Caterpillar Loses Traction Again

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The Wall Street Journal / January 27, 2015

Caterpillar Inc., which has bulked up over the past few years to prepare for a long-term boom in developing-world spending on highways, ports and other infrastructure, is finding the road ahead bumpier than it thought.

The Peoria, Ill.-based maker of construction and mining machinery, hurt by falling prices for oil, copper and other commodities, reported a 25% plunge in its fourth-quarter profit and forecast a 9% drop in sales and a 22% drop in per-share earnings for 2015.

"It's shaping up to be a much tougher year than we were expecting" three months ago, Mike DeWalt, a Caterpillar vice president, told analysts in a conference call on Tuesday. Business is being hurt by the plunge in crude-oil prices to around $46 a barrel from $80 in October and $100 12 months ago.

Also hitting Caterpillar results are lower prices for copper, coal and iron ore, which are deterring mining companies from buying new equipment. "We were hoping that 2014 was the bottom" for the mining slump, Mr. DeWalt said, but now "prospects for a rebound in 2015 are probably just not there." Meanwhile, Caterpillar expects sales to fall in China this year as that country's economy continues to slow.

Doug Oberhelman, chief executive, promised further cost cutting in 2015, though Mr. DeWalt said no major plant closures are on the horizon. Restructuring costs this year are forecast at $150 million, down from $441 million in 2014, when the company faced heavy expenses for scaling back a large plant in Gosselies, Belgium. Caterpillar's global workforce at the end of 2014 was 130,743, down 2% from a year earlier.

Caterpillar said it expects per-share earnings of about $4.60 in 2015, down from $5.88 in 2014. Coming out of the latest recession, Caterpillar earnings per share jumped to $8.48 in 2012 from $1.43 in 2009. Then a slump in mining investment knocked earnings down 32% for 2013. As Caterpillar rushed to close plants and reduce its workforce, earnings began recovering in 2014, but now the collapse of oil prices has hit potential profit.

Lower oil prices eventually will spur world economic growth, said Caterpillar, but the company noted it wouldn't "occur soon enough to have a significant impact on our 2015 sales."

After peaking at $65.9 billion in 2012, sales will be down for the third year in a row, Caterpillar expects. The last time the company's sales declined for three consecutive years was in the early 1930s, during the Great Depression.

Sales for 2015 could be about $50 billion, down from $55.18 billion in 2014, Caterpillar said.

Profit for the fourth quarter came to $757 million, or $1.23 a share, down from $1.0 billion, or $1.54 a share, a year earlier. The quarter's sales edged down 1% to $14.24 billion. Excluding restructuring costs, earnings per share were $1.35 in the latest quarter, down from $1.68 a year earlier. Wall Street had expected earnings before restructuring charges of about $1.55 in the latest quarter.

Operating profit from construction machinery dropped 26% in the latest quarter to $362 million, while mining was down 67% to $72 million. The energy and transportation unit, which makes a wide variety of engines, had operating profit of $1.08 billion, up 10%. But that unit, Caterpillar's main source of strength in the past few years, is expected to sputter in 2015 as demand for engines used in oil exploration and development falls. Caterpillar's sales of railroad locomotives also are expected to drop as the company races to catch up with tougher U.S. emissions standards.

The surging dollar "will not be good for U.S. manufacturing or the U.S. economy," Mr. Oberhelman said. But Caterpillar benefits in some respects because it has large amounts of production capacity in Europe and Asia.

Mr. Oberhelman said the European factories, once "dysfunctional," are starting to perform much better after years of streamlining and cost cuts. The plant in Grenoble, France, where workers took managers hostage during a dispute in 2009, is now a model performer, he said. A weaker euro should make those plants more competitive for exports to other parts of the world. "The currency benefit will just be kind of gravy on that" restructuring story, Mr. Oberhelman said.