updated 7/20/2007 11:10:05 AM ET 2007-07-20T15:10:05

Caterpillar Inc., one of the world’s largest heavy equipment makers, said Friday its second-quarter profit fell 21 percent, missing Wall Street expectations. Its shares fell more than 9 percent in morning trading.

The company cited sluggish sales in North American construction markets, higher then expected operating costs and a planned decline in inventories for the decline.

Caterpillar earned $823 million, or $1.24 per share, in the three months ended June 30, down from $1.05 billion, or $1.52 per share during the same period last year, when the heavy equipment maker posted its strongest earnings in at least four decades.

Revenue rose 7 percent to $11.36 billion — a company record for the second quarter — from $10.61 billion last year.

Analysts polled by Thomson Financial expected a profit of $1.49 a share on revenue of $11.12 billion.

“On the revenue side, no doubt it was a very solid quarter, but if you can’t manage costs and get the strong results to flow through to the bottom line investors will get concerned,” said Matt Collins, an analyst with Edward Jones.

Revenue was helped by sales outside of North America, Caterpillar said, which offset the planned decline in North American dealer machine inventories, a drop in demand for on-highway truck engines and weak housing construction in the U.S.

“We’re pleased with second-quarter sales and revenues which demonstrated the strength of our global reach,” Caterpillar Chairman and CEO Jim Owens said in a statement.

Caterpillar said earnings were hurt by soft North American machine and engine sales, selected supply chain disruptions and higher material and manufacturing costs as the company shifts to a just-in-time delivery system.

Owens called second-quarter earnings “disappointing,” but said the company is maintaining a full-year outlook that would post record profits for the fourth straight year.

The company has projected full-year revenue of about $44 billion, up from $41.5 billion last year. Profit per share is forecast in a range of $5.30 to $5.80, up from $5.17 in 2006.

Sales outside of North America are expected to be up 24 percent for the year, more than offsetting a projected 12 percent dip in North America, the company said.

Beyond 2007, Caterpillar has projected compound annual growth in profit per share of 15 percent to 20 percent through 2010, with revenue rising above $50 billion.

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

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