By Debbie Cai
Caterpillar Inc. (CAT) said it has uncovered accounting misconduct at a unit of China's ERA Mining Machinery Ltd., which the U.S. machinery manufacturer acquired last year.
An internal probe at Caterpillar revealed that several managers at Zhengzhou Siwei Mechanical & Electrical Manufacturing Co., or Siwei, engaged in deliberate misconduct beginning several years prior to the acquisition.
The misconduct will result in a noncash goodwill impairment charge of about $580 million, or 87 cents a share, in the fourth quarter of 2012, the company said.
Caterpillar said it has removed several senior managers at Siwei who were responsible for the misconduct and installed a new leadership team there. The responsibilities for Siwei manufacturing operations have been moved to Caterpillar's China operations division, led by Vice President Qihua Chen, while its sales and support team will report to Kebao Yang, Caterpillar's global mining general manager for China and Korea.
"The actions carried out by these individuals are offensive and completely unacceptable. This conduct does not represent, in any way, shape or form, the way Caterpillar does business or how we expect our employees to work, which is spelled out in Caterpillar's worldwide code of conduct," said Caterpillar Chief Executive Doug Oberhelman in a statement.
Steve Wunning, Caterpillar group president with responsibility for resource industries, said the company still believes the Siwei acquisition is well aligned with company strategy to grow in the Chinese coal mining industry.
Caterpillar, which said its investigation is ongoing, closed on its purchase of ERA Mining in June, after winning Chinese regulatory approval for the roughly $887 million deal. The approval came after ERA warned that its profits were weighed down by higher finance costs, as state-controlled rivals had access to cheaper steel.
Last month, sales of Caterpillar construction and mining equipment were reported to have grown 5% world-wide in the three months to the end of November, as sales in North America cooled significantly from the October period. It was the 30th straight three-month period of retail-sales expansion for the world's largest seller of bulldozers, excavators and wheel loaders.
But the growth rate has been easing in recent months, as tougher year-earlier comparisons, rising inventories of unsold equipment and deteriorating economic conditions, particularly in Europe, put pressure on sales expansion. Caterpillar has slowed production to avoid a machinery glut by temporarily idling some assembly plants.
Shares slipped 1.4% to $96.25 after hours. The stock is up 18% over the past six months.
Write to Debbie Cai at firstname.lastname@example.org
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