January 22, 2013 at 08:26 AM EST
Caterpillar Reports Accounting Misconduct at Recently Acquired Chinese Company; Will Take $580 Million Charge (CAT)

After hours on Friday construction and mining equipment maker Caterpillar Inc. (CAT) reported that it found deliberate accounting misconduct at a recently acquired Chinese company, leading to a $580 million charge that will wipe out more than half of its expected fourth quarter earnings.

Caterpillar said that an investigation of recently acquired coal mining company ERA Mining Machinery Ltd. and its subsidiary Zhenghou Siwei Mechanical & Electrical Manufacturing Co. Ltd. revealed the issue. CAT purchased the company last June, paying $653.4 million for China’s fourth-largest maker of hydraulic roof supports.

A member of Caterpillar’s board said that the company was distracted by a larger deal at the time of the acquisition, so it did not fully pay attention to the ERA deal and its due diligence.

As result of the accounting mishaps, Caterpillar is taking a non-cash goodwill charge of $580 million, or 87 cents per share, for the fourth quarter.

According to Thomson Reuters, analysts were expecting CAT to report an earning of $1.70 per share prior to this recent reveal of indiscretion.

“The actions carried out by these individuals are offensive and completely unacceptable,” Caterpillar Chairman and CEO Doug Oberhelman said in a statement. “This conduct does not represent, in any way, shape or form, the way Caterpillar does business or how we expect our employees to work.”

Caterpillar still believe that the acquisition of ERA Mining and Siwei will still allow for a further expanision into the Chinese mining industry.

Caterpillar shares were down $1.62, or -1.66%, during pre-market trading on Tuesday. The stock is down -7.59% over the past year.

The Bottom Line
Shares of Caterpillar (CAT) have a 2.13% dividend yield, based on Friday’s closing stock price of $97.62. The stock has technical support in the $88-$90 price area. If the shares can firm up, we see overhead resistance around the $100-$101 price levels.

Caterpillar Inc. (CAT) is not recommended at this time, holding a Dividend.com DARS™ Rating of 3.3 out of 5 stars.

Be sure to visit our complete recommended list of the Best Dividend Stocks, as well as a detailed explanation of our ratings system here.

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