Steel Markets

Caterpillar Forecasting 4% Growth in Construction & Power Systems

January 28, 2014

Caterpillar Inc. reported Q4 sales and revenues fell 10 percent year-over-year to $14.402 billion, impacted negatively by a goodwill impairment charge of $580 million and positively by a tax settlement of $300 million. Machinery & Power Systems (M&PS) revenue dropped 11 percent in Q4 while operating profit increased 37 percent to $1.27 billion but was offset by poor performance in the Resources segment. Sales and revenue for the full year 2013 slid 16 percent to 55.656 billion from $65.875 billion in 2012.

An expected drop in mining sales was worse than anticipated for Caterpillar. Resource industries sales dropped 48 percent year-over-year in the fourth quarter for a loss of $2.705 billion in sales volume. Dealers reduced inventory in fourth quarter in response to weaker demand. Caterpillar said the mining industry is focused on increasing productivity at existing mines rather than continuing to increase capital expenditures as it has done over the past several years. Sales were down in every region with the most significant decline in the Asia/Pacific area, primarily due to lower mining sales in Australia.

Construction and Power System sales fared better. Construction industry sales in Q4 were up 20 percent year-over-year to $4.851 billion but were hurt by unfavorable pricing due to continued sales to a Brazil government order and unfavorable currency exchange from the weaker Japanese yen. Power system sales increased 6 percent to $5.565 billion due primarily to dealer restocking.

Restructuring in 2013 resulted in some downsizing and/or closing of some facilities as well as reduction of 2000 management and support employees and 4500 production workers around the globe.

The company also announced a stock repurchase of $1.7 billion for first quarter 2014 which completes a $7.5 billion repurchase authorization that was initiated in 2007. A new $10 billion stock repurchase program has been approved by the Board of Directors and will expire on Dec. 31, 2018. The debt to capital ratio dropped eight points to 29.7, lowest level in 15 years. The company ended 2013 with $6.1 billion in cash giving it strong balance sheet. M&PS operating cash flow for the year was at a record $9 billion, increasing $4.8 billion from 2012.

Outlook

Caterpillar forecasts sales and revenue will be around 56 billion (plus or minus 5 percent) in 2014. Power Systems and Construction are expected to improve by 4 percent while mining will remain weak with a further decline of 20 percent in Resource Industries. Restructuring charges of $400 to $500 million are expected in 2014. Included in those charges will be $300 million for employee cash separation costs connected with the upcoming restructuring of the Gosselies, Belgium facility.

“We see some signs of improvement in the world economy, which should be positive for sales in our Construction Industries and Power Systems segments. However, despite our expectation that mine production will continue to increase, we expect mining companies to further reduce their capital expenditures in 2014. As a result, we’re expecting sales in Resource Industries to decline modestly. We’ve already taken a number of restructuring actions to help improve our financial results and expect to take additional actions in 2014. We continue to be cautious and are making the tough decisions necessary to better position us down the road when economic conditions improve and our sales rebound,” said Caterpillar Chairman and Chief Executive Officer Doug Oberhelman.

During the conference call the company said they are watching China very closely, especially liquidity in the banking system and reform efforts, and are not expecting much improvement in China’s GDP in 2014. Business in China has been positive for equipment sales in general and for Caterpillar specifically with equipment sales up 20 percent to $3.5 billion in 2013.