Caterpillar Would Gain From U.S. Highway Funding Amid Slump

  • Legislation would provide three years of transportation money
  • Plan includes Senate-passed provision to revive Ex-Im Bank

Caterpillar Inc. equipment sits outside the Altorfer Cat dealership in East Peoria, Illinois, on July 21, 2015.

Photographer: Daniel Acker/Bloomberg

A long-term highway funding bill being debated by the U.S. House this week may be the first bright spot in months for construction-equipment giant Caterpillar Inc., which announced restructuring plans in September that may involve cutting 10,000 or more jobs.

The highway bill also would revive the Export-Import bank, which counts Peoria, Illinois-based Caterpillar among its biggest beneficiaries. The legislation, already passed by the Senate, would be the first multiyear highway authorization law since 2012, extending transportation programs for six years.

"When I called the CEO of Caterpillar and told him that our Senate bill included an extension of the highway bill and of the Export-Import bank, he said it was the best news he’s had in months," second-ranking Senate Democrat Dick Durbin of Illinois said in an interview in the Capitol. "Both of those two provisions are critical for this manufacturer that employs thousands across Illinois and the nation."

The legislation would provide years of stability in federal transportation funding, perhaps encouraging contractors to purchase new road-building equipment instead of renting or relying on older models, as many have done while awaiting long-term highway funding, Steve Volkmann, a machinery analyst at Jefferies LLC, said Tuesday. He said the funding would probably translate to increased orders for Caterpillar, the world’s biggest maker of mining and construction equipment.

"This would be significant," Volkmann said in a phone interview. "If they’ve figured out how to fund transportation, it would be pretty positive for Caterpillar and a number of other people."

Road Construction

It’s difficult to say how much of Caterpillar’s sales are tied to the road construction market, he said, but estimated it was about 3 to 4 percent.

"It’s not huge, but this can pull through to some other stuff," Volkmann said. "For example, if you start working on new roundabouts, then somebody probably builds a new gas station and that also requires equipment, so there is a trickle-down effect there."

Melissa Avstreih, a Bloomberg Intelligence analyst, agreed the legislation is positive for Caterpillar.

"The bill provides stability for states to invest in large-scale, mulitimillion-dollar road projects, which could boost equipment sales for companies like Caterpillar," she said.

QuickTake: Money for Highways

Caterpillar spokeswoman Lisa Miller said the company was pleased to see the House weighing the highway bill after the chamber’s strong vote last week to reauthorize Ex-Im. She didn’t say whether the legislation could provide a turnaround opportunity for Caterpillar.

"We’ll evaluate the final package after it is complete," Miller said in an e-mail.

The House plans a final vote Thursday on the $339 billion highway measure, H.R. 22, which would provide only three years of funding for six years of highway authorization. It would go to a conference committee to work out differences between the House and Senate versions. Current funding ends Nov. 20. The last time Congress passed a highway funding measure that covered more than two years was 2005; since then, lawmakers passed a series of short-term extensions.

If the final legislation approved by Congress also reauthorizes Ex-Im, "that would also be helpful," Volkmann said.

$652 Million

Caterpillar’s foreign buyers received at least $652 million in Ex-Im loans and guarantees last year, according to an annual report from the bank. Boeing Co. is by far the bank’s biggest beneficiary: its customers received more than $7 billion of the $10.8 billion in long-term guarantees issued last year.

Ex-Im has been unable to approve new requests for financial assistance ,including loans, insurance and guarantees, since Congress let its charter expire June 30. The 81-year-old institution is designed to help American companies sell big-ticket items to overseas buyers.

Lawmakers in the Senate and the House overwhelmingly back reviving the bank, though it’s opposed by Republican leaders in Congress -- including new House Speaker Paul Ryan of Wisconsin -- who say it helps big companies that shouldn’t need government assistance.

In the House, conservative members opposed to the bank proposed a series of amendments to limit its operations. One that didn’t get a floor vote would have prohibited aid for customers of big companies like Caterpillar, Chicago-based Boeing and Fairfield, Connecticut-based General Electric Co.

Small Businesses

Instead, the House considered and defeated late Wednesday a proposal cosponsored by bank opponent Mick Mulvaney, a South Carolina Republican, that would have required Ex-Im to ensure within four years that 40 percent of its aid benefits small businesses. The small-business share would rise gradually from the current 20 percent. If the bank didn’t comply, it would be barred from issuing loans valued at more than $100 million.

The House also rejected other Mulvaney proposals. One would require companies involved in Ex-Im deals valued at more than $10 million to have received at least two denials for similar financial help from the private sector. Another would prohibit lending for deals that aren’t necessary to meet foreign competition, and a third would bar the bank from aiding companies from nations with government-owned investment funds of more than $100 billion.

Another amendment defeated by the House, proposed by Georgia Republican Lynn Westmoreland, would allow companies that say they would be hurt by the bank’s lending decisions to appeal to Ex-Im’s board of directors before a deal is signed. Delta Air Lines Inc., based in Atlanta, says some bank decisions have helped overseas rivals at its expense.

One of the Ex-Im Bank’s chief backers, Republican Representative Stephen Fincher of Tennessee, had said on Tuesday he was confident bank supporters would defeat amendments that would derail reauthorization.

“We will win in the end; it’s just going to be a little more work," said Fincher, who joined with second-ranking House Democrat Steny Hoyer of Maryland to force a House vote last week that showed overwhelming support for the bank.

‘Boon’ for Caterpillar

Senator Mark Kirk, an Illinois Republican and Ex-Im supporter, said consistent funding for highways "certainly could be a boon" for Caterpillar. He cosponsored the Senate bill to reauthorize the bank through September 2019 that’s now part of the plan being debated by the House.

"The better thing is if we attach Ex-Im to highway legislation, that will further help CAT’s books," Kirk said in an interview in the U.S. Capitol. "They’ve told me a very large percentage of their sales are overseas."

Caterpillar gets 60 percent of its pretax income from international sales. About 44 percent of its revenue comes from North America. 

Any increase in sales or earnings is still at least a year away for Caterpillar, the company said in its earnings statement last month. Sales in all segments will fall as miners and drillers have more equipment than they can use after slower growth created a glut of metals and other commodities.

‘Perfect Storm’

Caterpillar said in October that third-quarter profit fell more than estimated on the lowest sales in five years as plunging commodity prices dimmed demand for mining and energy equipment. Next year’s sales to those industries will drop as much as 10 percent, the company said.

"It has been a bit of a perfect storm for them," said Volkmann, the Jefferies analyst. "It’s nice to have a little ray of sunshine" in the highway legislation.

In September, the company announced its second major restructuring in three years, warning it could affect more than 20 of its global facilities and lead to at least 10,000 job cuts.

It’s unlikely passage of the legislation would alter Caterpillar’s plans to cut jobs, said Durbin, the Illinois senator, and Volkmann.

"I wish, but I think it has to do with the overall global production of coal, and many, many countries are backing away from using coal," Durbin said.

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