Mining and equipment behemoth Caterpillar Inc. (CAT) reported a 20% decline in its fourth-quarter 2014 adjusted earnings to $1.35 per share due to a muted mining environment, and lower prices of oil and key mined commodities, particularly copper, coal and iron ore.
Results fell way short of the Zacks Consensus Estimate of $1.55, a negative earnings surprise of 13%. Caterpillar’s shares went down 7.57% in the pre-market trading session following the release.
Including restructuring costs, earnings stood at $1.23 in the quarter, down 21% from $1.55 in the prior-year quarter.
Revenues
Revenues declined 1% year over year to $14.2 billion in the quarter but surpassed the Zacks Consensus Estimate of $14.1 billion. The year-over-year decline was mainly due to currency impacts from weakening of the euro and Japanese yen. Sales in Machinery, Energy & Transportation declined 1% and Financial Products sales dipped 2%.
Geographically, in North America, Caterpillar recorded a 15% increase in sales triggered by higher demand for oil and gas and transportation applications and favorable impact of changes in dealer inventories. Sales in Europe, Africa and Middle East (EAME) increased 2% on the back of rise in deliveries to end users, offset by the unfavorable impact of changes in dealer inventories as well as currency exchange as sales in euros translated into fewer U.S. dollars.
Latin America registered a 14% drop, mainly due to lower end-user demand for construction and mining equipment, partially offset by the favorable impact of changes in dealer inventories. Sales in Asia/Pacific declined 16%, due to lower demand for construction equipment and unfavorable impact of changes in dealer inventories.
Costs & Operating Profit
In the quarter, cost of sales remained flat year over year at $10.5 billion, while gross profit decreased 3% year over year to $3.7 billion. Selling, general and administrative (SG&A) expenses increased 7% to $1.5 billion and research and development (R&D) expenses went up 24% to $578 million.
Operating profit was at $1.06 billion, down 27% year over year, as increased SG&A and R&D expenses, resulting from new product introductions, higher manufacturing costs and incentive compensation expense, were offset by favorable price realization.
Segment Results
Machinery and Energy & Transportation (ME&T) sales decreased 1% year over year to $13.5 billion. Sales in Energy & Transportation went up 11% driven by increased sales for oil and gas, power generation and transportation applications, whereas sales of industrial applications dipped.
Sales in Resource Industries declined 10%, due to lower end-user demand for mining equipment, partially offset by favorable impact of changes in dealer inventories. Construction Industries' sales declined 9% as lower volume and unfavorable impact of currency translation, primarily the Japanese yen and the euro, were partially offset by improved price realization.
The segment’s operating profit decreased 27% to $921 million in the quarter. Operating profit decreased 26% in the Construction Industries segment, owing to lower sales volume, increased incentive compensation expense and higher spending on new product introduction programs. Operating profit went up 10% in the Energy & Transportation segment on the back of higher sales volume, partially offset by spending on growth-related programs. However, operating profit in Resource Industries plunged 67%, because of lower sales volume, increased SG&A and R&D expenses.
Financial Products’ net revenues decreased 1% to $811 million due to lower average financing rates in North America and Europe and lower average earning assets in Asia/Pacific, partially offset by higher average earning assets in North America. Financial Products’ profits declined 26% to $197 million in the quarter.
Fiscal 2014 Performance
Caterpillar’s fiscal 2014 adjusted earnings came in at $6.38, which increased 7% from $5.97 in the prior fiscal but fell short of the Zacks Consensus Estimate of $6.55. Earnings, however, were better than the company’s guidance of $5.85. Including one-time items, earnings came in at $5.88, rising 2% from $5.75 in fiscal 2013. Revenues declined 1% year over year to $52.1 billion, missing the Zacks Consensus Estimate of $54.8 billion as well as the company’s guidance of $56 billion.
Financial Position
Caterpillar ended fiscal 2014 with cash and short-term investments of $7.3 billion, up from $6.1 billion as of 2013-end. Total debt-to-capital ratio was at 70% as of 2014-end compared with 64% as of 2013-end. The debt-to-capital ratio at ME&T was 37.4% as of Dec 31, 2014 compared with 29.7% as of Dec 31, 2013.
Total cash flow from operating activities in fiscal 2014 was $8.1 billion compared with $10.2 billion in the prior year. Operating cash flow at ME&T was $7.5 billion in fiscal 2014, down from $9 billion in the prior year.
Caterpillar repurchased shares worth $4.2 billion in the year. At the end of 2014, the company had $7.5 billion remaining under the authorization.
Backlog
At the end of the fourth quarter, Caterpillar’s backlog was $17.3 billion, down from $19.7 billion at the end of the third quarter. The decrease was primarily in Energy & Transportation followed by the Resource Industries and Construction Industries.
Guidance for 2015
For 2015, the company expects revenues to be around $50 billion, reflecting the impact of relatively slow growth in the world economy and continued weakness in commodity prices, particularly oil, copper, coal and iron ore. The company guides earnings per share in the range of $4.75 per share.
Our Take
Caterpillar will benefit from recovery in the U.S. construction sector, cost reduction efforts and further share repurchases. However, lower locomotives sales, uncertainty around oil and gas and weakness in the mining industry remain headwinds.
Peoria, IL-based Caterpillar Inc. is the manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. The company is one of the few leading U.S. companies in an industry that competes globally from a principally domestic manufacturing base.
Peer Performance
Joy Global Inc. (JOY) reported adjusted earnings of $1.25 per share in the fourth quarter of fiscal 2014, up 12.6% from $1.11 per share a year ago. Earnings also outpaced the Zacks Consensus Estimate of $1.14 by 9.6%.
Caterpillar currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the sector include Briggs & Stratton Corp. (BGG) and Kubota Corp. (KUBTY). While Briggs & Stratton sports a Zacks Rank #1 (Strong Buy), Kubota holds a Zacks Rank #2 (Buy).
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