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Caterpillar Responds to Sharp Volume Decline First-Quarter Loss, but Profitable Excluding Redundancy Costs

By Amarendra Bhushan for CEOWORLD Magazine Updated:April 21, 2009

Caterpillar Inc. (NYSE: CAT) today reported a loss of $0.19 per share, down $1.64 per share from the first quarter of 2008. Excluding redundancy costs, first quarter profit was $0.39 per share. Redundancy costs related to reducing employment were $558 million before tax or $0.58 per share in the quarter. Sales and revenues were $9.225 billion, down 22 percent from $11.796 billion in the first quarter 2008.

“These results demonstrate significant reduction in our cost structure as a result of swift deployment of the economic trough strategy we introduced in 2005. I’m proud of Team Caterpillar’s response to these challenging economic conditions,” said Chairman and Chief Executive Officer Jim Owens. “Our business units are making the tough decisions necessary to respond to this widespread and sharp global recession. By taking aggressive and decisive actions now, we’re positioning the company not only for success in the short-term, but to be even more competitive in the long-term when the global economy recovers. We were also pleased with the improvement in price realization during the quarter. It’s a testament to the value customers place on our products,” Owens added.

“In addition to cost control, we’re very focused on maintaining our financial strength. We expect to lower inventory by about $3 billion in 2009 and reduced it by $789 million in the first quarter. Inventory management is a key element of the Caterpillar Production System using 6 Sigma, and we are pleased with the traction we’re gaining. In this environment liquidity is a major focus, and as a result we’ve decided to hold more cash than usual. While we do not anticipate the need to issue additional term debt during the remainder of the year, we may do so to maintain our liquidity position. Maintaining Caterpillar’s financial strength through these very difficult times will allow us to emerge a stronger company,” Owens said.

The first-quarter loss of $112 million was down $1.034 billion from a $922 million profit in the first quarter of 2008. The decrease was largely a result of lower sales and revenues and $558 million of redundancy costs.

“This is an extremely difficult time for employees affected by this severe economic downturn, and providing them with financial assistance and transitional support is important. While redundancy costs have been a considerable expense, it’s the right thing to do for our people,” Owens said.

Outlook

The company is updating its outlook for 2009 as a result of weaker economic conditions. We are now expecting 2009 sales and revenues to be in a range of plus or minus 10 percent around a midpoint of $35 billion. The high degree of uncertainty in the global economy, the timing and impact of stimulus measures and the extent of dealer inventory reductions make it very difficult to forecast sales and revenues, making the outlook range wide.

The company expects to be profitable in 2009 throughout the sales and revenues outlook range excluding redundancy costs, and at the midpoint, expects profit of about $1.25 per share excluding redundancy costs. Redundancy costs are expected to be about $0.75 per share for 2009 and, including these costs, we expect to earn about $0.50 per share at the midpoint. Despite the lower sales and revenues outlook, we expect strong cash flow for the year and expect to strengthen our balance sheet.

“A great deal of uncertainty exists in the global economy, making it extremely difficult to know how our customers will respond during the remainder of 2009,” said Owens. “One thing is clear, Team Caterpillar will remain focused on containing costs and reducing inventory,” Owens said. “We will take action to keep Caterpillar lean, while at the same time making strategic product and operational investments to position Caterpillar for long-term success when the economy does recover.”

Notes:

* Information on non-GAAP financial measures, including the treatment of redundancy costs in the first quarter and in the outlook, is included on page 25.

* Glossary of terms is included on pages 23-24; first occurrence of terms shown in bold italics.

* First-quarter sales and revenues of $9.225 billion were 22 percent lower than the first quarter of 2008.

* As a result of recessionary conditions throughout much of the world, Machinery and Engines sales decreased $2.469 billion.

* Machinery sales decreased 29 percent, Engines sales were down 8 percent, and Financial Products revenues declined 12 percent from a year ago.

* Redundancy costs were $558 million before tax or $0.58 per share in the quarter.

For more than 80 years, Caterpillar Inc. has been making progress possible and driving positive and sustainable change on every continent. With 2008 sales and revenues of $51.324 billion, Caterpillar is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines. The company also is a leading services provider through Caterpillar Financial Services, Caterpillar Remanufacturing Services, Caterpillar Logistics Services and Progress Rail Services. More information is available at: http://www.cat.com.

Sales of $5.342 billion decreased $2.206 billion, or 29 percent, from first quarter 2008.

* Excluding the consolidation of Cat Japan, sales volume decreased $2.450 billion, the result of the worst worldwide recession in the postwar period.

* Price realization increased $91 million.

* Currency decreased sales by $138 million.

* Geographic mix between regions (included in price realization) was $2 million unfavorable.

* The consolidation of Cat Japan sales added $291 million to sales.

* Recessionary conditions throughout much of the world caused machine demand to drop. We allowed dealers to cancel orders to bring their inventories more in line with reduced demand. Dealers reported inventory reductions of about $300 million during the first quarter. During the first quarter of 2008, dealers increased inventories about $700 million.

* Absence of the dealer inventory build that occurred in the first quarter of 2008 combined with the reduction of $300 million in the first quarter of 2009 accounted for about $1 billion of the overall decline in volume.

* Economic output in the developed economies of Europe, Japan and the United States declined substantially. Housing construction collapsed, and nonresidential construction declined.

* Developing economies, while faring better, weakened. Lower commodity prices and severe recessions in the developed countries led to large declines in exports. In addition, policy tightening last year has started to curtail domestic spending. Output slowed sharply in many countries and declined in Brazil, Mexico and Russia.

* Credit spreads on emerging market debt were very high, and international banks sharply curtailed lending to these countries. Those actions caused some delays and cancellations in major construction projects. As a result, sales volume declined in the developing regions of Latin America, Africa/Middle East, Commonwealth of Independent States (CIS) and Asia/Pacific.

* Key commodity prices held near or above investment thresholds, but producers in many countries cut production. As a result, sales of machines used in mining declined.

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