. Full-year pension and postretirement contributions were expected to be about $310M. In June, the Board approved an 8% quarterly dividend increase to $1.11 per share.
- Management highlighted COVID-19, including the Delta variant, supply-chain disruptions and cost and labor pressures, particularly involving semiconductors, transportation and raw materials. These factors had not significantly affected operations in the first half, but remained fluid; contingency plans were being adjusted.
- Cat Financial past dues improved to 2.58% from 3.74% a year earlier, while Q2 net write-offs increased to $54M from $30M. The allowance for credit losses was $402M, or 1.46% of finance receivables, at June 30.
- Legal and contingencies: The IRS has proposed approximately $2.3B in additional tax and penalties concerning certain parts transactions for tax years 2007–2012; Caterpillar contests the proposal and says it does not expect a material adverse effect. The company also reported an ongoing U.S. grand jury investigation and stated it cannot predict its outcome or reasonably estimate potential loss, while currently believing it will not have a material adverse effect. Recorded environmental remediation liability was not material; no significant losses were expected under guarantees, whose maximum potential payments totaled $1.442B.
- The company identified foreign-exchange, interest-rate and commodity-price exposures and uses derivatives for risk management, not speculation. It reported no material change to previously disclosed risk factors and effective disclosure controls.
Important facts for investors to verify
- Whether demand, price realization and backlog convert into sustained sales and margins, and how much growth reflects dealer-inventory movements and currency.
- Whether supply constraints, material and labor costs, and incentive compensation pressure profitability in the second half.
- How operating cash generation and working capital evolve, especially inventory and receivables, and how Financial Products’ funding and credit performance develop.
- Debt and liquidity trends, including Financial Products’ increased borrowing, credit-facility availability and the company’s mid-A credit-rating objective.
- Developments in the $2.3B IRS tax dispute and the unresolved government investigation, including any change in Caterpillar’s assessment of potential impact.
- Progress against management’s stated 2021 expectations for incentive compensation, restructuring, capital expenditures and pension contributions; these are not a full-year revenue or EPS guidance range.