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Cat profits drop

Posted July 19, 2007 11:00 pm

STEVE TARTER

Citing lower sales of truck engines and continued weakness in the North American housing market, Caterpillar Inc. reported Friday that second-quarter profits were down 21 percent from last year.

Wall Street reacted negatively as Caterpillar's reported share price of $1.24 for the quarter fell far short of $1.49 share price that analysts had predicted.

Second-quarter net income fell to $823 million, or $1.24 a share, from $1.05 billion, or $1.52 a share, a year earlier.

Caterpillar stock dropped more than 4.5 percent, closing at 82.91, helping put a damper on stock prices as the Dow lost almost 150 points Friday.

"It was a good-news, bad-news situation. Global demand was fantastic but that was overshadowed by a weak domestic market and cost issues," said Matt Collins, an analyst with Edward Jones in St. Louis.

Those cost issues involved higher material costs along with efficiency issues that Collins described as "a perfect internal storm" for the company.

Caterpillar officials said they planned to weather that storm by taking action. "We've got some work to do on costs in 2007. We want to put ourselves on a diet for the second half of the year," said Dave Burritt, the chief financial officer.

"There'll be some belt-tightening. Instead of traveling overseas, we might opt for a conference call in some cases. There'll be more focus on cost areas."

Caterpillar is also in the process of implementing a major overhaul of its production system, "a comprehensive program to streamline and improve our value chain," said Burritt.

That overhaul could take Caterpillar up to three years to complete but results could be realized as soon as late 2007 with a lot of "heavy lifting," he said.

But Caterpillar remains dedicated to growth, said Chairman and CEO Jim Owens, pointing to activity at the company's 300 manufacturing facilities across 40 countries. He noted that Caterpillar was "running at or near capacity at our facilities worldwide."

While Wall Street focused on the drop in profit per share, Caterpillar achieved a record for revenue in the quarter, he said. Sales and revenue exceeded $11.3 billion for the second quarter.

"It's the second-highest profit in the history of the company. It bodes well for the folks here in Illinois that make the products. We ship those exports around the world," said Burritt.

Overseas sales helped make up for a poor performance in North America because of a sagging construction industry and a drop in truck engine sales.

The on-highway truck industry turned out to be "weaker than we thought," said group president Doug Oberhelman. Caterpillar officials said new energy efficiency standards that went into effect in 2007 pushed many buyers to purchase engines in 2006.

A slowdown in truck engine sales was expected this year, said Oberhelman.

"So we virtually produced nothing in the month of January. We had startup problems then in February and on into March. We had some quality issues with some of the components," he told analysts Friday.

Oberhelman said that Caterpillar has shipped 11,000 of its new truck engines so far this year.

"They've performed better than any other engine rollout in our history. We expected 2007 to be pretty tough but we're looking to see signs of a general recovery by the end of the year," he said.

As for a rebound in the housing market, "that will depend on interest rates," said Mike DeWalt, Caterpillar's director of investor relations. "A reduction in interest rates could take some pressure off but we don't think there will be a change anytime soon."

Why should Wall Street be so concerned with a firm that turns an $800 million profit?

"Caterpillar is held to a higher standard and, frankly, we like that. The bar gets raised every year and we try to jump over it each time," said Burritt.

Analysts will scrutinize the company's performance closely through the end of the year, said Collins.

"The question is whether international demand can be sustained until the belt-tightening is completed," he said.

"The important thing is that (Caterpillar) has a plan to fix it. We'll just have to take a wait-and-see approach."

The sales and revenue of $11.35 billion increased $751 million from the second quarter of 2006.

Steve Tarter can be reached at (309) 686-3260 or starter@pjstar.com.

Caterpillar earnings report

Caterpillar Inc. reported Friday that second-quarter profits were down 21 percent from last year. Other items in the 2007 second-quarter earnings report included the following changes from the second quarter in 2006:

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There was a $943 million improvement in sales volume outside North America.

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There was a $366 million drop in on-highway truck engine sales.

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The acquisition of Progress Rail (in June, 2006) added $411 million in sales.

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Metals, mining and petroleum remained favorable areas for machine sales around the world.

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Housing construction continued to decline in the second quarter. Housing starts in the United States were 21 percent lower than in the second quarter of 2006.

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Highway contracts awarded in the second quarter were almost 7 percent lower than a year earlier.

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Among the projections made in the report:

Caterpillar's worldwide employment was 96,315 at the end of the second quarter, up 4 percent from a year ago.

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Caterpillar is raising its projection of 2007 sales and revenues to about $44 billion, or a 6 percent increase from 2006.

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North America will continue to be a weak area in the second half, the result of further dealer inventory reductions, a sharp drop in North American on-highway engine sales and unfavorable economic conditions for many key industries.

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