Cat improves its outlook after second-quarter profit increase.

By PAUL GORDON
Journal Star
Posted Jul 22, 2010 @ 06:45 AM
Last update Jul 22, 2010 @ 08:28 PM

PEORIA — Buoyed by strengthening sales of its machines worldwide and a 91 percent year-to-year increase in profit in the second quarter, Caterpillar Inc. turned more bullish Thursday on its outlook.

Acknowledging there still is some concern about worldwide economic conditions, company leaders said they nonetheless believe a double-dip recession is unlikely and that sales and profits should continue to escalate through the rest of 2010.

With a 31 percent increase in sales and revenues, Caterpillar posted a profit of $707 million - or $1.09 a share - in the second quarter.

Second quarter sales and revenues were $10.41 billion, compared with $7.98 billion in the second quarter of 2009.

In the second quarter of 2009, the company had a profit of $371 million, or 60 cents a share.

For the first six months of 2010, profit was $940 million, or $1.46 a share, compared with $259 million, or 42 cents a share, in the first half of 2009. Sales and revenue reached $18.65 billion in the first half of the year, compared with $17.2 billion in 2009.

In improving its outlook for the full year, the company said it now expects sales and revenues in the range of $39 billion to $42 billion and a profit of $3.15 to $3.85 a share, up from $2.50 to $3.25 a share. The improved profit outlook is 22 percent higher than the midpoint in the previous outlook released after the first quarter.

"We've been highly focused on three things this year: significantly increasing production in response to higher demand from our customers, particularly in developing economies, aggressively managing costs and driving better cash flow," said Caterpillar CEO Doug Oberhelman in a news release.

"You can see the results in our second quarter - sales and revenues increased substantially, operating profit as a percent of sales more than doubled, and Machinery and Engines operating cash flow and our debt-to-capital ratio strengthened. Our employees, dealers and suppliers are doing a great job ramping up to support customers. The increase in our sales from first to second quarter 2010 was one of the most significant quarter-to-quarter increases in our history," Oberhelman added.

The profit far exceeded Wall Street expectations. A consensus estimate of the analysts who follow Caterpillar was that the profit would be 84 cents a share, according to Thomson Financial Services.

Investors responded favorably. Caterpillar stock closed Thursday at $68 a share, up $1.13 a share, or 1.69 percent. More than 15 million shares - or 50 percent more than the average daily volume - were traded on the New York Stock Exchange.

Analysts were surprised by the results, but not that Caterpillar improved its outlook.

While noting the sales increases worldwide, particularly in economically struggling regions of the U.S. and Europe, Adam Fleck of Morningstar also cited the Caterpillar Production System for helping profitability in that it improved operating efficiency.

"Given that the product mix has been weaker so far in 2010, the profit they've been able to produce speaks well about CPS," he said.

Fleck said he believes Caterpillar's outlook for the year is achievable. "I thought they were conservative coming out of the fourth quarter and that was understandable because they had no reason to go out on a limb. Given the demand they are seeing, they can achieve those numbers."

Company officials mentioned the product mix in a conference call with analysts. Mike DeWalt, director of investor relations, said the mix was "rich" in 2009 in that most of the sales recorded were larger machines that were ordered in 2008 and take longer to turn out. This year, however, more small machines and engines that can be produced more quickly are in the mix, he said.

Still, sales were up enough that combined with operating efficiencies and favorable price realization resulted in the profit increase.

Key to the improved sales volume was a 43 percent increase in machine sales in North America, a region that had been down almost four years for Caterpillar.

Machine sales more than doubled in Latin America when compared with the second quarter of 2009, with Brazil leading the way. Sales were up 36 percent in Europe/Middle East, a surprise given the economic troubles in Europe this year.

As expected, machine sales were up significantly - 62 percent - in the Asia/Pacific region as growth continued in China.

Revenues were down 5 percent from the second quarter of 2009 at Cat Financial Products, the company's financing subsidiary.

In a meeting with reporters, Ed Rapp, group president and chief financial officer, said the production systems implemented in Caterpillar factories over the last couple of years will help the company be better able to meet customer demand in the event of a fast manufacturing ramp-up.

Acknowledging the huge second quarter improvement was skewed somewhat by the fact it's compared year-to-year with some "pretty bad lows," Rapp said the company still believes there is growth ahead. He said the company believes a double-dip recession is unlikely.

He noted that the concerns about continued economic woes should keep interest rates low and prevent the Federal Reserve from tightening lending policies.

Other highlights from Caterpillar's report include:

- Caterpillar's worldwide employment was 97,487 at the end of the second quarter. Year-to-date in 2010, the company has added about 3,650 employees, primarily because of increases in production. About 1,250 of the additional employees were in the United States, and about 2,400 were outside the United States.

- The strong profits mean a return of incentive bonuses for management and salaried personnel. The bonuses were cut in 2009 because of the recession. To date the company anticipates short-term incentive bonuses totaling $600 million in 2010, up from the previous estimate of about $350 million.

- Caterpillar has lowered its 2010 forecast for housing starts to about 675,000 units because of downward revisions of Gross Domestic Product. Still, starts averaged a 610,000 annual rate in the first six months of this year, so that forecast implies a small improvement in the second half of the year.

Paul Gordon can be reached at 686-3288 or pgordon@pjstar.com

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