Wednesday, 22 July 2009 01:00

CAT’s 2Q09 results analysis

Worsening end market demand and continuous reduction in the dealer inventory have led a steeper than anticipated decline of 41% (y-o-y) in the CAT’s revenues to $7.98 bn in 2Q09 from $13.62 bn in 2Q08. Total machine sales and engine sales declined 49% and 32%, respectively, while the revenues from financial products declined 13%. Decline in machine and engine sales was primarily volume driven and was across all geographies. Machine sales in North America, EAME (Europe, Middle East and Africa), Asia Pacific and Latin America declined a significant 51%, 61%, 25% and 47%, respectively. Engine sales in North America, EAME, Asia Pacific and Latin America declined 30%, 36%, 26% and 31%, respectively. The weak demand scenario propelled by cut in residential and non-residential construction spending is reflected in the company’s recent financial results.

The bottom line was severely hit by the sharp drop in the top line along with margin contraction. The increase in SG&A and R&D expenses as percentage of revenues offset the improvement in gross margin achieved through drastic workforce reduction. While the cost of goods sold (material and labor cost) as percentage of revenues declined to 72.1% in 2Q09 from 73.7% in 2Q08, the SG&A costs as percentage of revenues increased to 11.5% in 2Q09 from 7.9% in 2Q08 and the R&D costs as percentage of revenues increased to 4.4% in 2Q09 from 3.0% in 2Q08.

Operating profit (excl redundancy costs of $85 mn) declined 71.7% to $401 mn in 2Q09 from $1,525 mn in 2Q08. However, the sharp decline in operating results was moderated by $93 mn of favorable currency impact included in other income (expense) and lower effective tax rate which was about 10.0% in 2Q09 against 28.2% in 2Q08. Consequently, net income declined 66.5% to $371 mn in 2Q09 from $1,106 in 2Q08. EPS was $0.60 in 2Q09 against $1.74 in 2Q08.


2Q09 Actual versus our estimates – not much difference

The decline in revenues was more severe than anticipated and the reported revenues were lower at $7.98 bn in 2Q09 against our estimates of $9.2 bn. Although the company gained from larger than expected decline in workforce which boosted the gross margin, the gains were offset by higher than expected SG&A and R&D costs with the operating margin (excluding redundancy costs) marginally higher at 5.4% against our estimates of 5.1%. CAT’s total workforce declined 7.1% (q-o-q) in 2Q09 to 95,761 from 103,078 against our estimates of 3.0% reduction.

Operating profit (excl redundancy costs) were 7.9% lower at $432 mn against our estimates of $469 mn. Variation in the operating profit (incl redundancy costs) is largely due to variation in the redundancy costs which amounted to $85 mn in 2Q09 with balance expected to be incurred in the second half of 2009. We accounted for the redundancy costs of about $200 mn (expected redundancy costs for full year 2009 less redundancy costs incurred in 1Q09) in 2Q09 itself.

Net income (excl redundancy costs) was 27.9% lower than our estimates and the variance is largely on account of favorable currency impact (majorly hedging gains) of $93 mn included in other income (expense) and lower tax rate. The 2Q09 EPS (excl redundancy costs) of $0.72 included $0.14 per share impact from hedging gains and $0.12 per share impact for lower tax rate. Excluding these two items (which don’t relate to CAT’s core operations and are not expected to recur in coming periods), 2Q09 EPS comes to $0.46, close to our estimate of $0.54 (and much higher than consensus estimate of $0.22)

Company’s 2009 Revised Guidance versus our estimates

As per the Company’s revised guidance, the company expects the revenues within the range of $32 bn to $36 bn for full year 2009. EPS (excl redundancy costs) is expected within the range of $1.15 to $2.25 per share. Thus, after excluding the EPS for the first half of 2009 of $1.11, the company is expecting EPS (excl redundancy costs) ranging from $0.04 to $1.14 for the second half of 2009 thus estimating a subdued performance for 2H09 against 1H09.

Our projections include 2009 revenues and EPS (excluding redundancy cost) estimates of $36.9 bn and $2.04, respectively, in line with company’s guidance.

Click to enlarge.

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Last modified on Wednesday, 22 July 2009 01:00

1 comment

  • Comment Link dkn Wednesday, 22 July 2009 09:24 posted by dkn

    As I've noted to you, I just don't see how CAT, right now, could somehow bring about the best gross margin since at least Q3 2007, through the "sweet spot" of peak sales and still reasonably low input costs. I fully grant to them the benefits of cutting. They did a great job there. But best since at least Q3 2007, when sales are down tremendously? Give me a break.

    Even in their own guidance they implicitly assume it goes away in Q3 and Q4 2009. Or so it seems.

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