Executives at Caterpillar Inc., the U.S. heavy equipment maker whose disappointing earnings dragged Wall Street into the red on Friday, said internal company factors -- as much as broader economic headwinds -- were to blame for the company's bad quarter.
In an interview with Reuters, Chief Finance Officer Dave Burritt and Mike DeWalt, head of investor relations, said Caterpillar's effort to streamline manufacturing and the bankruptcy of a key European supplier contributed to the big second-quarter miss.
Caterpillar said net profit fell 21 percent to $823 million, or $1.24 a share, from $1.05 billion, or $1.52 a share, in the year-ago quarter. Analysts, on average, had expected a profit of $1.49 a share on machinery and engine sales of $10.34 billion, according to Reuters Estimates.
Caterpillar was hit by a massive price squeeze, on top of simultaneous downturns in U.S. housing and the market for diesel engines for the biggest on-highway trucks in North America, analysts said. Price increases were unable to keep up with rising costs, mostly from manufacturing inefficiencies rather than material prices increases, they noted.
In the interview on Friday, Burritt and DeWalt acknowledged as much, citing internal issues such as high costs for adopting the CAT Production System which resembles Toyota Motor Corp.'s streamlined manufacturing process.
The big issue when you create change and you do it this broad and this deep across the company ... is the rollout cost upfront, Burritt said of the system.
And I think the costs were a bit higher. One of the cultural things we're doing is this 'stop and fix it,' which is fundamental to improving the quality. And that's painful sometimes because you basically have the entire line down until you get it right.
The bankruptcy of a European company that makes driver cabs for some of Caterpillar's equipment also idled some key production lines, DeWalt said, and ate into the Peoria, Illinois-based company's operating profits.
And so all of a sudden our supply was cut off and we were scrambling to get an alternate supplier, DeWalt said. That's a pretty involved component. It was a big hassle and really shut us down for awhile.