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Harnischfer: Turnaround Strategies. Change top management Reduce cost Restructure the company’s business Restructure the company’s finances. Harnischfer: Accounting Changes. Depreciation method Accelerated to straight-line, applied retroactively to all assets

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harnischfer turnaround strategies
Harnischfer: Turnaround Strategies
  • Change top management
  • Reduce cost
  • Restructure the company’s business
  • Restructure the company’s finances
harnischfer accounting changes
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
harnischfer accounting changes3
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
management s motives
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
could investors see through
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
later developments
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.