It took a while, but Caterpillar finally managed to report its first earnings rise in nearly two years and topped with off with an upgraded outlook.

The heavy equipment manufacturer was badly hurt by the housing crisis and subsequent recession, which undercut demand for its construction and earth-moving equipment. But the times are a changing. During the first quarter of 2010 Peoria, Ill.-based Caterpillar ( CAT – news – people )posted earnings of $233 million, or 39 cents per share, a welcome turnaround from the loss of $112 million, 19 cents per share, reported in last year’s corresponding period.

Wall Street was happy with the news, pushing the company’s shares up 5.1%, or $3.53, to $72.31, in morning trading Monday. Since the beginning of the year Caterpillar’s market value has risen 26.9%. Industry competitors were also higher as Deere ( DE – news – people ) enjoyed a jump of 2.3% and Cummins ( CMI – news – people ) increased 1.4%, though Navistar ( NAV – news – people ) slipped 0.3%.

“Economic conditions are definitely improving, particularly in the world’s developing economies. Industry activity and orders are significantly higher than last year and are at record levels in some areas,” said Caterpillar Chief Executive Jim Owens.

Caterpillar said the earnings jump came on a mix of lower manufacturing costs, among other factors. The company noted that the improvements were partially offset by the impact of lower sales volume and higher taxes, including the $90 million charge related to the recently signed U.S. health care legislation. (See “Today’s Expensive Health Care Is Tomorrow’s Necessity.”)

Nonetheless, the brighter landscape led Caterpillar to up its outlook, lifting both its sales and earnings forecast for the rest of the year. The company now expects sales in a range between $38 billion and $42 billion, with earnings between $2.50 and $3.25 per share.

“The main driver behind our improved outlook is robust growth in Asia/Pacific and Latin America and continued improvement in mining and energy globally,” Owens said.

It wasn’t like that before. Caterpillar’s fourth quarter, while well ahead of expectations, saw its profits buried by reduced dealer inventories, leading to an earnings drop of 64.9%. (See “Caterpillar Beats, Profits Tumbles.”)

But that was then. “We are very encouraged by our performance in the first quarter. We focused on cost management and deployment of the Caterpillar Production System–factory efficiency improved, margins improved and our machinery business returned to profitability,” Owens said. “In addition, cash flow was positive, and we strengthened our balance sheet with continued improvement in our debt-to-capital ratio. As a result, we are well positioned to invest for growth where needed.”

The report wasn’t perfect though. Sales, while strong, were weaker than the market would have hoped, falling 7.3% to $631 million, from $681 million in 2009. The company credited the drop primarily to a $71 million impact from lower-earnings assets, along with an $11 million unfavorable impact from returned or repossessed impact.

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