Caterpillar Inc. (CAT) posted a robust 44% increase in profit to $1.02 in the second quarter of the year from $707 million in the year-earlier quarter. Excluding $204 million of expense related to the acquisition of Bucyrus, earnings per share surged 58% to $1.72 from $1.09 a year ago. However, the company failed to meet the Zacks Consensus Estimate of $1.77 per share.
Sales in the quarter rose 37% to $14.23 billion from $10.41 billion a year ago driven by higher customer demand. However, it was lower then the Zacks Consensus Estimate of $13.48 billion.
The sales growth was led by continued economic growth and improvement from the low levels of machine demand in the second quarter of 2010. However, the disaster in Japan had a negative impact of $200 million on sales.
Operating profit increased to $1.60 billion from $977 million in the second quarter of 2010. The improvement was attributable to higher sales volume and better price realization.
However, it was partially offset by higher manufacturing costs and selling, general and administrative (SG&A) and research and development (R&D) expenses. Moreover, the Japan disaster negatively impacted operating profit by nearly $60 million, primarily due to disruptions in factory and supply chain.
Manufacturing costs went up $364 million, primarily due to higher period costs related to increased production volume, increases in wage and benefit costs and higher incentive compensation. Freight costs were higher and material costs increased, primarily due to higher steel costs. However, these were offset by continued improvements in variable labor efficiencies.
SG&A and R&D expenses increased by $239 million mainly due to higher costs to support product programs, higher volume, inflationary pressure on wages and benefits and higher incentive compensation.
Segment Results
Machinery and Power System revenues increased 61% to $1.51 billion. Power Systems sales improved as a result of worldwide economic growth, strong demand for electric power and appropriate energy prices that encourage continued investment and increased demand from industrial engine customers that manufacture agricultural and construction equipment.
Financial Products revenues inched up 3% to $764 million driven by higher average earning assets and positive impact from returned or repossessed equipment, partially offset by an unfavorable impact from lower interest rates on new and existing finance receivables and a decline in Cat Insurance revenues.
Financial Products’ profit was $172 million in the quarter compared with $110 million in the second quarter of 2010. The increase was primarily due to a favorable impact of $21 million from higher net yield on average earning assets, a decrease of $20 million in provision expense at Cat Financial and a favorable change of $11 million from returned or repossessed equipment. However, these were partially offset by an increase in SG&A expenses (excluding provision expense at Cat Financial).
Financial Position
Caterpillar had cash and short-term investments of $10.72 billion as of June 30, 2011, up from $3.59 billion as of December 31, 2010. Total debt stood at $34.38 billion as June 30, 2011, translating into adebt-to-capital ratio of 72%.
In the first half of 2011, the company generated net cash of $3.29 billion from operating activities compared with $1.91 billion in the prior year, driven by higher profit.
Guidance
Caterpillar upgraded its guidance for 2011. Excluding the impact of Bucyrus acquisition, the company expects revenues in a range of $54 to $56 billion and earnings per share of $6.75 to $7.25. This compared with the prior guidance of $52 to $54 billion of sales and revenues and earnings per share of $6.25 to $6.75. The company anticipates Bucyrus will have a negative impact of $0.50 per share on profit during the year.
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 #1 Rank on the stock, which translates to a short-term rating of “Strong 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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