Caterpillar Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with the three months ended March 31, 2015 unless otherwise noted. Amounts are in U.S. dollars. Caterpillar manufactures machinery, engines and related products and provides customer and dealer financing.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Sales and revenues | $9.461 billion | $12.702 billion; down 26% |
| Operating profit | $494 million | $1.702 billion; down 71% |
| Operating margin | 5.2% | 13.4% (calculated from reported figures) |
| Profit attributable to common stockholders | $271 million; diluted EPS $0.46 | $1.245 billion; diluted EPS $2.03 |
| Net margin | 2.9% | 9.8% (calculated from reported figures) |
| Operating cash flow | $489 million | $1.270 billion |
| Cash and short-term investments | $5.886 billion at March 31 | $6.460 billion at December 31, 2015 |
| Total debt | $38.36 billion | Up $350 million from year-end 2015 |
| Stockholders’ equity | $15.753 billion | $14.885 billion at year-end 2015 |
Consolidated investing and financing activities used $572 million and $502 million, respectively. Cash declined $574 million during the quarter. Machinery, Energy & Transportation (ME&T) operating cash flow was $218 million, versus $1.042 billion; Financial Products operating cash flow was $355 million, versus $276 million.
ME&T debt-to-capital was 37.7%, down from 39.0% at year-end and within management’s 30%–45% target range. Available credit was $6.428 billion, including $2.961 billion allocated to ME&T. The company reported no borrowings under its $10.5 billion global credit facilities. It paid $448 million in dividends, or $0.77 per share; no shares were repurchased under the repurchase authorization in the quarter.
Material changes and business drivers
- Sales declined in every major segment. ME&T sales were $8.780 billion, down 27%; Financial Products revenues were $681 million, down 8%.
- Construction Industries sales fell 19% to $4.043 billion and segment profit fell 41% to $440 million. Resource Industries sales fell 26% to $1.449 billion, and the segment moved from $96 million profit to a $96 million loss. Energy & Transportation sales fell 33% to $3.278 billion and profit fell 60% to $410 million.
- Management attributed the decline chiefly to lower sales volume and unfavorable product mix amid weak commodity markets and economic conditions, with additional pressure from price realization and currency. The largest sales reductions were in oil and gas, transportation, mining and construction-related equipment.
- Financial Products profit decreased 26% to $168 million, reflecting lower net yield and earning assets and higher credit-loss provision. Cat Financial past-due receivables were 2.78% at quarter-end, versus 3.08% a year earlier and 2.14% at year-end 2015. Net write-offs were $31 million, versus $12 million.
- Dealer machine and engine inventories increased about $300 million in Q1 2016. Management expected dealers to continue reducing inventories during 2016. Order backlog was approximately $13.1 billion, broadly unchanged from year-end but down about $3.5 billion from Q1 2015; $4.1 billion was not expected to ship within 12 months.
Outlook, management commentary and notable items
- The filing does not provide a clear full-year sales or EPS forecast. Management said weak conditions persisted across key end markets and did not expect current oil prices to drive a 2016 demand turnaround. It expected competitive pricing pressure to continue through the year, particularly in Construction and Resource Industries, while most year-over-year pricing weakness was expected in the first half.
- Management expected approximately $550 million of restructuring costs in 2016 and about $700 million of lower operating costs in 2016 versus 2015 from restructuring and cost-reduction actions. Q1 restructuring charges were $161 million, with a reported after-tax EPS impact of $0.21; diluted EPS excluding these charges was $0.67, a non-GAAP measure. An additional $37 million of restructuring-related costs, primarily accelerated depreciation and inventory write-downs, was incurred, mainly in cost of goods sold.
- Caterpillar decided to discontinue production of on-highway vocational trucks and estimated $120 million of costs for that plan, of which $74 million was recognized in Q1. About 5,300 positions had been eliminated since the September 2015 restructuring announcement. Management said ME&T 2016 capital expenditures were expected to be lower than 2015 and expected required pension contributions of approximately $150 million.
- Reported results reflect accounting changes. Retrospective adoption of the pension accounting principle increased Q1 2016 reported profit by $70 million and diluted EPS by $0.12 versus the previous method. Separately, a new yield-curve method for pension service and interest costs reduced Q1 pension and postretirement expense by $45 million and increased EPS by $0.06 versus the prior method.
- Q1 2015 included a $120 million pretax gain on the sale of Caterpillar’s remaining interest in its former logistics business; its absence contributed to the year-over-year comparison. Q1 2016 also included no income from that gain, and reported other income/expense was zero.
- Management reported no goodwill impairment in Q1. The Surface Mining & Technology reporting unit’s estimated fair value exceeded carrying value by about 15% at January 1, 2016; the filing identifies further deterioration in mining or long-term forecasts as a potential impairment risk.
- Legal and regulatory matters include U.S. grand jury and SEC investigations, a Brazilian antitrust investigation, and a Progress Rail investigation involving alleged railcar inspection and environmental/business-practice issues. Caterpillar said it could not predict outcomes or reasonably estimate potential losses for several matters; it believed they would not materially adversely affect consolidated results, financial position or liquidity. The company stated a loss was probable in the Progress Rail matter but did not expect a material adverse effect.
- The IRS proposed approximately $1 billion in tax increases and penalties for 2007–2009 returns and a related loss carryback; Caterpillar is contesting the principal issues through IRS Appeals and said it did not expect a material adverse effect. The filing also disclosed guarantee exposure with maximum potential future payments of $717 million; the recorded related liability was $12 million, and management said no significant guarantee losses were anticipated.
Most important facts for investors to verify
- Whether weak demand, commodity prices, dealer inventory reductions and pricing competition continue to depress sales and margins, especially in mining, oil and gas, rail and construction.
- Whether the forecast restructuring charges and expected $700 million operating-cost benefit are realized, and how much is offset by implementation costs or further actions.
- Cat Financial credit trends, including past-due balances, write-offs, provisions and the concentration of delinquency exposure in regional and equipment-finance portfolios.
- Cash generation, debt levels, credit-facility availability and the sustainability of dividends during the downturn.
- Developments in the pending investigations and tax dispute, along with the assumptions supporting goodwill valuations and the stated impairment headroom.