) announced the resolution of its outstanding issues with Mining
Machinery Limited regarding Caterpillar's acquisition of ERA,
including its wholly-owned subsidiary Zhengzhou Siwei Mechanical
& Electrical Manufacturing Co., Ltd. (or Siwei). This brings
Caterpillar's embarrassing chapter to a close, which had so far
overshadowed the company's benefits from the acquisition.
Caterpillar still owed $164.5 million for the acquisition of ERA.
As part of the agreement between Caterpillar and former directors
of ERA and two other interested parties, Caterpillar's total
obligations have been slashed by $135 million to $29.5 million.
In exchange, Caterpillar has agreed to end any litigation
targeting ERA's former directors or auditors related to the
alleged accounting misconduct.
In a bid to strengthen its presence in the Chinese mining
industry, Caterpillar had announced its intention to acquire ERA
in Nov 2011. ERA primarily engaged in the design, manufacture 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
However, in Jan 2013, Caterpillar announced that it unearthed
accounting misconduct at ERA as well as its subsidiary Siwei The
issue first came to the fore when discrepancies were identified
between the inventory recorded in Sewer's accounting records and
the actual physical inventory.
An investigation revealed that inappropriate accounting practices
had been 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. As a result Caterpillar has removed the
erring senior managers and a new leadership team has been put in
place. In this regard, Caterpillar had incurred a goodwill
impairment charge of approximately $580 million (87 cents per
share) in its fourth quarter 2012 results.
The settlement will eliminate the management distraction caused
by the issue and will help Caterpillar realize the targeted
benefits from this acquisition. 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
Signs of a slowdown in China have triggered concerns lately as it
will have a negative effect on infrastructure and construction
spending. In its first quarter 2013 results, Caterpillar noted
gain of market share in China despite a slowdown in economic
growth. Sales of its construction and mining machines were up in
the first quarter of 2013 year-over-year even as inventories
Furthermore, the company faces risks from a global economic
slowdown and the expansion of big Chinese companies in the
international arena. We maintain our Underperform recommendation
on Caterpillar given its trimmed outlook for 2013, weak demand
for its mining equipment, recent loss of sales momentum,
declining backlog and negative impact of the European debt
Caterpillar currently retains a Zacks Rank #4 (Sell).Other stocks
in the industrial products sector with a favorable Zacks Rank are
H&E Equipment Services Inc.
Alamo Group, Inc.
CNH Global NV
), all carrying Zacks Rank #2 (Buy).
ALAMO GROUP INC (ALG): Free Stock Analysis
CATERPILLAR INC (CAT): Free Stock Analysis
CNH GLOBAL NV (CNH): Free Stock Analysis
H&E EQUIP SVCS (HEES): Free Stock Analysis
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