Caterpillar Inc. first-quarter 2016 sales and revenues plunged 34% to $9.5 billion, down from $12.7 billion in the first quarter of 2015. First-quarter 2016 profit per share was down 77% to $0.46 from a profit of $2.03 per share in the first quarter of 2015. Excluding restructuring costs, profit per share was down 68% to $0.67, compared with $2.07 per share in the first quarter of 2015.
The first quarter of 2016 added the 39th consecutive month of sales declines for Caterpillar, as capital investment in mining and energy industries continues to recede, and the global retraction in construction-industry equipment investment deepens. Sales for new equipment and aftermarket parts declined in all segments, but new-equipment sales fell most. Unfavorable pricing and currency conversions also contributed to falling revenue.
Sales fell in all regions. In North America, sales decreased 26% due to lower end-user demand, primarily in Energy & Transportation, and the unfavorable impact of changes in dealer inventories, primarily in Construction Industries. In Europe, Africa and the Middle East (Caterpillar’s EAME region), sales declined 24%, primarily in Africa/Middle East due to economic conditions weakened by low oil and other commodity prices. Asia/Pacific sales declined 23% on lower end-user demand for Energy & Transportation applications and products used in mining. Sales decreased 43% in Latin America, primarily due to widespread economic weakness across the region. The most significant decreases were in Brazil and Mexico.
Sales decreased in all of Caterpillar’s market segments. Energy & Transportation’s sales declined 33% largely due to lower end-user demand for oil and gas and transportation applications. Construction Industries’ sales decreased 19%, primarily due to the unfavorable impact of changes in dealer inventories, lower demand from end users and unfavorable price realization. Resource Industries’ sales declined 26%, mostly due to continued low end-user demand. Financial Products’ segment revenues were down 7% on lower average earning assets and lower average financing rates.
“While first-quarter results were about as we expected, sales and profit were well below the first quarter of 2015. Sales declined across the company with substantial reductions in construction, oil and gas, mining and rail. While many of the industries we serve are challenged, we remain focused on what we can control: the quality of our products, our market position, safety in our facilities and continued restructuring and cost reduction. In fact, our period costs and variable manufacturing costs in the quarter were nearly $500 million lower than the first quarter of 2015,” said Caterpillar Chairman and Chief Executive Officer Doug Oberhelman.
2016 Outlook Reduced
Caterpillar’s Q1 2016 financial report recalls recent increases in commodity prices, signs of improvement in construction equipment in China and better-than-expected order activity at the bauma trade fair.
“While we are seeing a few positive signals, other parts of our business remain challenged,” the report admits. “As a result, we have lowered the midpoint of the outlook for 2016 sales and revenues about 2%.”
Caterpillar expects sales and revenues in 2016 to be in a range of $40 to $42 billion, with a midpoint of $41 billion. The previous outlook was a range of $40 to $44 billion with a midpoint of $42 billion. The decline in the midpoint of the sales and revenues outlook range is a result of several factors that, while not individually large in the context of the outlook, collectively add up to about $1 billion. Those factors include lower transportation sales (rail, marine and the ending of production of on-highway vocational trucks), lower mining sales and weaker price realization than previously expected.
The profit outlook at the midpoint of the sales and revenues range is now $3.00 per share, or $3.70 per share excluding restructuring costs. The previous profit outlook was $3.50 per share, or $4.00 per share excluding restructuring costs at the midpoint of the previous sales and revenues outlook. The expected decline in sales and revenues and an increase in expected restructuring costs are the primary reasons for the decline in the profit outlook.
Restructuring costs are now expected to be about $550 million in 2016, up $150 million from the previous outlook. The decision to end production of on-highway vocational trucks is the primary reason for the increase in restructuring costs.
“While many of the industries we serve are challenged today, we’re looking ahead and investing for the future. We’re investing substantially in R&D, driving forward on our Lean journey, continuing implementation of Across the Table with our dealers and accelerating our digital strategy,” said Oberhelman.
“Our digital strategy is an exciting investment for the long term. We’re hard at work, inside Caterpillar and with our digital partners, developing the data architecture and applications that will make our products smarter and help our customers improve productivity and safety. Our goal is to help customers be more productive, better manage their fleets and make more money with Caterpillar than they could with our competitors. Our approximately 400,000 (and growing) connected assets mean entire fleets and job sites – from machines to tablets to drones – will eventually share data on one common technology platform in the age of smart iron. One thing that I am certain of is that it’s times like these when the Caterpillar team demonstrates the innovation and ambition to be the leader in all we do,” added Oberhelman.
Construction Industry Sales Fall 19%
Construction Industries’ sales fell 19% to $4.0 billion in the first quarter of 2016, a decrease of $971 million, from the first quarter of 2015. The decrease in sales was due to lower volume, unfavorable pricing and unfavorable currency impact on foreign sales because of the strengthening U.S. dollar. Sales declined for both new equipment and aftermarket parts, but substantially all of the decrease was in new equipment sales.
Dealers increased inventories in the first quarters of both 2016 and 2015, but the increase was greater in the first quarter of 2015. And deliveries to end users were lower.
Construction Industries’ profit was down 41% to $440 million in the first quarter of 2016. The decrease in profit was primarily due to lower sales volume, including an unfavorable mix of products and unfavorable price realization resulting from competitive market conditions.
Although residential and nonresidential construction activity in North America is improving, sales to end users were lower than the first quarter of 2015. Caterpillar’s North American Construction Industry sales fell 18%, compared to the first quarter of 2015.
“We believe declines in construction activity related to oil and gas have resulted in the availability of existing construction equipment for other purposes,” according to Caterpillar’s first quarter financial release. Unfavorable price realization resulted from competitive market conditions.
Caterpillar has not made any dramatic cuts to research and development expenditure in this current downturn. In fact the company has increased R&D spend from $2.04 billion in 2013 to $2.13 billion in 2014 to $2.16 billion last year. Although the company has doubled down on cost cutting measures, it has been consistently spending more than $500 million on R&D in each quarter (R&D expenditure was $508 million in Q1 2016).
