By Meribah Knight, Crain News Service
CHICAGO (Jan. 29, 2013) — Weaker demand in Asia and North America and an acute decline in the mining industry have left Caterpillar Inc., the world's heavyweight manufacturer of construction and mining equipment, with plunging profits.
The company's profits were down to $697 million, or $1.04 per share, from $1.55 billion, or $2.32, a year ago. The company also reported a 7 percent year-over-year reduction in revenue, to $16.08 billion from $17.24 billion.
Still, Caterpillar shares were up nearly 1.8 percent to $97.26 on the afternoon of Jan. 28.
"It's all about investor expectation," said Mircea Dobre, a senior analyst at Chicago-based Robert W. Baird & Co. "I think investors have focused primarily on the fact that inventory numbers have come down. Progress in that area has been viewed as positive."
Paired with a drop in investments by mining companies, Caterpillar also is dealing with a surplus of unsold machinery in China and elsewhere. In order to accommodate a fall in demand, the company has been idling factories and temporarily laying off workers.
"There is no fire sale of inventory going on; it's lowering our production," Mike DeWalt, Caterpillar's corporate controller and director of investor relations, said during the company's earnings conference call Jan. 28. The company said it reduced the value of its inventory from the third quarter by $2 billion.
Despite plummeting sales in its construction division because of the euro zone crisis and a slow recovery in the U.S., the declining sales in mining cut even deeper into Peoria-based Caterpillar's profits. Mining has become an increasingly large portion of the company's revenue—roughly a third—and it carries high operating margins of more than 20 percent compared with construction, which was 9.3 percent in 2012, according to Mr. Dobre.
Dropping commodity prices have slashed operating cash flow for mining companies, making them reluctant to invest in new projects.
"I think the real issue is what is happening with mining," Mr. Dobre said. "That growth is under a lot of question today."
Caterpillar Chairman and CEO Doug Oberhelman said during the call that he still has confidence in mining.
"I fully believe that our idea on long-term mining around the world and our strategy to go after it, whether it be surplus or underground, is the right strategy for this company," he said.
Caterpillar said fourth-quarter 2012 operating profit also was hurt by $58 million after it overstated the inventory at South Milwaukee, Wis.-based mining equipment manufacturer Bucyrus International Inc., which Caterpillar bought in 2011 for more than $8 billion. The company said the error "favorably impacted 2011 operating profit by $24 million and first-quarter 2012 operating profit by $34 million."
Adding to Caterpillar's misfortune and weighing on its profits is its recent accounting fraud discovery at ERA Mining Machinery Ltd., a Chinese mining company that Caterpillar acquired last June. The company took a non-cash goodwill impairment charge of $580 million, or 87 cents per share, in the fourth quarter and said it dismissed several senior executives at the company.
"The buck stops at my desk," Mr. Oberhelman said on the call. "I am accountable for that acquisition." He added that the company was "deliberately misled" by ERA managers.
Mr. Dobre said all eyes will be on Caterpillar to get additional clarity on the situation and see how the company intends to improve their processes when it comes to acquisitions.
"There are going to be some lessons learned," he said.
Caterpillar executives said they anticipate growth in 2013, but it will be slow and they are cautious about how quickly sales will benefit. Revenue will likely lag in the first quarter, they said, as dealers keep on a trend of fewer orders to reduce their inventory. The company's 2013 outlook in sales and revenues is $60 to $68 billion and a profit per share or $7 to $9.
"The range of our 2013 outlook reflects the level of uncertainty we see in the world today," Mr. Oberhelman said.
This report appeared in Crain's Chicago Business, a Chicago-based sister publication of Tire Business.