Caterpillar Earnings Jump Higher, Surprises The Market

10/27/2014 8:020 commentsViews: 23

The company continues on its lean manufacturing journey and focuses on improving safety, quality, and inventory turns.

 

Caterpillar and Lean ManufactoringThe heavy machinery honcho, Caterpillar (CAT), posted its third quarter results on October 23. The company was able to post much better earnings than was predicted, and the report card was completely in the green for the company. The stock market also reacted positively to the news and sent the Caterpillar stock soaring higher with the share price opening 3.3% higher at $97.69 on Thursday morning. Let’s find out the details of the third quarter earnings.

A brief quarter recap

Revenue edged 0.9% higher than a year ago to $13.55 billion, which was healthier than $13.20 billion estimated by analysts. Also, adjusted earnings jumped to $1.72 per share from $1.35 per share expected by the analysts. CEO Doug Oberhelman said, “We’re pleased with the third-quarter profit improvement considering world economic growth remains slower than we’d like…We are confident that, when we see more significant economic growth around the world, our consistent focus on operational performance will have prepared us to deliver even better results.”

Irrespective of economic slowdown in Russia and China, the company results ended on an attractive note, mainly due to the continued focus on cost management and operational execution. The company continues on its lean manufacturing journey and focuses on improving safety, quality, and inventory turns.

Though sales volumes decreased $187 million in the quarter due to lower sales in the Resource Industries and Construction Industries operating segments, the Energy and Transportation segment showed a significant improvement in volume and partially offset the decrease in overall sales volume. In fact, the mining slump tends to continue as mining companies are reducing their capital expenditure. Sales increased 15% in North America due to higher demand for oil and gas transportation applications, as well as the construction equipment demand revival in North America. In Europe, construction sales were decent and helped in offsetting the low volumes in the Asia Pacific, Latin America and CIS countries to a certain extent.

Restructuring has aided in improving the top and bottom line

As China remains a challenge for the company in the near future, and sales are not picking up momentum in the EMEA countries, Caterpillar resorted to workforce restructuring and closure of plants to rein in operational costs. Over the past year, Caterpillar has closed some of its smaller plants and has scaled back a large manufacturing complex in Gosselies, Belgium. The global workforce is currently down 4.5% from a year ago, to about 131,000. The CEO stated during the earnings call, “We have seen tremendous improvements… we’ve still got plenty of work to do.”

Restructuring costs were $81 million in the third quarter of the fiscal year, compared to $36 million a year earlier. Presently, the total restructuring cost is expected to be $450 million for the entire year, which is higher to the previous estimate of about $400 million. This is mainly due to restructuring at the mining plants as mining industry continues to remain weak in all the geographical regions.

Cash flow is solid, investors kept rewarded

The company has had a strong cash flow through the first nine months of the year. ME&T operating cash flow was $1.442 billion, compared to $2.109 billion recorded a year ago. This decrease was due to unfavorable changes in working capital, primarily inventory, that has increased in the third quarter of the fiscal year.

However, Caterpillar believes in keeping investors happy and has thus repurchased $2.5 billion of common stock in the third quarter. Nevertheless, the cash position of the company remains strong with cash balance of $6.082 billion as on September 30.

Remarkably, the year-to-date return of capital to the stockholders through the repurchase program and dividend pay-outs stood at $5.4 billion – a figure that is pretty impressive mainly when the segments are under pressure from economic headwinds.

Last word

The management remains optimistic regarding the future and expects the mining slump to have a limited effect on its earnings, while the sluggish construction activity in China will continue in the near future. As Caterpillar has implemented cost cutting strategies to maintain its profits at a decent level, it would be best to remain hooked to each and every company news that could throw more light on its upcoming future.

Source: gurufocus.com

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