(Bloomberg) -- Caterpillar Inc. reported second-quarter earnings that topped analysts’ estimates amid surging demand and higher prices for the company’s diggers, bulldozers and trucks, but the company’s finance chief said rising costs will put a dent in margins going into the third quarter.

The world’s biggest maker of mining and construction equipment reported adjusted second-quarter earnings of $2.60 a share, compared with the $2.40 a share average of analysts’ estimates compiled Bloomberg. Margins will moderate in the third quarter from last quarter, mostly driven by employee compensation.

“In the third quarter we expect it to be a small headwind and we expect sequentially for margins to decline,” Chief Financial Officer Andrew Bonfield said in a phone interview. “The biggest factor for us is not material cost increases this year, it’s short-term incentive compensation that is a bigger margin headwind for us.”

The company said price increases implemented mid-year and at the beginning of the year will offset raw-material costs. Caterpillar is a large consumer of steel to make its machinery, and domestic prices of the metal are up almost 90% so far in 2021.

Shares of Caterpillar fell 2.4% by 7:46 a.m. during pre-market trading in New York.

“Moderating margin expectations is probably not enough to drive additional near-term excitement, in our view,” Jefferies analyst Stephen Volkmann said in a note to clients.

Key Takeaways

  • Investors are watching Caterpillar, considered an economic barometer, for signs of whether demand is holding up in the face of the persistent coronavirus and supply snags in many industries. The company has benefited from rebounding construction and mining industries this year, and low dealer inventories lend support to the growth outlook, Bloomberg Intelligence analyst Christopher Ciolino said in a note last week.
  • Surging commodity prices are prompting replacement of aging mining-equipment fleets. Copper touched an all-time high in May, and the world’s biggest mining companies are expected to report record profits.
  • At the same time, businesses have struggled to keep pace with the outpouring of pent-up demand, pushing up costs of many supplies. The mining industry is starting to see cyclical cost pressures from labor, energy and raw materials, Newmont Corp. Chief Executive Officer Tom Palmer said in a Bloomberg TV interview.
  • Bonfield said in April that while the company saw “material cost favorability” in the first quarter because of inventories and forward-purchasing contracts, it expected “material cost to move from positive to negative as we move forward,” and that it would price products accordingly.
  • U.S. economic growth missed forecasts in the second quarter as the effects of supply-chain constraints rippled through industries. Caterpillar said in April that it could see potential impacts on equipment deliveries from a global computer-chip shortage.

(Updates with comments from CFO and margin outlook)

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