China fraud slashes Caterpillar profit

Caterpillar, the world's largest maker of construction equipment, posted a 55 per cent drop in quarterly profit on Monday due to a charge connected with accounting fraud at a Chinese subsidiary and weak demand among its dealers.

Caterpillar's bulldozers, tractors and other machines have been accumulating in warehouses due to slowing economies in China, Europe and the United States.

The company said it was able to sell off some of this glut in the fourth quarter, reducing the value of its inventory from the third quarter by $US2 billion. Inventory levels, however, remain $US1 billion above year-ago levels, and executives expect 2013 to be a "tough year."

Adding to the company's troubles, quarterly results were hit by a charge of 87 cents per share after the company discovered accounting fraud at a Chinese coal mining supplier it bought last year.

In a somber note on the global economy, Caterpillar said the "most significant favorable factor" for 2013 profit will be the absence of the ERA accounting fraud writedown, not increased demand for its machines.

"We're encouraged by recent improvements in economic indicators, but remain cautious," Caterpillar Chief Executive Doug Oberhelman said in a statement on Monday.

For the fourth quarter, the company posted net income of $US697 million, or $US1.04 per share, compared with $US1.55 billion, or $US2.32 per share, in the year-ago quarter.

Excluding one-time items, the company earned $US1.46 per share. By that measure, analysts expected earnings of $US1.69 per share, according to Thomson Reuters I/B/E/S.

Wall Street, however, appeared to look past the China accounting fraud mess, sending Caterpillar's shares up 2.1 per cent to $US97.62 in morning trading.

Revenue fell 7 per cent to $US16.08 billion. Analysts expected revenue of $US16.12 billion, according to Thomson Reuters I/B/E/S.

Caterpillar expects to earn $US7 to $US9 per share in 2013, below the $US9.12 per share analysts expect.

China fraud

Caterpillar closed the purchase of ERA Mining Machinery Ltd and its subsidiary Siwei, China's fourth-largest maker of hydraulic coal mine roof supports, last June, paying $US653.4 million (HK$US5.06 billion).

After the deal closed, Caterpillar found that physical inventory did not match accounting statements, a discovery that led to the charge. The case has opened questions about Caterpillar's research into ERA before the deal, as well as the adequacy of its auditors.

Caterpillar does not expect the fraud to harm its 2013 profit, but it will hinder the company's expansion into China, the world's largest coal producer.

Emory Williams, the chairman of ERA when the Caterpillar deal closed, ended days of silence on Monday, saying in a statement he was "dismayed" by the accounting charge Caterpillar was taking.

Williams said nothing about the accusation of accounting misconduct in his statement.

Citigroup Inc and law firm Freshfields Bruckhaus Deringer LLP served as financial and legal advisers to Caterpillar on the transaction. Blackstone and DLA Piper acted as ERA's financial and legal advisers.

A source directly involved with the Caterpillar deal previously told Reuters that RSM Nelson Wheeler was ERA's auditor, while Deloitte and Ernst & Young acted on Caterpillar's side.

None of the auditors has commented.