During tough times, companies have to figure out how to balance the need to pursue long-term growth with the fiscal realities of the business environment. Caterpillar (NYSE:CAT) has faced this challenge for years, as the heavy-equipment manufacturer has had to deal with slowing economic conditions in just about all of its major business segments.
Late last month, Caterpillar announced a restructuring plan that it believes will lead to major cost reductions that in turn should bolster its ability to remain successful even while poor macroeconomic conditions in its global markets persist, but investors still seem skeptical about whether the move will be enough to turn the ship and get Caterpillar's financial results moving back in the right direction. Let's look more closely at Caterpillar's latest move and what it means for investors going forward.
What Caterpillar's trying to do with its restructuring
The September announcement came in the context of Caterpillar's reporting its ongoing difficulties in finding revenue growth. The company said that it expects 2015 sales to come in around $48 billion, which is a full $1 billion less than its previous guidance. Caterpillar doesn't see any relief in sight in the near term, with expectations for 2016 revenue to fall another 5% from 2015 levels.
With that in mind, Caterpillar hopes that its restructuring will free up annual savings of about $1.5 billion once they're fully in place, helping to offset at least some of the revenue declines that the company expects to see. Although some of the measures will begin immediately, Caterpillar will implement the bulk of the cost-reduction strategies over the next year or so.
Specifically, Caterpillar will start out by offering what it calls a voluntary retirement enhancement program to certain employees, which it expects to complete by the end of this year. At the same time, the company will also look to cut 4,000 to 5,000 jobs. The reduction will focus on salaried and management positions, and while Caterpillar gave itself until the end of 2016 to implement the layoffs, it expects most of them to be done by year-end 2015.
In addition, Caterpillar is looking to streamline operations elsewhere. Just under half of the $1.5 billion in spending cuts will come from reductions in overhead expenses for selling, general, and administrative costs. The equipment maker also expects to reduce manufacturing costs by consolidating some of its manufacturing facilities while closing down some of its more costly sites. With more than 20 plants likely to feel the impact of these moves, Caterpillar also warned that a total of 10,000 jobs or more could be at risk through 2018 when you consider the workforce implications of closures and consolidation efforts.
Will this time be different for Caterpillar?
Caterpillar admitted that it has already taken substantial efforts to reduce costs in recent years. The company noted that it has closed or plans to close more than 20 of its facilities and cut more than 31,000 jobs over the past three years, but as CEO Doug Oberhelman said, "We are facing a convergence of challenging marketplace conditions in key regions and industry sectors, namely in mining and energy." Oberhelman sees the moves as an essential part of Caterpillar's responsibility "to manage through what can be considerable and sometimes prolonged downturns" in the many key industries it serves that have substantial cyclical components to their performance.
Moreover, the move comes with plenty of one-time costs. Caterpillar predicted pre-tax costs of about $2 billion for the elements of the restructuring related to labor costs as well as other expenses related to consolidating manufacturing facilities. The company didn't immediately identify which parts of its global network would be affected, but investors can likely expect a broader update when Caterpillar reports its third-quarter results later this month.
Caterpillar's latest restructuring move won't turn the ailing stock around by itself. What it will do, though, is once again convey to shareholders the extent of Caterpillar's commitment to make it through tough times as well as it can and to put itself in the best position to profit from an eventual recovery. That might not pay off for investors right away, but in the long run, Caterpillar's efforts should be rewarded.