|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the quarterly period ended: September 30, 1999 | Commission File Number: 0-7916 |
HARMON INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Missouri | 44-0657800 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
1600 NE Coronado Drive, Blue Springs, Missouri |
|
64014 |
(Address of principal executive offices) | (Zip Code) | |
816-229-3345 (Registrant's telephone number, including area code) |
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
Number of shares of Registrant's common stock outstanding as of September 30, 1999: 11,348,459
The Consolidated Statements of Earnings, Consolidated Balance Sheets, Consolidated Statements of Cash Flows and Consolidated Statements of Stockholders' Equity 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, 1999 and December 31, 1998 as well as the results of its operations for the interim periods ended September 30, 1999 and September 30, 1998. The Consolidated Balance Sheet as of December 31, 1998 is derived from the audited Consolidated Balance Sheet as of that date.
2
HARMON INDUSTRIES, INC.
Consolidated Statements of Earnings
For periods ended September 30, 1999 and 1998
Amounts in thousands (except per share data)
(Unaudited)
|
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
1999 |
1998 |
1999 |
1998 |
|||||||||
Net sales | $ | 75,812 | $ | 57,754 | $ | 214,544 | $ | 192,017 | |||||
Cost of sales | 60,466 | 43,749 | 168,835 | 145,087 | |||||||||
Research and development expenditures | 2,225 | 2,103 | 6,517 | 6,586 | |||||||||
Gross profit | 13,121 | 11,902 | 39,192 | 40,344 | |||||||||
Selling, general and administrative expenses | 9,757 | 7,783 | 28,689 | 23,750 | |||||||||
Amortization of cost in excess of fair value of net assets acquired | 730 | 234 | 1,724 | 668 | |||||||||
Miscellaneous (income) expensenet | (185 | ) | (188 | ) | (371 | ) | (206 | ) | |||||
Operating income | 2,819 | 4,073 | 9,150 | 16,132 | |||||||||
Interest expense |
|
|
(1,143 |
) |
|
(304 |
) |
|
(2,779 |
) |
|
(961 |
) |
Investment income | 113 | 98 | 241 | 209 | |||||||||
Earnings before income taxes and minority interest | 1,789 | 3,867 | 6,612 | 15,380 | |||||||||
Income tax expense | 533 | 1,399 | 2,739 | 5,498 | |||||||||
Minority interest in income of consolidated subsidiaries | (163 | ) | | (198 | ) | | |||||||
Net earnings | $ | 1,093 | $ | 2,468 | $ | 3,675 | $ | 9,882 | |||||
Net earnings per common share: | |||||||||||||
Basic | $ | 0.10 | $ | 0.23 | $ | 0.33 | $ | 0.94 | |||||
Diluted | $ | 0.10 | $ | 0.23 | $ | 0.33 | $ | 0.93 | |||||
Shares used for computation: | |||||||||||||
Basic | 11,262 | 10,532 | 11,002 | 10,512 | |||||||||
Diluted | 11,326 | 10,666 | 11,100 | 10,653 |
3
HARMON INDUSTRIES, INC.
Consolidated Balance Sheets
In thousands of dollars
|
September 30, 1999 |
December 31, 1998 |
||||
---|---|---|---|---|---|---|
(unaudited) | ||||||
Assets | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | 7,158 | $ | 1,669 | ||
Trade receivables, less allowance for doubtful accounts of $893 in 1999 and $351 in 1998 | 76,216 | 52,229 | ||||
Costs and estimated earnings in excess of billings on uncompleted contracts | 27,122 | 9,649 | ||||
Inventories: | ||||||
Work in process | 6,420 | 6,372 | ||||
Raw materials and supplies | 45,504 | 36,640 | ||||
51,924 | 43,012 | |||||
Income tax receivable | 109 | 597 | ||||
Deferred tax asset | 1,018 | 587 | ||||
Prepaid expenses and other current assets | 1,748 | 1,301 | ||||
Total current assets | 165,295 | 109,044 | ||||
Property, plant and equipment, at cost: | ||||||
Land | 555 | 465 | ||||
Buildings | 12,687 | 11,671 | ||||
Machinery and equipment | 25,905 | 18,830 | ||||
Office furniture and equipment | 33,065 | 25,246 | ||||
Transportation equipment | 4,712 | 1,709 | ||||
Leasehold improvements | 4,980 | 3,938 | ||||
81,904 | 61,859 | |||||
Less accumulated depreciation and amortization | 47,959 | 35,284 | ||||
Net property, plant and equipment | 33,945 | 26,575 | ||||
Deferred tax asset | 5,246 | 654 | ||||
Cost in excess of fair value of net assets acquired, net of accumulated amortization of $5,929 in 1999 and $4,212 in 1998 | 41,187 | 17,327 | ||||
Deferred compensation asset | 8,127 | 6,839 | ||||
Other assets | 3,414 | 2,414 | ||||
$ | 257,214 | $ | 162,853 | |||
4
HARMON INDUSTRIES, INC.
Consolidated Balance Sheets (Continued)
In thousands of dollars
|
September 30, 1999 |
December 31, 1998 |
|||||
---|---|---|---|---|---|---|---|
(unaudited) | |||||||
Liabilities and Stockholders' Equity | |||||||
Current liabilities: | |||||||
Current debt installments | $ | 7,868 | $ | 280 | |||
Accounts payable | 24,885 | 16,415 | |||||
Accrued payroll, bonus and employee benefit plan contributions | 9,930 | 13,342 | |||||
Billings in excess of costs and estimated earnings on uncompleted contracts | 23,254 | 17,493 | |||||
Other accrued liabilities | 10,758 | 5,650 | |||||
Total current liabilities |
|
|
76,695 |
|
|
53,180 |
|
Deferred compensation liability |
|
|
6,295 |
|
|
5,175 |
|
Other long-term liabilities | 4,589 | | |||||
Long-term debt | 70,791 | 19,540 | |||||
Total liabilities |
|
|
158,370 |
|
|
77,895 |
|
Minority interests | 1,132 | | |||||
Stockholders' equity |
|
|
|
|
|
|
|
Common stock of $.25 par value; authorized 50,000,000 shares, issued 11,378,459 in 1999 and 10,662,400 in 1998 | 2,845 | 2,666 | |||||
Additional paid-in capital | 37,600 | 27,457 | |||||
Treasury stock at cost; 30,000 shares | (641 | ) | | ||||
Foreign currency translation | 82 | 127 | |||||
Unearned compensation | (179 | ) | (287 | ) | |||
Retained earnings | 58,005 | 54,995 | |||||
Total stockholders' equity |
|
|
97,712 |
|
|
84,958 |
|
$ | 257,214 | $ | 162,853 | ||||
5
HARMON INDUSTRIES, INC.
Consolidated Statements of Cash Flows
For the nine month periods ended September 30, 1999 and 1998
In thousands of dollars
(Unaudited)
|
September 30, 1999 |
September 30, 1998 |
|||||
---|---|---|---|---|---|---|---|
Cash flows from operating activities: | |||||||
Net earnings | $ | 3,675 | $ | 9,882 | |||
Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||
Depreciation and amortization | 7,491 | 5,182 | |||||
(Gain) loss on sale of property, plant and equipment | 23 | 18 | |||||
Earned stock compensation | 140 | | |||||
Changes in assets and liabilities, net of businesses acquired: | |||||||
Trade receivables | (4,918 | ) | 8,373 | ||||
Inventories | (416 | ) | (1,948 | ) | |||
Estimated costs, earnings and billings on contracts | (9,608 | ) | (1,020 | ) | |||
Income tax receivable | 793 | (142 | ) | ||||
Prepaid expenses | (25 | ) | (1,257 | ) | |||
Other assets | | (675 | ) | ||||
Accounts payable | (1,280 | ) | (9,635 | ) | |||
Accrued payroll and benefits | (9,565 | ) | 390 | ||||
Current income taxes | (639 | ) | (566 | ) | |||
Other accrued liabilities | 2,695 | (701 | ) | ||||
Deferred compensation liability | 1,120 | 524 | |||||
Total adjustments | (14,189 | ) | (1,457 | ) | |||
Net cash provided by (used in) operating activities | (10,514 | ) | 8,425 | ||||
Cash flows from investing activities: | |||||||
Capital expenditures | (9,982 | ) | (5,868 | ) | |||
Proceeds from sale of property, plant and equipment | 6 | 13 | |||||
Deferred compensation contributions | (1,288 | ) | (650 | ) | |||
Acquisition of businesses | (20,962 | ) | | ||||
Other investing activities | 90 | (411 | ) | ||||
Net cash used in investing activities | (32,136 | ) | (6,916 | ) | |||
Cash flows from financing activities: | |||||||
Proceeds from issuance of common stock | 296 | 543 | |||||
Purchase of treasury stock | (641 | ) | | ||||
Borrowings under line of credit agreements | 103,585 | 43,906 | |||||
Repayments under line of credit agreements | (52,460 | ) | (44,478 | ) | |||
Borrowings under long-term debt agreements | 1,379 | | |||||
Principal payments of long-term debt | (3,310 | ) | (1,101 | ) | |||
Cash dividends paid | (665 | ) | (580 | ) | |||
Net cash (used in) provided by financing activities | 48,184 | (1,710 | ) | ||||
Foreign currency translation adjustment | (45 | ) | 91 | ||||
Net increase (decrease) in cash and cash equivalents | 5,489 | (110 | ) | ||||
Cash and cash equivalents at beginning of period | 1,669 | 6,748 | |||||
Cash and cash equivalents at end of period | $ | 7,158 | $ | 6,638 | |||
Supplemental disclosures of cash flow information: | |||||||
Cash paid during the period for: | |||||||
Interest | $ | 2,746 | $ | 1,395 | |||
Income taxes | $ | 2,252 | $ | 9,053 | |||
Acquisitions of businesses financed by issuance of common stock | $ | 9,994 | $ | 1,158 |
6
HARMON INDUSTRIES, INC.
Consolidated Statements of Stockholders' Equity
In thousands of dollars
(Unaudited)
|
Common Stock |
Additional Paid-in Capital |
Foreign Currency Translation |
Unearned Compensation |
Retained Earnings |
Total Stockholders' Equity |
Comprehensive Income |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at December 31, 1997 | 2,609 | 24,514 | 104 | (224 | ) | 42,759 | 69,762 | |||||||||||||||
Net earnings | 2,812 | 2,812 | $ | 2,812 | ||||||||||||||||||
Common stock issued: | ||||||||||||||||||||||
Acquisition of businesses | 20 | 1,138 | 1,158 | |||||||||||||||||||
Stock options and other | 1 | 36 | 37 | |||||||||||||||||||
Foreign currency translation | 149 | 149 | 149 | |||||||||||||||||||
Comprehensive income | $ | 2,961 | ||||||||||||||||||||
Balance at March 31, 1998 | $ | 2,630 | $ | 25,688 | $ | 253 | $ | (224 | ) | $ | 45,571 | $ | 73,918 | |||||||||
Net earnings | 4,602 | 4,602 | $ | 4,602 | ||||||||||||||||||
Cash dividends paid | (580 | ) | (580 | ) | ||||||||||||||||||
Common stock issued: | ||||||||||||||||||||||
Deferred compensation | 7 | 7 | ||||||||||||||||||||
Stock options and other | 5 | 291 | 296 | |||||||||||||||||||
Foreign currency translation | (115 | ) | (115 | ) | (115 | ) | ||||||||||||||||
Comprehensive income | $ | 4,487 | ||||||||||||||||||||
Balance at June 30, 1998 | $ | 2,635 | $ | 25,986 | $ | 138 | $ | (224 | ) | $ | 49,593 | $ | 78,128 | |||||||||
Net earnings | 2,468 | 2,468 | $ | 2,468 | ||||||||||||||||||
Common stock issued: | ||||||||||||||||||||||
Deferred compensation | 2 | 176 | (70 | ) | 108 | |||||||||||||||||
Stock options and other | 1 | 24 | 25 | |||||||||||||||||||
Foreign currency translation | 126 | 126 | 126 | |||||||||||||||||||
Comprehensive income | $ | 2,594 | ||||||||||||||||||||
Balance at September 30, 1998 | $ | 2,638 | $ | 26,186 | $ | 264 | $ | (294 | ) | $ | 52,061 | $ | 80,855 | |||||||||
Net earnings | 3,520 | 3,520 | $ | 3,520 | ||||||||||||||||||
Cash dividends paid | (586 | ) | (586 | ) | ||||||||||||||||||
Common stock issued: | ||||||||||||||||||||||
Acquisition of businesses | 24 | 976 | 1,000 | |||||||||||||||||||
Deferred compensation | 7 | 7 | ||||||||||||||||||||
Stock options and other | 4 | 295 | 299 | |||||||||||||||||||
Foreign currency translation | (137 | ) | (137 | ) | (137 | ) | ||||||||||||||||
Comprehensive income | $ | 3,383 | ||||||||||||||||||||
Balance at December 31, 1998 | $ | 2,666 | $ | 27,457 | $ | 127 | $ | (287 | ) | $ | 54,995 | $ | 84,958 | |||||||||
7
HARMON INDUSTRIES, INC.
Consolidated Statements of Stockholders' Equity (Continued)
In thousands of dollars
(Unaudited)
|
Common Stock |
Additional Paid-in Capital |
Foreign Currency Translation |
Unearned Compensation |
Retained Earnings |
Total Stockholders' Equity |
Comprehensive Income |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net earnings | 1,203 | 1,203 | $ | 1,203 | ||||||||||||||||||
Common stock issued: | ||||||||||||||||||||||
Acquisition of businesses | 50 | 2,968 | 3,018 | |||||||||||||||||||
Deferred compensation | 32 | 32 | ||||||||||||||||||||
Stock options and other | 8 | 308 | 316 | |||||||||||||||||||
Foreign currency translation | (223 | ) | (223 | ) | (223 | ) | ||||||||||||||||
Comprehensive income | $ | 980 | ||||||||||||||||||||
Balance at March 31, 1999 | $ | 2,724 | $ | 30,733 | $ | (96 | ) | $ | (255 | ) | $ | 56,198 | $ | 89,304 | ||||||||
Net earnings | 1,379 | 1,379 | $ | 1,379 | ||||||||||||||||||
Cash dividends paid | (665 | ) | (665 | ) | ||||||||||||||||||
Purchase of Treasury stock | (8 | ) | (633 | ) | (641 | ) | ||||||||||||||||
Common stock issued: | ||||||||||||||||||||||
Acquisition of businesses | 56 | 2,160 | 2,216 | |||||||||||||||||||
Deferred compensation | 37 | 37 | ||||||||||||||||||||
Stock options and other | 5 | 5 | ||||||||||||||||||||
Foreign currency translation | (367 | ) | (367 | ) | (367 | ) | ||||||||||||||||
Comprehensive income | $ | 1,012 | ||||||||||||||||||||
Balance at June 30, 1999 | $ | 2,772 | $ | 32,265 | $ | (463 | ) | $ | (218 | ) | $ | 56,912 | $ | 91,268 | ||||||||
Net earnings | 1,093 | 1,093 | $ | 1,093 | ||||||||||||||||||
Common stock issued: | ||||||||||||||||||||||
Acquisition of businesses | 73 | 4,687 | 4,760 | |||||||||||||||||||
Deferred compensation | 39 | 39 | ||||||||||||||||||||
Stock options and other | 7 | 7 | ||||||||||||||||||||
Foreign currency translation | 545 | 545 | 545 | |||||||||||||||||||
Comprehensive income | $ | 1,638 | ||||||||||||||||||||
Balance at September 30, 1999 | $ | 2,845 | $ | 36,959 | $ | 82 | $ | (179 | ) | $ | 58,005 | $ | 97,712 | |||||||||
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations: Three Months Ended September 30, 1999
Harmon Industries, Inc. ("Harmon" or "the Company") recorded net sales (gross sales net of cash discounts and changes in deferred contract revenue) for the quarter of $75.8 million, an increase of $18.1 million, or 31.3%, from the third quarter of 1998. This increase is primarily the combination of an increase in gross sales of $9.1 million in transit sales, $7.1 million in international sales and $5.3 million in other sales, less a decrease of $1.1 million in freight rail industry sales. Excluding acquired businesses, comparable revenues for the quarter were $57.3 million.
Gross profit for the quarter increased by 10.2% to $13.1 million in 1999 from $11.9 million in 1998, however the consolidated gross profit margin decreased to 17.3% from 20.6%. The increase in gross profit was the result of an increase in sales, net of the impact of lower gross profit margins and an increase in R&D expenditures of $0.1 million. The decline in gross profit margin is primarily the result of an increase in the sales mix toward lower margin transit and services sales, net of a decrease in R&D expenditures to 2.9% as a percent of sales in the third quarter of 1999 from 3.6% in the third quarter of 1998.
Selling, general and administrative expenses (SG&A) were $9.8 million during the 1999 quarter compared with $7.8 million during the prior year quarter. Much of the increase in SG&A consisted of personnel and occupancy expenses associated with acquisitions completed during the first half of 1999. SG&A as a percent of net sales decreased from 13.5% during the 1998 quarter to 12.9% during the 1999 quarter primarily as a result of SG&A expenses not increasing at as great a rate as the rate of sales increase.
Amortization expense increased to $730 thousand from $234 thousand in the same quarter one year ago. This increase is attributable to the increase in goodwill resulting from acquisitions during the twelve-month period ended September 30, 1999.
Net interest expense (interest expense less investment income) for the quarter increased to $1.0 million from $206 thousand for the prior year's quarter as a result of slightly higher interest rates and higher borrowings required to support increased working capital levels and to fund recent acquisitions. The Company expects net quarterly interest expense over the next several periods to increase slightly above current levels as a direct result of higher borrowings required to support increased working capital levels and the funds used for acquisitions completed in the first half of 1999.
The effective income tax rate for the quarter decreased from 36.2% in 1998 to 29.8% in 1999. This decrease is due primarily to changes in the estimated annual effective income tax rate for the Company's majority-owned Italian subsidiary acquired on April 30, 1999.
Net income decreased 55.7% to $1.1 million from $2.5 million in the prior year quarter and diluted earnings per common share decreased 56.5% to $0.10 from $0.23. Substantially all of the diluted earnings per common share in the current quarter is attributable to recent acquisitions.
During the quarter ended September 30, 1999, orders for the Company's products and services increased 60.6% to $69.7 million from $43.4 million during the same period of 1998. Excluding acquisitions, comparable orders for the quarter increased by $9.6 million or 22.2%.
9
Results of Operations: Nine Months Ended September 30, 1999
Net sales for the nine months ended September 30, 1999 were $214.5 million, an increase of $22.5 million, or 11.7%, from the same period in 1998. This increase is primarily the combination of an increase in gross sales of $75.8 million in transit sales, $23.6 million in international sales and $8.2 million in other sales, less a decrease of $26.0 million in freight rail industry sales. Excluding acquisitions, comparable revenues for the nine months ended September 30, 1999 were $168.5 million.
Gross profit for the nine-month period ended September 30, 1999 decreased by 2.9% to $39.2 million from $40.3 million in 1998. This decrease in gross profit was the result of the impact of lower gross profit margins. The Company's consolidated gross profit margin decreased to 18.3% from 21.0% in the prior year period. This decline in gross profit margin is primarily the result of an increase in the sales mix toward lower margin transit and services sales coupled with a $2.5 million charge in the second quarter of 1999 for a performance issue with a subcontractor.
Research and development expenditures (R&D) for the period decreased to $6.5 million from $6.6 million in the same period one year ago. This decrease, coupled with the above mentioned $22.5 million increase in net sales, resulted in R&D as a percent of net sales decreasing to 3.0% in the period from 3.4% in the same period of 1998.
Selling, general and administrative expenses (SG&A) were $28.7 million during the nine months ended September 30, 1999 compared with $23.8 million during the prior year period. Much of the increase in SG&A was represented by personnel and occupancy expenses necessary to support the revenue growth experienced in 1998 and 1999 as well as expenses associated with acquisitions completed during the first half of 1999. As a result, SG&A as a percent of net sales increased from 12.4% during the 1998 period to 13.4% during the 1999 period.
Amortization expense increased to $1.7 million from $668 thousand in the same period one year ago. This increase is attributable to the increase in goodwill resulting from acquisitions during the twelve months ended September 30, 1999.
Net interest expense (interest expense less investment income) for the nine months ended September 30, 1999 increased to $2.5 million from $752 thousand for the prior year period as a result of slightly higher interest rates and higher borrowings required to support increased working capital levels and to fund recent acquisitions.
The effective income tax rate for the nine months ended September 30, 1999 increased to 41.4% from 35.8% in 1998. This increase is due to a high effective income tax rate for the Company's majority-owned Italian subsidiary acquired on April 30, 1999. Including the full-year's impact of the effective income tax rate for the Company's majority-owned Italian subsidiary, the Company expects a consolidated effective income tax rate of 41% to 42% for the full year 1999.
For the nine months ended September 30, 1999, net income decreased 62.8% to $3.7 million from $9.9 million in the prior year. Diluted earnings per common share decreased 64.5% to $0.33 from $0.93. A significant amount of the 1999 year-to-date diluted earnings per common share is attributable to recent acquisitions.
During the nine months ended September 30, 1999, orders for the Company's products and services increased 44.4% to $265.4 million from $183.8 million during the same period of 1998. Excluding orders received by companies acquired after the third quarter of 1998, orders for the nine months increased 13.2% to $208.1 million. The Company's order backlog was $246.3 million at September 30, 1999 compared with $131.8 million at December 31, 1998 and $60.5 million one year ago. The growth in backlog from December 31, 1998 to September 30, 1999 is the result of orders exceeding shipments during the first nine months of 1999 combined with backlog obtained from acquisitions during the period.
10
Segment Information
The Company manages its operations through two business segments: domestic and international. Each unit sells train control and train signal products as well as services to railroads and transit authorities. The international business segment sells the Company's products and services outside the U.S. The Company is reporting business segment information in accordance with the provisions of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information which was issued in June 1997. The Company evaluates performance based upon net operating profit. Administrative functions such as finance, treasury and information systems are centralized. However, where applicable, portions of the administrative function expenses are allocated between the operating segments. The operating segments do not share manufacturing or distribution facilities. In the event any materials and/or services are provided to one operating segment by the other, the transaction is valued according to the company's transfer policy, which approximates market price. The costs of operating the manufacturing plants are captured discretely within each segment. The Company's property, plant and equipment, inventory and accounts receivable are captured and reported discretely within each operating segment. Summary financial information for the segments is as follows (dollars in thousands):
|
Three months ended September 30, 1999 |
Three months ended September 30, 1998 |
|||||
---|---|---|---|---|---|---|---|
USA Operations | |||||||
Net Sales | $ | 64,920 | $ | 55,525 | |||
Operating Income/(Loss) | 2,882 | 4,117 | |||||
International Operations |
|
|
|
|
|
|
|
Net Sales | 10,892 | 2,229 | |||||
Operating Income/(Loss) | (63 | ) | (44 | ) | |||
Consolidated |
|
|
|
|
|
|
|
Net Sales | 75,812 | 57,754 | |||||
Operating Income/(Loss) | 2,819 | 4,073 | |||||
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 1999 |
Nine months ended September 30, 1998 |
|||||
USA Operations | |||||||
Net Sales | $ | 191,930 | $ | 181,235 | |||
Operating Income/(Loss) | 9,087 | 14,935 | |||||
Assets | 214,964 | 154,695 | |||||
Accounts Receivable | 57,196 | 50,819 | |||||
Inventory | 44,196 | 42,693 | |||||
International Operations |
|
|
|
|
|
|
|
Net Sales | 22,614 | 10,782 | |||||
Operating Income/(Loss) | 63 | 1,197 | |||||
Assets | 42,250 | 8,158 | |||||
Accounts Receivable | 19,020 | 1,410 | |||||
Inventory | 7,728 | 319 | |||||
Consolidated |
|
|
|
|
|
|
|
Net Sales | 214,544 | 192,017 | |||||
Operating Income/(Loss) | 9,150 | 16,132 | |||||
Assets | 257,214 | 162,853 | |||||
Accounts Receivable | 76,216 | 52,229 | |||||
Inventory | 51,924 | 43,012 |
11
Financial Condition at September 30, 1999
At September 30, 1999, the Company had $26.9 million in liquidity. This consisted of $7.1 million in cash and cash equivalents plus $19.8 million available under bank lines of credit. The current ratio at September 30, 1999 was 2.06 to 1 compared to 2.05 to 1 at December 31, 1998 and 2.50 to 1 at September 30, 1998. Cash used in operating activities for the nine months ended September 30, 1999 was $10.5 million compared to cash provided by operating activities of $8.4 million for the same period one year ago. This decrease is largely attributable to lower earnings, increases in trade receivables, a decrease in accrued payroll and benefits and an increase in estimated costs, earnings and billings on contracts in 1999 compared to 1998. Cash used for investing activities in the nine months ended September 30, 1999 was $32.1 million, of which $21.0 million was utilized for acquisitions consummated in the first half of 1999.
Acquisition Payment
On August 3, 1999, the Company issued 288,053 common shares valued at $4.8 million as additional consideration payable pursuant to the 1998 acquisition of two of its wholly owned subsidiaries, SES CO and Seaboard Systems, Inc. This final single payment represented a negotiated agreement for future multiple year obligations previously reported at year end. The companies continue to do business as SES CO and Seaboard Systems, Inc. and will continue to operate in their primary market of transit products and services.
Restructuring Information and Earnings Expectations
Harmon is currently estimating 1999 full year earnings in the range of $0.50 to $0.55 per share, excluding the impact of charges related to the restructuring program as outlined below.
On November 2, 1999, in an important move to increase efficiency and profitability, Harmon announced that it was initiating a restructuring program to reduce costs by consolidating its component assembly operations, and research and development efforts into its Grain Valley, Missouri facility and its product assembly and asset management operations into its Warrensburg, Missouri plant. Current operations in Riverside, CA, Lee's Summit, MO and Long Island, NY will be closed. These closings, coupled with cost reductions in the remainder of the company, are anticipated to generate ongoing savings of $14 million ($0.74 per share after tax) when fully implemented in 2001. Excluding the restructuring costs described below, fiscal 2000 savings are currently estimated to be between $12 - $13 million ($0.63 to $0.69 per share after tax).
Total cost of the restructuring program is currently expected to be approximately $16 million. One-time charges of approximately $10 to $12 million ($0.55 to $0.65 per share after tax), consisting mainly of facility closing and employee severance costs, will be incurred in the fourth quarter of 1999. Remaining charges will be booked in 2000 as incurred.
Implementation will begin immediately and be completed by the end of fiscal 2000. The program will result in a net reduction in work force of approximately 200 people. Harmon is providing a comprehensive transition package to the impacted employees, including severance payments, individual support and outplacement services. Relocation will be offered to individuals with key skills necessary to effectively transfer technology.
Assuming that the North American freight railroad shipments continue at current low levels, what Harmon recaptures through restructuring savings, combined with the increase in revenue available from its transit backlog, plus the elimination of the subcontractor performance problems that led to the $2.5 million charge in the second quarter should enable it to reach approximately $1.25 in earnings per share (excluding restructuring costs) in 2000. Should freight railroad sector sales increase, Harmon's earnings should improve accordingly.
12
Year 2000 Issue
Year 2000 issue or Y2k refers to the practice in many existing computer programs that uses only the last two digits when designating a year. Therefore, these programs cannot distinguish a year that begins with 19 from a year that begins with 20. If not corrected, many computer applications could fail or create erroneous results beginning January 1, 2000.
Background
In 1997, the Company's Management Information Systems Steering Team developed a long-range plan to consolidate substantially all of its domestic operations onto a single computer operating system. The software vendor chosen was the one that currently supplies the largest of the Company's three primary operating systems. The benefits of this consolidation are increased efficiency and uniformity throughout the Company, particularly in the areas of manufacturing, inventory management and engineering, as well as achieving Y2k compliance.
Readiness
Project Management: To properly manage and coordinate the Company's Y2k efforts, the Management Information Systems Steering Team, using a formal team structure, appointed a Director of Y2k Compliance who is accountable to the chief executive officer and executive staff for Y2k compliance. This person supervises various sub-teams in the following areas:
System Y2k Compliance: To achieve Y2k compliance, the Company has completed three systems upgrades and one system conversion. The conversion or upgrade of an ancillary system along with certain tests are scheduled to be completed prior to the end of 1999. An inventory of workstation hardware identified over 300 personal computers that required installation of Y2k compliant systems boards. These boards were installed in the 3rd quarter 1999.
Product Y2k Compliance: A review by the Company of the products it sells identified no safety critical aspects of Y2k non-compliance and a minimal number of non-safety critical areas of Y2k non-compliance. The Company believes that none of the Y2k issues described above, if not corrected, would jeopardize the systems of any of its customers or the safety of the public at large. The Company does not believe the costs necessary to achieve Y2k compliance for its products will be material to the Company's financial statements on a consolidated basis.
One of the Company's subsidiaries that provides integration services has notified its customers that it can make no assurances regarding Y2k compliance for products manufactured by other companies. Another subsidiary of the Company that develops software has notified effected customers they may have non-compliant versions of the software and has offered to make the software compliant at the customers' expense.
Supplier Y2k Compliance: The Company has completed a survey of all significant vendors to determine if the Company's operations could be materially impacted by the failure of key vendors to achieve Y2k compliance. Where necessary, alternate suppliers or other contingency plans have been finalized.
Facility Y2k Compliance: The Company tested manufacturing and production equipment, telephone systems, security systems, and other peripheral devices associated with the Company's facilities for Y2k compliance. The results of these tests revealed the need for equipment upgrades from several vendors. The necessary upgrades have been installed and tested.
Customer and Investor Requests for Y2k Compliance Information: The Company has designated members of senior management as points of contact for Y2k compliance information requests from external constituents; one for customers and one for current and prospective shareholders.
13
Costs
As discussed above, Y2k compliance is one of two benefits achieved by the Company's upgrade and conversion efforts. While the Company is monitoring the costs of these projects against established budgets, it is not possible to allocate these costs between the two objectives; the benefits of a common operating system and the requirement for Y2k compliance. The Company incurred operating expenses of approximately $1.1 million in 1998 and has budgeted operating expenses of $1.1 million in 1999. These costs will be funded by cash flow from operations and borrowings, as necessary, under the Company's line of credit.
Risks
The Company's primary Y2k risks are related to systems and products. There is a risk that certain conversions or upgrades that have been completed with respect to Company's systems may not perform as anticipated, even though they have been tested and accepted by the Company. In the area of products, resolutions with customers regarding the need for software changes or assurances of Y2k compliance by other vendors in connection with integration projects may not be achieved on a timely basis.
Contingency Plans
In the area of suppliers, the Company has identified alternative suppliers for certain critical components. Where this was not feasible, a safety stock of inventory was established. In the area of systems, the Company believes that it has identified and corrected the problems that may have existed prior to beginning its Y2k project. However, in the event that a systems problem does occur on January 1, 2000, appropriate staffing will be available immediately to correct unforeseen situations that may occur.
Forward-looking Statements
Statements made in this document which are not historical in nature are forward-looking statements. The forward-looking statements made in this document, as well as all other forward-looking statements or information provided by Harmon Industries, Inc. or its officers and employees, whether written or oral, are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements of Harmon Industries, Inc. are based upon, among other things, internal estimates, preliminary information, management assumptions, and the performance of the U.S. and international economies, as well as the freight rail and transit rail industries in which Harmon Industries, Inc. does business. These statements should be considered in light of risks and uncertainties, the Company's restructuring initiative and other factors which may affect Harmon Industries, Inc.'s actual performance, including the ability of Harmon Industries, Inc. to complete its long-term contracts within current estimated costs, the completion of the Company's restructuring consistent with estimated timing and cost assumptions, timing of Class 1 freight railroad orders, the ability of Harmon Industries, Inc. to achieve a product mix consistent with its current projections and other factors as discussed in the Company's most recent Form 10-K. The Company assumes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.
14
Item 6. Exhibits and Reports on Form 8-K
Exhibit Number |
Exhibit |
|
---|---|---|
11 | Computation of per share earnings | |
27 |
|
Financial Data Schedule |
None.
15
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 12, 1999 | /s/ BJÖRN E. OLSSON Björn E. Olsson, President and Chief Executive Officer |
|
|
|
|
Date: November 12, 1999 | /s/ STEPHEN L. SCHMITZ Stephen L. Schmitz, Executive Vice PresidentFinance |
16
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
|