Caterpillar profit slides as costs and forex squeeze margins, shares down

Reuters | January 31, 2023

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By Bianca Flowers and Aishwarya Nair

(Reuters) – Caterpillar Inc’s fourth-quarter earnings slid by 29%, the company reported on Tuesday, citing higher manufacturing costs and foreign currency effects that weighed on the industrial bellwether’s margins.

The machinery maker has a robust $30 billion order backlog, but like other manufacturers it continues to grapple with supply constraints that have boosted raw material and freight costs.

The Texas-based company noted that profit was also hit by a $925 million “goodwill impairment” charge and margin-eroding restructuring costs.

CAT’s Chief Financial Officer, Andrew Bonfield, told shareholders on a conference call that fourth quarter margins “were lower than we needed them to be” and that the company will adjust operating profit margin targets in the year ahead to account for high inflation.

The decline in the company’s adjusted earnings per share sent its share price down as much as at 4.5% in early market trading, putting shares on track for their worst day since August.

While equipment purchases from energy and mining customers have remained resilient, along with a higher volume of sales for construction machinery, analysts believe higher financing costs can potentially drag down demand.

“You’ve got benefits from the infrastructure bill, but those are all sensitive to the broader economic backdrop,” said Oppenheimer’s Kristen Owen, executive director of equity research.

Currency exchange rates had a negative impact on sales at Caterpillar’s machinery, energy and transportation (ME&T) division, with a strong dollar making products less competitive abroad.

A strong dollar also hurts multinationals that need to convert foreign profits back into the U.S. currency.

An uptick in dealer inventories was a bright spot for the manufacturer with equipment levels returning to a typical range of three to four months, executives said.

Sales were up across Caterpillar’s three primary business segments. Strong pricing that the company implemented over the past two years in an effort mitigate rising manufacturing costs have sustained top-line growth. The industrial giant’s pricing has risen 14%, a decade high, Bank of America research analyst, Michael Feniger, said in a report.

Caterpillar’s sales and revenue for the quarter rose 20% to $16.6 billion despite weaker sales in the Asia Pacific region.

“We talked about the fact that China is slow and we continue to expect it to be slow — below 2022 levels,” said Chief Executive Jim Umpleby.

Operating profit rose 4% to 1.7 billion while free cash flow from the ME&T division came in at $5.8 billion.

(Reporting by Bianca Flowers in Chicago and Aishwarya Nair in Bengaluru; Editing by Maju Samuel, David Goodman and Jonathan Oatis)


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