US-based heavy machinery and mining equipment manufacturer Caterpillar will retrench more than 10 000 employees by the end of 2016 as part of a significant restructuring and cost reduction plan, designed to lower operating costs by about $1.5-billion a year once fully implemented.

Starting later this year, the Illinois-headquartered firm will let between 4 000 and 5 000 agency workers go, with an eventual total workforce reduction of more than 10 000 people possible, including manufacturing facility consolidations and closures to continue through to 2018.

The employee-related severance and other termination benefits, as well as other exit-related consolidation costs, are expected to cost about $2-billion before tax.

“We are facing a convergence of challenging marketplace conditions in key regions and industry sectors – namely mining and energy. While we’ve already made substantial adjustments as these market conditions emerged, we are taking even more decisive action now. We don’t take these decisions lightly, but I’m confident these additional steps will better position Caterpillar to deliver solid results when demand improves,” Caterpillar chairperson and CEO Doug Oberhelman says.

The NYSE-listed company says that its 2015 sales outlook has weakened to about $48-billion, or $1-billion lower than the previous outlook, and that 2016 sales are expected to come in at about 5% below 2015’s. Slightly less than half of the $1.5-billion cost reduction is expected to come from lower selling, general and administrative costs. The reduction will mainly be in place and effective in 2016 and be effective across the company.

The machinery manufacturer says that, despite navigating a changing market landscape, it has managed to increase market share for products across much of the company, noting that the challenging market has forced Caterpillar’s competitors to make even tougher decisions.

Another positive metric for Caterpillar is that its product margins have increased as a result of its focus on lean manufacturing strategies, boosting its 2015 gross margin rate – in line with its highest level in 20 years, despite reduced profits.

While the future now looks bleak for certain Caterpillar employees, shareholders have been rewarded handsomely, seeing their dividends rise 15% in 2013, 17% in 2014 and 10% in 2015, which has enabled share repurchases of $8.2-billion over the past three years.

Oberhelman attributes the performance to operational improvements that have contributed to the company’s strong balance sheet and cash flow. “In fact, three of [the Machinery, Energy & Transportation division’s] four best years [with regard to] operating cash flow have occurred since 2011 – simultaneously, sales and revenues have been under pressure. That’s driven substantial improvement in our quarterly dividend,” highlights Oberhelman.

This year has been Caterpillar’s third consecutive down year for sales and revenues, and 2016 will mark the first time in Caterpillar’s 90-year history that sales and revenues have fallen four years in a row.

“Several of the key industries we serve – including mining, oil and gas, construction and rail – have a long history of substantial cyclicality. While they are the right businesses to be in for the long term, we have to manage through what can be considerable and sometimes prolonged downturns,” Oberhelman adds.

Caterpillar notes that mining equipment sales are far below the previous peak and are substantially below what the company would consider a reasonable replacement level. Sales into the oil and gas sector have also declined substantially, as a result of lower oil prices, and construction equipment sales are well below earlier peaks in North America, Latin America, Europe, Africa, the Middle East and Asia Pacific.

The remaining cost reductions are expected to come from lower manufacturing costs, as a result of further contemplated facility consolidations and closures, which could impact on more than 20 facilities and slightly more than 10% of its manufacturing square footage. A portion of these cost reductions are expected to be effective in 2016, with more savings to come in 2017 and 2018.

Caterpillar’s latest round of cost reductions follows on the heels of similar actions taken since 2013, when Caterpillar closed or announced plans to close or consolidate more than 20 facilities, impacting on eight-million square feet of manufacturing space. The company has also cut its workforce by more than 31 000 since mid-2012.