Cat reports profit for 2014; says 2015 will be 'a tough year'

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It was less than two months ago that Doug Oberhelman warned that dropping oil prices, while good for consumers, would wreak short-term havoc for Caterpillar Inc.

On Tuesday, the Caterpillar chairman and CEO’s warning was repeated when the company gave a less-than-rosy outlook for 2015 while reporting fourth quarter 2014 sales were down from the previous year. Oberhelman said 2015 will be “a tough year” for Caterpillar.

It was news that caused quick and sharp reaction on Wall Street despite the fact the company had what he called an overall good year in 2014.

Caterpillar’s 2014 profit was $3.695 billion, down 2 percent from $3.789 billion in 2013. Sales and revenues for the year were $55.184 billion, slightly off from $55.656 billion in 2013. However, profit per share was $5.88 a share, up from $5.75 a share in 2013. Excluding restructuring costs the 2014 profit per share was $6.38, compared with $5.97 a share in 2013.

Oberhelman said profit per share was higher because of actions the company took to control costs. “Overall, we had many positives and a better year in 2014 than 2013,” he said. “Our emphasis on cost management, operational execution and cash flow helped us deliver better profit per share than both 2013 and the 2014 outlook we provided at the start of the year. At the mid-point of our original 2014 outlook, we anticipated sales and revenues of $56 billion and profit of $5.30 per share, or $5.85 per share excluding restructuring costs. We ended the year with sales and revenues within 2 percent of $56 billion and delivered much better profit per share. In addition to improved profit, Machinery, Energy & Transportation (ME&T) operating cash flow was higher than we expected and the third best year in our history.  

“It was a great year for Energy & Transportation with record sales and profit. Sales were also up and profit improved substantially in Construction Industries. The increase in Construction Industries’ sales was primarily in North America and was partially offset by sales declines in other regions. While our construction sales were up in 2014, the industry is still well below prior peaks in every major region due to relatively weak economic growth for most of the world. Prices for key mined commodities, particularly copper, coal and iron ore, declined in 2014.  Weakening commodity prices, along with improved mine productivity, led to lower sales for Resource Industries.  We haven’t seen evidence of an upturn in equipment orders yet and sales of mining equipment remain depressed,” Oberhelman added.

The fourth quarter, however, was down and it brought full-year numbers down with it. Sales and revenues were $14.244 billion, down from $14.402 billion in the last three months of 2013. Fourth quarter profit was down 25 percent, to $757 million, or $1.35 a share, from $1.003 billion, or $1.54 a share, in 2013. A chief reason for the decline was the negative effect of a strengthening dollar against the euro and the yen.

“We are disappointed that we missed our profit outlook in the fourth quarter. That said, 2014 overall was a successful year as we continued to execute on the things we can control. Our overall market position for machines improved for the fourth consecutive year; the quality of the machines delivered to customers was better; safety in our factories continued to improve and inventory turns were better. Our balance sheet is strong, and we repurchased $4.2 billion of stock in 2014 and raised the quarterly dividend by 17 percent,” Oberhelman said.

The miss on profit-per-share ended a string of four consecutive quarters in which the company beat the estimates of Wall Street analysts. This time, those analysts estimates a profit of $1.55 a share on sales and revenues of $14.18 billion.

That contributed to the negative reaction of investors; Caterpillar stock value dropped 8 percent in early trading on the New York Stock Exchange before making a slight comeback later to close at a 52-week low of $79.85 a share, down $6.18 or 7.18 percent. More than 27 million shares, or five times the daily average, traded.

As much or more to blame for the sell-off was the company’s negative outlook for 2015. The company projects sales and revenues of about $50 billion for the year, well off the preliminary forecast of $55 billion from analysts. The company forecasted earnings of $4.60 a share, including restricting costs. Oberhelman tabbed falling oil prices as the reason.

“The recent dramatic decline in the price of oil is the most significant reason for the year-over-year decline in our sales and revenues outlook. Current oil prices are a significant headwind for Energy & Transportation and negative for our construction business in the oil producing regions of the world. In addition, with lower prices for copper, coal and iron ore, we’ve reduced our expectations for sales of mining equipment. We’ve also lowered our expectations for construction equipment sales in China. While our market position in China has improved, 2015 expectations for the construction industry in China are lower,” Oberhelman said.

“While we are, without a doubt, facing a tough year in 2015, we’re driving cost management through additional restructuring actions and continued operational improvements gained from our focus on lean management. While 2015 will be difficult, the work we’ve done to improve our cost structure, market position and quality will position us for better results when the world economy and the key industries we serve improve,” Oberhelman added.

In a meeting with reporters Tuesday, Group President and CFO Brad Halverson said the fact sales and revenues were down while profits were up “is a testament to the work of our team.” He added that the company gained global market share for the fourth consecutive year and that employees will be rewarded this spring with bonuses. “The operating efficiency we have now is the best in my career,” Halverson said.

He noted, however, that if the outlook for 2015 comes true, it would be the third consecutive year sales and revenues were down from the previous year, something he said hasn’t happened since the 1930s.

“We’re ready for 2015. We know exactly what we have to do. We have to continue to focus on customer service and market share. I am very confident we’re doing what we need to do to deliver to our shareholders,” Halverson said.

Noting that Caterpillar is a cyclical company, he said the company knows business will turn around. Europe, for example, was 40 percent off its peak economy last year and most other markets Caterpillar serves were down, as well, including China and Brazil. “Europe won’t be down forever; nor will Brazil and China. And we will keep delivering good value,” he said.

One of the bright spots in 2014 and for 2015 will be North America. After that market was a drag on company revenues for several years, it now is showing strength, particularly in construction markets where demand continues to be strong.

The oil and gas industry will account for most of the company’s revenue decline in 2015 but Oberhelman said in an interview Tuesday with CNBC that he expects that and continued low interest rates will be a short-term problem that will turn into a long-term gain for the company.  

Some highlights in Caterpillar’s earnings report include:

The full report can be viewed at www.cat.com.

 

About the Author
Paul Gordon is the editor of The Peorian after spending 29 years of indentured servitude at the Peoria Journal Star. He’s an award-winning writer, raconteur and song-and-dance man. He also went to a high school whose team name is the Alices (that’s Vincennes Lincoln High School in Indiana; you can look it up).