Caterpillar Reports 2015 Fourth-Quarter and Full-Year Financial Results; Provides Outlook for 2016

PEORIA, Ill., Jan. 28, 2016 /PRNewswire/ --

Caterpillar Inc. (NYSE: CAT) today announced 2015 fourth-quarter sales and revenues of $11.0 billion, down from $14.2 billion in the fourth quarter of 2014.  Fourth-quarter 2015 was a loss of $0.15 per share, down from a profit of $1.23 per share in the fourth quarter of 2014.  Excluding restructuring costs, profit per share was $0.74, compared with $1.35 per share in the fourth quarter of 2014.

"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.  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," said Caterpillar Chairman and Chief Executive Officer Doug Oberhelman.   

Full-Year 2015

This past year was a difficult one for many of the industries and customers we serve.  Sales and revenues for 2015 were nearly 15 percent lower than 2014 and 29 percent off the 2012 peak.  The two most significant reasons for the decline from 2014 were weakening economic growth and substantially lower commodity prices.  The impact of weak economic growth was most pronounced in developing countries, such as China and Brazil.  Lower oil prices had a substantial negative impact on the portion of Energy & Transportation that supports oil drilling and well servicing, where new order rates in 2015 were down close to 90 percent from 2014.

"We anticipated about $5 billion of the $8 billion sales and revenues decline in our January 2015 outlook as we started the year.  Actual sales and revenues were about $3 billion below that $50 billion outlook because of steeper than expected declines in oil prices, a stronger U.S. dollar, weaker construction equipment sales and lower than expected mining-related sales in Resource Industries," added Oberhelman.

In 2015, we took substantial additional restructuring actions to lower our cost structure.  As a result, restructuring costs of $908 million were higher than anticipated when we started the year.  Additional restructuring costs were the most significant reason profit per share of $3.50 was below our January 2015 outlook of $4.60 per share.  Excluding restructuring costs, 2015 profit per share was much closer to our expectations, despite about $3 billion of lower sales and revenues.  For 2015, profit excluding restructuring costs was $4.64 per share, $0.11 per share lower than the $4.75 per share excluding restructuring costs expected in our outlook as we started the year last January.

Financial Position / Cash Flow / Cash Deployment

An important element of our strategy is maintaining a strong balance sheet to weather the ups and downs of the cyclical industries we serve and to support growth when business improves.  We finished 2015 with $6.5 billion of cash and a strong balance sheet with a Machinery, Energy & Transportation (ME&T) debt-to-capital ratio of 39.1 percent, well within our target range of 30 to 45 percent and only slightly higher than 37.4 percent at year-end 2014.  

ME&T operating cash flow was $5.2 billion in 2015, and with modest need for capital expenditures, helped enable a 10-percent increase in the quarterly dividend and about $2 billion of share repurchases in 2015.

"Fundamentally, we stayed focused in the right areas: we delivered solid cash flow, maintained a strong balance sheet and our credit rating and increased the dividend.  Maintaining our current dividend and our credit rating is important even in these tough times – it is a high priority for the company," said Oberhelman.

We have a substantial captive finance company, Caterpillar Financial Services, which serves thousands of customers around the world.  Key portfolio metrics, such as past dues and credit losses, were near historic averages despite weakness in the industries we serve and are an indication of how well the finance business is managed.

"I am particularly encouraged that our Cat Financial portfolio is performing so well because it is core to our business and important for our customers.  In fact, past dues were slightly lower at year-end 2015 than they were at the end of 2014," Oberhelman added.   

2016 Outlook

The outlook for 2016 sales and revenues does not anticipate improvement in world economic growth or commodity prices.  Sales and revenues are expected to be in a range of $40 to $44 billion – a mid-point of $42 billion.  The mid-point of the range reflects a decline of about $3.5 billion from last October's preliminary outlook for 2016 sales and revenues and a year-over-year decline of about 10 percent.  The decrease from last October's preliminary outlook is largely a result of continued declines in commodity prices and economic weakness in developing countries.  

The profit outlook for 2016 is $3.50 per share at the mid-point of the sales and revenues range.  To provide a better understanding of our expectations for 2016 profit, we are providing our outlook with and without anticipated restructuring costs.  Over the past few years, we have undertaken restructuring activities designed to lower our long-term cost structure.  Additional restructuring actions are anticipated in our 2016 outlook.  We expect the cost of these restructuring actions in 2016 to be about $400 million or about $0.50 per share.  Excluding restructuring costs, our profit outlook for 2016 is about $4.00 per share at the mid-point of the sales and revenues range.

Sales in Energy & Transportation are expected to decline about 10 to 15 percent from 2015.  Much of the decline is a result of low oil prices.  During the first half of 2015, sales remained at relatively high levels for equipment used in drilling and well servicing because we started the year with a substantial order backlog.  Sales declined during the second half of 2015 as orders from the backlog were shipped and new order levels were weak.  That impact, along with the further decline in oil prices, are the primary reasons for the expected decline in Energy & Transportation's 2016 sales.  In addition, continuing weakness in economic conditions in much of the world is expected to be negative for sales of power generation equipment, industrial engines, marine and rail.

Sales in Resource Industries are expected to be down about 15 to 20 percent from 2015 as a result of continuing reductions in mining-related commodity prices and difficult financial conditions for many mining customers around the world.  

Sales in Construction Industries are expected to decline about 5 to 10 percent from 2015.  In the United States, improving labor market conditions and relatively stable economic growth should continue to support the wider economy and construction.  However, we expect weakness in developing countries and lower activity in oil-producing regions to persist. 

Positively impacting the profit outlook is substantially lower pension and other postemployment benefit (OPEB) costs.  The most significant reason for lower pension and OPEB costs is from a change in accounting principle so expense reflects the effects of economic and interest changes in the year in which the gains and losses are incurred.  The impact of this change is expected to have a positive impact on 2016 profit of about $425 million.  A more complete review of the change is included in Q&A 10 on page 19.  In addition, we are expecting substantial additional cost reduction in 2016, much of it from the restructuring actions taken in 2015.  The positive impacts on profit from lower costs and lower pension and OPEB expense are expected to be more than offset by the impact of lower sales and revenues.

"Our outlook reflects struggling oil and other commodity markets, and continued economic weakness in developing countries.  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.  We are continuing substantial investments in R&D and our digital capabilities.  These investments will be positive for Caterpillar and our customers through connected fleets and jobsites and access to data and predictive analytics.  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," said Oberhelman.

Notes: 

• Glossary of terms is included on pages 21-22; first occurrence of terms shown in bold italics.
• Information on non-GAAP financial measures is included on page 23.
• Caterpillar will conduct a teleconference and live webcast, with a slide presentation, beginning at 10 a.m. Central Time on Thursday, January 28, 2016, to discuss its 2015 fourth-quarter and full-year financial results.  The slides accompanying the webcast will be available before the webcast on the Caterpillar website at caterpillar.com/investors/events-and-presentations.

About Caterpillar:

For 90 years, Caterpillar Inc. has been making sustainable progress possible and driving positive change on every continent.  Customers turn to Caterpillar to help them develop infrastructure, energy and natural resource assets.  With 2015 sales and revenues of $47.011 billion, Caterpillar is the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives.  The company principally operates through its three product segments - Construction Industries, Resource Industries and Energy & Transportation - and also provides financing and related services through its Financial Products segment.  For more information, visit caterpillar.com.  To connect with us on social media, visit caterpillar.com/social-media.

Forward-Looking Statements

Certain statements in this Release relate to future events and expectations and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Words such as "believe," "estimate," "will be," "will," "would," "expect," "anticipate," "plan," "project," "intend," "could," "should" or other similar words or expressions often identify forward-looking statements.  All statements other than statements of historical fact are forward-looking statements, including, without limitation, statements regarding our outlook, projections, forecasts or trend descriptions.  These statements do not guarantee future performance, and we do not undertake to update our forward-looking statements.

Caterpillar's actual results may differ materially from those described or implied in our forward-looking statements based on a number of factors, including, but not limited to: (i) global and regional economic conditions and economic conditions in the industries we serve; (ii) government monetary or fiscal policies and infrastructure spending; (iii) commodity price changes, component price increases, fluctuations in demand for our products or significant shortages of component products; (iv) disruptions or volatility in global financial markets limiting our sources of liquidity or the liquidity of our customers, dealers and suppliers; (v) political and economic risks, commercial instability and events beyond our control in the countries in which we operate; (vi) failure to maintain our credit ratings and potential resulting increases to our cost of borrowing and adverse effects on our cost of funds, liquidity, competitive position and access to capital markets; (vii) our Financial Products segment's risks associated with the financial services industry; (viii) changes in interest rates or market liquidity conditions; (ix) an increase in delinquencies, repossessions or net losses of Cat Financial's customers; (x) new regulations or changes in financial services regulations; (xi) a failure to realize, or a delay in realizing, all of the anticipated benefits of our acquisitions, joint ventures or divestitures; (xii) international trade policies and their impact on demand for our products and our competitive position; (xiii) our ability to develop, produce and market quality products that meet our customers' needs; (xiv) the impact of the highly competitive environment in which we operate on our sales and pricing; (xv) failure to realize all of the anticipated benefits from initiatives to increase our productivity, efficiency and cash flow and to reduce costs; (xvi) additional restructuring costs or a failure to realize anticipated savings or benefits from past or future cost reduction actions; (xvii) inventory management decisions and sourcing practices of our dealers and our OEM customers; (xviii) compliance with environmental laws and regulations; (xix) alleged or actual violations of trade or anti-corruption laws and regulations; (xx) additional tax expense or exposure; (xxi) currency fluctuations; (xxii) our or Cat Financial's compliance with financial covenants; (xxiii) increased pension plan funding obligations; (xxiv) union disputes or other employee relations issues; (xxv) significant legal proceedings, claims, lawsuits or government investigations; (xxvi) changes in accounting standards; (xxvii) failure or breach of IT security; (xxviii) adverse effects of unexpected events including natural disasters; and (xxix) other factors described in more detail under "Item 1A. Risk Factors" in our Form 10-K filed with the SEC on February 17, 2015 for the year ended December 31, 2014.

Fourth-Quarter 2015 Highlights

• Fourth-quarter sales and revenues were $11.030 billion, down 23 percent from the fourth quarter of 2014.
• Restructuring costs were $682 million in the fourth quarter of 2015, with an after-tax impact of $0.89 per share.
• In the fourth quarter of 2015, there was a loss of $0.15 per share; excluding restructuring costs, there was a profit of $0.74 per share. Profit in the fourth quarter of 2014 was $1.23 per share, or $1.35 per share excluding restructuring costs.

Full-Year 2015 Highlights

• 2015 sales and revenues were $47.011 billion, down 15 percent from 2014. Sales declined in all regions and in all segments.
• Restructuring costs were $908 million in 2015 with an after-tax impact of $1.14 per share.
• Profit per share was $3.50 in 2015, or $4.64 per share excluding restructuring costs. Profit in 2014 was $5.88 per share, or $6.38 per share excluding restructuring costs.

Cash Flow/Financial Position

• Inventory declined about $1.45 billion during the fourth quarter of 2015. For the full year, inventory decreased about $2.5 billion.
• ME&T operating cash flow for 2015 was about $5.2 billion.
• ME&T debt-to-capital ratio was 39.1 percent at the end of 2015, compared with 37.4 percent at the end of 2014. We ended the year with about $6.5 billion of enterprise cash.
• During the year, we repurchased about $2 billion of Caterpillar stock and increased the quarterly dividend by 10 percent.

2016 Outlook

• The company expects 2016 sales and revenues to be about $40 to $44 billion – a mid-point of $42 billion.
• With sales and revenues at $42 billion, the profit outlook is about $3.50 per share, or $4.00 per share excluding restructuring costs.
• The outlook includes a reduction in pension and OPEB costs as a result of accounting changes. (See Q&A 10 on page 19 for more information.)
• The company expects restructuring costs of about $400 million in 2016.
• We expect ME&T capital expenditures in 2016 to be lower than 2015.

CONSOLIDATED RESULTS

Consolidated Sales and Revenues

Consolidated Sales and Revenues Comparison
Fourth Quarter 2015 vs. Fourth Quarter 2014

To access this chart, go to http://www.caterpillar.com/en/investors/quarterly-results.html for the
downloadable version of Caterpillar 4Q 2015 earnings.

The chart above graphically illustrates reasons for the change in Consolidated Sales and Revenues between the fourth quarter of 2014 (at left) and the fourth quarter of 2015 (at right).  Items favorably impacting sales and revenues appear as upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting sales and revenues appear as downward stair steps with dollar amounts reflected in parentheses above each bar.  Caterpillar management utilizes these charts internally to visually communicate with the company's Board of Directors and employees.

Sales and Revenues

Total sales and revenues were $11.030 billion in the fourth quarter of 2015, compared with $14.244 billion in the fourth quarter of 2014, a decline of $3.214 billion, or 23 percent.  The decrease was primarily due to lower sales volume and the unfavorable impact of currency due to continued strengthening of the U.S. dollar against most currencies, with about half of the impact from the euro.  The two most significant reasons for the decline in sales in 2015 were weakening economic growth primarily in developing countries and substantially lower commodity prices, most notably oil.  While sales for both new equipment and aftermarket parts declined in all segments, most of the decrease was for new equipment.

Sales declined in all regions.  In North America, sales decreased 26 percent due to lower end-user demand, primarily in Energy & Transportation, and unfavorable changes in dealer inventories, mostly in Construction Industries.  In EAME, sales declined 20 percent, mostly due to lower end-user demand for products used in Energy & Transportation applications and the unfavorable impact of currency, as sales in euros translated into fewer U.S. dollars.  Sales decreased 36 percent in Latin America, primarily due to widespread economic weakness across the region, which had a negative impact on construction and mining activity and demand for products used in oil and gas applications.  The most significant decrease was in Brazil.  Asia/Pacific sales declined 16 percent, primarily due to lower end-user demand for Energy & Transportation applications and products used in mining.  In addition, the impact of currency was unfavorable as sales, mostly in Australian dollars and Japanese yen, translated into fewer U.S. dollars.  These unfavorable items were partially offset by favorable changes in dealer inventories as dealers reduced inventories more significantly in the fourth quarter of 2014 compared to the fourth quarter of 2015.

Sales decreased in all segments.  Energy & Transportation's sales declined 29 percent as sales decreased due to lower end-user demand and the unfavorable impact of currency.  Construction Industries' sales decreased 18 percent, primarily due to the unfavorable impact of changes in dealer inventories as dealers decreased inventories more significantly in the fourth quarter of 2015 compared to the fourth quarter of 2014.  Additionally, dealer deliveries to end users, the impact of currency and price realization were unfavorable.  Resource Industries' sales declined 23 percent, mostly due to continued low end-user demand.  Financial Products' segment revenues were down 8 percent, primarily due to lower average earning assets and lower average financing rates.

Consolidated Operating Profit

Consolidated Operating Profit (Loss) Comparison
Fourth Quarter 2015 vs. Fourth Quarter 2014

To access this chart, go to http://www.caterpillar.com/en/investors/quarterly-results.html for the
downloadable version of Caterpillar 4Q 2015 earnings.

The chart above graphically illustrates reasons for the change in Consolidated Operating Profit (Loss) between the fourth quarter of 2014 (at left) and the fourth quarter of 2015 (at right).  Items favorably impacting operating profit appear as upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting operating profit appear as downward stair steps with dollar amounts reflected in parentheses above each bar.  Caterpillar management utilizes these charts internally to visually communicate with the company's Board of Directors and employees.  The bar entitled Other includes consolidating adjustments and Machinery, Energy & Transportation other operating (income) expenses.

Operating loss for the fourth quarter of 2015 was $114 million, compared with operating profit of $1.063 billion in the fourth quarter of 2014.  The decrease of $1.177 billion was primarily due to lower sales volume reflecting weak market conditions in most of the industries we serve, higher restructuring costs and unfavorable price realization.  These items were partially offset by favorable manufacturing costs and lower SG&A and R&D expenses. 

The unfavorable price realization resulted from competitive market conditions and an unfavorable geographic mix of sales. 

Manufacturing costs were favorable due to lower incentive compensation expense, lower spending due to cost reduction efforts and improved material costs partially offset by the unfavorable impact of cost absorption as inventory decreased more significantly in the fourth quarter of 2015 than in the fourth quarter of 2014.

SG&A and R&D expenses were favorable due to lower incentive compensation expense and lower spending due to cost reduction efforts.

Although the strong U.S. dollar had a negative impact to our sales, our sizable manufacturing presence outside of the United States resulted in a favorable impact to costs and operating profit.

Restructuring costs of $682 million in the fourth quarter of 2015 were primarily related to a reduction in workforce.  In the fourth quarter of 2014, restructuring costs were $97 million.

Other Profit/Loss Items

Other income/expense in the fourth quarter of 2015 was income of $30 million, compared with income of $3 million in the fourth quarter of 2014.  The favorable change of $27 million was primarily due to gains on the sale of securities in the fourth quarter of 2015.  The net impact from currency translation and hedging gains and losses was about flat.

The provision for income taxes for the fourth quarter of 2015 reflects an effective tax rate of 24.5 percent, compared with 28 percent for the fourth quarter of 2014 excluding the items discussed below.  The decrease is primarily due to a more favorable geographic mix of profits from a tax perspective in 2015, including the impact of restructuring costs primarily at higher U.S. tax rates.

The provision for income taxes for the fourth quarter of 2015 also includes a benefit of $77 million related to the decrease from the third-quarter estimated annual tax rate of 27 percent, primarily due to the renewal in the fourth quarter of the U.S. research and development tax credit.  The provision for income taxes for the fourth quarter of 2014 also included benefits of $85 million related to a decrease from the third-quarter estimated annual effective tax rate and the release of a valuation allowance against the deferred tax assets of a non-U.S. subsidiary. 

Global Workforce

Caterpillar worldwide, full-time employment was about 105,700 at the end of 2015, compared with about 114,200 at the end of 2014, a decrease of about 8,500 full-time employees.  The flexible workforce decreased by about 3,500 for a total decrease in the global workforce of about 12,000.  The decrease was primarily the result of restructuring programs and lower production volumes.  Full-time employment at the end of 2015 includes approximately 2,100 employees who participated in the U.S. voluntary retirement enhancement program and left the company effective January 1, 2016.

SEGMENT RESULTS

 

 

 

Construction Industries' sales were $3.640 billion in the fourth quarter of 2015, a decrease of $780 million, or 18 percent, from the fourth quarter of 2014.  The decrease in sales was mostly due to lower volume and the unfavorable impact of currency.  While sales declined for both new equipment and aftermarket parts, most of the decrease was for new equipment.

• Sales volume declined primarily due to the unfavorable impact of changes in dealer inventories as dealers decreased inventories more significantly in the fourth quarter of 2015 compared to the fourth quarter of 2014. In addition, deliveries to end users decreased.
• The unfavorable impact of currency was largely due to the euro, Japanese yen and Brazilian real.

Sales decreased in North America, Latin America and Asia/Pacific, while sales in EAME were about flat.

• In North America, sales declined mostly due to dealers substantially reducing inventories in the fourth quarter of 2015, compared to maintaining inventory levels in the fourth quarter of 2014.  Although residential and nonresidential construction activity is improving, sales to end users were lower than the fourth quarter of 2014.  We believe declines in construction activity related to oil and gas has resulted in availability of existing construction equipment for other purposes.
• In Latin America, dealer deliveries were down across the region, with the most significant decline in Brazil due to continued weak construction activity resulting from depressed economic conditions.  In addition, sales declined due to the unfavorable impact of changes in dealer inventories as dealers lowered inventories in the fourth quarter of 2015, compared to relatively flat inventories in the fourth quarter of 2014.
• In Asia/Pacific, the sales decline was primarily due to lower sales in China and India and the unfavorable impact of currency.  The most significant decline was in China, a result of continued weak residential and nonresidential construction activity.  The unfavorable impact of currency was primarily due to the weaker Japanese yen and Australian dollar.  
• Sales in EAME were about flat as lower end-user demand and the unfavorable impact of currency were about offset by the favorable impact of changes in dealer inventories.  Dealers lowered inventories more in the fourth quarter of 2014 than in the fourth quarter of 2015.

Construction Industries' profit was $220 million in the fourth quarter of 2015, compared with $362 million in the fourth quarter of 2014.  The decrease in profit was primarily due to lower sales volume, unfavorable price realization resulting from competitive market conditions and an unfavorable geographic mix of sales, and an unfavorable impact from litigation.  The decline was partially offset by favorable manufacturing costs and lower SG&A and R&D expenses.  The reduction in manufacturing costs and SG&A and R&D expenses was primarily due to lower incentive compensation expense and cost reduction efforts.

Resource Industries' sales were $1.836 billion in the fourth quarter of 2015, a decrease of $549 million, or 23 percent, from the fourth quarter of 2014.  The decline was primarily due to lower sales volume.  Sales were lower for both new equipment and aftermarket parts.  We believe mining companies are continuing to curtail maintenance and rebuild activities.

The sales decrease was primarily due to lower end-user demand across all regions.  This was partially offset by the favorable impact of changes in dealer inventories, primarily in Asia/Pacific, as dealer inventories were about flat in the fourth quarter of 2015, compared to a decline in the fourth quarter of 2014.

Commodity prices remained weak and mining customers continued to focus on improving productivity in existing mines and reducing their total capital expenditures, as they have for several years.  As a result, sales and new orders in Resource Industries continue to be weak.

Resource Industries incurred a loss of $105 million in the fourth quarter of 2015, compared with profit of $25 million in the fourth quarter of 2014.  The unfavorable change was primarily the result of lower sales volume partially offset by improved manufacturing costs.

Manufacturing costs were favorable due to lower period costs resulting from cost reduction efforts and improved material costs.

SG&A and R&D expenses were about flat, as higher spending for new product introductions was about offset by lower SG&A expenses.

Energy & Transportation's sales were $4.419 billion in the fourth quarter of 2015, a decrease of $1.772 billion, or 29 percent, from the fourth quarter of 2014.  The decrease was primarily the result of lower sales volume and the unfavorable impact of currency, mostly from the euro.  Sales decreased in all applications.

• Oil and Gas – Sales continued to decrease in much of the world due to substantially lower oil prices. The decline was most pronounced in equipment used for well servicing and drilling applications, with the most significant impact in North America, our largest market for well servicing. Demand for reciprocating engines used in gas compression was also down.
• Power Generation – Sales decreased in EAME and North America and were about flat in Latin America and Asia/Pacific. In EAME, sales decreased primarily due to the absence of a large project in the fourth quarter of 2014. In North America, sales declined primarily due to the absence of several large projects and unfavorable changes in dealer inventories as dealers decreased inventories in the fourth quarter of 2015 and increased inventories in the fourth quarter of 2014.
• Transportation – Sales decreased in North America and were about flat in all other geographic regions. In North America, sales weakened primarily due to the absence of a Tier IV locomotive offering.
• Industrial – Sales were lower in all regions. Lower sales in EAME were mostly the result of lower demand and the unfavorable impact of currency. In Asia/Pacific, North America and Latin America, the decline in sales was primarily due to lower end-user demand for most industrial applications primarily due to weak economic conditions.

Energy & Transportation's profit was $712 million in the fourth quarter of 2015, compared with $1.123 billion in the fourth quarter of 2014.  The decrease was due to lower sales volume partially offset by lower costs, primarily incentive compensation expense, and favorable product mix due to the absence of the sale of a large power generation project in EAME that was recognized in the fourth quarter of 2014.

Financial Products' revenues were $746 million in the fourth quarter of 2015, a decrease of $65 million, or 8 percent, from the fourth quarter of 2014. The decline was primarily due to lower average earning assets and lower average financing rates.  Average earning assets were down in Asia/Pacific, Latin America and EAME, partially offset by higher average earning assets in North America.  Average financing rates were down in North America, EAME and Asia/Pacific, partially offset by higher rates in Latin America.

Financial Products' profit was $191 million in the fourth quarter of 2015, compared with $197 million in the fourth quarter of 2014. The decrease was primarily due to a $17 million unfavorable impact from lower average earning assets, a $10 million decrease in net yield on average earning assets reflecting changes in the geographic mix of margin and currency impacts and a $10 million unfavorable impact from returned or repossessed equipment.  These decreases were partially offset by a $24 million increase in gains on sales of securities at Caterpillar Financial Insurance Services and a $12 million decrease in SG&A expenses due to lower incentive compensation expense. 

At the end of 2015, past dues at Cat Financial were 2.14 percent, compared with 2.17 percent at the end of 2014.  Write-offs, net of recoveries, were $155 million for the full-year 2015, compared with $104 million for the full-year 2014.  The increase in write-offs, net of recoveries, was primarily driven by the mining and marine portfolios.

As of December 31, 2015, Cat Financial's allowance for credit losses totaled $338 million, or 1.22 percent of net finance receivables, compared with $401 million, or 1.36 percent of net finance receivables, at year-end 2014.

Corporate Items and Eliminations

Expense for corporate items and eliminations was $1.210 billion in the fourth quarter of 2015, an increase of $469 million from the fourth quarter of 2014.  Corporate items and eliminations include: corporate-level expenses; restructuring costs; timing differences, as some expenses are reported in segment profit on a cash basis; retirement benefit costs other than service cost; currency differences for ME&T, as segment profit is reported using annual fixed exchange rates; and inter-segment eliminations. 

The increase in expense from the fourth quarter of 2014 was primarily due to a $585 million increase in restructuring costs partially offset by timing differences.

2016 OUTLOOK

From an economic perspective, the company does not anticipate significant improvement in the world economy.  We are expecting world GDP growth in 2016 to be similar to 2015 at about 2.5 percent.  While economic growth is expected to continue to be weak, but stable, there are certainly risks.  Political conflicts and social unrest continue to disrupt economic activity in parts of the world, particularly the Middle East.  The Chinese government's push for structural reform has slowed growth and increased volatility, and U.S. monetary policy could temper business confidence.  In addition, commodity prices, oil in particular, have declined substantially.  Further declines in commodity prices could negatively impact 2016 financial results.

Sales and revenues in 2016 are expected to be in a range of $40 to $44 billion – a mid-point of $42 billion.

Sales and Revenues

The outlook for 2016 sales and revenues does not anticipate improvement in world economic growth or commodity prices.  It is based on the continuation of substantial weakness in many of the key industries the company serves.  Sales and revenues are expected to be in a range of $40 to $44 billion – a mid-point of $42 billion.  The mid-point reflects a year-over-year decline of about 10 percent. 

In October 2015, the company provided a preliminary outlook for 2016 that expected sales and revenues to be about 5 percent below the $48 billion outlook for 2015 – about $45.5 billion for 2016.  The mid-point of today's outlook reflects a decline of about $3.5 billion from last October's preliminary outlook for 2016 sales and revenues.  That decline is largely a result of continued declines in commodity prices and sustained economic weakness in developing countries.  

Sales in Energy & Transportation are expected to decline about 10 to 15 percent from 2015.  Much of the decline is a result of low oil prices.  During the first half of 2015, sales remained at relatively high levels for equipment used in drilling and well servicing because we started the year with a substantial order backlog.  Sales declined during the second half of 2015 as orders from the backlog were shipped and new order levels were weak.  That impact, along with the further decline in oil prices, are the primary reasons for the expected decline in Energy & Transportation's 2016 sales.  In addition, continuing weakness in economic conditions in much of the world is expected to be negative for sales of power generation equipment, industrial engines, marine and rail.

Sales in Resource Industries are expected to be down about 15 to 20 percent from 2015 as a result of continuing reductions in mining-related commodity prices and difficult financial conditions for many mining customers around the world.  

Sales in Construction Industries are expected to decline about 5 to 10 percent from 2015.  In the United States, improving labor market conditions and relatively stable economic growth should continue to support the wider economy and construction.  However, we expect weakness in developing countries and lower activity in oil-producing regions to persist. 

Profit Outlook

The profit outlook for 2016 is $3.50 per share at the mid-point of the sales and revenues range.  To provide a better understanding of our expectations for 2016 profit, we are providing our outlook with and without anticipated restructuring costs.  Over the past few years, we have undertaken restructuring activities designed to lower our long-term cost structure.  Additional restructuring actions are anticipated in our outlook for 2016.  In total, we expect the cost of these restructuring actions in 2016 to be about $400 million or about $0.50 per share.  Excluding restructuring costs, our profit outlook for 2016 is about $4.00 per share at the mid-point of the sales and revenues range.

The profit outlook excluding restructuring costs includes several substantial positive and negative factors outlined below:

Positive Factors

• Lower period costs (includes period manufacturing, SG&A and R&D – about $900 million) – The expected improvement in period costs is largely a result of substantial restructuring actions implemented near the end of 2015 and continuing in 2016. About $180 million or about $0.20 per share of the expected improvement is a result of a change in accounting estimate from weighted average discount rates to spot rates for pension and OPEB service and interest costs. (See Q&A 10 on page 19 for more information.)
• Change in accounting principle for pension and OPEB costs (about $425 million) ­– In 2016, we will recognize actuarial gains and losses for pension and OPEB plans in the period in which they occur and recognize expected returns based on the fair value of plan assets. (See Q&A 10 on page 19 for more information.)
• Variable costs (about $350 million) ­– Material costs, cost absorption and variable labor and burden costs are expected to be favorable in 2016 as a result of lower commodity prices and supplier collaboration, a smaller inventory decline than 2015 and continued implementation of Lean.

Negative Factors

• Sales volume ($2.1 billion at mid-point of outlook range) – By far the most significant negative impact on profit is expected to be from lower sales volume, including a substantial impact due to an unfavorable sales mix, as the decline in sales is expected to be relatively more concentrated in products with higher than average margin rates.
• Price realization (about $200 million) – While price realization was relatively neutral from 2014 to 2015, it was positive in the first half of 2015 and negative over the second half of 2015. We expect that negative trend to continue in 2016. We are experiencing pricing pressure from the competitive nature of the businesses we are in and from the impact of a stronger U.S. dollar.

The tax rate in 2016 is expected to be about 1 percent higher than in 2015 (excluding 2015 discrete items), and ME&T capital expenditures in 2016 are expected to be lower than 2015.

 

NON-GAAP FINANCIAL MEASURES

The following definition is provided for "non-GAAP financial measures" in connection with Regulation G issued by the Securities and Exchange Commission.  The non-GAAP financial measures we use have no standardized meaning prescribed by U.S. GAAP and therefore are unlikely to be comparable to the calculation of similar measures for other companies.  Management does not intend these items to be considered in isolation or substituted for the related GAAP measure.

Profit Per Share Excluding Restructuring Costs

We incurred significant restructuring costs in 2015 and expect to incur additional restructuring costs in 2016.  We believe it is important to separately quantify the profit per share impact of restructuring costs in order for our 2015 results and the 2016 outlook to be meaningful to our readers.  We have also provided 2014 profit per share excluding restructuring costs comparable to the 2015 and 2016 presentation.  Reconciliation of profit per share excluding restructuring costs to the most directly comparable GAAP measure, diluted profit per share, is as follows:  

Machinery, Energy & Transportation

Caterpillar defines Machinery, Energy & Transportation as it is presented in the supplemental data as Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.  Machinery, Energy & Transportation information relates to the design, manufacture and marketing of our products.  Financial Products' information relates to the financing to customers and dealers for the purchase and lease of Caterpillar and other equipment.  The nature of these businesses is different, especially with regard to the financial position and cash flow items.  Caterpillar management utilizes this presentation internally to highlight these differences.  We also believe this presentation will assist readers in understanding our business.  Pages 24-32 reconcile Machinery, Energy & Transportation with Financial Products on the equity basis to Caterpillar Inc. consolidated financial information.

Caterpillar's latest financial results and outlook are also available via:

Caterpillar contact:  Rachel Potts, 309-675-6892 (Office), 309-573-3444 (Mobile) or Potts_Rachel_A@cat.com

 

 

 

 

 

 

 

 

 

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SOURCE Caterpillar Inc.