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Cat announces more layoffs, restructuring as sales continue to fall

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Caterpillar Inc.’s dim, yet realistic expectations of the near term, including a projected fourth consecutive year of lower sales, is driving its need to restructure now and cut its workforce by 10,000 in the next few years, the company announced on Thursday.

By the time business cycles turn positive again, the company said, the reduction in annual costs of about $1.5 billion will put it that much further ahead in its plan to see sales and profits begin to rise again.

In the meantime, work on Caterpillar’s new headquarters won’t begin anytime soon, but the company remains committed to Peoria and to Illinois, Chairman Doug Oberhelman said in an opinion piece he wrote in the Peoria Journal Star.

“As individuals and as a company, we will continue to contribute resources to support the health, welfare and sustainability of communities around the world and where we work and live,” Oberhelman said.

Caterpillar rocked the region Thursday morning when it announced restructuring plans that will reduce the workforce by more than 10,000 people by the end of 2018, including nearly half of that before the end of this year. The company hopes much of that will be accomplished through a voluntary retirement program for qualifying employees it will offer through the end of 2015.

Also in the restructuring plan is the contemplated consolidation and/or closing of manufacturing facilities through 2018.

These plans result from the expectation that 2015 sales and revenues will be about $48 billion, or $1 billion lower than previously thought, and the projection that sales and revenues will be down another 5 percent in 2016. That would mark the fourth consecutive year of dropping sales, which the company said has never happened in its 90-year history.

Sales and revenues were $55.2 billion, but continued economic woes throughout the world in countries where Caterpillar does businesses and in industries that are going through down cycles has brought sales down.

Thursday's announcement is in addition to cost reduction actions already taken in the past two-plus years. Since 2013, Caterpillar has closed or announced plans to close or consolidate more than 20 facilities, affecting 8 million square feet of manufacturing space. The company has also reduced its total workforce by more than 31,000 since mid-2012.

Wall Street did not take the news well, particularly with the company announcing that sales were going to be off more than earlier believed.

Caterpillar stock fell $4.40 on Thursday to $65.80 (6.27 percent) as more than 21.5 million shares – more than triple the normal daily volume – were traded. At one point Thursday morning the stock reached a new 52-week low at $64.65.

In its announcement the company outlined its restructuring plans:

  • An expected permanent reduction in Caterpillar's salaried and management workforce, including agency, of 4,000 – 5,000 people between now and the end of 2016, with most occurring in 2015, and with a total possible workforce reduction of more than 10,000 people, including the contemplated consolidation and closures of manufacturing facilities occurring through 2018.
  • The company will offer a voluntary retirement enhancement program 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 reduction in SG&A will largely be in place and effective in 2016 and occur across the company.
  • The remaining cost reductions are expected to come from lower period manufacturing costs, including savings from additional contemplated facility consolidations and closures, which could impact more than 20 facilities and slightly more than 10 percent of our manufacturing square footage. A portion of these cost reductions are expected to be effective in 2016, with more savings anticipated in 2017 and 2018.

"We are facing a convergence of challenging marketplace conditions in key regions and industry sectors – namely in mining and energy," said Oberhelman in the company’s announcementWhile 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.

"Our strategy is to deliver superior total shareholder returns through the business cycle, and growth is a key element of that strategy. However, several of the key industries we serve – including mining, oil and gas, construction and rail – have a long history of substantial cyclicality. 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. 

"We recognize today's news and actions taken in recent years are difficult for our employees, their families and the communities where we're located. We have a talented and dedicated workforce, and we know this will be hard for them," said Oberhelman. 

The company noted how past changes have resulted in many positive effects, including:

  • Market share has improved in products across much of the company.
  • The company has delivered on decremental profit pull through targets as Lean manufacturing has driven its 2015 gross margin rate higher, and it is right in line with its highest level in 20 years.
  • Product quality is as good as it has been in Caterpillar's history.
  • Today, Caterpillar safety levels are among the best for heavy manufacturers.

"Operational improvements have contributed to our strong balance sheet and cash flow. In fact, three of our four best years of Machinery, Energy & 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 percent in 2013, 17 percent in 2014 and 10 percent in 2015. That's enabled $8.2 billion of share repurchases over the past three years," said Oberhelman.

Pre-tax costs associated with these actions are expected to be about $2 billion for employee-related severance and other termination benefits, and other exit-related costs associated with the consolidation of manufacturing facilities. Those costs will affect short-term profits. Caterpillar said it will update its 2015 profit outlook in its third-quarter financial report next month.

Caterpillar did not identify any of its manufacturing facilities that may be targeted for consolidation or closure. “We are contemplating restructuring actions that could impact more than 20 facilities around the world and across our three large segments – Construction Industries, Resource Industries and Energy & Transportation. There are many factors that impact these contemplated decisions and the subsequent timing of when each would be announced and implemented. Employees will be notified as decisions are made for each facility,” the company said. 

Despite the fact those industries are struggling now, the company said it believes they will make a comeback as the world economy improves. “With the actions we've taken over the past few years, along with the restructuring announced today (Thursday), we believe Caterpillar will be well positioned to deliver solid results when these industries recover and demand improves,” the company said.

Among the restructuring announced Thursday are changes in Caterpillar’s mining division and its dealer and support divisions.

In the case of the former, the Mining Sales and Support Division will be integrated into the Global Mining division. The move will bringing product, operations, sales and marketing organizations together in both the surface and underground mining applications, which will “enable a more effective cost structure in a challenging mining environment,” the company said.

The underground mining sales and support teams will join the Material Handling and Underground Division, led by Caterpillar Vice President Denise Johnson. The surface mining sales and support teams will join the Hauling & Extraction Division, which will be renamed the Surface Mining & Technology Division, led by Caterpillar Vice President Tom Bluth.

Also, the company is reorganizing divisions across the company into a new structure that will improve efficiency and reduce complexity. This new organizational structure will enable the company to more quickly deliver on its goals.

The Distribution Services Divisions, which is the company’s primary interface with its dealers, will be reduced from three to two, one covering dealers in Asia-Pacific, CIS, Africa and the Middle Eas and the other covering dealers in North and South America and Europe.

New divisions will be:

  • Global Aftermarket Solutions Division,created to accelerate the growth of aftermarket sales and service solutions.
  • Wear Components & Aftermarket Distribution Division,which merges the design and manufacturing of components and aftermarket distribution to enhance focus on components availability and inventory improvements.
  • Marketing and Digital Division,created to build on the current Analytics & Innovation Division.
  • Sustainable, Work Tools & Industry Solutions Division,created to bring together the sustainable businesses of Cat Reman and Caterpillar Safety Services with the company's machine attachment business – Cat Work Tools (design and manufacture). The new division also includes two external sales groups, Cat OEM Solutions and Defense and Federal Products.

Also, the company said, the Global Construction & Infrastructure Division has added responsibilities. As part of the company's move to improve its dealer and customer coverage model, the division will also assume sales responsibilities for work tools, industrial and waste, paving and forestry products, as well as responsibility for heavy rentals.

The above moves will be effective November 1, 2015.

About the Author
Paul Gordon is the editor of The Peorian after spending 29 years of indentured servitude at the Peoria Journal Star. He’s an award-winning writer, raconteur and song-and-dance man. He also went to a high school whose team name is the Alices (that’s Vincennes Lincoln High School in Indiana; you can look it up).