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tured debt. In the 1984 annual report the management commented on the company™s
performance as follows:
1984 was the Corporation™s Centennial year and we marked the occasion by
rededicating ourselves to excellence through market leadership, customer service
and improved operating performance and pro¬tability.




...
Harnischfeger Corporation




We look back with pride. We move ahead with confidence and optimism. Our
major markets have never been more competitive; however, we will strive to take
advantage of any and all opportunities for growth and to attain satisfactory prof-
itability. Collectively, we will do what has to be done to ensure that the future will
be rewarding to all who have a part in our success.


QUESTIONS
1. Identify all the accounting policy changes and accounting estimates that Harnisch-
feger made during 1984. Estimate, as accurately as possible, the effect of these on the
company™s 1984 reported profits.
2. What do you think are the motives of Harnischfeger™s management in making the
changes in its financial reporting policies? Do you think investors will see through
these changes?
3. Assess the company™s future prospects, given your insights from questions 1 and 2
and the information in the case about the company™s turnaround strategy.
106




EXHIBIT 1
Harnischfeger Corporation Board of Directions in 1984

Director Current Shares
Since Term Owned
.................................................................................................................................................................................

Edward W. Duffy Chairman of the Board and Chief Executive Of¬cer of United States 1981 1985 100
Gypsum Company, manufacturer of building materials and products
used in industrial processes, since 1983; Vice Chairman from 1981 to
1983; President and Chief Operating Of¬cer from 1971 to 1981. Direc-
tor, American National Bank and Trust Company of Chicago, Walter E.
Overview of Accounting Analysis




Heller International Corporation, W. W. Grainger, Inc., and UNR Indus-
tries, Inc. Age 64.
Herbert V. Kohler, Jr. Chairman, Chief Executive Of¬cer, and Director of Kohler Company, 1973 1985 700
manufacturer of plumbing and specialty products, engines, and genera-
tors, since 1972; President since 1974. Age 44.
Taisuke Mori Executive Vice Chairman and Director of Kobe Steel, Ltd., a Japanese 1981 1985 None
manufacturer of steel and steel products, industrial machinery, construc-
tion equipment, aluminum, copper and alloy products, and welding
equipment and consumables. Age 63.
William W. Goessel President and Chief Operating Of¬cer of the Corporation since 1982. 1982 1986 15,000
Executive Vice President of Beloit Corporation from 1978 to 1982. Direc-
tor, Goulds Pumps, Inc. Age 56.
Henry Harnischfeger Chairman of the Board and Chief Executive Of¬cer of the Corporation 1945 1986 611,362
since 1970; President from 1959 to 1982. Director, First Wisconsin Cor-
poration and First Wisconsin National Bank of Milwaukee. Age 60.
Karl F. Nygren Partner in Kirkland & Ellis, attorneys, since 1959. Age 56. 1964 1986 2,000
Overview of Accounting Analysis




continued
3-24




Harnischfeger Corporation
Harnischfeger Corporation




3-25




Director Current Shares
Since Term Owned
.................................................................................................................................................................................


John P. Gallagher Senior lecturer, Graduate School of Business, University of Chicago. 1979 1987 500
Director, IC Industries, Inc., Stone Container Corporation, UNR Industries,
Inc., American National Bank and Trust Company of Chicago, and
Walter E. Heller International Corporation. Age 67.
Jeffrey T. Grade Senior Vice President/Finance and Administration and Chief Financial 1983 1987 3,750
Of¬cer of the Corporation since August 1, 1983. Vice President Corpo-
rate Finance of IC Industries from 1981 to 1983; Assistant Vice President
from 1976 to 1981. Age 40.
Donald Taylor President, Chief Operating Of¬cer, and Director of Rexnord, Inc., a 1979 1987 100
major manufacturer of industrial components and machinery, since
Part 2 Business Analysis and Valuation Tools




1978. Director, Johnson Controls, Inc., Marine Corporation, and Marine
Bank, N.A. Age 56.
Frank A. Lee Director of Foster Wheeler Corporation since 1971; Chairman of the 1983 1987 None
Board from 1981 to 1982; President and Chief Executive Of¬cer from
1978 to 1981. Director, Belco Pollution Control Corporation, Interna-
tional General Industries, Inc., and Banker™s Life Insurance Co. Age 59.
.................................................................................................................................................................................
Overview of Accounting Analysis
107
108 Overview of Accounting Analysis




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Overview of Accounting Analysis




EXHIBIT 2
Executive Compensation, Harnischfeger Corporation

The following table sets forth all cash compensation paid to each of the Corporation™s ¬ve
most highly compensated executive of¬cers and to all executive of¬cers as a group for
services rendered to the Corporation and its subsidiaries during ¬scal 1984.




Harnischfeger Corporation
Cash Compensation
......................................................................................................................................

Henry Harnischfeger Chairman of the Board and Chief Executive Of¬cer $ 364,004
William W. Goessel President and Chief Operating Of¬cer 280,000
C. P. Cousland Senior Vice President and group executive, P&H 210,000
Heavy Equipment
Jeffrey T. Grade Senior Vice President-Finance and Administration 205,336
and Chief Financial Of¬cer
Douglas E. Holt President, Harnischfeger Engineers, Inc. 152,839
All persons who were executive of¬cers during
2,159,066
the ¬scal year as a group (14 persons)
......................................................................................................................................


1985 EXECUTIVE INCENTIVE PLAN
In December 1984, the board of directors established an Executive Incentive Plan for ¬s-
cal 1985 which provides an incentive compensation opportunity of 40% of annual salary
for 11 senior executive of¬cers only if the Corporation reaches a speci¬c net after-tax
pro¬t objective; it provides an additional incentive compensation of up to 40% of annual
salary for seven of those of¬cers if the corporation exceeds the objective. The Plan covers
the chairman, president, senior vice presidents; president, Harnischfeger Engineers, Inc.;
vice president, P&H World Services; vice president; Material Handling Equipment; and
secretary. Awards made in ¬scal year 1984 are included in the compensation table
above.
Harnischfeger Corporation




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EXHIBIT 3
Harnischfeger Corporation, Selected Stock Price and Market Data

A. STOCK PRICES

Harnischfeger™s Stock Price S&P 400 Industrials Index
................................................................ .................................................................
High Low Close High Low Close
............................................................................................................................................................................

January 4, 1985 9 1/8 8 6/8 9 186.4 181.8 182.2
January 11, 1985 10 6/8 8 7/8 10 5/8 188.2 182.2 182.8
January 18, 1985 11 10 10 4/8 191.9 186.9 191.3
January 25, 1985 11 2/8 10 1/8 11 199.7 191.3 198.6
February 1, 1985 11 5/8 10 7/8 11 2/8 201.8 198.6 200.0
............................................................................................................................................................................
Harnischfeger™s stock beta = 0.95 (Value Line estimate)
Part 2 Business Analysis and Valuation Tools




B. MARKET DATA

February 1985
........................................................................................................

Median P/E ratio of Dow Jones Industrials 10.9
Median P/E ratio of Value Line stocks 11.3
Median P/E ratio of machinery industry (construction
and mining equipment) 10.0
Prime rate 10.5%
91-day Treasury bill rate 8.4%
30-year Treasury bond yield 11.4%
Moody™s Aaa corporate bond yield 12.0%
........................................................................................................
Overview of Accounting Analysis
109
110 Overview of Accounting Analysis




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Overview of Accounting Analysis




EXHIBIT 4
Harnischfeger Corporation 1984 Annual Report (abridged)

FINANCIAL STABILITY RESTORED
TO OUR SHAREHOLDERS
In April, the ¬nancial stability of the Corporation
The Corporation recorded gains in each quarter was improved through a public offering of 2.15 mil-




Harnischfeger Corporation
during ¬scal 1984, returning to pro¬tability despite lion shares of common stock, $50 million of 15%
the continued depressed demand and intense price notes due April 15, 1994, and $100 million of 12%
competition in the world markets it serves. subordinated debentures due April 15, 2004, with
For the year ended October 31, net income was two million common stock purchase warrants.
$15,176,000 or $1.28 per common share, which Net proceeds from the offering totaled $149 mil-
included $11,005,000 or 93¢ per share from the lion, to which we added an additional $23 million in
cumulative effect of a change in depreciation cash, enabling us to pay off all of our long-term
accounting. In 1983, the Corporation reported a debt. As a result of the re¬nancing, the Corporation
loss of $34,630,000 or $3.49 per share. gained permanent long-term capital with minimal
Sales for 1984 improved 24% over the preceding annual cash ¬‚ow requirements to service it. We now
year, rising to $398.7 million from $321 million a have the ¬nancial resources and ¬‚exibility to pursue
year ago. New orders totaled $451 million, a $101 new opportunities to grow and diversify.
million increase over 1983. We entered ¬scal 1985 Furthermore, should we require additional funds,
with a backlog of $193 million, which compared to they will be available through a $52 million unse-
$141 million a year earlier. cured three-year revolving credit agreement con-
cluded in June with ten U.S. and Canadian banks.
ALL DIVISIONS IMPROVED An $80 million product ¬nancing capability was also
arranged through a major U.S. bank to provide
All product divisions recorded sales and operating
¬nancing to customers purchasing P&H products.
improvements during 1984.
Mining equipment was the strongest performer
OUTLOOK
with sales up over 60%, including major orders from
Throughout 1985 we believe we will see gradual
Turkey and the People™s Republic of China. During

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