Caterpillar earnings hit by China fraud; estimates cautious for 2013

Caterpillar earnings topped analysts' estimates Monday, after adjusting for a big write-down in China.

The company said it expects earnings to improve later this year, but its outlook shows it isn't banking on it.

The world's largest maker of construction equipment posted sharply lower profits due to weak demand among its dealers and a charge connected with accounting fraud at a Chinese subsidiary. Caterpillar's bulldozers, tractors and other machines have been accumulating in warehouses due to slowing economies in China, Europe and the US.

The company said it was able to sell off some of this glut in the fourth quarter, reducing the value of its inventory from the third quarter by $2 billion. Inventory levels, however, remain $1 billion above levels from a year-ago, and executives expect 2013 to be a "tough year."

Caterpillar forecasts full-year earnings of $7 to $9 a share, compared to analysts' estimates of about $8.54 a share.

Caterpillar CEO Douglas R. Oberhelman cited the ongoing uncertainty surrounding the federal debt and deficit debate in Washington, D.C., as a reason for the company's current situation.

"What's coming up in 2013? … It could be a pretty good year, but we've got that same political issue here in this country that will drive a lot of uncertainty if they start screaming at each other again. [So] we chose a wide-range top and bottom [lines]," he told CNBC's "Squawk Box."

Oberhelman added: "We've got that wall coming at us mid-year — starting in March with sequestration, then on into May with the debt ceiling. So how that turns out is probably going to dictate how 2013 happens for Caterpillar and maybe for the world [economy]."

The company reported earnings of $1.91 a share on Monday, excluding a write-down of 87 cents a share relating to a China holding. That figure compared to earnings of $2.32 a share in the same period a year earlier.

Earlier this month, Caterpillar said it would take a massive charge of $580 million in the fourth quarter, after having to write off most of a Chinese deal that collapsed under fraud allegations.

Revenue fell to $16.08 billion from $17.24 billion during the same period last year.

Analysts had expected Caterpillar to report $16.13 billion in revenue, with earnings of $1.70 a share, according to a consensus estimate from Thomson Reuters.

"We're celebrating a record year here. If you look at the whole 12 months over 2011, sales are up 10 percent … profit up 15 percent. All of our operations metrics were near records inside," Oberhelman said. "And we're pretty happy with the results regardless of some of the things — that noise out there [in the fourth quarter numbers]."

Ex-Chairman of China Firm 'Dismayed'

Caterpillar closed the purchase of ERA Mining Machinery and its subsidiary Siwei — China's fourth-largest maker of hydraulic coal mine roof supports — last June, paying $653.4 million. After the deal closed, Caterpillar found out that physical inventory did not match accounting statements, a discovery that led to the fraud charge.

Caterpillar does not expect the allegations to harm its 2013 profit but it will hinder the company's expansion into China, which is the world's largest coal producer.

Emory Williams, the chairman of ERA when the Caterpillar deal closed, ended days of silence on Monday, saying in a statement he was "dismayed" by the accounting charge Caterpillar was taking.

Williams said nothing about the accusation of accounting misconduct in his statement.

CLARIFICATION: An earlier version of this story stated that earnings fell short of expectations. The company's earnings, including the China one-time charge, were above analysts' consensus.