CATERPILLAR INC. 
This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited financial statements and related notes included elsewhere in this report and our discussion of significant risks to the company's business under Part I, Item 1A. Risk Factors of the 2019 Form 10-K as supplemented by Part II, Item 1A. Risk Factors of this report.
Overview
Total sales and revenues for the first quarter of 2020 were$10.635 billion , a decrease of$2.831 billion , or 21 percent, compared with$13.466 billion in the first quarter of 2019. The decline was due to lower sales volume driven by lower end-user demand and the impact from changes in dealer inventories. Dealers increased machine and engine inventories about$100 million during the first quarter of 2020, compared with about$1.3 billion during the first quarter of 2019. The changes in dealer inventories came primarily inConstruction Industries , driven byNorth America , andResource Industries . Sales were lower across all regions and in the three primary segments. Unfavorable currency impacts, unfavorable price realization and lower Financial Products revenues also contributed to the decrease. First-quarter 2020 profit per share was$1.98 , a decrease of$1.27 , or 39 percent, compared with$3.25 profit per share in the first quarter of 2019. Profit per share in the first quarter of 2020 included a pre-tax remeasurement gain of$254 million , or$0.38 per share, resulting from the settlement of a non-U.S. pension obligation. Profit per share in the first quarter of 2019 included a discrete tax benefit related toU.S. tax reform of$178 million , or$0.31 per share. Profit was$1.092 billion in the first quarter of 2020, a decrease of$789 million , or 42 percent, compared with$1.881 billion in the first quarter of 2019. The decrease was mostly due to lower sales volume. Higher tax expense, unfavorable impacts from equity securities at Insurance Services and foreign currency exchange gains (losses) were mostly offset by a remeasurement gain resulting from the settlement of a non-U.S. pension obligation, lower selling, general and administrative (SG&A) and research and development (R&D) expenses as well as favorable manufacturing costs. Lower SG&A/R&D expenses and manufacturing costs were primarily driven by reduced short-term incentive compensation expense, a favorable change in fair value adjustments related to deferred compensation plans and other cost-reduction actions implemented in response to lower sales volumes. Highlights for the first quarter of 2020 include: • First-quarter 2020 sales and revenues were$10.635 billion , compared with
regions and in the three primary segments. The decline was due to lower sales
volume driven by lower end-user demand and the impact from changes in dealer
inventories. Dealers increased machine and engine inventories about
million during the first quarter of 2020, compared with about
during the first quarter of 2019.
• Operating profit margin was 13.2 percent in the first quarter of 2020,
compared with 16.4 percent in the first quarter of 2019.
• Profit per share was
in the first quarter of 2019. Profit per share in the first quarter of 2020
included a pre-tax remeasurement gain of
resulting from the settlement of a non-
share in the first quarter of 2019 included a discrete tax benefit related to
• During the first quarter of 2020, enterprise operating cash flow was
billion.
position by increasing sources of liquidity. On a consolidated basis,
global credit facilities of
billion of incremental cash by issuing new 10- and 30-year bonds. In
addition, we entered into an incremental
facility and registered for
now available in
Response to COVID-19 and Global Business Conditions: Operational ImpactsCaterpillar has implemented safeguards in its facilities to protect team members, including increased frequency of cleaning and disinfecting facilities, social distancing practices and other measures consistent with specific regulatory requirements and guidance from health authorities. 51
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Many governments classifiedCaterpillar's operations as an essential activity for support of critical infrastructure.Caterpillar has suspended operations temporarily at certain facilities during the last several months due to supply chain issues, weak customer demand or government regulations. As ofmid-April 2020 , globally and across the three primary segments, approximately 75 percent of the company's primary production facilities continue to operate. Some facilities that were temporarily closed have reopened. The company will continue to monitor the situation and may suspend operations temporarily at additional facilities if warranted by business conditions. The company has taken actions to reduce costs, including reducing discretionary expenses and suspending 2020 base salary increases and short-term incentive compensation plans for many employees and all senior executives.Caterpillar is prioritizing spending to allow continued investment in services and expanded offerings, key elements of its strategy for profitable growth introduced in 2017.Caterpillar's financial results for the remainder of 2020 will be impacted by continued global economic uncertainty due to the COVID-19 pandemic. We expect the impacts of the pandemic on our results to be more significant in the second quarter than in the first quarter, and to continue until global economic conditions improve.
Notes:
• Glossary of terms is included on pages 59 - 61; first occurrence of terms
shown in bold italics.
• Information on non-GAAP financial measures is included on page 66.
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Consolidated Results of Operations
THREE MONTHS ENDED
CONSOLIDATED SALES AND REVENUES
[[Image Removed: conssalesandrevenues1q2020a.jpg]]
The chart above graphically illustrates reasons for the change in consolidated
sales and revenues between the first quarter of 2019 (at left) and the first
quarter of 2020 (at right). Caterpillar management utilizes these charts
internally to visually communicate with the company's Board of Directors and
employees.
Total sales and revenues for the first quarter of 2020 were $10.635 billion , a
decrease of $2.831 billion , or 21 percent, compared with $13.466 billion in the
first quarter of 2019. The decline was due to lower sales volume driven by lower
end-user demand and the impact from changes in dealer inventories. Dealers
increased machine and engine inventories about $100 million during the first
quarter of 2020, compared with about $1.3 billion during the first quarter of
2019. The changes in dealer inventories came primarily in Construction
Industries , driven by North America , and in Resource Industries .
Sales were lower across all regions and in the three primary segments.
North America sales declined 25 percent driven by the impact from changes in
dealer inventories and lower end-user demand. Dealers increased inventories
during the first quarter of 2019 and dealer inventories were about flat during
the first quarter of 2020.
Sales decreased 22 percent in Latin America due to lower demand in most
countries across the region.
EAME sales decreased 7 percent due to lower demand in many countries and
unfavorable currency impacts. The unfavorable currency impacts were mostly due
to a weaker euro.
Asia/Pacific sales decreased 28 percent due to lower demand across most
countries in the region, including unfavorable changes in dealer inventories,
primarily in China . Dealers decreased inventories during the first quarter of
2020, compared with an increase during the first quarter of 2019. Decreases in
China reflected lower end-user demand mostly due to the COVID-19 pandemic.
Dealer machine and engine inventories increased about $100 million during the
first quarter of 2020, compared with an increase of about $1.3 billion during
the first quarter of 2019. Dealers are independent, and the reasons for changes
in their inventory levels vary, including their expectations of future demand
and product delivery times. Dealers' demand expectations take into account
seasonal changes, macroeconomic conditions, machine rental rates and other
factors. Delivery times can vary based on availability of product from
Caterpillar factories and product distribution centers. We expect dealer
inventories to decline by at least $1.5 billion during 2020.
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Sales and Revenues by Segment
First Sales Price First $ %
(Millions of dollars) Quarter 2019 Volume Realization Currency Inter-Segment / Other Quarter 2020 Change Change
Construction Industries $ 5,873 $ (1,418 ) $ (63 ) $ (59 ) $ (27 ) $ 4,306 $ (1,567 ) (27 %)
Resource Industries 2,752 (607 ) (21 ) (40 ) - 2,084 (668 ) (24 %)
Energy & Transportation 5,210 (599 ) 21 (37 ) (246 ) 4,349 (861 ) (17 %)
All Other Segment 121 (9 ) - - (3 ) 109 (12 ) (10 %)
Corporate Items and 22 1 (1 ) 276 (934 ) 298
Eliminations (1,232 )
Machinery, Energy & (22 %)
Transportation Sales 12,724 (2,611 ) (62 ) (137 ) - 9,914 (2,810 )
Financial Products Segment 850 - - - (36 ) 814 (36 ) (4 %)
Corporate Items and (108 ) - - - 15 (93 ) 15
Eliminations
Financial Products Revenues 742 - - - (21 ) 721 (21 ) (3 %)
Consolidated Sales and $ 13,466 $ (2,611 ) $ (62 ) $ (137 ) $ (21 ) $ 10,635 $ (2,831 ) (21 %)
Revenues
Sales and Revenues by
North America Latin America EAME Asia/Pacific External Sales and Revenues Inter-Segment Total Sales and Revenues
(Millions of dollars) $ % Chg $ % Chg $ % Chg $ % Chg $ % Chg $ % Chg $ % Chg
First Quarter 2020
(26 %) $ (6 ) (129 %) $ 4,306 (27 %)
Resource Industries 696 (27 %) 320 (24 %) 395 (16 %) 568 (29 %) 1,979 (25 %) 105 - % 2,084 (24 %)
Energy & Transportation 1,738 (19 %) 249 (25 %) 1,053 2 % 578 (19 %)
3,618 (15 %) 731 (25 %) 4,349 (17 %)
All Other Segment 5 (38 %) 2 - % 11 - % 10 (44 %) 28 (24 %) 81 (4 %) 109 (10 %)
Corporate Items and
Eliminations (15 ) (2 ) (4 ) (2 ) (23 ) (911 ) (934 )
Machinery, Energy & Transportation Sales 4,509 (25 %) 834 (22 %) 2,344 (7 %) 2,227 (28 %)
9,914 (22 %) - - 9,914 (22 %)
Financial Products Segment 525 (6 %) 70 - % 102 - % 117 (3 %)
814 1 (4 %) - - 814 (4 %)
Corporate Items and
Eliminations (54 ) (12 ) (9 ) (18 ) (93 ) - (93 )
Financial
Products Revenues 471 (4 %) 58 (2 %) 93 - % 99 (2 %) 721 (3 %) - - 721 (3 %) Consolidated Sales and Revenues$ 4,980 (24 %)$ 892 (21 %)$ 2,437 (7 %)$ 2,326 (27 %)$ 10,635 (21 %)
$ - -
First Quarter 2019 Construction Industries$ 2,965 $ 319 $ 1,006 $ 1,562 $ 5,852 $ 21 $ 5,873 Resource Industries 951 423 468 805 2,647 105 2,752 Energy & Transportation 2,151 332
1,032 718 4,233 977 5,210 All Other Segment 8 - 11 18 37 84 121 Corporate Items and Eliminations (41 ) 1 (3 ) (2 ) (45 ) (1,187 ) (1,232 ) Machinery, Energy & Transportation Sales 6,034 1,075 2,514 3,101 12,724 - 12,724 Financial Products Segment 558 70 102 120 850 1 - 850 Corporate Items and Eliminations (69 ) (11 ) (9 ) (19 ) (108 ) - (108 )
Financial
Products Revenues 489 59 93 101 742 - 742 Consolidated Sales and Revenues$ 6,523 $ 1,134 $ 2,607 $ 3,202 $ 13,466 $ -$ 13,466
1 Includes revenues from Machinery, Energy & Transportation of
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CONSOLIDATED OPERATING PROFIT
[[Image Removed: consopprofit1q2020a.jpg]]
The chart above graphically illustrates reasons for the change in consolidated
operating profit between the first quarter of 2019 (at left) and the first
quarter of 2020 (at right). Caterpillar management utilizes these charts
internally to visually communicate with the company's Board of Directors and
employees. The bar titled Other includes consolidating adjustments and
Machinery, Energy & Transportation other operating (income) expenses.
Operating profit for the first quarter of 2020 was $1.404 billion , a decrease of
$803 million , or 36 percent, compared with $2.207 billion in the first quarter
of 2019. The decrease was mostly due to lower sales volume and unfavorable
currency impacts related to the Australian dollar, partially offset by lower
SG&A/R&D expenses as well as favorable manufacturing costs.
Lower SG&A/R&D expenses reflected reduced short-term incentive compensation
expense, a favorable change in fair value adjustments related to deferred
compensation plans and other cost-reduction actions implemented in response to
lower sales volumes.
Favorable manufacturing costs were primarily driven by lower period
manufacturing and material costs, partially offset by higher warranty expense.
Period manufacturing costs declined mostly due to a reduction in short-term
incentive compensation expense and other cost-reduction actions implemented in
response to lower sales volumes.
Short-term incentive compensation expense is directly related to financial and
operational performance, measured against targets set annually. In response to
the continued global economic uncertainty due to the COVID-19 pandemic,
Caterpillar suspended 2020 base salary increases and short-term incentive
compensation plans for many employees and all senior executives. As a result, no
short-term incentive compensation expense was recognized in the first quarter of
2020, compared with about $220 million in the first quarter of 2019.
Operating profit margin was 13.2 percent in the first quarter of 2020, compared
with 16.4 percent in the first quarter of 2019.
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Profit by Segment
$ %
(Millions of dollars) First Quarter 2020 First Quarter 2019 Change Change
Construction Industries $ 640 $ 1,085 $ (445 ) (41 %)
Resource Industries 304 576 (272 ) (47 %)
Energy & Transportation 602 838 (236 ) (28 %)
All Other Segment 7 25 (18 ) (72 %)
Corporate Items and Eliminations (212 ) (375 ) 163
Machinery, Energy & Transportation 1,341 2,149 (808 ) (38 %)
Financial Products Segment 105 211 (106 ) (50 %)
Corporate Items and Eliminations 47 (46 ) 93
Financial Products 152 165 (13 ) (8 %)
Consolidating Adjustments (89 ) (107 ) 18
Consolidated Operating Profit $ 1,404 $ 2,207 $ (803 ) (36 %)
Other Profit/Loss and Tax Items ? Interest expense excluding Financial Products in the first quarter of 2020
was
The increase was due to higher average debt outstanding during the first
quarter of 2020, compared with the first quarter of 2019.
? Other income (expense) in the first quarter of 2020 was income of $222
million, compared with income of
The change was primarily due to a
from the settlement of a non-
unfavorable impacts from equity securities at Insurance Services and foreign
currency exchange gains (losses) primarily due to the Australian dollar and
Brazilian real. The unfavorable impact of equity securities was due to
unrealized losses in the first quarter of 2020, compared with unrealized
gains in the first quarter of 2019. The company experienced foreign currency
exchange net losses in the first quarter of 2020, compared with net gains in
the first quarter of 2019.
? The provision for income taxes for the first quarter of 2020 reflected ahigher estimated annual tax rate of 31 percent compared with 26 percent for
the first quarter of 2019, excluding the discrete items discussed below. The
increase in the estimated annual tax rate is primarily related to changes in
the expected geographic mix of profits from a tax perspective for 2020,
including the impact of
reform.
In the first quarter of 2020, a$43 million tax charge was recorded related to the$254 million remeasurement gain resulting from the settlement of a non-U.S. pension obligation. This gain and related tax were excluded from the estimated annual tax rate as the future period remeasurement impacts cannot currently be estimated. In addition, a discrete tax benefit of$8 million was recorded in the first quarter of 2020, compared with$23 million in the first quarter of 2019, for the settlement of stock-based compensation awards with associated tax deductions in excess of cumulativeU.S. GAAP compensation expense. During the first quarter of 2019, a$178 million discrete tax benefit was also recorded to adjust previously unrecognized tax benefits as a result of receipt of additional guidance related to the calculation of the mandatory deemed repatriation of non-U.S. earnings.Construction Industries Construction Industries' total sales were$4.306 billion in the first quarter of 2020, a decrease of$1.567 billion , or 27 percent, compared with$5.873 billion in the first quarter of 2019. The decrease was due to lower sales volume, driven by lower end-user demand and the impact from changes in dealer inventories. Dealers increased inventories significantly more during the first quarter of 2019 than in the first quarter of 2020. ?In North America , sales decreased due to lower demand driven by the impact
from changes in dealer inventories and lower end-user demand. Dealers
increased inventories more during the first quarter of 2019 than in the
first quarter of 2020. The lower end-user demand was driven primarily by
non-residential and pipeline construction.
? Sales declined in
in dealer inventories and unfavorable currency impacts from a weaker
Brazilian real. Dealers decreased inventories more during the first
quarter of 2020 than in the first quarter of 2019.
? In EAME, the sales decrease was primarily due to lower end-user demand
across most of the region and unfavorable currency impacts from a weaker
euro.
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? Sales declined in
the region, primarily in
end-user demand mostly due to COVID-19 pandemic-related impacts.
Construction Industries' profit was$640 million in the first quarter of 2020, a decrease of$445 million , or 41 percent, compared with$1.085 billion in the first quarter of 2019. The decrease was mainly due to lower sales volume, partially offset by lower manufacturing costs. Favorable manufacturing costs were primarily due to lower period manufacturing and material costs, partially offset by higher warranty expense. Lower period manufacturing costs reflected a reduction in short-term incentive compensation expense and targeted cost-reduction actions implemented in response to lower sales volumes.Construction Industries' profit as a percent of total sales was 14.9 percent in the first quarter of 2020, compared with 18.5 percent in the first quarter of 2019.Resource Industries Resource Industries' total sales were$2.084 billion in the first quarter of 2020, a decrease of$668 million , or 24 percent, compared with$2.752 billion in the first quarter of 2019. The decrease was due to lower sales volume, driven by changes in dealer inventories and lower end-user demand. Dealers increased inventories during the first quarter of 2019, compared with a decrease during the first quarter of 2020. Mining equipment sales were lower due to weakness in certain commodities. In addition, demand decreased for equipment supporting non-residential construction and quarry and aggregates.Resource Industries' profit was$304 million in the first quarter of 2020, a decrease of$272 million , or 47 percent, compared with$576 million in the first quarter of 2019. The decrease was mainly due to lower sales volume. Manufacturing costs were about flat as the unfavorable impact of cost absorption and higher warranty expense were more than offset by lower period manufacturing costs, freight expense and material costs. Cost absorption was unfavorable as inventory increased more in the first quarter of 2019 than in the first quarter of 2020. Lower period manufacturing costs were primarily due to lower short-term incentive compensation expense and the favorable impact of restructuring and other cost-reduction actions.Resource Industries' profit as a percent of total sales was 14.6 percent in the first quarter of 2020, compared with 20.9 percent in the first quarter of 2019. Energy & Transportation Sales by Application (Millions of dollars) $ % First Quarter 2020 First Quarter 2019 Change Change Oil and Gas $ 861 $ 1,131$ (270 ) (24 %) Power Generation 854 1,036 (182 ) (18 %) Industrial 801 904 (103 ) (11 %) Transportation 1,102 1,162 (60 ) (5 %) External Sales 3,618 4,233 (615 ) (15 %) Inter-segment 731 977 (246 ) (25 %) Total Sales $ 4,349 $ 5,210$ (861 ) (17 %) Energy & Transportation's total sales were$4.349 billion in the first quarter of 2020, a decrease of$861 million , or 17 percent, compared with$5.210 billion in the first quarter of 2019. Sales declined across all applications and inter-segment engine sales. ? Oil and Gas - Sales were lower mainly inNorth America . The sales decline was largely due to lower demand for reciprocating engines used in gas compression and well servicing. ? Power Generation - Sales decreased primarily due to lower sales inAsia/Pacific andNorth America for both reciprocating engines and turbine-related projects.
? Industrial - Sales decreased due to lower demand across all regions.
? Transportation - Sales declined in both rail and marine applications.
Energy & Transportation's profit was$602 million in the first quarter of 2020, a decrease of$236 million , or 28 percent, compared with$838 million in the first quarter of 2019. The decrease was mostly due to lower sales volume. The decline was partially offset by lower SG&A/R&D expenses and manufacturing costs, both of which were mostly impacted by a reduction in short-term incentive compensation expense and other cost-reduction actions implemented in response to lower sales volumes. 57
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Energy & Transportation's profit as a percent of total sales was 13.8 percent in the first quarter of 2020, compared with 16.1 percent in the first quarter of 2019. Financial Products Segment Financial Products' segment revenues were$814 million in the first quarter of 2020, a decrease of$36 million , or 4 percent, from the first quarter of 2019. The decrease was primarily due to lower average earning assets inNorth America . Financial Products' segment profit was$105 million in the first quarter of 2020, compared with$211 million in the first quarter of 2019. Most of the decrease was due to an unfavorable impact from equity securities in Insurance Services. Additionally, Cat Financial experienced lower average earning assets. These unfavorable impacts were partially offset by a reduction in SG&A expenses due to lower short-term incentive compensation expense. At the end of the first quarter of 2020, past dues at Cat Financial were 4.13 percent, compared with 3.61 percent at the end of the first quarter of 2019. The increase was primarily due toNorth America ,Asia/Pacific and Mining, partially offset by a decrease in Caterpillar Power Finance. Write-offs, net of recoveries, were$30 million for the first quarter of both 2020 and 2019. As ofMarch 31, 2020 , Cat Financial's allowance for credit losses totaled$457 million , or 1.69 percent of finance receivables, compared with$424 million , or 1.50 percent of finance receivables, atDecember 31, 2019 . The increase in allowance for credit losses was driven by the forecast of deteriorating economic conditions from the COVID-19 pandemic. Corporate Items and Eliminations Expense for corporate items and eliminations was$165 million in the first quarter of 2020, a decrease of$256 million from the first quarter of 2019, primarily due to a favorable change in fair value adjustments related to deferred compensation plans and segment reporting methodology differences.
RESTRUCTURING COSTS
Restructuring costs for the three months endedMarch 31, 2020 and 2019 were as follows: (Millions of dollars) Three Months Ended March 31 2020 2019 Employee separations 1 $ 11 $ 15 Contract terminations 1 1 - Long-lived asset impairments 1 9 7 Other 2 16 26 Total restructuring costs $ 37 $ 48 1 Recognized in Other operating (income) expenses. 2 Represents costs related to our restructuring programs, primarily for inventory write-downs, equipment relocation, building demolition and project management, all of which are primarily included in Cost of goods sold. For the three months endedMarch 31, 2020 , the restructuring costs were primarily related to a strategic action to address a certain product line, which were partially offset by a gain on the sale of a manufacturing facility that had been closed. For the three months endedMarch 31, 2019 , the restructuring costs were primarily related to ongoing facility closures across the company.
Certain restructuring costs are a reconciling item between Segment profit and Consolidated profit before taxes.
The following table summarizes the 2019 and 2020 employee separation activity:
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(Millions of dollars) Liability balance atDecember 31, 2018 $ 85 Increase in liability (separation charges) 48 Reduction in liability (payments) (85 ) Liability balance atDecember 31, 2019 48 Increase in liability (separation charges) 11 Reduction in liability (payments) (16 )
Liability balance at
Most of the liability balance atMarch 31, 2020 is expected to be paid in 2020 and 2021. We expect to incur about$300 -$400 million of restructuring costs in 2020, about half for restructuring actions across the company and the remainder for strategic actions to address a small number of products. We expect that prior restructuring actions will result in an incremental benefit to operating costs, primarily Cost of goods sold and SG&A expenses of about$200 million in 2020 compared with 2019.
GLOSSARY OF TERMS 1. All Other Segment - Primarily includes activities such as: business strategy;
product management and development; manufacturing and sourcing of filters and
fluids, undercarriage, ground engaging tools, fluid transfer products,
precision seals, rubber sealing and connecting components primarily for Cat®
products; parts distribution; integrated logistics solutions; distribution
services responsible for dealer development and administration, including a
wholly owned dealer in
most efficient and effective distribution of machines, engines and parts;
brand management and marketing strategy; and digital investments for new
customer and dealer solutions that integrate data analytics with
state-of-the-art digital technologies while transforming the buying
experience.
2. Consolidating Adjustments - Elimination of transactions between Machinery,
Energy & Transportation and Financial Products.
3.
customers using machinery in infrastructure and building construction
applications. Responsibilities include business strategy, product design,
product management and development, manufacturing, marketing and sales and
product support. The product portfolio includes asphalt pavers; backhoe
loaders; compactors; cold planers; compact track and multi-terrain loaders;
mini, small, medium and large track excavators; motor graders; pipelayers;
road reclaimers; skid steer loaders; telehandlers; small and medium
track-type tractors; track-type loaders; utility vehicles; wheel excavators;
compact, small and medium wheel loaders; and related parts and work tools.
4. Corporate Items and Eliminations - Includes corporate-level expenses, timing
differences (as some expenses are reported in segment profit on a cash
basis), methodology differences between segment and consolidated external
reporting, certain restructuring costs, and inter-segment eliminations.
5. Currency - With respect to sales and revenues, currency represents the
translation impact on sales resulting from changes in foreign currency
exchange rates versus the
currency represents the net translation impact on sales and operating costs
resulting from changes in foreign currency exchange rates versus the
dollar. Currency only includes the impact on sales and operating profit for
the Machinery, Energy & Transportation lines of business; currency impacts on
Financial Products revenues and operating profit are included in the
Financial Products portions of the respective analyses. With respect to other
income/expense, currency represents the effects of forward and option
contracts entered into by the company to reduce the risk of fluctuations in
exchange rates (hedging) and the net effect of changes in foreign currency
exchange rates on our foreign currency assets and liabilities for
consolidated results (translation).
6. EAME - A geographic region including
Commonwealth of Independent States (CIS).
7. Earning Assets - Assets consisting primarily of total finance receivables net
of unearned income, plus equipment on operating leases, less accumulated
depreciation at Cat Financial.
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8. Energy & Transportation - A segment primarily responsible for supporting
customers using reciprocating engines, turbines, diesel-electric locomotives
and related parts across industries serving Oil and Gas, Power Generation,
Industrial and Transportation applications, including marine- and
rail-related businesses. Responsibilities include business strategy, product
design, product management and development, manufacturing, marketing and
sales, and product support of the following product portfolio: turbine
machinery and integrated systems and solutions and turbine-related services,
reciprocating engine-powered generator sets, integrated systems used in the
electric power generation industry, reciprocating engines and integrated
systems and solutions for the marine and oil and gas industries, and
reciprocating engines supplied to the industrial industry as well as Cat
machinery. Responsibilities also include the remanufacturing of
engines and components and remanufacturing services for other companies; the
business strategy, product design, product management and development,
manufacturing, remanufacturing, leasing and service of diesel-electric
locomotives and components and other rail-related products and services; and
product support of on-highway vocational trucks for
9. Financial Products Segment - Provides financing alternatives to customers and
dealers around the world for
vehicles, power generation facilities and marine vessels that, in most cases,
incorporate
finance leases, installment sale contracts, working capital loans and
wholesale financing plans. The segment also provides insurance and risk
management products and services that help customers and dealers manage their
business risk. Insurance and risk management products offered include
physical damage insurance, inventory protection plans, extended service
coverage for machines and engines, and dealer property and casualty
insurance. The various forms of financing, insurance and risk management
products offered to customers and dealers help support the purchase and lease
of
related costs are not allocated to operating segments. Financial Products'
segment profit is determined on a pretax basis and includes other
income/expense items.
10.
countries and
11. Machinery, Energy & Transportation (ME&T) - Represents the aggregate total of
Other Segment and related corporate items and eliminations with Financial
Products accounted for on the equity basis.
12. Machinery, Energy & Transportation Other Operating (Income) Expenses -
Comprised primarily of gains/losses on disposal of long-lived assets,
gains/losses on divestitures and legal settlements, and accruals.
13. Manufacturing Costs - Manufacturing costs exclude the impacts of currency and
represent the volume-adjusted change for variable costs and the absolute
dollar change for period manufacturing costs. Variable manufacturing costs
are defined as having a direct relationship with the volume of production.
This includes material costs, direct labor and other costs that vary directly
with production volume, such as freight, power to operate machines and
supplies that are consumed in the manufacturing process. Period manufacturing
costs support production but are defined as generally not having a direct
relationship to short-term changes in volume. Examples include machinery and
equipment repair, depreciation on manufacturing assets, facility support,
procurement, factory scheduling, manufacturing planning and operations
management.
14. Price Realization - The impact of net price changes excluding currency and
new product introductions. Price realization includes geographic mix of
sales, which is the impact of changes in the relative weighting of sales
prices between geographic regions.
15.
customers using machinery in mining, heavy construction, quarry and
aggregates, waste and material handling applications. Responsibilities
include business strategy, product design, product management and
development, manufacturing, marketing and sales, and product support. The
product portfolio includes large track-type tractors, large mining trucks,
hard rock vehicles, longwall miners, electric rope shovels, draglines,
hydraulic shovels, rotary drills, large wheel loaders, off-highway trucks,
articulated trucks, wheel tractor scrapers, wheel dozers, landfill
compactors, soil compactors, select work tools, machinery components,
electronics and control systems, and related parts. In addition to equipment,
to provide customers fleet management, equipment management analytics and
autonomous machine capabilities.
provide services to other parts of the company, including integrated
manufacturing and research and development.
16. Restructuring Costs - May include costs for employee separation, long-lived
asset impairments and contract terminations. These costs are included in
Other operating (income) expenses except for defined-benefit plan curtailment
losses and special termination benefits, which are included in Other income
(expense). Restructuring costs also include other exit-related costs, which
may consist of accelerated depreciation, inventory write-downs, building
demolition, equipment relocation and project management costs and LIFO
inventory decrement benefits from inventory liquidations at closed
facilities, all of which are primarily included in Cost of goods sold.
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17. Sales Volume - With respect to sales and revenues, sales volume represents
the impact of changes in the quantities sold for Machinery, Energy &
Transportation as well as the incremental sales impact of new product
introductions, including emissions-related product updates. With respect to
operating profit, sales volume represents the impact of changes in the
quantities sold for Machinery, Energy & Transportation combined with product
mix as well as the net operating profit impact of new product introductions,
including emissions-related product updates. Product mix represents the net
operating profit impact of changes in the relative weighting of Machinery,
Energy & Transportation sales with respect to total sales. The impact of
sales volume on segment profit includes inter-segment sales.
18. Services - Enterprise services include, but are not limited to, aftermarket
parts, Financial Products revenues and other service-related revenues.
Machinery, Energy & Transportation segments exclude most Financial Products
revenues.
LIQUIDITY AND CAPITAL RESOURCES
Sources of funds
We generate significant capital resources from operating activities, which are the primary source of funding for our ME&T operations. Funding for these businesses is also available from commercial paper and long-term debt issuances. Financial Products' operations are funded primarily from commercial paper, term debt issuances and collections from its existing portfolio. Despite lower volume in most of the industries we serve, we had positive operating cash flow in the first quarter of 2020 within both our ME&T and Financial Products' operations. On a consolidated basis, we ended the first three months of 2020 with$7.12 billion of cash, a decrease of$1.16 billion from year-end 2019. We intend to maintain a strong cash and liquidity position. Consolidated operating cash flow for the first three months of 2020 was$1.13 billion , about flat with the same period last year. Items favorably impacting cash flow included lower payments for short-term incentive compensation and reduced working capital requirements. Favorable changes in receivables and inventory were partially offset by unfavorable changes in accounts payable and accrued expenses. Mostly offsetting these favorable changes was lower profit adjusted for non-cash items, including lower accruals for short-term incentive compensation and postemployment benefits. Higher taxes paid during the first three months of 2020 compared to the same period last year also unfavorably impacted cash flow. Total debt as ofMarch 31, 2020 was$37.09 billion , a decrease of$564 million from year-end 2019. Debt related to Financial Products decreased$543 million , primarily due to lower portfolio funding requirements. Debt related to ME&T decreased$21 million in the first three months of 2020. As ofMarch 31, 2020 , we had three global credit facilities with a syndicate of banks totaling$10.50 billion (Credit Facility) available in the aggregate to bothCaterpillar and Cat Financial for general liquidity purposes. Based on management's allocation decision, which can be revised from time to time, the portion of the Credit Facility available to ME&T as ofMarch 31, 2020 was$2.75 billion . Information on our Credit Facility is as follows: • The 364-day facility of$3.15 billion (of which$0.82 billion is available
to ME&T) expires in
• The three-year facility, as amended and restated in September of 2019, of
$2.73 billion (of which$0.72 billion is available to ME&T) expires inSeptember 2022 .
• The five-year facility, as amended and restated in September of 2019, of
$4.62 billion (of which$1.21 billion is available to ME&T) expires inSeptember 2024 . AtMarch 31, 2020 ,Caterpillar's consolidated net worth was$14.25 billion , which was above the$9.00 billion required under the Credit Facility. The consolidated net worth is defined as the consolidated shareholders' equity including preferred stock but excluding the pension and other postretirement benefits balance within Accumulated other comprehensive income (loss). AtMarch 31, 2020 , Cat Financial's covenant interest coverage ratio was 1.78 to 1. This is above the 1.15 to 1 minimum ratio calculated as (1) profit excluding income taxes, interest expense and net gain/(loss) from interest rate derivatives to (2) interest expense calculated at the end of each calendar quarter for the rolling four quarter period then most recently ended, required by the Credit Facility. In addition, atMarch 31, 2020 , Cat Financial's six-month covenant leverage ratio was 7.29 to 1. This is below the maximum ratio of debt to net worth of 10 to 1, calculated (1) on a monthly basis as the average of the leverage ratios determined on the last day of each of the six preceding calendar months and (2) at eachDecember 31 , required by the Credit Facility. 61
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In the eventCaterpillar or Cat Financial does not meet one or more of their respective financial covenants under the Credit Facility in the future (and are unable to obtain a consent or waiver), the syndicate of banks may terminate the commitments allocated to the party that does not meet its covenants. Additionally, in such event, certain of Cat Financial's other lenders under other loan agreements where similar financial covenants or cross default provisions are applicable may, at their election, choose to pursue remedies under those loan agreements, including accelerating the repayment of outstanding borrowings. AtMarch 31, 2020 , there were no borrowings under the Credit Facility. Our total credit commitments and available credit as ofMarch 31, 2020 were: March 31, 2020 Machinery, (Millions of dollars) Energy & Financial Consolidated Transportation Products Credit lines available: Global credit facilities$ 10,500 $ 2,751$ 7,749 Other external 4,335 167 4,168 Total credit lines available 14,835 2,918 11,917 Less: Commercial paper outstanding (4,060 ) - (4,060 ) Less: Utilized credit (854 ) - (854 ) Available credit$ 9,921 $ 2,918$ 7,003 The other external consolidated credit lines with banks as ofMarch 31, 2020 totaled$4.34 billion . These committed and uncommitted credit lines, which may be eligible for renewal at various future dates or have no specified expiration date, are used primarily by our subsidiaries for local funding requirements.Caterpillar or Cat Financial may guarantee subsidiary borrowings under these lines. Since the outbreak of the COVID-19 global pandemic,Caterpillar has taken actions to maintain our strong financial position and increase liquidity. InApril 2020 , we raised$2.0 billion of incremental cash by issuing$800 million in ten-year bonds at 2.6 percent and$1.2 billion in 30-year bonds at 3.25 percent. In addition, we entered into an incremental$3.9 billion short-term credit facility that expires onDecember 31, 2020 and also registered for$4.1 billion in commercial paper support programs now available inthe United States andCanada . The Company has not made any drawings under any of the above mentioned credit facilities nor does it have any outstanding borrowings under either commercial paper support program as of the date of this filing. We receive debt ratings from the major credit rating agencies. Moody's currently rates our debt as "low-A", while Fitch and S&P maintain a "mid-A" debt rating. To date, this split rating has not had a material impact on our borrowing costs or our overall financial health. However, a downgrade of our credit ratings by any of the major credit rating agencies would result in increased borrowing costs and could make access to certain credit markets more difficult. In the event economic conditions deteriorate such that access to debt markets becomes unavailable, ME&T's operations would rely on cash flow from operations, use of existing cash balances, borrowings from Cat Financial and access to our committed credit facilities. Our Financial Products' operations would rely on cash flow from its existing portfolio, existing cash balances, access to our committed credit facilities and other credit line facilities of Cat Financial, commercial paper support facilities sponsored by theU.S. Federal Reserve and theBank of Canada , and potential borrowings fromCaterpillar . In addition, we maintain a support agreement with Cat Financial, which requiresCaterpillar to remain the sole owner of Cat Financial and may, under certain circumstances, requireCaterpillar to make payments to Cat Financial should Cat Financial fail to maintain certain financial ratios. Machinery, Energy & Transportation Net cash provided by operating activities was$318 million in the first three months of 2020, compared with$860 million for the same period in 2019. The decrease was primarily due to lower profit adjusted for non-cash items, including lower accruals for short-term incentive compensation and postemployment benefits. Higher taxes paid during the first three months of 2020 compared to the same period last year also unfavorably impacted cash flow. Partially offsetting these unfavorable changes were lower payments for short-term incentive compensation. Net cash provided by investing activities in the first three months of 2020 was$324 million , compared with net cash used of$226 million in the first three months of 2019. The change was primarily due to decreased ME&T lending with Financial Products. Net cash used for financing activities during the first three months of 2020 was$1.63 billion , compared with net cash used of$1.25 billion in the same period of 2019. In the first three months of 2020, we repurchased$1.04 billion ofCaterpillar common stock, an increase of$292 million compared to the first three months of 2019. Additionally, dividends paid increased$73 million in the first three months of 2020 compared to the same period last year. 62
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While our short-term priorities for the use of cash may vary from time to time as business needs and conditions dictate, our long-term cash deployment strategy is focused on the following priorities. Our top priority is to maintain a strong financial position in support of a mid-A rating. Next, we intend to fund operational requirements and commitments. Then, we intend to fund priorities that profitably grow the company and return capital to shareholders through dividend growth and share repurchases. Additional information on cash deployment is as follows: Strong financial position - Our top priority is to maintain a strong financial position in support of a mid-A rating. We track a diverse group of financial metrics that focus on liquidity, leverage, cash flow and margins which align with our cash deployment actions and the various methodologies used by the major credit rating agencies. Operational excellence and commitments - Capital expenditures were$302 million during the first three months of 2020, compared to$297 million for the same period in 2019. We expect ME&T's capital expenditures in 2020 to be about$1.0 billion . We made$98 million of contributions to our pension and other postretirement benefit plans during the first three months of 2020. We currently anticipate full-year 2020 contributions of approximately$280 million . In comparison, we made$119 million of contributions to our pension and other postretirement benefit plans during the first three months of 2019. Fund strategic growth initiatives and return capital to shareholders - We intend to utilize our liquidity and debt capacity to fund targeted investments that drive long-term profitable growth focused in the areas of expanded offerings and services, including acquisitions. As part of our capital allocation strategy, ME&T free cash flow is a liquidity measure we use to determine the cash generated and available for financing activities including debt repayments, dividends and share repurchases. We define ME&T free cash flow as cash from ME&T operations excluding discretionary pension and other postretirement benefit plan contributions less capital expenditures. A goal of our capital allocation strategy is to return substantially all ME&T free cash flow to shareholders in the form of dividends and share repurchases, while maintaining our mid-A rating. Our share repurchase plans are subject to the company's cash deployment priorities and are evaluated on an ongoing basis considering the financial condition of the company and the economic outlook, corporate cash flow, the company's liquidity needs, and the health and stability of global credit markets. The timing and amount of future repurchases may vary depending on market conditions and investing priorities. InJuly 2018 , the Board of Directors approved an authorization to repurchase up to$10 billion ofCaterpillar common stock (the 2018 Authorization) effectiveJanuary 1, 2019 , with no expiration. In the first three months of 2020, we repurchased$1.04 billion ofCaterpillar common stock, with$4.91 billion remaining under the 2018 Authorization as ofMarch 31, 2020 . Our basic shares outstanding as ofMarch 31, 2020 were approximately 542 million. Due to current economic uncertainty, we have temporarily suspended our share repurchase program. The existing share repurchase program remains authorized by the Board, and we may resume share repurchases in the future at any time depending upon market conditions, our capital needs and other factors. Each quarter, our Board of Directors reviews the company's dividend for the applicable quarter. The Board evaluates the financial condition of the company and considers the economic outlook, corporate cash flow, the company's liquidity needs, and the health and stability of global credit markets to determine whether to maintain or change the quarterly dividend. InApril 2020 , the Board of Directors approved maintaining our quarterly dividend representing$1.03 per share and we continue to expect our strong financial position to support the dividend. Dividends paid totaled$567 million in the first three months of 2020. Financial Products Financial Products operating cash flow was$431 million in the first three months of 2020, compared with$350 million for the same period a year ago. Net cash provided by investing activities was$444 million for the first three months of 2020, compared with net cash provided of$19 million for the same period in 2019. The change was primarily due to the impact of net intercompany purchased receivables and higher collections of finance receivables, partially offset by higher additions to finance receivables. Net cash used for financing activities was$968 million for the first three months of 2020, compared with net cash used of$489 million for the same period in 2019. The change was primarily due to lower portfolio funding requirements.
RECENT ACCOUNTING PRONOUNCEMENTS
For a discussion of recent accounting pronouncements, see Part I, Item 1. Note 2 - "New accounting guidance."
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CRITICAL ACCOUNTING POLICIES
For a discussion of the company's critical accounting policies, see Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2019 Annual Report on Form 10-K. The following critical accounting policy has been revised since our 2019 Annual Report on Form 10-K: Allowance for credit losses - The allowance for credit losses is management's estimate of losses inherent in our finance receivable portfolio calculated using loss forecast models that take into consideration historical credit loss experience, current economic conditions and forecasts and scenarios that capture country and industry-specific economic factors. In addition, qualitative factors not able to be fully captured in our loss forecast models, including borrower-specific and Company-specific macro-economic factors, are considered in the evaluation of the adequacy of our allowance for credit losses. These qualitative factors are subjective and require a degree of management judgment. The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist and on an individual basis when it is determined that similar risk characteristics do not exist. Finance receivables are identified for individual evaluation based on past-due status and information available about the customer, such as financial statements, news reports and published credit ratings, as well as general information regarding industry trends and the economic environment in which our customers operate. The allowance for credit losses attributable to finance receivables that are individually evaluated is based on the present value of expected future cash flows discounted at the receivables' effective interest rate, the fair value of the collateral for collateral-dependent receivables or the observable market price of the receivable. In determining collateral value, we estimate the current fair market value of the collateral less selling costs. We also consider credit enhancements such as additional collateral and contractual third-party guarantees. While management believes it has exercised prudent judgment and applied reasonable assumptions, there can be no assurance that in the future, changes in economic conditions or other factors would not cause changes in the financial health of our customers. If the financial health of our customers deteriorates, the timing and level of payments received could be impacted and therefore, could result in a change to our estimated losses.
OTHER MATTERS
Environmental and Legal Matters
The Company is regulated by federal, state and international environmental laws governing its use, transport and disposal of substances and control of emissions. In addition to governing our manufacturing and other operations, these laws often impact the development of our products, including, but not limited to, required compliance with air emissions standards applicable to internal combustion engines. We have made, and will continue to make, significant research and development and capital expenditures to comply with these emissions standards. We are engaged in remedial activities at a number of locations, often with other companies, pursuant to federal and state laws. When it is probable we will pay remedial costs at a site, and those costs can be reasonably estimated, the investigation, remediation, and operating and maintenance costs are accrued against our earnings. Costs are accrued based on consideration of currently available data and information with respect to each individual site, including available technologies, current applicable laws and regulations, and prior remediation experience. Where no amount within a range of estimates is more likely, we accrue the minimum. Where multiple potentially responsible parties are involved, we consider our proportionate share of the probable costs. In formulating the estimate of probable costs, we do not consider amounts expected to be recovered from insurance companies or others. We reassess these accrued amounts on a quarterly basis. The amount recorded for environmental remediation is not material and is included in Accrued expenses. We believe there is no more than a remote chance that a material amount for remedial activities at any individual site, or at all the sites in the aggregate, will be required. OnJanuary 27, 2020 , theBrazilian Federal Environmental Agency ("IBAMA") issued Caterpillar Brasil Ltda a notice of violation regarding allegations around the requirements for use of imported oils at the Piracicaba,Brazil facility. We have instituted processes to address the allegations. While we are still discussing resolution of these allegations with IBAMA, the initial notice from IBAMA included a proposed fine of approximately$370,000 . We do not expect this fine or our response to address the allegations to have a material adverse effect on the Company's consolidated results of operations, financial position or liquidity. 64
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OnJanuary 7, 2015 , the Company received a grand jury subpoena from theU.S. District Court for the Central District of Illinois . The subpoena requested documents and information from the Company relating to, among other things, financial information concerningU.S. and non-U.S. Caterpillar subsidiaries (including undistributed profits of non-U.S. subsidiaries and the movement of cash amongU.S. and non-U.S. subsidiaries). The Company has received additional subpoenas relating to this investigation requesting additional documents and information relating to, among other things, the purchase and resale of replacement parts byCaterpillar Inc. and non-U.S. Caterpillar subsidiaries, dividend distributions of certain non-U.S. Caterpillar subsidiaries, and Caterpillar SARL (CSARL) and related structures. OnMarch 2-3, 2017 , agents with theDepartment of Commerce , theFederal Deposit Insurance Corporation and the Internal Revenue Service executed search and seizure warrants at three facilities of the Company in thePeoria, Illinois area, including its former corporate headquarters. The warrants identify, and agents seized, documents and information related to, among other things, the export of products fromthe United States , the movement of products betweenthe United States andSwitzerland , the relationship betweenCaterpillar Inc. and CSARL, and sales outsidethe United States . It is the Company's understanding that the warrants, which concern both tax and export activities, are related to the ongoing grand jury investigation. The Company is continuing to cooperate with this investigation. The Company is unable to predict the outcome or reasonably estimate any potential loss; however, we currently believe that this matter will not have a material adverse effect on the Company's consolidated results of operations, financial position or liquidity. OnMarch 20, 2014 ,Brazil's Administrative Council for Economic Defense (CADE) published a Technical Opinion which named 18 companies and over 100 individuals as defendants, including two subsidiaries ofCaterpillar Inc. , MGE - Equipamentos e Serviços Ferroviários Ltda. (MGE) and Caterpillar Brasil Ltda. The publication of the Technical Opinion opened CADE's official administrative investigation into allegations that the defendants participated in anticompetitive bid activity for the construction and maintenance of metro and train networks inBrazil . While companies cannot be held criminally liable for anticompetitive conduct inBrazil , criminal charges have been brought against one current employee of MGE and two former employees of MGE involving the same conduct alleged by CADE. OnJuly 8, 2019 , CADE found MGE, one of its current employees and two of its former employees liable for anticompetitive conduct. CBL was dismissed from the proceeding without any finding of liability. MGE intends to appeal CADE's findings. We currently believe that this matter will not have a material adverse effect on the Company's consolidated results of operations, financial position or liquidity. In addition, we are involved in other unresolved legal actions that arise in the normal course of business. The most prevalent of these unresolved actions involve disputes related to product design, manufacture and performance liability (including claimed asbestos exposure), contracts, employment issues, environmental matters, intellectual property rights, taxes (other than income taxes) and securities laws. The aggregate range of reasonably possible losses in excess of accrued liabilities, if any, associated with these unresolved legal actions is not material. In some cases, we cannot reasonably estimate a range of loss because there is insufficient information regarding the matter. However, we believe there is no more than a remote chance that any liability arising from these matters would be material. Although it is not possible to predict with certainty the outcome of these unresolved legal actions, we believe that these actions will not individually or in the aggregate have a material adverse effect on our consolidated results of operations, financial position or liquidity.
Order Backlog
At the end of the first quarter of 2020, the dollar amount of backlog believed to be firm was approximately$14.1 billion , about$400 million higher than the fourth quarter of 2019. The increase was in Energy &Transportation and Resource Industries , whileConstruction Industries was about flat. Of the total backlog atMarch 31, 2020 , approximately$4.0 billion was not expected to be filled in the following twelve months. 65
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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 byU.S. GAAP and therefore are unlikely to be comparable to the calculation of similar measures for other companies. Management does not intend for these items to be considered in isolation or as a substitute for the related GAAP measures. We believe it is important to separately quantify the profit impact of two significant items in order for our results to be meaningful to our readers. These items consist of (i) a remeasurement gain resulting from the settlement of a non-U.S. pension obligation in the first quarter of 2020 and (ii) a discrete tax benefit related toU.S. tax reform in the first quarter of 2019. We do not consider these items indicative of earnings from ongoing business activities and believe the non-GAAP measure provides investors with useful perspective on underlying business results and trends and aids with assessing our period-over-period results. In addition, we provide a calculation of ME&T free cash flow as we believe it is an important measure for investors to determine the cash generation available for financing activities including debt repayments, dividends and share repurchases.
Reconciliations of adjusted profit per share to the most directly comparable GAAP measure, profit per share - diluted are as follows:
Three Months Ended March 31
2020 2019
Profit per share - diluted $ 1.98 $ 3.25
Per share remeasurement gain of a non-US pension obligation 1 $ (0.38 ) $ -
Per share U.S. tax reform impact $ - $ (0.31 )
Adjusted profit per share $ 1.60 $ 2.94
1 At statutory tax rates.
Reconciliations of ME&T free cash flow to the most directly comparable GAAP measure, net cash provided by operating activities are as follows:
(Millions of dollars) Three
Months Ended
2020 2019
ME&T net cash provided by operating activities 1 $ 318 $ 860
ME&T capital expenditures $ (302 ) $ (297 )
ME&T free cash flow $ 16 $ 563
1 See reconciliation of ME&T net cash provided by operating activities to consolidated net cash provided by operating activities on pages 72-73.
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Supplemental Consolidating Data
We are providing supplemental consolidating data for the purpose of additional analysis. The data has been grouped as follows:
Consolidated -
Machinery, Energy & Transportation -Caterpillar defines Machinery, Energy & Transportation as it is presented in the supplemental data asCaterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis. Machinery, Energy & Transportation information relates to the design, manufacturing and marketing of our products. Financial Products' information relates to the financing to customers and dealers for the purchase and lease ofCaterpillar 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. We also believe this presentation will assist readers in understanding our business.
Financial Products - Our finance and insurance subsidiaries, primarily Cat Financial and Insurance Services.
Consolidating Adjustments - Eliminations of transactions between Machinery, Energy & Transportation and Financial Products.
Pages 68 to 73 reconcile Machinery, Energy & Transportation with Financial
Products on the equity basis to
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Caterpillar Inc. Supplemental Data for Results of Operations For the Three Months EndedMarch 31, 2020 (Unaudited) (Millions of dollars)
Supplemental Consolidating Data
Machinery,
Energy & Financial Consolidating
Consolidated Transportation 1 Products Adjustments
Sales and revenues:
Sales of Machinery, Energy &
Transportation $ 9,914 $ 9,914 $ - $ -
Revenues of Financial Products 721 - 830 (109 ) 2
Total sales and revenues 10,635 9,914 830 (109 )
Operating costs:
Cost of goods sold 7,266 7,267 - (1 ) 3
Selling, general and administrative
expenses 1,121 940 182 (1 ) 3
Research and development expenses 356 356 - -
Interest expense of Financial Products 175 - 176 (1 ) 4
Other operating (income) expenses 313 10 320 (17 ) 3
Total operating costs 9,231 8,573 678 (20 )
Operating profit 1,404 1,341 152 (89 )
Interest expense excluding Financial
Products 113 112 - 1 4
Other income (expense) 222 179 (47 ) 90 5
Consolidated profit before taxes 1,513 1,408 105 -
Provision (benefit) for income taxes 425 397 28 -
Profit of consolidated companies 1,088 1,011 77 -
Equity in profit (loss) of unconsolidated
affiliated companies 5 5 - -
Equity in profit of Financial Products'
subsidiaries - 73 - (73 ) 6
Profit of consolidated and affiliated
companies 1,093 1,089 77 (73 )
Less: Profit (loss) attributable to
noncontrolling interests 1 (3 ) 4 -
Profit 7 $ 1,092 $ 1,092 $ 73 $ (73 )
1
accounted for on the equity basis.
2 Elimination of Financial Products' revenues earned from Machinery, Energy &
Transportation.
3 Elimination of net expenses recorded by Machinery, Energy & Transportation
paid to Financial Products.
4 Elimination of interest expense recorded between Financial Products and
Machinery, Energy & Transportation.
5 Elimination of discount recorded by Machinery, Energy & Transportation on
receivables sold to Financial Products and of interest earned between
Machinery, Energy & Transportation and Financial Products.
6 Elimination of Financial Products' profit due to equity method of accounting.
7 Profit attributable to common shareholders.
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Caterpillar Inc. Supplemental Data for Results of Operations For the Three Months EndedMarch 31, 2019 (Unaudited) (Millions of dollars)
Supplemental Consolidating Data
Machinery,
Energy & Financial Consolidating
Consolidated Transportation 1 Products Adjustments Sales and revenues: Sales of Machinery, Energy &
$ 12,724 $ 12,724 $ - $ -
Transportation
Revenues of Financial Products 742 - 870 (128 ) 2 Total sales and revenues 13,466 12,724 870 (128 ) Operating costs: Cost of goods sold 9,003 9,003 - - Selling, general and administrative 1,319 1,127 192 expenses - Research and development expenses 435 435 - - Interest expense of Financial Products 190 - 200 (10 ) 4 Other operating (income) expenses 312 10 313 (11 ) 3 Total operating costs 11,259 10,575 705 (21 ) Operating profit 2,207 2,149 165 (107 ) Interest expense excluding Financial 103 110 - Products (7 ) 4 Other income (expense) 160 19 41 100 5 Consolidated profit before taxes 2,264 2,058 206 - Provision (benefit) for income taxes 387 335 52 - Profit of consolidated companies 1,877 1,723 154 - Equity in profit (loss) of unconsolidated 7 7 - - affiliated companies Equity in profit of Financial Products' - 148 - subsidiaries (148 ) 6 Profit of consolidated and affiliated 1,884 1,878 154 (148 )
companies
Less: Profit (loss) attributable to 3 (3 ) 6 - noncontrolling interests Profit 7$ 1,881 $ 1,881$ 148 $ (148 )
1
accounted for on the equity basis.
2 Elimination of Financial Products' revenues earned from Machinery, Energy &
Transportation.
3 Elimination of net expenses recorded by Machinery, Energy & Transportation
paid to Financial Products.
4 Elimination of interest expense recorded between Financial Products and
Machinery, Energy & Transportation.
5 Elimination of discount recorded by Machinery, Energy & Transportation on
receivables sold to Financial Products and of interest earned between
Machinery, Energy & Transportation and Financial Products.
6 Elimination of Financial Products' profit due to equity method of accounting.
7 Profit attributable to common shareholders.
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Caterpillar Inc. Supplemental Data for Financial Position AtMarch 31, 2020 (Unaudited) (Millions of dollars)
Supplemental Consolidating Data
Machinery,
Energy & Financial Consolidating
Consolidated Transportation 1 Products Adjustments
Assets
Current assets:
Cash and short-term investments $ 7,123 $ 6,251 $ 872 $ -
Receivables - trade and other 7,834 2,722 482 4,630 2,3
Receivables - finance 9,120 - 13,886 (4,766 ) 3
Prepaid expenses and other current
assets 1,761 1,237 555 (31 ) 4
Inventories 11,748 11,748 - -
Total current assets 37,586 21,958 15,795 (167 )
Property, plant and equipment - net 12,488 8,385 4,103 -
Long-term receivables - trade and
other 1,196 268 266 662 2,3
Long-term receivables - finance 12,021 - 12,694 (673 ) 3
Investments in Financial Products
subsidiaries - 3,999 - (3,999 ) 5
Noncurrent deferred and refundable
income taxes 1,426 1,975 96 (645 ) 6
Intangible assets 1,478 1,478 - -
Goodwill 6,140 6,140 - -
Other assets 3,559 2,048 1,610 (99 ) 7
Total assets $ 75,894 $ 46,251 $ 34,564 $ (4,921 )
Liabilities
Current liabilities:
Short-term borrowings $ 4,789 $ - $ 4,789 $ -
Short-term borrowings with
consolidated companies - - - -
Accounts payable 5,769 5,672 233 (136 ) 9
Accrued expenses 3,776 3,426 350 -
Accrued wages, salaries and employee
benefits 878 862 16 -
Customer advances 1,295 1,295 - -
Dividends payable - - - -
Other current liabilities 2,074 1,500 626 (52 ) 6,10
Long-term debt due within one year 7,935 143 7,792 -
Total current liabilities 26,516 12,898 13,806 (188 )
Long-term debt due after one year 24,369 9,009 15,371 (11 ) 8
Liability for postemployment benefits 6,333 6,332 1 -
Other liabilities 4,437 3,773 1,387 (723 ) 6
Total liabilities 61,655 32,012 30,565 (922 )
Commitments and contingencies
Shareholders' equity
Common stock 6,046 6,046 919 (919 ) 5
Treasury stock (25,341 ) (25,341 ) - -
Profit employed in the business 35,504 35,504 4,057 (4,057 ) 5
Accumulated other comprehensive
income (loss) (2,012 ) (2,012 ) (1,152 ) 1,152 5
Noncontrolling interests 42 42 175 (175 ) 5
Total shareholders' equity 14,239 14,239 3,999 (3,999 )
Total liabilities and shareholders'
equity $ 75,894 $ 46,251 $ 34,564 $ (4,921 ) 1
accounted for on the equity basis.
2 Elimination of receivables between Machinery, Energy & Transportation and
Financial Products.
3 Reclassification of Machinery, Energy & Transportation's trade receivables
purchased by Financial Products and Financial Products' wholesale inventory
receivables.
4 Elimination of Machinery, Energy & Transportation's insurance premiums that
are prepaid to Financial Products.
5 Elimination of Financial Products' equity which is accounted for by Machinery,
Energy & Transportation on the equity basis. 6 Reclassification reflecting required netting of deferred tax assets / liabilities by taxing jurisdiction. 7 Elimination of other intercompany assets between Machinery, Energy & Transportation and Financial Products.
8 Elimination of debt between Machinery, Energy & Transportation and Financial
Products.
9 Elimination of payables between Machinery, Energy & Transportation and
Financial Products.
10 Elimination of prepaid insurance in Financial Products' other liabilities.
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Caterpillar Inc. Supplemental Data for Financial Position AtDecember 31, 2019 (Unaudited) (Millions of dollars)
Supplemental Consolidating Data
Machinery,
Energy & Financial Consolidating
Consolidated Transportation 1 Products Adjustments
Assets
Current assets:
Cash and short-term investments $ 8,284 $ 7,299 $ 985 $ -
Receivables - trade and other 8,568 3,737 451 4,380 2,3
Receivables - finance 9,336 - 14,489 (5,153 ) 3
Prepaid expenses and other current
assets 1,739 1,290 529 (80 ) 4
Inventories 11,266 11,266 - -
Total current assets 39,193 23,592 16,454 (853 )
Property, plant and equipment - net 12,904 8,606 4,298 -
Long-term receivables - trade and other 1,193 348 152 693 2,3
Long-term receivables - finance 12,651 - 13,354 (703 ) 3
Investments in Financial Products
subsidiaries - 4,260 - (4,260 ) 5
Noncurrent deferred and refundable
income taxes 1,411 2,002 117 (708 ) 6
Intangible assets 1,565 1,565 - -
Goodwill 6,196 6,196 - -
Other assets 3,340 1,868 1,572 (100 ) 7
Total assets $ 78,453 $ 48,437 $ 35,947 $ (5,931 ) Liabilities
Current liabilities: Short-term borrowings$ 5,166 $ 5$ 5,161 $ - Short-term borrowings with consolidated companies - - 600 (600 ) 8 Accounts payable 5,957 5,918 212 (173 ) 9 Accrued expenses 3,750 3,415 335 - Accrued wages, salaries and employee benefits 1,629 1,580 49 - Customer advances 1,187 1,187 - - Dividends payable 567 567 - - Other current liabilities 2,155 1,689 566 (100 ) 6,10 Long-term debt due within one year 6,210 16 6,194 - Total current liabilities 26,621 14,377 13,117 (873 ) Long-term debt due after one year 26,281 9,151 17,140 (10 ) 8 Liability for postemployment benefits 6,599 6,599 - - Other liabilities 4,323 3,681 1,430 (788 ) 6 Total liabilities 63,824 33,808 31,687 (1,671 ) Commitments and contingencies Shareholders' equity Common stock 5,935 5,935 919 (919 ) 5 Treasury stock (24,217 ) (24,217 ) - - Profit employed in the business 34,437 34,437 3,997 (3,997 ) 5 Accumulated other comprehensive income (loss) (1,567 ) (1,567 ) (828 ) 828 5 Noncontrolling interests 41 41 172 (172 ) 5 Total shareholders' equity 14,629 14,629 4,260 (4,260 ) Total liabilities and shareholders' equity$ 78,453 $ 48,437 $ 35,947 $ (5,931 ) 1Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.
2 Elimination of receivables between Machinery, Energy & Transportation and
Financial Products.
3 Reclassification of Machinery, Energy & Transportation's trade receivables
purchased by Financial Products and Financial Products' wholesale inventory
receivables.
4 Elimination of Machinery, Energy & Transportation's insurance premiums that
are prepaid to Financial Products.
5 Elimination of Financial Products' equity which is accounted for by Machinery,
Energy & Transportation on the equity basis. 6 Reclassification reflecting required netting of deferred tax assets / liabilities by taxing jurisdiction. 7 Elimination of other intercompany assets between Machinery, Energy & Transportation and Financial Products.
8 Elimination of debt between Machinery, Energy & Transportation and Financial
Products.
9 Elimination of payables between Machinery, Energy & Transportation and
Financial Products.
10 Elimination of prepaid insurance in Financial Products' other liabilities.
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Caterpillar Inc. Supplemental Data for Cash Flow For the Three Months EndedMarch 31, 2020 (Unaudited) (Millions of dollars)
Supplemental Consolidating Data
Machinery,
Energy & Financial Consolidating
Consolidated Transportation 1 Products Adjustments
Cash flow from operating activities:
Profit of consolidated and affiliated
companies $ 1,093 $ 1,089 $ 77 $ (73 ) 2
Adjustments for non-cash items:
Depreciation and amortization 614 402 212 -
Undistributed profit of Financial
Products - (73 ) - 73 3
Gain on remeasurement of a non-U.S.
pension obligation (254 ) (254 ) - -
Provision (benefit) for deferred income
taxes 20 75 (55 ) -
Other 534 249 170 115 4
Changes in assets and liabilities, net
of acquisitions and divestitures:
Receivables - trade and other 500 328 (56 ) 228 4, 5
Inventories (541 ) (538 ) - (3 ) 4
Accounts payable 90 2 51 37 4
Accrued expenses (97 ) (105 ) 8 -
Accrued wages, salaries and employee
benefits (722 ) (689 ) (33 ) -
Customer advances 116 116 - -
Other assets - net (50 ) 15 (16 ) (49 ) 4
Other liabilities - net (173 ) (299 ) 73 53 4
Net cash provided by (used for)
operating activities 1,130 318 431 381
Cash flow from investing activities:
Capital expenditures - excluding
equipment leased to others (305 ) (304 ) (1 ) -
Expenditures for equipment leased to
others (243 ) 2 (249 ) 4 4
Proceeds from disposals of leased
assets and property, plant and
equipment 216 61 156 (1 ) 4
Additions to finance receivables (2,953 ) - (3,213 ) 260 5
Collections of finance receivables 3,153 - 3,421 (268 ) 5
Net intercompany purchased receivables - - 376 (376 ) 5
Proceeds from sale of finance
receivables 31 - 31 -
Net intercompany borrowings - 599 1 (600 ) 6
Investments and acquisitions (net of
cash acquired) (35 ) (35 ) - -
Proceeds from sale of securities 68 6 62 -
Investments in securities (180 ) (5 ) (175 ) -
Other - net 35 - 35 -
Net cash provided by (used for)
investing activities (213 ) 324 444 (981 )
Cash flow from financing activities:
Dividends paid (567 ) (567 ) - -
Common stock issued, including treasury
shares reissued (23 ) (23 ) - -
Common shares repurchased (1,043 ) (1,043 ) - -
Net intercompany borrowings - (1 ) (599 ) 600 6
Proceeds from debt issued (original
maturities greater than three months) 2,141 15 2,126 -
Payments on debt (original maturities
greater than three months) (2,466 ) (6 ) (2,460 ) -
Short-term borrowings - net (original
maturities three months or less) (40 ) (5 ) (35 ) -
Other - net (1 ) (1 ) - -
Net cash provided by (used for)
financing activities (1,999 ) (1,631 ) (968 ) 600
Effect of exchange rate changes on cash (80 ) (59 ) (21 ) -
Increase (decrease) in cash and
short-term investments and restricted
cash (1,162 ) (1,048 ) (114 ) -
Cash and short-term investments and
restricted cash at beginning of period 8,292 7,302 990 -
Cash and short-term investments and
restricted cash at end of period $ 7,130 $ 6,254
1
accounted for on the equity basis.
2 Elimination of Financial Products' profit after tax due to equity method of
accounting.
3 Elimination of non-cash adjustment for the undistributed earnings from
Financial Products.
4 Elimination of non-cash adjustments and changes in assets and liabilities
related to consolidated reporting.
5 Reclassification of Financial Products' cash flow activity from investing to
operating for receivables that arose from the sale of inventory. 6 Elimination of net proceeds and payments to/from Machinery, Energy & Transportation and Financial Products.
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Caterpillar Inc. Supplemental Data for Cash Flow For the Three Months EndedMarch 31, 2019 (Unaudited) (Millions of dollars)
Supplemental Consolidating Data
Machinery,
Energy & Financial Consolidating
Consolidated Transportation 1 Products Adjustments
Cash flow from operating activities:
Profit of consolidated and affiliated
companies $ 1,884 $ 1,878 $ 154 $ (148 ) 2
Adjustments for non-cash items:
Depreciation and amortization 641 424 217 -
Undistributed profit of Financial
Products - (148 ) - 148 3
Provision (benefit) for deferred income
taxes (11 ) 14 (25 ) -
Other 88 49 (59 ) 98 4
Changes in assets and liabilities, net
of acquisitions and divestitures:
Receivables - trade and other (150 ) 75 (24 ) (201 ) 4, 5
Inventories (813 ) (818 ) - 5 4
Accounts payable 355 336 12 7 4
Accrued expenses 135 124 11 -
Accrued wages, salaries and employee
benefits (1,185 ) (1,177 ) (8 ) -
Customer advances 105 105 - -
Other assets - net (7 ) (6 ) 37 (38 ) 4
Other liabilities - net 79 4 35 40 4
Net cash provided by (used for)
operating activities 1,121 860 350 (89 )
Cash flow from investing activities:
Capital expenditures - excluding
equipment leased to others (278 ) (274 ) (4 ) -
Expenditures for equipment leased to
others (269 ) (23 ) (247 ) 1 4
Proceeds from disposals of leased
assets and property, plant and
equipment 209 26 189 (6 ) 4
Additions to finance receivables (2,615 ) - (2,971 ) 356 5
Collections of finance receivables 2,818 - 3,096 (278 ) 5
Net intercompany purchased receivables - - (16 ) 16 5
Proceeds from sale of finance
receivables 44 - 44 -
Net intercompany borrowings - 63 - (63 ) 6
Investments and acquisitions (net of
cash acquired) (2 ) (2 ) - -
Proceeds from sale of securities 57 4 53 -
Investments in securities (107 ) (7 ) (100 ) -
Other - net (38 ) (13 ) (25 ) -
Net cash provided by (used for)
investing activities (181 ) (226 ) 19 26
Cash flow from financing activities:
Dividends paid (494 ) (494 ) - -
Common stock issued, including treasury
shares reissued (5 ) (5 ) - -
Common shares repurchased (751 ) (751 ) - -
Net intercompany borrowings - - (63 ) 63 6
Proceeds from debt issued (original
maturities greater than three months) 2,665 - 2,665 -
Payments on debt (original maturities
greater than three months) (2,567 ) (2 ) (2,565 ) -
Short-term borrowings - net (original
maturities three months or less) (522 ) 4 (526 ) -
Other - net (1 ) (1 ) - -
Net cash provided by (used for)
financing activities (1,675 ) (1,249 ) (489 ) 63
Effect of exchange rate changes on cash 3 5 (2 ) -
Increase (decrease) in cash and
short-term investments and restricted
cash (732 ) (610 ) (122 ) -
Cash and short-term investments and
restricted cash at beginning of period 7,890 6,994 896 -
Cash and short-term investments and
restricted cash at end of period $ 7,158 $ 6,384 $ 774 $ -
1
accounted for on the equity basis.
2 Elimination of Financial Products' profit after tax due to equity method of
accounting.
3 Elimination of non-cash adjustment for the undistributed earnings from
Financial Products.
4 Elimination of non-cash adjustments and changes in assets and liabilities
related to consolidated reporting.
5 Reclassification of Financial Products' cash flow activity from investing to
operating for receivables that arose from the sale of inventory. 6 Elimination of net proceeds and payments to/from Machinery, Energy & Transportation and Financial Products.
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Forward-looking Statements
Certain statements in this Form 10-Q 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," "forecast," "target," "guide," "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) inventory management decisions and sourcing practices of our dealers and our OEM customers; (x) a failure to realize, or a delay in realizing, all of the anticipated benefits of our acquisitions, joint ventures or divestitures; (xi) union disputes or other employee relations issues; (xii) adverse effects of unexpected events; (xiii) disruptions or volatility in global financial markets limiting our sources of liquidity or the liquidity of our customers, dealers and suppliers; (xiv) 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; (xv) our Financial Products segment's risks associated with the financial services industry; (xvi) changes in interest rates or market liquidity conditions; (xvii) an increase in delinquencies, repossessions or net losses of Cat Financial's customers; (xviii) currency fluctuations; (xix) our or Cat Financial's compliance with financial and other restrictive covenants in debt agreements; (xx) increased pension plan funding obligations; (xxi) alleged or actual violations of trade or anti-corruption laws and regulations; (xxii) additional tax expense or exposure, including the impact ofU.S. tax reform; (xxiii) significant legal proceedings, claims, lawsuits or government investigations; (xxiv) new regulations or changes in financial services regulations; (xxv) compliance with environmental laws and regulations; (xxvi) the duration and geographic spread of, business disruptions caused by, and the overall global economic impact of, the COVID-19 pandemic; and (xxvii) other factors described in more detail inCaterpillar's Forms 10-Q, 10-K and other filings with theSecurities and Exchange Commission .
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