Issue link: https://read.dmtmag.com/i/120608
TRENDS AND TIDBITS continued from page 37 Caterpillar CEO Won't 'Shy Away' From China Caterpillar announced the write-down recently in the value of ERA Mining Machinery Ltd., a Chinese maker of roof supports for coal mines, acquired last June for about $700 million. Peoria, Ill.-based Caterpillar, the world's largest maker of construction and mining equipment, alleges that former ERA managers—whom it hasn't identified—deliberately misled Caterpillar about the value of the business. Caterpillar said it has found problems with inaccurate inventory data and premature recognition of revenue. The write-down and lower machinery sales worldwide led to a 55 percent drop in Caterpillar's profit for the fourth quarter, Caterpillar said. It added that profit is likely to be "significantly lower" than a year earlier in the current quarter as dealers in the company's construction and mining equipment continue shrinking inventories in response to weaker demand. Caterpillar still owes the sellers of ERA, the Chinese mining machinery company it acquired last year, at least $150 million in loan notes, putting a new twist on the saga that has forced the U.S. machinery group to make a $580 million write-off. ERA's controlling shareholder was a vehicle co-owned by American entrepreneur Emory Williams, who has said he was "shocked and dismayed" at Caterpillar's write-down, and businessman James Thompson III, who is the son-in-law of Mr. Williams' Chinese business partner, Li Rubo. The two men sold 40 percent of their shares to Caterpillar in cash, and exchanged the remaining 60 percent for the loan notes. On April 30 this year, Caterpillar will have to pay the first tranche of loan notes, according to filings that are public, but have not been previously reported. That payment will be at least $150 million, and could increase with a second tranche to a maximum total of $232 million if ERA's profits meet specified levels, according to the filings. Caterpillar chief executive Doug Oberhelman said: "We were deliberately misled by the accounting misconduct at Siwei [ERA's subsidiary], and we are considering all options to recover our losses and hold those responsible accountable for their wrongdoing." A Caterpillar spokesman declined to comment about the outstanding loan notes. Caterpillar hasn't accused Mr. Williams of any wrongdoing. Caterpillar's CEO said the acquisition "made sense" as a way to boost sales of mining equipment in China: "China is the world's largest coal producer. Our long-term mining strategy around the world...is exactly the right one for this company." Despite Caterpillar Inc.'s recent discovery of accounting fraud in a Chinese division, Chairman and CEO Doug Oberhelman said that when it comes to working with China, he and everyone else must forge ahead. "I'm not shying away, and we as a country cannot shy away from the market, the opportunity and the challenges," he said. "We have to figure out how to engage with this country in a way that we grow the pie for both of us," Mr. Oberhelman said today at a forum in Oakbrook Terrace sponsored by Elmhurst College. Caterpillar offered a tepid outlook for 2013, based largely on a drop in investment by mining companies and general uncertainty about global economic growth. The company projected profit of $7 a share to $9 a share for 2013, compared with $8.48 for 2012. It forecast revenue of $60 billion to $68 billion this year, compared with $65.88 billion in 2012. Caterpillar will need to win new mining-equipment orders to meet that forecast, said Mike DeWalt, the company's director of investor relations. In an interview after the call, Ms. Duignan of J.P. Morgan said one risk is that "it may be 2015 before we start to see orders [for mining equipment] accelerate significantly." First, she said, mining companies will have to regain confidence that mineral prices are back on a long-term rising trend. Caterpillar declined to comment. For the fourth quarter, Caterpillar posted profit of $697 million, or $1.04 a share, off from $1.55 billion, or $2.32 a share, a year earlier. Total revenue, which includes Caterpillar's finance unit, fell 6.8 percent to $16.08 billion. Caterpillar expects a boost this year from the recovery in U.S. housing construction. But Rob Wertheimer, an analyst at Vertical Research Partners Yard in Beijing in New York, said Caterpillar is much more dependent on demand from other areas, notably global mining and energy production, than on U.S. housing. The company's sales of mining equipment in the latest quarter rose 14percent to $5.78 billion, while sales of construction machinery plunged 25 percent to $4.03 billion. In North America, which had been Caterpillar's bestperforming geographic market in recent quarters, machinery sales declined 17percent to $1.45 billion. ● January 30, 2013. Sources www.chicagobusiness.com and www.FinancialTimes. com Trends continued on page 47 IDA UNIVERSAL March-April 2013 43