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Cat profits down in Q2; outlook unchanged

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Two things can be taken from Caterpillar Inc.’s second quarter financial results announced on Thursday.

First is that the global economy and the markets Caterpillar serves are still struggling, causing lower sales volumes and a decrease in profits.

Second, because of moves the company has made the past few years to improve efficiency in down cycles, it could be a feasting scenario when the up cycle returns to the construction and mining industries.

After all, company officials said, Caterpillar has gained market share in those industries despite sales being down $16 billion over the last three years and it has strong cash flow. “Without question, it’s a mixed bag for us,” Group President Brad Halverson said in a meeting with reporters.

The company announced it has a profit of $710 million, or $1.16 a share, during the second quarter, down 29 percent from the profit of $999 million, or $1.57 a share, reported during the second quarter of 2014. Excluding restructuring costs made necessary to bring production into line with demand, the second quarter profit this year was $1.27 a share, compared with $1.69 a share a year earlier.

Sales and revenues were $12.3 billion in the second quarter, down 13 percent from a year earlier, the company reported.

For the first six months of the year the number were more in line. Profit was $1.8 billion, or $2.98 a share, through the first half of this year, compared with $1.9 billion, or $3 a share, through the first six months of 2014.

But company officials cautioned that the short-term global forecast makes it likely the second half of 2015 will be down, as well. That’s why the company kept its outlook for the remainder of the year basically unchanged from the first quarter; a profit of $4.70 a share (or $5 excluding restructuring costs) with sales and revenues of about $49 billion, down from $50 billion in the previous outlook.

However, the second quarter profit was well off the estimates of industry analysts of $1.27 a share if you figure in restructuring costs. That and the forecast that the second half of the year will likely be down didn’t sit well with investors.

Caterpillar stock ended trading on the New York Stock Exchange with a value of $76.88 a share, down $2.88, on a day the Dow Jones Industrial Average was down 119.12. Caterpillar is a component of the Dow.   

In announcing the results, Caterpillar Chairman Doug Oberhelman said, “Our Caterpillar team continues its track record of solid operational performance in the face of difficult conditions in several of the key industries we serve. Because we serve cyclical industries, we focus intently on operational execution and cost control. This is particularly important when sales decline; our goal when sales decline is to manage costs so the decline in operating profit is less than 30 percent of the decline in sales and revenues.  We did much better than that in the second quarter. We’ve achieved that by closely watching costs, the restructuring we’ve done over the past two years and the work done by Caterpillar employees across the world who are proving we can excel in this challenging economic environment.”

He said the company focused on “operational execution and customer success through efforts like lean management and our Across the Table initiative with dealers, while also investing in tomorrow through new technologies, innovation and data analytics – both within Caterpillar, and by partnering with and investing in other companies.”   

The economic and industry conditions that were expected at the beginning of the year are occurring. World economic growth is about as the company expected: severe weakness in mining continues, construction-related sales in China and Brazil are lower and new orders for oil-related applications declined.  

“While economic conditions in the United States are modestly positive, the global economy remains relatively stagnant. Many of the key industries we serve remain weak, and we haven’t seen sustained signs of improvement. Continuing economic weakness in China and Brazil, as well as uncertainty in the Eurozone and over Greece, haven’t helped confidence. Prices for commodities like coal, iron ore and oil are not signaling an improvement in the short term. We are committed to controlling costs as we manage through this downturn, and that will position Caterpillar for better results when conditions improve,” Oberhelman said.

Halverson, who is also chief financial officer, echoed that latter statement. He pointed out that despite the fact Caterpillar’s sales will likely end the year down $16 billion from 2012, the company has gained market share, improved its balance sheet, improved safety and have been hitting their financial targets while improving efficiency.

“The down side, of course, is that we have had to reduce the number of employees. It is always hard to let employees go,” he said. The company’s global workforce is at 126,800, down nearly 5,000 from a year ago.

Halverson said there are many positives on the horizon, including the company’s belief a comprehensive federal highway bill will get approved in Congress, the prospects for sales to Cuba once embargoes are lifted and the strength of its market share in the industries it serves. “We are always going to have strong competitors, so we work on staying close to our customers and delivering the best product. It comes down to what goes on without our own walls and we have the right structure and the right team in place,” he said.

Highlights from the second quarter report include:

  • Caterpillar said it will repurchase approximately $1.5 billion of its common stock during the third quarter. That would be in addition to the approximately $500 million of stock that was repurchased in the first half of 2015, and $4.2 billion repurchased in 2014.
  •  Financial Product revenues were $734 million in the second quarter, down 3 percent from revenues of $759 in the second quarter last year.
  • Restructuring costs were $89 million in the second quarter.
  • Machinery, energy and transportation sales were down in every segment and in every region compared with the second quarter of 2015. Construction sales were down 18 percent.

The full report can be read at www.caterpillar.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).