Jan. 26 (Bloomberg) -- Caterpillar Inc., the world’s largest maker of bulldozers and excavators, said it’s cutting 20,000 jobs and profit and sales will trail analysts’ estimates this year because of the deepest recession in a quarter century.

The jobs include 12,000 employees, or 11 percent of the workforce, and 8,000 contractors, spokesman Jim Dugan said today. Peoria, Illinois-based Caterpillar’s full-year earnings forecast missed the average estimate by 41 percent, and its shares dropped the most in eight weeks.

Demand evaporated and dealers canceled orders in the fourth quarter after nine months of record sales, Caterpillar said in a statement. U.S. builders broke ground last month on the fewest houses since record-keeping began 50 years ago, and stimulus plans like those from President Barack Obama may not be enough to counter the drop in private construction, the company said.

“The results were worse than we were even anticipating, and we had lowered our expectations considerably,” Kristine Kubacki, a St. Louis-based analyst with Avondale Partners LLC, said in an interview. Comments about order cancellations in December “were particularly worrisome,” she said.

Profit excluding some items may fall this year to $2.50 a share, less than the average estimate of $4.22 in a Bloomberg survey of 21 analysts, Caterpillar said. Sales may decline 22 percent to $40 billion, below the $46 billion estimate.

Shares Decline

Caterpillar fell $2.99, or 8.4 percent, to $32.67 at 4 p.m. in New York Stock Exchange composite trading, the biggest percentage decline since Dec. 1. Credit-default swaps rose 11 basis points to 217 basis points, according to CMA DataVision in New York.

Questions about the depth and duration of the U.S. recession triggered a plan to cut production costs in line with a 25 percent decline in sales volume, today’s statement said.

“We are looking at seismic adjustments in our top-line sales and revenues in 2009,” Chief Executive Officer Jim Owens, 63, said on a conference call with analysts. “Quite frankly, the best hope, I think is a stimulus package in the U.S. and China, driving demand for commodities.”

Fourth-quarter net income fell almost a third to $661 million, or $1.08 a share, from $975 million, or $1.50, a year earlier. Analysts, on average, estimated earnings of $1.30 a share. Sales rose 6.4 percent to $12.9 billion, reflecting price increases and consolidation of Cat Japan sales into the parent.

Machinery sales fell 9 percent to $2.83 billion in North America and 13 percent to $2 billion in the region that includes Europe, where construction permits declined. Machinery sales rose 38 percent in Asia-Pacific because of the Cat Japan shift and 41 percent in Latin America on demand for energy equipment.

Global Growth Stalls

American exports are contracting as the global economy faces the first simultaneous recession in the U.S., Japan and the euro region in the postwar era. Foreign purchases of American-made goods plunged 5.8 percent in November, declining for a fourth consecutive month, to $142.8 billion, the Commerce Department said Jan. 13.

“We are expecting recessionary conditions to persist in most of the world throughout the year, with no growth in the world economy,” said Owens, who in October predicted the global economy would grow less than 2.5 percent.

Efforts in Congress to add “buy-American” rules to stimulus plans would be “disastrous” by promoting protectionism, he said later in a CNBC interview.

The jobs target is a mixture of previously announced and new reductions, spokesman Dugan said. The cuts include 5,000 management and support positions that had not previously been announced. Caterpillar had 112,887 employees at the end of 2008.

Temporary Workers

“Most of the temporary and contract workers are now gone,” Chief Financial Officer Dave Burritt said in an interview. The 5,000 management positions to be cut will come from every unit, including a few from Caterpillar Financial Services Corp., which provides financing to dealers and customers.

“This is our fourth recession,” Burritt said, speaking of the current management team. “We’ve been there. We’ve done that. 2009 could be the most difficult year in the last 30 years.”

A first-quarter loss is possible as production volume is “severely depressed” and production and sales may fall faster than costs early in the year, Caterpillar said. In addition, the company will see job-related expenses of $500 million, most of which will be booked in the first quarter.

Responding to the drop in commodities prices and the “decline in the world economy in general,” Caterpillar took the unprecedented step of asking dealers to cancel orders, Mike DeWalt, director of investor relations, said on the call. “They did, and they made substantial order cancellations.”

Bank Covenants

Credit default swaps rose after Caterpillar said its consolidated net worth fell below the covenant level in its $6.85 billion revolving credit facility because of a $3.4 billion year-end charge driven by lower returns on its pension assets. The company said its corporate bank group has consented to the consolidated net worth level and that it has no borrowings under the credit facility.

Stock traders’ bets against Caterpillar reached their highest level since April on Dec. 31 on doubts that the world’s largest maker of construction equipment would get a boost from Obama’s public-works spending plan. Rising short interest indicates an increase in speculation that the shares will drop.

“The ray of hope is that Caterpillar comes out of this a better company in 2010 when global growth may resume,” Larry de Maria, a New York-based analyst with Sterne Agee & Leach Inc. said in a telephone interview.

To contact the reporter on this story: Melita Marie Garza in Chicago at mgarza4@bloomberg.net

Last Updated: January 26, 2009 16:41 EST