Harnisch Corporation - Business Analysis Base on Financial Statements

Harnisch Corporation

In February 1985, Peter Roberts, the research director of Exeter Group was reviewing the 1984 annual report of Harnisch Corporation (Exhibit 4). His attention was drawn:

• $1.28 per share net profit Harnisch reported for 1984
• Three years earlier the company had faced a severe financial crisis:

• Defaulted on its debt and stopped dividend payments, $7.64 per share net loss in fiscal 1982.
• The company’s poor performance continued in 1983, leading to a net loss of $3.49 per share.

Roberts noted that Harnisch’s rapid turnaround and wondered whether he should recommend purchase of the company’s stock.

COMPANY BUSINESS AND PRODUCTS                                                                                        [pic 1]

Harnisch Corporation was a machinery company.

Harnisch was a leading producer of construction equipment. In the 1980s the construction equipment industry in general was experiencing declining margins.

The company had a dominant share of the mining machinery market. A significant part of the division’s sales were from the sale of spare parts. Because of its large market share, the division was traditionally very profitable. Most of the company’s future mining product sales were expected to occur outside the United States, principally in developing countries.

The Material Handling Equipment Division has a 9% market share. The demand for this equipment was expected to grow in the coming  years as an increasing number of manufacturing firms emphasized cost reduction programs. Harnisch believed that the this division would a major source of its future growth.

Harnisch Engineers (an engineering services, design custom software development, and project management). The company expected such automated storage and retrieval systems to play an increasingly important role in the “factory of the future.”

Harnisch had a number of subsidiaries, affiliated companies, and licensees in number of countries. Export and foreign sales constituted more than 50 percent of the total revenues of the company.

FINANCIAL DIFFICULTIES OF 1982

The machinery industry experienced a period of explosive growth during the 1970s.To fund the growth, the company relied increasingly on debt financing, and the firm’s debt/equity ratio rose from 0.88 in 1973 to 1.26 in 1980. The worldwide recession in the early 1980s caused a significant drop in demand for the company’s products starting in 1981 and culminated in a series of events that shook the financial stability of Harnisch.

Reduced sales and the high interest payments resulted in poor profit performance leading to a reported loss in 1982 of $77 million.

The management of Harnisch commented on its financial difficulties:

Energyrelated projects, which had been a major source of business of our Construction Equipment Division, have slowed significantly in the last year as a result of lower oil demand and subsequent price decline. Lack of demand for such basic minerals have decreased worldwide mining activity, causing reduced sales for mining equipment. Difficult   economic   conditions   have   caused   many   of   our   normal   customers to cut capital expenditure dramatically, especially in such depressed sectors as the steel industry, which has always been a major source of our sales.