Cat announces several major cost reduction plans

Caterpillar Inc. announced several major cost reduction plans to lower Cat’s operating costs by about $1.5 billion.

Cost reduction plans include cutting jobs, creating a retirement enhancement plan and reorganizing several divisions. Cat says this year is the company’s third consecutive down year for sales and revenues. If this trend continues into 2016,  it would mark the first time in the company’s 90-year history that sales and revenues have decreased four years in a row.

“We are facing a convergence of challenging marketplace conditions in key regions and industry sectors, namely in mining and energy,” says Doug Oberhelman, Cat chairman and CEO. “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.”

Given Cat’s current marketplace conditions, Oberhelman wrote in an op-ed to the Peoria Journal Star newspaper that Cat’s plans to build a new headquarters in Peoria, Ill., are on hold as of  Sept. 24.

Cat says cost reduction steps will begin in late 2015 to reflect current and expected market conditions. For 2015, the company’s sales and revenues outlook has weakened, with 2015 sales and revenues expected to be about $48 billion, which is about $1 billion lower than its previous outlook. For 2016, sales and revenues are expected to be about 5 percent below the 2015 outlook. Cat adds that it plans to provide an update on its 2015 profit outlook with its third-quarter financial release in late October.

Cat plans to cut between 4,000 and 5,000 jobs by the end of 2016 to help reduce operating costs. According to a press release, Cat might cut more than 10,000 jobs between now and 2018. Cat will also offer a voluntary retirement enhancement program for qualifying employees by the end of 2015 to reduce costs, as well.

In addition, slightly less than half of the $1.5 billion of cost reduction is expected to be from lower selling, general and administrative costs. The reduction in selling, general and administrative costs will largely be in place and effective in 2016. Remaining cost reductions are expected to come from lower period manufacturing costs, including savings from additional contemplated facility consolidations and closures, which could influence more than 20 facilities and slightly more than 10 percent of Cat’s manufacturing square footage. Some of these reductions are expected to be effective in 2016.

Cat also announced a reorganization of its dealer and customer support divisions. Chris Curfman, Cat’s vice president for the Mining Sales and Support division, plans to retire Dec. 31. His division will be integrated into the existing Global Mining machine business division. Cat says the surface mining sales and support teams will join the Hauling and Extraction division, which will be renamed the Surface Mining and Technology division, led by Tom Bluth, Cat’s vice president. The underground mining sales and support teams will join the Material Handling and Underground division, led by Denise Johnson, Cat’s vice president.