updated 10/22/2006 6:56:34 PM ET 2006-10-22T22:56:34

Caterpillar Inc. on Friday said its third-quarter profit rose 15 percent but sharply reduced its forecast for the full year and said it expects a slowdown in 2007. Its shares sank sharply on the New York Stock Exchange.

The heavy-equipment maker lowered its full-year earnings forecast, citing high operating costs and lower than expected sales volumes and said it expects a slowdown next year as well as new diesel engine emissions regulations take effect.

The company also cautioned that the weak residential housing market in the U.S. and a drop-off in sales of truck engines will restrain revenue growth next year.

During a conference call with analysts, Caterpillar officials called next year’s slowdown a pause, not the end of a sales surge that has doubled the company’s annual revenues since 2002. Energy exploration, mining and infrastructure improvements remain strong worldwide and will continue demand for the company’s trademark yellow earth-moving machines, they said.

For the third quarter, net income grew to $769 million, or $1.14 per share, from $667 million, or 94 cents per share, in the year-ago quarter. The latest period included about $80 million in legal expenses, most to settle a dispute with truck and engine maker Navistar International Corp. over licensing and supply agreements.

Sales jumped 17 percent to $10.52 billion from $8.98 billion a year earlier, boosted by higher prices and increased volumes for both machines and engines. Favorable foreign currency exchange boosted sales by $97 million.

Analysts polled by Thomson Financial forecast earnings, excluding one-time items, of $1.35 per share and sales of $9.87 billion.

The company said it expects full-year revenue of about $41 billion, up about 13 percent from 2005. Caterpillar forecasts profit of $5.05 to $5.30 per share for 2006, with growth coming from higher prices and sales volume.

The forecast is down from Caterpillar’s earlier estimate for earnings of $5.25 to $5.50, on sales and revenue that had been expected to rise 12 to 15 percent. The company attributed the shortfall to increased operating costs, including the third-quarter legal expenses, as well as slightly lower than expected sales volumes.

Analysts project full-year sales of $39.88 billion and profit of $5.52 per share.

Caterpillar also issued a preliminary forecast for 2007 that projects sales will range from flat to up 5 percent. Profit per share is expected to range from flat to up 10 percent from the midpoint of its 2006 forecast of $5.05 to $5.30.

Caterpillar Chairman and Chief Executive Jim Owens said 2007 sales will be slightly higher despite a lowing U.S. economy, weaker housing construction and a sharp drop in sales of on-highway truck engines.

Diesel engine prices are expected to rise next year. That’s because all diesel engines produced starting Jan. 1 must meet new federal regulations that require a 50 percent reduction of nitrogen oxide emissions. Particulate emissions also must be reduced by more than 90 percent from previous government regulations put in place in 2004.

“It’s a testament to the strength and diversity of the industries we serve and the global nature of our products and services that we expect at least modest growth despite a weaker U.S. economy and significant declines in important North American markets,” Caterpillar chairman and chief operating officer Jim Owens said in a statement.

Caterpillar designs and manufactures mining, construction and agricultural machines, as well as engines for earth moving and construction equipment. It also is the world’s leading manufacturer of electrical generators.

Copyright 2006 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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