Caterpillar Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The unaudited filing covers Caterpillar’s machinery, energy and transportation businesses and its Financial Products financing operations. Unless noted, amounts are U.S. dollars.
Financial results and liquidity
- Third quarter: Sales and revenues were $10.962 billion, down 19% year over year. Profit was $368 million, down 64%; diluted EPS was $0.62, down from $1.63. Operating profit was $713 million versus $1.392 billion. Approximate operating margin was 6.5% versus 10.3%; net margin was 3.4% versus 7.5%.
- First nine months: Sales and revenues were $35.981 billion, down 12%; profit was $2.189 billion, down 25%; diluted EPS was $3.62 versus $4.64. Operating profit was $3.370 billion versus $4.265 billion. Approximate operating margin was 9.4% versus 10.4%; net margin was 6.1% versus 7.2%.
- Cash flow: Nine-month operating cash flow was $4.864 billion versus $6.186 billion. Machinery, Energy & Transportation (ME&T) operating cash flow was $3.446 billion versus $5.384 billion; Financial Products’ was $1.103 billion versus $1.141 billion. Consolidated investing cash outflow was $1.973 billion and financing cash outflow was $4.055 billion.
- Cash and liquidity: Cash and short-term investments were $6.046 billion at September 30, down $1.295 billion from year-end 2014. The company reported $7.832 billion of available credit and no borrowings under its $10.5 billion global credit facilities. Current assets were $35.280 billion and current liabilities $25.833 billion.
- Debt and capital: Total debt was $37.54 billion, down $1.74 billion from year-end 2014. ME&T debt-to-capital was 37.4%, unchanged from year-end and within the company’s 30%–45% target range. Total stockholders’ equity was $15.968 billion.
- Capital allocation: Nine-month dividends paid were $1.309 billion; share repurchases were $2.025 billion. Capital expenditures were $2.197 billion, including equipment leased to others. The company reported $1.47 of dividends declared per share for the nine-month period.
Material changes and business drivers
- Q3 sales declined across all major segments and regions. Management cited lower sales volume and unfavorable currency translation, particularly the stronger U.S. dollar. Lower demand was most pronounced in oil and gas, mining, and construction-related markets.
- Q3 segment sales and profit: Construction Industries sales were $3.792 billion and profit $378 million; Resource Industries sales were $1.796 billion and recorded a $68 million loss; Energy & Transportation sales were $4.213 billion and profit $635 million. Financial Products revenue was $752 million and profit $207 million.
- For the first nine months, ME&T sales fell 12%; Financial Products revenue fell 7%. Resource Industries profit fell to $17 million from $379 million, while Energy & Transportation profit decreased to $2.527 billion from $3.012 billion.
- Q3 consolidated operating profit fell 49%. Lower volume and unfavorable price realization and geographic mix weighed on results. Cost savings, lower incentive compensation and material costs, and favorable currency effects partly offset the decline.
- Other income/expense was a $68 million expense in Q3 versus $117 million of income a year earlier, largely reflecting currency translation and hedging. For the first nine months, other income was $76 million versus $236 million; 2015 included a $120 million pretax gain on the sale of the company’s remaining interest in its former third-party logistics business.
Outlook, commentary, risks and unusual items
- Management expected Q4 2015 profit to be lower than Q3, primarily because of higher restructuring costs. It expected weaker oil-related sales to continue into 2016, no improvement in Resource Industries sales volume in Q4 2015 or 2016, and lower turbine sales in 2016. Gas-compression sales were expected to increase in 2016.
- On September 24, Caterpillar announced significant restructuring and cost-reduction actions. It expected approximately $800 million of 2015 restructuring costs, including about $400 million in Q4 related to the U.S. voluntary retirement program; the full-year estimate was approximately $0.90 per share. Management expected the actions to benefit operating costs by about $750 million in 2016, with further actions contemplated through 2018. Nine-month restructuring and related costs were $226 million; Q3 costs and related costs were $101 million.
- Management expected 2015 capital expenditures to be about the same as 2014’s $1.6 billion and pension contributions of approximately $180 million, all required. It anticipated further inventory declines in 2015. Firm order backlog was approximately $13.7 billion at September 30, down from $17.3 billion at December 31, 2014.
- Key operating exposures include persistently weak commodity prices and mining investment, low oil prices, global economic weakness, competitive pricing, foreign exchange movements, dealer inventory changes and weaker construction demand in China. Cat Financial’s non-performing finance receivables rose to $608 million from $468 million at year-end; Q3 net write-offs were $69 million versus $22 million a year earlier. Its allowance was $348 million, or 1.26% of net finance receivables, and included a reduction arising from revised loss-emergence and loss-given-default assumptions.
- The IRS proposed approximately $1 billion of tax increases and penalties for 2007–2009, principally involving parts transactions of Caterpillar SARL and foreign tax credits. Caterpillar is contesting the proposals and said it did not expect a material adverse effect. The filing also describes ongoing U.S. grand jury and SEC investigations, a Brazilian competition investigation, and a Progress Rail criminal investigation; outcomes and potential losses were not estimable, although the company generally did not expect material adverse effects. For the Progress Rail matter, the company said a loss was probable.
- Management estimated that pension underfunding could increase by approximately $800 million at year-end based on September 30 market conditions; the final measurement was subject to year-end assumptions and asset returns. A separate unusual item was the $42 million net Q3 tax charge related to unrecognized tax benefits, partly offset by a $26 million benefit for prior-year U.S. refund claims.
Important facts for investors to verify
- Whether demand, orders and backlog stabilize in mining, oil and gas, construction, and Energy & Transportation markets—and whether the anticipated 2016 trends materialize.
- Actual restructuring charges, timing, workforce reductions and realized cost savings compared with the $800 million 2015 cost estimate and $750 million 2016 operating-cost benefit.
- Cat Financial credit quality, especially non-performing receivables and write-offs, and the effect of revised allowance-model assumptions on reserves.
- Developments in the IRS tax dispute and the U.S., SEC, Brazilian and Progress Rail investigations, including any change in estimated exposure.
- Year-end pension funding and liabilities, foreign-exchange effects, cash generation, debt levels and continued share repurchases and dividends.