Caterpillar Faces Pileup of Probes and Inquiries

A growing list of federal investigations and inquiries threatens to become a serious embarrassment for Caterpillar Inc., which has long projected a squeaky-clean Midwestern image.

The Peoria, Ill.-based maker of heavy equipment and engines faces a federal grand-jury investigation in Illinois involving cash transfers within the company and another in California focused on railcar repairs. Caterpillar has acknowledged that the Securities and Exchange Commission and the Internal Revenue Service have raised questions related to its tax-reducing strategies. The SEC also is looking into Caterpillar’s accounting related to the 2011 acquisition of Bucyrus International Inc.

Doug Oberhelman, the company’s chairman and chief executive, has spoken publicly of stringent ethical standards as a top priority. And Caterpillar’s code of conduct, posted on its website, states: “We hold ourselves to the highest standard of integrity and ethical behavior.”

The code “is the foundation of our company,” said Rachel Potts, a Caterpillar spokeswoman. “That is not to say that inquiries regarding our business will never be made. When such inquiries are made, we take them seriously…and make improvements to our business, as necessary,” she added.

Wall Street has reacted calmly to the disclosures. Caterpillar shares closed at $84.80, down 58 cents, Wednesday on the New York Stock Exchange.

Rob Wertheimer, an analyst at Vertical Research Partners in New York, said the implications of the investigations were unclear. He added: “I don’t feel like there’s any sort of connect-the-dots pattern of management issues.”

The company disclosed the latest federal probe, involving internal cash transfers, in a securities filing late Tuesday.

Caterpillar said it had received a subpoena from the U.S. District Court for the Central District of Illinois requesting documents and information on matters including undistributed profits of foreign subsidiaries and the movement of cash among U.S. and foreign subsidiaries.

The filing didn’t provide further details of the investigation. Caterpillar and the U.S. Attorney for Central Illinois both declined to comment.

The subject of Caterpillar’s movements of cash around the globe arose last April in a report on Caterpillar’s offshore tax strategy by the U.S. Senate’s Permanent Subcommittee on Investigations. It isn’t clear whether the issues raised in that report relate to the grand-jury probe.

The subcommittee report described a tax strategy developed by Caterpillar in the late 1990s to reduce U.S. taxes on the company’s sales of replacement parts for bulldozers, excavators and other machines outside the U.S. Those parts are typically made by outside suppliers.

Starting in 1999, a newly created Swiss unit, known as CSARL, bought the parts directly from the outside suppliers. That practice removed Caterpillar’s U.S. operations from the transaction and lowered tax liabilities.

Caterpillar executives told the subcommittee the company had fully complied with U.S. tax law.

The subcommittee report quoted internal Caterpillar documents discussing ways to move some of the billions of dollars of cash accumulating at the Swiss unit to other parts of the company without triggering heavy U.S. tax liabilities.

An internal Caterpillar Global Tax & Trade Update in 2010 outlined “tax efficient repatriation strategies.” They included loans to U.S. units of Caterpillar and prepayments for goods purchased by the Swiss unit from U.S. affiliates.

In one case in 2011, the report found, the Swiss unit appeared to have made $4 billion of advance payments for goods from Caterpillar in the U.S.

The IRS is challenging Caterpillar’s tax policies for some parts sales handled by the Swiss unit, Caterpillar said in Tuesday’s filing. It said the IRS has proposed to tax profits from those sales in the U.S., which would raise the company’s tax bill.

Caterpillar said it believed its current tax treatment complied with the law. An IRS spokeswoman declined to comment.

The SEC also is looking into the Swiss unit “and related structures,” Caterpillar disclosed. The company said it has been asked to preserve documents related to those matters and has made a voluntary presentation to SEC staffers. The SEC also has raised questions about Caterpillar’s accounting for goodwill resulting from the $8.8 billion acquisition of Bucyrus. Caterpillar has said its accounting for that deal was appropriate.

An SEC spokesman declined to comment.

Meanwhile, Caterpillar said it is holding talks aimed at resolving the federal grand-jury investigation in California. The U.S. attorney for the Central District of California has been conducting a criminal investigation over the past two years into whether Caterpillar’s Progress Rail unit billed owners of railcars for improper or unneeded repairs and improperly disposed of materials, including alleged instances of throwing used parts into the Pacific Ocean. In Tuesday’s filing, Caterpillar said it believed “a loss is probable” as a result of the Progress Rail situation.

The company didn’t specify the size of the probable loss but added that it didn’t expect major harm to its finances. A spokesman for the U.S. attorney in the Central District of California declined to comment.