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Caterpillar narrows Q3 profit, again cuts FY outlook

23rd October 2013

By: Henry Lazenby

Creamer Media Deputy Editor: North America

  

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TORONTO (miningweekly.com) – The significant downturn in the mining market has hurt the world’s largest earthmoving-equipment manufacturer Caterpillar’s third-quarter earnings, forcing the company to readjust its full-year outlook lower.

Caterpillar on Wednesday said that for the quarter ended September 30, its sales and revenues declined 18% year-on-year to $13.42-billion, down from $16.44-billion.

The Peoria, Illinois-based company’s profit slipped 44% to $946-million, or $1.45 a share, down from $1.7-billion, or $2.54 a share, a year earlier.

Wall Street analysts had expected earnings of $1.67 a share on revenues of $14.37-billion.

The company also revised its 2013 outlook and now expected sales and revenues to total about $55-billion, with profit per share of about $5.50. The previous outlook for 2013 sales and revenues was in the range of $56-billion to $58-billion, with a profit per share of about $6.50 at the middle of that range.

“This year has proven to be difficult, with expected sales and revenues nearly $11-billion lower than last year. That is a 17% decline from 2012, with about 75% of the drop from resource industries, which is principally mining. We expect resource industries to be down close to 40% for the full year and power systems’ and construction industries’ sales to each be down about 5%,” Caterpillar chairperson and CEO Doug Oberhelman said.

Not only was mining down from 2012, the demand for equipment had been difficult to forecast. Orders for new mining equipment began to drop significantly in mid-2012 and have continued at very low levels.

As a result of weak orders and feedback from end-users, the sales and revenues outlook provided in January of 2013 included a decline in mining sales. At that time, based on strong mine production for many commodities, the company’s outlook was that order rates would improve later in 2013.

“Unfortunately, order rates have not picked up much despite continuing strong commodity production. That has caused us to ratchet down our sales and revenues outlook as we have moved through 2013,” Oberhelman said.

Critical elements of Caterpillar's downturn survival strategy were cost flexibility and reducing costs.

The company said that the magnitude of the decline in sales in 2013 had resulted in “substantial actions” to lower production, costs and employment, including numerous temporary plant shutdowns, reducing the global workforce by more than 13 000 throughout the past year, temporary layoffs for thousands of employees, reductions in programme spending, substantially lowered incentive pay, lower capital expenditures and implementing general austerity measures across the company.

Caterpillar had also taken substantial actions to mitigate some of the impact of lower mining sales on profit. The company expected to limit the decline in the 2013 operating profit from 2012 to about 30% of the sales and revenues change.

This was at the high end of the company’s incremental operating profit pull-through target range and was a result of an unfavourable product mix, as the sales decline was weighted toward higher-margin mining products.

Despite the challenging year for sales and profit, it had been a positive year for cash flow. In the third quarter, the machinery and power systems operating cash flow was $2.1-billion, and the company was expecting 2013 to be its second-best year for cash flow and not far from the all-time record.

The strong cash flow had enabled the company to improve its balance sheet, repurchase $2-billion in Caterpillar stock this year, raise the quarterly dividend by 15% and improve the debt-to-capital ratio. The company’s debt-to-capital ratio was 34% at the end of the third quarter, and it was expected to improve further by year-end. This represented a substantial improvement over the past five years from the 58% debt-to-capital ratio at the end of 2008.

"With $11-billion coming off the top line, it has been a painful year and has required wide ranging and substantial actions across the company,” Oberhelman said.

Caterpillar’s sales in China were up almost 30% in the quarter.

From an economic standpoint, the company expected better world growth in 2014.

However, significant risks and uncertainties remained that could temper global economic growth. The direction of US fiscal and monetary policy remained uncertain; eurozone economies were far from healthy and China continued to transition to a more consumer demand-led economy.

Also, despite higher mine production around the world, new orders for mining equipment remain very low.

As a result, the company was holding its outlook for 2014 sales and revenues flat, with 2013 in a plus-or-minus 5% range. The company expected sales growth in construction industries, relatively flat sales in power systems and a decline in resource industries’ sales.

“There are encouraging signs, but there is also a good deal of uncertainty worldwide as we look ahead to 2014, and our preliminary outlook reflects that uncertainty. Despite prospects for improved economic growth and continued strong mine production around the world, we won't be increasing our expectations for resource industries until mining orders improve.

“We can’t change the economy or industry demand, but we've taken many actions to align our costs with the environment we’re in currently. While we’ve done much already, we're not finished and expect to take deeper actions to improve our cost structure and balance sheet. We're not seeing bright spots in mining yet, but the turnaround will happen at some point, and when it does, we'll be ready to respond," Oberhelman said.

The company's NYSE-listed stock fell about 6.5% to $83.30 a share on Wednesday afternoon.

Edited by Creamer Media Reporter

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