Caterpillar Inc. CEO Defends ERA China Deal

Caterpillar Inc. CEO Defends ERA China Deal

Caterpillar Inc. CEO Defends ERA China Deal

Doug Oberhelman, chief executive officer of Caterpillar Inc. (NYSE:CAT) defended the company’s acquisition deal of ERA Mining Machinery Ltd as part of its long-term mining strategy worldwide amid issues regarding accounting misconduct of Zhengzhou Siwei Mechanical & Electrical Manufacturing Co., Ltd. (“Siwei”) that masked the real financial situation of the Chinese company.

During the company’s earnings conference call, Oberhelman said Caterpillar Inc. (NYSE:CAT) was “deliberately misled by the accounting misconduct at Siwei.” The company wrote down $580 million related to its Era Mining acquisition. The company purchased ERA Mining for $700 million last June.

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However, he explained the deal is beneficial for the company citing that China is the world’s largest coal producer, the largest country in the world in terms of population, one of the fastest growing economies and the largest market for construction equipment worldwide.

Oberhelman said, “When we looked at Siwei, we thought we could make improvements with Caterpillar’s experience and people and given our strategic imperatives, this deal made sense. In fact, we have already made good progress on significantly lowering Siwei’s most significant cost driver, steel. The ability to lower steel costs is just one example of leveraging Caterpillar’s scale and global network to improve Siwei’s operation.”

In addition, Oberhelman also took responsibility for the mistake in paying over price fo Era Mining. He said, “I recognize the decision to acquire Siwei happened on my watch and the buck stops at my desk. I am accountable for that acquisition.”

On the other hand, Era Mining’s former chairman, Emory Williams stated he was shocked and dismayed by the report that Caterpillar’s impairment charge related to the deal. He said, “We took the company’s fiduciary and reporting responsibilities very seriously. We contacted Caterpillar senior management last week, urgently requesting further details and clarification. To date we have received no response.”

Caterpillar Inc. (NYSE:CAT) reported $65.87 billion revenues for 2012 compared with its $60.13 billion revenues last year. The company said its profit was $5.68 billion, higher than the $4.92 billion profit generated in 2011. Its earnings per share were $8.48 compared with its earnings per share of $7.40 a year ago.

The company expects to generate around $60 billion to $68 billion revenue and $7.00 to $9.00 profit in 2013.

“If the recent improvement in economic indicators continues, 2013 could be another record year for Caterpillar. We expect the first half of 2013 will be weaker than the first half of 2012, with better growth in the second half. However, if, like the last two years, growth and confidence decline in the second half, 2013 could be a tough year. Either way, as we demonstrated with inventory reductions in the fourth quarter, our team is prepared to execute and deliver,” said Oberhelman.

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