Last week, Zach.com noted that China had cut its 2012 growth target to an eight-year low of 7.5%, and the "detrimental effect" that the decreased spending on infrastructure and construction would have on Caterpillar. Indeed, first among the company's stated Risk Factors is a high sensitivity to global economic conditions. The company stands to be heavily impacted by prolonged downturns in the energy, mining, housing, and commercial construction industries.
The pessimistic interview from Caterpillar's CEO Douglas Oberhelman comes on the heels of a contentious employee strike. The three and a half month strike ended Friday when the company approved a one-time ratification bonus of $3,100 per worker after initially proposing $1,000 per worker. The worker strike came about as Caterpillar sought to freeze the pay of veteran workers and shift an increased burden of the health-care cost to employees despite the posting of record setting sales and revenues. The increased bonus was about the only concession the hard negotiating company was willing to make on the six-year contract, as salaries will remain frozen with the company receiving nearly all of the concessions it sought to achieve.
The company asked employees to make concessions on pay, healthcare, and pensions even as pay for its CEO rose 42 percent in 2011. In addition to a 32 percent rise in base salary, Mr. Oberhelman's $16.9 million in total summary compensation included more than $8 million in stock options, half of which are time-vesting, a cash bonus of almost $5 million, and shareholder sponsored corporate aircraft and home security costs. Five other named executive officers were awarded discretionary cash bonuses "to reward significant efforts that may not be reflected in the performance objectives". Recently, Caterpillar's former CEO James W. Owens received one of the highest severance packages of all companies we've covered in the past few years when he retired in July 2010. After six years as CEO, he received almost $52 million in total realized compensation.
The board of Caterpillar Inc. is not only large, with 16 current members, but also well paid. Non-employee directors earned between $266,089 and $313,218 in total compensation for service on the company's board last year. Of 16 board members just one is female, seven have served for at least a decade, and there are certain relationships on the board that skirt the SEC rules for independence, but signal camaraderie among board members. For instance, two directors serve together on the board of Abbott Laboratories and two more serve together on the board of The Boeing Company. In fact, Caterpillar's board is a virtual who's who of blue-chip directors.
Currently, half of Caterpillar's board sits on at least three boards we rate. The board members include Miles White, the Chairman and CEO of Abbot Laboratories, who also sits on the board and two committees at McDonald's Corporation. David Goode, who chairs the compensation committee, has served on the board for 19 years, as has fellow compensation committee member Joshua Smith. The most recently elected board member to join the compensation committee is David Calhoun, whose full time job is as CEO of Nielsen Holdings N.V. and who also serves on the boards of Medtronic, Inc. and The Boeing Company.
Caterpillar Inc. is also rated Very Aggressive in terms of Accounting & Governance Risk (AGR). With an overall AGR score in the 4th percentile, Caterpillar's financial statements indicate accounting and governance risk higher than 96% of the company's we cover. We have flagged the company on 10 metrics pertaining to Revenue Recognition, Expense Recognition, and Asset-Liability Valuation. The company has scored "Aggressive" or "Very Aggressive" in its AGR for the past three years while industry peers typically scored as "Average" over the same time period.
Employees at Caterpillar chose to accept a pay freeze and decreased benefits against the recommendation of their local union, and on terms that greatly favored the company even as it made profits. However, the CEO has unexpectedly warned that the company could face lean times in the face of a global economic downturn. It's too early to tell whether the statement was made to ease the public sentiment over a controversial employee strike settlement or if it's the foreshadowing of a real threat to investor confidence.
Region: North America
Industry: Construction/Agricultural Machinery
Market Cap: $56,219.4mm (Unknown Cap)
ESG Rating: D
AGR: Very Aggressive (4)
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I am a corporate governance specialist.