Case IH, helped by the upturn in the farm economy and the export market, is expected to report its first profit in six years this quarter.
The turnaround, however slight, couldn`t come at a better time for Racine-based Case or its Houston-based parent, Tenneco Inc.
The debt-laden Tenneco needs cash and plans to sell its oil and natural gas properties, excluding its interstate gas properties. The sale could carry a $6 billion-plus price tag.
Once the sales of these properties are complete, Case will be Tenneco`s biggest single subsidiary, accounting for a third of the conglomerate`s revenue. Two other remaining units-Packaging Corp. of America in Evanston and Tenneco Automotive in Lincolnshire-give Tenneco, founded in 1947 as Tennessee Gas Transmission Co., a decidedly Midwestern look. Moreover, the Tenneco Gas Pipeline Group serves the upper Midwest.
But Case will be in the spotlight to produce not only farm and construction equipment but also profits.
Case was formed in 1985, when Tenneco`s J I Case division and the agricultural equipment division of the former International Harvester Co. merged. Case is the second largest farm equipment manufacturer in the U.S., behind Deere & Co., and the leading manufacturer of small to medium-size construction equipment.
”No. 1, we have not yet gotten through the consolidation of the IH purchase,” said James L. Ketelsen, Tenneco Inc. chairman and chief executive. ”We said it would take a full four to five years. It`s coming out of a big loss over time.”
Case reported a loss of $259 million on sales of $3.7 billion in 1987. In 1986, the company lost $1 million on sales of $3.4 billion. In 1985, it lost $214 million on sales of $2.7 billion.
Case last showed a profit in 1981, when sales were $2.5 billion and net income $70 million. The company broke even in 1982 on sales of $2.01 billion. Case hopes at least to break even in the second quarter, which ends June 30.
”Fundamentally, the merger went together well,” Ketelsen said. ”We have accomplished most of what we wanted to do, but the industry was much more depressed than what we thought at the time. It was off 35 percent from what we thought it would be when we bought Harvester.”
Though a great deal of work lies ahead to mold the Case subsidiary into a profitable unit, Tenneco is confident that the oil and gas spinoff is a better move than selling Case.
”Because of past profitability problems, it doesn`t make sense to do it at this time,” Ketelsen said of selling Case. ”All the fundamentals are in place for the company to be successful. Case needs more time. The market is clearly coming back.”
Ketelsen is not alone in his assessment.
”They could never get the value for Case if they sold it,” said George Gaspar, first vice president at the investment firm of Robert W. Baird & Co. in Milwaukee. ”It will probably take another year for them to put Case back on track.”
Packaging Corp. of America and Tenneco Automotive are profit contributors to Tenneco. Also remaining after the oil and gas sale will be Newport News Shipbuilding & Drydock Co. and the Tenneco Gas Pipeline Group, which serves the upper Midwest. Of the Tenneco units that will remain, Case is the only one without a profit.
”The pipeline business will remain the energy group of Tenneco,” said Robert C. Thomas, president of Tenneco Gas Pipeline Group, based in Houston.
The pipeline division serves 15 to 20 percent of Chicago`s natural gas market. It sells to Northern Illinois Gas Co., Peoples Gas, Light and Coke Co. and Northern Indiana Public Service Co.
”We think at this point in time the value sale of the oil and gas units is best,” said Ketelsen. ”We feel we can receive a good price for these properties. It`s a good time to sell. Many major oil companies are in good cash positions.”
Cash-rich suitors for Tenneco`s oil and gas reserves abroad and in the U.S. could include Pennzoil Co., which received a $3 billion settlement from Texaco Inc. last month, and Mobil Corp., which got $1.5 billion from the sale in March of Montgomery Ward & Co.
Other companies that have been mentioned as prospective buyers of Tenneco`s oil and gas operations include Royal Dutch/Shell Group, which owns Shell Oil Co., and Exxon Corp.
Ketelsen declined to estimate the price that the oil and gas properties would bring but said proceeds would be used to pay down debt.
As of Dec. 31, Tenneco listed $7.13 billion in consolidated debt and $4.2 billion in unconsolidated debt owed by subsidiaries to finance purchases.
”They are going to put the grease to the wheel after the sale of the oil and gas properties,” said Baird`s Gaspar. ”A considerable portion is expected, perhaps $6 billion to $7 billion, to come from the sale. It obviously won`t be used to pay all the debt. They probably will commit to a program to buying back stock and building up business.”
The sale is to be completed by year-end.
To relieve debt pressures, Packaging Corp. and Tenneco Automotive also would have brought handsome prices.
”We clearly had that alternative to consider spinning off in the Midwest, but these are good businesses with good returns and good growth prospects,” said Ketelsen. ”Obviously, Packaging and Automotive could be sold, bang, tomorrow but these are companies we can build on.”
Packaging Corp. and Tenneco Automotive consistently have rung up impressive sales and profits.
Sales for Tenneco Automotive in 1987 were $1.5 billion, up from $1.3 billion in 1986 and $1.1 billion in 1985. Net income for the automotive division in 1987 was $195 million; in 1986, $179 million; and in 1985, $134 million.
Tenneco Automotive, a worldwide automotive parts manufacturing and marketing firm, was formed 10 years ago by joining the operations of Monroe Auto Equipment Co., Walker Manufacturing and Speedy Muffler King.
”We`re market share leaders in many of the areas of the world,” said Tenneco Automotive President John P. Reilly. ”We`ve shown continued growth. On the profit side of the equation, we focus very hard on cost reduction and feel that has been the fuel that has fired our engine of success.”
Automotive`s products include Monroe ride-controls, comprising shock absorber products, and Walker exhaust systems. Automotive employs 15,800 people. Tenneco Automotive`s retail division consists of Car-X, Speedy and Pit Stop operations.
Packaging Corp. has had an equally stellar performance.
Sales for Packaging Corp. in 1987 were $1.2 billion; in 1986, $952 million; and in 1985, $858 million. Net income the company in 1987 was $166 million; in 1986, $110 million; and in 1985, $93 million.
Packaging Corp. is one of the largest producers of paperboard, molded fiber, aluminum foil and plastic packaging.
”Five years ago, if you looked at us, you would have concluded we were a paperboard company with a heavy Midwest orientation,” said Monte R. Haymon, president of Packaging Corp. ”Now we have 60 operating properties around the world and are doing quite well. We expect profits to top $200 million in 1988. ”We got here in several ways,” said Haymon. ”We liquidated about 25 nonperforming operations and reorganized by making several acquisitions.”
Packaging Corp. is also making what it terms ”a medium-size acquisition” that will fall into the disposable plastic and aluminum side of the company.
The cash-troubled Case is striving to look just as good as, if not better than, Tenneco Automotive and Packaging Corp. All Case needs is time, said President James K. Ashford.
”Everybody would like to have instant success,” Ashford said. ”This business is starting to grow a little bit, at least on the agricultural side.”
Some observers of the farm equipment industry also give Case a chance.
”There`s been a definite turnaround in the farm equipment business,”
said Emmett Barker, president of the Farm and Industrial Equipment Institute, based in Chicago. ”Farm equipment tractor sales are up 17 percent. All this bodes well, very well, for Case.”
Harking back to the ”good old days,” Barker said: ”When we were really doing business, it was common to sell hundreds of combines a day. In 1987, the year-to-date total by April was 485. Year to-date totals as of April this year were 1,583 for combines.”
”As you can see we have an opportunity to turn this business around,”
said Ashford.
”We need to re-evaluate the system we use to get products into the marketplace and the progams we have that are designed to get that product sold,” said Ashford. ”But none of these are short-term goals.”
To meet some of its goals, Case has implemented a cost-reduction plan that means fewer people on its payroll. In March, Case said it would lay off 3,000 people this year. Ashford said the work reduction would be spread throughout the year and be done in worldwide. Case employs about 30,000.
”I don`t know if there will be any further reductions than that,” said Ashford. ”In terms of cost reduction, we`re examining every aspect of cost in this company to find ways to reduce it.”
Case closed three construction equipment facilities in the last year in Terre Haute, Ind.; Rock Island, Ill.; and Bettendorf, Ia.
Case also has closed a plant in Lee, England, and is curtailing its operations in Malcolm, England, by reducing its employee rolls from to 250 to 300 approximately 1,100.
”We don`t anticipate any more closings, but if any further rationalization needs to be done it will be done in Europe because we have smaller facilities there,” Ashford said.
Though Ashford said Case could achieve profitability this quarter, he`s concentrating on goals that will make the company stronger year to year.
”It`s difficult to say, but we should be right at the break-even point and maybe even make some money this quarter,” said Ashford. ”What`s more important is that we can get back on track for the long term for the rest of the year and for years to come.”
”Historically, we`ve done much better with construction equipment,”
said Ashford. ”But this market goes through ups and downs like agriculture.” Though Case has a presence in the farm and heavy equipment business worldwide, the company`s strongest sales are in North America. Sixty-five percent of its sales come from North America and approximately 30 percent from Europe, with the remaining 5 percent from elsewhere.
”No doubt we will be much stronger in agricultural and construction equipment in all the markets throughout the world,” said Ashford.
”But, maybe, I don`t want to get too far out on the limb, Tenneco may ask me to deliver,” quipped Ashford. ”I don`t feel the pressure from corporate people in Houston or at the board level to produce results from month to month or quarterly to effectively do the job that needs to be done here. If there`s any pressure, it comes from within for us here to give the company a greater focus.”
Though Case is cutting some elements of its business, it`s expanding others.
The company will introduce a midrange tractor this year to its farm equipment line and plans to upgrade construction equipment products.
In response to the theory ”if Case falls so goes Tenneco,” Ketelsen first said: ”You mean so goes Ketelsen.”
”Tenneco is obviously stronger than that,” he said. ”I don`t think that`s a likelihood. We have very strong divisions and diverse industries. With the exception of Case, our businesses have shown good records of profitability.”
With the sale of Tenneco`s oil and gas properties, Tenneco will have more control of its future, said Ketelsen.
Of Tenneco`s remaining businesses after the sale, Ketelsen said: ”No one of these businesses is so large in relation to the whole that its trends will dominate the whole Tenneco picture. We feel we now have more control in what lies ahead.”
