Caterpillar Inc.’s CAT second-quarter 2016 adjusted earnings of $1.09 per share, beat the Zacks Consensus Estimate of 99 cents. However, compared to the prior year, earnings plunged 22% reflecting persistent tough market conditions for many of the company’s businesses – mining, oil and gas and rail.
Despite the earnings beat, the company remains cautious entering the second half of the year and does not expect an upturn in the important markets like mining, oil and gas and rail, this year. Due to the subdued view, the company’s shares fell 1.12% in pre-market trading, following the release.
Including restructuring costs, Caterpillar’s earnings of 93 cents per share was 29% lower than the prior-year quarter figure of $1.31 per share.
Revenues
Revenues plummeted 16% year over year to $10.34 billion in the quarter, surpassing the Zacks Consensus Estimate of $9.99 billion due to lower sales volume resulting from consistent weak commodity prices globally and economic weakness in developing countries. Sales declined for both new equipment and aftermarket parts, with the major decline noted in the former.
Caterpillar witnessed a revenue decline across all regions. Latin America was the worst, registering a 31% drop in sales, primarily attributable to lower end-user demand as a result of widespread economic weakness. In North America, Caterpillar witnessed a 16% fall in sales due to lower end-user demand in construction, mining and the impact of low oil prices.
Sales in Europe, Africa and Middle East (EAME) tanked 15% due to the weak oil and commodity price environment as well as political uncertainly. Sales in the Asia-Pacific region tumbled 13% due to lower demand for Energy & Transportation applications.
Costs & Operating Profit
In the quarter, cost of sales declined 14% year over year to $7.4 billion. Gross profit plunged 20% to $2.9 billion. Selling, general and administrative (SG&A) expenses decreased 15% to $1.12 billion, while research and development (R&D) expenses fell 8% to $468 million.
Adjusted operating profit was $1.33 billion, down 27% year over year. Lower sales volumes, including an unfavorable mix of products along with unfavorable price realization led to the decline. However, lower costs were a minor offset.
Segment Results
Machinery and Energy & Transportation (ME&T) sales decreased 17% year over year to $9.6 billion. Sales of Energy & Transportation plunged 20% due to lower sales volume. Sales at Resource Industries dropped 29% owing to lower end-user demand across all regions. Construction Industries sales dipped 8% due to lower volumes and unfavorable price realization.
The ME&T segment reported an operating profit of $678 million, marking a 44% plunge from $1.2 billion reported in the year-ago quarter. At the Energy & Transportation segment, operating profit dropped 36% as a result of lower sales volume, including an unfavorable mix of products, partially countered by lower costs.
Operating profit tumbled 6% at Construction Industries owing to lower volume and unfavorable price realization. The worst performance was witnessed at Resource Industries, with the segment incurring a loss of $163 million in the quarter as against profit of $27 million a year ago because of lower sales volume.
Financial Products’ revenues dropped 3% to $759 million owing to lower average earning assets in Asia/Pacific and Latin America. This was partially offset by higher average earning assets in North America. Financial Products' profit was $202 million in the quarter, compared with $184 million in the prior-year quarter.
Financial Position
Caterpillar ended the second quarter with cash and short-term investments of $6.76 billion, up from $6.5 billion at 2015 end. Total debt-to-capital ratio was 71% at the quarter end, down from 72% at 2015 end. The debt-to-capital ratio at ME&T was 39% as of Jun 30, 2016 within the company’s target range of 30–45%.
Total cash flow from operating activities in the first half of 2016 was $2.80 billion, compared with $3.36 billion in the prior-year comparable period. Operating cash flow at ME&T declined to $1.165 million in the quarter from $1.638 billion in the prior-year quarter primarily owing to lower profit and the absence of a dividend from Cat Financial that was paid in second-quarter 2015.
Backlog
At the end of the quarter, Caterpillar’s backlog was at $11.8 billion. On a year-over-year basis, order backlog declined by about $3 billion, having recorded decreases in all segments.
Guidance
The company stated that given the subdued world economic growth, it does not expect improvement in its end markets. Even though commodity prices seem to have stabilized, it still remains at low levels. Further, global uncertainty clouds the outlook with the recent Brexit outcome and the turmoil in Turkey.
Caterpillar now expects revenues in the $40–$40.5 billion range, as against the previous outlook of $40–$42 billion. Also, Caterpillar now expects earnings per share (excluding restructuring costs) of $3.55, down from the earlier projection of $3.70.
CATERPILLAR INC Price, Consensus and EPS Surprise
CATERPILLAR INC Price, Consensus and EPS Surprise | CATERPILLAR INC Quote
To stay profitable despite weak demand, Caterpillar has stepped up its restructuring actions which should lead to cost savings. Earlier restructuring costs in 2016 were expected to be about $550 million. The company has now increased it to about $700 million (80 cents per share) reflecting additional workforce reductions anticipated in the second half of 2016.
The company also continues in investing substantially in R&D. However, the slump in oil prices, weak mining, Chinese economy woes, declining backlog, and softness in the agriculture sector remain major headwinds ahead.
Caterpillar currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the sector include Apogee Enterprises, Inc. APOG, Belden Inc. BDC and Hudson Technologies Inc. HDSN. All the three stocks sport a Zacks Rank #1 (Strong Buy).
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