Earns Caterpillar
Toby Talbot  /  AP
Heavy equipment maker Caterpillar said Tuesday it sees signs that the global economy is starting to stabilize after a prolonged slide.
updated 7/21/2009 2:24:25 PM ET 2009-07-21T18:24:25

Caterpillar Inc.’s second-quarter profit tumbled on slumping sales of heavy equipment and the cost of staff cuts, but it saw signs that the global economy is starting to stabilize after a prolonged slide.

Caterpillar boosted its 2009 profit forecast, citing evidence that government stimulus plans, particularly in China, are beginning to work. The company’s global reach and diverse products — from bulldozers to mining trucks to cargo ship engines — give a snapshot of industrial strength.

The optimistic forecast lifted shares nearly 6 percent in afternoon trading.

“There is still a great deal of economic uncertainty in the world, but we are seeing signs of stabilization that we hope will set the foundation for an eventual recovery,” Caterpillar Chairman and CEO Jim Owens said in a statement.

Caterpillar, a component of the Dow Jones Industrial Average, said its net income fell 66 percent to $371 million, or 60 cents per share. That compared with $1.11 billion, or $1.74 per share, a year earlier.

The cost of thousands of job cuts lowered earnings by 12 cents per share during the quarter. Caterpillar has undertaken dramatic cost-cutting measures, including the planned elimination of more than 22,000 positions and sweeping production cuts. The company employed 112,887 people at the end of 2008 and 95,761 at the end of the second quarter.

Revenue dropped 41 percent to $7.98 billion, with equipment and engine sales down 43 percent.

Global equipment sales — Caterpillar’s largest source of revenue — plunged by 49 percent, led by a 61 percent decline in Europe, Africa and the Middle East and followed by a 51 percent drop in North America.

The results reflect weakened global demand and prices for commodities such as iron ore, a key steel ingredient that is mined by some of Caterpillar’s customers and hauled in its huge yellow-and-black trucks. Dealers that sell Caterpillar equipment are cutting stockpiles to keep up with falling demand. The value of equipment removed from inventories could reach nearly $3 billion by the end of the year, the company said.

Caterpillar now expects annual revenue in a narrower range — between $32 billion and $34 billion — compared with an earlier forecast of $31.5 million to $38.5 billion. Analysts think the Peoria, Ill.-based company will generate sales of $34.86 billion.

Sales and profit are expected to be at their weakest this year in the third quarter, excluding costs tied to job cuts. And Caterpillar is planning “widespread and significant rolling factory shutdowns” during the period, Mike DeWalt, the company’s director of investor relations, said in a conference call.

Still, the company expects a higher profit in 2009 of between $1.15 and $2.25 per share, excluding the cost of employment reductions. It previously forecast about $1.25 per share, while analysts predicted $1.01 per share.

Owens said credit markets have improved significantly and commodity prices have risen from their lows in the first quarter. Better credit markets may make it easier for customers to borrow money to buy Caterpillar’s products.

Morgan Stanley analyst Robert Wertheimer wrote in a client note the Caterpillar’s performance exceeded his expectations, helped partly by lower costs.

Sterne Agee analyst Lawrence T. De Maria said his firm does not expect a demand rebound until 2011 at the earliest, and that cost cuts, a better tax rate, foreign exchange and accounting for inventory helped Caterpillar during the quarter.

In April, Caterpillar reported its first quarterly loss in 17 years, citing weak sales and the cost of laying off thousands of workers. It also lowered its outlook for 2009, saying the global economy was clouded by uncertainty. Last year, Caterpillar generated 67 percent of its revenue overseas.

Its sales of large equipment sank in May. That was the third consecutive month of declines.

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