Caterpillar Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Caterpillar’s businesses include machinery, energy and transportation operations (ME&T) and equipment financing and insurance (Financial Products). Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Sales and revenues | $9,160 | $10,962 | $28,963 | $35,981 |
| Operating profit | $481 | $925 | $1,760 | $3,960 |
| Operating margin | 5.3% | 8.4% | 6.1% | 11.0% |
| Profit attributable to common stockholders | $283 | $559 | $1,104 | $2,606 |
| Diluted profit per share | $0.48 | $0.94 | $1.88 | $4.30 |
| Operating cash flow | Not stated in the filing text for the quarter | Not stated in the filing text for the quarter | $3,963 consolidated; $1,783 ME&T | $4,864 consolidated; $3,446 ME&T |
- Q3 revenue fell 16% year over year; nine-month revenue fell 20%. ME&T sales drove the decline, while Financial Products revenue was approximately flat in Q3 and down 4% year to date.
- Q3 profit per share declined 49%; nine-month profit per share declined 56%. Lower sales volume was the primary earnings pressure.
- Restructuring costs were $324 million in Q3 and $624 million year to date, versus $98 million and $219 million in the comparable 2015 periods. Management reported diluted EPS excluding restructuring of $0.85 in Q3 and $2.58 year to date; these are non-GAAP measures.
- Consolidated operating cash flow was $3.963 billion for nine months, down from $4.864 billion. Management attributed the decline principally to lower ME&T profit, employee separation payments and less inventory reduction, partly offset by working-capital changes.
Financial position and liquidity
- At September 30, cash and short-term investments were $6.113 billion, down $347 million from year-end 2015. Total assets were $76.402 billion and stockholders’ equity was $15.715 billion.
- Total debt was $37.110 billion, down $903 million from year-end 2015: $8.985 billion ME&T and $28.125 billion Financial Products. ME&T’s debt-to-capital ratio was 37.1%, within management’s 30%–45% target range, versus 39.0% at year-end.
- Available credit was $7.044 billion, including $2.501 billion allocated to ME&T. No borrowings were outstanding under the $10.5 billion global credit facilities. The filing reports compliance with applicable facility covenants.
- Dividends paid were $1.348 billion for the first nine months; management said the quarterly dividend paid was $0.77 per share. No common shares were repurchased during the period.
Changes versus the prior comparable period
- Sales declined across Construction Industries, Resource Industries, and Energy & Transportation. For Q3, segment sales fell 13%, 25%, and 19%, respectively; Resource Industries reported a $77 million loss versus a $42 million loss in Q3 2015.
- Management cited weak commodity prices, subdued demand in mining, oil and gas and rail, economic weakness in developing markets, competitive pricing, and lower new-equipment sales. Q3 sales declined in every region; Latin America was down 21% and North America down 18%.
- Cost reductions, lower incentive compensation and improved material costs partly cushioned the volume-related decline. Q3 short-term incentive compensation expense was zero, compared with approximately $120 million in Q3 2015.
- ME&T operating cash flow was $1.783 billion year to date, compared with $3.446 billion. Financial Products operating cash flow was $1.258 billion, compared with $1.103 billion.
Outlook, unusual items and risks
- Management expected approximately $800 million of restructuring costs for full-year 2016, with about $800 million of operating-cost benefits in 2016 versus 2015. It anticipated additional workforce actions and manufacturing facility consolidations or closures through 2018. The filing text does not provide a clear numerical full-year sales or profit forecast.
- Management expected substantial dealer inventory reductions in Q4, continued competitive pricing pressure, and no further price deterioration from Q3 levels. It expected rail weakness to persist into 2017 and did not anticipate a significant Q4 demand recovery from current oil prices.
- Pension exposure: Based on September 30 market conditions, Caterpillar estimated a possible year-end increase of approximately $3 billion in underfunded pension and postretirement status and pre-tax mark-to-market losses of approximately $3 billion (about $2 billion after tax, or $3.50 per share). The actual amount depended on year-end discount rates, plan returns and other assumptions. The estimate was not a recorded Q3 charge. Full-year 2016 plan contributions were expected to be about $350 million; 2017 contributions about $550 million.
- Goodwill: Management identified the Surface Mining & Technology reporting unit as having the greatest risk of failing the first step of its Q4 2016 goodwill impairment test; no interim triggering event was identified at September 30. Any impairment would be a non-cash charge.
- Tax and legal matters: Up to approximately $230 million of state deferred tax assets could require additional valuation allowances within 12 months. The IRS proposed about $1 billion of tax increases and penalties for 2007–2009 returns, which Caterpillar is contesting. The company also disclosed ongoing U.S. investigations, a Brazilian antitrust investigation and a Progress Rail investigation; outcomes and potential losses were not estimable, though management did not expect material adverse effects.
- Q3 restructuring included $158 million of long-lived asset impairments. Caterpillar discontinued on-highway vocational truck production and took further Resource Industries actions, including ending track-drill production and considering strategic alternatives for room-and-pillar products.
- Accounting changes affected comparability: pension actuarial gains and losses and asset returns are now recognized differently, with comparative periods retrospectively adjusted. Separately, the new pension-cost yield-curve method reduced pension and OPEB expense by $45 million in Q3 and $135 million year to date, increasing year-to-date EPS by $0.15.
Important facts for investors to verify
- Whether end-user demand, dealer inventory reductions and order backlog stabilize; backlog was $11.6 billion at Q3-end, about $2.1 billion below a year earlier.
- Whether the expected $800 million restructuring program delivers the stated cost benefits, and whether additional charges or impairments arise.
- The December 31 pension measurement, including the discount rate, actuarial loss and required contributions.
- The outcome of the Q4 goodwill impairment test for Surface Mining & Technology and developments in the disclosed tax, regulatory and legal matters.
- Cat Financial portfolio credit trends: past-due accounts were 2.77% at Q3-end versus 2.68% a year earlier; non-accrual customer receivables were $624 million versus $485 million at year-end 2015.