Caterpillar Resists Calls to Slash Spending

By James R. Hagerty 

Caterpillar Inc. is resisting suggestions from some Wall Street analysts that it should slash much more deeply into production capacity as demand for construction, mining and oil equipment continues to slump.

The Peoria, Ill.-based maker of engines and heavy equipment on Thursday reported a 29% profit decline for the second quarter. It said demand for mining equipment remains "severely depressed" and sales of equipment used in construction and oil exploration have also begun falling. However, Caterpillar left its profit forecast for the full year unchanged and said the cost cuts already made have allowed it to keep its balance sheet strong enough to buy back more shares and raise dividends.

With Caterpillar sales running at about 25% below the level of three years ago, analysts asked Chief Executive Doug Oberhelman during a conference call if he thought deeper cost cuts were needed. "We are constantly monitoring the market," he said, promising to slash spending if the global economy gets much worse. But Mr. Oberhelman said Caterpillar wants to retain enough capacity so it can be ready to take advantage of an eventual recovery.

Caterpillar over the past two years has shut some of its smaller U.S. plants making mining equipment and is slashing the workforce at a large plant in Gosselies, Belgium. The global workforce at the end of June was 126,800, down 20% from three years before.

Caterpillar held about $7.8 billion of cash at the end of the latest quarter, compared with $7.9 billion a year earlier, and said its balance sheet has held up much better than it did in past slumps. Caterpillar raised its dividend 10% last month and plans to spend $1.5 billion buying back stock in the third quarter.

The resource industries division, which mainly makes mining equipment, broke even in the latest quarter. That is down from $114 million a year earlier and $1.4 billion in the second quarter of 2012, when the division accounted for more than half the company's operating profit amid a global boom in mining investment. Now, Caterpillar said, mining companies continue to reduce spending on equipment, maintenance and even spare parts.

"Our (mining) trucks and ancillary equipment are being used longer and longer and longer," Mr. Oberhelman said. Eventually, he said, miners will have to buy new trucks.

Caterpillar kept is forecast for full-year earnings per share at $4.70, down from $5.88 in 2014. It reduced its sales forecast for the year to $49 billion from $50 billion. That compares with sales of $55.2 billion last year and a peak of nearly $66 billion in 2012.

For the latest quarter, profit came to $710 million, or $1.16 per share, down from $999 million, or $1.57 per share, a year earlier. Excluding restructuring costs, earnings per share were $1.27 in the latest quarter, roughly in line with Wall Street expectations. Sales declined 13% to $12.32 billion.

Write to James R. Hagerty at [e-mail]

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