Caterpillar Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; includes fourth-quarter results. Caterpillar manufactures construction and mining equipment, engines, turbines and locomotives, and provides customer and dealer financing through Financial Products.
Financial performance
| Metric | 2015 | 2014 |
|---|---|---|
| Sales and revenues | $47.011 billion | $55.184 billion |
| Operating profit | $3.256 billion | $5.328 billion |
| Profit attributable to common stockholders | $2.102 billion | $3.695 billion |
| Diluted earnings per share | $3.50 | $5.88 |
| Operating margin | 6.9% | 9.7% |
| Operating cash flow | $6.675 billion | $8.057 billion |
| Cash and short-term investments at year-end | $6.460 billion | $7.341 billion |
| Total debt at year-end | $38.093 billion | $39.285 billion |
Debt included $9.530 billion for Machinery, Energy & Transportation (ME&T) and $28.563 billion for Financial Products. ME&T’s debt-to-capital ratio was 39.1%, within its 30%–45% target range. Consolidated available credit was $6.990 billion, with no borrowings under the global credit facilities. Inventories fell approximately $2.5 billion during the year.
Annual segment sales declined across the major businesses: Construction Industries $16.568 billion (down 14%); Resource Industries $7.551 billion (down 15%); Energy & Transportation $17.938 billion (down 17%); and Financial Products revenues $2.864 billion (down 6%). Resource Industries recorded an $88 million operating loss, versus $404 million profit in 2014.
Fourth-quarter sales and revenues were $11.030 billion, down 23% year over year. Caterpillar reported a net loss of $87 million, or $0.15 per diluted share, compared with profit of $757 million, or $1.23 per diluted share, in fourth-quarter 2014. Fourth-quarter operating loss was $114 million.
Material changes and drivers
- Annual sales and revenues fell 15%; management attributed the decline chiefly to weaker economic growth, substantially lower commodity prices and $1.7 billion of unfavorable currency impact.
- Sales declined in all regions and reportable segments. Lower oil prices sharply weakened oil-and-gas demand; oil-and-gas new orders in Energy & Transportation were down close to 90% from 2014. Mining customers continued to reduce investment and defer maintenance.
- Operating profit declined 39%. Lower volume and restructuring costs were partly offset by lower manufacturing costs, reduced incentive compensation and lower SG&A and R&D expenses.
- Restructuring costs were $908 million in 2015, compared with $441 million in 2014; the 2015 after-tax effect was $1.14 per share. Excluding restructuring costs, diluted EPS was $4.64 in 2015 versus $6.38 in 2014 (company non-GAAP measure).
- Financial Products profit declined to $809 million from $901 million. Cat Financial’s year-end past-due rate was 2.14%, versus 2.17%; net write-offs increased to $155 million from $104 million. Its credit-loss allowance was $338 million, or 1.22% of net finance receivables.
Outlook, risks and unusual items
- Management expected 2016 sales and revenues to be below 2015, citing no expected improvement in global growth or commodity prices, continued U.S. dollar strength and further dealer inventory reductions. Management expected negative price realization to continue.
- Management forecast Resource Industries sales to decline approximately 15%–20% in 2016. It expected about $400 million of 2016 restructuring costs and approximately $700 million of operating-cost benefits from restructuring actions in 2016.
- Management expected 2016 ME&T capital expenditures below 2015 and approximately $150 million of required pension contributions. It estimated the 2016 pension accounting changes would reduce benefit expense by about $425 million before remeasurement gains or losses; the filing also estimated a $180 million expense reduction from a separate calculation-method change.
- In September 2015, the company announced broad workforce and facility actions. Approximately 5,000 positions had been eliminated or were scheduled to leave by January 1, 2016; restructuring liabilities were $483 million at year-end.
- Resource Industries goodwill remained unimpaired in the 2015 annual test, but the Hauling & Extraction reporting unit’s fair value exceeded carrying value by only about 15%. Further deterioration in mining assumptions could raise impairment risk.
- Legal and tax matters include a U.S. grand jury investigation involving subsidiaries, cash movements and parts transactions; an ongoing SEC investigation into Bucyrus goodwill accounting; Brazilian antitrust allegations; and a Progress Rail criminal investigation. Management said outcomes or potential losses could not be reliably estimated for several matters, while it did not expect material consolidated effects. The SEC concluded its separate Caterpillar SARL investigation without recommending enforcement action.
- The IRS proposed approximately $1 billion in tax increases and penalties for 2007–2009, primarily concerning foreign subsidiary parts transactions and foreign tax credits. Caterpillar is contesting the proposals and said it did not expect a material adverse effect; gross unrecognized tax benefits were $968 million at year-end.
Important facts for investors to verify
- Whether 2016 demand, dealer inventory movements, pricing and currency effects matched management’s weak outlook, especially in oil and gas and mining.
- Whether restructuring spending and planned savings were realized on schedule, and how further workforce or facility actions affected cash flow and margins.
- Cat Financial credit quality, especially mining and marine exposures, write-offs, repossessions and the assumptions underlying its credit-loss allowance.
- Progress and eventual outcomes of the tax, legal and regulatory matters, including any changes to loss estimates or reserves.
- Goodwill headroom in Resource Industries and the sensitivity of valuations to commodity prices and long-term cash-flow assumptions.
- Debt maturities, refinancing access and liquidity needs across ME&T and Financial Products; their funding profiles differ materially.
The independent auditor issued an unqualified opinion on the consolidated financial statements and concluded internal control over financial reporting was effective as of December 31, 2015.