Caterpillar Reports Steep 22-Percent First-Quarter Loss

Peoria, Ill.-based Caterpillar Inc. last week 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 $9.23 billion, down 22 percent from $11.80 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,” said chairman and CEO Jim Owens. “I’m proud of Team Caterpillar’s response to these challenging economic conditions. 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.

“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 $1.03 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.

Machinery sales in the first quarter of 2009 decreased $2.21 billion, or 29 percent, to $5.34 billion, from $7.55 billion in 2008. Engines sales in the quarter fell 8 percent to $3.17 billion from $3.43 billion a year ago.

Cat Financial revenues of $715 million decreased $102 million, or 12 percent, from first-quarter 2008. A decrease of $69 million was due to the impact of lower interest rates on new and existing finance receivables, which was partially offset by growth in average earning assets of $17 million. Other revenues at Cat Financial decreased $37 million. The decrease was primarily due to a $22 million write-down on retained interests related to the securitized asset portfolio and a $14 million impact from returned or repossessed equipment.

Manufacturing costs rose $330 million as a result of inefficiencies related to a sharp decline in production and higher warranty and material costs.

Worldwide employment was 103,078 at the end of first quarter 2009. Excluding the impact of consolidating Cat Japan and acquisitions, employment declined by approximately 5,900 from first quarter 2008. Cat Japan and acquisitions added about 6,400.

“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,” Owens said. “While redundancy costs have been a considerable expense, it’s the right thing to do for our people.”

Since late 2008, Caterpillar has taken a variety of steps to bring its workforce in line with demand, which includes full-time Caterpillar employees who have been laid off or separated, and those who have taken advantage of incentive-based voluntary plans offered by the company. Since the end of 2008 full-time employment has declined by about 10,000. In addition, the company has reduced its flexible workforce by about 15,000. Depending on business conditions, more layoffs and reductions may be required as the year unfolds, the company said. Additional action would likely be handled with flexible and cost-effective rolling layoffs.

The company is updating its outlook for 2009 as a result of weaker economic conditions. It is 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, Caterpillar expects to earn about $0.50 per share at the midpoint. Despite the lower sales and revenues outlook, the company expect strong cash flow for the year and expects to strengthen its 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. 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.”

Caterpillar expects the world economy to decline about 1.3 percent and remain in recession for most of the year, making this the worst year of global growth in the postwar period. It expects sales and revenues to be in a range of plus or minus 10 percent around a midpoint of $35 billion. At the midpoint, sales and revenues would be 32 percent lower than in 2008. After adjusting for the inclusion of Cat Japan sales, the decline would be about 35 percent, the most significant one-year decline since the 1930s.

With 2008 sales and revenues of $51.32 billion, Caterpillar is a 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.

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