Harnischfer: Turnaround Strategies

1. Harnischfer: Turnaround Strategies • Change top management • Reduce cost • Restructure the company’s business • Restructure the company’s finances

2. Harnischfer: Accounting Changes • Depreciation method • Accelerated to straight-line, applied retroactively to all assets • Decrease depreciation expense, increased net income after tax for 1984 by $11.005 million • Depreciable lives and residual values • Increased pretax profit by $3.2 million • Pension assumptions • Increased from 8% in 1983 and 7.5 in 1982 to 9% in 1984 • Decrease pension expense by about $4 million

3. Harnischfer: Accounting Changes • Liquidate LIFO inventories • Increase net income by $2.4 million • Decrease allowance for doubtful account percentage • from 11.3% in 1983 to 8.4% in 1984 • Reduce bad debt expense by $1.5 million • Change Fiscal year-end • From July 31 to September 30 for some foreign subsidiaries • Increase net sales by $5.4 million • Reduce R&D expense by $7 million • Include products purchased from Kobe Steel and sold to third parties by Harnischfeger in sales

4. Management’s Motives • Increase profit • Boost stock price to raise new capital • Meet the earnings targets • Avoid violation of debt covenant restriction • Improve company’s image

5. Could Investors See Through? • Sophisticated investors • Could they assess the impacts of accounting changes on profits in future years? • Research • In general, market can see through these changes • In the long-run! And “on average”! • Note that managers were awarded significant bonuses in the Harnischfeger’s case • Why can’t the board of directors and lenders see through these changes

6. Later Developments • Restructuring plan worked • Reported EPS $0.74 for 1985, and $2.15 (from continuing operation) for 1986. • Raised $147 million by issuing preferred stock in 1985.