LIFO Liquidation at Caterpillar
My response to WSJ article on Caterpillar dated 7/22/09 (also posted on WSJ online comments section). Caterpillar got burned due to huge capacity expansion in 2007/2008 because they thought they knew what was coming. So I believe, they are holding the cards close to their vest and focusing on the bottom line now (at least you know what you are getting when you focus on the supply side).
Also I think they are benefiting from the huge LIFO reserve created during the pre 2008 inflationary world. This reserve is being depleted since the existing inventory is being used instead of new inventory.
What do you do with all that inventory of tires that were stockpiled when Oil was at $100+ and capacity constraint at the tire manufacturer’s caused the tire prices to go through the roof ? It seemed prudent to stockpile those tires then, not so now.
Perhaps it is time to switch to FIFO accounting for the inventory in case of deflation?
Update (October 26, 2009)
For Q3, 2009, Caterpillar reported $7.29 billion in revenues (down 44% from 2008 Q3) and $404 Million of earnings (down 54% from 2008 Q3) of which $120 million was attributed to LIFO reserve liquidation (29.7%) and $129 million to tax benefits (31.9%).
Shaker Cherukuri
Managing Principal
Process Improvement Solutions, Inc.
