Caterpillar Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; includes fourth-quarter results. Caterpillar manufactures construction and mining equipment, engines, turbines and locomotives, and provides customer and dealer financing.
Financial performance
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Sales and revenues | $38.537 billion | $47.011 billion |
| Operating profit | $498 million | $3.785 billion |
| Profit (loss) attributable to common stockholders | $(67) million | $2.512 billion |
| Diluted earnings per share | $(0.11) | $4.18 |
| Operating cash flow | $5.608 billion | $6.675 billion |
| Cash and short-term investments at year-end | $7.168 billion | $6.460 billion |
| Total debt at year-end | $36.783 billion | $38.013 billion |
| Total assets at year-end | $74.704 billion | $78.342 billion |
Revenue fell 18%; operating profit fell 87%. Operating margin was approximately 1.3%, compared with 8.1% in 2015, calculated as reported operating profit divided by sales and revenues. The company reported a $67 million GAAP loss, while its non-GAAP adjusted profit per share was $3.42, versus $5.35 in 2015; these adjustments exclude restructuring, pension and other postemployment benefit (OPEB) mark-to-market losses, goodwill impairment and a deferred-tax valuation allowance.
Fourth-quarter sales and revenues were $9.574 billion, down 13% year over year. The company reported a $1.171 billion net loss, or $2.00 per diluted share, compared with a $94 million loss, or $0.16 per share, in Q4 2015. Fourth-quarter operating loss was $1.262 billion.
Segment results and operating drivers
- Construction Industries: Sales of $15.612 billion, down 12%; profit of $1.650 billion, down 12%. Lower end-user demand, dealer inventory reductions and competitive pricing weighed on results.
- Resource Industries: Sales of $5.726 billion, down 26%; loss of $1.047 billion, including a $595 million goodwill impairment. Mining investment remained weak; aftermarket parts sales improved sequentially in each of the final three quarters.
- Energy & Transportation: Sales of $14.411 billion, down 22%; profit of $2.222 billion, down 34%. Oil and gas and rail weakness were major pressures.
- Financial Products: Revenues of $2.993 billion, down 3%; profit of $702 million, down 13%. Past-due accounts rose to 2.38% from 2.14%; net write-offs declined to $123 million from $155 million.
All regions reported lower full-year sales: North America declined 18%, Latin America 28%, EAME 21% and Asia/Pacific 9%. Asia/Pacific was the only region with higher Q4 sales, primarily reflecting stronger construction demand in China.
Cash flow, liquidity and capital
- Consolidated operating cash flow was $5.608 billion; Machinery, Energy & Transportation (ME&T) generated $3.857 billion. The filing says ME&T cash flow covered capital expenditures and dividends.
- Cash and short-term investments increased $708 million during the year. Year-end cash included approximately $5.2 billion held by non-U.S. subsidiaries; repatriation to the U.S. could generally incur U.S. tax, net of available credits.
- Year-end total current assets were $31.967 billion and current liabilities were $26.132 billion. These figures include Financial Products financing balances and should be interpreted in light of the finance business.
- Available credit was $6.707 billion, including $2.601 billion allocated to ME&T; no borrowings were outstanding under the $10.5 billion global credit facilities. Caterpillar’s Moody’s ratings were downgraded in December 2016 to A3 and Prime-2.
- Dividends paid were $1.799 billion, or $3.08 per share. No common shares were repurchased in 2016. ME&T debt-to-capital was 41.0%, within management’s 30%–45% target range.
Changes, outlook and notable items
- The sales decline reflected weak demand across construction, mining, oil and gas, and rail, as well as lower dealer inventories and unfavorable price realization. Management said dealer inventory reductions were not expected to be as large in 2017 as in 2016.
- 2016 included $1.019 billion of restructuring costs, $985 million of pension/OPEB mark-to-market losses, a $595 million Resource Industries goodwill impairment and a $141 million non-cash deferred-tax valuation allowance charge. The company changed pension/OPEB accounting in 2016 to recognize actuarial gains and losses immediately; prior periods were recast.
- Management expected approximately $500 million of restructuring costs and approximately $450 million of cost reductions in 2017. ME&T capital expenditures were expected to be about flat with 2016; expected 2017 pension and OPEB contributions were approximately $610 million. The supplied filing text does not provide a clear consolidated 2017 sales or earnings forecast.
- Management saw potentially positive Resource Industries indicators—including improved quoting and order activity and sequential parts-sales growth—but said sustained commodity prices and recovery were needed to lift equipment demand. It expected North American rail weakness and oil-price-related investment constraints to persist into 2017.
- Backlog was approximately $12.1 billion at year-end, down $0.9 billion from 2015; about $3.4 billion was not expected to be filled in 2017.
- Significant uncertainties include cyclical demand and commodity prices, competitive pricing, dealer inventory decisions, currency movements, pension assumptions and funding, Cat Financial credit quality and access to funding, and further restructuring execution.
- Legal and tax matters include an IRS dispute over Caterpillar SARL parts transactions, with approximately $2 billion of proposed tax and penalties that Caterpillar is contesting; grand jury and SEC investigations; and a Brazilian antitrust investigation. The company stated it could not predict outcomes or estimate potential losses for several investigations and generally did not expect a material consolidated impact. A Progress Rail investigation was described as involving a probable loss and discussions toward potential resolution.
Investor verification priorities
- Review the reconciliation and assumptions behind adjusted EPS of $3.42, especially the recurring cash and earnings effects of restructuring and pension/OPEB remeasurement.
- Track end-user demand, dealer inventories, pricing and backlog conversion by segment and region, particularly mining, oil and gas, and rail.
- Assess Cat Financial delinquencies, repossessions, credit-loss allowance and funding access; verify the increase in past dues and the concentration of weaker exposures.
- Monitor liquidity, refinancing needs, credit ratings and covenant headroom, distinguishing ME&T debt from Financial Products debt.
- Follow restructuring charges, projected savings, pension contributions and the remaining goodwill impairment risk in Resource Industries.
- Check subsequent disclosures for developments in the IRS dispute, government investigations and other legal contingencies.