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Caterpillar (CAT) Posts In-Line Q1 Earnings; Stock Down

Caterpillar Inc.’s CAT first-quarter 2016 adjusted earnings plunged 68% to 67 cents per share, reflecting persistent tough market conditions for many of the company’s businesses – mining, oil and gas, rail and construction – in key developing countries. Earnings, however, came in line with the Zacks Consensus Estimate of 67 cents as well as within the company’s guidance range of 65 and 70 cents per share. The company’s shares dipped 2.62% in pre-market trading following the release.

Including restructuring costs, Caterpillar’s earnings of 46 cents per share was significantly lower than the prior-year quarter figure of $2.03 per share.

Revenues

Revenues plummeted 26% year over year to $9.461 billion in the quarter, and failed to meet the Zacks Consensus Estimate of $9.499 billion due to unfavorable currency impact, negative price realization and lower volumes. Sales declined for both new equipment and aftermarket parts.

Caterpillar witnessed a revenue decline across all regions. Latin America was the worst, registering a 43% drop in sales, mainly due to lower end-user demand as a result of widespread economic weakness. In North America, Caterpillar witnessed a 26% decline in sales due to lower end-user demand for Energy & Transportation applications and unfavorable changes in dealer inventories, mostly in Construction Industries. Sales in Europe, Africa and Middle East (EAME) tanked 24% due to the weak oil and other commodity price environment. Sales in the Asia-Pacific region tumbled 23% due to lower demand for Energy & Transportation applications and mining products.

Costs & Operating Profit

In the quarter, cost of sales declined 22% year over year to $6.8 billion. Gross profit plunged 33% to $2.6 billion. Selling, general and administrative (SG&A) expenses decreased 13% to $1.09 billion, while research and development (R&D) expenses fell 3% to $508 million.

Adjusted operating profit was $1.04 billion, down 52% year over year. Lower sales volumes, including an unfavorable mix of products, stemming from continually weak commodity prices worldwide and economic weakness in developing countries, along with unfavorable price realization led to the decline. However, favorable period costs and variable manufacturing costs were a minor offset.

Segment Results

Machinery and Energy & Transportation (ME&T) sales decreased 27% year over year to $8.78 billion. Sales of Energy & Transportation plunged 33% due to lower sales volume. Sales at Resource Industries dropped 26% owing to lower end-user demand across all regions. Construction Industries sales tanked 19% due to lower volumes, unfavorable price realization and unfavorable currency impact.

The ME&T segment reported an operating profit of $390 million, marking a 75% plunge from $1.5 billion reported in the year-ago quarter. Operating profit tumbled 41% at Construction Industries owing to lower volume and unfavorable price realization. At the Energy & Transportation segment, too, operating profit plunged 60% as a result of lower sales volume, partially offset by lower costs related to restructuring and favorable material costs. The worst performance was witnessed at Resource Industries, with the segment incurring a loss of $96 million in the quarter as against profit of $96 million a year ago due to lower sales volume and negative price realization, partially offset by improved manufacturing costs and a decrease in SG&A expenses.

Financial Products’ revenues dropped 7% to $743 million due to lower average earning assets and lower average financing rates. Financial Products' profit was $168 million in the quarter, compared with $227 million in the prior-year quarter.

Financial Position

Caterpillar ended the first quarter with cash and short-term investments of $5.9 billion, down from $6.5 billion at 2015 end. Total debt-to-capital ratio was 71% at first quarter end, down from 72% at 2015 end. The debt-to-capital ratio at ME&T was 37.7% as of Dec 31, 2015, reflecting an improvement from 39.1% as of Dec 31, 2015, and within the company’s target range of 30–45%.

Total cash flow from operating activities in 2015 was $489 billion, compared with $1.27 billion in the prior-year period. Operating cash flow at ME&T declined to $218 million in the quarter from $1.042 billion in the prior-year quarter mainly due to lower profit.

Backlog

At the end of the quarter, Caterpillar’s backlog remained unchanged at $13.1 billion. On a year-over-year basis, order backlog declined by about $3.5 billion, having recorded decreases in all segments.

A Sneak Peek into 2016

Due to continually challenging business conditions in 2016, Caterpillar now expects revenues in the range of $40–$42 billion, with the midpoint being $41 billion, as against the previous outlook of $40–$44 billion, which had a midpoint of $42 billion. The trimmed guidance reflects expectations of lower transportation sales (rail, marine and the ending of production of on-highway vocational trucks), lower mining sales and weaker price realization.

Also, Caterpillar now expects earnings per share (excluding restructuring costs) of $3.70, down from the earlier projection of $4.00 due to the decline in revenues.

To stay profitable despite weak demand, Caterpillar has stepped up its restructuring actions which should lead to cost savings. The company also continues to investing substantially in R&D. However, the slump in oil prices, weak mining, Chinese economy woes, declining backlog, and softness in the agriculture sector remain major headwinds ahead of the company.

Caterpillar currently carries a Zacks Rank #5 (Strong Sell). Better-ranked stocks in the sector include Century Aluminum Co. CENX, John Bean Technologies Corporation JBT and Sealed Air Corporation SEE. All the three stocks sport a Zacks Rank #1 (Strong Buy).

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