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 the second thirteen week accounting Commission File
period ended June 2, 1996 Number 1-9440
HARROW INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1499045
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2627 East Beltline S.E., Grand Rapids, Michigan 49546
(Address of principal executive offices) (Zip Code)
(616) 942-1440
(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 twelve (12) months and; (2) has been subject to
such filing requirements for the past ninety (90) days.
Yes X No
The Company has 1,100,000 shares of common stock, par value $.01 a share,
issued and outstanding as of July 11, 1996.
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PART I FINANCIAL INFORMATION
Harrow Industries, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
June 2, December 3,
1996 1995
(Unaudited) (Audited)
(Thousands of dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 636 $ 676
Accounts receivable, less allowances
(1996--$903; 1995--$824) 20,248 16,453
Inventories:
Finished products 4,685 3,524
Work-in-process 5,427 3,956
Raw materials 2,843 2,926
--------- ---------
12,955 10,406
Other current assets 2,729 2,621
--------- ---------
Total current assets 36,568 30,156
Property, plant and equipment:
Cost 40,664 39,230
Accumulated depreciation (deduct) (23,164) (21,662)
--------- ---------
17,500 17,568
Other assets:
Intangible assets, less accumulated
amortization (1996--$6,318; 1995--$5,797) 13,372 13,892
Prepaid pension costs 7,235 6,875
Other 257 498
--------- ---------
20,864 21,265
--------- ---------
$74,932 $68,989
========= =========
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June 2, December 3,
1996 1995
(Unaudited) (Audited)
(Thousands of dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $16,530 $16,878
Long-term debt 50,259 46,365
Other noncurrent liabilities 6,191 6,145
Stockholders' equity (deficit):
Junior preferred stock,
par value $.01 a share--470,000 shares
authorized, 399,964 shares issued
and outstanding 4 4
Common stock, par value $.01 a share--
1,100,000 shares authorized,
issued and outstanding 11 11
Additional paid-in capital 4,006 4,006
Retained earnings 12,039 9,688
Deficit arising from restructuring
transactions (deduct) (14,108) (14,108)
-------- --------
1,952 (399)
-------- --------
$74,932 $68,989
======== ========
See accompanying notes to consolidated condensed financial statements.
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Harrow Industries, Inc. and Subsidiaries
Consolidated Condensed Statements of Operations (Unaudited)
Thirteen weeks ended Twenty-six weeks ended
June 2, May 28, June 2, May 28,
1996 1995 1996 1995
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
Net sales $39,155 $33,517 $77,279 $65,887
Cost of products sold 25,111 21,301 49,964 42,619
------- ------- ------- -------
Gross margin 14,044 12,216 27,315 23,268
Selling, administrative
and general expense 9,470 9,236 19,844 18,099
------- ------- ------- -------
Operating income 4,574 2,980 7,471 5,169
Other expense (income):
Interest expense 1,661 1,691 3,272 3,376
Other (26) 5 (29) (815)
------- ------- ------- -------
1,635 1,696 3,243 2,561
------- ------- ------- -------
Earnings before income
taxes 2,939 1,284 4,228 2,608
Income taxes 1,147 524 1,677 712
------- ------- ------- -------
Net earnings $ 1,792 $ 760 $ 2,551 $ 1,896
======= ======= ======= =======
Net earnings per share $1.59 $ .64 $2.23 $1.63
======= ======= ======= =======
See accompanying notes to consolidated condensed financial statements.
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Harrow Industries, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows (Unaudited)
Twenty-six weeks ended
June 2, May 28,
1996 1995
(Thousands of dollars)
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 2,551 $ 1,896
Adjustments necessary to reconcile
net earnings to net cash
used in operating activities:
Depreciation and amortization 2,050 1,888
Gain on sale of business (800)
Other (150) (535)
Changes in operating assets and liabilities:
Accounts receivable (3,795) (132)
Inventories (2,549) (2,185)
Other current assets (258) (380)
Accounts payable and accrued expenses (348) 420
------- -------
Net cash provided by (used in)
operating activities (2,499) 172
INVESTING ACTIVITIES
Additions to property, plant and equipment (1,474) (1,762)
Purchase of business (9,556)
Proceeds from sale of business 5,998
Other 241 (268)
------- -------
Net cash used in investing activities (1,233) (5,588)
FINANCING ACTIVITIES
Proceeds from long-term borrowings 7,310 12,442
Payments of long-term debt (3,418) (7,376)
Cash dividends paid on preferred stock (200) (200)
------- -------
Net cash provided by financing activities 3,692 4,866
------- -------
Decrease in cash and cash equivalents (40) (550)
Cash and cash equivalents at beginning of year 676 919
------- -------
Cash and cash equivalents at end of period $ 636 $ 369
======= =======
( ) Denotes reduction in cash and cash equivalents.
See accompanying notes to consolidated condensed financial statements.
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Harrow Industries, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements
June 2, 1996
Note A - Basis of Presentation
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included in the consolidated condensed financial
statements. For further information, refer to the consolidated financial
statements and footnotes included in the Annual Report on Form 10-K filed by
the Company with the Securities and Exchange Commission.
Note B - Purchase of Business
On January 4, 1995, pursuant to a definitive purchase agreement entered
into on November 30, 1994, the Company acquired all of the common stock of
Recognition Systems, Inc. (RSI) for a cash purchase price (net of cash
acquired) of $9,556,000. RSI manufactures and markets biometric
identification devices and had net sales of $3,300,000 in 1994. Operating
results ofRSI are included in the Company's consolidated results beginning
December 1, 1994. Goodwill and other intangible assets recognized in
connection with the purchase approximated $9,734,000.
Note C - Sale of Business
On February 6, 1995, the Company completed the sale of substantially all of
the net assets of its Leigh Products Division and all of the capital stock of
its Canadian subsidiary, Leigh Metal Products, Ltd. Results of operations of
the Leigh businesses for the 1995 period prior to the sale are included in
other income as a part of the gain of $800,000 recognized in the first quarter
of 1995. This gain was revised downward to $270,000 in subsequent quarters
of fiscal 1995.
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Harrow Industries, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements (continued)
June 2, 1996
Note D - Net Earnings Per Share
A summary of the computation of net earnings per share is as follows:
Thirteen weeks ended Twenty-six weeks ended
June 2, May 28, June 2, May 28,
1996 1995 1996 1995
(Thousands of dollars, except shares
outstanding and per share data)
<S> <C> <C> <C> <C>
Weighted average
shares outstanding 1,100,000 1,100,000 1,100,000 1,100,000
Net earnings $1,792 $ 760 $2,551 $1,896
Dividend requirements of
junior preferred stock (50) (50) (100) (100)
---------- --------- --------- ---------
Net earnings applicable
to common stock $1,742 $ 710 $2,451 $1,796
========== ========= ========= =========
Net earnings per share $1.59 $.64 $2.23 $1.63
===== ==== ===== =====
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ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Company's cash requirements relate primarily to the seasonal financing
of working capital, purchase of property, plant and equipment, business
acquisition opportunities, servicing outstanding debt and cash dividends.
Cash provided by operating activities continues to be the major source of the
Company's funds and is expected to satisfy a substantial portion of future
cash needs. These funds have been augmented by long-term borrowings under a
revolving credit agreement.
Cash used in operating activities totaled $2.5 million in the 1996 year to
date period as compared to $172,000 of cash provided by operations in the 1995
period. Cash provided by operating activitives, exclusive of working capital
changes, increased from $2.5 million in the 1995 period to $4.5 million in
1996 due primarily to improved net earnings. Additional working capital
investments approximate $7.0 million in the 1996 year to date period compared
to $2.3 million in 1995. Accounts receivable increases in fiscal 1996 are
primarily a result of overall sales growth, added sales of consumer pruning
tools with extended payment terms and higher receivables from major custom
cabinetry dealers. Inventory increases in fiscal 1996 and 1995 reflect both
the higher current level of business activity and, for most operations,
anticipated increases in sales during the third and fourth quarters. Working
capital at June 2, 1996 was $20.0 million compared to $13.3 million at
December 3, 1995. The Company's current ratio of 2.2 to 1 at June 2, 1996
improved from the current ratio of 1.8 to 1 at December 3, 1995.
Capital expenditures were $1.5 million in the 1996 period compared to
$1.8 million in the 1995 period. Total capital expenditures for 1996 are
expected to approximate $5.0 million and will be primarily for plant
expansion, new products, profit improvement and replacement.
The Senior Subordinated Debentures require annual sinking fund payments;
however, as a result of the repurchase of debentures in 1990 and 1991, no
principal maturities are due until 1999. Under the terms of the revolving
credit agreement, the Company can borrow up to $20 million. As of June 2,
1996, the balance outstanding under the agreement was $5.3 million and the
available unused credit under the asset-based limitation formula approximated
$12.2 million. Subsequent to the end of the second quarter, the Company
utilized $7 million of the available balance under the revolving credit
agreement to redeem its outstanding 14% Junior Subordinated Debentures.
Results of Operations - Thirteen weeks ended June 2, 1996 compared to
thirteen weeks ended May 28, 1995.
Consolidated net sales increased by $5.7 million (16.8%) from $33.5
million in the 1995 period to $39.2 million in the 1996 period. All product
lines experienced increases, however, sales for the 1996 quarter were
particularly strong in pruning and harvesting tools, commercial security
products and systems, and water source heat pumps.
Gross margin increased $1.8 million (15.0%) from $12.2 million in the
1995 period to $14.0 million in the 1996 period. As a percentage of net
sales, gross margin decreased slightly from 36.4% in the 1995 period to 35.9%
in the 1996 period. Modest improvements in percentage gross <PAGE> margins
for most product lines were more than offset by increased warranty costs and
labor inefficiencies at custom cabinetry operations and the effect of
increased sales of lower margin consumer products.
Selling, administrative and general expenses increased by $234,000 (2.5%)
from $9.2 million in the 1995 period to $9.5 million in the 1996 period.
Commissions and other volume related items increased proportionate to the
sales increase. Engineering costs also increased to reflect added emphasis
on new product development. These increases were reduced by $500,000 to
reflect an insurance recovery of prior period environmental remediation and
related costs. As a percentage of net sales, selling, administrative and
general expenses decreased from 27.6% in the 1995 period to 24.2% in the 1996
period.
Interest expense remained constant at $1.7 million in both the 1995 and
1996 periods.
The effective income tax rate for the 1996 quarter was 39.0% compared to
40.8% for the 1995 period. These rates exceed the statutory rate of 34% due
primarily to state income taxes and the tax effect of nondeductible goodwill
amortization.
Net earnings of $1.8 million ($1.59 per share) in the 1996 period compares
to net earnings of $760,000 ($.64 per share) in the 1995 period.
Results of Operations - Twenty-six weeks ended June 2, 1996 compared to
twenty-six weeks ended May 28, 1995.
Consolidated net sales increased by $11.4 million (17.3%) from $65.9
million in the 1995 period to $77.3 million in the 1996 period. All product
lines experienced increases, however, sales were particularly strong in
pruning and harvesting tools, commercial security products and systems, and
water source heat pumps. Severe winter weather in the northeast adversely
affected the 1996 first quarter sales of builder and consumer hardware and
custom cabinetry.
Gross margin increased $4.0 million (17.4%) from $23.3 million in the
1995 period to $27.3 million in the 1996 period. As a percentage of net
sales, gross margin was 35.3% in both the 1996 and 1995 periods. Modest
improvements in percentage gross margins for most product lines were offset
by increased warranty costs and labor inefficiencies at custom cabinetry
operations.
Selling, administrative and general expenses increased by $1.7 million
(9.6%) from $18.1 million in the 1995 period to $19.8 million in the 1996
period. Higher commission and other volume related expenses comprised a
significant portion of the increase. Engineering and product development
costs and an additional provision related to post employment benefits for the
Company's former president and chief executive and its former chairman also
contributed to the increase. These increases in the 1996 period were reduced
by $500,000 to reflect an insurance recovery of prior period environmental
remediation and related costs. As a percentage of net sales, selling,
administrative and general expenses decreased from 27.5% in the 1995 period
to 25.7% in the 1996 period.
Interest expense decreased slightly from $3.4 million in the 1995 period
to $3.3 million in the 1996 period due to lower borrowings under the revolving
credit agreement.
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Other income in the 1995 period included a gain of $800,000 on the sale
of the Company's Leigh business. This gain was revised downward to $270,000
in subsequent quarters of fiscal 1995.
The 1996 provision for income taxes exceeds the amount expected using
the statutory rate of 34% due primarily to state income taxes and the tax
effect of nondeductible goodwill amortization. The 1995 provision for income
taxes is less than the expected amount due to a tax benefit from the sale of
the Leigh businesses.
Net earnings of $2.6 million ($2.23 per share) in the 1996 period compares
to net earnings of $1.9 million ($1.63 per share) in the 1995 period.
PART II-OTHER INFORMATION
Item 5. Other Information
James S. Dalhke was elected President and Chief Operating Officer of the
Registrant effective June 17, 1996.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
Pursuant to Item 601(c) of Regulation SK, a financial data schedule is
being submitted as an exhibit to this Form 10-Q.
Reports on Form 8-K:
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
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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.
HARROW INDUSTRIES, INC.
Date: July 11, 1996 By:/s/John S. Hogan
John S. Hogan
Vice President and Chief Financial Officer
Date: July 11, 1996 By:/s/Gary L. Humphreys
Gary L. Humphreys
Vice President, Corporate Controller and
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-01-1996
<PERIOD-END> JUN-02-1996
<CASH> 636
<SECURITIES> 0
<RECEIVABLES> 20,248
<ALLOWANCES> 903
<INVENTORY> 12,955
<CURRENT-ASSETS> 36,568
<PP&E> 40,664
<DEPRECIATION> 23,164
<TOTAL-ASSETS> 74,932
<CURRENT-LIABILITIES> 16,530
<BONDS> 50,259
0
4
<COMMON> 11
<OTHER-SE> 1,937
<TOTAL-LIABILITY-AND-EQUITY> 74,932
<SALES> 77,279
<TOTAL-REVENUES> 77,279
<CGS> 49,964
<TOTAL-COSTS> 49,964
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,272
<INCOME-PRETAX> 4,228
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<NET-INCOME> 2,551
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<EPS-DILUTED> 2.23
</TABLE>
