Caterpillar Shifts Its Engines Into Overdrive After Record Earnings in Second Quarter
Caterpillar Inc. is ramping up for several new capital construction projects following a record-setting second quarter of earnings.
Fueled by industrial market strength in mining, energy and infrastructure, the Peoria, Ill.-based company, the world’s largest construction and mining equipment maker, saw second-quarter profits increase 91% to $707 million, up from $371 million a year ago. Cat previously trimmed staff last year, cutting 20,000 jobs, or about 18% of its workforce. “We have streamlined our organization from the top down,” said CEO Doug Oberhelman during an August 19 investor call. “We think there is going to be fantastic growth in our industries in the future.”
North America saw a 43% second- quarter sales gain, and it remains Cat’s biggest market by sales. The brightened outlook has prompted ambitious U.S. expansion plans, including a new $120-million, 600,000-sq-ft hydraulic excavator manufacturing plant, in Victoria, Texas, about 120 miles southwest of Houston.
Expected to add 1,000 jobs upon completion in mid-2012, the plant will produce hydraulic excavators now produced in Akashi, Japan, and Aurora, Ill., where excavator production will be phased out. The Texas plant is part of a long-term U.S. manufacturing shift from the Midwest to the South, where production costs are cheaper, thanks to lower labor costs—fewer unions, that is—and inexpensive shipping.
“For Caterpillar to maintain industry leadership, it is critical that we continue to invest in our operations,” says Rich Lavin, Cat group president, in a statement. Cat additionally gets $3 million in cash, 320 acres of land and tax breaks from state and local authorities. It marks the company’s second Texas plant in two years.
“It helps Caterpillar to be located down there close to its supply chain to reduce shipping costs and ensure product quality,” says Mark Koznarek, senior research analyst and partner with Cleveland Research Co., Cleveland. “More and more, Caterpillar relies on component suppliers for pieces and parts. It’s a risk when you move to China or Brazil and source things locally.”
In August, Cat also announced plans for an 850,000-sq-ft mining axle assembly plant in Winston-Salem, N.C., a 270,000-sq-ft compact-equipment facility expansion in Sanford, N.C., as well as a 3,100-sq-ft design center on the campus of South Dakota School of Mines & Technology in Rapid City. The projects will finish between late 2010 and early 2012, adding about 825 jobs combined.
The company has upped its annual outlook based on higher-than-expected machinery sales and revenue, which could top $40.5 billion. Others are seeing similarly bullish results. For example, Moline, Ill.-based Deere & Co., saw fiscal third-quarter net income rise to $420 million, up 47% from a year ago, while for boom-truck producer Manitex International Inc., Bridgeview, Ill., second-quarter net revenue soared 65% to $19.5 million, compared to the same period in 2009.
“Equipment markets overall have stabilized and are showing some signs of improvement, after declines in the 50% range during the recession,” says Dennis Slater, president of the Association of Equipment Manufacturers, a Milwaukee-based trade group. “Export demand will continue to play an important role in the recovery, especially equipment sales to emerging markets.”
Overseas Action
Beginning earlier this year, Cat’s rebound was aided by transportation-related federal stimulus projects, low interest rates and China’s brisk mining growth due to metals demand. Asia was Cat’s fastest-growing market, with sales up by 62% to $1.7 billion. This year, China’s economy is expected to grow 10.5% and India 8.5%, Cat says.
“Growth in emerging markets is central to Cat’s strategy,” says Ann Duignan, managing director, JP Morgan Equity Research, New York City. “Organic growth will likely be focused on infrastructure expansion in developing economies like China, India and Latin America [and] growth of its mining business through product expansion.”
Cat also is building an excavator plant in Xuzhou, China, and a backhoe and small-loader plant in Piraciccaba, Brazil. The U.S. economy, meanwhile, is expected this year to grow by just 3%.
