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Caterpillar slashes outlook, plans more cost cuts

Workers walk past Caterpillar excavator machines at a factory in Gosselies February 28, 2013. REUTERS/Eric Vidal
Workers walk past Caterpillar excavator machines at a factory in Gosselies February 28, 2013. REUTERS/Eric Vidal

By James B. Kelleher

(Reuters) - Caterpillar Inc reported a 43.5 percent drop in quarterly profit and cut its outlook for the year on Wednesday, blaming steeper-than-expected inventory reductions by dealers and continued weak demand from the mining industry.

The world's largest maker of mining and construction equipment, which has reduced its worldwide workforce by 8 percent in the past year, said the cost-paring would continue in the second half. It did not give details.

"There's no question there's a slowdown. But long-term ... mining is a great place to be," Doug Oberhelman, Caterpillar's chairman and chief executive, said in an interview with CNBC.

Lower metal prices have forced mining companies around the world to move dramatically to lower capital and operating costs, including putting on hold expansions and new projects, and cutting non-essential spending.

Barrick Gold Corp , the world's largest gold producer, has canceled all new mine projects, save for its Pascua-Lama project in South America. Even there, it has slowed construction and slashed spending for the next two years.

Copper miner Freeport McMoRan Copper & Gold Inc said on Tuesday it cut $1.9 billion in planned capital spending, adding that more cuts, along with asset sales, will be pursued.

The softness in mining was the main reason the company and its dealers slashed inventories. The company's 200 worldwide dealers sell everything from construction and mining equipment to power systems.

The company said its dealers reduced inventories by $1 billion in the quarter, while the company cut its own inventories by another $1.2 billion. Together, it said, the actions were "significantly negative to profit."

"We're actually producing and selling to dealers far less than they're selling to end users and their customers," Oberhelman told CNBC. "That bodes well for the future, but it's certainly been a drag on earnings."

(Interactive graphic on Q2 industrials:

http://link.reuters.com/jeb89t)

In the second quarter, Caterpillar reported a profit of $960 million, or $1.45 a share, down from $1.70 billion, or $2.54 a share, a year earlier. Analysts expected earnings of $1.70 per share.

The company, which also makes locomotives, gas turbines and diesel engines and generators, said sales fell nearly 16 percent to $14.62 billion.

Looking forward, it now expects a full-year profit of about $6.50 a share, down from its previous target of $7.

The company forecast full-year sales at $56 billion to $58 billion, down from its previous forecast of $57 billion to $61 billion.

In April, Caterpillar posted disappointing quarterly results and cut its full-year 2013 profit forecast, citing a drop in demand from mining customers.

'WRONG PRODUCTS AT WRONG PART OF CYCLE'

But some analysts worried the situation was deteriorating faster than Caterpillar was acknowledging and the emphasis in recent years on increasing its penetration in the global mining business would be a short-term problem if the slowdown in China reduced incremental demand for mined commodities.

Last week, short-seller Jim Chanos of Kynikos Associates said he was betting against the shares of Caterpillar because the company was "tied to the wrong products at the wrong part of the cycle."

Rising interest rates, meanwhile, have raised concerns the nascent recovery in the construction market, another key area for Caterpillar, could be derailed.

But in its results on Wednesday, Caterpillar said business in China improved in the quarter and builder demand for its earth-moving machines was up, even though the overall construction equipment industry was down.

Reaction on Wall Street to the news from Caterpillar was muted, with the shares down 1.3 percent to $84.43 in mid-day trading.

Larry De Maria, an analyst at William Blair, said the earnings miss and forecast cut had been "well previewed" and already priced into the shares.

Eli Lustgarten, an analyst at Longbow Research, agreed. "It's an ugly quarter," he said. "And the drop in mining is substantial. But there are really no big surprises here."

The company has cut 10,000 employees from its full-time payroll in the last year.

(Reporting by James B. Kelleher; Editing by Gerald E. McCormick, Lisa Von Ahn and Jeffrey Benkoe)

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