Caterpillar Inc. 10-Q Summary: Period Ended June 30, 2009
Business Context and Reporting Period
This Form 10-Q covers the quarterly and six-month periods ended June 30, 2009. Caterpillar Inc. operates in three principal lines of business: Machinery, Engines, and Financial Products. The reporting period reflects the company's response to a severe global recession, characterized by sharp declines in sales volume, aggressive cost-cutting measures, and significant inventory reductions. The company consolidated Caterpillar Japan Ltd. (Cat Japan) effective August 1, 2008, impacting year-over-year comparisons.
Key Financial Metrics
| Metric (in millions) | Q2 2009 | Q2 2008 | 6M 2009 | 6M 2008 |
|---|---|---|---|---|
| Total Sales and Revenues | $7,975 | $13,624 | $17,200 | $25,420 |
| Operating Profit | $347 | $1,525 | $172 | $2,818 |
| Profit (Net Income) | $371 | $1,106 | $259 | $2,028 |
| Diluted EPS | $0.60 | $1.74 | $0.42 | $3.18 |
| Operating Cash Flow (6M) | $2,803 | $1,905 | ||
| Total Assets | $62,092 | $67,782 | ||
| Total Debt | $33,300 | $35,540 | ||
| Cash and Short-term Investments | $3,991 | $2,736 |
Material Changes vs. Prior Period
- Revenue Decline: Total sales and revenues decreased 41% in Q2 2009 and 32% for the six months ended June 30, 2009, compared to the prior year. This was driven primarily by a 49% decline in Machinery sales volume and a 32% decline in Engines sales volume due to weak global demand and dealer inventory drawdowns.
- Profitability Impact: Operating profit fell 77% in Q2 and 94% for the six-month period. The decline was attributed to lower sales volume and $85 million (Q2) and $643 million (6M) in redundancy costs related to employment reductions.
- Cost Management: Selling, General, and Administrative (SG&A) and Research and Development (R&D) expenses declined significantly ($291 million in Q2) due to cost-cutting measures. Manufacturing costs decreased $85 million in Q2, aided by $110 million in LIFO inventory decrement benefits.
- Balance Sheet: Total assets decreased by $5.7 billion, driven by reductions in receivables and inventories. Cash and short-term investments increased by $1.26 billion to $3.99 billion, reflecting strong operating cash flow and reduced capital expenditures.
Guidance, Outlook, and Risks
- 2009 Outlook Update: Management tightened the full-year sales and revenue outlook to a range of $32 billion to $36 billion. The profit outlook is $0.40 to $1.50 per share (including redundancy costs of ~$0.75 per share). Excluding redundancy costs, profit is forecast between $1.15 and $2.25 per share.
- Inventory Strategy: The company remains committed to a $3 billion inventory reduction goal for 2009, having already reduced inventory by over $1.6 billion in the first half of the year. Dealers are expected to reduce machine inventories by close to $3 billion for the full year.
- Capital Allocation: The company has suspended its stock repurchase program. Capital expenditures for 2009 are expected to be approximately $1.5 billion, a 38% decline from 2008. Dividends were maintained at $0.84 per share for the quarter.
- Risks and Contingencies:
- Redundancy Costs: Significant charges ($643 million YTD) related to voluntary and involuntary separation programs impacting over 13,000 employees in the first half of 2009.
- Financial Products: Cat Financial faces increased credit risk, with bad debt write-offs rising to $55 million in Q2. Past dues increased to 5.53%.
- Legal/Environmental: Ongoing EPA negotiations regarding Clean Air Act violations and a wastewater release incident in Joliet, Illinois, though management does not anticipate a material impact.
- Market Conditions: Continued volatility in credit markets and global economic uncertainty pose risks to customer liquidity and demand.
Key Facts for Investor Verification
- Verify the sustainability of the $110 million LIFO inventory decrement benefit and the potential for additional benefits in the second half of 2009.
- Monitor the progress of the $3 billion inventory reduction target and the impact of dealer inventory drawdowns on future sales volumes.
- Assess the adequacy of Cat Financial's allowance for credit losses given the rise in bad debt write-offs and past dues.
- Track the execution of cost-cutting measures, specifically the reduction in SG&A and R&D expenses, to ensure they align with the improved profit outlook.
- Review the status of the EPA Clean Air Act negotiations and the Joliet wastewater incident for potential future liabilities.