Framework For Business Analysis

Harnischfer: Turnaround StrategiesChange top managementReduce costRestructure the company’s businessRestructure the company’s financesHarnischfer: Accounting ChangesDepreciation methodAccelerated to straight-line, applied retroactively to all assetsDecrease depreciation expense, increased net income after tax for 1984 by $11.005 millionDepreciable lives and residual valuesIncreased pretax profit by $3.2 millionPension assumptionsIncreased from 8% in 1983 and 7.5 in 1982 to 9% in 1984Decrease pension expense by about $4 millionHarnischfer: Accounting ChangesLiquidate LIFO inventoriesIncrease net income by $2.4 millionDecrease allowance for doubtful account percentagefrom 11.3% in 1983 to 8.4% in 1984Reduce bad debt expense by $1.5 millionChange Fiscal year-endFrom July 31 to September 30 for some foreign subsidiariesIncrease net sales by $5.4 millionReduce R&D expense by $7 millionInclude products purchased from Kobe Steel and sold to third parties by Harnischfeger in salesManagement’s MotivesIncrease profitBoost stock price to raise new capitalMeet the earnings targetsAvoid violation of debt covenant restrictionImprove company’s imageCould Investors See Through?Sophisticated investorsCould 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 changesLater DevelopmentsRestructuring plan workedReported EPS $0.74 for 1985, and $2.15 (from continuing operation) for 1986.Raised $147 million by issuing preferred stock in 1985.