CAT Caterpillar Inc

By Bob Tita 

Caterpillar Inc. warned Thursday that its sales for 2016 could sink to a six-year low as the company swung to a fourth-quarter loss from expenses to shrink operations as it deals with falling demand.

The maker of mining and construction equipment said depressed prices for mined commodities, lower oil prices and weak economic conditions in developing countries are weighing on sales of its bulldozers, excavators, giant dump trucks and engines.

The Peoria, Ill.-based company now expects 2016 revenue to fall by about 10% from 2015 to about $42 billion, which would be the lowest level since 2010 and more than one-third below the company's peak of $65.9 billion in 2012. Caterpillar in October had forecast a 5% decrease in sales this year. The revised outlook would drop Caterpillar's revenue to a level not seen since the company acquired mining equipment company Bucyrus International Inc. in 2011 for $8.8 billion

The Bucyrus acquisition--the largest in the 90-year-old company's history--represented a double-down bet by Caterpillar on the global mining industry and sustained high demand for iron ore, copper, coal and other commodities. At the same time, Caterpillar aggressively added plants in overseas markets to capture surging demand for machinery for infrastructure construction. But the growth strategy stalled as the company encountered falling commodity prices and contracting economies throughout the world.

Caterpillar's 2015 profit dropped 43% from 2014 to $2.1 billion, or $3.50 a share. Revenue slipped 15% to $47 billion.

Caterpillar Chairman and Chief Executive Doug Oberhelman said he's not expecting a recovery in commodity or oil prices in 2016 or much economic expansion in developing countries, such as Brazil and Russia.

"I would expect bumps in the road throughout the year," he said on a conference call with analysts. "We're really going into [2016] with eyes wide open."

Fourth-quarter revenue came in lower than expected and was 23% below the same period a year earlier, as equipment and engine sales declined in all of the company's geographic markets. Caterpillar, which is already planning to cut 10,000 jobs in the coming years, said it would book $400 million in charges for restructuring operations in 2016 to lower expenses after spending $908 million on restructuring in 2015.

Restructuring expenses wiped out the company's fourth-quarter profit. But excluding the restructuring costs, earnings per share topped expectations, which helped propel Caterpillar's stock to a 4.6% gain to $61 a share.

Caterpillar expects sales of mining equipment this year to fall 15% to 20% from 2015. Fourth-quarter sales of resource industry equipment dropped 23% from a year earlier to $1.8 billion. The business recorded a $105 million loss during the quarter after earning $25 million a year earlier.

Mike DeWalt, a Caterpillar vice president, described the global mining industry as "very a tough business" with "very few orders" for equipment.

"Many of our customers are in challenged financial conditions," he said.

Meanwhile, falling oil prices are choking demand for Caterpillar's engines, which are used to generate power at oil drilling sites. The company expects sales from its energy and transportation unit to sink 10% to 15% in 2016. Fourth-quarter sales for the unit plunged 29% to $4.4 billion, while profit declined 37% to $712 million.

The company predicts that construction equipment sales will decline 5% to 10% this year, following an 18% decline in fourth quarter to $3.6 billion. Profit from the business dropped 39% to $220 million.

Kwame Webb, an analyst for research firm Morningstar Inc., said he considers the construction outlook overly optimistic, especially after equipment rental giant United Rentals Inc. warned Wednesday that its 2016 revenue could decline for the first time since 2010. The rental industry accounts for about half the construction machinery used in the U.S.

"The market is just awash in too much equipment," Mr. Webb said.

Caterpillar forecast earnings of $4 a share for 2016, excluding the restructuring costs. Analysts were expecting $3.48 a share in adjusted earnings. But lower pension costs caused by change in accounting practices provide nearly all the higher per-share profit in the company's forecast.

For the fourth quarter ended Dec. 31, Caterpillar swung to a loss of $87 million, or 15 cents a share, compared with a prior-year profit of $757 million, or $1.23 a share.

Excluding restructuring costs, which totaled about 89 cents a share, the company reported earnings of 74 cents a share, topping analysts' forecast of 69 cents a share. Total revenue, which includes Caterpillar's finance unit, tumbled 23% to $11.03 billion. Analysts had forecast $11.4 billion in revenue.

Write to Bob Tita at robert.tita@wsj.com

(END) Dow Jones Newswires

January 28, 2016 15:12 ET (20:12 GMT)

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