Did This Caterpillar Acquisition Hurt Earnings?

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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…

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