Caterpillar Plans 10,000 Job Cuts

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Wall Street Journal / September 24, 2015

Equipment maker projects 10,000 job cuts, revenue falling for record fourth-straight year

Caterpillar Inc. said it would slash thousands of jobs and cut manufacturing space by 10%, as it expects weakening demand from resource and construction companies will continue to drive down sales of its heavy equipment through at least next year.

The company said the job cuts could exceed 10,000 people through 2018, including 4,000 to 5,000 salaried and management positions to be eliminated by the end of next year. It aims to reduce annual costs by roughly $1.5 billion.

Caterpillar said it now expects 2015 revenue to be about $48 billion—$1 billion lower than its previous projection—which would mark a decline of about 27% from a peak of nearly $66 billion in 2012. And it said 2016 revenue likely would fall a further 5% from 2015, which would be the first time in Caterpillar’s 90-year history that sales declined for four consecutive years.

The announcement, which sent Caterpillar shares tumbling, underscores the depth of the downturn in the mining and energy sectors after years of rocketing demand for the company’s excavators, mining trucks, wheel loaders and industrial engines. Caterpillar already had cut its global workforce, before Thursday’s announcement, by more than 31,000 since mid-2012, and it had closed or announced plans to close or consolidate more than 20 facilities, affecting 8 million square feet of manufacturing space.

Caterpillar, based in Peoria, Ill., had 111,247 employees at the end of June.

Previous slumps in global mining have lasted for years, making it difficult for the company to hold on to plants and workers in anticipation of an upturn. The latest restructuring makes clear that Caterpillar expects the current pain to persist.

“We are facing a convergence of challenging marketplace conditions in key regions and industry sectors—namely in mining and energy,” Chief Executive Doug Oberhelman said. “While we’ve already made substantial adjustments as these market conditions have emerged, we are taking even more decisive actions now.”

He said the cuts would “better position Caterpillar to deliver solid results when demand improves.”

Mr. Oberhelman became CEO in 2010 determined to compete better in fast-growing overseas markets, where Caterpillar had lacked production space, and in the mining-equipment market, which it had eyed for years.

Caterpillar aggressively expanded during a commodities and construction boom that followed the 2008 global economic slump, anticipating sustained demand for equipment from China, Brazil and other overseas markets. The company anticipated eventually needing production capacity to sustain equipment sales of about $100 billion annually.

It also acquired more factories and workers when it purchased Milwaukee-based, mining-equipment maker Bucyrus International in 2010. The $8 billion purchase, the largest in Caterpillar’s history, was a strategic departure for a company with a reputation for caution in acquisitions. The purchase helped increase Caterpillar’s annual sales by $33 billion from 2009 through 2012.

But commodity demand has since collapsed amid slower economic growth in China, and lower prices for oil also have squeezed demand from Canada’s oil-sands region for Caterpillar’s giant mining trucks.

Mining company BHP Billiton this week cut its planned 2016 capital spending by $2.5 billion to $8.5 billion, and Phoenix-based Freeport-McMorRan Inc. said last month it would slash its 2016 outlay by 29% to $4 billion and cut about one-tenth of its U.S. workforce. Macquarie Bank recently predicted that the industry’s global capital spending would fall by half through this year from its 2012 peak of $134 billion.

China’s construction-equipment market also has tanked amid a slowdown in housing and infrastructure construction. Unit sales of construction excavators in China are down about 40% so far this year.

“They’ve got huge amounts of capacity in China and now they don’t need it,” said Charles Yengst, president of equipment-market consultants Yengst Associates Inc. “Everywhere you go they’ve been adding capacity, except in Europe, and we’re watching markets all over the globe just shrink.”

Throughout the slump, Caterpillar has remained profitable, with earnings of $3.7 billion last year, down from $5.7 billion in 2012. And even as it has shed workers to cut costs, it has spent $8.2 billion on share repurchases over the past three years to support its stock.

Still, its share price has fallen sharply. The shares declined 6.3% to $65.80 on Thursday, leaving them down 41% from their high in 2014.

Caterpillar on Thursday didn’t update its profit outlook for this year, saying it would do so when it reports third-quarter results late next month.

The company said its restructuring effort is expected to lead to pretax costs of roughly $2 billion, but that it expects to record half of the projected $1.5 billion in cost savings from the restructuring next year. It said the restructuring could affect more than 20 facilities, covering more than 10% of its manufacturing square footage.

Caterpillar said it isn’t abandoning plans for a new headquarters building in downtown Peoria, but that there currently is no schedule to begin construction. “We do remain committed to Peoria and Illinois, and our vision for a new downtown headquarters, [but] now is not the time to begin work, and I can’t say when,” a spokeswoman said.

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Caterpillar `Bites the Bullet' as Oil Rout Compounds Mining Pain

Bloomberg / September 24, 2015

The last time Caterpillar Inc. cut thousands of jobs, a mining slowdown was to blame. Now the main culprit is oil, as slumping prices batter drillers.

On Thursday, the world’s most valuable machinery producer announced a plan to cut as many as 10,000 jobs, or 9 percent of its workforce, through 2018 as the effects of crude’s collapse ripple through the industry. The measures -- including the second reduction in sales guidance in two months -- represent the biggest round of cuts since 2013, when the company reduced its headcount by 13,000 as sales to metal producers declined along with prices.

The announcement marks a capitulation to a prolonged downturn in energy, the segment that had helped shield Caterpillar’s earnings as mining slumped and construction growth remained tepid, according to Bloomberg Intelligence.

“They’ve finally opened up the manila envelope that says ‘doomsday’ on it and they’re executing the plan that they hoped they would never have to execute,” Sameer Rathod, a San Francisco-based analyst at Macquarie, said by telephone. “No one knows what the shape of the downturn looks like or any shape of the recovery.”

The Peoria, Illinois-based company will cut as many as 5,000 workers this year and another 5,000 by 2018. It reduced a 2015 revenue projection by $1 billion and said sales are expected to drop 5 percent next year as 2016 results will decline across the company’s three largest segments led by “the most significant decline in the oil and gas portion of our energy and transportation segment.”

In July, Caterpillar also lowered its sales guidance by $1 billion.

Shares Slump

Caterpillar fell 6.3 percent to a five-year low of $65.80, the steepest loss in the Dow Jones Industrial Average. The stock has lost 28 percent this year, the biggest annual drop since 2008. The MSCI Emerging Markets Index has fallen 18 percent in 2015 while the Dow is down 9.8 percent.

The consolidation may affect more than 20 plants, part of a plan that will save about $1.5 billion of operating costs annually and cost about $2 billion pre-tax, it said.

Headcount was 111,247 in the second quarter. The elimination of 13,000 jobs in 2013 marked a 5.5 percent reduction at the time, according to data compiled by Bloomberg.

No Backlog

“When they finally went negative in energy, they said ‘we have to bite the bullet’,” Karen Ubelhart, an analyst at Bloomberg Intelligence in New York, said in an interview Thursday. “They basically said in the second quarter they don’t have any backlog. There’s no incoming orders in that segment.”

Caterpillar is reorganizing only four years after making its biggest acquisition ever, spending $7.5 billion on Bucyrus International Inc., to expand into mining equipment, as it faces what it says is the first four-year sales decline in its 90-year history.

Since the 2011 deal, a slowdown in China has created a glut of metals and coal, leaving Caterpillar’s mining customers with shut down mines and lots full of idled equipment.

Now, tumbling oil and gas prices are leading to a similar retreat by drillers, hitting Caterpillar’s business selling energy producers the engines that run their rigs. The number of active oil and natural-gas rigs around the world has averaged 2,472 through Aug. 31, the lowest since 2009, according to data compiled by Bloomberg from Baker Hughes Inc.

"We are facing a convergence of challenging marketplace conditions in key regions and industry sectors – namely in mining and energy," Caterpillar Chief Executive Officer Doug Oberhelman said in the statement. “While they are the right businesses to be in for the long term, we have to manage through what can be considerable and sometimes prolonged downturns.”

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