An employee uses a level at the Caterpillar Inc. engine manufacturing facility in Sequin, Texas, U.S. (Photographer: Callaghan O’Hare/Bloomberg)

The Upside of Caterpillar’s Bleak Results

(Bloomberg Opinion) -- There’s a silver lining to Caterpillar Inc.’s disappointing 2019 guidance: It’s more in line with reality.

The industrial bellwether reported fourth-quarter earnings on Monday that missed analysts’ estimates by the most in a decade as rising manufacturing costs and an increase in provisions for credit losses at its financing arm weighed on results. Caterpillar expects only a modest sales increase in 2019 and a smaller gain in earnings per share than analysts anticipated. If you needed more evidence that global economic growth is losing steam, this is it. One of the biggest topics of discussion in industrial circles has been around whether stocks have sold off sufficiently to reflect that slowdown; Caterpillar’s more than 9 percent drop on Monday suggests they haven’t, and its results are a good reminder of how quickly economic momentum can shift.

The Upside of Caterpillar’s Bleak Results

But I would like to focus on Caterpillar’s decision to stop excluding restructuring costs from its earnings guidance. That could explain some of the shortfall between Caterpillar’s forecast for $11.75 to $12.75 in earnings per share this year and analysts’ expectations for about $12.72. Caterpillar says it’s eliminating the restructuring adjustment because those costs are expected to return to more “normalized” levels this year. The company notched $386 million in expenses tied to firing employees and closing down factories in 2018, down from $1.26 billion the year before and about $1 billion in 2016.

The Upside of Caterpillar’s Bleak Results

The treatment of restructuring costs by industrial companies has been a matter of hot debate lately, given the extent to which the exclusion of these expenses can distort earnings. Some analysts argue these spikes in expenses aren’t really one-time because restructuring is a cost of doing business for a cyclical manufacturer and stripping out the impact of that from earnings numbers can do more to muddy the conversation than clarify it. General Electric Co., for example, has traditionally excluded these costs from its adjusted earnings per share, despite the fact that the company has seemingly been in a perpetual restructuring mode for the past few years with little to show for it in terms of profit gains. Even assuming the company finds a way to dig itself out of the current crisis in its power unit, some restructuring will always be necessary to stay technologically competitive and to offset shortfalls on variable cost productivity.

Caterpillar’s move to add back restructuring costs as these bills fall to more manageable levels pays lip service to the idea that these really are one-time expenses. I will point out, though, that the idea falls a bit flat if you think changing economic conditions may soon force Caterpillar to again rethink its employee and factory base. Amid other troubling signs in the company’s earnings release on Monday was the disclosure that its order backlog declined about $800 million in the fourth quarter from the previous three-month period. But if Caterpillar’s move to cut back on the earnings adjustments inspires other manufacturers to be more transparent with their own results, that would be a good thing.  

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

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