Caterpillar Wins Defense Contract

Zacks

On Mar 22, Caterpillar Inc. (CAT) won a 5-year contract worth $633 million from the Department of Defense to supply equipments to the U.S. military.
 
The fixed-price contract with economic-price-adjustment for the supply of material handling equipment will commence from fiscal 2013 through Mar 21, 2018. As per the contract, Caterpillar will supply the equipment to the U.S. Army, Navy, Air Force, Marine Corps, and federal civilian agencies. The locations specified in the contract are - Ill, Pa, Belgium, Japan, Germany, and Texas.
 
Amongst the other contract awards by the Department of Defense on the same date, Lockheed Martin Corporation (LMT) was awarded a $27.4 million extension to previously awarded contract to exercise and restructure the fixed-price-incentive-options for the Surface Electronic Warfare Improvement Program. General Dynamics’ (GD) Armament and Technical Products division was awarded a $7 million contract to supply 19 M61A2 20mm Lightweight Gatling Gun Systems for installation on F/A-18 E/F fighter aircraft. ManTech International Corporation (MANT) also won a $15.3 million contract for systems engineering and integration support for the Space and Missile Systems, Launch and Range Systems directorate.
 
In May last year, Caterpillar was awarded a fixed-price with economic price adjustment contract valued at $776 million for supplying commercial type construction equipment by the Defense Logistics Agency. The contract is scheduled to be completed by May 23, 2017.
 
At the end of the fourth quarter, Caterpillar’s backlog was $19.6 billion, a 15% sequential and 34% annual decline. The most significant decline was noted in the Resource Industries. Although dealer deliveries to end users in the fourth quarter of 2012 remained flat sequentially, orders received from Cat dealers have continued to be well below the end-user demand. Caterpillar will need additional orders during the year to meets its guidance.
 
Caterpillar’s fourth quarter results were also disappointing with revenues declining 7% to $16.1 billion due to the impact of changes in dealer new machine inventories – the first quarterly revenue drop since the March 2010 quarter. Among the regions, sales growth in Latin America was the only saving grace. Caterpillar’s worldwide sales declined 13% for the three months ending Feb 2013, the third consecutive month of declining sales, worsening from the 4% and 1% dip reported in Jan 2013 and Dec 2012, respectively. 
 
Caterpillar sales started its downhill journey in Dec 2012, hurt by tougher year-earlier comparisons and rising inventories of unsold equipment. Caterpillar had earlier witnessed negative sales growth in Apr 2010 and since then enjoyed a stint of positive growth, benefiting from strong equipment demand both domestically as well as in the emerging markets.
 
Caterpillar remains affected by slowing demand and inventory correction as a result of overproduction compared to demand. Caterpillar is struggling to bring production under control.
 
Even though Caterpillar will benefit from the recovery in the U.S. construction sector, the recent loss of sales momentum, declining backlog, negative impact of the European debt crisis and a slowing Chinese economy remain concerns. Caterpillar currently retains a Zacks Rank #3 (Hold).
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