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 1, 1997 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 879,748 shares of common stock, par value $.01 a share, issued
and outstanding as of July 11, 1997.
<PAGE>
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
Harrow Industries, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
June 1, December 1,
1997 1996
(Unaudited) (Audited)
(Thousands of dollars)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,050 $ 3,088
Accounts receivable, less allowances
(1997--$1,168; 1996--$1,043) 21,929 19,085
Inventories:
Finished products 5,914 3,735
Work-in-process 5,817 4,321
Raw materials 3,780 3,488
--------- ---------
15,511 11,544
Other current assets 2,817 2,806
--------- ---------
Total current assets 43,307 36,523
Property, plant and equipment:
Cost 46,709 41,963
Accumulated depreciation (deduct) (25,955) (24,239)
--------- ---------
20,754 17,724
Other assets:
Intangible assets, less accumulated
amortization (1997--$7,369; 1996--$6,911) 12,154 12,613
Prepaid pension costs 7,922 7,595
Other 266 265
---------- ----------
20,342 20,473
-------- --------
$84,403 $74,720
======= =======
</TABLE>
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<TABLE>
June 1, December 1,
1997 1996
(Unaudited) (Audited)
(Thousands of dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C>
Current liabilities:
Accounts payable $ 6,740 $ 6,662
Accrued expenses 12,806 11,227
-------- --------
Total current liabilities 19,546 17,889
Long-term debt 55,724 47,388
Other noncurrent liabilities 6,043 5,952
Redeemable preferred and common stock 3,450 2,955
Stockholders' equity (deficit):
Junior preferred stock, par value $.01 per share authorized: 470,000 shares;
issued (1997 - 399,964 shares; 1996 - 319,528 shares) including 119,436
shares of treasury stock in 1997 and excluding
80,436 shares redeemable stock in 1996 4 3
Common stock, par value $.01 per share - authorized:
1,100,000 shares; issued (1997 - 1,021,098 shares; 1996-987,294 shares)
including treasury stock (1997 - 194,856 shares; 1996 - 82,150 shares) and
excluding redeemable stock (1997 - 78,902 shares;
1996 - 112,706 shares) 10 10
Additional paid-in capital 4,006 3,370
Retained earnings 14,221 12,486
Cost of treasury stock (deduct) (4,493) (1,225)
Deficit arising from restructuring transactions (deduct) (14,108) (14,108)
-------- --------
(360) 536
----------- ----------
$84,403 $74,720
======= =======
See accompanying notes to consolidated condensed financial statements.
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<TABLE>
Harrow Industries, Inc. and Subsidiaries
Consolidated Condensed Statements of Operations (Unaudited)
Thirteen weeks ended Twenty-six weeks ended
June 1, June 2, June 1, June 2,
1997 1996 1997 1996
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
Net sales $42,249 $39,155 $81,284 $77,279
Cost of products sold 26,215 25,111 50,789 49,964
-------- -------- -------- --------
Gross margin 16,034 14,044 30,495 27,315
Selling, administrative and general expenses 11,771 9,470 22,851 19,844
-------- --------- -------- --------
Operating income 4,263 4,574 7,644 7,471
Other expense (income):
Interest expense 1,476 1,661 2,769 3,272
Other (81) (26) (137) (29)
----------- ----------- ---------- -----------
1,395 1,635 2,632 3,243
--------- --------- --------- ---------
Earnings before income taxes 2,868 2,939 5,012 4,228
Income taxes 1,140 1,147 2,005 1,677
--------- --------- --------- ---------
Net earnings $ 1,728 $ 1,792 $ 3,007 $ 2,551
======== ======== ======== ========
Net earnings per share $1.87 $1.59 $3.20 $2.23
===== ===== ==== =====
See accompanying notes to consolidated condensed financial statements.
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<TABLE>
Harrow Industries, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows (Unaudited)
Twenty-six weeks ended
June 1, June 2,
1997 1996
------------- ----------
(Thousands of dollars)
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 3,007 $ 2,551
Adjustments necessary to reconcile
net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,175 2,050
Other (174) (150)
Changes in operating assets and liabilities:
Accounts receivable (1,837) (3,795)
Inventories (1,332) (2,549)
Other current assets (71) (258)
Accounts payable and accrued expenses (18) (348)
----------- -----------
Net cash provided by (used in) operating activities 1,750 (2,499)
INVESTING ACTIVITIES
Additions to property, plant and equipment (2,747) (1,474)
Purchase of Company (3,967)
Other 241
------------- ----------
Net cash used in investing activities (6,714) (1,233)
FINANCING ACTIVITIES
Proceeds from long-term borrowings 13,020 7,310
Payments of long-term debt (4,686) (3,418)
Purchase of capital stock (3,268)
Cash dividends paid on preferred stock (140) (200)
---------- ----------
Net cash provided by financing activities 4,926 3,692
--------- ---------
Decrease in cash and cash equivalents (38) (40)
Cash and cash equivalents at beginning of year 3,088 676
--------- ----------
Cash and cash equivalents at end of period $ 3,050 $ 636
======== =======
( ) Denotes reduction in cash and cash equivalents.
See accompanying notes to consolidated condensed financial statements.
</TABLE>
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Harrow Industries, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements
June 1, 1997
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 February 28, 1997, the Company purchased substantially all of the assets of
Broadway Industries, Inc. ("Broadway") for cash including related expenses of
approximately $4,000,000 under a transaction approved by a bankruptcy court on
February 14, 1997. Broadway manufactures and markets high quality decorative
plumbing fixtures and bath and cabinet hardware. The acquisition, which we
accounted for under the purchase method, was financed principally through
borrowings under the Company's revolving credit facility. Broadway had net sales
of approximately $9,500,000 in 1996. Pro forma consolidated net earnings for
1996 and 1997, assuming the acquisition had occurred as of the beginning of the
fiscal 1996, would not have varied significantly from the amount reported.
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Harrow Industries, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements (continued)
June 1, 1997
Note C - Net Earnings Per Share
A summary of the computation of net earnings per share is as follows:
<TABLE>
Thirteen weeks ended Twenty-six weeks ended
June 1, June 2, June 1, June 2,
1997 1996 1997 1996
(Thousands of dollars, except shares
outstanding and per share data)
<S> <C> <C> <C> <C>
Weighted average shares outstanding 905,144 1,100,000 929,087 1,100,000
Net earnings $1,728 $1,792 $3,007 $2,551
Dividend requirements of
junior preferred stock (35) (50) (35) (100)
---------- --------- --------- --------
Net earnings applicable to common stock $1,693 $1,742 $2,972 $2,451
====== ====== ====== ======
Net earnings per share $1.87 $1.59 $3.20 $2.23
==== ==== ==== ====
</TABLE>
<PAGE>
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 provided by operating activities totaled $1.8 million in the 1997
period as compared to the use of cash of $2.5 million in the 1996 period. The
period to period change in cash provided by (used in) operating activities
resulted from improved 1997 earnings combined with the somewhat slower 1997
growth rate which necessitated a lower investment in working capital. Working
capital management performance measures including the accounts receivable
collection period and inventory turnover rates remained consistent with the
prior year. Working capital at June 1, 1997 was $23.8 million compared to $18.6
million at December 1, 1996. The Company's current ratio of 2.2 to 1 at June 1,
1997 improved from the current ratio of 2.0 to 1 at December 1, 1996.
Capital expenditures were $2.7 million in the 1997 period and $1.5 million
in the 1996 period. Total capital expenditures for 1997 are expected to
approximate $7.0 million and will be primarily for capacity expansion, new
products, profit improvement and replacement.
The Company acquired the net assets of Broadway Industries, Inc. effective
as of the end of the first quarter for a total purchase price of approximately
$4.0 million (see Note B to the accompanying Consolidated Condensed Financial
Statements).
Long-term debt at June 1, 1997 consists of approximately $26.0 million of
12 3/8% Senior Subordinated Debentures and $29.7 million of borrowings under a
revolving credit facility with interest principally at LIBOR (5.75% at June 1,
1997) plus a variable amount (1.5% at June 1, 1997) based upon the Company's
ratio of debt to earnings. The Senior Subordinated Debentures are due $6.5
million in 2001 with the balance due in 2002. As of June 1, 1997, the available
unused credit under the asset-based limitation formula of the revolving credit
facility approximated $5.4 million. The revolving credit agreement also provides
for a standby credit facility of $8 million to finance possible future
acquisitions.
The Company is a party to various put and call options with respect to its
junior preferred and common stock. During the quarter ended June 1, 1997, the
Company exercised options to purchase 39,000 shares of junior preferred stock
and 47,886 shares of common stock for approximately $1.3 million. Options to
purchase an additional 78,902 shares of common stock were outstanding at June 1,
1997 and are expected to be exercised prior to the end of fiscal 1997 for
approximately $3.5 million.
<PAGE>
Results of Operations - Thirteen weeks ended June 1, 1997 compared to thirteen
weeks ended June 2, 1996.
Consolidated net sales increased by 7.9% from $39.2 million in the 1996
period to $42.2 million in the 1997 period. Security businesses experienced
particularly strong increases in sales in 1997 versus compared to the comparable
1996 period. Smaller percentage sales increases were realized in builder and
consumer hardware, pruning and harvesting tools, and custom cabinetry. The
acquisition of Broadway contributed modestly to the 1997 second quarter sales
increase. Sales of water source heat pumps declined by approximately 1% from the
exceptionally strong sales activity during the second quarter of fiscal 1996.
Gross margin increased by 14.2% from $14.0 million in the 1996 period to
$16.0 million in the 1997 period. As a percentage of net sales, gross margin
improved to 38.0% in the 1997 period compared to 35.9% in the 1996 period. The
improvement in gross margin percentage was due to the more rapid sales growth of
the higher margin security businesses, selective price increases, favorable
material costs and labor productivity improvements.
Selling, administrative and general expenses increased by 24.3% from $9.5
million in the 1996 period to $11.8 million in the 1997 period. As a percentage
of net sales, selling, administrative and general expenses increased from 24.2%
in the 1996 period to 27.9% in the 1997 period. Engineering and product
development costs, additional customer rebates, higher commissions and other
volume related expenses and high initial expenses related to the Broadway
acquisition comprised a significant portion of the increase. Selling and
administrative expenses for 1996 were reduced by $500,000 to reflect an
insurance recovery of prior period environmental remediation and related costs.
The increase in expenses as a percentage of sales is also impacted by the more
rapid growth of security businesses which have comparably higher percentage
selling and administrative expenses.
Interest expense decreased from $1.7 million in the 1996 period to $1.5
million in the 1997 period due to lower average borrowing rates resulting from
the 1996 renegotiation of the Company's revolving credit agreement and the
redemption of its 14% Junior Subordinated Debentures and $12.0 million of its 12
3/8% Senior Subordinated Debentures.
The effective income tax rate for the 1997 quarter was 39.7% compared to
39.0% for the 1996 period. These rates exceed the statutory federal income tax
rate of 34% due primarily to state income taxes and the tax effect of
nondeductible goodwill amortization.
Net earnings of $1.7 million ($1.87 per share) in the 1997 period compares
to net earnings of $1.8 million ($1.58 per share) in the 1996 period.
<PAGE>
Results of Operations - Twenty-six weeks ended June 1, 1997 compared to
twenty-six weeks ended June 2, 1996.
Consolidated net sales increased by $5.2% from $77.3 million in the 1996
period to $81.3 million in the 1997 period. Security businesses experienced
particularly strong increases in sales in 1997 versus the comparable 1996
period. Smaller percentage sales increases were realized in builder and consumer
hardware and custom cabinetry. Sales of water source heat pumps and pruning and
harvesting tools declined modestly from the exceptionally strong sales activity
during the first half of fiscal 1996.
Gross margin increased by 11.6% from $27.3 million in the 1996 period to
$30.5 million in the 1997 period. As a percentage of net sales, gross margin
improved from 35.3% in the 1996 period to 37.5% in the 1997 period. The
improvement in gross margin percentage was due to the more rapid sales growth of
the higher margin security businesses, selective price increases, favorable
material costs and labor productivity improvements.
Selling, administrative and general expenses increased by $15.2% from $19.8
million in the 1996 period to $22.9 million in the 1997 period. As a percentage
of net sales, selling, administrative and general expenses increased from 25.6%
in the 1996 period to 28.1% in the 1997 period. Engineering and product
development costs, additional customer rebates, higher commissions and other
volume related expenses and high initial expenses related to the Broadway
acquisition comprised a significant portion of the increase. The increase in
expenses as a percentage of sales is also impacted by the more rapid growth of
security businesses which have comparably higher percentage selling and
administrative expenses.
Interest expense decreased from $3.3 million in the 1996 period to $2.8
million in the 1997 period due to lower average borrowing rates resulting from
the 1996 renegotiation of the Company's revolving credit agreement and the
redemption of its 14% Junior Subordinated Debentures and $12.0 million of its 12
3/8% Senior Subordinated Debentures.
The effective income tax rate for the 1997 year-to-date period was 40.0%
compared to 39.7% for the 1996 period. These rates exceed the statutory federal
income tax rate of 34% due primarily to state income taxes and the tax effect of
nondeductible goodwill amortization.
Net earnings of $3.0 million ($3.20 per share) in the 1997 period compares
to net earnings of $2.6 million ($2.23 per share) in the 1996 period.
<PAGE>
PART II-OTHER INFORMATION
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.
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, 1997 By: /s/ John S. Hogan
John S. Hogan
Vice President and Chief
Financial Officer
Date: July 11, 1997 By: /s/ Gary L. Humphreys
Gary L. Humphreys
Vice President, Corporate
Controller and Chief
Accounting Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-02-1996
<PERIOD-END> JUN-01-1997
<CASH> 3,050
<SECURITIES> 0
<RECEIVABLES> 23,097
<ALLOWANCES> 1,168
<INVENTORY> 15,511
<CURRENT-ASSETS> 43,307
<PP&E> 46,709
<DEPRECIATION> 25,955
<TOTAL-ASSETS> 84,403
<CURRENT-LIABILITIES> 19,546
<BONDS> 55,724
4
10
<COMMON> 3,450
<OTHER-SE> (374)
<TOTAL-LIABILITY-AND-EQUITY> 84,403
<SALES> 81,284
<TOTAL-REVENUES> 81,284
<CGS> 50,789
<TOTAL-COSTS> 50,789
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,769
<INCOME-PRETAX> 5,012
<INCOME-TAX> 2,005
<INCOME-CONTINUING> 3,007
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,007
<EPS-PRIMARY> 3.20
<EPS-DILUTED> 3.20
</TABLE>
