Cat report shows smaller profit after sales fall in Q3; 2,100 accept buyout

More salaried employees and managers accepted Caterpillar Inc.’s early buyout offer than even the company expected, but it still left with some tough choices as it works toward right-sizing itself in the next few years.

The company reported Thursday that approximately 2,100 of its salaried and management personnel opted to take the retirement package that included built-in incentives to make it more attractive. About half of those work in the Peoria area, the company said.

That was more than half of those deemed eligible, said Group President Brad Halverson, which was what the company hoped to that permanent layoffs could be reduced. And that’s just in the United States; the company doesn’t yet have a figure on how many in other parts of the world plan to accept the offer, he said.

But Caterpillar still plans to reduce that category of workers by at least another 1,000 worldwide by the end of the year, with notices going out starting next week, officials said when they met with the media after Caterpillar released its third-quarter financial report.

At the end of the third quarter, that report showed, Caterpillar was down more than 8,000 employees from the end of third quarter 2014. Of those, more than half were from outside the United States. None include those taking the early retirement package.

The company now has 122,879 employees worldwide.

There was little surprise in the third quarter financial report, since Caterpillar said on Sept. 24 that sales were down and that its outlook would be lowered. That’s the day Caterpillar it announced it plans to restructure and reduce its workforce by 10,000 by the end of 2018, which would bring to more than 30,000 the number of jobs it has eliminated since 2012.

Knowing the public has been curious about the early retirement offers, Halverson discussed it up front. He said the company had decided it needed to reduce the full-time salaried and management ranks by 3,000 in the United States when it made the offers.

Other areas where the company anticipates job reductions will be in hourly workers and agency workers, though it hasn’t given numbers. It also plans to consolidate some operations and close up to 20 facilities worldwide by the end of 2018.

“This is a very painful thing for us. It is not something we want to do,” said Halverson, who is also Caterpillar’s chief financial officer.

In the third quarter Caterpillar reported a profit of 62 cents a share on sales and revenues of $11 billion, well below the profit reported in the third quarter of 2014 of $1.63 a share, which was on sales and revenues of $13.5 billion.

The bigger news was that Caterpillar now expects 2016 sales and revenues to be about 5 percent lower than this year; the company forecasts that to be about $48 billion with a profit of about $3.70 a share.

“The environment remains extremely challenging for most of the key industries we serve, with sales and revenues down 19 percent from the third quarter last year. Improving how we operate is our focus amidst the continued weakness in mining and oil and gas. We’re tackling costs, and our year-to-date decremental profit pull through has been better than our target. We’re also focusing on our global market position, and it continues to improve even in challenging end markets. Our product quality is in great shape, and our safety record is among the best of any industrial company today,” said Chairman and CEO Doug Oberhelman.    

“Our strong balance sheet is important in these difficult times. Our debt-to-capital ratio is near the middle of our target range at 37.4 percent; we have about $6 billion of cash, and our captive finance company is healthy and strong. We’ve repurchased close to $2 billion of stock in 2015 and more than $8 billion over the past three years. In addition, the dividend, which is a priority for our use of cash, has increased 83 percent since 2009,” added Oberhelman.

Something in that explanation pleased the investment community. Caterpillar stock finished trading on the New York Stock Exchange at $70.88 a share, which was up $1.98 as 13.4 million shares, nearly twice the normal daily volume, were traded.

History has shown that when Caterpillar gives a preliminary outlook that predicts falling sales and revenues its stock usually falls as a result.

Halverson said there has been consistency in the company’s reports, including how challenging its operating environment has been around the world. But he said Caterpillar’s performance has remained solid and profitable despite that because of measures taken earlier, since its peak financial performance in 2012. “Given the sales we had to work with, we had a solid quarter and year-to-date,” he said.

Since that time sales and revenues have fallen and will be off by $20 billion by the end of 2016. Halverson put that in perspective: “That is more than the entire annual sales and revenues of 70 percent of the Fortune 500 companies.”

That kind of drop-off, he added, “is unprecedented in company history.”

One bit of positive news, Halverson said, is that Caterpillar has increased its market share in construction equipment for four consecutive years. That in itself generates business because when Caterpillar products are being used they generate parts and service business, “which is critical to our business model.”

In its quarterly report Caterpillar said they expectation for restructuring costs for 2015 more than tripled what it originally forecast, from $250 million to $800 million. That makes a significant difference in profits; for example, it expects 2015 profit to be $3.70 a share, or $4.60 a share excluding restructuring costs.

The previous outlook for profit per share was provided in late July was $4.70, or $5 excluding restructuring costs and was based on sales and revenues of about $49 billion.

The company said it expects 2016 sales and revenues to continue to lag because of continued declines in several industries. It expects sales in Construction Industries to be flat to down 5 percent, with some improvement in developed countries offset by declining sales in developing countries. Energy & Transportation sales are expected to be down 5 to 10 percent as a result of continuing weakness in oil and gas coupled with a weaker order backlog than in 2015 and mining is expected to be down again, resulting in a decline in Resource Industries’ sales of about 10 percent, the company said.

It added that the preliminary outlook reflects weak economic growth in the United States and Europe with U.S. construction activity affected by low infrastructure investment and continued headwinds from oil and gas.  It also reflects a slowing China, Brazil in recession and continuing weakness in commodity prices, the report said.

“Managing through cyclicality has been critical to Caterpillar’s success for the past 90 years; it’s nothing new for us or our customers,” Oberhelman said. “When world growth improves, the key industries we serve – construction, mining, energy and rail – will be needed to support that growth. We’re confident in the long-term success of the industries we’re in, and together with our customers, we’ll weather today’s challenging market conditions.”

Oberhelman said that while Caterpillar can’t control the business cycle it is continuing to improve its business. It also, he said, is investing in emerging technologies and data analytics tools “to continue our role as an innovation leader for our customers.”

“As we look ahead to what will likely be our fourth consecutive down year for sales, which has never happened in our 90-year history, we are restructuring to lower our cost structure. It’s painful and will affect thousands of people, but is essential for the long-term health of the company and should position us for better results when conditions improve,” added Oberhelman.

The company’s full third-quarter report, including charts, can be seen at www.caterpillar.com. 

Credit rating agencies act on Illinois’ woes

By Mark Fitton
Illinois News Network

SPRINGFIELD — Two credit rating agencies on Monday took note of Illinois’ financial woes, including its inability to make its November pension-system payments.

Fitch Ratings announced it has downgraded the rating on $26.8 billion in outstanding Illinois general obligation bonds to BBB+ from A-.

Ratings on bonds related to the state based on its appropriations have been downgraded to BBB from BBB+, Fitch said.

Fitch also reduced its rating outlook for Illinois from stable to negative.

Moody’s Investor Services took a lesser measure, issuing Illinois a “credit negative” but not downgrading the state’s credit rating.

Moody’s rates Illinois at A3 with a negative outlook.

Both credit rating houses have Illinois as the lowest-rated state in the nation.

Fitch said its actions reflect “reflects the deterioration of the state's financial flexibility as its budget stalemate continues deep into the current fiscal year.

“With the national economic expansion now extending into a sixth year, Illinois has failed to capitalize on economic growth to restore flexibility … or to find a solution to its chronic mismatch of revenues and expenditures,” the Fitch statement said.

“Once again, the state has displayed an unwillingness to address numerous fiscal challenges, which are now again increasing in magnitude as a result,” Fitch said.

Moody’s noted it had calculated Illinois’ adjusted net pension liabilities to be 260 percent of the state’s revenues, the largest of any state and approximately five times higher than the 50-state median of 52 percent for the same time period.

Not only is Illinois’ long-term debt picture not improving, Moody’s said, the short-term view isn’t good.

“With the lapse of the (2011) tax package and the Illinois Supreme Court’s rejection of pension reform last May, the state reverted to accumulating unpaid bills, which the comptroller’s office estimates at $6.9 billion. As the budget impasse continues, less scope is available to address the current year’s budget gap through either spending reductions or revenue increases,” the agency said.

Like Fitch, Moody’s noted “the continued failure of the state’s political leadership to enact a fiscal 2016 budget.”

Illinois Comptroller Leslie Geissler Munger, R-Lincolnshire, last week announced the state would be unable to make its November pension-systems payment of about $560 million.

The state will attempt to make up for the late payments in the spring, she said. Pension checks will still go out, but the state’s retirement systems will have to dip into the body of their already under-funded accounts.

Illinois is in its fourth month of fiscal year 2016 without a budget, but it is spending at a rate said to put it on track for a $5 billion shortfall as it funds primary and secondary education and items mandated by court order and continuing appropriation.

Republicans led by Gov. Bruce Rauner of Winnetka and legislative Democrats who hold supermajorities in the General Assembly remain at an impasse that has changed little since May.

Rauner complains that Democrats have sent him plans for billions heavier in spending than in estimated revenue. While Rauner says he’s willing to discuss new revenue, he also says he won’t sign off until he gets at least some of his agenda items, which he considers fundamental reforms.

Democrats complain Rauner and the GOP have been unwilling to work with them until the governor gets what he wants and they don’t consider his agenda items directly related to the annual budget, which they consider the state’s most pressing need.

Rauner answers that his proposals are necessary to retain and attract jobs and improve the state’s long-term economic health.

One political analyst said the financial news might add a bit of pressure for the Republican governor and legislative Democrats to renew talks on a compromise.

“I think .... (it) adds to the drumbeat that is becoming louder and underscoring the idea that the governor and the speaker (Michael Madigan, D-Chicago) need to come together to resolve this stalemate,” said Jim Nowlan, a former Republican member of the House and retired senior fellow with the University of Illinois Institute of Government and Public Affairs.

Calling all girls! Learn engineering!

For many years girls were discouraged from pursuing careers in engineering. Ask those who ignored the advice why, they really can’t remember.

“I just knew this was what I wanted to do, so I went for it. The message here is, you can be what you want to be,” said Jean Savage, vice president of the Advanced Components and Systems Division at Caterpillar Inc. “We have female engineers all over the world because it is important to us to have diversity of thought.”

Savage expressed those thoughts just before she spoke to about a few hundred middle school girls Tuesday at the Caterpillar Visitors Center. The event was the third annual Introduce a Girl to Engineering Day, sponsored by the Caterpillar Women's Initiative Network, at which the company discussed ways to get involved in engineering. The students, who came from schools throughout central Illinois, participated in various engineering activities and toured the Caterpillar Visitors Center.

Savage said she became interested in electrical engineering in grade school, but heard then and all through high school that girls can’t be engineers. She went into the military out of high school so she could pay her way through college and was told she’d never make in the military.

“I guess it’s a good thing I didn’t listen,” she said. “Hey, people are people. We are all going to have different personalities whether we’re girls or boys, but a lot of time girls don’t feel they get a chance. We want to make sure they see what’s out there.”

One 14-year-old from Washington already has seen what’s out there and she wants to be part of it in the future.

Kristine Leas has spent a lot of time at Morton Industries with her father, an engineer there, and has seen the different aspects of the company at work. She knows that it takes engineering to make it happen and she wants to learn. “My dad takes me to his shop and I get on the safety goggles and everything so I can see it and learn it, including welding. So when I was one of the few who was picked to come here today, it was amazing,” she said.

Kristine was showing off a bridge she made during one of the activities. She built it from straws, paper clips and tape in less than 15 minutes. “It’s kind of lopsided in one spot but we had to work with what we had. It was fun,” she said.

Kristine said she hasn’t decided yet where to she wants to go to college or what type of engineering she wants to do.

That’s not the case with Emily Capitelli, 13, a student at Calvin Coolidge School in Peoria. She plans on becoming an “imaginer” with Disney after going to whichever college she determines will be best to get her there. For starters, she hopes to get into the college prep course at Richwoods High School.

“I have always wanted to be an engineer. I heard engineers could work on roller coasters. That’s a passion of mine,” Emily said.

Emily was told by her parents, both service coordinators for charitable organizations, to decide at an early age whether she wanted to be an engineer, a lawyer or a doctor. Besides designing roller coasters, she said, she figured out engineers can design and build many things. “I made the decision. That’s what I want to do,” she said.

After seeing the various machines and processes Caterpillar engineers can design, Emily said that while she found it interesting, “it doesn’t change my chosen career path.”

Savage, the Caterpillar vice president, said the company needs STEM (science-technology-engineering-mathematics) graduates. The numbers of students graduating with degrees in those disciplines have been declining since 2003, she added. “We will need to fill positions in the future. It’s important we start now to get these students interested,” she said.

Caterpillar held the Introduce a Girl to Engineering event at several locations Tuesday and Wednesday, including Aurora, Milwaukee and Wuxi, China. The event was held earlier in Decatur. All told nearly 1,000 middle-school aged girls of 12 to 14 were invited to participate, including 480 in central Illinois, said spokesperson Barbara Cox.

Mega-star to perform Saturday with Peoria Symphony

Audra McDonald, the legendary Broadway performer and award-winning actress and musician, will be the featured guest of the Peoria Symphony Orchestra on Saturday at 8 p.m. in the Peoria Civic Center Theatre.

McDonald, who has won six Tony Awards and two Grammy Awards, will perform a thrilling collection of songs from Cole Porter to Stephen Sondheim to George Gershwin, including a variety of popular Broadway hits and jazz standards.

“Ms. McDonald is unparalleled in the breadth and versatility of her artistry, as both a singer and an actress,” said a Peoria Symphony news release. “With a record six Tony Awards and two Grammy Awards, she is among today’s most highly regarded performers. Blessed with a luminous soprano voice and an incomparable gift for dramatic truth telling, the Juilliard graduate is equally at home on Broadway and opera stages, as she is in roles on film and television.

“In addition to her theatrical work, she maintains a major career as a concert and recording artist, regularly appearing on the great stages of the world,” the release said.

This is McDonald’s final Midwest performance of the 2015-16 season and her appearance with the Peoria Symphony is made possible by a gift from Flo and Sid Banwart with additional support from Unity Point Health Methodist|Proctor. Support for the 118^thseason of the PSO is also provided by PNC.

PSO Music Director George Stelluto said McDonald is “the most sought-after Broadway singer and will eventually take her place as one of the legendary performers of the American Songbook. This is truly an astounding opportunity for audiences in this region.”

McDonald most recently starred as Billie Holiday on Broadway in “Lady Day at Emerson’s Bar and Grill,” and as Bess in “Porgy and Bess,” winning Tony Awards for each. Her television credits include “Private Practice,” “Live from Lincoln Center” and the HBO documentary “Six by Sondheim.”

In 2013, her critically acclaimed performance as Mother Abbess in NBC’s live telecast of Rodgers and Hammerstein’s “The Sound of Music” was watched by an estimated 18.5 million people across America.

She has performed in the White House for President Barack and First Lady Michelle Obama, multiple times at The Lincoln Center and The Kennedy Center and has appeared on numerous television shows.

Tickets for Saturday’s concert start at $40 and student tickets are $21 and are available by calling the PSO Box Office at (309) 671-1096 or online at www.peoriasymphony.org.