Caterpillar Inc. (CAT) posted an impressive third quarter with a 44% climb in EPS to $1.71 from $1.22 in the year-earlier quarter. Excluding the impact of the acquisition of Bucyrus International Inc., EPS was a record $1.93, up an impressive 58% from $1.22 a year ago. The company was way ahead of the Zacks Consensus Estimate of $1.59 per share.
Driven by higher customer demand, sales in the quarter rose 41% to a record $15.7 billion from $11.1 billion a year ago. Excluding Bucyrus, sales were $14.6 billion in the quarter, a record. The result surpassed the Zacks Consensus Estimate of $14.6 billion.
The sales growth was led by higher sales volume. In addition to the improvement in sales for new equipment and after-market parts, new equipment sales improved significantly. Price realization improved $129 million, and currency impacts added $356 million. The Bucyrus acquisition provided $1.135 billion in sales.
Cost of goods sold increased 48% to $11.4 billion in the quarter from the year-ago quarter. Consequently, gross margin contracted 330 basis points to 27.1%. Selling, general and administrative expenses increased 18% to $1.36 billion.
Operating profit increased to $1.75 billion from $1.19 billion in the third quarter of 2010. The improvement was attributable to higher sales volume and better price realization slightly offset by higher manufacturing costs, the unfavorable impact of currency, acquisitions and higher selling, general and administrative and research and development expenses Operating margin expanded 50 basis points to 11.2% in the quarter.
Segment Results
Machinery and Power System revenues jumped 44% to $1.5 billion. Construction Industries’ sales improved as a result of significantly higher sales volume across all geographic regions, increase in sales for new equipment, after-market parts as well as new equipment.
Power Systems sales improved as a result of higher sales volume for both new equipment and parts, the acquisition of Electro-Motive Diesel, currency and price realization. Sales were up in all geographic regions except for Latin America, which was affected by the absence of two large orders for turbines in the third quarter of 2010. Machinery and Power System’s operating profit surged 47% to $1.68 billion in the quarter.
Financial Products’ revenue was $757 million in the quarter, a 3% increase from $737 million in the year ago quarter. The improvement was primarily due to higher average earning assets and higher miscellaneous net revenues, partially offset by an unfavorable impact from lower interest rates on new and existing finance receivables.
Financial Products’ profit was $145 million compared with $108 million in the third quarter of 2010. The increase was primarily due to a $17 million decrease in provision expense at Cat Financial, a $14 million favorable impact from miscellaneous net revenues and a $13 million favorable impact from higher net yield on average earning assets.
Financial Position
Caterpillar had cash and short-term investments of $3.2 billion as of September 30, 2011, up from $3.59 billion as of December 31, 2010. In the first nine months of 2011, the company generated net cash of $5.5 billion from operating activities compared with $2.94 billion in the comparable period in the prior year.
Total debt stood at $30.7 billion as of June 30, 2011, translating into a debt-to-capital ratio of 68% compared with $25 billion and 69% as of December 31, 2010. Machinery and Power System’s debt-to-capital ratio at September 30, 2011, was 41.1% compared with 305 as of December 31, 2010
Guidance
Caterpillar upgraded its guidance for 2011. Excluding the impact of Bucyrus acquisition, the company expects revenues to be around $56 billion and earnings per share of $7.25. This compared with the prior guidance of $54 to $56 billion of revenues and earnings per share of $6.75 to $7.25. Including the impact of Bucyrus, revenues are expected to be about $58 billion in 2011 and EPS at $6.75 per share.
For 2012, Caterpillar expects revenues to be up 10 to 20% from the 2011 outlook of about $58 billion. The 2012 outlook includes a full year of Bucyrus-related sales of about $5 billion, up from a partial year of about $2 billion in 2011.
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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