Option Millionaires

[farooq]

It is little long but interesting, Why CAT does not have loss.

PEORIA, Ill., July 21 /PRNewswire-FirstCall/ -- Caterpillar Inc. today reported a second-quarter profit of $0.60 per share, down $1.14 per share from the second quarter of 2008. Excluding redundancy costs, profit was $0.72 per share. Redundancy costs related to reducing employment were $85 million before tax or $0.12 per share in the quarter. Sales and revenues of $7.975 billion were down 41 percent from $13.624 billion in the second quarter 2008.

Uh, make that the 40% club.

The second-quarter profit of $371 million was down $735 million from $1.106 billion in the second quarter of 2008. The decline was largely a result of lower sales volume and $85 million of redundancy costs. These negative impacts were partially offset by lower Selling, General and Administrative (SG&A) and Research and Development (R&D) expenses, favorable price realization, LIFO inventory decrement benefits and a lower tax rate.

Watch that LIFO; it can burn you hard down the road.

The street loved it; the futures moved about a half-percent on the release and CAT's stock is up $4 pre-market, more than 10%.

Oh, and if you're wondering how in the devil you can turn in these sorts of numbers with this kind of top-line, here's part of the reason:

Utilizing the Caterpillar Production System (CPS) with 6 Sigma, the company reduced inventory in the second quarter by more than $800 million, and through the first half of the year inventory has declined by more than $1.6 billion.

In other words they already paid for the $800 million of "stuff" building it in previous quarters (and recorded the costs of doing so) and now they've sold it, so this quarter it has a COGS (cost of goods sold) of zero and the entire $800 million goes straight to the bottom line.

That works out well for this quarter and makes for a hell of a beat. Indeed, absent this inventory sell-down the company would have posted more than a $400 million dollar loss!

And once again we get a lesson in how revenues (down 41%) hit profits (down 735 million from 1.106 billion), and the "profit" they made was only due to selling already-built stuff! That is, absent that extra inventory they had available to sell that decline in revenues was more than enough to tip the company into a sizable loss.

Source: http://market-ticker.denninger.net/archives/1242-Another-30%25-Club-Member-CAT-Also-KO-UTX.html