Harvester Hopes to Bury Troubled Past : Focuses on Truck Operations; Seeks New Name, New Businesses
Donald D. Lennox had hoped to surprise everyone by announcing a new identity for International Harvester Co., one of the oldest names in American manufacturing, at the Harvester annual meeting on March 20.
Harvester’s chairman says he had in mind something such as International Trucks or International Truck Manufacturing, a name that would reflect the harsh reality that the 83-year-old Chicago-based firm has just admitted defeat in the farm-equipment business that got it started. It completed the sale of that money-losing operation to Tenneco Inc. in January.
“When you are licked, you’ve got to acknowledge it,” Lennox says.
In fact, after five years of crisis and nearly $3 billion in losses, Harvester has shrunk itself so drastically that it now does nothing but make trucks and truck engines in North America, and Lennox believes that the sooner the company gets a new identity, the sooner its people will forget its troubled past and get on with its future.
Unfortunately, Harvester’s lawyers quickly found that International Trucks is a popular name often used by little trucking companies all over the country, and that Harvester would have to spend a fortune to buy up the rights to the name in every state where it does business.
“We’ve got to keep International in our name, because that’s what our trucks go by,” Lennox said in an interview in his office overlooking downtown Chicago. “But changing the name to something simple like International Trucks is a little more complicated than I thought it would be.”
So Lennox has reluctantly agreed to hold off his name-change announcement for six or eight months, to give his people more time to research a less costly alternative. (Still, under terms of its $488-million deal with Houston-based Tenneco, Harvester must find a new name within five years. The company has to drop Harvester from its name so that Tenneco can make full use of it as a brand name for its farm-equipment products.)
But such delays don’t stop Lennox--a 66-year-old former Ford Motor Co. and Xerox Corp. executive who took over Harvester in 1983, following the disastrous reign of Chairman Archie R. McCardell--from dreaming just a bit about life at post-crisis Harvester.
With the troublesome agricultural operations gone and with Harvester now able to concentrate on its increasingly profitable heavy-truck business, where it is still the nation’s largest producer, Lennox believes that Harvester’s long period of financial turmoil--which took it to the brink of bankruptcy more than once--is finally over.
Despite a $534-million net loss in its first fiscal quarter ended Jan. 31, which it attributed to huge write-offs on the Tenneco sale, the company reported a profit from its continuing operations of $42 million. And most analysts predict that Harvester will make about $200 million on an operating basis this year, its first profit since 1979.
“There is no question now that the crisis is over at Harvester,” agrees Eli Lustgarten, heavy-equipment analyst with Paine Webber Inc. in New York.
“Now that they are no longer in the agricultural implements business, they are left as the No. 1 (heavy) truck producer in the United States (with about 26% of the market), and that is a very profitable business for them,” adds Larry D. Hollis, an analyst with Robert W. Baird & Co. in Milwaukee.
So Lennox feels free to talk about how he hopes to take what is left of Harvester and reshape it. But for now, his plans have less to do with expanding Harvester’s historic heavy-equipment manufacturing operations than with transforming the company into a diversified, service-oriented conglomerate.
“My personal philosophy is that in the long run, we have to do enough diversification to reduce our dependence on trucks,” Lennox says. “But first, we need to concentrate on making money in trucks for a few years, to get our balance sheet healthy before we can go to the banks for the money to diversify.”
Task Made Easier
Ironically, his task of remaking the company may be easier because so much of Harvester has already disappeared. Between 1979 and 1984, Harvester’s revenues were cut nearly in half from $8.4 billion to $4.8 billion, and the sale of its farm-equipment operations should drop them below $4 billion this year.
Draconian cost-cutting efforts and the sale of its farm equipment, construction equipment, turbine engine and truck axle and transmission divisions leave it with just 15,000 employees this year, compared with more than 98,000 six years ago.
In effect, Lennox has a clean sheet of paper to design the company all over again--if he can pay off Harvester’s debts.
Lennox believes that he can. Over the next three years, Lennox predicts, Harvester’s rebounding truck sales and increasing profits--protected by $1 billion in tax benefits saved up from when it was reporting massive losses--should make it possible for the company to cut its debt burden to manageable size.
With the proceeds from the Tenneco deal, Lennox has already made a start, having reduced Harvester’s total debt from about $1.2 billion to an average of just under $800 million in the last two months, and he says it could fall as low as $200 million by 1988.
May Regain Credit
That should help Harvester regain access to the credit markets, which have been closed to it under the terms of its three debt-restructuring plans, arranged with its lenders in 1981, 1982 and 1983 to keep the company afloat.
“One thing we can’t do right now is borrow money, but we would be in very good shape if we could get our total debt down to a couple hundred million dollars within three or three and a half years,” Lennox says.
Further, Lennox hopes to improve Harvester’s credit rating by eliminating as much as half of Harvester’s $900 million unfunded pension liabilities in two years, when Harvester will be able to tap into between $400 million and $500 million in cash paid to its credit subsidiary by Tenneco in return for taking over the credit arm’s farm-equipment loans and inventory.
With bank doors thus open to him again, Lennox hopes to borrow aggressively to make acquisitions in the service sector, so that he can achieve his goal of reducing the company’s dependence on its highly cyclical and capital intensive durable goods manufacturing operations. He likes to point out how Chicago-based Borg-Warner Corp., a diversified conglomerate with roots in the automotive-parts industry, has moved into the security-guard business, helping to cushion the parent company from the violent swings of the auto industry.
Low Capital Investment
“That’s the kind of thing we’d like to get into--low capital investment and minimal cyclicality,” Lennox says. “The only capital investments in that business are the suits and hats for the guards.”
If Lennox accomplishes his remaking Harvester, it could be the next big corporate recovery story, ranking with Chrysler Corp. and Lockheed Corp..
But it has only been since the Tenneco deal was announced in November that Harvester’s future has seemed relatively secure, and analysts on Wall Street, who were writing Harvester obituaries not too long ago, remain a little skeptical.
“I would have thought an acquisition would have been way down the road, certainly beyond Lennox’s time in his job,” analyst Lustgarten says. (Lennox is expected to retire in 1987, when his current contract expires.) “It’s not an off-the-wall scenario . . . but there are still a lot of ifs.”
The biggest question mark in Harvester’s future is how long the current recovery in truck sales will continue, Lustgarten notes, since Harvester is now completely dependent on the truck market and will remain so until it can diversify.
In 1984, Harvester’s unit sales of medium- and heavy-duty trucks rose nearly 35% over 1983 levels, and sales in 1985 and 1986 are expected to stay close to the pace set in 1984.
Should Remain Good
“The truck market should remain relatively good for them for a couple more years if the economy doesn’t tank completely,” Hollis predicts. As a result, Hollis foresees Harvester operating earnings of $190 million to $225 million this year, and $350 million to $400 million in 1986.
Neil A. Springer, Harvester’s 46-year-old president, agrees that the company should be quite profitable with that kind of volume, since Harvester has slashed its break-even level in its truck operations so that it can now avoid losses even if sales fall back to 1983 levels, when Harvester sold just 53,913 trucks, 18,695 fewer than it did in 1984.
But a sales slowdown is likely to begin by 1987, analysts say, cutting into Harvester profits and its ability both to pay off its remaining debts and make acquisitions. “It would require an awful long business cycle for Harvester to count on three or four years of strong truck sales to get to a point where it could make an acquisition,” Lustgarten warns.
In the meantime, Lennox must fend off growing speculation that Harvester itself is a takeover candidate. Harvester’s $1 billion in tax credits from its red-ink years might be attractive to another company needing a tax shelter.
“I don’t see us as a prime target, but it is always a threat,” Lennox concedes. He adds that he hasn’t been approached--yet.
MEDIUM AND HEAVY-DUTY TRUCK SALES IN THE UNITED STATES
Total Industry Year Sales Harvester 1979 372,856 98,599 ’80 269,524 62,452 ’81 227,783 65,747 ’82 182,479 49,760 ’83 187,562 53,913 ’84 271,654 72,608
Source: Motor Vehicle Manufacturers Assn. of the United States Inc.
