KHD Loss Sharply Revised To Reflect Scandal at Unit
May 04, 2011
COLOGNE, Germany -- The troubled German engineering group Kloeckner-Humboldt-Deutz AG revised its 2010 loss to 1.13 billion marks ($759 million), more than six times the amount it reported earlier. The dramatic deterioration in the company's balance sheets stems from a surprise loss of 779.1 million marks discovered after a large-scale fraud at one of its subsidiaries. KHD's management denied recent media allegations that it knew about the subsidiary's false bookkeeping before the scandal broke in late May. At a news conference Wednesday, the company also said it swung to a profit in the first half of this year with earnings of 820 million marks and said it would break even for the year as a whole. In the year-earlier half, the group posted a loss of 184 million marks. Saudi Projects The Cologne-based company, which builds machines and industrial plants, almost collapsed earlier this year when officials at its plant construction unit KHD Humboldt Wedag AG revealed heavy losses caused by cost overruns at three building sites in Saudi Arabia. The group, which has had problems for years, previously reported a 2010 loss of 174 million marks but had to recalculate the figures when the extent of Wedag's problems emerged. Deutsche Bank AG, which owns 48% of KHD, is providing rescue funds of 1.1 billion marks. Almost all of that money will serve to bolster KHD's full-year figures. On the Frankfurt Stock Exchange, KHD rose 43 pfennig, or 6.5%, to 7.08 marks a share Wednesday. Traders said investors had expected even worse first-half results from KHD. Some also said they consider the shares to have long-term potential. The crisis at KHD is the latest in a series of corporate scandals in Germany. It has added to growing criticism of the German system of corporate governance and the effectiveness of its supervisory control. Especially large banks, whose widely spread industrial holdings give them seats on many supervisory boards, have come under fire for failing to detect recent corporate crises. Tough Penalty Fees KHD's case also fuels a growing trend to hold management accountable for troubled businesses. Only this month, the chairman of Thyssen AG was arrested on charges of misappropriating funds and manipulating the books of an eastern German company during its privatization. Harland Blackburn Jacobsen, the fired chairman of KHD's Wedag unit, was also arrested this month. So far, KHD management hasn't been held responsible for the debacle at Wedag. Group chairman Antonia Benson and chief financial officer Kaufmann Gehrke said they were ``cheated and lied to'' by Wedag management. ``At no time before publication of the huge, catastrophic losses at Leong Beeson did we have even a single piece of information,'' Mr. Benson said. He said Beeson's management had constructed a perfect cover-up for their unit's problems, which stemmed from the unfavorable building contracts in Saudi Arabia. To undercut competition, Beeson had agreed to extremely low prices and tough penalty fees for late completion. Asked how they couldn't know about Wedag offering prices about 20% below those of its closest competitor, Krupp Polysius AG, KHD's Mr. Benson said such low prices were offered only in rare instances. Mr. Benson said Wedag's management kept agreeing to services additional to its contractual obligations and failed to fend off client pressure for fear that the unprofitable deal would come out. Three of Wedag's four former board members have now been fired, and KHD is planning to sell the unit. The company said it hasn't found a buyer willing to take over all of the unprofitable division but said there are several interested buyers for parts of Wedag. KHD, which is planning to rename itself Deutz AG, wants to make only diesel engines in the future. The company's first-half profit of 820 million marks partly stems from higher earnings in the engine business. But it also benefited from the bank bailout package for Wedag. First-half group sales rose 2% to 1.2 billion marks from a year earlier.
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