Caterpillar chairman & CEO, Doug Oberhelman.

Caterpillar chairman & CEO, Doug Oberhelman.

More than 20 of Caterpillar’s facilities and over 10% of its manufacturing area could be affected by “consolidations and closures” as a result of the company’s weakened sales and revenues outlook.

It said there would be an expected permanent reduction in Caterpillar’s salaried and management workforce, including agency, of 4,000 to 5,000 people between now and the end of 2016, with most coming this year.

A total possible workforce reduction of more than 10,000 people is being predicted.

Caterpillar has announced significant restructuring and cost reduction actions that it said were expected to lower operating costs by about $1.5 billion (€1.35 billion) per year once fully implemented.

It said the cost reduction steps would begin in late 2015 and would reflect recent, current and expected market conditions. For 2015, its sales and revenues are now expected to be about $48 billion (€43.09 billion), or $1 billion (€897.8 million) lower than the previous outlook of about $49 billion (€44 billion). For 2016, Cat said that sales and revenues were expected to be about 5% below 2015.

It said the total possible workforce reduction of more than 10,000 people included the contemplated consolidation and closures of manufacturing facilities occurring through 2018.

The company will offer a voluntary retirement enhancement programme for qualifying employees, which will be completed by the end of 2015.

Slightly less than half of the $1.5 billion of cost reduction is expected to be from lower selling, general and administrative (SG&A) costs, the company said. The reduction in SG&A will largely be in place and effective in 2016 and occur across the company, it added.

The remaining cost reductions are expected to include savings from additional facility consolidations and closures, which Cat said could have an impact on more than 20 facilities and slightly more than 10% of its manufacturing square footage.

A portion of these cost reductions are expected to be effective in 2016, with more savings expected in 2017 and 2018.

‘Challenging conditions’

Chairman and CEO Doug Oberhelman said, “We are facing a convergence of challenging marketplace conditions in key regions and industry sectors – namely in mining and energy.

“While we’ve already made substantial adjustments as these market conditions have emerged, we are taking even more decisive actions now. We don’t make these decisions lightly, but I’m confident these additional steps will better position Caterpillar to deliver solid results when demand improves.”

This year is the company’s third consecutive year of falling sales and revenues, and it said that 2016 would mark the first time in Caterpillar’s 90-year history that sales and revenues had decreased four years in a row.

Oil and gas decline

Cat said it expected that sales and revenues would be down about 5% in 2016 versus 2015, with the decline in sales and revenues in 2016 occurring in all three of its large segments – construction industries, energy and transportation, and resource industries. The most significant decline is expected in the oil and gas portion of its energy and transportation segment.

Oberhelman said that the company’s strategy was to deliver “superior total shareholder returns through the business cycle”, and he said growth was a key element of that strategy. He added, however, that several of the key industries served – including mining, oil and gas, construction and rail – had a long history of being cyclical.

“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.”

The latest announcement is in addition to actions already taken by Caterpillar. Since 2013, it has closed or announced plans to close or consolidate more than 20 facilities, affecting 743,000m2 of manufacturing space. The company has also reduced its total workforce by more than 31,000 since the middle of 2012.

While Caterpillar has responded to macro-economic challenges, it said it had remained focused on executing its strategy, and that this had driven positive operational results.

These are said to have included market share which had improved in products across much of the company.

The company said it had delivered on decreasing profit pull through targets as lean manufacturing had driven its 2015 gross margin rate higher, “and it is right in line with its highest level in 20 years”, added Caterpillar.

“Operational improvements have contributed to our strong balance sheet and cash flow,” said Oberhelman. “In fact, three of our four best years of machinery, energy and transportation (ME&T) operating cash flow have occurred since 2011 – at the same time sales and revenues have been under pressure.

“That’s driven substantial improvement in our quarterly dividend. Our dividend increased 15% in 2013, 17% in 2014 and 10% in 2015. That’s enabled $8.2 billion (€7.37 billion) of share repurchases over the past three years.”

Pre-tax costs associated with Cat’s planned actions are expected to be about $2 billion (€1.80 billion) for employee-related severance and other termination benefits, plus other exit-related costs associated with the consolidation of manufacturing facilities.

Cat said it was contemplating restructuring actions that could impact more than 20 facilities around the world and across the three segments of construction industries, resource industries, and energy and transportation.

Profit outlook

The company said it would provide an update on its 2015 profit outlook with its third-quarter financial release in late October. However, it said the decline in the sales outlook and higher restructuring costs as a result of its announcement would be negative for profit.

It added that on the positive side, it expected that costs excluding the restructuring would be favourable.

It added that it had more work to do to complete its profit plan for 2016 and to understand how its latest announcement affected each of its businesses. However, it said there were three directional points related to 2016 profit that were noteworthy – two negative to profit versus 2015 and one that it expected to be positive.

On the negative side, 2015 had a gain on the sale of its remaining ownership of its third-party logistics business that helped profit in 2015 by about $0.14 (€0.13) per share. It said that would not repeat in 2016.

Second, it said the sales decline in 2016, at about 5%, was expected to be concentrated in relatively higher margin products, so the impact of sales mix was expected to be unfavourable.

On the positive side for profit, Cat predicted that about half of the $1.5 billion cost reduction expected from the restructuring actions would be effective in 2016.

It said that many of the key industries it served had a long history of being substantially cyclical, and were currently well below previous peak levels. As an example, it said mining equipment sales were far below their peak and were substantially below what Cat would consider a reasonable replacement level. Oil and gas has declined substantially as a result of lower oil prices, it said, and construction equipment sales were well below peaks in North America, Latin America, Europe, Africa, the Middle East and Asia Pacific.

Caterpillar said that as the world economy improved, it strongly believed the need for Cat products and services for infrastructure, mining, commodities, energy and transportation would improve.

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