Caterpillar Inc. announced that an internal investigation of its recently acquired company, ERA Mining Machinery Limited, including its wholly owned subsidiary Hengzhou Siwei Mechanical & Electrical Manufacturing Co., commonly known as Siwei, has uncovered deliberate, multi-year, coordinated accounting misconduct concealed at Zhengzhou, China-based Siwei.
Caterpillar’s investigation determined several Siwei senior managers engaged in deliberate misconduct beginning several years prior to Caterpillar’s acquisition of Siwei. This deliberate misconduct at Siwei will result in a non-cash goodwill impairment charge of approximately $580 million, or $0.87 per share, in the fourth quarter of 2012.
Caterpillar removed several senior managers at Siwei who were responsible for the misconduct and a new leadership team has been put in place. The responsibilities for Siwei manufacturing operations have been moved to Caterpillar’s China Operations Division, led by vice president Qihua Chen, a long-time Caterpillar employee. The sales and support organization at Siwei will report to Kebao Yang, Caterpillar Global Mining general manager for China and Korea.
“The actions carried out by these individuals are offensive and completely unacceptable,” said Caterpillar chairman and CEO Doug Oberhelman. “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. Once our investigation confirmed that misconduct had taken place at Siwei, we moved quickly and decisively to hold the responsible leaders directly accountable for the wrongdoing. Accountability is a critical way that we measure leaders at Caterpillar, and it is my expectation that leaders set an example and are accountable for their actions and results.”
Caterpillar has advised the Hong Kong Securities and Futures Commission of these issues and has filed a Form 8-K with the United States Securities and Exchange Commission disclosing the impairment charge. Caterpillar’s investigation is ongoing.
“Despite these actions we continue to believe that the Siwei acquisition is well aligned with our strategy to expand our role as a leading equipment and solutions provider for the Chinese coal mining industry,” said Steve Wunning, Caterpillar group president with responsibility for Resource Industries. “We intend to utilize Siwei roof support products and manufacturing capabilities, combined with Caterpillar’s strong commitment to technical innovation and safety, to help our mining customers in China become more efficient and safer within their mines.”
Caterpillar and ERA in November 2011 jointly announced a pre-conditional voluntary offer by Caterpillar, through a wholly owned subsidiary, for all of the issued shares of ERA, which was at that time publicly traded on the Hong Kong Stock Exchange. ERA primarily designed, manufactured, sold and supported underground coal mining equipment in China through its wholly owned subsidiary, Siwei.
In June of 2012, Caterpillar completed its tender offer for ERA, including its subsidiary Siwei. The tender offer was completed after approval from the Ministry of Commerce of the People’s Republic of China.
The discovery of the accounting misconduct at Siwei will not change Caterpillar’s strategy for China. “The actions of the individuals involved were clearly wrong and purposely designed to overstate the profitability of the company prior to our acquisition,” the company said in a statement. “This does not change our plans to develop, grow, and improve the business.”
Caterpillar said it has no plans at this time to remove the Siwei name. As a result of the accounting misconduct, however, Caterpillar will record a charge of approximately $580 million, or $0.87 per share in its fourth-quarter 2012 results. The company does not expect the matters related to Siwei to have a significant impact on 2013 sales, revenues or profit.
Headquartered in Peoria, Ill., Caterpillar is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. For more information, visit www.caterpillar.com.
