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Caterpillar earnings disappoint due to weaker China sales and higher production costs

Global equipment manufacturer Caterpillar’s (CAT) second quarter earnings disappointed analysts. The company cited a combination of tariffs, weaker sales in China and slower growth in the Permian Basin for the declines.

The Deerfield, Illinois-based company reported a 5.1 percent decrease in second quarter net income to $1.62 billion, or $2.83 per share, compared with $1.71 billion, or $2.82 per share, a year ago. 

Consensus Wall Street estimates had forecast earnings of $3.12 per share for Caterpillar’s second quarter. Revenue also disappointed Wall Street with $14.432 billion reported compared to the $14.435 billion analysts expected. 

Caterpillar’s stock is taking a hit after the release of its second quarter report on July 24. As of about 2:00 p.m. EDT, Caterpillar stock is down 4.32 percent and trading at $132.13 per share.

During its earnings call, Caterpillar officials said full-year earnings should be between $12.06 to $13.06 per share, but said they currently expect the result to be at the lower end of that range.

“We expect our profit per share in 2019 to be another record,” said Caterpillar chief executive Jim Umpleby during the earnings call. “We have the right strategy in place to deliver long-term profitable growth through our continued focus on strategic investments, including growing services and expanding offerings. We will also continue to focus on driving operational excellence including a flexible and competitive cost structure.”

The maker of construction and heavy equipment said sales in North America and Latin America increased by 11 percent and 9 percent, respectively. Machinery, Energy & Transportation (ME&T) sales rose 3 percent overall year-over-year to $13.67 billion. Revenue in North America rose 28 percent from a year ago, helping to lift Caterpillar’s total sales by 5 percent. 

“Sales and revenues increased this quarter, including a record performance from Construction Industries, which reflected our strong competitive position globally,” Umpleby said.

According to the report, second quarter profit was $79 million, up 11 percent, or $8 million from the second quarter of 2018.

However, Caterpillar said sales for oil-and gas-related equipment were down 11 percent, in part because of “lower demand for new equipment in the Permian Basin,” Umpleby said.

Machine sales in Asia declined 8 percent in the second quarter due to competitive pricing pressure and weaker overall purchases in China, officials said. Sales were down 6 percent in Europe, Africa and the Middle East. 

“The increase in manufacturing costs was primarily due to higher material costs, including tariffs, variable labor and burden and warranty expense,” the company said in its earnings release. 

China accounts for up to 15 percent of Caterpillar’s construction equipment sales. It is facing competition from local Chinese companies trying to chip away at its market share through aggressive pricing.

“We are suddenly taking steps to ensure our competitiveness long-term in China. We’re introducing a number of GC products that will help us compete as well but again, we feel good about our forecast there in China,” Umpleby said. 

Caterpillar’s “GC” designation is “a modifier that stands for a total offering” machinery rather than initials representing a specific feature, company officials said.

Umpleby added, “Our strong operating cash flow in the quarter allowed us to repurchase shares and pay dividends of about $1.9 billion. This is in line with our intention to return substantially all free cash flow to shareholders.” 

Caterpillar Inc. is a Fortune 100 corporation that designs, develops, engineers, manufactures, markets and sells machinery, engines, financial products and insurance to customers via a worldwide dealer network.

It is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. 

As of December 31, Caterpillar’s overall workforce represented 104,000 full-time employees and 20,000 part-time and contract employees. The U.S. workforce was at 53,700, while the non-U.S. workforce was at 70,300.

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Noi Mahoney

Noi Mahoney is the Cross-Border Freight Market Reporter for FreightWaves.com. He graduated from the University of Texas at Austin with a degree in English in 1999. Mahoney has more than 20 years experience as a reporter and editor. He has worked for newspapers in Florida, Maryland and Texas.

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