Caterpillar Punked By Chinese Fraud, To Write Off Half Of Q4 Earnings

Tyler Durden's picture




 

Fraudulent Chinese corporations are nothing new - we have been warning about them since late 2010, spurring the creation of a cottage industry focused exclusively on unmasking such public reverse merger companies (and generating trading profits along the way). One company, however, which apparently was completely unaware of the now pervasive and proven for the past two years Chinese corporate fraud, is US industrial titan Caterpillar. This was made clear when, after hours on Friday night naturally, the company revealed that it had been misled by "deliberate, multi-year, coordinated accounting misconduct" at a subsidiary of a Chinese company it acquired last summer, leading it to write off most of the value of the deal. In the process it would also take a $580 million, or $0.87 cent charge to earnings, which would wipe out more than half its expected earnings of $1.70 for the fourth quarter of 2012. One wonders, however, is there more to this story than just a case of a gentle, naive board duped by fraudulent, evil, cunning "Chinamen" which may have watched one too many episodes of Autonomy does Hewlett Packard?

Reuters has more details on the Fraud:

Caterpillar closed the purchase of ERA Mining Machinery Ltd and its subsidiary Siwei, China's fourth-largest maker of hydraulic roof supports, last June, paying HK$5.06 billion, or $653.4 million. ERA had been publicly traded in Hong Kong, doing business through Siwei, which is known for making equipment to support roofs in mines.

 

A member of the Caterpillar board during the course of the Siwei deal told Reuters the board was distracted at the time by a larger transaction and paid relatively little attention to the Siwei acquisition.

 

"It came as a complete surprise to us," the former board member said of the fraud, speaking on condition of anonymity because of the sensitivity of the situation. "It was presented to us as a pretty straightforward transaction. It's a shame. It should have been investigated further."

 

The source said the driving force behind the deal was Ed Rapp, the former Caterpillar chief financial officer who now serves as a group president with responsibility for China, among other operations. The source said it was Rapp who presented the deal to the board and pushed for its completion.

 

A Caterpillar spokesman declined to comment on Rapp's role in the deal. Rapp could not be immediately located for comment.

...

In a statement, Caterpillar said an ongoing investigation launched after the deal closed "determined several Siwei senior managers engaged in deliberate misconduct beginning several years prior to Caterpillar's acquisition of Siwei."

 

According to a question-and-answer dialog Caterpillar included in its statement, the company found discrepancies in November between the inventory in Siwei's books and its actual physical inventory, triggering the probe.

 

The company also said it had replaced several senior managers at Siwei, adding that their conduct was "offensive and completely unacceptable."

So the board was "distracted"? Perhaps, the board was perfectly "tracted" and instead what the board did was pay close attention to what Hewlett-Packard did with Autonomy, where the allegations of fraud are still an open-ended case of he said, she said, and immediately saw an opportunity to use a tiny bolt on acquisition in a country which is the source of its entire marginal growth, as a scapegoat on which to pin everything that was going wrong in China, and maybe the world.

Recall from the Q2 CAT earnings release warning profusely about what is going on in China:

In China, we are lowering production levels and have started to export machines to other regions of the world.  However, the construction industry in China is still weak and our dealers are reducing their inventories of new machines, further reducing our shipments.  While our inventory of new machines in China increased, the combination of our finished inventory and dealer machine inventory was about flat with the end of the first quarter of 2012.  We are working to lower finished inventory, but given the weak construction equipment industry in China it will be a gradual reduction throughout 2012.  We are being appropriately cautious—we intend to lower inventory, but are considering our supply chain and are acting in an orderly manner.  In addition, we are trying to balance our actions—the industry in China has been weak over the past year, but can move quickly when it turns around.

 

As we began 2012, our expectations for sales in China were higher, and we built substantial new machine inventory in the first quarter to support what is usually a seasonally strong quarter.  First-quarter sales were lower than expected, and we ended the first quarter with higher inventory in China.  We developed and are executing a plan for an orderly reduction of China inventory that includes lower production, merchandising programs to improve sales and the export of machines from China to other parts of the world.

 

We remain very positive on long-term industry growth in China and our strategy to grow our business there.  Our plans for the remainder of 2012 reflect an orderly ramp down of production that considers our entire supply chain in China.  Given the current low rate of sales and the production ramp down, it will likely take the rest of 2012 to reduce inventory to appropriate levels.

Subsequently, in Q3 CAT did all it could to telegraph that things in China may finally be improving, so no need to change anything about how business is conducted there:

From an economic standpoint, we are expecting slightly better world growth in 2013 with modest improvement in the United States, China and most of the developing world, but continuing difficulty in Europe.

 

"We are taking a pragmatic view of 2013—we're not expecting rapid growth, and we're not predicting a global recession.  At this point, we expect 2013 sales will be similar overall to 2012, but with a slightly weaker first half and a slightly better second half.  While machine deliveries to end users have continued to hold up, our sales will probably remain relatively weak early in 2013 as dealers are likely to continue reducing inventories.  When expected dealer inventory reductions level off, and easing actions by central banks and governments around the world begin to improve economic growth, we expect our business will begin to improve.  While there's reason for optimism, and we're not expecting a global recession in 2013, we are prepared and stand ready to take action no matter what happens to the global economy," Oberhelman added.

Betting one's business model on the "easing actions by central bankers" - brilliant. But let's leave that for another day (yet one does wonder: was one of the "actions" the board was "prepared to take" in case of global recession, the release of news of massive fraud at a small Chinese subsidiary, thereby being excused for missing earnings by half?)

Reuters said as much:

The Siwei deal came as part of Caterpillar's larger ambitions in China. In early 2012, it added Jon Huntsman, the former U.S. ambassador to China, to its board of directors.

 

The company, which already has 23 manufacturing facilities in China and four more under construction, said the Siwei episode would not change its strategy in the country.

Of course it won't change the strategy: in fact, CAT will welcome the acquisition of futher such EPS-charge off enabling microcaps. After all, all it takes for the company to pull a get out of jail card by missing EPS by half in any given quarter, is for it to blame lax accounting and someone else's fraud for the problem.

Because who is to say what is really going on? Naturally, nobody will trust the Chinese side of the story now. As for CAT: well, let's say operating earnings were so horrible that not even all the GAAP accounting magic in the world could make the company beat earnings estimates. So what does the company do? It takes a "charge" which allows it to mask a whopping one-eighth of its entire full year EPS miss courtesy of a perfectly convenient scapegoat. As for what is really going on behind the scenes - it could be due to Chinese business imploding, or global economic conditions getting so bad the firm just can't find a way to offset the losses, or anything else. Alas, we will never know as the official spian has been released.

But in the meantime, business in China continues as usual of course, now that CAT has reset losses with enough of a buffer to last it one more quarter. And if Chinese growth, and by growth we mean the construction of empty cities and hollow malls, does not pick up, well then - some other "manager" will be thrown under the bus for pushing a "distracted" board to purchase yet another Chinese microcap, whose books everyone is shocked, shocked, to learn were cooked end to end.

We look forward to even more high flying companies whose stock price has been pulled artificially higher due to the relentless ramp in ES by prop desk of primary dealers, to come up with comparable excuses for why earnings will miss. Because if it is not some softward glitch's fault, it is some manager, or some auditor, or some accountant, or some M&A advisor, or some regulator.

Whose fault it never, ever is, is the ever declining global cash flow in a world in which the stock market and the economy have now hopelessly and laughably disconnected.

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Sat, 01/19/2013 - 11:21 | 3168702 ziggy59
ziggy59's picture

Notice how over the past 10 years there is always a bogeyman and scapegoat for horrible earnings, and its not because the economy sux?

Sat, 01/19/2013 - 11:30 | 3168707 GetZeeGold
GetZeeGold's picture

 

 

You mean like the campaign on gun control? Get the weapons before the masses realize they're screwed.

 

I would point out we did sorta dishonor their investment first.....right after we told them we wouldn't.

Sat, 01/19/2013 - 11:43 | 3168745 francis_sawyer
francis_sawyer's picture

Well at least they didn't blame it on hurricane Sandy...

Sat, 01/19/2013 - 11:45 | 3168750 GetZeeGold
GetZeeGold's picture

 

 

.....or Bush.

Sat, 01/19/2013 - 11:55 | 3168766 francis_sawyer
francis_sawyer's picture

Standard Curriculum of 'graduate' level of business school...

~~~

- How to cleverly affix BLAME 504

- Insider Stock Option Trading 101 ~ (the rest is 'on the job' training)

- Golden Parachute jumping 301

- Techniques & Strategies of political bribes

- How to be a douchebag without really trying (a 'pass-fail' course)

 

 

Sat, 01/19/2013 - 12:16 | 3168790 Zer0head
Zer0head's picture

 

 

A Caterpillar spokesman declined to comment on Rapp's role in the deal. Rapp could not be immediately located for comment.

 

Rumor has it he has been spotted here http://oceanhomemag.com/wp-content/themes/oceanhome/images/bgs/backgroun...

In other news

Algeria launches 'final assault'; all  hostages dead

(so was the strategy to end the crisis before the US media was forced to start reporting on it?)

Sat, 01/19/2013 - 12:37 | 3168822 Stackers
Stackers's picture

The Chinese have no word for business ethics. Gave up on doing any business with those people in '95.

Sat, 01/19/2013 - 13:52 | 3169021 secret_sam
secret_sam's picture

That's silly.  You make it sound like it's the Chinese running Goldman-Sachs or the Fed.

Sat, 01/19/2013 - 14:01 | 3169044 Stackers
Stackers's picture

At least GS and the Fed pretend to use lube when they give you a good ramming. Chinese dont even bother with that.

Sat, 01/19/2013 - 14:19 | 3169090 unrulian
unrulian's picture

it's ok.... they have small penises..

..and chinese penises are pretty small too

Sat, 01/19/2013 - 20:41 | 3169788 AldousHuxley
AldousHuxley's picture

Chinese communists ripoff Jewish bankers

 

 

 

 

 

Sat, 01/19/2013 - 11:44 | 3168746 ihedgemyhedges
ihedgemyhedges's picture

Not only was the release issued after hours on a Friday, IT IS A 3 DAY WEEKEND WITH AN INAUGURATION AND A SCALING UP IN ALGERIA!!!

When the market is running on ether and algos, you always release info like this on a weekend like this..........

Sat, 01/19/2013 - 11:50 | 3168762 Caviar Emptor
Caviar Emptor's picture

Earnings matter? 

Sat, 01/19/2013 - 12:41 | 3168835 walküre
walküre's picture

The much BIGGER picture is that China as a whole is one epic fraud. Why give any credence to any reporting coming from an alleged communist shithole where corruption is naturally rampant. Much more predominent even than in the US and that says ALOT. The Chinese fraudsters have stolen decades worth of IP from the West and converted their toiletpaper currency into real assets such as foreign real estate and foreign companies. Of course they had help from our own fraudsters on Wall Street and in DC.

Now the snake is eating its tail and the whole enchilada will collapse into nothingness. Everyone who built their house on paper is getting nothing. What does controlled demolition of a house of cards look like?

Sat, 01/19/2013 - 15:35 | 3169239 Never One Roach
Never One Roach's picture

at least 'The Aliens' are using all that money to buy houses in California and Vancouver, propping up the Bubbles there...ya gotta look at the bright side.

Sat, 01/19/2013 - 18:26 | 3169582 Koffieshop
Koffieshop's picture

"The Chinese fraudsters have stolen decades worth of IP from the West and converted their toiletpaper currency into real assets such as foreign real estate and foreign companies."

IP only exits if you pretend it does and same goes for fiat currencies. Those who understand this have an edge.

Sat, 01/19/2013 - 21:02 | 3169810 sun tzu
sun tzu's picture

We sold them $1 trillion worth of toilet paper and the British slapped them around for 100 years. It's called payback. Besides, it's not like all these corporations didn't know that the Chicoms couldn't be trusted. If I jump in a snakepit and get bitten, do you blame the snakes or me?

Sat, 01/19/2013 - 23:33 | 3170058 cynicalskeptic
cynicalskeptic's picture

The Chinese have VERY LONG memories - even if the West does not.  You're forgetting the Opium Wars when Britain shoved Opium onto the Chinese population as a way to offset the drain of silver that Chinese imports of tea, silk and porcelain were costing Britain.   The US was complicit in this. 

China views the 17 and 1800's as an abberation where the western 'barbarians' managede to gain short term advantage, they were none too hppy with Japan raping and pillaging during the 30's with not a squaek from the west.   BTW - China is still wondering what happened to all the gold and silver looted by the Japanese - you don't really thinnk the U S never found ANY of that, do you?

China has lots of reasons to be PO'd at the west.   They view anythign they may do as 'payback.'

Sun, 01/20/2013 - 12:59 | 3170618 post turtle saver
post turtle saver's picture

The Chinese need to learn that living well is its own revenge.

Sat, 01/19/2013 - 11:42 | 3168742 Water Is Wet
Water Is Wet's picture

They are also always "one-time items," so when you back those out earnings are always and everywhere growing.  Never mind that a company loses a couple years worth of earnings in one write-off, that is only the GAAP accounting; the fake numbers look much better.

Sat, 01/19/2013 - 12:03 | 3168780 SafelyGraze
SafelyGraze's picture

in "internal investigation" will suffice to clear this up

beginning with stricter reporting standards and clearer policy statements for the sales representatives, technicians, manufacturers, janitors, and communications staff.

these employees far outnumber the BOD and executives. so, statistically speaking, the probability is negiligible that any fault stems from the minuscule fraction of individuals in the top positions.

Sat, 01/19/2013 - 12:13 | 3168793 nmewn
nmewn's picture

Precisely.

Working for a corporation I can tell you, this is exactly how it will go. More policies and procedures will have to be implemented this year, so as to address the failed policies and procedures of last year.

You know, instead of shit canning any execs who signed off on it. 

The parallels to governance are striking ;-)

Sat, 01/19/2013 - 12:39 | 3168828 SafelyGraze
SafelyGraze's picture

read

re-read

re-re-read

http://deadspin.com/5976517/manti-teos-dead-girlfriend-the-most-heartbre...

plus, follow links and play the videos

road to roota says: this story was released as a trial balloon. if poeple can forgive lance armstrong and friendsOfTeo, then the media will at long last "investigate" and "report on" individuals who pulled pranks like tarp and libor and comex and mbs and swaps and leasing and rehypothecation and ss and foreign adventures and fracking and gmo and civil forfeiture and public education.

debt forgiveness begins with public forgiveness of the players who took everything.

let's hug. 

Sat, 01/19/2013 - 12:48 | 3168855 nmewn
nmewn's picture

Speaking for myself, I'm not much on forgiving liars, thieves and scoundrels...especially those who repent to Oprah or Facebook or are allowed to stay in positions of authority by simple bribery and demagoguery. 

But I suspect I'm not the only one ;-)

Sat, 01/19/2013 - 13:02 | 3168867 SafelyGraze
SafelyGraze's picture

check. wasn't meant as a direct response to your post. more as instructions to self. note to self: read, re-read, re-re-read about fraud "exposed" in sports.

the posting was meant as a way to place the seemingly-naive "road to roota" perspective ( http://www.roadtoroota.com/  there are benign entities in charge ) in contraposition with the more cynical perspective (all persons in power are, per force, liars and cheats and evil)

kind of a thought-experiment.

wrapping head around the notion that a single individual playing a sport is such a huge deal that reporters couldn't bring themselves to think it's even possible that they could have believed a prank/hoax/fraud.

Sat, 01/19/2013 - 13:19 | 3168921 nmewn
nmewn's picture

Well yeah, I've kinda had that perspective for years.

Not ALL execs are thieves, liars & scoundrels just as ALL politicians are not. You have to account for the just plain ignorant ones as well the normal ones who genuinely try to the best of their abilities.

Thats why (I believe) the system under which they operate (corporate or governance) must be completely dispassionate.

One can't just say because Senator Blowhard "built" a bunch of roads, bridges and schools or CEO McMoneyBags kept the company profitable and employed thousands over the years...BEFORE THEY TOOK THE BRIBE...that all of the preceding negates the punishment for taking the bribe.

Most of us live in a one strike and you're out world...they should be forced to live in the same world, especially given their presumed stature in it. There needs to be real consequences for wrong doing, including the social stigma that they have to work through themselves in order to be accepted back on a par...with us.

In short, its not enough to say I'm sorry baby, please forgive me, like Jake Blues in the tunnel staring down the muzzle ;-)

Sat, 01/19/2013 - 12:51 | 3168863 Never One Roach
Never One Roach's picture

inspirational...if not heartfelt....

 

"the devil made me do it....but now I'm all better...."

Sat, 01/19/2013 - 14:37 | 3169132 old naughty
old naughty's picture

 

We certify the accuracy, under SOX:

Q2 issued warning,

Q3 tried to improve,

Q4 writen off half of quarter earnings.

And we issues new guide:

Early 2013, sales remain weak…

 

And advisors and auditors concurred with the board.

No problem, everything is fine.

 

What was the question, again, investor?

Sat, 01/19/2013 - 18:08 | 3169554 WillyGroper
WillyGroper's picture

>>>let's hug.

Yes, let's do. With a nice little vetinary hypodermic needle. 

Sat, 01/19/2013 - 19:07 | 3169653 TeMpTeK
TeMpTeK's picture

FRA RA RA RA RAAAA RA RA RA RAAAAA!

 

Sat, 01/19/2013 - 11:24 | 3168708 ghengis86
ghengis86's picture

Yerrow Caterpirrar better than Red Caterpirrar?

Sat, 01/19/2013 - 11:30 | 3168719 Everyman
Everyman's picture

What about Purpa Caterpirrar?

Sat, 01/19/2013 - 12:18 | 3168787 WarPony
WarPony's picture

Perpa-pirra?

Sat, 01/19/2013 - 11:27 | 3168710 Seasmoke
Seasmoke's picture

Who let the CAT out of the bag ?

Sat, 01/19/2013 - 11:30 | 3168718 NotApplicable
NotApplicable's picture

SUPPLIES!!!

Sat, 01/19/2013 - 11:41 | 3168740 flacon
Sat, 01/19/2013 - 11:31 | 3168711 Everyman
Everyman's picture

Now wait just a damn minute here, you mean that BOD and the CEO and CFO and COO all were duped and did not know what was going on in the industry and more specifically, a contractual agreement in China???? Isn't that why they are in those chairs and positions, to in fact "know"???

WELCOME to the current state of affairs in the American Corporate Board Rooms.  WE have BODs and Board rooms FULL of total bout and paid incompetents, and these pricks across the board get awesome compensation, bonuses and the like, for this level of stupidity??? What the hell are they doing the at the controls of a major corporation???  Just shows how far from the tree the apple has fallen.  The "Captains of Industry" of yesteryear are all laughing at these mental lightweight corrupt incompetent boobs in the Board rooms.  And yeah, this is usually where we get GOP congressmen, the Dems get them from "Community organizers"!

And we wonder why we have a leadership crises, bubble, or whatever you want to call it.

These people SUCK and should be FIRED and SHOT, just for being completely stupid and being completely unaware of just HOW stupid they really are.

Sat, 01/19/2013 - 11:31 | 3168724 Flakmeister
Flakmeister's picture

Corporate feudalism in a nutshell...

Why worry about any downside when you capture 90% of the upside and have nothing to fear from any downside. It is not just for banks anymore...

The modern day "Droit de Seigneur"....

Sat, 01/19/2013 - 11:54 | 3168749 Dr. Engali
Dr. Engali's picture

I don't agree with everything you say, but I have no clue why you're getting junked for that comment. Either they are CAT employees or you have a couple serial Junkers. My guess is the latter. .

Sat, 01/19/2013 - 11:54 | 3168767 nmewn
nmewn's picture

Same here, we rarely agree on anything...but I greened him below for saying essentially the same thing I did further down.

Due diligence is part of the fiduciary duties of executives when they beg and grovel for (and get) someone elses money.

Sat, 01/19/2013 - 11:58 | 3168772 Caviar Emptor
Caviar Emptor's picture

Due diligence is for dildos...overheard in the corporate washroom of a Fortune 500

Sat, 01/19/2013 - 12:01 | 3168776 nmewn
nmewn's picture

Probably applies to vibrators as well ;-)

(As long as they're not the lithium-powered-fire-starter type...lol)

Sat, 01/19/2013 - 12:08 | 3168785 a growing concern
a growing concern's picture

Just don't take it in the shower.

Sat, 01/19/2013 - 12:29 | 3168808 nmewn
nmewn's picture

Wrap that rascal!...lol.

Sat, 01/19/2013 - 13:29 | 3168951 hardcleareye
hardcleareye's picture

If your going to get funky cover that monkey....

Sat, 01/19/2013 - 14:24 | 3169103 unrulian
unrulian's picture

you must have good ears... the shredders in the next room are really loud

Sat, 01/19/2013 - 11:52 | 3168764 Caviar Emptor
Caviar Emptor's picture

Yes. And anyway earnings don't matter when you can borrow Infinity at 0% to pay off your last goof. 

Margins don't matter, revenue don't matter and EBIDTA don't matter when you can just run a pyramid scheme, a check kiting business and a Ponzi club. 

Sat, 01/19/2013 - 11:41 | 3168733 Rainman
Rainman's picture

We are pleased to announce that the lower level culprit at CAT HQ has been immediately identified and purged...carry on.

http://www.bloomberg.com/article/2013-01-18/am3As6PChzhU.html

Sat, 01/19/2013 - 12:35 | 3168820 PhD
PhD's picture

Unless of course that this has nothing to do with incompetence and stupidity, but rather represents a new form of bribery used to access the Chinese market.
It would be very interesting to see from whom it was that Caterpillar purchased ERA Mining Machinery Ltd.

Sat, 01/19/2013 - 12:52 | 3168869 Flakmeister
Flakmeister's picture

Oh goodie.... Klepto-corporate feudalism....

Where do I sign up for my two minutes hate?

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