Construction and mining equipment maker Caterpillar Inc. (CAT) on Tuesday reported a 53% drop in profit for the third quarter, hurt by lower machinery and engine sales. The results for the quarter, however, exceeded analysts' expectations. The company tightened its earnings outlook for fiscal year 2009, saying that the third quarter was its low point in the recession and it was now seeing signs of a recovery.
For fiscal year 2010, the company projects sales and revenues to increase 10%-25% from the midpoint of the 2009 outlook range, partly due to the end of dealer inventory reductions that significantly impacted sales in 2009.
The global recession has had a negative impact on Caterpillar, affecting customer demand and increasing inventory levels. In April, the company reported its first quarterly loss in 17 years, hurt by lower sales and charges related to job cuts. The company has adopted drastic cost-cutting measures to combat the economic crisis. Going by its latest announcements, the situation is slowly improving for the company. In early August, Caterpillar indicated that its strategic planning, including inventory reduction and cost management, has positioned it for long-term profitability.
Third-Quarter Results
The Peoria, Illinois-based company reported net income for the third quarter of $404 million, or $0.64 per share, down from $868 million, or $1.39 per share, in the year-ago quarter. On average, 22 analysts polled by Thomson Reuters expect the company to earn $0.06 per share for the quarter. Analysts' estimates typically exclude special items.
Total sales and revenues for the third quarter were $7.30 billion, down 44% from $12.98 billion in the year-ago period, primarily due to significantly lower sales volume. Analysts had a consensus revenue estimate for the quarter of $7.49 billion.
Jim Owens, Chairman and Chief Executive Officer of Caterpillar said, "We are pleased with this quarter's profit given the severe economic environment and with our sales well below end-user demand as dealers continue to aggressively draw down inventories."
Owens added, "We believe the third quarter marked the low point for Caterpillar sales and revenues in what has been the toughest recession since the 1930s. We are seeing encouraging signs that indicate a recovery may be underway."
Peer Performance
Among others in the industry, Deere & Co. (DE:) is slated to announce financial results for the fourth quarter on November 25. Analysts expect the company to report earnings of $0.04 per share on revenues of $4.41 billion.
Agricultural and construction equipment manufacturer CNH Global NV (CNH) is scheduled to announce third-quarter results after the close of market on Tuesday. Analysts expect the company to report loss of $0.14 per share on revenues of $3.04 billion for the quarter.
Segmental Results
Caterpillar's machinery and engines sales for the quarter declined 46% to $6.58 billion from $12.15 billion in the previous-year quarter. Financial Products revenues were $715 million, down 14% from $833 million in the year-ago quarter.
During the quarter, price realization improved $227 million, while currency had a negative impact on sales of $138 million, primarily due to a weaker euro and British pound.
Machinery sales for the second quarter declined 52% from a year ago to $3.90 billion, with decline in sales spread across all regions. In North America, sales decreased 54% to $1.49 billion. Operating loss for the division was $124 million compared to operating profit of $464 million in the year-ago quarter due to sharply lower sales volume and losses at Cat Japan. These were partially offset by lower SG&A and R&D expenses, a decrease in manufacturing costs, LIFO inventory decrement benefits and improved price realization.
Engine sales were down 35% from the same period last year to $2.68 billion. Sales in North America dropped 41% from the prior-year quarter to $828 million. The division's operating profit declined 40% from the prior-year quarter to $370 million, due to significantly lower sales volume, partially offset by improved price realization and lower SG&A as well as R&D expenses.
Financial products revenues declined 14% from a year ago to $715 million due to lower average earning assets of $57 million and an $11 million impact of lower interest rates on new and existing finance receivables. Other revenues at Cat Financial decreased $25 million, primarily due to the unfavorable impact from returned or repossessed equipment.
The operating profit for the financial products division was $92 million, down 36% from the same period last year, due primarily to a $29 million impact from lower average earning assets, $29 million increase in the provision for credit losses at Cat Financial and a $23 million unfavorable impact from returned or repossessed equipment. These were partially offset by a $25 million decrease in SG&A expenses.
Other Metrics
Caterpillar's total operating costs for the quarter were $7.02 billion, down from $11.81 billion in the previous-year quarter. The company noted that significant inventory reduction resulted in $120 million, or $0.16 per share, of pre-tax LIFO inventory decrement benefits.
Operating profit for the third quarter was $277 million, down 77% from $1.17 billion in the year-ago quarter, primarily due to lower sales volume. Currency had a $90 million favorable impact on operating profit as the benefit to costs more than offset the negative impact on sales. Meanwhile, the consolidation of Cat Japan unfavorably impacted operating profit for the quarter by $79 million.
Caterpillar said that due to the positive results for the third quarter and the improving outlook, its board of directors maintained the quarterly dividend of $0.42 per share at the October 14, 2009, meeting.
As at the end of the third quarter, Caterpillar's worldwide employment was 94,225. Employment declined by about 17,900 from the year-ago quarter.
Since the end of 2008, Caterpillar has reduced full-time employment by about 17,100 and also reduced its flexible workforce by more than 17,000 since late 2008. The company said that it will adjust its workforce as production levels and resource requirements change.
In mid-March, Caterpillar had said it was laying off 2,454 workers in Illinois, Indiana and Georgia, citing the reduction in demand for its construction equipment. This was in addition to the 2,110 layoffs of its production employees at its three Illinois manufacturing facilities, announced in January, as well as the 20,000 job cuts revealed while announcing its fourth-quarter results last year.
Year-To-Date Results
For the nine months of the year, Caterpillar's net income fell to $663 million, or $1.07 per share, from $2.90 billion, or $4.57 per share, a year ago.
Total sales and revenues for the half year dropped to $24.50 billion from $38.40 billion in the same period of the prior year.
Outlook
Caterpillar updated its outlook for 2009 by tightening the sales and revenues outlook as well as its profit expectations.
Caterpillar now forecasts fiscal year 2009 profit in a range of $1.10-$1.30 per share, compared to the prior range of $0.40-$1.50 per share, including redundancy costs of about $0.75 per share. The company reiterated its expectations for redundancy costs for the full year of about $700 million, or $0.75 per share.
Excluding redundancy costs, the company now forecasts profit for the year between $1.85 and $2.05 per share, compared to the prior range of $1.15-$2.25 per share. Analysts expect the company to report earnings of $1.49 per share for the year.
Owens said, "Caterpillar's improved profit outlook for 2009 is a clear demonstration of our ability to implement our economic trough plans, which we announced as part of our corporate strategy in 2005. While we are still navigating through a very difficult environment in 2009, we see signs of improving economic conditions throughout most of the world."
Caterpillar also tightened its outlook for full-year sales and revenues to a range of $32 billion-$33 billion, from the prior range of $32 billion-$36 billion. Analysts have a consensus revenue estimate for the year of $33.07 billion.
The company said it expects dealers will continue to reduce machine inventories during the fourth quarter, but likely at a lower rate than the second and third quarters. According to the company, dealers will likely reduce new machine inventories between $3 billion and $3.5 billion for the full year 2009.
For fiscal year 2010, the company projects sales and revenues to increase 10%-25% from the midpoint of the 2009 outlook range, partly due to the end of dealer inventory reductions which significantly impacted sales in 2009.
Caterpillar noted that industrial production has improved in the vast majority of major economies, signaling an end to the world's worst postwar recession. According to the company, world economic growth should be positive in the last half of 2009. Led by developing economies, the company expects that economic recovery will strengthen in 2010, with worldwide growth of about 3%.
The company now expects capital expenditures for the year of about $1.4 billion, down slightly from the prior expectation of $1.5 billion.
Credit Suisse said in a client note last week that when Caterpillar announces third-quarter results today, a key focus would be the company's thoughts on full year 2009, as a likely indicator for what is in store in 2010. The brokerage believes that investors will be looking for the company's initial revenue outlook for 2010 and whether the dealer inventory cuts of $3 billion are sufficient. The brokerage feels that even if demand is flat next year, Caterpillar will have to overproduce theoretically to meet demand, which should translate into higher earnings.
Caterpillar Financial Services
Separately, Caterpillar Financial Services, a wholly owned subsidiary of Caterpillar, reported a 36% decline in profit for the third quarter from the year-ago period.
The Nashville, Tennessee-based Cat Financial's profit after tax for the second quarter declined to $76 million from $118 million a year ago.
Profit before income taxes was $80 million, down 50% from $159 million in the year-ago period. The decline in profit was due mainly to a $33 million impact from net currency exchange gains and losses, a $29 million increase in the provision for credit losses, a $29 million unfavorable impact from lower average earning assets and a $23 million impact from returned or repossessed equipment. These were partially offset by a $21 million decrease in general, operating and administrative expense and a $13 million impact from increased net yield on average earning assets.
Revenues for the quarter declined 11% to $676 million from $760 million in the prior-year period.
Of the decrease in revenues for the latest quarter, $77 million resulted from a decrease in earning assets and $23 million impact from returned or repossessed equipment. These were partially offset by a $20 million impact from higher interest rates on new and existing finance receivables.
Provision for income taxes for the quarter decreased $38 million compared with the same period of the prior year, primarily due to lower pre-tax results and income tax benefits related to the conclusion of two separate prior years' income tax examinations.
Bad debt write-offs, net of recoveries, were $65 million in the quarter, up from $22 million in the year-ago period. This increase was primarily driven by adverse economic conditions in North America and, to a lesser extent, in Europe.
At the end of the the third quarter, Cat Financial's allowance for credit losses totaled $381 million, compared to $390 million in the same period last year. The decrease in allowance for credit losses resulted from a $58 million decrease due to a reduction in the overall net finance receivable portfolio, partially offset by a $49 million increase in the allowance rate.
For the nine months, Cat Financial's profit after tax was $216 million, down 42% from $372 million in the year-ago period. Revenues for the period declined 11% to $2.06 billion from $2.32 billion in the same period last year.
Stock Quotes
In Tuesday's regular trading session, CAT is trading at $59.87, up $2.02 or 3.49% on a volume of 5.06 million shares. In the past 52 weeks, the stock has been trading in a range of $21.71-$58.20.
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