CAT Caterpillar Inc

By Austen Hufford 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 29, 2019).

Caterpillar Inc. said its profit this year is likely to rise less than analysts were expecting, 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 manufacturers in the U.S. Caterpillar, which makes about 10% of its sales in China, said Monday that weakening demand is hurting its results in Asia.

The Deerfield, Ill.-based manufacturer said it expects sales of excavators and other construction-related equipment, for example, to be flat this year in China, a sign of faltering demand for some capital goods along with a slack market for consumer products in the world's second-biggest economy. Chip maker Nvidia Corp. on Monday cited weaker Chinese demand for its computer chips for gaming consoles and other products.

Caterpillar's shares fell 9.1%, leading the Dow Jones Industrial Average down 0.8%.

Caterpillar also said problems in its financing unit cut into profit in 2018's final quarter. The company said it had overestimated the value of recoverable assets from bad loans.

"Some of those estimates were proven to be wrong," Caterpillar finance chief Andrew Bonfield said on a conference call to discuss fourth-quarter results.

Lending in Latin America and to customers for power-generating equipment and boating engines accounted for a big portion of the write-offs, Caterpillar said.

Like other manufacturers, Caterpillar has raised prices to offset higher costs for fuel, labor and some materials subject to U.S. import tariffs. But Caterpillar said the prices increases didn't achieve that goal in the fourth quarter.

"Material costs and freight were adverse and worse than we were expecting," Mr. Bonfield said in an interview.

Caterpillar said costs tied to new U.S. tariffs on foreign goods including steel and aluminum came in, as expected, at just above $100 million for 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 the U.S. economy's strong performance in the fourth quarter to continue this year. The equipment maker said it also expects to benefit from higher investment by mining companies globally as well as continued pipeline construction and state and local funding for infrastructure in the U.S.

Other manufacturers are less sanguine about the U.S. economy. Whirlpool Corp. said late Monday that soft demand in North America contributed to a downbeat forecast for this year. Whirlpool's shares fell 6.2% in after-hours trading.

Caterpillar set its 2019 outlook for adjusted profit at $11.75 to $12.75 a share, below what analysts were expecting. Its adjusted profit last year was $11.22 a share. The company said it expects a modest increase in revenue, following a 20% increase in 2018.

For the fourth quarter, Caterpillar reported adjusted earnings of $2.55 a share, 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 analysts' 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. Profit in the company's finance unit fell to $83 million from $156 million.

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

(END) Dow Jones Newswires

January 29, 2019 02:47 ET (07:47 GMT)

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