Caterpillar Inc. (CAT) posted a very strong increase in profit to $1.23 billion or $1.84 per share in the first quarter of 2011 from $233 million or 36 cents per share in the same quarter of 2010, primarily driven by higher sales volume
This is an all-time quarterly record in the company’s history. The company has also beaten the Zacks Consensus Estimate by a significant margin of 53 cents per share.
Revenues during the quarter surged 57% to $12.95 billion, surpassing the Zacks Consensus Estimate of $11.20 billion. Higher sales volume contributed $4.07 billion to the increase in revenues, price realization added $295 million, Electro-Motive Diesel (EMD), which was acquired in the third quarter of 2010, added $264 million and currency impacts contributed $94 million.
The increase in revenues was a result of continued economic growth and improvement from the low levels of machine demand in the first quarter of 2010.
Operating profit was $1.83 billion compared with $508 million for the first quarter of 2010. The improvement was attributable to higher sales volume and better price realization. These were partially offset by unfavorable manufacturing costs and higher selling, general and administrative (SG&A) and research and development (R&D) expenses.
Manufacturing costs went up $219 million, primarily due to higher period costs related to increased volume and provisions for incentive pay. Material prices, primarily of steel, and freight costs were unfavorable compared with the first quarter of 2010.
SG&A and R&D expenses increased by $290 million to $1.62 billion, primarily due to increased provisions for incentive pay, higher costs to support new product development programs and increased growth-related costs.
Segment Results
Machinery and Power System revenues shot up 63% to $12.28 billion due to higher end-user demand and dealers adding inventory during the first quarter of 2011. Sales volume increased more than 50% while manufacturing costs increased less than 3% during the quarter. Operating profit in the segment leapt 284% to $1.76 billion from $458 million a year ago.
Financial Products’ revenues slipped 2% to $672 million from the first quarter of 2010. The decrease was primarily driven by an unfavorable impact of $15 million from lower average earning assets, $14 million from lower interest rates on new and existing finance receivables and a $12 million decrease in Cat Insurance revenues.
These were partially offset by a $19 million favorable change from returned or repossessed equipment and a favorable impact from miscellaneous net revenue items.
Financial Products' profit was $136 million in the quarter compared with $106 million in the first quarter of 2010. The increase was primarily attributable to a $19 million favorable change from returned or repossessed equipment, an $11 million favorable impact from higher net yield on average earning assets and a favorable impact from miscellaneous net revenue items. These were partially offset by an $8 million increase in SG&A expenses (excluding the provision for credit losses).
Financial Position
Caterpillar had cash and short-term investments of $4.87 billion as of March 31, 2011, up from $3.59 billion as of December 31, 2010. Total debt stood at $29.59 billion as March 31, 2011, translating into adebt-to-capital ratio of 70%.
In the quarter, the company generated net cash of $765 million from operating activities in fiscal 2010 compared with $716 million in the prior year.
Guidance
In 2011, Caterpillar anticipates sales and revenues in the range of $52 billion to $54 billion compared with $42.6 billion in 2010. The company also expects profits in the range of $6.25 to $6.75 per share, an increase from $4.15 per share in 2010.
The 2011 earnings outlook represents the highest profit in Caterpillar history, exceeding the prior record of $5.66 per share set in 2008. The highly optimistic profit is driven by higher sales volume.
Our Take
Caterpillar’s strong brand name, pricing power and global dealer network put it in a vantage position to capitalize on the growing need for infrastructure development worldwide. We believe Caterpillar’s expansion plans of opening new facilities and furthering existing operations, particularly in emerging markets, will boost its long-term potential.
Furthermore, its biggest acquisition to date, Bucyrus, will not only enhance its product line and increase its presence in the emerging markets, but also strengthen its position as the top mining equipment manufacturer in the U.S.The company currently retains a Zacks #2 Rank on the stock, which translates to a short-term rating of Buy.
Peoria, Illinois-based Caterpillar Inc. is the manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. The company is one of the few leading U.S.companies in an industry that competes globally from a principally domestic manufacturing base.
The company operates three divisions – Machines, Engines and Financial Products. Caterpillar competes with CNH Global NV (CNH), Komatsu Ltd. (KMTUY) and Volvo AB (VOLVY) but is way ahead of its peers.
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