Last updated on April 20, 2014 at 5:20 EDT

Caterpillar Takes Action to Address Accounting Misconduct at Siwei, its Recently Acquired Company; Misconduct Results in a Fourth Quarter Non-Cash Charge of Approximately $580 Million and the Removal of Several Siwei Senior Managers

January 18, 2013

PEORIA, Ill., Jan. 18, 2013 /PRNewswire/ — Caterpillar Inc. (NYSE: CAT) today announced that an internal investigation of its recently acquired company, ERA Mining Machinery Limited (ERA), including its wholly owned subsidiary Zhengzhou Siwei Mechanical & Electrical Manufacturing Co., Ltd., commonly known as “Siwei,” has uncovered deliberate, multi-year, coordinated accounting misconduct concealed at Siwei, located in Zhengzhou, China.

Caterpillar’s investigation determined several Siwei senior managers engaged in deliberate misconduct beginning several years prior to Caterpillar’s acquisition of Siwei. This deliberate misconduct at Siwei will result in a non-cash goodwill impairment charge of approximately $580 million, or $0.87 per share, in the fourth quarter of 2012.

Caterpillar removed several senior managers at Siwei who were responsible for the misconduct and a new leadership team has been put in place. The responsibilities for Siwei manufacturing operations have been moved to Caterpillar’s China Operations Division, led by Vice President Qihua Chen, a long time Caterpillar employee. The sales and support organization at Siwei will report to Kebao Yang, Caterpillar Global Mining General Manager for China and Korea.

“The actions carried out by these individuals are offensive and completely unacceptable. This conduct does not represent, in any way, shape or form, the way Caterpillar does business or how we expect our employees to work, which is spelled out in Caterpillar’s Worldwide Code of Conduct,” said Caterpillar Chairman and CEO Doug Oberhelman. “Once our investigation confirmed that misconduct had taken place at Siwei, we moved quickly and decisively to hold the responsible leaders directly accountable for the wrongdoing. Accountability is a critical way that we measure leaders at Caterpillar, and it is my expectation that leaders set an example and are accountable for their actions and results.”

Caterpillar has advised the Hong Kong Securities and Futures Commission of these issues and has filed a Form 8-K with the United States Securities and Exchange Commission disclosing the impairment charge. Caterpillar’s investigation is ongoing.

“Despite these actions we continue to believe that the Siwei acquisition is well aligned with our strategy to expand our role as a leading equipment and solutions provider for the Chinese coal mining industry,” said Steve Wunning, Caterpillar group president with responsibility for Resource Industries. “We intend to utilize Siwei roof support products and manufacturing capabilities, combined with Caterpillar’s strong commitment to technical innovation and safety, to help our mining customers in China become more efficient and safer within their mines,” Wunning added.

Additional background on Siwei acquisition:

In November of 2011, Caterpillar and ERA jointly announced a pre-conditional voluntary offer by Caterpillar, through a wholly owned subsidiary, for all of the issued shares of ERA, which at that time was a publicly traded company on the Hong Kong Stock Exchange. ERA primarily designed, manufactured, sold and supported underground coal mining equipment in China through its wholly owned subsidiary, Siwei.

In June of 2012, Caterpillar announced the completion of its tender offer for ERA, including its wholly owned subsidiary Siwei. The tender offer was completed after approval from the Ministry of Commerce of the People’s Republic of China (MOFCOM).

Siwei has a manufacturing base of 600,000 square meters and employs about 4,000 people in Zhengzhou, Henan province, where Caterpillar intends to continue manufacturing roof support equipment to serve underground mining customers in China.

    Questions and Answers:

    Q1:                    Does the discovery of this misconduct
                           at Siwei change Caterpillar's
                           strategy for China or its view of
                           the mining industry?

    A:                     No. Caterpillar has 23 existing
                           manufacturing facilities in China,
                           four new facilities under
                           construction, four Research &
                           Development (R&D) centers and three
                           logistics and parts centers,
                           employing more than 15,000 people
                           across the country. In addition,
                           China produces and consumes more
                           coal than any other country in the
                           world. Our strategy to expand our
                           coal mining business in China is
                           unchanged, and we are optimistic
                           about the underground coal mining
                           equipment opportunities.

                           The accounting misconduct that
                           occurred at Siwei does not reflect
                           the way Caterpillar does business
                           and is not in keeping with our
                           Worldwide Code of Conduct.

                           The actions of the individuals
                           involved were clearly wrong and
                           purposely designed to overstate the
                           profitability of the company prior
                           to our acquisition. This does not
                           change our plans to develop, grow,
                           and improve the business.

                           The acquisition is aligned with
                           Caterpillar's strategy to expand in
                           the rapidly growing Chinese coal
                           mining equipment industry utilizing
                           the Siwei roof support products and
                           manufacturing capabilities, combined
                           with Caterpillar's strong commitment
                           to product innovation and safety, to
                           help our mining customers in China
                           become more efficient and safer
                           within their mines.

    Q2:                    What is Caterpillar's due diligence
                           process for mergers and

    A:                     We believe our process is rigorous
                           and robust and includes Caterpillar
                           personnel and outside accounting,
                           legal and financial advisors. It is
                           important to understand that Siwei
                           was a publicly traded company with
                           audited financial statements. What
                           we discovered at Siwei following the
                           acquisition was deliberate, multi-
                           year, coordinated accounting
                           misconduct that was concealed by the
                           persons responsible.

    Q3:                    Can you provide more details about
                           the nature of the accounting

    A:                     Caterpillar first became concerned
                           about an issue when discrepancies
                           were identified in November 2012
                           between the inventory recorded in
                           Siwei's accounting records and the
                           company's actual physical inventory.
                           This was determined by a physical
                           inventory count conducted at Siwei
                           as part of Caterpillar's integration
                           process. Caterpillar promptly
                           launched a comprehensive review and
                           investigation into the nature and
                           source of this discrepancy. This
                           extensive review has identified
                           inappropriate accounting practices
                           involving improper cost allocation
                           that resulted in overstated profit.
                           The review further identified
                           improper revenue recognition
                           practices involving early and, at
                           times unsupported, revenue
                           recognition. This review is ongoing.

    Q4:                    Several individuals on Siwei's board
                           of directors were part of the
                           ownership structure of ERA. Did the
                           investigation determine if ERA or
                           its principals had any knowledge of
                           this misconduct?

    A:                     Caterpillar's investigation of these
                           matters is ongoing and any other
                           comment at this time is not

    Q5:                    How does the announcement about Siwei
                           change Caterpillar's previously-
                           stated outlook for 2012 and its
                           preliminary outlook for 2013?

    A:                     The accounting misconduct described
                           in today's announcement was
                           discovered after Caterpillar
                           released its most recent outlook for
                           2012. The expected charge of
                           approximately $580 million, or $0.87
                           per share will be included in
                           fourth-quarter 2012 financial
                           results, but was not anticipated in
                           the 2012 outlook.  We do not expect
                           these matters related to Siwei to
                           have a significant impact on
                           Caterpillar's 2013 sales and
                           revenues or profit.  We will provide
                           our 2013 outlook with our Earnings
                           Release on January 28 but are not
                           updating the outlook today.

    Q6:                    Will there be litigation as a result
                           of the investigation?

    A:                     Caterpillar is reviewing these
                           matters very closely and is
                           considering all of its options to
                           recover its losses from those

    Q7:                    Was the conduct you have described
                           criminal? Has anyone been arrested
                           or is this being investigated by the
                           U.S. or Chinese governments?

    A:                     Caterpillar is not aware of any
                           arrests or criminal investigations.
                           If contacted by governmental
                           authorities, Caterpillar will

    Q8:                    In light of the circumstances, do you
                           intend to keep the Siwei name or
                           will the business be rebranded as

    A:                     At this point, there are no plans to
                           remove the Siwei name. The company
                           maintains a strong reputation in the
                           marketplace. Caterpillar intends to
                           build on Siwei's strengths. The
                           Siwei roof support business is a
                           good complement to our existing
                           product line for our mining
                           customers, and we remain committed
                           to our continued investment in China
                           to support our growing base of

    Q9:                    Did the investigation determine
                           whether any Caterpillar employees,
                           beyond those who came over to
                           Caterpillar as part of the Siwei
                           acquisition, had any knowledge of,
                           or participated in, this misconduct?

    A:                     The misconduct at issue commenced at
                           Siwei well in advance of
                           Caterpillar's acquisition. We
                           believe it was perpetrated without
                           the knowledge of any Caterpillar
                           employee who did not come over to
                           Caterpillar as part of the Siwei

About Caterpillar:

For more than 85 years, Caterpillar Inc. has been making sustainable progress possible and driving positive change on every continent. With 2011 sales and revenues of $60.138 billion, Caterpillar is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company also is a leading services provider through Caterpillar Financial Services, Caterpillar Remanufacturing Services and Progress Rail Services. More information is available at: http://www.caterpillar.com.

Forward-Looking Statements

Certain statements in this press release relate to future events and expectations and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “believe,” “estimate,” “will be,” “will,” “would,” “expect,” “anticipate,” “plan,” “project,” “intend,” “could,” “should” or other similar words or expressions often identify forward-looking statements. All statements other than statements of historical fact are forward-looking statements, including, without limitation, statements regarding our outlook, projections, forecasts or trend descriptions. These statements do not guarantee future performance, and we do not undertake to update our forward-looking statements.

Caterpillar’s actual results may differ materially from those described or implied in our forward-looking statements based on a number of factors, including, but not limited to: (i) global economic conditions and economic conditions in the industries and markets we serve; (ii) government monetary or fiscal policies and infrastructure spending; (iii) commodity or component price increases and/or limited availability of raw materials and component products, including steel; (iv) our and our customers’, dealers’ and suppliers’ ability to access and manage liquidity; (v) political and economic risks and instability, including national or international conflicts and civil unrest; (vi) our and Cat Financial’s ability to: maintain credit ratings, avoid material increases in borrowing costs, and access capital markets; (vii) the financial condition and credit worthiness of Cat Financial’s customers; (viii) inability to realize expected benefits from acquisitions and divestitures, including the acquisition of Bucyrus International, Inc. and ERA Mining Machinery Limited; (ix) international trade and investment policies; (x) challenges related to Tier 4 emissions compliance; (xi) market acceptance of our products and services; (xii) changes in the competitive environment, including market share, pricing and geographic and product mix of sales; (xiii) successful implementation of capacity expansion projects, cost reduction initiatives and efficiency or productivity initiatives, including the Caterpillar Production System; (xiv) sourcing practices of our dealers or original equipment manufacturers; (xv) compliance with environmental laws and regulations; (xvi) alleged or actual violations of trade or anti-corruption laws and regulations; (xvii) additional tax expense or exposure; (xviii) currency fluctuations; (xix) our or Cat Financial’s compliance with financial covenants; (xx) increased pension plan funding obligations; (xxi) union disputes or other employee relations issues; (xxii) significant legal proceedings, claims, lawsuits or investigations; (xxiii) compliance requirements imposed if carbon emissions legislation and/or regulations are adopted; (xxiv) changes in accounting standards; (xxv) failure or breach of IT security; (xxvi) adverse effects of natural disasters; and (xxvii) other factors described in more detail under “Item 1A. Risk Factors” in our Form 10-K filed with the SEC on February 21, 2012 for the year ended December 31, 2011. This filing is available on our website at www.caterpillar.com/secfilings.

SOURCE Caterpillar Inc.

Source: PR Newswire