Cat Stock Blog

I needed a night to sleep on whether I even wanted blog about Caterpillar’s new Seguin, Texas, engine plant, where ground was broken yesterday (there’s a video of it at this breathless “Happy Days Are Here Again” report from an Austin TV station). An uncle of mine spent his entire working career at the Mossville plant from whence all kinds of jobs are heading south to Texas, so I can’t work up much enthusiasm (revealing my pro-Peoria bias, which is odd, considering I haven’t lived there in nine years).

Of course it’s the biggest news since the Alamo in southeast Texas, but the local reporters conveniently omit the zero-sum nature of this move: the jobs coming to Texas are leaving somewhere else, and the folks losing their jobs in Illinois and South Carolina gotta eat too. Sorry to be a softie, but that bugs me.

Cold reality, though, is that Caterpillar would’ve gone out of business by now if the suits in the big offices hadn’t been able to make brutally efficient calls like this. The Detroit automakers could depend on a certain amount of Yankee patriotism to keep them in business, but Cat had no such luxury. Only way you stay on top in a highly competitive market machinery market is to build stuff that gets work done as promised, and to stay lean, agile and profitable. It’s true for high-tech companies in my Silicon Valley neighborhood and everywhere else.

(Here’s the link for Caterpillar’s job-recruitment site, though I doubt any Seguin openings are listed yet).

Something else the south Texas media could be forgiven for not knowing because they didn’t live through it like all us Central Illinois kids in the early ’80s: Plant expansions can be planned years in advance but getting them up and running is subject to current economic conditions. Caterpillar nearly got ruined by unfavorable currency exchange rates back then, and the result was an empty steel skeleton that stood outside the Morton parts plant for years on end. It’s not a done deal till the engines start coming off the lines.

Caterpillar’s earnings call was remarkable in the degree to which the record-breaking sales of last year were utterly irrelevant to the world we live in this year. Cat raced along fine for three quarters, then took a spectacular spill in the fourth. (Think “agony of defeat” ski jumper and remember — he survived).

Caterpillar CEO Jim Owens described a “seismic adjustment” in revenues for 2009. Cat was hoping for $50 billion; now it’ll settle for $36-44B. Caterpillar’s promise to deliver $2.50 a share in earnings — a 50 percent haircut from ’08 — this year drew some skeptical questioning from the analysts, but Owens and company assured them the “redundancy” operations (if they got no work for you, you’re redundant; and unemployed) of the first quarter, combined with reductions in prices for steel, copper and other essentials, should help get costs in line with sales volume.

Speaking of commodities, there’s a lot riding on how much miners can earn digging them out of the ground. Mike DeWalt, director of investor relations, noted that since the end of the third quarter, “copper, which is a bellwether commodity for us, is down about 50%; oil was off about 60%; and natural gas prices were down about a third.”

Owens highlighted the uncertainty that will affect whether Cat earns $2.50 a share: “… we just need to see where the bottom of this cycle is going to end up. It’s difficult to assess. Is oil going to be $30 or $80 at the end of the year? Is copper going to be $0.75 or $2.50 at the end of the year?” Cat expects copper to be in the $1.10 per pound range, which is below the price miners need to launch new projects.

What about inventories?
“We pretty much hit a wall in December,” DeWalt said. Things got bad enough that Cat called up its dealers and asked them to call off any orders that weren’t a sure thing. That means Cat won’t be heading in to the depths of recession with so many parking lots full of tractors nobody wants.

And what about the legendary order backlogs of the mega mining trucks? Owens says the three-year waiting list has helped, but things are pretty ugly across the mining sector. “The volatility in the orders of people slicing about or canceling orders has been very high,” Owens said. The order backlog “still looks reasonably good for this year,” he said, though some orders are likely to be canceled.

Cat’s pitch is that when the mining sector recovers, it’s going to have to do something about the 10-year average age of its fleet. Like, buy a bunch of new trucks, tractors and loaders.

What about cap-ex?
While Caterpillar plans to slash capital expenditures by 40 percent, it’s sticking to its guns about getting the North Little Rock, Arkansas, motor grader plant up and running. Same with the engine plant in Seguin, Texas.

Talking debt
Cat’s debt ratio swelled to 57 percent last year, which triggered some analyst consternation, but Group President Ed Rapp promised to get it back down to its historical range of 35 or so in the next year. Where the excess came from: 11 percent to fund the pension plan; 3 percent to load up on extra cash to ride out the financial crises; and 7 percent to integrate Cat Japan. Subtract those factors and Cat’s back to normal, he says.

Stimulus thoughts:
Mike DeWalt is hoping for “a good thoughtful package” in the United States and China. He added that a number of the emerging markets have relatively low inflation and stronger balance sheets than they’ve ever had heading into a major recession.

“If we just get the financial market to stabilize globally, this economy wants to grow and we, Caterpillar, I think are exceptionally well positioned.”

I’ve skipped some details on Cat Financial that are a bit out of my league. Nothing set off any car alarms, though.

Cat’s stock took a proper pummeling Monday, and there’s more in store, no doubt. Still, the five-years-down-the-road outlook is that when the economy recovers, commodities will again be in short supply and big yellow trucks, tractors and engines will be needed to get them to market. Doesn’t have to be Cat supplying all that machinery, but I suspect most folks who already own Cat equipment will buy more when their current supply wears out.

Caterpillar Inc. will begin taking applications later this year for up to 800 jobs at a new motor grader plant in North Little Rock.

The company said it will invest $140 million in the new plant. Production of commercial motor graders is expected to begin in early 2010. Renovation will begin immediately, and management offices are already operational.

The state of Arkansas gave Caterpillar $3 million from its Quick Action Closing Fund as incentive for the plant. North Little Rock is providing a package worth more than $13 million, Mayor Patrick Hays said, though the city council must first pass the package.

The city’s incentives are largely for infrastructure, including an $8 million new power substation, an $800,000 wastewater treatment facility and the waiver of building permits worth more than $30,000. Hays emphasized that the city planned to build the power substation in 2010, but has moved plans forward to accommodate the manufacturer.

The city is also providing carbon offsets worth $2.5 million, Hays said. The city receives the offsets because of its use of hydroelectric power, he said. The company will also pay reduced electrical bills over the next five years. The electricity deal is worth more than $2 million.

…

Company officials said that a full line of motor graders, with the exception of its 24M motor grader, will be made at the North Little Rock facility. The graders are used to build and maintain roads, highways, airports and other construction projects.

Update: Here’s Paul Gordon of the Peoria Journal Star’s report.

Update: Arkansas Blog is on the story.

Here’s a YouTube video from this morning’s press conference.

This doesn’t appear to be a built-from-scratch facility like the one announced in late December in Sequin, Texas — the grader plant will go into a former video-production site.

The jobs number quoted is eerily similar to the number of layoffs in Mossville, though I suspect the wages and benefits will be predictably dissimilar. I’ll do some poking around to see how this affects the plant in Decatur, Illinois, which also produces motor graders. (Note: this article on the introduction of the new M series of motor graders says the 24M — the exception named above — would be built at Decatur.)

This was just posted at Yahoo’s Cat message board:

“We” were told several months ago – maybe it was back in August of ’08 – that Cat had planned to move the motor grader line out of Decatur. During the entire time since that original announcement “we” were told that the 24M – the biggest motor grader built – would remain in Decatur. The idea is that a vast majority of the 24M’s sold are sold to buyers of the larger mining trucks…including the 797 mining truck. But that the rest of the line would find a new home.

We were also told that very few, if any, of the grader jobs in Decatur would transfer to whatever new home the grader line would find. With the tractor scraper line down to one shift and small mining truck sales in the basement, one has to wonder what Cat will do with the nearly 1000 folks they threw at the Monarch series of motor graders.

Good question indeed.

More links on this Twitter search.

Paul Gordon of the Peoria Journal Star pokes some holes in the notion that workers in the new Caterpillar engine plant in Seguin, Texas, will make $21 an hour, a number some local real estate type appears to have pulled out of thin air.

I researched the typical base wages for factory workers in Texas, the San Antonio area in particular.

According to the U.S. Department of Labor, Bureau of Labor Statistics, the only production workers now making $21 an hour, or $44,000 a year, are supervisors – the bosses of those doing the assembly work.

Engine assemblers – which I expect many of these jobs would be – make an average of $16 an hour there, or about $33,270 a year. The BLS says there are currently only 540 engine assemblers in the San Antonio metropolitan area. Other assemblers make less.

Machinists – which likely will be among the jobs to be created at Seguin – make an average of $14.41 an hour, or just under $30,000 a year.

The average pay for all production workers in that area, the BLS says, is $12.79 an hour.

Cat flacks won’t say what they plan to pay. Gordon notes there’s at least a shred of likelihood that Cat is doing in private what it says in public: consolidating production in a single location mainly to improve efficiency.

For fun we should set up a pool to see who can guess how long it’ll take the folks responding to Paul’s post to blame everything on greedy corporate bean-counters or grasping union leaders.

The paper in Greenville, S.C, says local economic development honchos had no idea they were on the short list of finalists for the new Caterpillar engine plant to be built in Seguin, Texas. Cat received a $10 million incentive from a fund Texas set up specifically for instances where several states were competing for the same facility.

It does seem, shall we say, peculiar that Cat seems to have told the folks in Texas that Greenville was on the table but doesn’t seem to have mentioned it to, you know, the folks running the town where they might have actually built the plant.

But get this: The Austin American-Statesman says next to nobody in Seguin knew they had won the plant till Thursday’s announcement was aired.

Of course the job of local officials is to provide tax breaks and keep their yaps shut, except when asking “how high?” when told to jump, so everything is as it should be, I suppose.

UPDATE: Paul Gordon at the Journal Star reports on yesterday’s layoff news, etc.

The layoff is not connected with Caterpillar’s earlier announced decision to cease making on-highway truck engines, or to an announcement by the governor of Texas on Thursday that Caterpillar is going to build a small-engine plant in that state, transferring some work from Mossville, a Caterpillar spokesman said.

Naturally the UAW is skeptical, and as much as this “move 1,400 jobs somewhere else for fun and profit” vibe irks me, one thing must be said: The Texas project has been in the works for months and nobody imagined the economy would’ve turned this ugly by now. The coincidence makes Cat look like Scrooge painted yellow this morning, but hey, coincidences do happen.

(Some part of me pities the Texans who sold their souls and abandoned their pride to get this plant. Because Texans are such a prideful bunch.)

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Last night’s post:

On the same day that 800-plus got pink-slip notices from the Mossville engine plant, word came out about a new engine plant Caterpillar is planning. It moves 1,400 jobs from Illinois and and South Carolina to a town east of San Antonio. From the Austin American-Statesman:

Caterpillar Inc., a heavy-equipment giant, is consolidating its assembly, paint and testing operations from Illinois and South Carolina to Seguin. On the economic development scorecard, the move counts as a win for Texas against Mexico and South Carolina, both of which were also competing for the facility.

“The location really just fits our long-term strategic plans,” said Kate Kenny, a spokeswoman for Caterpillar. “About 70 percent of the engines that will be manufactured there will be exported, and Seguin gives us great access to ports and interstates and other hubs.”

Seguin is on Interstate 10 and near Interstate 35, and it is about 30 miles northeast of San Antonio and about 50 miles south of Austin. The ports of Houston and Corpus Christi are about an equal distance away. And when construction of Texas 130 is completed, the city will mark one end of the highway.

The state’s offering is the biggest Texas Enterprise Fund investment this year. In previous years, the fund has granted $50 million to companies such as Texas Instruments. The Texas Enterprise Fund was created in 2003 at the urging of Gov. Rick Perry and was funded through the Texas Legislature in 2005 and 2007.

This item says it’ll generate $170 million in capital investment. Well, at least they’re not pouring it into credit default swaps. Next on my to-do list: see how many millions Texas will give me to move my blog headquarters to a flat above an ultra-hip Austin watering hole. I love that song about going home with the armadillo.