Caterpillar Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited U.S. GAAP financial statements. Caterpillar reports Machinery, Energy & Transportation (ME&T) and Financial Products, including its equipment financing and insurance businesses. Dollar amounts below are U.S. dollars.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total sales and revenues | $12.397B | $9.881B | $37.173B | $30.513B |
| Operating profit | $1.664B | $985M | $5.267B | $3.173B |
| Operating profit margin | 13.4% | 10.0% | 14.2% | 10.4% |
| Profit attributable to common shareholders | $1.426B | $668M | $4.369B | $2.218B |
| Diluted profit per share | $2.60 | $1.22 | $7.94 | $4.05 |
| Operating cash flow | Not separately stated | Not separately stated | $5.786B | $4.255B |
For Q3, sales rose 25%, operating profit rose 69%, and profit attributable to common shareholders rose 113% year over year. For the nine-month period, sales rose 22% and operating profit rose 66%. Adjusted operating profit margin was 13.7% in Q3 and 14.5% year to date, versus 11.1% and 11.4%, respectively, in 2020. Adjusted diluted profit per share was $2.66 for Q3 and $8.13 year to date; these non-GAAP measures exclude specified restructuring and, where applicable, pension remeasurement items.
Cash, debt and liquidity: Cash and cash equivalents were $9.446B at September 30, 2021, up from $9.352B at December 31, 2020; management reported $9.4B of enterprise cash at quarter-end. Total debt was approximately $36.8B, down $379M from year-end 2020. Current assets were $41.893B and current liabilities $25.976B. The company reported $10.49B of available credit and no borrowings under its $10.5B global credit facilities. ME&T generated $4.899B of operating cash flow and $4.206B of ME&T free cash flow in the first nine months.
Business changes and drivers
- Higher equipment and services demand, dealer inventory changes, and favorable price realization drove sales growth. Sales increased across the three primary segments and all geographic regions for the nine-month period.
- Q3 sales increased across Construction Industries (+30%), Resource Industries (+32%), and Energy & Transportation (+22%). Financial Products revenue increased 5% to $762M.
- Higher sales volume and pricing supported profit growth. Higher freight, labor, material, SG&A and R&D costs partly offset the gains. Short-term incentive compensation, reinstated in 2021, was about $350M in Q3 and $1.1B for the first nine months.
- Financial Products segment profit increased 67% to $660M year to date, primarily reflecting lower credit-loss provisions, gains related to returned or repossessed equipment, and higher net yield on average earning assets. Cat Financial past dues were 2.41% at Q3-end, versus 3.81% a year earlier.
- Inventories increased $2.264B from year-end. The inventory increase and higher receivables were working-capital uses of cash, partly offset by higher accounts payable and accrued expenses.
Outlook, risks and unusual items
- Management said supply-chain disruption, component availability, freight delays, and higher raw-material and labor costs were pressuring production and costs, and expected these pressures to continue into 2022. Caterpillar said it was redirecting components, changing assembly processes, and taking pricing actions.
- Management did not expect a significant dealer inventory increase in 2021. Firm order backlog was approximately $20.6B at quarter-end, up about $2.2B from Q2; approximately $3.9B was not expected to be filled within 12 months.
- Management expected 2021 restructuring costs of $150M–$200M and approximately $200M of incremental operating-cost benefit from prior restructuring actions compared with 2020. Expected 2021 ME&T capital expenditures were $1.0B–$1.1B; anticipated pension and postretirement contributions were about $310M. Short-term incentive compensation expense was expected to be about $1.4B for 2021.
- In October 2021, the board approved maintaining the quarterly dividend at $1.11 per share. The filing gives no specific full-year revenue or earnings forecast.
- Q3 results included $35M of restructuring costs. The prior-year quarter included $112M of restructuring costs and a $77M pretax pension remeasurement loss. Other income was $225M in Q3 2021 versus $14M in Q3 2020, helped by foreign-exchange gains and pension/OPEB items. The nine-month effective tax-rate estimate was 25%, versus 31% in 2020, primarily due to expected geographic mix of profits.
- The filing describes a continuing U.S. government investigation involving tax and export matters; Caterpillar said it could not predict the outcome or reasonably estimate potential loss. The IRS has proposed approximately $2.3B of additional tax and penalties relating to specified 2007–2012 tax matters; Caterpillar is contesting the proposal and said it did not expect a material adverse effect. Management reported no material changes to previously disclosed risk factors.
- Other key exposures include global economic and COVID-19 effects, supply and commodity-cost pressure, foreign-exchange and interest-rate movements, dealer inventory decisions, credit losses at Cat Financial, pension funding, and legal, tax and regulatory matters.
Important facts for investors to verify
- Whether demand, pricing, backlog and dealer inventory trends persist, and whether supply constraints limit Caterpillar’s ability to fulfill orders.
- Whether freight, material, labor and incentive-compensation costs outpace pricing and productivity gains, affecting margins and cash conversion.
- Cash generation and working-capital needs, particularly inventory growth; ME&T free cash flow is a company-defined non-GAAP measure.
- Debt, Financial Products funding needs, credit-facility covenant headroom, and Cat Financial delinquencies, losses and allowance adequacy.
- Developments in the IRS tax dispute and government investigation, including any change in estimated exposure or management’s stated assessment.
- Actual restructuring costs, capital expenditures, pension contributions, share repurchases and dividend sustainability compared with management’s stated plans.