Caterpillar Inc.’s CAT third-quarter 2015 adjusted earnings declined 56% to 75 cents per share, reflecting the ongoing weakness in mining, and oil and gas industries. Earnings, however, came in line with the Zacks Consensus Estimate. The company’s shares went down 4.08% in pre-market trading session following the release.
Including restructuring costs, earnings were 62 cents in the quarter, down 62% from $1.63 in the prior-year quarter.
Revenues
Revenues declined 19% year over year to $10.96 billion in the quarter, failing to match the Zacks Consensus Estimate of $11.11 billion due to unfavorable currency impact along with lower volumes. Sales declined for both new equipment and aftermarket parts.
Caterpillar witnessed revenue decline across all regions. Latin America fared the worst, registering a 31% drop in sales, mainly due to lower end-user demand affected by widespread economic weakness across the region. Sales in Asia/Pacific declined 25% due to lower demand for construction and mining equipment as well as products used in oil and gas applications, coupled with unfavorable impact from currency translation. In North America, Caterpillar witnessed a 17% decline in sales due to lower end-user demand for Energy & Transportation applications and construction equipment. Sales in Europe, Africa and Middle East (EAME) declined 13% because of unfavorable currency impact and lower demand for products used in mining equipment and power generation applications.
Costs & Operating Profit
In the quarter, cost of sales declined 17% year over year to $7.95 billion. Gross profit dipped 23% year over year to $3 billion. Selling, general and administrative (SG&A) expenses decreased 15% to $1.2 billion due to lower incentive compensation expense, partially offset by new product introduction programs. Research and development (R&D) expenses remained flat at $534 million.
Operating profit was at $713 million, down 49% year over year due to unfavorable price realization and lower volume.
Segment Results
Machinery and Energy & Transportation (ME&T) sales decreased 19% year over year to $10.3 billion. Sales in Energy & Transportation dipped 25% due to decline in sales across end-user applications and unfavorable impact of foreign exchange. Sales in Resource Industries fell 17% because of lower demand. Construction Industries' sales declined 15% due to lower end user demand and unfavorable impact of currency exchange.
The ME&T segment’s operating profit decreased 53% to $590 million in the quarter. Operating profit decreased 22% in the Construction Industries owing to lower volume and unfavorable price realization. Operating profit went down 45% in the Energy & Transportation segment as a result of lower sales volume. Resource Industries incurred a loss in the quarter as against profit in the year-ago quarter due to lower sales volume and higher spending for new products, partially offset by favorable warranty, lower incentive compensation expense and improved material costs.
Financial Products’ net revenues decreased 12% to $752 million due to lower average earning assets in Asia/Pacific, EAME and Latin America, partially offset by higher average earning assets in North America and lower average financing rates. Financial Products’ profits declined to $207 million in the quarter from $220 million in the prior-year quarter.
Financial Position
Caterpillar ended the third quarter with cash and short-term investments of $6.05 billion, down from $7.34 billion as of 2014-end. Total debt-to-capital ratio was at 70% as of third-quarter end, flat compared with 2014-end. The debt-to-capital ratio at ME&T was 37.4% as of Sep 30, 2015 flat with that as of Dec 31, 2014, and at about midpoint of the company’s target range of 30% to 45%.
Total cash flow from operating activities in the first nine months of 2015 was $4.9 billion compared with $6.2 billion in the prior-year period. Operating cash flow at ME&T was $766 million in the quarter, down from $1.44 billion in the year-ago quarter.
Caterpillar repurchased approximately $1.5 billion of its shares during the third quarter of 2015. So far in fiscal 2015, Caterpillar has returned $3.3 billion to its shareholders through repurchase of common stock and payment of dividends.
Backlog
At the end of the quarter, Caterpillar’s backlog was $13.7 billion, down from $14.8 billion at the end of second-quarter 2015. The decrease was due to Energy & Transportation and Resource Industries .
Guidance for 2015
For 2015, the company maintained its revenue guidance of $48 billion. On Sep 24, the company had trimmed its revenue guidance to $48 billion, which is $1 billion lower than the previous expectation, due to broadly weaker business conditions across its three large segments – Construction Industries, Energy & Transportation and Resource Industries.
Caterpillar expects earnings per share of $4.60, excluding restructuring costs in 2015. This is lower than the company’s previous earnings per share outlook, provided during its second-quarter 2015 conference call, wherein the company had provided a guidance of $5.00 per share on the back of revenues of about $49 billion. The additional restructuring actions announced in September are expected to increase its restructuring costs from about $250 million to about $800 million.
Sneak Peek into 2016
For 2016, the company expects sales to be 5% below 2015 levels with decline across all three of its aforementioned major segments. Sales in Construction Industries' are expected to be flat to down 5% as improvement in developed countries will be offset by declining sales in developing countries. Energy & Transportation's sales are expected to decline 5% to 10% affected by continuing weakness in oil and gas along with a weaker order backlog than in 2015. Weak mining sector will again lead to a decline in Resource Industries' sales by about 10%.
The guidance reflects weak economic growth in the United States and Europe with U.S. construction activity being impacted by low infrastructure investment and continued headwinds from oil and gas. It also factors in the slowdown in China, recession in Brazil and lower commodity prices.
Our Take
To stay profitable in the wake of reduced revenue expectations, Caterpillar has perked up its restructuring actions that are expected to lead to annual savings of $1.5 billion in operating costs, once they are executed. Of this, about $750 million is expected in 2016. However, slump in oil prices, weak mining, lowered expectations for Chinese construction equipment demand, declining backlog, and weak agriculture sector remain headwinds.
Caterpillar currently carries a Zacks Rank #5 (Strong Sell). Some better-ranked stocks in the sector include ACCO Brands Corporation ACCO, Global Brass and Copper Holdings, Inc. BRSS and Columbus McKinnon Corporation CMCO. All of these stocks carry a Zacks Rank #1 (Strong Buy).
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