Profits soar, but demand slows for Caterpillar

October 24, 2012

Although revenue in the third quarter was lower than expected, and a glut of unsold construction and mining machinery forced it to lower sales and profit forecasts for 2012 and to predict flat demand for 2013, Caterpillar Inc. still plans to proceed with the opening of new assembly plants in the U.S.

In the third quarter, Caterpillar achieved a 49 percent profit gain thanks in part to a $273 million gain from the sale of the company’s logistics business. This topped analysts’ expectations, however, revenue was lower than expected, as dealers reduced their orders to shrink equipment inventories, The Wall Street Journal reported.

In September, Caterpillar predicted revenue for the year would be about $2 billion lower than the midpoint of its July revenue range of between $68 billion and $70 billion. On Oct. 22, it chopped an additional $1 billion from its revenue forecast and shaved its 2012 profit outlook, reinforcing a view of rapidly deteriorating end-market demand.

“As we’ve moved through the year, we’ve seen continued economic weakening and uncertainty,” Chairman and Chief Executive Doug Oberhelman said. “It’s definitely impacting our business with dealers intending to lower inventories and mining customers delaying some projects and reducing orders.”

Caterpillar has dialed down production rates, temporarily idling some assembly plants and laying off workers. It said lowered production rates would likely accelerate during the fourth-quarter and extend into the first quarter of 2013. But executives stressed that the slowdown is likely to be temporary.

The company continues to construct a new plant near Athens, GA, to assemble small bulldozers and excavators and a ramp up is under way for a newly completed plant for large excavators in Victoria, TX, and at another plant near Winston-Salem, NC, to manufacturer axle assemblies for big mining trucks.

Orders to Caterpillar from its dealers have been running below customer deliveries of machinery. The company said dealer inventories in the third-quarter rose by about $400 million from the end of the second quarter. Caterpillar's backlog of orders meanwhile fell 18 percent, or $5.1 billion, from the end of the second quarter, to $23.1 billion.

The company said it doesn’t expect the current weakness to become a global economic recession next year. It anticipates “modest improvement” in sales in the U.S., China and most of the developing world with “continuing difficulty” in Europe.

The company’s 2013 forecast now calls for revenue to be about flat with 2012.

Oberhelman remains optimistic that machinery demand in China will justify the company's investments in production capacity. The company now has 16 plants and 12,000 employees in China.

Caterpillar's world-wide sales of machinery and engines in the third quarter increased 5 perent from a year earlier, to $15.7 billion. Construction-machinery sales were flat at $4.9 billion. A 23 percent increase in North American construction-machinery sales and 7 percent gain in Europe, Africa and the Middle East offset a 23 percent sales decline in Latin America and an 18 percent drop in Asia. Operating profit from such machinery slid 7 percent, to $459 million.

But the company warned that mining equipment sales in 2013 are likely to be lower as lower prices for coal and metal and higher operating costs for mines squeeze profit from mining, causing companies to delay equipment purchases.

Overall, Caterpillar reported a profit of $1.7 billion, or $2.54 a share, up from $1.14 billion, or $1.71 a share, a year earlier. Total revenue, which also includes financing results, rose 4.6 percent, to $16.45 billion.


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