Caterpillar Reports Second-Quarter 2018 Results

DEERFIELD, Ill., July 30, 2018 /PRNewswire/ -- 

• Second-quarter sales and revenues up 24 percent
• Profit per share doubled; adjusted profit per share nearly doubled
• Raised full-year profit per share outlook
• Repurchased $750 million of shares; increased quarterly dividend 10 percent

Caterpillar Inc. (NYSE: CAT) today announced second-quarter 2018 sales and revenues of $14.0 billion, compared with $11.3 billion in the second quarter of 2017, a 24 percent increase. Second-quarter 2018 profit per share of $2.82 was a second-quarter record. Profit per share was $1.35 in the second quarter of 2017. Adjusted profit per share in the second quarter of 2018 was $2.97, compared with second-quarter 2017 adjusted profit per share of $1.49.

During the second quarter of 2018, Machinery, Energy & Transportation (ME&T) operating cash flow was $2.1 billion, and the company repurchased $750 million of Caterpillar common stock. In June 2018, the board of directors approved an increase to the quarterly dividend of 10 percent to $0.86 per share. The second quarter of 2018 ended with an enterprise cash balance of $8.7 billion.

"Caterpillar delivered record second-quarter profit per share," said Caterpillar CEO Jim Umpleby. "Our team is doing a great job executing our strategy for profitable growth, focusing on operational excellence, expanded offerings and services."

2018 Outlook

The company is raising its 2018 profit per share outlook to a range of $10.50 to $11.50. Excluding restructuring costs of about $400 million, the company expects adjusted profit per share to be in a range of $11.00 to $12.00. The prior profit per share outlook range was $9.75 to $10.75, and the adjusted profit per share outlook range was $10.25 to $11.25.

"Based on outstanding results in the first half of the year and continued strength in many of our end markets, Caterpillar is again raising our profit outlook for 2018. We remain focused on operational excellence, cost discipline and investing for long-term profitable growth," said Umpleby.

Sales and revenues – Most end markets continue to improve, order rates are healthy, and the backlog remained solid in the quarter. For certain applications, particularly in oil and gas and mining, the company is seeing strong demand and taking orders for delivery well into 2019.

Operating profit – The company is raising the outlook range primarily due to the continued strength in many end markets. Recently imposed tariffs are expected to impact material costs in the second half of the year by approximately $100 million to $200 million, and the company expects supply chain challenges to continue to pressure freight costs. However, the company intends to largely offset these impacts through announced mid-year price increases and using the Operating & Execution Model to further drive operational excellence and structural cost discipline.

The outlook does not include a mark-to-market gain or loss for remeasurement of pension and other postemployment benefit (OPEB) plans, changes to provisional estimates recorded in 2017 for U.S. tax reform, or any impact from future geopolitical risks, including increased trade restrictions above those currently in place.

Share Repurchase; Authorization for New $10 Billion Share Repurchase Program

In January 2014, the board of directors authorized the repurchase of $10.0 billion of Caterpillar common stock. The current program expires at the end of this year. Under this authorization, the company repurchased $1.25 billion in common stock in the first half of 2018, of which $750 million was repurchased in the second quarter. As of June 30, 2018, $4.2 billion remained on the current authorization. The company currently expects share repurchases during the second half of 2018 to be in a similar range as the first half, but the amount could vary depending upon market conditions and investing priorities. Aligned with the cash deployment strategy, the company plans to be in the market for share repurchases on a fairly consistent basis.

In July 2018, the board of directors authorized the repurchase of up to $10.0 billion of Caterpillar common stock effective January 1, 2019, with no expiration date.

Notes:

• Glossary of terms is included on pages 13-14; first occurrence of terms shown in bold italics.
• Information on non-GAAP financial measures is included on page 15.
• Caterpillar will conduct a teleconference and live webcast, with a slide presentation, beginning at 10 a.m. Central Time on Monday, July 30, 2018, to discuss its 2018 second-quarter financial results. The accompanying slides will be available before the webcast on the Caterpillar website at http://www.caterpillar.com/investors/events-and-presentations.

About Caterpillar:
For more than 90 years, Caterpillar Inc. has been making sustainable progress possible and driving positive change on every continent. Customers turn to Caterpillar to help them develop infrastructure, energy and natural resource assets. With 2017 sales and revenues of $45.462 billion, Caterpillar is the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company principally operates through its three primary segments - Construction Industries, Resource Industries and Energy & Transportation - and also provides financing and related services through its Financial Products segment. For more information, visit caterpillar.com. To connect with us on social media, visit caterpillar.com/social-media.

Forward-Looking Statements

Certain statements in this press release relate to future events and expectations and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "believe," "estimate," "will be," "will," "would," "expect," "anticipate," "plan," "project," "intend," "could," "should" or other similar words or expressions often identify forward-looking statements. All statements other than statements of historical fact are forward-looking statements, including, without limitation, statements regarding our outlook, projections, forecasts or trend descriptions. These statements do not guarantee future performance and speak only as of the date they are made, and we do not undertake to update our forward-looking statements.

Caterpillar's actual results may differ materially from those described or implied in our forward-looking statements based on a number of factors, including, but not limited to: (i) global and regional economic conditions and economic conditions in the industries we serve; (ii) commodity price changes, material price increases, fluctuations in demand for our products or significant shortages of material; (iii) government monetary or fiscal policies; (iv) political and economic risks, commercial instability and events beyond our control in the countries in which we operate; (v) international trade policies and their impact on demand for our products and our competitive position, including the imposition of new tariffs or changes in existing tariff rates; (vi) our ability to develop, produce and market quality products that meet our customers' needs; (vii) the impact of the highly competitive environment in which we operate on our sales and pricing; (viii) information technology security threats and computer crime; (ix) additional restructuring costs or a failure to realize anticipated savings or benefits from past or future cost reduction actions; (x) failure to realize all of the anticipated benefits from initiatives to increase our productivity, efficiency and cash flow and to reduce costs; (xi) inventory management decisions and sourcing practices of our dealers and our OEM customers; (xii) a failure to realize, or a delay in realizing, all of the anticipated benefits of our acquisitions, joint ventures or divestitures; (xiii) union disputes or other employee relations issues; (xiv) adverse effects of unexpected events including natural disasters; (xv) disruptions or volatility in global financial markets limiting our sources of liquidity or the liquidity of our customers, dealers and suppliers; (xvi) failure to maintain our credit ratings and potential resulting increases to our cost of borrowing and adverse effects on our cost of funds, liquidity, competitive position and access to capital markets; (xvii) our Financial Products segment's risks associated with the financial services industry; (xviii) changes in interest rates or market liquidity conditions; (xix) an increase in delinquencies, repossessions or net losses of Cat Financial's customers; (xx) currency fluctuations; (xxi) our or Cat Financial's compliance with financial and other restrictive covenants in debt agreements; (xxii) increased pension plan funding obligations; (xxiii) alleged or actual violations of trade or anti-corruption laws and regulations; (xxiv) additional tax expense or exposure, including the impact of U.S. tax reform; (xxv) significant legal proceedings, claims, lawsuits or government investigations; (xxvi) new regulations or changes in financial services regulations; (xxvii) compliance with environmental laws and regulations; and (xxviii) other factors described in more detail in Caterpillar's Forms 10-Q, 10-K and other filings with the Securities and Exchange Commission.

CONSOLIDATED RESULTS

Consolidated Sales and Revenues

Consolidated Sales and Revenues Comparison
Second Quarter 2018 vs. Second Quarter 2017

To access this chart, go to http://www.caterpillar.com/en/investors/quarterly-results.html for the downloadable version of Caterpillar 2Q 2018 earnings.

The chart above graphically illustrates reasons for the change in Consolidated Sales and Revenues between the second quarter of 2017 (at left) and the second quarter of 2018 (at right). Items favorably impacting sales and revenues appear as upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting sales and revenues appear as downward stair steps with dollar amounts reflected in parentheses above each bar. Caterpillar management utilizes these charts internally to visually communicate with the company's board of directors and employees.

Total sales and revenues were $14.011 billion in the second quarter of 2018, an increase of $2.680 billion, or 24 percent, compared with $11.331 billion in the second quarter of 2017. The increase was primarily due to higher sales volume driven by improved demand across the three primary segments, with the largest increase in Construction Industries. Sales were also higher due to currency impacts, primarily from a stronger euro and Chinese yuan.

Consolidated Operating Profit

Consolidated Operating Profit Comparison
Second Quarter 2018 vs. Second Quarter 2017

To access this chart, go to http://www.caterpillar.com/en/investors/quarterly-results.html for the downloadable version of Caterpillar 2Q 2018 earnings.

The chart above graphically illustrates reasons for the change in Consolidated Operating Profit between the second quarter of 2017 (at left) and the second quarter of 2018 (at right). Items favorably impacting operating profit appear as upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting operating profit appear as downward stair steps with dollar amounts reflected in parentheses above each bar. Caterpillar management utilizes these charts internally to visually communicate with the company's board of directors and employees. The bar entitled Other includes consolidating adjustments and Machinery, Energy & Transportation other operating (income) expenses.

Operating profit for the second quarter of 2018 was $2.167 billion, compared to $1.184 billion in the second quarter of 2017. The increase of $983 million was mostly due to higher sales volume. Favorable price realization was partially offset by higher manufacturing costs.

Manufacturing costs were higher due to increased freight and material costs, partially offset by lower warranty expense. Freight costs were unfavorable primarily due to supply chain inefficiencies as the industry responds to strong global demand. Material costs were higher primarily due to increases in steel prices.

Lower operating profit from Financial Products and slightly higher selling, general and administrative (SG&A) and research and development (R&D) expenses were partially offset by a decrease in restructuring costs.

Other Profit/Loss Items

• Other income/expense in the second quarter of 2018 was income of $121 million, compared with income of $96 million in the second quarter of 2017. The favorable change was primarily a result of lower currency translation and hedging net losses, the impact from pension and OPEB plans and other miscellaneous items, mostly offset by the absence of a pretax gain of $85 million on the sale of Caterpillar's equity investment in IronPlanet in the second quarter of 2017.
• The provision for income taxes in the second quarter of 2018 reflected an estimated annual tax rate of 24 percent, compared to 32 percent for the second quarter of 2017, excluding the discrete items discussed in the following paragraph. The decrease was primarily due to the reduction in the U.S. corporate tax rate beginning January 1, 2018, along with other changes in the geographic mix of profits from a tax perspective.
  
  The provision for income taxes in the second quarter of 2018 also included a $25 million benefit for the release of a valuation allowance against the deferred tax assets of a non-U.S. subsidiary. In addition, a discrete tax benefit of $9 million was recorded in the second quarter of 2018, compared to $10 million in the second quarter of 2017, for the settlement of stock-based compensation awards with associated tax deductions in excess of cumulative U.S. GAAP compensation expense.

Global Workforce

Caterpillar worldwide, full-time employment was about 101,600 at the end of the second quarter of 2018. The increase of about 6,800 full-time employees from the end of the second quarter of 2017 was primarily due to an increase in production employment to support higher volumes. The flexible workforce increased by about 3,300, also primarily due to higher production volumes. In total, the global workforce increased by about 10,100 from the end of the second quarter of 2017.

Construction Industries' total sales were $6.172 billion in the second quarter of 2018, compared with $4.959 billion in the second quarter of 2017. The increase was mostly due to higher sales volume for construction equipment. Sales were also higher due to currency impacts, primarily from a stronger Chinese yuan and euro, partially offset by unfavorable price realization.

Sales increased in all regions.

• In North America, the sales increase was mostly due to higher demand for construction equipment, primarily due to oil and gas, including pipelines, and non-residential construction activities. The sales increase was partially offset by unfavorable price realization.
• Although construction activities remained weak in Latin America, sales were slightly higher in the region.
• Sales increased in EAME primarily due to higher demand and the favorable impact of currency, mostly from a stronger euro. Higher demand was driven by increased construction activities across several countries in the region.
• Sales in Asia/Pacific were higher across the region, with most of the improved demand in China stemming from increased building construction and infrastructure investment. The favorable impact of a stronger Chinese yuan also contributed to increased sales.

Construction Industries' profit was $1.154 billion in the second quarter of 2018, compared with $900 million in the second quarter of 2017. The increase in profit was a result of higher sales volume, partially offset by unfavorable price realization, higher material and freight costs, and increased SG&A/R&D expenses.

Resource Industries' total sales were $2.526 billion in the second quarter of 2018, an increase of $690 million from the second quarter of 2017. The increase was primarily due to higher demand for equipment across all regions. Commodity prices remained strong in the second quarter of 2018, and the company saw mining customers invest in current fleets and mine expansions, resulting in higher equipment sales. However, the company believes mining customers have not yet commenced full-scale fleet replacements. Increased mine production and higher machine utilization resulted in improved aftermarket parts sales. In addition, global economic growth contributed to stronger sales for heavy construction equipment.  Favorable price realization also contributed to increased sales.

Resource Industries' profit was $411 million in the second quarter of 2018, compared with $99 million in the second quarter of 2017. The improvement was mostly due to higher sales volume and favorable price realization. Manufacturing costs were favorable primarily due to lower warranty expense, partially offset by higher freight costs. The favorable warranty was mostly driven by the absence of a customer warranty program that occurred in the second quarter of 2017.

Energy & Transportation's total sales were $5.724 billion in the second quarter of 2018, compared with $4.768 billion in the second quarter of 2017. The increase was primarily due to higher sales volume across all applications. Favorable currency impacts, mostly from a stronger euro, and favorable price realization also contributed to the increase in sales.

• Oil and Gas – Sales increased due to higher demand in North America for gas compression, well servicing and production applications. Higher energy prices and growth in U.S. onshore oil and gas drove increased sales for reciprocating engines and related aftermarket parts. Sales in North America were also positively impacted by the timing of turbine project deliveries.
• Power Generation – Sales improved mostly due to higher demand in EAME, primarily from growth in the gas power generation market and favorable currency impacts.
• Industrial – Sales were higher in North America and Asia/Pacific due to favorable economic conditions.
• Transportation – Sales were higher for rail services, driven primarily by acquisitions in Asia/Pacific and EAME, and increased rail traffic in North America. Marine sales were higher in EAME primarily due to activity in the cruise sector and favorable currency.

Energy & Transportation's profit was $1.012 billion in the second quarter of 2018, compared with $694 million in the second quarter of 2017. The improvement was due to higher sales volume, favorable price realization and lower short-term incentive compensation expense. This was partially offset by higher freight costs and increased spending for targeted investments.

Financial Products' segment revenues were $829 million in the second quarter of 2018, an increase of $53 million, or 7 percent, from the second quarter of 2017. The increase was primarily due to higher average financing rates in North America and higher average earning assets in Asia/Pacific and North America, partially offset by lower intercompany lending activity in North America and lower average earning assets in Latin America.

Financial Products' segment profit was $134 million in the second quarter of 2018, compared with $191 million in the second quarter of 2017. The decrease was primarily due to an increase in the provision for credit losses at Cat Financial, partially offset by an increase in net yield on average earning assets and a favorable impact from higher average earning assets.

At the end of the second quarter of 2018, past dues at Cat Financial were 3.16 percent, compared with 2.71 percent at the end of the second quarter of 2017. Write-offs, net of recoveries, in the second quarter of 2018 were $80 million, compared with $26 million in the second quarter of 2017. The increase in write-offs, net of recoveries, was primarily driven by a small number of customers in the Cat Power Finance portfolio and recent collection experience in the Latin America portfolio.

As of June 30, 2018, Cat Financial's allowance for credit losses totaled $416 million, or 1.48 percent of finance receivables, compared with $403 million, or 1.45 percent of finance receivables at March 31, 2018. The allowance for credit losses at year-end 2017 was $365 million, or 1.33 percent of finance receivables.

Corporate Items and Eliminations

Expense for corporate items and eliminations was $471 million in the second quarter of 2018, a decrease of $123 million from the second quarter of 2017. Corporate items and eliminations include: restructuring costs; corporate-level expenses; timing differences, as some expenses are reported in segment profit on a cash basis; currency differences for ME&T, as segment profit is reported using annual fixed exchange rates; cost of sales methodology differences, as segments use a current cost methodology; and inter-segment eliminations.

The decrease in expense was primarily due to lower restructuring costs and cost of sales methodology differences. Restructuring costs were $114 million in the second quarter of 2018, compared to $169 million in the second quarter of 2017.

QUESTIONS AND ANSWERS

GLOSSARY OF TERMS

NON-GAAP FINANCIAL MEASURES

The following definitions are provided for the non-GAAP financial measures used in this report. These non-GAAP financial measures have no standardized meaning prescribed by U.S. GAAP and therefore are unlikely to be comparable to the calculation of similar measures for other companies. Management does not intend these items to be considered in isolation or as a substitute for the related GAAP measures.

Adjusted Profit Per Share

The company believes it is important to separately quantify the profit impact of two special items in order for the company's results to be meaningful to readers. These items consist of restructuring costs, which are incurred in the current year to generate longer-term benefits, and a gain on sale of an equity investment in the second quarter of 2017. The company does not consider these items indicative of earnings from ongoing business activities and believes the non-GAAP measure provides investors with useful perspective on underlying business results and trends and aids with assessing the company's period-over-period results.

Reconciliations of adjusted profit per share to the most directly comparable GAAP measure, diluted profit per share, are as follows:

Machinery, Energy & Transportation

Caterpillar defines Machinery, Energy & Transportation as it is presented in the supplemental data as Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis. Machinery, Energy & Transportation information relates to the design, manufacture and marketing of Caterpillar products. Financial Products' information relates to the financing to customers and dealers for the purchase and lease of Caterpillar and other equipment. The nature of these businesses is different, especially with regard to the financial position and cash flow items. Caterpillar management utilizes this presentation internally to highlight these differences. The company also believes this presentation will assist readers in understanding Caterpillar's business. Pages 19-24 reconcile Machinery, Energy & Transportation with Financial Products on the equity basis to Caterpillar Inc. consolidated financial information.

Caterpillar's latest financial results and outlook are also available via:

                                                                   

SOURCE Caterpillar Inc.

Related Links

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