Caterpillar Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; filed May 4, 2022. Caterpillar reports Machinery, Energy & Transportation (ME&T) and Financial Products, which provides customer and dealer financing and insurance. Amounts below are in U.S. dollars unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Total sales and revenues | $13.589 billion | $11.887 billion; up 14% |
| Operating profit | $1.855 billion | $1.814 billion; up 2% |
| Operating profit margin | 13.7% | 15.3%; adjusted margin 13.7% versus 15.8% |
| Profit attributable to common shareholders | $1.537 billion | $1.530 billion |
| Diluted profit per share | $2.86; adjusted $2.88 | $2.77; adjusted $2.87 |
| Operating cash flow | $313 million | $1.928 billion |
| Cash and cash equivalents at quarter-end | $6.526 billion | $9.254 billion at Dec. 31, 2021 |
| Total debt | $37.58 billion | Down $205 million from year-end 2021 |
Revenue growth reflected higher sales volume and favorable price realization, partly offset by unfavorable foreign exchange. Dealers increased inventories by $1.3 billion, versus $700 million in Q1 2021. Higher material and freight costs, and increased SG&A and R&D spending, weighed on profitability; price realization and volume gains partly offset those pressures. The effective tax rate was 23.4%, versus 23.8% in Q1 2021, including a $12 million discrete tax benefit in 2022.
Operating cash flow fell primarily because of short-term incentive compensation payments and higher working-capital requirements, including inventory and accrued-wage movements. ME&T operating cash flow was negative $78 million; ME&T free cash flow, as defined by the company, was negative $426 million. Consolidated investing and financing cash flows were negative $1.313 billion and $1.715 billion, respectively. Cash, cash equivalents and restricted cash ended the quarter at $6.532 billion.
Current assets were $42.570 billion and current liabilities $29.532 billion at March 31. The company reported $9.166 billion of available credit and no borrowings under its $10.5 billion global credit facilities. The filing also reports $1.73 billion of ME&T investments in available-for-sale debt securities and bank time deposits available for current operations.
Segment performance and changes
- Construction Industries: Sales rose 12% to $6.115 billion; segment profit increased 1% to $1.057 billion. Profit margin fell to 17.3% from 19.1%.
- Resource Industries: Sales rose 30% to $2.830 billion; segment profit increased 16% to $361 million. Profit margin declined to 12.8% from 14.3%.
- Energy & Transportation: Sales rose 12% to $5.038 billion; segment profit fell 20% to $538 million. Profit margin declined to 10.7% from 15.0%, mainly due to higher manufacturing costs and SG&A/R&D expenses.
- Financial Products: Consolidated revenues were $703 million; segment revenues were $783 million before consolidation adjustments. Segment profit decreased 2% to $238 million, mainly due to higher credit-loss provisions and SG&A.
Sales increased in North America, Latin America and EAME, but fell 4% in Asia/Pacific, including lower sales in China. Cat Financial past dues were 2.05%, versus 2.90% a year earlier; net write-offs were $8 million, versus $24 million. Its allowance for credit losses was $357 million, or 1.29% of finance receivables, at March 31, including a higher reserve for Russia and Ukraine portfolios.
Outlook, management commentary and risks
- Management said supply-chain disruption, component and transportation shortages, labor and raw-material pressures, and COVID-19 impacts remained fluid. The company was taking price actions and adjusting contingency plans. Management expected 2022 price realization to more than offset manufacturing cost increases, and did not expect a significant increase in dealer inventories in 2022.
- Firm order backlog was approximately $26.5 billion at quarter-end, $3.4 billion above Q4 2021; about $4.5 billion was not expected to be filled in the next 12 months. Contracts with unsatisfied performance obligations over one year totaled $7.7 billion; about half was expected to be completed and recognized as revenue in the following 12 months.
- The company expected approximately $600 million of restructuring costs in 2022, primarily related to strategic actions addressing a small number of products. Prior restructuring actions were expected to benefit 2022 operating costs by about $75 million versus 2021. ME&T capital expenditures were expected to be about $1.5 billion for 2022; pension and postretirement contributions were expected to total about $357 million.
- In April 2022, the Board approved maintaining the quarterly dividend at $1.11 per share. Management described maintaining a strong financial position and supporting a mid-A credit rating as priorities. The filing does not provide a clear full-year revenue or EPS guidance figure.
- Key risks include supply-chain and cost pressures, demand and dealer inventory fluctuations, currency and commodity movements, credit and liquidity risks, and changes in global economic conditions. Management said there were no material changes to previously disclosed risk factors.
- The company is contesting approximately $2.3 billion of proposed U.S. tax increases and penalties relating to CSARL transactions for tax years 2007–2012; management said it believes the matter will not materially adversely affect results, financial position or liquidity. A long-running U.S. grand jury investigation involving tax and export matters remains ongoing; the company could not predict its outcome or reasonably estimate potential loss, but did not expect a material adverse effect. Management said other unresolved legal matters were not expected to be material.
- Dealer performance guarantees had a maximum potential payment of $655 million at March 31, versus $1.221 billion at year-end; the recorded liability was $4 million. The filing says no significant guarantee losses were anticipated. A dealer performance guarantee expiring in 2025 was terminated during Q1 without payment.
- Caterpillar disclosed limited regulatory submission and authorization activity by its Russian affiliate involving the FSB for software imported into Russia; the affiliate reported no revenue or profit from that activity.
Important facts for investors to verify
- Whether pricing continues to offset material, freight and other cost inflation, and whether margin recovery follows the Q1 contraction.
- How much reported sales growth reflects end-user demand versus dealer inventory changes, and whether dealer inventory levels develop as management expects.
- Whether working-capital needs and incentive payments normalize, given the sharp year-over-year decline in operating cash flow and negative ME&T free cash flow.
- Progress on the $26.5 billion backlog, including timing of fulfillment and any effects from supply constraints.
- Credit quality and reserve adequacy at Cat Financial, particularly for Russia and Ukraine exposures, and the trend in past dues and write-offs.
- The actual cost and timing of the expected $600 million in 2022 restructuring charges, and the realization of projected savings.
- Developments in the IRS tax dispute and ongoing government investigation, as well as the potential effects of supply-chain, geopolitical, currency and market risks.