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Cat earnings show continued struggle in third quarter

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It was one of those types of quarters for Caterpillar Inc. in the third quarter of 2016, in that little seemed changed from almost every quarter the past few years. Sales and profits were lower as markets continued to struggle worldwide.

It appears it will be more of the same again in 2017, based on the company’s preliminary outlook for next year. Except there may actually be a bright side coming the second half of next year, the company said Tuesday when it announced its third quarter financials.

That outlook, which will be updated at the end of the fourth quarter, says the first half of 2017 will be down again, but that the second half, should commodity prices remain stable, could see sales and revenues start to move into positive territory.

“We remain cautious as we look ahead to 2017, but are hopeful as the year unfolds we will begin to see more positive momentum,” said Doug Oberhelman, chairman and CEO.

Said Mike DeWalt, vice president of financial services, “It’s hard enough to predict one quarter out, let alone a full year. But we have seen some positive signs; they just haven’t translated into sales. So, we’re being cautiously optimistic. Uncertainty is our enemy.”

The third quarter of 2016, as noted, was nothing to shout about. The company announced it had a profit of 48 cents a share on sales and revenues of $9.2 billion, well off the profit of 94 cents a share and 16 percent below the $11 billion in sales and revenues during the third quarter of 2015. Those numbers include restructuring costs, which the company anticipates will reach $800 million by year’s end.

While those results actually topped expectations of Wall Street analysts, who by consensus predicted a profit of 76 cents a share, the investment community was put off by the fact the company lowered its outlook for the remainder of the year, from sales of $40 billion to $39 billion and a profit of $2.35 a share, down from $2.75.

Cat stock closed Tuesday at $84.48 a share, down $1.51 as 11.6 million shares – or about 2.5 times the average volume – traded.

Oberhelman, in prepared remarks, said the struggles continued in the third quarter because “Economic weakness throughout much of the world persists and, as a result, most of our end markets remain challenged. In North America, the market has an abundance of used construction equipment, rail customers have a substantial number of idle locomotives, and around the world there are a significant number of idle mining trucks.”

“However, there were a few bright spots this quarter,” he added “Both the construction industry and our machine market position improved in China. Most commodity prices, while low, seem to have stabilized. Parts sales have increased sequentially in each of the last two quarters. Our machine market position and quality remain at high levels and our work on Lean and restructuring are continuing to help us lower costs.

“I’m pleased with how Caterpillar has responded and our team’s incredible focus on reducing costs and pulling through profit despite sluggish end markets. In the third quarter, despite a $1.8 billion decline in sales and revenues, our operating profit pull through was significantly better than our target range. Lower variable manufacturing costs of $234 million and lower period costs of $420 million enabled us to offset much of the negative impact from a weak sales environment and continue investment in products and digital capabilities.”

In its preliminary outlook for 2017 Caterpillar said sales and revenues will not be significantly different than 2016 and in the first half of the year will likely be negative. “We are, however, encouraged that most commodity prices important to our business have improved from the lows earlier in 2016. Should commodity prices show relative stability and move higher in 2017, it is reasonable to expect that our business would respond, and we could see a more positive second half. Our preliminary outlook for 2017 is based on our expectation that world economic growth will remain subdued at close to 2.5 percent – similar to the past few years,” the company said.  

The company listed positive and negative factors it believes could influence 2017 sales and revenues. They include:

Positive factors

  • Prices for some commodities have improved from earlier lows.
  • Most prices for mined commodities have risen from lows earlier this year, and average prices in 2017 should be flat to up modestly from 2016.
  • The construction industry and our market position have continued to improve in China.
  • Construction sales in Brazil and Russia have likely bottomed in 2016.
  • After several years of decline, surveys of capital expenditures in the mining sector indicate spending should level off in 2017. 

Negative factors

  • While sentiment around mining has improved, there are still many idle trucks on customer sites and there has not been an increase in orders for new equipment.
  • Construction activity and construction equipment sales in North America during the second half of 2016 are anticipated to be lower than in the company’s previous 2016 outlook.
  • There is continuing uncertainty in Europe, particularly around the impact of Brexit on European economic growth, business confidence and investment.
  • While sales in China have improved, there is risk of slowing if Chinese government monetary and fiscal policy become less supportive.
  • Power generation sales are expected to be down, particularly in oil-producing regions of Africa/Middle East.

“While we are seeing early signals of improvement in some areas, we continue to face a number of challenges. We remain cautious as we look ahead to 2017, but are hopeful as the year unfolds we will begin to see more positive momentum,” Oberhelman said. “Whether or not that happens, we are continuing to prepare for a better future.”

Oberhelman noted his decision to retire next year and that he will be succeeded by Group President Jim Umpleby. “He’s been a key part of the leadership team for several years and is absolutely ready to lead Caterpillar. I’m confident I’m turning over a company that’s ready for a better future. We have a great team, our product portfolio is the best ever, our machine market position and quality remain at high levels and we’ve significantly improved our cost structure. At some point, and I think we’re getting closer to that point, our businesses will turn up.”

In a meeting with reporters, DeWalt noted the last four years have been the roughest patch he’s experienced in 36 years with the company, but he said the situation would have been much worse if not for the difficult decisions that came with restructuring, including the layoffs of about 20 percent of the workforce. Cat now employs 108,800 people worldwide; its peak was 143,000 just four years ago.

The restructuring has enabled Caterpillar to remain profitable and improve its market position in every business in which it is involved. Most companies, he believes, would have posted operating losses under similar circumstances.

DeWalt said the company has had to go beyond the restructuring moves it announced in September 2015 because weaknesses in the markets have not abated. In that announced last year the company said it would reduce the workforce by more than 10,000, consolidate and close 20 facilities and reduce manufacturing square footage by 10 percent.

Since then the workforce has been reduced by more than 14,000 and there have been 30 facilities closed or expected to close, which would reduce square footage by 11 percent. Also, the company has ended production of on-highway vocational trucks and track drills and consolidated two divisions in Resource Industries.

DeWalt said the company hasn’t finished restructuring yet.

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).