<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter ended September 30, 1997 Commission File No. 0-7916
----------------------- --------
HARMON INDUSTRIES, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Missouri 44-0657800
------------------------------ -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1300 Jefferson Court, Blue Springs, Missouri 64015
-------------------------------------------- --------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 816-229-3345
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
The number of shares of Registrant's common stock outstanding as of
September 30, 1997 was 6,891,642.
---------
-1-
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The Consolidated Statements of Earnings, Consolidated Balance Sheets and
Consolidated Statements of Cash Flows are unaudited, but reflect, in the
opinion of management, all adjustments necessary, all of which are considered
normal and recurring, to present fairly the financial position of the
Company at September 30, 1997 and December 31, 1996 as well as the results of
its operations for the interim periods ended September 30, 1997 and
September 30, 1996.
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<PAGE>
HARMON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
FOR PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IN THOUSANDS OF DOLLARS (EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $56,125 $41,957 $139,734 $119,465
Cost of sales 41,512 29,721 101,316 83,086
Research and development expenditures 1,758 1,492 5,168 4,676
------- ------- -------- --------
Gross profit 12,855 10,744 33,250 31,703
Selling, general and
administrative expenses 8,228 6,491 20,763 19,216
Amortization of cost in
excess of fair value of
net assets acquired 178 154 505 428
Equity in net loss of affiliate -- -- 330 --
Miscellaneous (income) expense-net (4) (14) (76) (45)
------- ------- -------- --------
Operating income 4,453 4,113 11,728 12,104
Interest expense (333) (123) (884) (612)
Investment income 67 28 381 226
------ ------ ------- --------
Earnings before income taxes 4,187 4,018 11,225 11,718
Income tax expense (benefit):
Current 1,548 1,554 4,152 4,561
Deferred -- (24) -- (64)
------- ------- -------- --------
1,548 1,530 4,152 4,497
------- ------- -------- --------
Net earnings $2,639 $2,488 $7,073 $7,221
======= ======= ======== ========
Net earnings per common share $0.38 $0.36 $1.03 $1.06
======= ======= ======== ========
Weighted average outstanding common and
common equivalent shares 6,935,829 6,843,881 6,898,295 6,837,743
========= ========= ========= =========
</TABLE>
3
<PAGE>
HARMON INDUSTRIES, INC.
Consolidated Balance Sheets
In Thousands of Dollars
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $2,350 --
Trade receivables, less allowance for doubtful accounts
of $811 in 1997 and $307 in 1996 41,257 39,656
Costs and estimated earnings in excess of billings on
uncompleted contracts 3,401 1,665
Inventories:
Work in process 7,037 4,145
Raw materials and supplies 31,186 23,076
-------- --------
38,223 27,221
Income tax receivable 1,421 --
Deferred tax asset 1,637 1,637
Prepaid expenses and other current assets 964 2,851
-------- --------
Total current assets 89,253 73,030
-------- --------
Property, plant and equipment, at cost:
Land 363 356
Buildings 10,828 9,010
Machinery and equipment 15,618 14,292
Office furniture and equipment 19,085 16,032
Transportation equipment 1,303 1,236
Leasehold improvements 2,985 2,395
-------- --------
50,182 43,321
Less accumulated depreciation and amortization 28,579 25,389
-------- --------
Net property, plant and equipment 21,603 17,932
Deferred tax asset 738 738
Cost in excess of fair value of net assets acquired,
net of accumulated amortization of
$2,988 in 1997 and $2,483 in 1996 8,264 7,606
Deferred compensation asset 5,392 4,998
Other assets 148 373
-------- --------
$125,398 $104,677
======== =========
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current debt installments $1,229 $737
Accounts payable 13,842 15,119
Accrued payroll, bonus and employee benefit plan
contributions 9,020 10,892
Billings in excess of costs and estimated earnings
on uncompleted contracts 8,382 5,926
Federal and state income taxes payable 839 492
Other accrued liabilities 4,869 6,235
-------- --------
Total current liabilities 38,181 39,401
-------- --------
Deferred compensation liability 4,138 3,925
Long-term debt 18,200 3,412
-------- --------
Total liabilities 60,519 46,738
Stockholders' equity
Common stock of $.25 par value; authorized
20,000,000 shares, issued 6,891,642 in 1997
and 6,829,273 in 1996 1,723 1,707
Additional paid-in capital 23,731 23,194
Foreign currency translation 32 203
Retained earnings 39,393 32,835
-------- --------
Total stockholders' equity 64,879 57,939
-------- --------
$125,398 $104,677
======== =========
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
HARMON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IN THOUSANDS OF DOLLARS
(UNAUDITED)
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $7,073 $7,221
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 3,978 3,638
Equity in net loss of affiliate 330 --
(Gain) loss on sale of property, plant and equipment -- 10
Deferred tax expense (benefit) -- (64)
Changes in assets and liabilities:
Trade receivables (933) (3,474)
Inventories (10,927) (2,791)
Estimated costs, earnings and billings on contracts 783 5,181
Income tax receivable (1,421) 423
Prepaid expenses 2,160 (327)
Accounts payable (2,646) 250
Accrued payroll and benefits (1,872) 2,435
Current income taxes 347 --
Other liabilities (1,438) 322
Other deferred liabilities 213 268
------------- -------------
Total adjustments (11,426) 5,871
------------- -------------
Net cash provided by (used in) operating activities (4,353) 13,092
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (7,064) (4,393)
Proceeds from sale of property, plant and equipment 19 --
Deferred compensation contributions (394) (181)
Other investing activities 14 485
Acquisition of businesses (155) (2,056)
------------- -------------
Net cash used in investing activities (7,580) (6,145)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 553 --
Proceeds from issuance of long-term debt 15,045 --
Borrowings under line of credit agreements 29,934 30,224
Repayments under line of credit agreements (29,953) (36,332)
Principal payments of long-term debt (610) (281)
Bank overdraft -- (56)
Cash dividends paid (515) (510)
------------- -------------
Net cash provided by (used in) financing activities 14,454 (6,955)
------------- -------------
Foreign currency translation adjustment (171) 8
------------- -------------
Net increase (decrease) in cash and cash equivalents 2,350 --
------------- -------------
Cash and cash equivalents at beginning of period -- --
------------- -------------
Cash and cash equivalents at end of period $2,350 $ --
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 673 $ 573
Income taxes $5,135 $4,288
</TABLE>
-5-
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -------------------------------------------------------------------------------
Net sales for the third quarter ended September 30, 1997 were $56.1 million
compared with net sales of $42.0 million for the quarter ended September 30,
1996, an increase of 33.8%. Net sales for the nine months ended September
30, 1997 increased 17.0% to $139.7 million from $119.5 million for the nine
months ended September 30, 1996. The increases in net sales for these
periods are the result of continued strong demand for the Company's products
and services, primarily from North American freight railroads which are
investing in capital equipment to increase safety and efficiency and to
integrate recently merged operations.
Gross profit for the 1997 third quarter was $12.9 million, a 19.7% increase
from the 1996 third quarter. Gross profit margin was 22.9% versus 25.6% in
the prior year quarter. The decline in gross profit margin is primarily the
result of an increase in the sales mix toward services, systems and
pass-through sales. Research and development expenditures (R&D) increased to
$1.8 million in the third quarter of 1997 from $1.5 million in the same
quarter one year ago. As a percent of net sales, R&D for the quarter
decreased to 3.1% from 3.6% in the 1996 third quarter.
Gross profit for the nine months ended September 30, 1997 was $33.3 million,
an increase of 4.9% from $31.7 million for the comparable period of 1996.
Gross profit margin decreased from 26.5% for the nine months ended September
30, 1996 to 23.8% for the nine months ended September 30, 1997. The decline
in gross profit margin is primarily the result of an increase in the sales
mix toward services, systems and pass-through sales. R&D increased to $5.2
million for the nine months ended September 30, 1997 from $4.7 million for
the same period in 1996. For the nine months ended September 30, 1997, R&D
as a percent of net sales was 3.7%, a decrease from 3.9% of net sales for the
same period in 1996.
Selling, general and administrative expenses (SG&A) were $8.2 million for the
quarter ended September 30, 1997, an increase of 26.8% from $6.5 million
during the 1996 quarter. SG&A as a percent of net sales was 14.7% during the
third quarter of 1997 versus 15.5% for the third quarter of 1996. For the
nine months ended September 30, 1997, SG&A was $20.8 million, or 14.9% of net
sales, an increase of 8.1% from $19.2 million, or 16.1% of net sales, for the
comparable period in 1996. SG&A increased in both the three and nine months
ended September 30, 1997 over the comparable periods in 1996 in support of
increased net sales during the corresponding periods. The decreases in SG&A
as a percent of net sales for both the three months and nine months ended
September 30, 1997 compared with the prior year periods resulted from net
sales increasing at a rate which exceeded the rate of increase in SG&A.
During the quarter ended June 30, 1997, the Company acquired the remaining
62% of the issued and outstanding shares of its Canadian affiliate, Vale
Harmon Enterprises, Ltd. (Vale), that it previously did not own. The Company
recorded a charge of $330 thousand during the second quarter of 1997 to
recognize its share of Vale's pre-acquisition losses.
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<PAGE>
Net interest expense (interest expense less investment income) for the third
quarter was $266 thousand in 1997 compared with $95 thousand in 1996. For
the nine months ended September 30, 1997, net interest expense was $503
thousand compared with $386 thousand for the prior year period. These
increases in interest expense are the result of the issuance of $15 million
of senior unsecured notes in January, 1997.
The effective tax rate decreased to 37.0% in the third quarter of 1997 from
38.1% in the prior year quarter. For the nine months ended September 30, the
effective tax rate decreased from 38.4% in 1996 to 37.0% in 1997. These
decreases are due to lower state income taxes resulting from changes in the
Company's business activity by state, state exemption for United Kingdom
earnings and use of United Kingdom tax loss carryforwards.
Orders for the Company's products and services during the third quarter of
1997 were $69.6 million, exceeding orders of $57.3 million in the second
quarter of 1997 by 21.5%. Orders for the third quarter of 1997 were led by
the freight railroad market. Class I railroads in the United States are
making significant capital improvements to achieve efficiencies within
recently merged operations. For the nine months ended September 30, 1997,
orders were $173.6 million, an increase of 35.7% from $128.0 million for the
comparable period of 1996. The Company's order backlog increased to $88.9
million at September 30, 1997, up from $59.4 million at December 31, 1996 and
$50.7 million one year ago.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" which revises the calculation and presentation
provisions of Accounting Principles Board Opinion 15 and related
interpretations. Statement No. 128 is effective for the Company's fiscal
year ending December 31, 1997. The Company believes the adoption of
Statement No. 128 will not have a significant effect on its reported earnings
per share.
At September 30, 1997 the Company had $34.2 million in liquidity. This
consisted of $2.4 million in cash and cash equivalents plus $31.8 million
available under bank lines of credit. The current ratio at September 30,
1997 was 2.3 to 1 compared to 1.9 to 1 at December 31, 1996 and 2.1 to 1 at
September 30, 1996. The increase in the current ratio from December 31, 1996
to September 30, 1997 is primarily the result of higher inventory levels in
anticipation of increased shipments in the fourth quarter.
-7-
<PAGE>
PART II. OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
No Form 8-K was required to be filed during the most recent quarter.
EXHIBIT TABLE
REFERENCE # PAGE #
------------- ------
Computation of earnings per share 11A 10 - 11
-8-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARMON INDUSTRIES, INC.
Date: November 7, 1997 /s/Bjorn E. Olsson
---------------------------------------
Bjorn E. Olsson,
President
Date: November 7, 1997 /s/Charles M. Foudree
---------------------------------------
Charles M. Foudree,
Executive Vice President-Finance
Date: November 7, 1997 /s/Stephen L. Schmitz
---------------------------------------
Stephen L. Schmitz,
Vice President-Controller
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<PAGE>
HARMON INDUSTRIES, INC. EXHIBIT 11A
FORM 10-Q
SEPTEMBER 30, 1997
COMPUTATION OF EARNINGS PER SHARE (INSTRUCTION H(g))
Computation of the average number of shares of Common Stock outstanding for the
three months ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
(1) (2) (3) (4)
Average number of
shares outstanding
as shown on
consolidated statements
Shares of Number of operations (3)
common of days Share days divided by number
stock outstanding (2 x 1) of days in period
------------ ------------ ------------- ------------------------
<S> <C> <C> <C> <C>
1997
July 1 - September 30 6,876,608 92 632,647,936
Options exercised 1,000 54 54,000
700 28 19,600
300 6 1,800
13,034 77 1,003,618
Equivalent shares under the
Company's option plans 47,493 92 4,369,356
------------
638,096,310 6,935,829
============= =========
1996
July 1 - September 30 6,805,626 92 626,117,592
Stock issued in acquisition 17,647 3 52,941
Equivalent shares under the
Company's option plans 37,680 92 3,466,560
------------
629,637,093 6,843,881
============ =========
</TABLE>
- 10-
<PAGE>
Computation of the average number of shares of Common Stock outstanding for
the nine months ended September 30, 1997 and 1996.
1997
Quarter 1 weighted average 6,868,909
Quarter 2 weighted average 6,890,148
Quarter 3 weighted average 6,935,829
Divided by
20,694,886 3 quarters= 6,898,295
=========
1996
Quarter 1 weighted average 6,828,883
Quarter 2 weighted average 6,840,464
Quarter 3 weighted average 6,843,881
Divided by
20,513,228 3 quarters= 6,837,743
=========
-11-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF HARMON INDUSTRIES, INC. AT SEPTEMBER 30,
1997 AND FOR THE NINE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,350
<SECURITIES> 0
<RECEIVABLES> 42,068
<ALLOWANCES> (811)
<INVENTORY> 38,223
<CURRENT-ASSETS> 89,253
<PP&E> 50,182
<DEPRECIATION> (28,579)
<TOTAL-ASSETS> 125,398
<CURRENT-LIABILITIES> 38,181
<BONDS> 19,429
0
0
<COMMON> 1,723
<OTHER-SE> 63,156
<TOTAL-LIABILITY-AND-EQUITY> 125,398
<SALES> 139,734
<TOTAL-REVENUES> 139,734
<CGS> 106,484
<TOTAL-COSTS> 106,484
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 884
<INCOME-PRETAX> 11,225
<INCOME-TAX> 4,152
<INCOME-CONTINUING> 7,073
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,073
<EPS-PRIMARY> 1.03
<EPS-DILUTED> 1.03
</TABLE>
