Caterpillar Net Falls on Aluminum Costs, Engine Sales

Caterpillar Inc., the world's biggest maker of heavy-duty diesel engines and earth-moving equipment, said second-quarter profit dropped 21 percent on rising costs and falling U.S. sales of truck motors and construction machinery. Caterpillar shares had their biggest decline in nine months. Net income decreased to $823 million, or $1.24 a share, from $1.05 billion, or $1.52, a year earlier, missing analysts' estimates. An 11 percent gain in operating expenses overwhelmed a rise in revenue. North American engine sales fell 7.5 percent after companies bought models in 2006 ahead of stricter U.S. emissions standards, Peoria, Illinois-based Caterpillar said. The company said aluminum and nickel prices unexpectedly increased, and Chief Executive Officer James W. Owens said materials spending was partly to blame for the "disappointing earnings." The U.S. housing recession cut orders for construction equipment. "Truck sales were down; no matter how you look at it the number is weak," said Eli Lustgarten, senior analyst with Longbow Securities in Independence, Ohio. "You have these increased costs and price squeezes, and the profits were weaker." Lustgarten has a "buy" rating on the stock. Caterpillar's shares dropped $3.78, or 4.4 percent, to $83.20 at 4 p.m. in New York Stock Exchange composite trading. That's the biggest decline since Oct. 20. The shares have gained 20 percent in the past year. Revenue Rises Revenue rose 7.1 percent to $11.4 billion on overseas sales of machines used in mining and oil and gas production, the company said. "In Europe, the Middle East and Asia our dealers are scrambling for products, particularly for the larger end of our product lines," Owens said on a conference call with analysts and investors. Sales of machinery and engines climbed 6.6 percent to $10.6 billion and revenue in the financial division gained 14 percent to $743 million. Operating expenses jumped 11 percent to $10.1 billion as Caterpillar's suppliers raised prices due to higher aluminum, nickel and steel costs. The company now forecasts materials expenses will rise 1 percent this year. "Both the machinery and engine segments missed our margin expectations, as core operating costs remained stubbornly high," Stephen Volkmann, a New York-based analyst with J.P. Morgan Securities Inc., wrote in a note to investors today. He has an "underweight" rating on the stock. Analyst Estimates The average of 13 analyst estimates compiled by Bloomberg was for profit of $1.49 a share in the quarter. Analysts, on average, projected sales of $10.8 billion. Caterpillar affirmed its 2007 earnings per-share forecast of $5.30 to $5.80 and projected sales of about $44 billion, the high end of its range. Revenue in North America is predicted to fall 12 percent, while international is forecast to climb 24 percent. Analysts, on average, estimate $5.57 a share in profit and sales of $42.1 billion for the year. The company lowered its full-year forecast for U.S. housing starts to 1.4 million from 1.5 million. "A third of the world is low-trend growth, and that's North America," said Chief Financial Officer David Burritt. "The developing countries are in a boom, and Europe is above average." Emission Standard The U.S. government put in place new emission standards for on-highway diesel truck engines at the start of the year, causing companies to boost purchases last year ahead of the switch. Caterpillar also scaled back production to correct an inventory surplus among North American dealers. Dealers reduced inventory by about $800 million in the quarter, compared with a $200 million reduction a year earlier. "They built and shipped more engines in the first quarter than their customers sold," said Ann Duignan, an analyst at Bear Stearns Cos. in New York. She has a "peer perform" rating on the stock and doesn't own it. Caterpillar has sought increased international sales with a greater presence in China, whose economy grew 11.9 percent in the second quarter, to counter the weakness in North America. It has doubled the number of employees there to 5,000 in the past three years and moved its Asia base to Beijing from Tokyo in 2006. The company's Asian joint venture with Mitsubishi Heavy Industries Ltd. will spend 20 billion yen ($164 million) to ramp up production of hydraulic excavators and small front-loaders over the next four years. Caterpillar has said it wants to take control of the 50-50 joint venture. The company said in February it will buy back $7.5 billion of its stock in the next five years.