Caterpillar Reports Third-Quarter 2018 Results

DEERFIELD, Ill., Oct. 23, 2018 /PRNewswire/ --

• Third-quarter sales and revenues up 18 percent
• Best third-quarter profit per share in company history
• Contributed $1 billion to pension plans; repurchased $750 million of shares; paid $511 million in dividends
• Profit per share outlook $10.65 to $11.65; maintained adjusted profit per share outlook at $11.00 to $12.00

Caterpillar Inc. (NYSE: CAT) today announced third-quarter 2018 sales and revenues of $13.5 billion, compared with $11.4 billion in the third quarter of 2017, an 18 percent increase. Third-quarter 2018 profit per share of $2.88 was a third-quarter record. Profit per share was $1.77 in the third quarter of 2017. Excluding restructuring costs and a net tax benefit to adjust deferred tax balances, adjusted profit per share in the third quarter of 2018 was $2.86, compared with third-quarter 2017 adjusted profit per share of $1.95.

During the third quarter of 2018, Machinery, Energy & Transportation (ME&T) operating cash flow was $848 million. In the quarter, the company deployed significant capital, including a discretionary pension contribution of $1.0 billion, the repurchase of $750 million of Caterpillar common stock and a dividend payment of $511 million. The enterprise cash balance at the end of the third quarter of 2018 was $8.0 billion.

"This was the best third-quarter profit per share in our company's history," said Caterpillar CEO Jim Umpleby. "Our global team continues to do excellent work focusing on our customers' success and executing our strategy for profitable growth."

2018 Outlook

The company's 2018 profit per share outlook is a range of $10.65 to $11.65. The company is maintaining the adjusted profit per share outlook range of $11.00 to $12.00. The current profit per share outlook now includes a net tax benefit of $95 million that was recorded in the third quarter of 2018 to adjust deferred tax balances. The outlook for adjusted profit per share excludes restructuring costs of about $400 million and the net tax benefit.

Most end markets continue to improve. Order rates and backlog remain healthy. In the fourth quarter, price realization, operational excellence and cost discipline are expected to more than offset higher material and freight costs, including tariffs.

The outlook does not include a mark-to-market gain or loss for remeasurement of pension and other postemployment benefit (OPEB) plans and any additional changes to provisional estimates recorded in 2017 for U.S. tax reform.

Notes:

• Glossary of terms is included on pages 11-12; first occurrence of terms shown in bold italics.
• Information on non-GAAP financial measures is included on page 13.
• Caterpillar will conduct a teleconference and live webcast, with a slide presentation, beginning at 10 a.m. Central Time on Tuesday, October 23, 2018, to discuss its 2018 third-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 
Third Quarter 2018 vs. Third Quarter 2017

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

The chart above graphically illustrates reasons for the change in Consolidated Sales and Revenues between the third quarter of 2017 (at left) and the third 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 $13.510 billion in the third quarter of 2018, an increase of $2.097 billion, or 18 percent, compared with $11.413 billion in the third quarter of 2017. The increase was due to higher sales volume driven by improved demand across the three primary segments, including an increase in dealer inventories. Favorable price realization, primarily in Resource Industries, also contributed to the sales improvement. The increase was partially offset by unfavorable currency impacts, primarily due to a weaker Australian dollar and Brazilian real.

Consolidated Operating Profit

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

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

The chart above graphically illustrates reasons for the change in Consolidated Operating Profit between the third quarter of 2017 (at left) and the third 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 third quarter of 2018 was $2.135 billion, compared to $1.509 billion in the third quarter of 2017. The increase of $626 million was mostly due to higher sales volume and favorable price realization.

Manufacturing costs were higher due to increased material and freight costs. Material costs were higher primarily due to increases in steel prices and tariffs. Freight costs were unfavorable primarily due to supply chain inefficiencies as the industry continues to respond to strong global demand. Selling, general and administrative (SG&A) and research and development (R&D) expenses increased primarily due to investments aligned with the company's strategic growth initiatives.

Other Profit/Loss Items

• Other income/expense in the third quarter of 2018 was income of $102 million, compared with income of $132 million in the third quarter of 2017. The unfavorable change was primarily a result of higher currency translation and hedging net losses.
• The provision for income taxes in the third quarter of 2018 reflected an estimated annual tax rate of 24 percent, compared to 32 percent in the third 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 third quarter of 2018 included a $95 million net benefit to adjust deferred tax balances. In addition, a discrete tax benefit of $3 million was recorded in the third quarter of 2018, compared to $18 million in the third 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

The global workforce increased about 8,200 from the end of the third quarter of 2017, primarily due to higher production volumes.

Construction Industries' total sales were $5.683 billion in the third quarter of 2018, compared with $4.886 billion in the third quarter of 2017. The increase was mostly due to higher sales volume for construction equipment.

Sales increased in all regions except Latin America.

• In North America, the sales increase was mostly due to higher demand for new equipment, primarily to support oil and gas activities, including pipelines, and non-residential building construction activities.
• Construction activities remained weak in Latin America.
• Sales increased in EAME as infrastructure and building construction activities drove higher demand across several countries in the region.
• Sales in Asia/Pacific were higher across the region, with the most significant impact from improved demand in China, including an increase in dealer inventories from low levels, stemming from increased non-residential building construction and infrastructure activities.

Construction Industries' profit was $1.058 billion in the third quarter of 2018, compared with $884 million in the third quarter of 2017. The increase in profit was a result of higher sales volume, partially offset by higher manufacturing costs. Manufacturing costs were higher primarily due to increased material and freight costs.

Resource Industries' total sales were $2.638 billion in the third quarter of 2018, an increase of $682 million from the third quarter of 2017. The increase was primarily due to higher demand for both mining and heavy construction equipment. Commodity market fundamentals remained positive, contributing to higher mining equipment sales. In addition, increased sales to heavy construction and quarry and aggregate customers were driven by positive global economic growth. Resource Industries' customers globally continue to focus on improving the productivity and efficiency of existing machine assets, thereby extending equipment life cycles and lowering operating costs. Rebuild, overhaul and maintenance activity remains strong, resulting in higher aftermarket parts sales. Favorable price realization also contributed to the sales improvement.

Resource Industries' profit was $414 million in the third quarter of 2018, compared with $229 million in the third quarter of 2017. The improvement was mostly due to higher sales volume and favorable price realization. The increase was partially offset by higher manufacturing costs, including freight and material costs, and increased SG&A/R&D expenses primarily due to investments aligned with strategic growth initiatives.

Energy & Transportation's total sales were $5.555 billion in the third quarter of 2018, compared with $4.838 billion in the third quarter of 2017. The increase was primarily due to higher sales volume across all applications except Industrial.

• Oil and Gas – Sales increased due to higher demand in North America for well servicing and gas compression applications. Higher energy prices and growth in U.S. onshore oil and gas drove increased sales for reciprocating engines.
• Power Generation – Sales improved across all regions, with the largest increases in North America and Asia/Pacific primarily for reciprocating engine applications, including data centers and power plants, and for aftermarket parts.
• Industrial – Sales were lower in EAME primarily due to economic uncertainty in a few countries in the Middle East, partially offset by slightly higher sales in Asia/Pacific and North America.
• Transportation – Sales were higher primarily due to rail services, driven by acquisitions in Asia/Pacific and EAME, and increased rail traffic in North America.

Energy & Transportation's profit was $973 million in the third quarter of 2018, compared with $743 million in the third quarter of 2017. The improvement was mostly due to higher sales volume. The increase was partially offset by higher manufacturing costs, including freight costs, and increased SG&A/R&D expenses primarily due to investments aligned with strategic growth initiatives.

Financial Products' segment revenues were $845 million in the third quarter of 2018, an increase of $71 million, or 9 percent, from the third quarter of 2017. The increase was primarily due to higher average financing rates and higher average earning assets in North America and Asia/Pacific as well as a favorable impact from returned or repossessed equipment. These favorable impacts were partially offset by lower intercompany lending activity in North America, lower average earning assets in Latin America and lower average financing rates in Europe.

Financial Products' segment profit was $201 million in the third quarter of 2018, compared with $185 million in the third quarter of 2017. The increase was primarily due to a favorable impact from returned or repossessed equipment, higher average earning assets and an increase in net yield on average earning assets. This was partially offset by an unfavorable impact from available for sale securities in Insurance Services.

At the end of the third quarter of 2018, past dues at Cat Financial were 3.47 percent, compared with 2.73 percent at the end of the third quarter of 2017. The increase in past dues was primarily driven by the Cat Power Finance portfolio. Write-offs, net of recoveries, in the third quarter of 2018 were $40 million, compared with $47 million in the third quarter of 2017.

As of September 30, 2018, Cat Financial's allowance for credit losses totaled $416 million, or 1.49 percent of finance receivables, compared with $416 million, or 1.48 percent of finance receivables at June 30, 2018. The allowance for credit losses at December 31, 2017, was $365 million, or 1.33 percent of finance receivables.

Corporate Items and Eliminations

Expense for corporate items and eliminations was $401 million in the third quarter of 2018, a decrease of $58 million from the third quarter of 2017, primarily due to methodology differences and lower corporate costs. Restructuring costs were $110 million in the third quarter of 2018, compared to $90 million in the third 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 significant 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 net tax benefit to adjust deferred tax balances in the third quarter of 2018. 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 14-22 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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