Caterpillar posts 32 percent drop in 4Q earnings, will cut 20,000 jobs

Caterpillar Inc.'s fourth-quarter profit dropped 32 percent as the global economic slowdown sapped demand for heavy equipment, forcing the company to lower its 2009 profit expectations and make further job cuts that will ultimately wipe out 20,000 positions.

Earnings for the world's largest maker of mining and construction machinery fell far short of expectations as customers pulled back on purchases of equipment used to mine quarries and help build homes, highways and offices. Demand hit a wall in the last month of the year, weighed down by the forces of recession: slumping commodity prices, tight credit markets and weak home building.

Caterpillar, an economic bellwether and component of the Dow Jones industrial average, reported fourth-quarter earnings of $661 million, or $1.08 per share, on Monday, down from $975 million, or $1.50 per share, a year earlier. Overall sales rose 6 percent to $12.92 billion.

Analysts, on average, expected earnings of $1.31 per share on revenue of $12.84 billion, according to a survey by Thomson Reuters.

Shares of Caterpillar, which makes yellow-and-black backhoes, tractors and paving machines, and offers loans to customers, fell $2.99, or 8.4 percent, to $32.67. Earlier, they touched a new 52-week low of $31.70.

In response to worsening conditions, Caterpillar disclosed nearly 20,000 job cuts, most of which have already been made. Of the total, about 5,000 are new layoffs of white-collar workers which will occur globally by the end of March.

Earlier cuts included the elimination of 2,500 workers through a buyout offer announced in December. Another 8,000 contract and temp agency workers have also been laid off, steps the company had announced earlier without disclosing the figure. Finally, a total of 4,000 full-time production workers have been let go through firings and buyouts, a number that hadn't been announced.

"These are very uncertain times, and it's imperative that we focus ... on dramatically reducing production schedules and costs in light of poor economic conditions," Caterpillar Chief Executive Jim Owens said in a statement.

Caterpillar may also lay off more employees depending on the business climate. Several facilities already have shortened workweeks and there's a possibility of full or partial plant shutdowns. Caterpillar expects a substantial charge of about $500 million this year for what it called "redundancy costs," with most of it coming in the first quarter.

The Peoria, Ill.-based company also scaled back its expectations for 2009, with revenue and sales now seen at about $40 billion -- give or take 10 percent -- and profit at $2.50 per share. That's down from revenue and sales of $51.32 billion and profit of $5.66 per share last year.

"Without a doubt, 2009 will be a very tough year," Owens said.

A first-quarter loss is possible, Caterpillar said, as costs could outstrip falling orders from dealers, who normally stock up on equipment ahead of spring and summer construction demand. It would be the company's first quarterly loss since 1992.

As demand withered late in the year, Caterpillar said it encouraged dealers to cut back inventories, and they responded with "significant order cancellations," particularly in December.

Kristine Kubacki, an analyst at Avondale Partners, said the results were worse than her firm expected, and that she was concerned about further cancellations.

"It might be a little bit optimistic getting production and the work force to match the macroeconomic environment," she said.

Fourth-quarter profit was hit by a combination of the sudden slowdown in demand, the higher cost of materials, and weak results from the company's finance unit, which reported an 88-percent decline in profit, partly due to financial markets turmoil.

Higher costs for materials such as steel offset a $409-million tax benefit and higher product prices. Though steel prices plummeted in the second half of 2008, Caterpillar's costs tend to lag commodity prices, which were significantly higher earlier in the year.

Those costs, along with freight expenses, accounted for about half the $938 million increase in manufacturing costs during the quarter, according to Mike DeWalt, Caterpillar's director of investor relations.

Caterpillar's machinery sales, meanwhile, climbed 41 percent in Latin America and 38 percent in Asia. More than 60 percent of total sales came from regions outside North America.

But machinery sales fell 13 percent in Europe, Africa and the Middle East, and 9 percent in North America.

Sales, Owens said, remained strong for the year into November before they "literally hit a wall in December."

The company expects U.S. housing starts of about 904,000 in 2008 to remain virtually flat this year. Although those starts were at the lowest level since 1945, Owens expressed optimism that they would rebound to as much as 1.8 million annually "in our not-too-distant future."

In recent weeks, analysts have forecast continued weak earnings for Caterpillar and other U.S.-based machinery firms, pointing to lackluster construction and mining markets and an infrastructure spending plan proposed by President Barack Obama that may not boost equipment demand anytime soon. Farm-equipment maker Deere & Co. last week told employees it plans to lay off almost 700 workers at factories in Brazil and Iowa. That follows forecasts of lower sales.

Caterpillar, which employs nearly 113,000 people worldwide, has expanded dramatically in recent years, helped by surging demand arising from infrastructure projects in developing countries, particularly in Asia. At the end of 2008, Caterpillar employed 11,554 more people than it did a year earlier.

For the year, the company's earnings totaled $3.56 billion, or $5.66 per share. Sales and revenues hit $51.32 billion.

Analyst Matt Collins of Edward Jones, said: "It was an ugly quarter, no matter how you slice it. The good news is that 2008 is over, and the bad news is that 2009 will be worse."