Under CEO Jim Umpleby, Caterpillar is achieving “operational excellence,” and it’s showing up on the bottom line.
The Deerfield, Ill.-based manufacturer of machinery and engines last month posted its the highest first quarter profit in the company’s 93 year history, on a 31% spike in revenues, to $12.9 billion. Caterpillar’s $2.82 earnings per share, 85 cents higher than last year’s first quarter profit, beat Wall Street expectations by an “astounding” 69 cents, and company executives raised their 2018 guidance to $10.25-$11.25 a share, far above the $9.27 consensus expectation.
“We had a great start to the year, but higher sales volumes wasn’t the only contributor to this record first quarter results,” Umpleby said on the earnings call with analysts. “Operational excellence, which includes safety, quality, lean principles and our commitment to control structural costs, is one of the three key components of our enterprise strategy.”
Caterpillar’s rise is “a management story several years in the making,” Markman Capital Insight president Jon Markman wrote in Forbes. While the company is benefitting from positive macroeconomic conditions, “the real story” is on the operational side, with the company’s “Operating & Execution Model.”
“If done right, O&E should force a laser-like focus on its business strengths,” Markman wrote. “This should pave the way for profitability even when business cycles turn lower.”
The O&E model is a strategic framework to identify areas of the business that either create or consume the most value, according to Caterpillar.
“Using the O&E Model as a guide, we gain a deeper understanding of where we have a competitive advantage, which is key to generating high returns,” the company writes. “As a result, we allocate resources to those areas of our business that create or have the potential to create the most growth or improvement. This allows us to make swift, strategic choices so that we prioritize business opportunities with the greatest value.”
The O&E model is not unique or new, but Caterpillar’s company-wide commitment to it is proving out, Markman wrote. Product quality within its construction segment has improved 40%, while assets deployed have shrunk by $3.3 billion. The company is producing more, at same time reducing the footprint of manufacturing facilities by 7.9 million square feet.
In the resources segment, Caterpillar reduced its breakeven point every year since 2012, and it’s “moving aggressively” toward autonomy and electrification to streamline the product line, according to Markman.
“Caterpillar is a great operational story,” he wrote. “It’s the kind of excellence investors should demand.”
While Caterpillar adopted the O&E model in 2010 and Umpleby became CEO last year, he is being credited for making sure the strategy would truly be carried out across the enterprise. When he took the helm, Barron’s called Umpleby “the new sheriff in town,” who immediately set expectations on how the company would be managed during his first turn at leading Caterpillar’s Investor Day.
While many of the initiatives detailed that day may not have been entirely new, Umpleby’s appointment gave them a strong breath of fresh air, and the editors at Barron’s wrote that they were confident that “management will deliver the goods.”
“The difference is the new CEO, Mr. James Umpleby, who comes across as a hard charging and focused executive,” they wrote. “It is clear that he has a strong plan for Caterpillar to refocus on driving profitable growth, and that mediocrity will not be tolerated.”
Umpleby has been a longtime veteran of the company, joining Solar Turbines, now a Caterpillar subsidiary, in 1980 as an associate engineer. During his career at Caterpillar, Umpleby has held a variety of positions in engineering, manufacturing, marketing, sales and services. He became president of Solar Turbines and a Caterpillar vice president in 2010; from 2013 to 2016 Umpleby led Caterpillar’s Energy & Transportation business segment as group president.
Jim Umpleby, CEO, Caterpillar, Inc.
Headquarters: Chicago, IL
Education: Rose-Hulman Institute of Technology
First joined company: 1980
First positions with company: Associate engineer, manufacturing, marketing, sales and services
Named CEO: 2017