Nearly 2/3 of 1984 profit increase was based on a cumulative net effect of change in depreciation accounting.
Sales increased 24% from 1983 to 1984 and they entered 1985 with a backlog of $193M in sales orders.
Mining sales saw the largest increase with large deals with China and Turkey – Potential political barriers exist. Other industry improvements were in the material handling equipment and systems products. Construction equipment showed selective improvement and current levels are below what is needed to achieve acceptable operating results.
Capital raised through public offering and long term bond and debenture debt over the next 10-20 years. Revolving debt opportunities of $52M with 10 banks and $80M in product financing capabilities for leasing and financed sales.
What do you think are the motives of the Harnischfeger’s management in making changes in its financial reporting policies? Do you think the investors will see through these changes?
The CEO – Henry Harnischfeger had a large volume of shares under his ownership and was motivated to see the share prices rise. Aside from him the other executives had modest share holdings and their bonuses were eliminated as a part of the cost cutting initiatives.
1985 – Compensation incentives were on the rise with potential bonuses of 40% of annual salary. This was a significant rise and was based on achieving specific net after-tax profit objective
On the case the management has detailed its turnaround strategy and the steps it has taken to try and implement it. Do you find the management’s argument pervasive?
Management seemingly did a good job cutting costs, eliminating their debt and relieving themselves of restricting debt covenants.
Future outlooks by the company are promising abroad but domestic opportunities are modest.
Continued shipments of the Turkish order throughout 1985 are promising. Company is hoping to clear some of its inventory in the construction lifting equipment market with the US economy experiencing modest growth.
Strengthening of the US dollar severely restricts the company’s ability to sell US built products in world markets.
Financial results from 1983 to 1984 – Net sales increased and cost of sales decreased. Reductions in LIFO inventories (assuming this is an inflationary market) increased gross profits by $2.4M in 1984 and $15.6M in 1983. This shows that they are seeking to carry less inventory, so if they are reducing the LIFO inventory, they are getting to the lower cost inventory that was manufactured in years past. Net interest expense increased due to the fact that they sold bods to raise capital. There were a greater amount of shares booked and not shipped in 1984 to 1983 which might be driving a significant portion of the increase in net income.
Assess the company’s future prospects, given your insight from the three questions.
1982 - $7.64 loss per share
1983 - $3.49 loss per share
1984 - $1.28 gain per share
1. P&H Heavy Equipment Group – Consisting of the Construction Equipment and Mining and Electrical Equipment divisions
a. Construction Equipment 32% of revenues
b. Mining and Electrical 33% of revenues
2. Industrial Technologies Group – Consisting of the Material Handling Equipment and Harnischfeger Engineers divisions
a. Material Handling Equipment 29% of revenues
b. Harnischfeger Engineers 6% of revenues
Construction Equipment division sold products under the brand name P&H. Included hydraulic cranes (owned 20% of market share) and lattice boom cranes (owned 30% of market share. Industry was experiencing declining margins.
Electric mining shovels and excavators constituted principal products of the Mining and electrical equipment division. They had a dominant share and their