Did This Caterpillar Acquisition Hurt Earnings?

As Caterpillar (NYSE:CAT) warned last week, the company’s fourth-quarter earnings were hit hard by a $580 million charge resulting from accounting improprieties at a recently-acquired subsidiary. For the three-month period, net profit fell 55 percent to $697 million, or $1.04 a share, from $1.55 billion, or $2.32 a share, in the year-ago quarter. That included an 87-cents-per-share write down relating to the company’s purchase of ERA Mining Machinery last year.

On January 16, Caterpillar submitted a filing with the Securities and Exchange Commission showing that its acquisition of ERA Mining Machinery and its subsidiary Zhengzhou Siwei Mechanical & Electrical Manufacturing was impaired. As a result, the company had to write off $580 million, or almost the entire value of the $654 million deal. Before the acquisition was made, several directors lent the company money at relatively high interest rates and assets were transferred between Siwei and related parties, all with the intention of overstating Siwei’s profitability, said Caterpillar officials in a press release.

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The construction and mining equipment manufacturer also reported that its quarterly revenue was hurt by changes in dealer new machines inventory; revenue fell 6.8 percent to $16.08 billion, while world-wide sales of machinery and power systems decreased 7.3 percent to $15.36 billion from last year…
Caterpillar’s results missed expectations. Analyst polled by Thomson Reuters had predicted earnings of $1.69 a share on revenue of $16.12 billion, according to The Wall Street Journal.

For the upcoming year, Caterpillar forecast earnings between $7 and $9 per share on revenue of $60 billion to $68 billion, with analysts predicting earnings of $8.54 per share and revenue of $65.12 billion. Chairman and Chief Executive Doug Oberhelman said in the earnings press release that recent economic uncertainty influenced this year’s outlook; the company is still cautious about the future despite improvements in economic indicators. Throughout last year, the bulldozer maker’s sales growth rate slowed as dealers’ inventories became backlogged with unsold equipment and economic conditions pressured sales expansion.

However, Oberhelman was pleased with the company’s results. “From an operational standpoint, 2012 was a very successful year with record sales and profit in a tough economic climate,” he said. “Considering the weak economy in the United States, along with much of Europe in recession and China slowing, we had a solid year. Our incremental operating profit pull through was very good, we made progress adjusting inventory levels, and our quality and safety indicators continued to improve.”

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