Caterpillar Inc.
Cat Construction 1

Cat Margins Hit Record, Execs See Strength in Construction

Jan. 31, 2023
The equipment manufacturer’s leaders see a more typical sales year ahead and say fewer suppliers are pushing for price hikes.

Caterpillar Inc. posted record adjusted operating margins in the fourth quarter of 2022 thanks to 20% sales growth enabled by a smoother supply chain as well as higher prices and executives expect that strong demand from construction and mining customers will help the equipment giant produce top- and bottom-line growth this year.

Chairman and CEO Jim Umpleby told analysts that infrastructure and energy transition investment tailwinds in the United States, much of the Asia-Pacific region and the Middle East will be big drivers of the Texas-based company’s 2023 business. On the flip side, he added, Chinese demand for heavy excavators remains weak and construction activity in Latin America is forecast to be flat.

“We'll pay close attention to the market and we'll modify our production plans as appropriate,” Umpleby said about Cat’s construction division. “But there are still some products that we need to produce more of and, quite frankly, we're still dealing with some supply chain issues in some areas. So it's not a one-size-fits-all answer.”

Cat produced a fourth-quarter net profit of $1.45 billion on sales of $16.6 billion. Those numbers were down 31% and up 20%, respectively, from the same period of 2021. The company’s operating profit rose slightly to nearly $1.7 billion but was hurt by a $925 million goodwill impairment charge related to a weaker long-term outlook for its locomotive business. For the year, operating income climbed to $7.9 billion from $6.9 billion and revenues climbed more than $8 billion to $59.4 billion.

Cat’s Q4 got a $1.7 billion lift from higher prices—volume generated $499 million in growth versus late 2021—which helped the company produce an adjusted operating profit margin of 17.0% despite manufacturing costs growing by $876 million year over year. The company finished the year with a sales backlog of $30.4 billion, with the fourth quarter contributing about $400 million to that figure.

CFO Andrew Bonfield said Cat’s leadership team is forecasting a more typical year for sales in 2023, which means the current quarter will be “lighter” and operating margins flat to down. Dealer inventories are expected to be flat from 2022, when they grow significantly, and Cat will further hike price hikes, albeit at a slower rate as various input cost pressures are gradually easing.

“We are starting to see signs of lower levels of requests for price increases coming from suppliers,” Bonfield said while also noting that material costs will still be a headwind for a wihle. “So that's a positive sign. And hopefully, as things unwind through the year, some of that will moderate.”

On the capital spending front, Umpleby and Bonfield are planning to allocate roughly $1.5 billion to growth investments, up from about $1.3 billion in 2022.

Also worth noting from the company’s conference call: Bonfield said Cat Financial, the company’s financing organization, is not seeing activity related to new equipment slow. Demand for used equipment also remains strong, he added, and many customers are choosing to buy their equipment when their lease terms wrap up.

Shares of Cat (Ticker: CAT) were down nearly 4% to about $251 in afternoon trading Jan. 31. They are, however, still up about 30% over the past six months, a move that grew the company’s market capitalization to more than $130 billion.

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