Cat reports improved Q2 profit despite lower sales
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- Published on Thursday, 24 July 2014 16:12
- Written by Paul Gordon
Citing its ability to execute more efficient operations after reducing costs in several areas, Caterpillar Inc. on Thursday reported it made a higher profit in the second quarter despite slightly lower sales when compared with a year ago.
The company took its feeling of confidence further by improving its profit outlook for the remainder of 2014 even while slightly reducing its sales projections for the year.
The company made a profit of $999 million, or $1.57 a share, compared with a profit of $960 million, or $1.45 a share, in the second quarter of 2013. For the first six months of the year profit was $1.921 billion, or $3.00 a share, compared with a profit of $1.840 billion, or $2.76 a share, through the first half of 2013.
Those profits were despite a 3 percent dip in second quarter sales and revenues, from $14.6 billion last year to $14.15 billion. That drop in sales and revenues can mostly be attributed to continued weakness in the company’s resource industries division, which is mainly mining equipment. In fact, said Group President and Chief Financial Officer Brad Halverson, if not for the troubled mining segment the company would be in the midst of its third best year in its history.
Caterpillar Chairman Doug Oberhelman noted the weak mining industry when he said the company was pleased it could nonetheless improve its bottom line. “Three key things are contributing to the continuing strength of our financial results — the diversity of our businesses, substantial success in operational improvements through the execution of our strategy and the strength of our cash flow and balance sheet,” he said.
“Our Construction Industries and Energy & Transportation segments continue to improve. Construction Industries had a good quarter with sales up 11 percent and operating profit up 83 percent from the second quarter of 2013. The improvement in Construction Industries, along with sales stability and record profit from Energy & Transportation, has helped us improve profit despite the downturn in the mining industry,” Oberhelman added.
“We understand that we don’t control the economy or the timing of a turnaround in mining. That’s why we’ve been so focused on executing our strategy and improving our operational performance, which have helped us control costs with year-to-date manufacturing costs and SG&A and R&D expenses improving nearly $500 million. We’ve also improved our balance sheet and cash flow over the past few years, and that’s contributed to our ability to return value to our stockholders — including today’s announcement that we intend to repurchase $2.5 billion of Caterpillar stock in the third quarter,” Oberhelman said.
Caterpillar’s board of directors announced earlier that the company would repurchase $10 billion in stock this year. That coupled with a 17 percent in the dividend reported a couple weeks ago is how the company is able to reward its stockholders, while its continued strength in its cash flow enables it to reward employees in its incentive bonus program, said Halverson.
He added that the ability to improve its profit outlook to $5.75 for the year, which is up from the previous outlook of $5.55 a share, while remaining conservative about sales and revenues should please shareholders, as well. That also includes a projected $400 million in restructuring costs for the year.
Said Oberhelman, “After a sizable drop in sales and revenues in 2013, our ongoing forecasting process has, since the third quarter of last year, pegged 2014 as a roughly flat year for sales. That’s still the case. There have been plusses and minuses, but they’ve both been relatively muted in the context of our total sales and revenues. While we’d certainly like to see improvement in economies around the world, and more specifically, the mining industry, the stability that we’ve seen this year has helped. Even though sales and revenues are relatively flat compared to last year, we’ve improved the bottom line with better execution and continued focus on costs.”
Still, the investment community didn’t seem too impressed. Caterpillar’s stock was at $105.04, down $3.34, at the close of trading on the New York Stock Exchange on Thursday. Just over 8 million shares were traded and while that is more than double the daily average volume of 3.54 million shares, it is well below how the stock normally trades on the day Caterpillar announces earnings.
But the profit did beat Wall Street, if by a small amount. Analysts who cover Caterpillar estimated the profit would be $1.53 a share. It was the third consecutive quarter Caterpillar’s profit beat Wall Street estimates.
During his meeting with reporters, Halverson said that despite continued weakness in the mining industry, Caterpillar remains committed to it. He said there have been signs that the industry has bottomed out, including that producers are filling orders with excess inventory and are improving their own efficiency for when the turnaround occurs. “And it will turn around and when it does we believe it will be consistent. Look 10 to 15 years out and what the energy demands will be and there will be consistency in the market,” he said.
When asked about politics abroad, particularly with events in Russia and the Urkraine, Halverson said they are a relatively small piece of Caterpillar’s business. “But we have focused on the humanitarian issues there and our thoughts go out to the families who have suffered. We are hoping for stability,” he said.
At home, Caterpillar remains frustrated with the lack of a comprehensive infrastructure bill out of Congress that would make badly needed improvements to the country’s infrastructure and create jobs. Such a bill would help sell Caterpillar equipment, as well. “Everybody understands we need it, so why don’t we have one?”
A crumbling infrastructure, Halverson added, detracts from this country’s global competitiveness. So does another issue in Washington that is troubling to Caterpillar ̶ the belief by some in Congress that the U.S. Ex-Im bank should be abolished. “Do we really want to be the only country competing on the world stage without an Ex-Im Bank? It’s a question of what’s for the good of the country and we should not be taking unilateral action that takes jobs away from this country,” he said.
“We are proud to be a global company but we have to be able to compete outside the U.S.,” he added.
Highlights from Caterpillar’s second-quarter report, which can be read in its entirety at www.caterpillar.com, include:
- Cat Financial reported second-quarter revenues of $728 million, an increase of $34 million, or 5 percent, over the second quarter of 2013. Second-quarter 2014 profit after tax was $146 million, a $35 million, or 32 percent, increase from the second quarter of 2013.
- Construction Industries and Financial Products were the only segments to see an increase in sales in the second quarter, with Construction Industries scoring an 11 percent increase largely because of a 20 percent improvement in North America.
- Resource Industries, which is largely mining, was off by 29 percent in the second quarter.
- Caterpillar anticipates global economic growth will be about 2.5 percent in all of 2014, which would be a modest improvement from 2013.
- Caterpillar worldwide full-time employment was 115,292 at the end of the second quarter, compared with 122,402 at the end of the second quarter of 2013, a decrease of 7,110 full-time employees. The decrease was primarily the result of restructuring programs.
