In a shocking development,
) announced that it has 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).
Financial Impact & Impact on Shares
Following the discovery of the fraud, Caterpillar will incur a
charge of approximately $580 million (87 cents per share) in the
fourth quarter scheduled on Jan 28. Caterpillar, however, added
that it will not have a significant impact on 2013 revenue or
profit. With the break of this news, Caterpillar stock price fell
1.5% at $96.11 in late trading.
A Brief Background of the Acquisition
In a bid to strengthen its presence in the Chinese mining
industry, Caterpillar had announced its intention to acquire ERA
in November 2011. ERA primarily engaged in the designing,
manufacturing and supporting underground coal mining equipment in
China through its wholly owned subsidiary, Siwei.
Siwei possesses a manufacturing base of 600,000 square meters
in Zhengzhou, Henan province, where it manufactures and sells
roof support equipment to underground mining customers in China.
In June 2012, Caterpillar closed the deal after receiving a
go-ahead from the Ministry of Commerce of the People's Republic
of China (MOFCOM).
Findings of the Investigation
The issue first came to the fore when discrepancies were
identified in November last year between the inventory recorded
in Sewer's accounting records and the actual physical inventory.
Caterpillar immediately initiated a comprehensive review and
The investigation revealed that inappropriate accounting
practices were being carried out for a number of years prior to
Caterpillar's acquisition of Siwei. This included improper cost
allocation that resulted in overstated profit and also improper
revenue recognition practices involving early and, at times
unsupported, revenue recognition. Several Siwei senior managers
had been identified involved in the malpractices.
Corrective Measures Taken
Caterpillar has removed the erring senior managers and a new
leadership team has been put in place. The responsibilities for
Siwei manufacturing operations have been shifted to Caterpillar's
China Operations Division, which will now report to Kebao Yang,
Caterpillar Global Mining General Manager for China and
Despite this setback, Caterpillar believes that the Siwei
acquisition is well aligned with its strategy to expand its role
as a leading equipment and solutions provider for the Chinese
coal mining industry. Caterpillar continues to systematically
strengthen its business in China and remains committed to
providing the lowest owning and operating costs in the
However, signs of a slowdown in China have triggered concerns
lately as it will have a negative effect on infrastructure and
construction spending. This will in turn negatively impact on
Caterpillar's sales in the near term. Furthermore, the
company faces risks from a global economic slowdown and the
expansion of big Chinese companies in the international arena.
Furthermore, the slip on part of the management in not
identifying the accounting problem will weigh on the shares in
the near term.
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. Caterpillar
operates two divisions - Machinery and Power Systems and
Financial Products. Caterpillar currently retains a Zacks Rank #4
Joy Global, Inc.
H&E Equipment Services Inc.
The Manitowoc Company, Inc.
) retain Zacks Rank #3 (Hold) in the same industry.
CATERPILLAR INC (CAT): Free Stock Analysis
H&E EQUIP SVCS (HEES): Free Stock Analysis
JOY GLOBAL INC (JOY): Free Stock Analysis
MANITOWOC INC (MTW): Free Stock Analysis
To read this article on Zacks.com click here.