Caterpillar Inc. (CAT:US), the largest maker of construction and mining equipment, said it’s considering “all options” to recover losses from false accounting at a Chinese business that led to a $580 million writedown.
The company is also seeing how it can hold those responsible to account for the “multiyear, coordinated accounting misconduct,” Chairman and Chief Executive Officer Doug Oberhelman said yesterday.
“We are not done,” Oberhelman said on the company’s fourth-quarter earnings conference call with analysts. “We are putting in more effort to finish our investigation.”
Caterpillar, which revealed the discrepancy on Jan. 18, said yesterday it first became concerned about issues at its Zhengzhou Siwei Mechanical & Electrical Manufacturing Co. unit after a count of physical inventory. That assessment took place in November, a month after Caterpillar completed its purchase of Siwei’s parent ERA Mining Machinery Ltd. for HK$6.15 billion ($793 million).
The takeover was Peoria, Illinois-based Caterpillar’s largest Asian deal and among $10.3 billion of acquisitions announced by Oberhelman since he became CEO in 2010. Caterpillar says it has replaced the management at Siwei, which makes hydraulic roof supports used in underground coal mining. The U.S. company said it doesn’t comment on pending or potential litigation.
“When we put our own team in place, the way we operate, we get to the bottom of it,” Chief Financial Officer Brad Halverson said in a telephone interview yesterday. Those responsible “purposefully misled their auditors and us.”
Fourth-quarter net income fell 55 percent to $697 million, or $1.04 a share, from $1.55 billion, or $2.32 a year earlier, Caterpillar said yesterday. Excluding the 87-cent-a-share writedown and a tax benefit, earnings were $1.46, missing the¼$1.70 average of 22 analysts’ estimates compiled by Bloomberg.
Caterpillar said it doesn’t expect the problems at Siwei to have a “significant impact” on 2013 profit and revenue, which it forecast at $7 to $9 a share and $60 billion to $68 billion respectively. The shares rose 2 percent to close at $97.45 in New York yesterday.
China is “a very important market now, and as we look to the future, we expect it to become even more significant,” Oberhelman said on the call. “While the industries we serve in China are significant, it doesn’t mean there aren’t challenges.”
The problem at Siwei is the latest setback for Caterpillar in China, where machine sales have slowed amid excess manufacturing capacity. The country, which is the largest construction-equipment market and biggest coal miner, saw excavator sales fall in December for the 20th consecutive month, according to China Construction Machinery Business Online.
China’s excavator manufacturing capacity has increased to almost 600,000 a year, compared with a worldwide market of about 300,000, London-based Off-Highway Research said last month.
Emory Williams, the chairman of ERA prior to its takeover by Caterpillar, said yesterday he was “shocked and dismayed” by the writedown.
“We were especially surprised by this situation as we cooperated very closely with Caterpillar during their extensive due diligence,” he said in a statement.
Williams said he’s had no response after trying to contact Caterpillar senior management last week to request further details and to offer his assistance to the company. Caterpillar declined to comment on Williams’ statement, said Jim Dugan, a company spokesman.
Caterpillar’s diligence process for mergers and acquisitions “is rigorous and robust and includes Caterpillar personnel and outside accounting, legal and financial advisors,” the company said in its earnings statement. “It is important to understand that Siwei was a publicly traded company with audited financial statements.”
The Siwei case isn’t unusual in a country whose accounting standards are described by Jefferies & Co. analyst Stephen Volkmann as “opaque.” Zoomlion Heavy Industry Science & Technology Co., a Chinese machinery manufacturer, is trying to allay investor concerns after Ming Pao Daily reported Jan. 8 it had an unsigned letter questioning the company’s sales.
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