By Bob Tita and Andrew Tangel 

Caterpillar Inc. Chairman and Chief Executive Doug Oberhelman will retire earlier than expected, leaving company veteran Jim Umpleby to battle a historic sales slump after ill-timed bets on China and mining equipment.

The Peoria, Ill. based maker of hulking yellow excavators and bulldozers will also split its chief executive and chairman roles for the first time in a quarter-century, pleasing investors and analysts who called for a stronger check on the chief executive's power.

"This is a good start," said Lawrence De Maria, an analyst at William Blair.

Mr. Umpleby will become chief executive Jan. 1. Mr. Oberhelman will remain chairman until the end of March, when will be succeeded by Dave Calhoun, a longtime executive at Nielsen Holdings, General Electric Co., and Blackstone Group LP.

Mr. Umpleby will take over as the world's largest mining and construction equipment maker struggles to recover from the global commodity bust. Falling prices for mined commodities and oil and slower economic growth in China plunged the world-wide equipment market into a deep slump beginning in 2012. After record numbers that year, Caterpillar sales have fallen every year since.

"He's going to see some of the darker days first -- no question," said Matt Arnold, an analyst for Edward Jones.

The prolonged downturn has been rough on Caterpillar's rivals as well. Mining-equipment maker Joy Global Inc. of Milwaukee expects revenue of about $2.4 billion for its current fiscal year, less than half of 2012 levels. Joy shareholders will vote Wednesday whether to sell the company to Japan's Komatsu Ltd., which has forecast a drop in demand of up to 10% for its construction equipment and a 20% decrease for mining equipment in the current fiscal year. Komatsu has said it doesn't expect the mining market to improve until the end of the decade.

After becoming chief executive in July 2010, Mr. Oberhelman plowed billions of dollars into additional factories in the U.S. and abroad to build more machinery and engines for a booming equipment market, particularly in China, Brazil and other developing countries.

Mr. Oberhelman believed expanding in China, where the company had struggled to make equipment in the past, was critical to capitalizing on that market's surging demand.

He also broke with his predecessors' aversion to big acquisitions by purchasing railroad locomotive builder Electro-Motive Diesel Inc., Germany engine maker MWM Holding GmbH and mining equipment maker Bucyrus International in his first months on the job.

The $8.8-billion acquisition of Milwaukee-based Bucyrus is the largest deal in the company's history and provided Caterpillar with a complete line of mining equipment, including giant shovels for open-pit mines and underground mining equipment.

The deals catapulted Caterpillar's sales and profit to record levels by 2012. Demand for machinery and engines has been unraveling ever since. Caterpillar is expected to log its fourth straight year of lower sales in 2016, the longest in its 91-year history.

"Doug was a decisive guy and a risk taker and it turned out the environment wasn't congenial to the risks he took," said James Koch, an economics professor and former president of Old Dominion University in Virginia.

To preserve profits, Mr. Oberhelman aggressively cut expenses. Caterpillar's workforce has shrunk by 20% since 2012. As many as 20 plants could be closed or consolidated by 2018. Some of the underground mining equipment lines acquired from Bucyrus are up for sale again.

Thanks to the cost-cutting, Caterpillar has continued to earn annual profits. This year, Caterpillar's shares are up 28%, and other big-ticket equipment makers are also on a tear after cutting costs and production. But Caterpillar's shares are still down 25% from their 2012 peak, and closed 0.4% lower on Monday.

Mr. Oberhelman shook up top management ranks to drive better performance in tough markets. He appointed former General Motors Co. executive Denise Johnson to run the mining group, the first woman to be a group president at Caterpillar.

"Oberhelman corrected the issues left from past managements," said Robert Wertheimer, an analyst for Barclays. "Cat now has a much-improved operating system."

But much remains for Mr. Umpleby to do. Some analysts say the timing of Mr. Oberhelman's departure signals that Caterpillar's sales woes will continue into 2017.

Caterpillar's CEOs typically retire by age by age 65. At 63, Mr. Oberhelman was expected to begin telegraphing his departure soon. In selecting Mr. Umpleby, 58, the Caterpillar board followed its habit of picking Caterpillar lifers with varied experience.

Mr. Umpleby, a 35-year Caterpillar veteran, has been group president of the engine business since 2013. He was previously ran Caterpillar's Solar Turbines subsidiary, a highly profitable unit that other CEOs managed on their way to the top job.

Mr. Umpleby could lead the company for six years or so before retiring, like Mr. Oberhelman and his predecessors. It is unclear whether the board will maintain separate chief executive and chairman roles after Mr. Umpleby.

Many investors hope they do.

"You grade your own papers," said John Chevedden of California, who said he owns 200 of the company's shares. "Why should you be responsible to yourself?"

Mr. Chevedden's resolution urging Caterpillar to name an independent director as chairman won 42.8% of the votes cast at this year's annual meeting, according to a regulatory filing.

But Caterpillar's board rejected the resolution, saying "unified leadership and direction" was critical to wrangling the company's sprawling business.

Mr. Calhoun's appointment as an outside chairman suggests Caterpillar directors now want someone to keep close tabs on the chief executive, one succession-planning expert suggested.

"They want faster change," and expect Mr. Calhoun will be "very super aggressive" about overseeing Mr. Umpleby, predicted Jeffrey Cohn, managing director of global CEO succession planning for recruiters DHR International.

Write to Bob Tita at robert.tita@wsj.com and Andrew Tangel at Andrew.Tangel@wsj.com

 

(END) Dow Jones Newswires

October 17, 2016 18:12 ET (22:12 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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