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Reduced sales, lower production and a decline in inventory primarily resulted in lower fourth quarter 2012 earnings for Caterpillar Inc. (CAT - Analyst Report). However, the company reported record fiscal 2012 with respect to both earnings and revenues. On the news, CAT shares were up 2.54% to $98.01 in pre-market trading.
In the fourth quarter, adjusted EPS was $1.91, down 18% from $2.32 in the prior-year quarter, but ahead of the Zacks Consensus Estimate of $1.70.
As announced earlier this month, Caterpillar unearthed accounting misconduct at its recently acquired company ERA Mining Machinery Limited (ERA) as well as its subsidiary Zhengzhou Siwei Mechanical & Electrical Manufacturing Co., Ltd. (Siwei). Including the goodwill impairment charge of $580 million or 87 cents per share, EPS in the quarter stood at $1.04.
Revenues dipped 7% to $16.1 billion in the quarter but managed to edge past beating the Zacks Consensus Estimate of $16 billion. The impact of changes in dealer new machine inventories had a negative impact of about $1.4 billion as dealers reduced inventories by about $600 million in contrast to as against an increase of about $800 million in prior-year quarter.
However, price realization of $421 million and the favorable net impact of acquisitions and divestitures of $116 million were the bright spots in the quarter.
Sales decreased in North America but increased in Latin America. Within Asia/Pacific, decreases in China and other parts mitigated the sales increases higher sales in Australia and Japan. Within EAME, lower sales in Europe and CIS were somewhat offset by increased sales in the Middle East and Africa.
Cost of sales improved 7% to $11.9 billion in the quarter. Selling, general and administrative (SG&A) expenses increased 7% to $1.59 billion and research and development (R&D) expenses inched up 1% to $613 million.
Operating profit was an adjusted $1.6 billion (excluding the above-mentioned charge), a decline of 17% from $1.96 million in the fourth quarter of 2011. Including the charge, operating profit in the quarter was $1.038 billion, down 47% from the year ago quarter. Increased manufacturing costs due to inefficiencies arising from lower production and declining inventory, lower sales volume, partially offset by favorable price realization, led to the decline in operating profit.
Machinery and Power System (M&PS) revenues decreased 7% to $15.3 billion. Sales decline of 25% in the Construction Industries dragged down the overall revenues as dealers reduced new machine inventory levels in the quarter. Resource Industries' sales improved 16% on the back of higher volume, improved price realization and an increase in Bucyrus sales of $102 million. Power Systems' sales decreased 9% on lower sales volume.
Financial Products’ revenues increased 5% to $789 million as the positive impact of higher average earning assets were offset by an unfavorable impact of lower average financing rates on new and existing finance receivables and operating leases.
Financial Products’ profits increased to $180 million from $134 million in the fourth quarter of 2011. The increase was attributed to a $34 million impact from lower claims experience at Cat Insurance and a $32 million favorable impact of higher average earning assets.
2012: A Record Year
Earnings per share in fiscal 2012 were an all-time record at $9.35, up 26% from $7.40 in the prior year and striding ahead of the Zacks Consensus Estimate of $9.14. Results also outperformed management earnings guidance of $9.00 to $9.60. Including the goodwill impairment charge incurred in the fourth quarter, earnings per share was $8.48, still a record.
Revenues for the year increased 10% to a record $65.875 billion, ahead of the Zacks Consensus Estimate of $65.56 billion and close to management guidance of sales of $66 billion.
As of 2012-end, Caterpillar had cash and short-term investments of $5.5 billion, up from $3 billion as of 2011 end. Total debt-to-capital ratio improved to 70% as of 2012 end from 73% as of 2011 end. The debt-to-capital ratio at M&PS decreased to 37.4% at the end of the year from 42.7% as of 2011 end.
Total cash flow from operating activities in fiscal 2012 was $5.2 billion compared with $7 billion in the prior year. Operating cash flow at M&PS plunged to $4.2 million in the year from $8 billion in the prior year, mainly due to unfavorable changes in working capital, most significantly accounts payable.
Fiscal 2013 Outlook
The company did not provide a specific outlook for the first quarter of fiscal 2013 but hinted that sales will be significantly lower than the first quarter of 2012 as dealers are expected to continue to lower their new machine inventories. The company foresees earnings to be affected by lower-than-expected sales and the negative cost impact of continuing low production levels and declining inventory.
For fiscal 2013, sales are expected to be in the range of $60 to $68 billion and earnings between $7.00 and $9.00. The guidance has factored an improving U.S. economy, albeit at a slow pace.
China's economy is expected to improve but will not regain the standards set in 2010 and 2011. Economic uncertainty is expected to plague Europe in 2013. The second half of 2013 is expected to be relatively stronger than the first half.
As per recent indicators, the U.S. residential and non-residential construction is finally stabilizing and is on the road to a much-awaited recovery. Further improvement is expected in 2013. This bodes well for Caterpillar going ahead.
Caterpillar had been persistently adding production capacity for many of its products. However, with the growing concerns and uncertainty about the pace of world economic growth, short-term economic risks in the U.S, the Euro zone debt crisis and the slowdown in China's growth, Caterpillar has now opted to be cautious regarding acquisitions and investments for expansion.
The company plans to remain focused on its cost control measures and continue to invest in research and development. The recent loss of sales momentum, negative impact of the European debt crisis and a slowing Chinese economy remain concerns.
Peoria, Illinois-based Caterpillar Inc. is the manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. The company is one of the few leading U.S. companies in an industry that competes globally from a principally domestic manufacturing base.