Caterpillar CEO Stands by Mining Strategy

Caterpillar Inc. CAT +0.27%Chief Executive Douglas Oberhelman on Monday defended the company's expanded investment in mining equipment, saying the strategy "is changing our company for the better."

Sharply lower demand for mining machinery recently has left Caterpillar exposed to second-guessing for its $8.8 billion purchase of mining-equipment manufacturer Bucyrus International Inc. in 2011.

Mr. Oberhelman's comments came as Caterpillar reported first-quarter earnings fell 45% and revenue dropped 17%, both below analysts' expectations. The Peoria, Ill.-based company also lowered its sales and profit forecasts, largely because of soft conditions in the mining business and aggressive destocking by Caterpillar dealers.

Sales of Caterpillar's mining equipment dropped 23% in the quarter from a year earlier to $3.67 billion, while operating profit from mining equipment dropped 59% to $477 million.

The Bucyrus deal was the largest acquisition in Caterpillar's history and expanded its mining products to include shovels and underground-mining equipment to go along with the company's giant haul trucks and other large earth-moving machinery used in mining.

The global mining boom helped Caterpillar rebound quickly from the 2008 recession, offsetting weak market conditions in the company's traditional construction markets. But mine operators recently have pulled back on purchases of equipment and shelved expansion projects in response to lower prices for commodities such as coal.

Mr. Oberhelman, in a conference call Monday with analysts, predicted the market will rebound as economic growth accelerates. The chief executive, who engineered the Bucyrus purchase and a string of other acquisitions soon after taking over the helm in 2010, predicted the next generation of Caterpillar executives will judge the Bucyrus deal as a seminal event for the company's future.

"We're definitely in a down cycle right now, but long term it's a great business for us," he said. "I still firmly believe that what we've done the last few years is really changing the company for the better."

Caterpillar forecast that sales of Bucyrus machinery will decline 15% this year, while sales of big mining trucks and other mining machinery traditionally built by Caterpillar are expected to fall 50% from 2012.

"Certainly, given the price they paid for [Bucyrus] and the profit they're getting out of it today, the deal doesn't look too good in hindsight," said Adam Fleck, an analyst for research firm Morningstar Inc. MORN +1.63%

But others suggest Caterpillar's mining business will be back on its feet sooner than anticipated.

"I don't think mining [industry] capex will be down 50% or 60% this year or next," said Robert Wertheimer, an analyst for Vertical Research Partners. "We don't think the earnings are going to stagnate. They're going to return to growth."

Caterpillar's overall sales of machinery and engines dropped 18% in the first quarter to $12.4 billion. The company attributed about half of the sales decline to destocking of inventories by Caterpillar dealers, who reduced their inventories of machinery by $700 million in the quarter; that compared with an $875 million increase in inventories in the year-earlier quarter in anticipation of improving demand by the end of 2012. When the U.S. economy weakened in last year's second half and mining-equipment demand softened, dealers changed course.

Caterpillar said it now expects revenue this year of $57 billion to $61 billion, down from its previous forecast of $60 billion to $68 billion. The company said it anticipates a profit of $7 a share this year, down from the $7 to $9 a share it predicted earlier. Wall Street analysts had expected the company to earn $7.68 a share on revenue of $62.6 billion.

For the quarter ended March 31, Caterpillar earned $880 million, or $1.31 a share, down from $1.59 billion, or $2.37 a share, a year earlier. Total revenue, which also includes the company's finance unit, dropped to $13.21 billion. Analysts recently polled by Thomson Reuters expected earnings of $1.40 a share on revenue of $13.71 billion.