Case Digs Out From Way Under

When engineers at Case Corp. asked longtime customer Larry Willingham to fly to Burlington, Iowa, to assess the company's new loader backhoe in mid-1992, the Tucson (Ariz.) contractor was more than a little skeptical. Just another factory tour, he thought.

But from the moment Willingham arrived, Case put him to work. For three grueling 11-hour days, Willingham loaded trucks, dug ditches, and leveled dirt as he rated Case's backhoe against rival machines from Caterpillar Inc. and Deere & Co. Evenings, Willingham huddled over pizza as Case engineers peppered him with questions.

Willingham liked what he saw, but he still wasn't sold. At nearly 16,000 pounds, the prototype weighed far more than he needed. If he bought one, he'd need a bigger truck, too. If this was Case's best shot, he'd stick with the lighter Deere model. But a year later, when the new model was unveiled, Case surprised Willingham. It had all of the features he had liked--and weighed 12,900 pounds. "I was really happy with the new model," Willingham says. "I definitely felt they listened to me."

NO TAKERS. Listening to the customer? It's all part of an extensive makeover that has Case, the long-troubled unit of Houston-based conglomerate Tenneco Inc., plowing up big profits for the first time in years. After a decade in which Case made a virtual art of ignoring the market, the maker of construction and farm equipment has spent four years trimming costs and capacity. But most important, Case, based in Racine, Wis., has made building what the customer wants top priority. "We need to be asking what the farmer and contractor really need," says Jean-Pierre Rosso, a 55-year-old Frenchman who became chief executive in April, 1994.

Case's makeover began back in 1991, when Tenneco's board, fed up with years of poor performance at the parent company, named turnaround expert Michael H. Walsh as CEO. Walsh brought in Dana G. Mead as his No. 2, and sent the longtime International Paper Co. executive to clean up Tenneco's biggest woe, Case.

Mead knew drastic change was needed: Despite repeated attempts to restructure, Case had lost money through most of the preceding decade. For 1991 and 1992 alone, operating losses hit nearly $900 million. "The [earlier efforts] weren't dramatic enough; they lacked resolution," says Mead today. He blames Tenneco's old guard, which refused to put up the money needed to remake Case. Tenneco also insisted on micromanaging the changes from Houston. Frustrated Case managers, figuring they would have little input anyway, never moved aggressively to implement the fixes.

At first, things looked so bad that even Mead wasn't sure he could succeed. He offered Case to anyone who would take it off his hands for a dollar--but he couldn't find any takers. But now Mead, who became Tenneco's CEO last year after Walsh died of cancer, is glad he didn't: After tipping into the black in 1993, Case saw net income more than triple, to $165 million last year, on a 14% sales hike, to $4.3 billion. This year should be even better. On revenues expected to rise a additional 11%, Smith Barney Inc. analyst Tobias M. Levkovich predicts Case's net income could leap 78%, to $294 million.

Of course, strong demand helps--rivals also are turning in record years. But on one measure, at least, the perennial industry laggard is gaining ground. Since last June, Tenneco has sold 56% of its Case stake to the public--and over the past year, Case shares have leapt 73%, vs. roughly 30% gains for rivals. Selling the Case stake has brought Tenneco $750 million. In late July, Mead announced plans to sell up to 14 million more Case shares. That would cut Tenneco's stake to 24%, earning it roughly an additional $500 million.

It's all a long way from the 1980s, when Case was one of the most mismanaged companies in America. For years, it poured products out to its company-owned stores to keep factories running. That forced Case to repeatedly slash prices to pump up sales. Case also had too much capacity, and it kept making unpopular lines, such as low-horsepower tractors. And it was inefficient, building too many components in-house.

It took the 1991 recession to teach Case its folly. When demand plummeted, dealers were caught with 11 months of inventory--four months above the industry average--and no customers. Facing financial disaster, Tenneco finally shored up Case's balance sheet with $1.4 billion and sent in Mead.

Mead vowed not to repeat Tenneco's earlier errors. He quickly brought in a new management team--and insisted that they write the turnaround plan that would make Case profitable. Then he linked bonuses to meeting restructuring targets and insured that Case's managers had the freedom to act. "I ran cover over Case," says Mead, who as chairman spent two days each week overseeing the turnaround. "I kept Tenneco bureaucrats out of their hair." Just as important, Mead told Case managers up front that Tenneco planned to spin off or sell the company once the restructuring began to bear fruit. "That created a sense of commitment," he says. "They knew they were likely to be an independent company."

Mead and his new team immediately tore into the bloated cost structure. Over the next two years, Case took restructuring charges of $1.4 billion. By 1997, Case will have closed 5 of 20 plants and shifted much production outside. Mead also began trimming Case's offerings, killing money-losing lines. Along the way, he slashed the payroll nearly 35%, to 15,900, started to spin off most of Case's 250 stores, and sold more than $2 billion in excess inventory.

These moves already are paying off. General and administrative expenses have fallen to 12.9% of sales this year, down from 23.3% in 1991. Gross margins have shot from 8.9% in 1991 to 23% last year--topping Cat and Deere. Says one rival: "The Case comeback looks like it may be real."

Still, much work remains. Case is only now embarking on restructuring its European operations, which account for 26% of sales. And Rosso says Case has so far only realized roughly 35% of expected cost savings. That--together with Case's interest burden--means net margins still lag industry leaders.

But with the worst over, Rosso, once a top executive at Honeywell Inc., knows cost-cutting alone won't sell more tractors. To fuel growth, Rosso must spread the lessons learned during the customer-driven redesign of the loader backhoe. Starting in 1992, Case sent teams of engineers and marketing managers to talk to 150 key customers and users of rival machines. They quickly got an earful. For example, engineers had planned to eliminate the backhoe's unique engine hood--which flips up like a car hood, rather than sliding like a side panel, as do rivals'--since it was expensive to build. But the ability to open the hood and see the entire engine was a key selling point. Says product designer Ronald C. Headrick: "We wouldn't have found that out if we didn't ask."

Case designers built a prototype machine and asked Willingham and hundreds of others to test it. Then, final prototypes were shipped to customers for field tests, as Case began overhauling the Burlington plant where the backhoes are built. To cut production costs 13% and improve product quality, Case gutted the 1 million square-foot factory. The company spent $10 million on a new painting system to give the machines an auto-like shimmer and improve rust resistance. Case also borrowed a page from the car industry: To cut the time and costs of design--and to trim inventories--it will build its new family of backhoes around a common platform. Now, 75% of parts will be shared, up from 30%.

WARY INVESTORS. The changes have helped: When the new backhoe was launched early this year, the first six months of production sold out, and the model remains in short supply. But Case isn't out of the woods yet. Caterpillar is keeping up the price pressure, dealers say. So far, Case and its newly independent distributors are holding the line. "The days of using price to gain market share are over for Case," says Rosso. Still, even he admits that investors are wary. "The ultimate proof will be weathering a downturn," he says. Rosso argues Case is prepared: Its break-even point will drop to $3 billion by 1997, down 33%, from $4.5 billion in 1991.

Count on Tenneco to prevent backsliding. Although Mead eventually wants to sell off Tenneco's remaining stake, he plans to keep 24% for now. Creditor agreements had prohibited Tenneco from going below 30% until Case bonds no longer are rated junk--and until Case pays off more than half of a $1 billion loan that Tenneco helped arrange in 1994. But with Case's improvement, that looks imminent. Late in July, a new Case debt offering was rated investment grade, and Case will use the proceeds to cut the debt to $425 million. Then Tenneco will be free to sell out--and Rosso will find out if Case can continue to plow ahead on its own.

Before it's here, it's on the Bloomberg Terminal.