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Caterpillar profit lower; company revises outlook

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As it had predicted three months ago, Caterpillar Inc. said Monday that its first quarter was a challenge and, with a weak mining industry as the culprit, it expects that the remainder of 2013 will be, as well.

That said, the company did report a profit in the first quarter, albeit just above half that recorded a year earlier, and it expects to finish the year well into black ink despite the slow economic recovery.

Caterpillar recorded a profit of $880 million, or $1.31 a share, in the first quarter, compared with a profit of $1.59 billion, or $2.37 a share, in the first three years of 2012. That was a difference of 45 percent.

Sales and revenues were off from $15.98 billion in the first quarter of 2012 to $13.21 billion, the company reported.

A chief factor for the declines were a dealer reduction in inventory, which started in the fourth quarter of 2012 and continued into the first part of this year as dealers continued to bring inventory into line with expected demand. Whereas the company added $2 billion in inventory during the first quarter last year, it cut it by $500 million; last year dealers increased machine inventory by $875 million in the first quarter and this year reduced it by about $700 million.

"Those are significant year-to-year swings, and coupled with moderating end-user demand, resulted in sales and revenues being down 17 percent," said Caterpillar Chairman and CEO Doug Oberhelman.

"Considering the magnitude of the decline in sales and production, I am very pleased with our performance in the first quarter. We did a good job managing costs and made even more progress on inventory reduction. Operating cash flow was a highlight in the quarter and improved nearly $900 million from the first quarter of 2012. Better cash flow and the strength of our balance sheet are enabling us to resume stock repurchases," he said.

The expectation that economic growth with remain slow through the rest of the year prompted Caterpillar to revise downward and tighten its outlook for the year. The new outlook expects sales and revenues of $57 billion to $61 billion, with profit of about $7 a share at the middle of the sales and revenues outlook range. At the end of 2012 Caterpillar gave a 2013 outlook of sales and revenue from $60 billion to $68 billion and a profit of $7 to $9 a share.

"What's happening in our business and in the economy overall is a mixed picture. Conditions in the world economy seem relatively stable, and we continue to expect slow growth in 2013," Oberhelman said. "As we began 2013, we were concerned about economic growth in the United States and China and are pleased with the relative stability we have seen so far this year. In the United States, we are encouraged by progress so far and are becoming more optimistic on the housing sector in particular. In China, first quarter economic growth was slightly less than many expected, but in our view remains consistent with slow growth in the world economy. In fact, our sales in China were higher in the first quarter of 2013 than they were in the first quarter of 2012, and machine inventories in China have declined substantially from a year ago."

He noted, however, that Caterpillar's expectations for the mining industry "have decreased significantly. Our revised 2013 outlook reflects a sales decline of about 50 percent from 2012 for traditional Cat machines used in mining and a decline of about 15 percent for sales of machines from our Bucyrus acquisition."

"From an operational standpoint, we have taken action to align production, costs and capital expenditures with the sales and revenues outlook." Oberhelman added, referring mostly to rolling temporary layoffs planned for this quarter, including in Decatur where mining trucks are manufactured, and at the Bucyrus plant in Milwaukee. Indeed, Caterpillar worldwide full-time employment was 124,874 at the end of the first quarter, down by more than 2,300 since a year earlier. Much of that is because of cutbacks in the number of flexible employees.

"While 2013 will be a challenging year, we are confident about the long-term prospects for our business, and when conditions improve, the steps we have taken will position us well to serve our customers and deliver better financial results," added Oberhelman.

Wall Street has taken note of those actions, including the revision of the company's outlook, and Caterpillar stock rose during Monday's trading on the New York Stock Exchange despite the fact the profit missed the estimates of analysts who follow the company. Those analysts estimated a first quarter profit of $1.40 a share.

However, some of those analysts lauded Caterpillar's actions in their own reports and Caterpillar stock ended the day at $82.71 a share, up $2.28. Nearly 18 million shares, or nearly triple the daily average, were traded.

Analysts also labeled as positive Caterpillar's decision to resume repurchasing stock in this quarter. The company's board of directors first authorized the repurchase of $7.5 billion in stock in February 2007, about half of which has been repurchased to date, but none since the end of 2008 as the stock value climbed considerably.

However, Group President and Chief Financial Officer Brad Halverson told reporters that with the decline in the stock price, the continued strength of the company's balance sheet and cash flow, "We believed this was a very opportune time to resume the repurchase program." The company said it plans to repurchase another $1 billion.

Halverson said the repurchase would help protect Caterpillar's credit rating while the economic recovery continue and help fund its growth while giving something back to shareholders.

Halverson said the company believes its inventory levels, outside of mining equipment, are "about where they need to be" and said the company believes demand for commodities will continue to exist and come back.

Mike DeWalt, director of investor relations, said Caterpillar knew the first quarter was going to be tough but that it is confident moving into the spring and summer selling season that sales will begin to recover.

He added, however, that Caterpillar still believes there is some risk if the central banks of the United States and other countries where it does business aren't careful about the actions they take in coming months. Those banks were premature in tightening economic policies and raising interest rates during the recovery from the 2009 financial crisis and that resulted in a slow recovery and continued high unemployment throughout the world.

Now, DeWalt said, central banks throughout the world are easing back on policies and rates to try and keep and induce momentum, "and that is a good thing. But if they start raising rates again and declaring victory, there is a risk."

About the Author
Paul Gordon is the editor of The Peorian after spending 29 years of indentured servitude at the Peoria Journal Star. He’s an award-winning writer, raconteur and song-and-dance man. He also went to a high school whose team name is the Alices (that’s Vincennes Lincoln High School in Indiana; you can look it up).