Caterpillar Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are primarily with Q1 2016. Amounts are U.S. dollars. Caterpillar manufactures machinery, engines, turbines and related products and provides customer and dealer financing through Financial Products.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total sales and revenues | $9.822 billion | $9.461 billion | +4% |
| Operating profit | $417 million | $494 million | -16% |
| Profit attributable to common shareholders | $192 million | $271 million | -29% |
| Diluted earnings per share | $0.32 | $0.46 | -30% |
| Operating cash flow, consolidated | $1.541 billion | $490 million | +$1.051 billion |
| Cash and short-term investments, March 31 | $9.472 billion | $7.168 billion at Dec. 31, 2016 | +$2.304 billion |
- Reported operating margin was approximately 4.2%, versus 5.2% a year earlier; net margin was approximately 2.0%, versus 2.9%.
- Restructuring costs were $752 million, compared with $161 million in Q1 2016. Management estimated their after-tax impact at $0.96 per diluted share. Excluding restructuring costs, the company reported non-GAAP diluted EPS of $1.28 versus $0.64; this measure is not a substitute for GAAP results.
- Quarterly cash generation included working-capital movements, including a $732 million increase in accounts payable and a $444 million inventory cash outflow. Investing cash outflow was $125 million; financing cash inflow was $879 million. Dividends paid were $452 million, or $0.77 per share.
- Total debt was $38.28 billion, up $1.50 billion from year-end 2016. ME&T debt-to-capital was 41.7%, within the company’s 30%–45% target range, versus 41.0% at year-end. The reported consolidated cash balance should be considered alongside debt and Financial Products’ financing needs.
- Total assets were $77.549 billion and shareholders’ equity was $13.660 billion at March 31. Current assets were $35.548 billion and current liabilities were $27.635 billion.
Business and segment trends
- Machinery, Energy & Transportation (ME&T) sales rose 4% to $9.130 billion. Growth was led by Resource Industries, where sales increased 15%, mainly on higher aftermarket-parts demand; Energy & Transportation sales rose 2%, and Construction Industries sales rose 1%.
- ME&T segment profit was $302 million versus $390 million. The comparison includes significantly higher restructuring and corporate-level costs; segment results before those reconciling items improved. Construction Industries profit rose to $635 million from $440 million, Resource Industries returned to profit of $158 million from a $96 million loss, and Energy & Transportation profit increased to $552 million from $410 million.
- Financial Products revenue increased 2% to $692 million; segment profit rose 9% to $183 million, primarily reflecting lower credit-loss provision. Cat Financial past dues were 2.64% versus 2.78% a year earlier; net write-offs were $15 million versus $31 million.
- Sales improved in Asia/Pacific and Latin America, with China construction demand and mining aftermarket activity among the cited drivers. North American sales were broadly flat; end-user demand for new construction equipment remained weak. Management noted that dealer inventories increased about $200 million in Q1 2017, compared with about $300 million in Q1 2016.
Outlook, commentary and notable items
- Management expected 2017 restructuring costs of approximately $1.25 billion, revised up from about $500 million, primarily due to the planned closure of the Gosselies, Belgium facility. About $671 million of Q1 restructuring costs related to that closure. The closure affects approximately 2,000 employees; production was expected to end by mid-2017 and other operations to phase out by year-end. The company expected approximately $450 million of 2017 operating-cost benefit from restructuring actions compared with 2016.
- Management expected full-year pricing to be neutral to slightly positive, with competitive pricing, and anticipated material costs would increase in the second half. It expected ME&T capital expenditures to be about the same as in 2016 and full-year pension and postretirement contributions of approximately $610 million. Dealer inventories were expected to decline in 2017, but less than in 2016.
- Firm order backlog was approximately $14.8 billion at March 31, up $2.7 billion from year-end; approximately $3.3 billion was not expected to be filled within 12 months. Management said mining-company capital spending may improve from low levels but noted stronger, sustained demand depends in part on commodity prices stabilizing.
- Liquidity: cash and short-term investments included approximately $7.7 billion held by non-U.S. subsidiaries. The company had $6.857 billion of available credit and no borrowings under its $10.5 billion global credit facilities. Moody’s had downgraded Caterpillar’s ratings in December 2016; the filing said this had not materially affected borrowing costs, while a further downgrade could increase costs or constrain market access.
- Material legal and tax matters include an ongoing U.S. grand jury investigation; search warrants were executed at three Peoria-area facilities in March 2017. Caterpillar said it could not predict the outcome or estimate potential loss, but did not then expect a material adverse effect. The IRS proposed approximately $2 billion of additional tax and penalties for 2007–2012 parts transactions involving Caterpillar SARL; the company contested the proposal and said it did not expect a material adverse effect. The SEC closed its Bucyrus goodwill investigation without intending to recommend enforcement action. Other Brazil competition and Progress Rail investigations remain unresolved.
- Other unusual items: a $20 million net pension curtailment and termination-benefit loss related to Gosselies and $9 million of termination benefits related to the Aurora, Illinois production move. Management reported no goodwill impairment in the quarter. The 2017 revenue-recognition standard was expected to change timing for certain turbine sales; the company had not identified a material adoption impact but was still evaluating some segment revenue streams.
Most important facts for investors to verify
- Whether the planned restructuring costs, cash payments and anticipated $450 million cost benefit track management’s estimates and timing.
- Whether sales growth, backlog and mining aftermarket demand translate into sustained end-user equipment demand, particularly if commodity prices or dealer inventory trends change.
- How operating cash flow and liquidity develop as severance payments, pension contributions and debt obligations come due; assess consolidated cash alongside total debt and Financial Products funding needs.
- Developments in the U.S. investigation and the IRS dispute, including any change to the company’s assessment of potential financial exposure.
- Whether credit quality remains stable, including Cat Financial delinquencies, impairments, write-offs and allowance coverage.
- Reconcile the filing’s Q1 dividend paid of $0.77 per share with the income statement’s zero dividends declared for the quarter; the filing text does not clearly explain that presentation difference.