As J.I. Case Sowed, So Shall It Reap

James K. Ashford seemed to have the magic touch. In 1987, he took over as president of J. I. Case Co., Tenneco's troubled farm-equipment division, and turned it into a powerhouse. Under Ashford, Case churned out electronics-packed tractors that farmers happily paid $80,000 to own. In 1989, Case earned a stellar $228 million, and he seemed likely to succeed James L. Ketelsen as CEO of Tenneco Inc. But in March, just three months after being named a Tenneco director, Ashford abruptly resigned. Says a former Case executive: "No one could figure it out."

Now, the reasons for his sudden departure are becoming clearer. In an effort to boost performance, Ashford may have left Case especially vulnerable to a downturn. While other suppliers were cutting back production late last year, Ashford kept on shipping--booking strong annual sales of $5.4 billion but leaving its dealers swamped with inventory in a recession. Case had to unload the machinery at fire-sale prices--and take first-half losses estimated at $247 million. The red ink is still flowing, and it may take a sale of part of Case to help stanch it. "They're paying for last year's sins," claims a former company executive. "It was all smoke."Ketelsen and Ashford say there was nothing wrong with Case's sales practices. But neither man denies that Case's problems are hammering Tenneco. C. J. Lawrence Inc. analyst Paul J. Milbauer estimates that the Houston conglomerate will be lucky to make $100 million this year, down from $561 million in 1990 on sales of $14.5 billion. At 34 3/8, Tenneco shares are trading at half their year-ago level (chart). "The wolf's at the door," says Milbauer.

DICEY NUMBERS. Those dire straits must seem familiar to Ketelsen, an Iowa native who ran Case in the late 1960s. When he tapped Ashford to take over Case, it was struggling to absorb the farm-equipment operations of International Harvester, which it bought in 1985 for $475 million. Ashford, who had just engineered a turnaround of Tenneco's automotive-parts unit, slashed the work force by 10%, to 27,000, shuttered four plants, and cut back on discounting, reducing overall costs by $150 million a year. He also caught a break: The seven-year agricultural recession ended just as he was taking over.

Ashford did, however, continue one longtime Case practice. The company, like other farm-equipment manufacturers, books the sale when it ships a piece of equipment to a dealer--even though it doesn't get paid until the dealer sells the goods, often at a discount. Some Case rivals, such as Deere & Co., immediately adjust sales figures downward by as much as 20% off their list prices. By comparison, Case often adjusted downward by a much smaller percentage, say former executives of the company.

The practice conforms to generally accepted accounting principles, which provide flexibility. But it's risky. And Case's aggressive accounting continued even as the market was slowing last year, say those former executives.

FURROWED BROWS. The strategy began to go sour when Iraq invaded Kuwait in August and showroom traffic dried up. Case compounded its woes by continuing to ship tractors through December. While Deere cut back U. S. production 21% in the last quarter, "we just kept shipping tons of equipment," says a former executive. Says another: "They tried to sell their way out of it, and it didn't work." Ketelsen responds: "By the time we knew where we were in August, it was October. We figured the market would settle down sooner."

In any event, the subsidiary came into 1991 with nearly 11 months' worth of inventory, vs. 7 for the industry and 3 or 4 for Deere. Just before the start of the second quarter, Ashford resigned, for "personal reasons."

Now, Ketelsen has to clean up the mess. He has cut production by 25%, laid off 4,000 workers, and given dealers rebates and incentives that reduce prices on some tractors by as much as 35%. But while Case sales are rising again, Deere continues to dominate the market for large farm machines, with a 42% share, vs. 32% for Case, says John A. Stark, who publishes an industry newsletter. Nor are Tenneco's other businesses helping. Operating income at its gas-pipeline, shipbuilding, and other operations will be down 7% this year, to $1.1 billion, says Ronald J. Barone, a Kidder, Peabody & Co. analyst.

Meanwhile, Tenneco's costs and debt are rising. Barring a roaring economic recovery, Barone figures Tenneco will have a cash-flow deficit of nearly $600 million for 1991.

Ultimately, Ketelsen may have to sell Case--or at least part of it. Case dealers say he's shopping Case's construction-equipment unit to Japan's Kubota Ltd. Ketelsen refutes that report--and speculation that he may leave soon. "I'm going to be here a while," he vows. Case's problems aren't going anywhere, either.

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