10-23-13 1:08 PM EDT | Email Article

By James R. Hagerty


Caterpillar Inc. (CAT) promised a "lockdown" on costs after reporting a surprisingly steep 44% drop in third-quarter earnings.

"We have everyone here on a cost-lockdown binge," Doug Oberhelman, chief executive officer of the world's largest maker of construction and mining equipment, said in a call with analysts Wednesday morning. Mr. Oberhelman said incentive pay was falling, thousands of management employees had been laid off temporarily and more long-term "structural" cost reductions would be achieved.

On the New York Stock Exchange, Caterpillar shares (CAT) were recently down 6% to $83.74.

The Peoria, Ill.-based company continues to suffer from a plunge in demand for mining equipment. Caterpillar vastly increased its exposure to mining in 2011 with the $8.8 billion purchase of Bucyrus International Inc., a maker of bus-sized shovels used to scoop ore. While many analysts like the long-term story on mining, they say Caterpillar paid a premium for Bucyrus because it made the purchase near the top of an upswing in demand for mining equipment.

Mr. Oberhelman conceded that there was no sign of an early upturn in investment in new mines: "Any expansion in the near term is dead. It's over, it's not going to happen."

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

Caterpillar said it was considering "rationalization" of some smaller facilities, more job cuts and consolidating management functions, among other things. It said some of these actions should be announced before the end of January. Already, the company has closed or announced plans to shut small plants near Toronto and in Summerville, S.C.; Owatonna, Minn.; Tazewell, Va., and Sudbury, Canada.

One bright spot, the company said, was China, where third-quarter sales increased 30% from a year earlier to $800 million. Caterpillar said it gained market share in excavators, one of the most important product categories, in China. Caterpillar and other foreign companies in recent years have struggled in a Chinese market glutted by lower-priced machinery made by local rivals. But, Mr. Oberhelman said, "we're in a nice position there going forward."

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 added.

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%.

Normally, when mining companies reduce their buying of new equipment, Caterpillar expects to sell them more parts needed to keep old machines running. But even parts sales have fallen recently, said Mike DeWalt, Caterpillar's investor relations chief. "We do think mining customers are delaying some maintenance and repairs," he said. "That kind of behavior can't go on forever."

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

The long-term outlook for mining equipment remained strong, Mr. Oberhelman said. "The world will grow; China will not implode," he said. "At some point, that plays to our hand. Just not right now."


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(END) Dow Jones Newswires

October 23, 2013 13:08 ET (17:08 GMT)

Copyright (c) 2013 Dow Jones & Company, Inc.
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