When is good news not good enough? Ask Caterpillar Inc. On Jan. 19, the construction-equipment giant announced that both sales and profits hit record levels in 1994. Net income climbed to $955 million, up from $345 million before extraordinary items in 1993, on sales of $14.3 billion, a 23% increase. But Caterpillar's stock plunged 6.6% that day, to 543/4. Why? Its fourth-quarter gross profit margin was 22.4%, no higher than 1993's fourth quarter. And that spooked Wall Street.
Maybe the Street should be looking forward, not backward. On Jan. 31, Caterpillar and the United Auto Workers will restart contract negotiations with the help of the Federal Mediation & Conciliation Service. And after months of standoff, brought on by management's firing of union members, the company and the UAW appear ready to talk turkey. "This is the first serious effort by both sides," says a source close to the negotiations.
The seven-month dispute has hurt Cat--but not by much. The company says defecting strikers, plus its use of management employees, new hires, and temporary workers, helped it raise production 14% higher in the second half of 1994 than in the first. Still, more than 9,000 of its UAW-represented workers remain on strike. And the hiring and training of temps, plus higher sales of low-margin products, shaved $30 million to $40 million off Cat's operating income last year, figures Smith Barney Inc. analyst Tobias M. Levkovich.
Now, exhaustion may be pushing both sides to the table. Caterpillar has the upper hand, having proved it can build product without the union. But, according to an employee at one Caterpillar factory, 2 in 10 temporary workers hired since the strike have left or been dismissed. If true, that means Cat faces the cost of constantly training and integrating new workers. The company says turnover among temps is not a problem.
EMBOLDENED. The union is under even greater pressure. Every day, some 5,200 of its members cross the picket line, including 1,100 hired in part to replace retirees since the strike began in late June. And Cat rival Deere & Co. has been emboldened to resist the union's demands. UAW members at Deere have worked without a contract since last fall.
Few expect there will be a swift end to the Cat conflict, though. A company-imposed contract has been in effect since April, 1992, and the UAW wants to win some concessions before members head back. But most observers expect Cat to offer only to raise retirement benefits or improve job security a bit. Working out the details could take at least two months, say company and union sources. Till then, Cat's gross margins may suffer--along with the striking workers.