Caterpillar Promises More Cost Cuts as Profit Plunges -- Update

By James R. Hagerty

Caterpillar Inc. (CAT) promised further efforts to drive costs down after reporting a surprisingly steep 44% drop in third quarter earnings.

The Peoria, Ill.-based maker of heavy equipment continues to suffer from a plunge in demand for mining equipment but also surprised analysts by reporting downward pressure on prices for construction equipment.

As part of a cost-cutting drive, Caterpillar said it reduced its global work force to 137,104 people, down 9% from a year earlier. The company said it instituted "general austerity measures across the company." Capital spending this year will be less than $3 billion, down from $3.4 billion in 2012.

"We're not finished and expect to take deeper actions to improve our cost structure," Doug Oberhelman, Caterpillar's chief executive, said in a prepared statement. The company said it was considering "rationalization" of some smaller facilities, more job cuts and consolidating management functions, among other things.

One bright spot was China, where third-quarter sales increased 30% from a year earlier to $800 million, the company said. Caterpillar said dealers' sales of its excavators there in this year's first nine months were up from a year earlier, despite a decline in industry-wide excavator sales. Caterpillar and other foreign companies have been struggling to gain market share in a Chinese market glutted by lower-priced machinery made by local rivals.

Caterpillar reduced its forecast for full-year earnings per share to about $5.50, compared with a prior forecast of $6.50. For 2012, Caterpillar reported record earnings of $8.48 per share.

Caterpillar cut its sales forecast for 2013 to $55 billion, down from $65.88 billion a year earlier. The previous forecast for this year was $56 billion to $58 billion.

Looking further ahead, Caterpillar said it expects 2014 sales to be little changed from this year, falling into a range of plus or minus 5%. Caterpillar reported "an increasingly competitive pricing environment" for construction equipment. Demand for energy drilling and well-servicing equipment was down, the company said.

For the third quarter, Caterpillar reported profit of $946 million, or $1.45 per share, down from $1.70 billion, or $2.54 per share, a year earlier. Wall Street had expected earnings of $1.68 per share. Sales, including revenue from financing, dropped 18% to $13.42 billion.

About three-quarters of the drop in sales was due to lower sales of mining equipment, Caterpillar said. It expects the resource industries segment, which mainly makes mining equipment, to show a 40% sales drop for the full year, while power systems, mainly engines, and construction equipment fall about 5%.

To appease shareholders, Caterpillar has bought back $2 billion of shares over the past two quarters and recently raised its quarterly dividend 15%.

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