Caterpillar Reports Third-Quarter 2015 Results

PEORIA, Ill., Oct. 22, 2015 /PRNewswire/ -- Caterpillar Inc. (NYSE: CAT) today announced profit per share of $0.62 for the third quarter of 2015, a decrease from $1.63 per share in the third quarter of 2014.  Excluding restructuring costs, profit per share was $0.75, down from $1.72 per share in the third quarter of 2014.  Third-quarter 2015 sales and revenues were $11.0 billion, down from $13.5 billion in the third quarter of 2014.

"The environment remains extremely challenging for most of the key industries we serve, with sales and revenues down 19 percent from the third quarter last year.  Improving how we operate is our focus amidst the continued weakness in mining and oil and gas.  We're tackling costs, and our year-to-date decremental profit pull through has been better than our target.  We're also focusing on our global market position, and it continues to improve even in challenging end markets.  Our product quality is in great shape, and our safety record is among the best of any industrial company today," said Caterpillar Chairman and Chief Executive Officer Doug Oberhelman.    

"Our strong balance sheet is important in these difficult times.  Our ME&T debt-to-capital ratio is near the middle of our target range at 37.4 percent; we have about $6 billion of cash, and our captive finance company is healthy and strong.  We've repurchased close to $2 billion of stock in 2015 and more than $8 billion over the past three years.  In addition, the dividend, which is a priority for our use of cash, has increased 83 percent since 2009," added Oberhelman.

The additional restructuring actions announced recently are substantial, but necessary to manage through this downturn and keep the company strong for the long term.  The actions are expected to lower operating costs by about $1.5 billion annually once fully implemented, with about $750 million of that expected in 2016.

2015 Outlook

The 2015 outlook for sales and revenues is about $48 billion, and that is unchanged from the outlook that was included with the September 24 announcement of new restructuring actions. 

The outlook for profit per share is about $3.70, or $4.60 excluding restructuring costs.  The expectation for 2015 restructuring costs has increased significantly, from about $250 million to about $800 million, and is a result of the additional restructuring actions.

The previous outlook for profit per share was provided in late July along with second-quarter 2015 financial results.  At that time, the outlook for profit per share was $4.70, or $5.00 excluding restructuring costs and was based on sales and revenues of about $49 billion.

Preliminary 2016 Sales and Revenues Outlook 

Sales and revenues for 2016 are expected to be about 5 percent below 2015.  We expect Construction Industries' sales to be flat to down 5 percent with some improvement in developed countries offset by declining sales in developing countries.  Energy & Transportation's sales are expected to be down 5 to 10 percent as a result of continuing weakness in oil and gas coupled with a weaker order backlog than in 2015.  Mining is expected to be down again, resulting in a decline in Resource Industries' sales of about 10 percent.

The preliminary outlook reflects weak economic growth in the United States and Europe with U.S. construction activity impacted by low infrastructure investment and continued headwinds from oil and gas.  It also reflects a slowing China, Brazil in recession and continuing weakness in commodity prices.

"Managing through cyclicality has been critical to Caterpillar's success for the past 90 years; it's nothing new for us or our customers.  When world growth improves, the key industries we serve – construction, mining, energy and rail – will be needed to support that growth.  We're confident in the long-term success of the industries we're in, and together with our customers, we'll weather today's challenging market conditions," Oberhelman said.

"We can't control the business cycle, but we continue to drive improvements in our business.  We're implementing Lean to drive improvements through our businesses and executing our Across the Table initiative with dealers to improve our market position, service performance and value to customers.  We're also investing in emerging technologies and data analytics tools to continue our role as an innovation leader for our customers.  As we look ahead to what will likely be our fourth consecutive down year for sales, which has never happened in our 90-year history, we are restructuring to lower our cost structure.  It's painful and will affect thousands of people, but is essential for the long-term health of the company and should position us for better results when conditions improve," added Oberhelman.

Notes: 

• Glossary of terms is included on pages 17-18; first occurrence of terms shown in bold italics.
• Information on non-GAAP financial measures is included on page 19.

About Caterpillar:

For 90 years, Caterpillar Inc. has been making sustainable progress possible and driving positive change on every continent.  Customers turn to Caterpillar to help them develop infrastructure, energy and natural resource assets.  With 2014 sales and revenues of $55.184 billion, Caterpillar is the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives.  The company principally operates through its three product segments - Construction Industries, Resource Industries and Energy & Transportation - and also provides financing and related services through its Financial Products segment.  For more information, visit caterpillar.com.  To connect with us on social media, visit caterpillar.com/social-media.

Forward-Looking Statements

Certain statements in this Release 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," "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 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) government monetary or fiscal policies and infrastructure spending; (iii) commodity price changes, component price increases, fluctuations in demand for our products or significant shortages of component products; (iv) disruptions or volatility in global financial markets limiting our sources of liquidity or the liquidity of our customers, dealers and suppliers; (v) political and economic risks, commercial instability and events beyond our control in the countries in which we operate; (vi) 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; (vii) our Financial Products segment's risks associated with the financial services industry; (viii) changes in interest rates or market liquidity conditions; (ix) an increase in delinquencies, repossessions or net losses of Cat Financial's customers; (x) new regulations or changes in financial services regulations; (xi) a failure to realize, or a delay in realizing, all of the anticipated benefits of our acquisitions, joint ventures or divestitures; (xii) international trade policies and their impact on demand for our products and our competitive position; (xiii) our ability to develop, produce and market quality products that meet our customers' needs; (xiv) the impact of the highly competitive environment in which we operate on our sales and pricing; (xv) failure to realize all of the anticipated benefits from initiatives to increase our productivity, efficiency and cash flow and to reduce costs; (xvi) additional restructuring costs or a failure to realize anticipated savings or benefits from past or future cost reduction actions; (xvii) inventory management decisions and sourcing practices of our dealers and our OEM customers; (xviii) compliance with environmental laws and regulations; (xix) alleged or actual violations of trade or anti-corruption laws and regulations; (xx) additional tax expense or exposure; (xxi) currency fluctuations; (xxii) our or Cat Financial's compliance with financial covenants; (xxiii) increased pension plan funding obligations; (xxiv) union disputes or other employee relations issues; (xxv) significant legal proceedings, claims, lawsuits or government investigations; (xxvi) changes in accounting standards; (xxvii) failure or breach of IT security; (xxviii) adverse effects of unexpected events including natural disasters; and (xxix) other factors described in more detail under "Item 1A. Risk Factors" in our Form 10-K filed with the SEC on February 17, 2015 for the year ended December 31, 2014.

Third-Quarter 2015 Highlights

• Third-quarter sales and revenues were $10.962 billion, down 19 percent from the third quarter of 2014.
• Restructuring costs were $101 million in the third quarter of 2015, with an after-tax impact of $0.13 per share.
• Profit per share was $0.62 in the third quarter of 2015, or $0.75 per share excluding restructuring costs. Profit in the third quarter of 2014 was $1.63 per share, or $1.72 per share excluding restructuring costs.
• ME&T operating cash flow was $766 million in the third quarter of 2015, compared with $1.442 billion in the third quarter of 2014.
• ME&T debt-to-capital ratio was 37.4 percent, the same as the end of 2014.
• The company repurchased $1.5 billion of Caterpillar common stock during the third quarter of 2015.

2015 Outlook

• The company expects 2015 sales and revenues to be about $48 billion, unchanged from the September 24 announcement.
• With sales and revenues at $48 billion, the revised profit outlook is about $3.70 per share, or $4.60 per share excluding restructuring costs.
• The company expects restructuring costs of about $800 million in 2015, an increase from the previous estimate of about $250 million.
• We expect ME&T capital expenditures in 2015 to be about the same as 2014 capital expenditures of $1.6 billion.

Preliminary 2016 Sales and Revenues Outlook

• The company expects 2016 sales and revenues to be down about 5 percent from the 2015 outlook.

CONSOLIDATED RESULTS

Consolidated Sales and Revenues

Consolidated Sales and Revenues Comparison
Third Quarter 2015 vs. Third Quarter 2014

To access this chart, go to http://www.caterpillar.com/en/investors/quarterly-results.html for the
downloadable version of Caterpillar 3Q 2015 earnings.

The chart above graphically illustrates reasons for the change in Consolidated Sales and Revenues between the third quarter of 2014 (at left) and the third quarter of 2015 (at right).  Items favorably impacting sales and revenues appear as upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting sales and revenues appear as downward stair steps with dollar amounts reflected in parentheses above each bar.  Caterpillar management utilizes these charts internally to visually communicate with the company's Board of Directors and employees.

Sales and Revenues

Total sales and revenues were $10.962 billion in the third quarter of 2015, compared with $13.549 billion in the third quarter of 2014, a decline of $2.587 billion, or 19 percent.  The decrease was primarily due to lower sales volume and the unfavorable impact of currency due to continued strengthening of the U.S. dollar against most currencies, with the largest impact from the euro.  While sales for both new equipment and aftermarket parts declined in all segments, most of the decrease was for new equipment.

Sales declined in all regions.  In North America, sales decreased 17 percent, primarily due to lower end-user demand across all the Energy & Transportation applications and for construction equipment.  Asia/Pacific sales declined 25 percent, primarily due to lower end-user demand for mining equipment, products used in oil and gas applications and construction equipment.  In addition, the impact of currency was unfavorable as sales, mostly in Australian dollars and Japanese yen, translated into fewer U.S. dollars.  Sales decreased 31 percent in Latin America, primarily due to widespread economic weakness across the region, which had a negative impact on demand for construction equipment and spending.  The most significant decrease was in Brazil.  In EAME, sales declined 13 percent, mostly due to the unfavorable impact of currency, as sales in euros translated into fewer U.S. dollars, and lower end-user demand for products used in mining equipment and power generation applications.

Sales decreased in all segments.  Energy & Transportation's sales declined 25 percent as sales decreased across all of the applications and the impact of currency was unfavorable.  Construction Industries' sales decreased 15 percent, primarily due to lower end-user demand and the unfavorable impact of currency.  Resource Industries' sales declined 17 percent, mostly due to lower end-user demand.  Financial Products' segment revenues were down 12 percent, primarily due to lower average earning assets and lower average financing rates.

Consolidated Operating Profit

Consolidated Operating Profit Comparison
Third Quarter 2015 vs. Third Quarter 2014

To access this chart, go to http://www.caterpillar.com/en/investors/quarterly-results.html for the
downloadable version of Caterpillar 3Q 2015 earnings.

The chart above graphically illustrates reasons for the change in Consolidated Operating Profit between the third quarter of 2014 (at left) and the third quarter of 2015 (at right).  Items favorably impacting operating profit appear as upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting operating profit appear as downward stair steps with dollar amounts reflected in parentheses above each bar.  Caterpillar management utilizes these charts internally to visually communicate with the company's Board of Directors and employees.  The bar entitled Other includes consolidating adjustments and Machinery, Energy & Transportation other operating (income) expenses.

Operating profit for the third quarter of 2015 was $713 million, a decline of $679 million from the third quarter of 2014.  The decrease in profit was primarily due to lower sales volume reflecting weak market conditions in most of the industries we serve. 

The unfavorable price realization resulted from competitive market conditions and an unfavorable geographic mix of sales. 

Although the stronger U.S. dollar had a negative impact to our sales, our sizable manufacturing presence outside of the United States resulted in a favorable impact to operating profit.  The majority of the favorability for the quarter was due to the Japanese yen, as we are a net exporter from Japan.

Manufacturing costs were favorable due to lower incentive compensation expense and improved material costs, partially offset by the unfavorable impact of cost absorption and manufacturing inefficiencies driven by declining production volume.  The unfavorable cost absorption resulted from a significant decrease in inventory in the third quarter of 2015, compared to an increase in the third quarter of 2014.

SG&A and R&D expenses were favorable due to lower incentive compensation expense, partially offset by new product introduction programs.

Restructuring costs of $101 million in the third quarter of 2015 were related to the Resource Industries' segment and other restructuring programs across the company.  In the third quarter of 2014, restructuring costs were $81 million.

Other Profit/Loss Items

Other income/expense in the third quarter of 2015 was expense of $68 million, compared with income of $117 million in the third quarter of 2014.  The unfavorable change of $185 million was primarily due to the net impact from currency translation and hedging gains and losses.  The third quarter of 2015 included net losses related to currency translation and hedging, compared to net gains in the third quarter of 2014.  Net losses in the third quarter of 2015 were primarily due to the Brazilian real and the Chinese yuan.  Net gains in the third quarter of 2014 were primarily due to the euro.

The provision for income taxes for the third quarter of 2015 reflects an estimated annual tax rate of 27 percent, compared with 29.5 percent for the third quarter of 2014 excluding the items discussed below.  The decrease is mostly due to a more favorable expected geographic mix of profits from a tax perspective in 2015, including the impact of restructuring costs primarily at higher U.S. tax rates.      

The provision for income taxes for the third quarter of 2015 also includes a $42 million net charge for prior year tax adjustments.  This net charge was offset by a benefit of $38 million related to the decrease from the second-quarter estimated annual tax rate of 28.5 percent, primarily due to a more favorable expected geographic mix of profits from a tax perspective, including the impact of restructuring costs primarily at higher U.S. tax rates. 

The provision for income taxes for the third quarter of 2014 included a benefit of $43 million to adjust the prior year's U.S. taxes.

Global Workforce

Caterpillar worldwide, full-time employment was 108,922 at the end of the third quarter of 2015 compared with 114,352 at the end of the third quarter of 2014, a decrease of 5,430 full-time employees.  The flexible workforce decreased by 2,658 for a total decrease in the global workforce of 8,088.  The decrease was primarily the result of restructuring programs and lower production volumes.

SEGMENT RESULTS

Construction Industries' sales were $3.792 billion in the third quarter of 2015, a decrease of $679 million, or 15 percent, from the third quarter of 2014.  The decrease in sales was mostly due to lower volume and the unfavorable impact of currency.  While sales declined for both new equipment and aftermarket parts, most of the decrease was for new equipment.

• Sales volume declined primarily due to lower deliveries to end users.
• The unfavorable impact of currency was largely due to the euro, Japanese yen and Brazilian real.

Sales decreased in all regions.

• In Asia/Pacific, the sales decline was primarily due to lower sales in China and Japan. In China, the lower sales resulted mostly from continued weak residential and non-residential construction activity. In Japan, the weaker yen contributed to the decline as sales in yen translated into fewer U.S. dollars.
• In Latin America, dealer deliveries were down in most countries in the region, primarily in Brazil, due to continued weak construction activity resulting from depressed economic conditions. In addition, sales declined slightly due to the unfavorable impact of currency from the Brazilian real.
• Sales declined slightly in North America as weakness in oil and gas-related construction was largely offset by stronger activity in residential and non-residential building construction.
• Sales declined in EAME due to the unfavorable impact of currency, as sales in euros translated into fewer U.S. dollars. Lower end-user demand, primarily in Russia as a recession and sanctions slowed construction activity, was more than offset by the favorable changes in dealer inventories, which were about flat in third quarter of 2015, compared to a decrease in the third quarter of 2014.

Construction Industries' profit was $378 million in the third quarter of 2015, compared with $483 million in the third quarter of 2014.  The decrease in profit was primarily due to lower sales volume and unfavorable price realization resulting from competitive market conditions and an unfavorable geographic mix of sales.  The decline was partially offset by favorable manufacturing costs and lower SG&A and R&D expenses.  The reduction in manufacturing costs and SG&A and R&D expenses was primarily due to lower incentive compensation expense.

Resource Industries' sales were $1.796 billion in the third quarter of 2015, a decrease of $376 million, or 17 percent, from the third quarter of 2014.  The decline was primarily due to lower sales volume and the unfavorable impact of currency.  Sales were lower for both new equipment and aftermarket parts.  We believe some mining companies are continuing to delay maintenance and rebuild activities.

The sales decrease was primarily due to lower end-user demand across all regions.  In Asia/Pacific, the unfavorable impact of currency due to the Australian dollar also contributed to the decline.  Commodity prices remained weak, and mining customers continued to focus on improving productivity in existing mines and reducing their total capital expenditures, as they have for the last several years.  As a result, sales and new orders in Resource Industries are continuing to weaken. 

Resource Industries incurred a loss of $68 million in the third quarter of 2015, compared with profit of $122 million in the third quarter of 2014.  The unfavorable change was primarily the result of lower sales volume and higher spending for new product introductions, partially offset by favorable warranty, lower incentive compensation expense and improved material costs.

Energy & Transportation's sales were $4.213 billion in the third quarter of 2015, a decrease of $1.372 billion, or 25 percent, from the third quarter of 2014.  The decrease was primarily the result of lower sales volume and the unfavorable impact of currency, mostly from the euro.  Sales decreased in all applications.

• Oil and Gas – Sales decreased in much of the world due to substantially lower oil prices. The decline was most pronounced in equipment used for well servicing and drilling, with the most significant impact in North America, our largest market for well servicing. Demand for reciprocating engines used in gas compression applications was also down, but not as sharply.
• Transportation – Sales decreased in North America and were about flat in all other geographic regions. In North America, sales weakened primarily due to the absence of a Tier IV locomotive offering.
• Power Generation – Sales decreased in EAME and North America and were about flat in Asia/Pacific and Latin America. In EAME, sales decreased primarily due to lower end-user demand and the negative impact of currency. In North America, sales decreased largely because of unfavorable changes in dealer inventories as dealers increased inventories in the third quarter of 2014 and decreased inventories in the third quarter of 2015.
• Industrial – Sales were lower in all regions. Lower sales in EAME were mostly the result of lower demand and the unfavorable impact of currency. In North America, Asia/Pacific and Latin America, the decline in sales was primarily due to lower end-user demand for most industrial applications.

Energy & Transportation's profit was $635 million in the third quarter of 2015, compared with $1.151 billion in the third quarter of 2014.  The decrease was due to lower sales volume.  Lower incentive compensation expense was about offset by the unfavorable impact of cost absorption and variable manufacturing inefficiencies driven by declining production volume.  The unfavorable cost absorption resulted from a decrease in inventory in the third quarter of 2015, compared to an increase in the third quarter of 2014.

Financial Products' revenues were $752 million in the third quarter of 2015, a decrease of $99 million, or 12 percent, from the third quarter of 2014.  The decline was primarily due to lower average earning assets and lower average financing rates.  Average earning assets were down in Asia/Pacific, Latin America and EAME, partially offset by higher average earning assets in North America.  Average financing rates were lower across all geographic regions.

Financial Products' profit was $207 million in the third quarter of 2015, compared with $220 million in the third quarter of 2014.  The decrease was primarily due to a $26 million decrease in net yield on average earning assets and a $21 million unfavorable impact from lower average earning assets, partially offset by the absence of $32 million of unfavorable out-of-period adjustments in the third quarter of 2014 related to interest rate swap contracts and the provision for credit losses. 

At the end of the third quarter of 2015, past dues at Cat Financial were 2.68 percent, compared with 2.81 percent at the end of the third quarter of 2014.  Write-offs, net of recoveries, were $69 million for the third quarter of 2015, compared with $22 million for the third quarter of 2014.  The increase in write-offs, net of recoveries, was primarily driven by the mining and marine portfolios.

As of September 30, 2015, Cat Financial's allowance for credit losses totaled $348 million, or 1.26 percent of net finance receivables, compared with $405 million, or 1.37 percent of net finance receivables at September 30, 2014.  The allowance for credit losses at year-end 2014 was $401 million, or 1.36 percent of net finance receivables.

Corporate Items and Eliminations

Expense for corporate items and eliminations was $573 million in the third quarter of 2015, a decrease of $168 million from the third quarter of 2014.  Corporate items and eliminations include: corporate-level expenses; restructuring costs; timing differences, as some expenses are reported in segment profit on a cash basis; retirement benefit costs other than service cost; currency differences for ME&T, as segment profit is reported using annual fixed exchange rates; and inter-segment eliminations. 

The decrease in expense from the third quarter of 2014 was primarily due to timing differences.

2015 Outlook

The 2015 outlook for sales and revenues is about $48 billion, and that is unchanged from the outlook that was included in the September 24 announcement of new restructuring actions.  Sales in the first half of 2015 benefited from a strong order backlog for reciprocating engines for oil and gas applications that was in place when the year started.  We expect the significant declines that occurred in the third quarter to continue into the fourth quarter.  While we expect sales and revenues to be about $48 billion, that is rounded up to the nearest billion.  With one quarter to go, it is likely that we will end the year within a percent or two of the "about $48 billion" outlook, with $48 billion the likely top end. 

The outlook for profit per share is $3.70, or $4.60 excluding restructuring costs.  The expectation for 2015 restructuring costs has increased significantly, from about $250 million to about $800 million, and is a result of the additional restructuring actions.

The previous outlook for profit per share was provided in late July along with second-quarter 2015 financial results.  At that time, the outlook for profit per share was $4.70, or $5.00 excluding restructuring charges, and was based on sales and revenues of about $49 billion.

2016 Preliminary Sales and Revenues Outlook

We expect world economic growth to be up slightly next year, from 2.4 percent in 2015 to 2.8 percent in 2016.  We expect the improvement to be led by the United States and Europe, partially offset by slower growth in China and Russia and continued recession in Brazil.  As a result, we expect prices for key commodities in 2016 to be close to current levels.  While we expect a small improvement in world economic growth, we do not expect it will be enough to improve the key industries we serve.  We do not expect construction or commodity-related industries like oil and gas and mining to improve.

2016 sales and revenues are expected to be about 5 percent below 2015:

• We expect Construction Industries' sales to be flat to down 5 percent, with some improvement in developed countries offset by declining sales in developing countries.
• Energy & Transportation's sales are expected to be down 5 to 10 percent as a result of continuing weakness in oil and gas. Most of the decline is because sales in the first half of 2015 benefited from substantial order backlog that was in place when the year started. In 2016, we expect a full year of weakness in oil and gas.
• Continued weakness in mining is expected to result in a decline in Resource Industries' sales of about 10 percent.