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 Shares of Caterpillar tumbled as much as 8 percent to a five-year
low, pulling down the sector and knocking as much as 37 points off
the Dow Jones industrial average <.DJI>.
Over the past year, miners and energy companies have chopped budgets
and put expansion projects on hold as prices of raw materials such
as crude oil, copper, coal and iron ore have plunged to six-year
lows amid lingering worries about oversupplies and China’s slowing
economic growth. As a result, orders for equipment have dried up.
Peoria, Illinois-based Caterpillar, the world's biggest construction
and mining equipment maker, has also been hit by a slowdown in
industrial activity in China.
S&P Capital IQ analyst Jim Corridore termed the restructuring "a
strong reaction" to market conditions.
"The company has shown a lack of revenue growth in the last few
years (and) earnings are in a decline," he said. "That definitely
puts pressure on the CEO to find a way to react to the environment,
which at this time shows no near-term catalyst for improvement."
Earlier this month, mining equipment maker Joy Global Inc <JOY.N>
issued a profit warning as it struggled to adapt to slowing demand
for its services.
Deere & Co <DE.N>, the world's largest maker of farm equipment,
announced layoffs of more than 900 plant employees in January as
declining grain prices have hurt demand for agricultural machinery.
Caterpillar had raised its 2015 profit forecast in April and
affirmed it in July.
"That they had hung in with their guidance for so long was probably
the most surprising, given the ... accumulating evidence around them
that things were slowing," said Morningstar analyst Kwame Webb.
Caterpillar expects revenue to fall in 2015 for the third straight
year, to $48 billion, below the average analyst estimate of $48.82
billion, as compiled by Thomson Reuters I/B/E/S.
For 2016, the company forecast a 5 percent revenue decline, mainly
in higher-margin products, to about $45.6 billion. Analysts had
expected $47.36 billion.
Caterpillar said it will update its 2015 profit forecast when it
releases third-quarter results in late October. It expects to
provide a 2016 earnings outlook in January.
"WAY, WAY TOO MUCH CAPACITY"
"We are facing a convergence of challenging marketplace conditions
in key regions and industry sectors - namely in mining and energy,"
Chief Executive Officer Doug Oberhelman said in a statement.
Caterpillar's announcement was no surprise to Bill Hickey, president
of Chicago-based steel-mill operator Lapham-Hickey, which supplies
the company's road construction and road equipment operations.
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"There is way, way too much capacity worldwide, and the question is,
how long will the cycle last?" he said. "Our best guess is that
there is going to be oversupply on steel and other commodities until
maybe late next year.”
Caterpillar said it will cut 4,000 to 5,000 jobs by the end of 2016,
most of them coming in 2015. It has already reduced its workforce by
more than 31,000 since mid-2012.
The company had 114,233 employees as of Dec. 31, 2014 according to
Thomson Reuters data.
Caterpillar expects to incur about $2 billion in pretax costs from
the restructuring and save about $1.5 billion annually.
Caterpillar said it might close or consolidate more than 20 plants
around the world across its three large businesses - construction,
resources, and energy and transportation.
"2016 would mark the first time in Caterpillar's 90-year history
that sales and revenues have decreased four years in a row," the
company said in a statement.
It last reported annual revenue growth in 2012, the first full year
after it bought heavy equipment maker Bucyrus International Inc in
its largest acquisition ever.
Caterpillar's 2015 revenue forecast represents a 27 percent drop
from 2012. Wall Street's net income outlook for this year is 50
percent lower than the company's 2012 profit.
Shares of Caterpillar, which already had fallen 23 percent this
year, were down 6.3 percent at $65.81 in afternoon trading. The S&P
Industrials Index <.SPLRCI> fell 0.7 percent.
The company's market value was about $39 billion on Thursday, down
from nearly $60 billion at the end of 2012.
(Reporting by Meredith Davis and Nick Carey in Chicago, and Ankit
Ajmera and Sweta Singh in Bengaluru; Writing by Lisa Von Ahn;
Editing by Kirti Pandey and Jeffrey Benkoe)
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