CAT Caterpillar Inc

By Austen Hufford 

Caterpillar Inc. set lower-than-expected profit targets for 2019, as China's slowing economy and write-offs on loans to equipment customers weigh on the machinery giant.

A growing number of industrial companies have said they are making fewer sales in China, threatening a strong three-year run for U.S. manufacturers. Caterpillar, which makes about 10% of its sales in China, said on Monday that lower demand is hurting its results in Asia.

The Deerfield, Ill.-based manufacturer said it expects sales of excavators in China to be flat this year, for instance, a sign of faltering demand for capital goods along with a slack market for consumer products in the world's second-biggest economy.

Caterpillar's shares fell 9.2% Monday, leading the Dow Jones Industrial Average down 1.4%.

Caterpillar also raised its allowance for losses on loans it makes to customers for its equipment. The company said write-offs and past-due loans in its financing unit grew in the fourth quarter, particularly in Latin America and for buyers of its power generators and boating engines.

Caterpillar said it was working to reduce its exposure and risk in those sectors. The company said the write-offs were related to loans from "quite some time ago."

Like other manufacturers, Caterpillar has raised prices to try to offset higher prices for fuel, labor and some materials subject to U.S. import tariffs. Caterpillar said that didn't make up for its higher expenses in the fourth quarter.

"Material costs and freight were adverse and worse than we were expecting," Caterpillar finance chief Andrew Bonfield said in an interview.

Caterpillar said, as expected, costs related to U.S. tariffs on foreign goods including steel and aluminum came in just above $100 million over the five months of 2018 that they were in effect. The company expects more than $200 million in tariff-related costs this year.

The company has said it plans to raise prices by between 1% and 4% in 2019 on most of its machines and engines to offset higher costs.

Caterpillar executives said they expect strength in the U.S. economy, as well as higher investments from mining companies globally, to drive demand this year.

The company set its 2019 profit outlook at $11.75 to $12.75 a share, below what analysts were expecting. Caterpillar said it expects a modest increase in revenue.

Caterpillar reported adjusted earnings of $2.55 a share in the fourth quarter, above a year-earlier $2.16 but below analyst expectations of $2.99, based on surveys by Refinitiv.

It was the first time Caterpillar fell short of expectations for its adjusted earnings per share since early 2016, and by the largest margin since at least 2014, according to FactSet data.

Total sales, including revenue from financial products, rose 11% to $14.34 billion in the fourth quarter, roughly in line with analyst expectations.

In all, Caterpillar reported a fourth-quarter profit of $1.05 billion, or $1.78 a share, compared with a year-earlier loss of $1.3 billion, or $2.18 a share, that reflected the impact of changes to U.S. tax laws.

Write to Austen Hufford at austen.hufford@wsj.com

(END) Dow Jones Newswires

January 28, 2019 13:25 ET (18:25 GMT)

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