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No surprises in Cat year-end financial report

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Caterpillar Inc. ended 2015 about where it expected, with lower sales and profits reflective of the global economy and weakness in the markets it serves, and it expects 2016 to be similar, the company announced Thursday.

Caterpillar had $11 billion in sales and revenues in the fourth quarter and, because of higher-than-expected restructuring costs, posted a loss of $87 million, or 15 cents a share, in the last three months. It was the first quarterly loss posted by Caterpillar since the first quarter of 2009. In the fourth quarter of 2014 Caterpillar has sales and revenues of $14.2 billion and a profit of $757 million, or $1.23 a share.

Without the restructuring costs, Caterpillar would have posted a fourth-quarter profit of 74 cents a share, the company’s report said.

For the year Caterpillar had sales and revenues of $47.01 billion, a 15 percent decline from 2014 sales and revenues of $55.2 billion. The profit in 2015 was $2.1 billion, or $3.50 a share, compared with $3.7 billion, or $5.88 a share in 2014. The profit was off 43 percent because of the restructuring costs. Without those costs the decline was 27 percent, from $6.38 a share in 2014 to $4.64 in 2015.

Among the culprits for the struggle in 2015 was that oil prices have dropped low enough because of ample supplies around the world that nobody is exploring or drilling to find more. Machine orders in the Energy and Transportation Division were down nearly 90 percent. Also, a stronger U.S. dollar, weaker construction equipment sales and lower than expected mining-related sales were negative factors.

Sales and revenues were down in every product segment and in every geographic region in the fourth quarter compared with the same period in 2014, the report said.

One result of a year that was down by Caterpillar standards already was confirmed on Thursday, when the company informed its employees that merit increases for 2016 are canceled.

Despite the declines, the company was upbeat about the fact it was showing a profit and strong cash position in a cyclical downturn.

“Cost management, restructuring actions and operational execution are helping the company while sales and revenues remain under pressure from weak commodity prices and slowing economic growth in developing countries,” said Chairman and CEO Doug Oberhelman.

“We took tough but necessary restructuring actions in 2015 – and they were significant. I am proud that our team stayed focused on our customers in this difficult environment. Our balance sheet is strong; our product quality remained at high levels; we gained market position for machines for the fifth year in a row; inventory levels have declined and are well positioned as we look forward to 2016; and our safety levels are world class. We are benefiting now and expect to even more in the future when markets rebound,” he said.

Still, the company predicted 2016 will be one of continued declines in sales and profits. It expects sales and revenues to be between $40 billion and $44 billion and profit to be about $3.50 a share. And that is including projected savings of $425 million from a change in accounting principles for pension and other post-employment benefit costs and a reduction in restructuring costs from $908 million in 2015 to a projected $400 million in 2016.

Yet that profit forecast is higher than what Wall Street analysts who cover Caterpillar were expecting and because of that some considered the outlook to be at least somewhat upbeat. For that reason Caterpillar stock was valued at $61.08 a share at the close of trading on the New York Stock Exchange. That was up $2.76, or 4.73 percent, from Wednesday’s close as 12.6 million shares, or nearly twice the daily average volume, were traded.

In a meeting with reporters Thursday morning, Mike DeWalt, vice president of Caterpillar’s Financial Services Division, said he would not describe the company’s outlook as upbeat or anything other than “reflective of what is going on in the world today.” He added that the outlook shows the company is not expecting any sharp turnaround in the global economy or the markets it serves.

Still, he said, the work Caterpillar has done in restructuring itself the past year or so has it well-positioned to survive a continuing down cycle and to take off once the cycle turns. He credited the company’s cash position for much of that, as it is strong enough to meet its expenses, pay dividends and continue investing in research and development.

Caterpillar intends to spend about $2.1 billion on research and development again in 2016, which DeWalt said can signal to investors that the company is looking forward with optimism. Also, he said, continuing to spend on research and development while it can gives Caterpillar an advantage over competitors who cannot afford it.

In a conversation with CNBC on Thursday, Oberhelman said Caterpillar is enthused that Congress recently approved a new, five-year transportation bill that will free billions of dollars for infrastructure improvement. He said the company believes, however, it will be late 2016 or in 2017 before it will realize any benefits from that bill.

DeWalt added that while the $305 billion transportation bill isn’t significantly higher than the temporary bills of years past, a big difference is that it is a five-year bill, which may give some Caterpillar customers more confidence to replace aging equipment.

DeWalt said most of the restructuring Caterpillar announced last September – including job reductions and plant closures – had 2016 in mind as the company already was anticipating it would be another off year. Much of that restructuring has been accomplished, though the company will be announcing some moves as early as Friday.

To date, On Sept. 24, 2015, Caterpillar announced it will reduce its workforce by up to 10,000 people by the end of 2018, with up to 5,000 of that by the end of 2016. Since that announcement the company has eliminated approximately 5,000 positions, including the 2,100 voluntary early retirements. Also, the company has closed or consolidated nine facilities, with more likely.

At the end of 2015 Caterpillar had 118,700 employees worldwide. That was down 12,000 from a year earlier, with 5,600 of the eliminated jobs in the United States.

In his conversation with CNBC, Oberhelman said Caterpillar still wants some relief through corporate tax reform. Asked to explain further, DeWalt said Caterpillar is at a disadvantage in not only that the U.S. corporate tax rate is higher than most other countries of the world, but also in the way the system is set up.

For example, he said, China’s corporate tax rate is lower than that of the United States. If the company brings back any of the money it makes in China from sales, it must pay the U.S. tax rate. “We would just like to see a more level playing field,” he added.

In discussing the 2016 outlook, Oberhelman said it takes into account continuing struggles in the oil and other commodity markets and economic weakness in other countries, including China and Brazil.

“While the U.S. and European economies are showing signs of stability, the global economy remains under pressure. While we manage through these difficult economic times with substantial restructuring actions to lower costs, we are also preparing for the long term,” he said. “Investing in the future is important to improving productivity and the bottom line – for Caterpillar and our customers over the long term. While it is tough to predict when an economic recovery will happen, the investments we are making and the actions we are taking to lower our cost structure and improve quality and our market position will help deliver better results when a recovery comes.”

To read Caterpillar’s full report visit 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).