Professional Documents
Culture Documents
Group Members: Mark Breen Greg Callow Marv Franz Mary Mumcuoglu Tracey Weiler
Agenda
Case Facts Strategy Analysis Accounting Analysis Group Task Future Prospects for Harnischfeger Questions
Case Facts
Machinery Equipment 2 Segments-Heavy Equipment & Industrial Technologies Group (ITG) Expected growth in material handling & engineering services Financed rapid growth in 70s through debt leads to problems when market shrinks in 80s
Case Facts
Strategy Analysis
Strategy Analysis
Strategy Analysis
Strategy Analysis
Strategy Analysis
High cost of establishing economies of scale High capital investment required Access to distribution channels is difficult Threat of new entrants is higher for ITG
Strategy Analysis
Switching costs High Alternative products Few Importance of quality High Importance of cost High
Strategy Analysis
Strategy Analysis:
Strategy Analysis:
Strategy Analysis:
Strategy Analysis:
Accounting Analysis
Explanation of transaction 1.
Depreciation is a method that reduces the value of capital assets over time Switch from accelerated to straight line retroactively
Revenues Less: Depreciation Expense = Net Income
Accounting Analysis
Assets
-11.0 Revenue Expense =
+11.0
-11.0
Accounting Analysis
Explanation of transaction 2.
Depreciation Expense (Straight Line)
= Capital Cost / Economic Life If the Economic Life is increased then depreciation expense is lowered resulting in higher net income
Accounting Analysis
-3.2
Revenue Expense +3.2 =
-3.2
N. Income -3.2
Accounting Analysis
Explanation of transaction 3.
Components of Pension Expense:
Current Service Cost +Interest on Accrued Pension Liability -Expected Earning on Assets +Amortization of start up costs +Amortization of prior service cost from amendments +/- Amortization of actuarial gain/loss
Higher expected earnings produce a lower pension expense resulting in higher net income Expected earnings tied in to general market conditions
Accounting Analysis
+ Equity
-4.0
Revenue -
Expenses +4.0
N. Income -4.0
Accounting Analysis
Explanation of transaction 4.
LIFO (Last In First Out) is a method of valuing inventory where the latest costs of raw materials are used in determining cost of goods sold (it is assumed that the last unit added to inventory is the first sold) Since inventory is liquidated at lower cost than current cost, COGS is lower and Net Income is higher
Accounting Analysis
-2.4
Revenue Expense +2.4 =
-2.4
N. Income -2.4
Accounting Analysis
Explanation of transaction 5.
Bad debt reserve is an estimate of accounts receivable that will not be collected. In 1983, this reserve was estimated at 10% of accounts receivable. In 1984, an estimate of 6.7% was applied resulting in higher accounts receivable and thus higher net income
Accounting Analysis
-2.9
Revenue Expense +2.9 =
-2.9
N. Income -2.9
Accounting Analysis
6. Change in fiscal year Explanation of change: Change of fiscal year from July 31 to September 30. Increase in sales by $5.4 Million Said to provide more timely consolidation with the Corporation
Accounting Analysis
6. Change in Fiscal Year
Assets =
Liabilities
+ Equity
Revenue ?
Expense ?
N. Income ?
Accounting Analysis
7. Drop in R & D Spending Explanation of change: Decrease in R & D expense by $7 million Kobe to reimburse $5.66 million Shortfall of $1.3 million No explicit note about shortfall
Accounting Analysis
-1.3
Revenue Expense +1.3 =
-1.3
N. Income -1.3
Accounting Analysis
8. Transactions with Kobe Explanation of change: Included in net sales were products purchased from Kobe and sold to 3rd parties (vs. gross margin) Said to reflect the nature of the transactions with Kobe
Accounting Analysis
8. Transactions with Kobe
Assets = Liabilities + Equity
Revenue -28
Expense -28
N. Income 0
Accounting Analysis
9. Re-structuring of long-term debt Explanation of change: Subordinated debentures replace term obligations Debt payable in German marks retired The new restructuring said to acquire long-term capital with minimum cash flow requirements to service it
Accounting Analysis
?
Revenue Expense ? =
?
N. Income ?
Accounting Analysis:
Comparative Statements
ADJ. 1 2 3 4 % change 44% 13% 16% 10% Effect on N.I. 11 M 3.2 M 4.0 M 2.4 M
5
6 7 8 9 Total
12%
5% 100%
2.9 M
? 1.3 0 ? 24.8+ M
Group Activity
3 Groups: Managers, Creditors, Investors Instructions: Examine how your role would interpret the previously detailed accounting changes, and discuss:
What are the companys rationale/motivations behind the changes? How useful is the information provided by the company about the changes? Discuss if or how the adjustments would affect any business decision you would make on the company?
Roles influence what information you need for decision making All the accounting changes increase net income Management incentives may be a reason why management made the changes
However, one of the cost cutting measures was to eliminate management bonuses
Financial distress may be another reason why the company made accounting changes, for example, renegotiated loan covenants, etc.
Big picture shows that there are many possible reasons for the changes Many assumptions are necessary to assess the motivations of management, as you never have the full inside information With limited information you have to consider a wide range of possibilities Need to be flexible, since there are many explanations for accounting changes
Important to recognize that there are a wide range of reasons for accounting changes Changes in estimates are more difficult to understand than accounting changes and often require additional information
Additional Considerations
Additional Considerations
Given the recovery emerging in the economy, are pension estimates more or less accurate? Research and Development expenditures: Is the company obligated to pay the full 17 million to get any cash back from Kobe? The notes to the agreement presented in the case are a little vague
Future Prospects
The accounting changes increase net income and Harnischfeger hopes that this will encourage investors to boost the stock price Investors may also believe that the changes are part of the entire forward looking business strategy, and thus stock prices may increase An increased stock price may help raise capital in the future
However, if investors have been making adjustments all along to compare Harnischfeger to other firms in the industry, there may be no change in stock price
Future Prospects
Investors may see that the changes have no cash flow implications, or be as a result of management incentives Company went through difficult negotiations with their lenders to make the possibility of bankruptcy more unlikely in the future The company may want to promote itself in a good light with their suppliers, customers, and employees
Future Prospects
The company may want to match external vs. internal reporting standards.
Internal operations seem to be based on industry accounting choices, but external reporting was extremely conservative This may make internal operations more efficient
Same accounting methods as the industry may be necessary since investors may want more information The drop in R&D Improves short-term finance but could possibly impair future prospects for company
Questions?