How Caterpillar’s Big Bet Backfired

[kscarbel2]

The Wall Street Journal  /  October 16, 2016

CEO Doug Oberhelman invested heavily in production of machinery and equipment. Then commodities began their slide

Doug Oberhelman spent his first years as Caterpillar Inc. ’s chief executive plowing billions of dollars into factories to build more of its familiar yellow machines and move the company deeper into mining equipment.

It was a bold bet, spectacularly mistimed.

The world was gripped by a global commodities boom in 2010 when he took charge, along with strong postrecession demand from developing markets and the energy industry. The world was ordering excavators and bulldozers and giant dump trucks at a rapid clip.

Mr. Oberhelman bet he could grab an outsize share if he could just make more equipment. He spent almost $10 billion world-wide on plants and equipment from 2010 through 2013.

Much of that went toward building more of its flagship CAT construction machinery. It also paid $8.8 billion in 2011 for Bucyrus International Inc., a Milwaukee mining-equipment maker, to gain a position in giant open-pit-mining shovels and underground-mining machines Caterpillar didn’t make.

In China, Caterpillar was “going to play offense and we’re going to win,” Mr. Oberhelman proclaimed in 2010. It had missed opportunities in China before. From 2011 to 2014, Caterpillar roughly doubled its number of plants and facilities there to 26.

“Everybody was convinced that this time would be different,” said Ken Banks, who retired in 2013 as manager for Caterpillar’s electric mining shovels. “They thought the Chinese market was so hot, that commodity prices would continue to be very strong and Caterpillar would increase sales substantially.”

The year 2012 would prove to be a peak for Caterpillar. Soon after, miners began shelving equipment-buying plans as commodity prices fell. China’s growth slowed. Then oil prices fell, along with demand for related equipment.

Caterpillar now faces its fourth straight year of falling sales, the longest decline in its history. Its stock is up 29% this year—the best-performing in the Dow Jones Industrial Average—but trades 25% below its 2012 peak.

“Everybody was surprised by the size of the downturn and the length of it,” Mr. Oberhelman, 63 years old, said at a September mining trade show in Las Vegas. “I firmly believe we couldn’t have forecast that at the time” of the Bucyrus deal. The company declined to make Mr. Oberhelman available for comment for this article.

Slumps are common in Caterpillar’s world, and rivals are suffering, too. Caterpillar, though, has long been a flagship American firm, a reliable blue chip in the Dow industrials and a major job creator with plants around the world. Now, it has fallen behind in the slow-growing economy.

Caterpillar has reduced its workforce 20% in the past four years, about 30,000 jobs, and has said it expected to close or consolidate as many as 20 plants. In China, Caterpillar said, it has closed one plant and is operating many others at low production rates. Caterpillar in August said it would sell off some of the mining-equipment lines it gained with the Bucyrus acquisition.

Its stock, up 46%from the beginning of Mr. Oberhelman’s tenure, trails the S&P 500 index’s 107% rise.

“They overlooked the possibility that the whole market would collapse,” said Charles Yengst, a Connecticut equipment consultant. “They opened factories all over the place to operate at a market peak that doesn’t happen every year or even every 10 or 15 years.”

Caterpillar is still the world’s largest seller of construction and mining equipment and continues to gain market share, especially in China. The Peoria, Ill., company has posted annual profits throughout Mr. Oberhelman’s CEO tenure. “In what is likely to be our fourth down year for sales and revenues, we’re proud of what we’re accomplishing,” Mr. Oberhelman said in a July release, adding that “our machine market position has increased, including in China, product quality continues to be at high levels, and the safety in our facilities is world class.”

Caterpillar spokeswoman Amy Campbell said Caterpillar expects to handle the next upturn with a more-nimble manufacturing operation. “We’re lowering our cost structure,” she said. “The company has learned a lot of lessons on how you drive more capacity without spending on capex.”

The possibility of a market collapse was almost unthinkable when Mr. Oberhelman, who joined Caterpillar in 1975, became CEO in July 2010. The northeast-Illinois native, whose father was a Deere & Co. salesman, had been chief financial officer in the 1990s and developed a cost-reduction contingency plan credited with helping Caterpillar navigate the last recession.

“Doug had been in the succession pipeline for a number of years,” said Gail Fosler, a Caterpillar director who left the board in 2010. “The board felt he would bring a performance discipline to the company that it really needed.”

Expansion strategy

His strategy was to expand Caterpillar’s dominance into the developing world. In particular, he set sights on markets such as Brazil and China where mining and infrastructure construction were running full tilt. Meanwhile, strong crude prices were driving sales of oil-field-related equipment, especially in North America.

Mr. Oberhelman voiced determination to avoid production-capacity constraints that had clipped Caterpillar’s sales growth before the recession. He increased production of the equipment that contractors use to construct buildings and roads and pipelines—Caterpillar’s forte—in existing plants. Caterpillar built new factories such as one in Victoria, Texas, to produce some excavator models and another near Athens, Ga., for small dozers—machines it previously made overseas and imported.

Mining companies were telling Caterpillar they wanted to buy more of their equipment from one source. Caterpillar already made some mining machinery, such as the giant dump trucks strip mines and quarries use.

To produce more trucks at its Decatur, Ill., plant, Caterpillar used a tack it repeated during the boom: It narrowed the plant’s assembly lineup by relocating some other work to new, smaller plants.

The approach would come to hurt the Decatur plant’s workforce, but during the mining boom it allowed Caterpillar to pledge a 30% increase in mining-truck production capacity. The company also planned to double production capacity in East Peoria, Ill., for large bulldozers it mainly exported to mining customers.

What Caterpillar still needed in its catalog were the gargantuan shovels used in open-pit mines and rock-shearing machines for underground mining, among other pieces of mining machinery. Rather than building capacity in-house, as it traditionally did, Caterpillar agreed to buy Bucyrus, the largest deal in the company’s history. Caterpillar thus secured a line of shovels, underground-mining equipment and large assembly plants in Wisconsin, Pennsylvania and Texas.

In less than six months on the job, Mr. Oberhelman had turned Caterpillar into a full-line mining-equipment player.

In China, Mr. Oberhelman went on an investing spree. In 2008, Caterpillar had bought Chinese construction-equipment concern SEM, gaining a local brand to sell in lower price ranges; it now invested to expand the brand. It expanded existing factories and built new plants to produce more machines and engines, and Bucyrus made Caterpillar a stronger competitor there.

It acquired ERA Mining Machinery Ltd. in Zhengzhou for nearly $700 million, which sold hydraulic roof supports for mechanized underground coal-mining systems. Months after the 2012 deal closed, Caterpillar said, it discovered ERA had inaccuracies in reported profit, revenue and inventory. Caterpillar eventually wrote down ERA’s value by $580 million.

Mr. Oberhelman’s strategy still looked like a winner. Caterpillar reported profit of $5.68 billion in 2012, nearly 60% above 2008 results.

After the peak

The year 2012 would prove to be the high point. Afterward, prices for mined and other commodities began to fall. China’s GDP growth waned, and equipment sales slowed around the world.

The market weakened in 2013 as developing countries cut construction and consumed fewer commodities. Caterpillar’s machinery and engine sales fell 16% in 2013 from 2012.

In 2014, oil prices began falling. Caterpillar sales fell 15% in 2015 as fracking drillers deployed less equipment. U.S. coal mining fell as pollution regulations and cheap natural gas reduced the generation of coal-produced electricity. Caterpillar continued layoffs and in September 2015 said it would make permanent job cuts that could exceed 10,000 positions through 2018.

Rivals were hurt, too. Mining-equipment maker Joy Global Inc. of Milwaukee expects revenue of about $2.4 billion for its current fiscal year, down from $5.6 billion in 2012. Japan’s Komatsu Ltd. , which in July agreed to acquire Joy, said it expects a 5% to 10% drop in demand for its construction equipment in its current fiscal year and a 15% to 20% decrease in its mining business.

A significant sign of strategic retreat was Caterpillar’s August announcement that it would sell some underground-mining equipment lines that serve markets Mr. Oberhelman had aimed to expand in by acquiring Bucyrus.

“The amount of investment it would take to make that business successful we thought was better placed elsewhere in our product portfolio,” said Denise Johnson, president of the mining-equipment group, at the Las Vegas trade show. “We have to make choices in this environment.”

In its Decatur, Ill., plant, Caterpillar’s mining emphasis has cost jobs. To focus on the giant trucks, Caterpillar moved away assembly of some other products including graders, used in road building, which it shifted to a new plant in North Little Rock, Ark.

Now Decatur didn’t have those lines to fall back on, as it had in many past downturns, when big-truck orders waned. “Graders kept the lights on for a lot of years,” said Craig Karnes, president of the United Auto Workers Union Local 751. “When we lost them, it hurt us.”

Fewer than 600 mining and other off-highway dump trucks left the Decatur plant last year, down 78% from the plant’s 2011 peak, according to market-research firm Power Systems Research, which forecasts 543 trucks this year. Decatur’s production workforce has fallen to about 800 workers, the lowest in more than 50 years and a third of 2012 levels, Mr. Karnes said.

Caterpillar confirmed the plant’s volume and production workforce have declined, but had no comment on the research firm’s or the union’s calculations. The company plans to send some powertrain-assembly work back to Decatur that it moved to a new plant in Winston-Salem, N.C.

Charlotte Opalka was laid off April 2015. “I like building those big mining trucks,” said Ms. Opalka, 45, who assembled hoods and cowls. Each month without work puts more strain on her family. “It took our pay and cut it in half,” said Ms. Opalka, whose three small grandchildren live with her.

Caterpillar has enough production capacity to benefit from the next upturn, industry analysts say. And investors have shown renewed confidence in Caterpillar, which has remained profitable by slashing expenses, driving its stock price up in 2016.

U.S. construction-machinery sales, though, are being held down by a slow-growing economy and persistent inventories of used fracking-related equipment. In the mining-equipment market, sales droughts typically last seven or eight years.

Caterpillar said it expects overall revenue—including sales and revenue from its finance business—of about $40 billion this year, down 39% from 2012, and profit of $2.75 a share after restructuring expenses, down 68%. Through the first six months of 2016, Caterpillar’s overall revenue was $19.8 billion, down 21% from the same period in 2015; profit dropped 60% to $821 million.

Mr. Oberhelman may not be at the helm when fortunes turn. Caterpillar chiefs by tradition haven’t stayed beyond age 65, leaving him about two years. Caterpillar declined to comment on whether Mr. Oberhelman intends to depart in the next two years. Spokeswoman Rachel Potts said the board is “actively engaged and has a robust process for managing succession planning,” which it reviews annually.

Mr. Oberhelman recently warned that a recovery probably wouldn’t start this year. Still, he said at the Las Vegas show, “When the industry emerges, we’ll be a very key player and a very solid performer for our customers.”

.

[mrsmackpaul]

HMmmmmmmmmmmmm. I think Cat's main problem is they have priced themselves out of their traditional market in a quest to become the biggest and the grandest at all cost, and have forgotten their roots.

Think about a little mum and dad business will never be able to afford a new D7  or any other new crawler for that matter, and that is their traditional market.

No talk that I noticed of the flop Cat trucks is or was.

Paul 

[kscarbel2]

Caterpillar CEO to Step Down at Year’s End

The Wall Street Journal  /  October 17, 2016

Doug Oberhelman to remain chairman until March; Jim Umpleby to be new CEO

Caterpillar Inc. said Chairman and Chief Executive Doug Oberhelman is slated to retire next year after leading the equipment maker to its highest annual sales ever before overseeing the longest sales decline in the company’s history.

The board selected Caterpillar executive Jim Umpleby, a company veteran and current head of the company’s energy and transportation business, to succeed Mr. Oberhelman in the CEO role, effective Jan. 1. Caterpillar’s board appointed Mr. Umpleby as CEO on Thursday, according to a filing Monday with regulators.

Mr. Oberhelman will remain as executive chairman of Caterpillar until March 31, when he will retire from the company. After that, board member Dave Calhoun will assume the role of nonexecutive chairman. Mr. Calhoun is senior managing director and head of private equity portfolio operations of Blackstone Group L.P.

It wasn’t immediately clear why Caterpillar decided to split Mr. Oberhelman’s roles, and a company representative was unavailable to explain. In recent history, the company has tended to have one person serve as chairman and CEO.

Mr. Oberhelman has led Caterpillar since 2010. He spent his first years as CEO putting billions of dollars into factories to build more of its familiar yellow machines and move the company deeper into mining equipment, which would prove to be a risky bet, The Wall Street Journal reported Sunday.

The year 2012 turned out to be a peak for Caterpillar, but soon after, miners began shelving equipment-buying plans as commodity prices fell, China’s growth slowed and then oil prices fell, along with demand for related equipment. Caterpillar now faces its fourth straight year of falling sales, the longest decline in its history.

The Journal reported Sunday that the 63-year-old Mr. Oberhelman may not be at the helm when Caterpillar’s fortunes turn, as the company’s chiefs by tradition haven’t stayed beyond age 65.

Of the members on Caterpillar’s 12-member board, Mr. Oberhelman received the fewest number of “For” votes to be elected to the board at the company’s annual shareholder meeting, according to a June filing with regulators.

Caterpillar shares fell 22 cents to $87.45 in morning trading in New York. Before Monday, the stock was up 29% this year—the best-performing in the Dow Jones Industrial Average—but was trading 25% below its 2012 peak.

 

[kscarbel2]

New Caterpillar CEO Faces Tough Decisions as Company Digs Out

The Wall Street Journal  /  October 19, 2016

Jim Umpleby’s first months at the helm could require difficult calls as he cleans up after a bad bet on mining

Among Jim Umpleby’s first tasks as Caterpillar Inc. ’s chief executive will be cleaning up the fallout from his predecessor’s expansion plans.

Doug Oberhelman, who is leaving the top job at the end of this year after big money investments ran afoul of the global commodities bust, has embarked on a cost cuts aiming to pare 10,000 jobs, $1.5 billion in annual expenses, and up to 20 plants through 2018.

Mr. Umpleby will preside in his first months as CEO over a downsizing expected to last through next year. The 58-year-old Caterpillar veteran also faces contract negotiations ahead of a March 1 deadline with the equipment maker’s United Auto Workers union.

Those cutbacks and negotiations will set the stage for decisions on how aggressively Caterpillar will chase the next boom in construction and mining, or whether it will narrow the equipment giant’s focus to less-risky projects and higher-profit business lines.

Caterpillar’s sales of bulldozers, excavators, mining shovels and huge dump trucks have declined for four consecutive years. Many analysts expect them to fall again in 2017. Caterpillar faces a tougher set of competitors in China and Japan that are ratcheting up product lines and quality in expectation of a market rebound.

Since 2013, Mr. Umpleby presided over Caterpillar’s engines business: a low-profile division that recently has been Caterpillar’s most profitable. Engines have accounted for up to two-thirds of the company’s annual operating profit in recent years and 40% of its equipment sales.

Identifying pockets of strength in Caterpillar’s cyclical markets likely will define Mr. Umpleby’s tenure, particularly if demand for Caterpillar’s earth-moving and mining equipment remains soft.

In its engine business, “they could identify opportunities that are not immediately obvious now,” said Joe O’Dea, an analyst for Vertical Research Partners LLC.

Despite 35 years at Caterpillar, Mr. Umpleby isn’t well known at the company’s Peoria, Ill., headquarters because he spent most of his time in San Diego and overseas. His ascent was a surprise to some.

Mr. Umpleby wasn’t available for comment. A Caterpillar spokeswoman declined to say whether he would speak with analysts next week after the company releases its third-quarter results.

The spokeswoman said Mr. Umpleby will be reviewing the company’s strategy with Caterpillar’s leadership team in coming weeks. “You should expect to hear more about the strategy in early 2017,” she said in an email, noting Messrs. Oberhelman and Umpleby will remain in their current positions through the end of the year. “We’re all focused on finishing the year strong.”

Colleagues described Mr. Umpleby, son of a steel mill foreman in Highland, Ind., as a methodical manager and careful listener. Don Ings, a former Caterpillar executive who has known Mr. Umpleby for more than 30 years, said the company’s fortunes may turn up during his tenure.

“Doug was dealt a deck of cards,” Mr. Ings said of Mr. Oberhelman. “Jim’s going to be lucky enough that his deck of cards is going to include the upcycle [for machinery] and Caterpillar is very, very-well positioned to achieve greatness during that cycle.”

Mr. Umpleby joined Caterpillar in 1981 through its acquisition of Solar Turbines, a subsidiary prized for its high margins. He later served as the San Diego-based business unit’s president. The oil-price decline has damped Solar’s sales recently, but the division hasn’t slipped as much as other units.

“Those gas turbines continue to operate on offshore facilities, oil and gas pipelines,” Mr. Umpleby told investors at a conference in August. “We’re pleased with where we are at this point in the year.”

Mr. Umpleby will report to Dave Calhoun, an executive at private-equity firm Blackstone Group LP who will replace Mr. Oberhelman as board chairman at the end of March. It is the first time Caterpillar will have a separate chairman and CEO in 26 years.

“If I had to pick a chairman of any company that needed turning around, I’d pick Dave,” said Jim Kilts, former Nielsen Holdings chairman when Mr. Calhoun was its CEO.

[Red Horse]

On 10/17/2016 at 5:37 AM, mrsmackpaul said:

HMmmmmmmmmmmmm. I think Cat's main problem is they have priced themselves out of their traditional market in a quest to become the biggest and the grandest at all cost, and have forgotten their roots.

Think about a little mum and dad business will never be able to afford a new D7  or any other new crawler for that matter, and that is their traditional market.

No talk that I noticed of the flop Cat trucks is or was.

Paul 

My thought exactly on the Cat truck fiasco-but financially a drop in the bucket I'm sure given the huge sums spent on plant expansion.

In a word, "arrogance" comes to my mind.  I always say you could paint a pile of dog poop "Cat Yellow" and guys would stand around it saying..."isn't that the best looking pile of dog poop you ever saw"?  Well those days  are gone.  As costs go up, and the competition gets tougher, all of a sudden the premium Cat demanded-and received- might not be working anymore.

Reminds me of a friend who used to sell yellow Deere equipment.  He told me, once he lost a customer to a Ford 555 TLB, he would NEVER get him back.  The "triple nickel" might not be the machine the Deere was, but at the end of the day the guy had more money in the bank.

[kscarbel2]

Merriam-Webster defines the word arrogance as the "the demeanor of people at Caterpillar, Allison and Paccar".