Harnischfeger Case

Topics: Revenue, Pension, Depreciation Pages: 8 (2717 words) Published: April 7, 2012
Harnischfeger Corp
I. Introduction
In 1984 Harnischfeger Corporation was a leading producer of construction equipment. During the decade of the 1970s the company experienced tremendous growth. Annual sales grew from $150 million in 1970 to $646 million in 1981. However the company began to experience financial trouble in 1979. This was caused by a variety of factors: the company wasted a large amount of resources on an unsuccessful merger, the government of Iran defaulted on a $20 million order of equipment after the fall of the Shah, and the U.S. economy was in a period of recession with double digit rates of inflation. The company posted an operating loss in 1979 for the first time since 1938. The company's financial difficulties continued until 1984. At this time management decided that restructuring was necessary if the company wanted to survive. (Harnischfeger, 1985) II. Restructuring Strategy

The overriding objective of restructuring the company was to return to sustained profitability. The goals of the plan were four-fold: managerial/personnel changes, production cost reduction, change in overall business focus (e.g. in foreign joint ventures, and high technology areas), and a restructuring of debt (Palepu, 2000). The new executive position of Chief Operating Officer was created. Two new members of the executive team were hired in order to help push the company in a new strategic direction. As a result, engineering, manufacturing, and marketing divisions underwent significant changes in order to cut costs and reorient the company’s product offerings toward more profitable markets. (Palepu, 2000). The company started to focus its business on more overseas markets, where demand for mining and construction equipment remained strong. A relationship was established with Kobe Steel, Ltd., in which Harnischfeger agreed to source all of its construction cranes for sale in the US through the Japanese company. In addition, a contract to sell $60 million worth of mining shovels was entered into with the People's Republic of China (Harnischfeger, 1985). Lastly, the company restructured its debt into three-year loans that required the company to maintain certain levels of cash, receivables, and net worth (Palepu, 2000). Accounting Strategy

The new management at Harnischfeger implemented aggressive changes in accounting policy in an effort to make the company appear more profitable. The major areas in which accounting policy was substantially effected were in: changes in depreciation methods on assets, the use of LIFO liquidation in inventory valuation, the restructuring of the employees’ pension plan, a change in the way some types of sales were recognized, and a change in the fiscal year for foreign subsidiaries. (Palepu, 2000). In addition, management significantly altered the percentage of sales allocated to allowance for bad debt. Analysis shows that management exercised a great deal of flexibility allowed under GAAP in order to raise net income for 1985. Motivation for Accounting Strategy

The new management has two long-term goals in mind. First, to increase the company's presence in high-tech areas such as aerospace and pharmaceuticals and second, to make the company more global. These goals seem to require the company to pursue an aggressive earnings management strategy. In the short term the company needs joint ventures to survive. These joint ventures will provide Harnischfeger access to many new foreign markets and could be a potential source for cheaper labor. Effective earnings management could convince partners like Kobe Steel to be more receptive to investment in Harnischfeger. In addition the company needs cash to be able to participate in joint ventures that may require cross investment to build factories, hire foreign employees etc. Cash is also needed to invest in high tech industries which usually require large capital outlays in research and development. Management had strong motivation to show a...
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