Lower demand resulting from a weak global economy impacted Caterpillar‘s (NYSE:CAT) revenues and earnings in the fourth quarter. Earnings were also impacted by a goodwill impairment charge related to the accounting misconduct at the recently acquired Chinese company, Siwei. In the fourth quarter, revenues declined 7% year-over-year to $16.1 billion and earnings declined 55% year-over-year to $1.04 per share. 
For full year 2012 though, revenues and earnings posted impressive growth due to a strong performance in the first three quarters. Revenues increased 10% y-o-y to $65.8 billion and earnings increased 15% y-o-y to $8.48 per share in 2012. 
Caterpillar forecasts reduced sales and earnings in the first quarter of 2013 as low demand is expected to persist.
Lower sales volume
In the fourth quarter, Caterpillar dealers lowered their purchase activity of new machinery in order to reduce their inventory to levels that matched the suppressed end-user demand. This impacted the company’s sales volume. Declining dealer inventory reduced sales by $1.4 billion in the fourth quarter. 
However, the impact from lower sales volume was partially offset by improved price realization, positive impact from acquisitions and growth in CAT Financial’s revenues. In all, Caterpillar’s revenues declined by $1.2 billion or 7% y-o-y in the fourth quarter. 
Additionally, the company’s sales declined in almost all geographies such as North America, Latin America, Europe, Middle-East and Africa (EMEA), and Asia-Pacific. The largest decline was witnessed in North America where sales contracted 13% y-o-y on declining coal production which impacted sales of mining equipment and machinery manufactured by Caterpillar. In Latin America and Asia-Pacific, sales contracted 2% and 3%, respectively, on a year-over-year basis. In EMEA, sales declined 5% y-o-y on a severe decline in Europe partially offset by growth in the Middle-East and Africa. 
Profits reduced by lower production and Siwei accounting misconduct
Lower sales in turn reduced the company’s profits in the fourth quarter.
Additionally, in response to reduced dealer purchase activity, Caterpillar sharply declined its production rates in the fourth quarter. The cost impact from lower production negatively impacted its operating profit by $417 million. 
The largest impact to operating profit though came from the accounting mismanagement at Siwei. Caterpillar had acquired Siwei in June 2012 as part of its acquisition of ERA Mining. During Siwei’s integration with Caterpillar, a deliberate, multi-year accounting scandal was revealed. The senior management at Siwei had engaged in wrongful revenue recognition practices for several years to overstate profits. As a result, Caterpillar incurred a goodwill impairment charge of $580 million in the fourth quarter. 
As part of its response to the misconduct, Caterpillar removed several senior managers at Siwei and is currently considering legal options to recover losses. Siwei manufactures roof support equipment for underground mining operations and has a significant presence in the local Chinese market. Caterpillar intends to keep the Siwei brand and says despite this scam the ERA acquisition is well-aligned to its expansion strategy in China.
In all, in the fourth quarter, operating profit declined $922 million or 47% y-o-y to $1.04 billion. 
Outlook for 2013
Caterpillar will continue to reduce its production rates at least through the first quarter of 2013, in-line with the declining purchase activity of its dealers. As a result, it forecasts revenues and earnings to be significantly lower on a year-over-year basis in the first quarter of 2013.
The company anticipates sales to improve in the second-half of 2013 subject to a continuous improvement in Chinese construction and mining sectors. Growth in the U.S. housing market will also be a key determinant of its performance in 2013. In all, Caterpillar forecasts 2013 sales between $60 billion and $68 billion and 2013 earnings between $7 and $9 per share. The wide range of guidance reflects the current level of uncertainty that the company faces in its key markets. 
We currently have a stock price estimate of $90.26 for Caterpillar, approximately 10% below its current market price. We are in the process of incorporating the fourth quarter results and will update our analysis shortly.Notes: