Caterpillar Profit Misses Estimates on Japan Quake Impact; Shares Decline

Caterpillar Inc. (CAT), the world’s largest construction and mining-equipment maker, posted lower- than-expected profit for the first time in 10 quarters after the Japanese earthquake reduced sales and manufacturing costs rose.

Second-quarter earnings excluding $204 million in costs related to its acquisition of Bucyrus International Inc. were $1.72 a share, Peoria, Illinois-based Caterpillar said in a statement today. That trailed the $1.75 average of 20 analysts’ estimates compiled by Bloomberg. The shares dropped the most in more than two years in New York trading.

“Expectations were getting too high,” Eli Lustgarten, an Independence, Ohio-based analyst for Longbow Research who rates the shares “neutral,” said in an interview. “People were expecting a beat and bump.”

Caterpillar said the March 11 disaster in Japan caused “sporadic disruptions” at its plants and suppliers globally, losing the company $200 million in sales and $60 million in operating profit. Manufacturing costs climbed by $364 million in the second quarter and expenses related to research and development, selling and administration rose by $239 million.

Caterpillar dropped $6.45, or 5.8 percent, to $105.15 at 4:15 p.m. in New York Stock Exchange composite trading, the biggest decline since April 7, 2009. Caterpillar has risen 12 percent this year.

Photographer: Francois Lochon/Gamma-Rapho via Getty Images

A Caterpillar bulldozer moves rubble on April 1, 2011 in Yamda, Japan. Close

A Caterpillar bulldozer moves rubble on April 1, 2011 in Yamda, Japan.

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Photographer: Francois Lochon/Gamma-Rapho via Getty Images

A Caterpillar bulldozer moves rubble on April 1, 2011 in Yamda, Japan.

Acquisition Costs

Second-quarter net income climbed 44 percent to $1.02 billion, or $1.52 a share, from $707 million, or $1.09, a year earlier. Revenue increased 37 percent to $14.2 billion from $10.4 billion.

Caterpillar, whose first-quarter profit rose fivefold, had until today beaten analysts’ estimates since the first quarter of 2009.

Upfront integration costs for Bucyrus of $700 million in 2011 were a “bit higher” than expected when the deal was announced in November, Mike DeWalt, Caterpillar’s director of investor relations, said on a conference call with analysts. The costs included an unexpected loss on interest-rate swaps of $150 million and a higher-than-expected inventory cost of $250 million, DeWalt said.

The earthquake and tsunami in Japan caused a “sharp” drop in first-half output, Caterpillar said. As reconstruction begins, “we do see upside to our business in Japan,” Chief Financial Officer Ed Rapp said today in a telephone interview.

China Growth

Caterpillar saw “some softening of growth” in China, Oberhelman said in the statement. China “is doing a good job of balancing growth and inflation” and Caterpillar is still positive on the country’s market, he said.

“We remain very bullish on China,” Rapp said in the interview. “We saw strong growth in dealer deliveries. We continue to build out our business model. Our dealers are continuing to build out their footprint.”

China’s economy will grow more than 9 percent this year, compared with 10.3 percent in 2010, Caterpillar said in the statement.

The company projects the U.S. economy will grow 2.5 percent this year, down from an April forecast of 3.5 percent.

Uncertainty about the deficit, trade agreements and legislation authorizing spending for transportation is leading to a lack of business confidence, Rapp said.

Mining Expansion

Caterpillar raised its full-year profit forecast excluding Bucyrus to $6.75 to $7.25 a share from $6.25 to $6.75 previously. It also raised its sales forecast to a range of $54 billion to $56 billion from $52 billion to $54 billion.

Including Bucyrus, the company expects profit of $6.25 to $6.75 a share on $56 billion to $58 billion in sales.

Caterpillar is betting on expansion in mining with its $8.8 billion acquisition of Bucyrus, completed this month, and demand for construction machinery in developing countries to help drive growth. The company reiterated it’s still targeting earnings of $8 to $10 a share in 2012 as demand for excavators, trucks and wheel loaders increases amid greater consumption of commodities and construction of roads, bridges and buildings in countries such as China, India and Brazil.

The Bucyrus acquisition adds surface and underground mining equipment products to Caterpillar’s portfolio. Caterpillar purchased locomotive maker Electro-Motive Diesel last year and its acquisition of German engine-maker MWM Holding GmbH is still pending.

‘Organic Growth’

Rapp didn’t rule out additional acquisitions.

“We will always be on the lookout for opportunities for acquisitions, especially those that are in attractive industries and fit our business model and have good bolt-on capability,” Rapp said. “But the real story relative to Caterpillar’s growth going forward is the opportunities that exist for organic growth.”

The company has projected $3 billion in capital expenditures in 2011, with about half of that spent in the U.S., Rapp said.

To contact the reporter on this story: Shruti Date Singh in Chicago at ssingh28@bloomberg.net.

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net.

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