SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1996
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
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Commission File Number: 0-7304
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DYNAMICS CORPORATION OF AMERICA
- -------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 13-0579260
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
475 Steamboat Road, Greenwich, Connecticut 06830-7197
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(Address of principal executive offices) (Zip Code)
(203) 869-3211
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(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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of April 29, 1996:
Voting 3,810,502
Non-Voting 3,688
<PAGE>
DYNAMICS CORPORATION OF AMERICA
AND SUBSIDIARIES
INDEX
Page No.
--------
Part I - Financial Information
Item 1. Financial Statements
--------------------
Condensed Consolidated Balance Sheets -
As of March 31, 1996 and December 31, 1995 2
Condensed Consolidated Statements of
Income - For the Three Months
Ended March 31, 1996 and 1995 3
Condensed Consolidated Statement of
Stockholders' Equity - For the Three
Months Ended March 31, 1996 4
Condensed Consolidated Statements of
Cash Flows - For the Three Months
Ended March 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial
Statements 6 - 8
Item 2. Management's Discussion and
---------------------------
Analysis of Results of Operations
---------------------------------
and Financial Condition 9 - 10
-----------------------
Part II - Other Information:
Item 6. Exhibits and Reports on Form 8-K 11
--------------------------------
Signature Page 12
<PAGE>
Part 1 - Financial Information
Item 1 - Financial Statements
- -----------------------------
DYNAMICS CORPORATION OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AT MARCH 31, 1996 (Unaudited) and DECEMBER 31, 1995
(DOLLAR AMOUNTS IN THOUSANDS)
March 31, December 31,
ASSETS 1996 1995
------ -------- -----------
Current Assets:
Cash and cash equivalents $ 277 $ 1,767
Accounts Receivable, less allowances of
$488 and $484 18,165 19,175
Inventories - Note 1 22,541 22,989
Other current assets 1,416 1,237
Current assets of division held for sale -
Note 2 3,727 1,191
Deferred income taxes 4,430 4,434
-------- --------
TOTAL CURRENT ASSETS 50,556 50,793
Property, Plant and Equipment - at cost, less
accumulated depreciation and amortization of
$33,342 and $33,051 3,510 3,603
Equity Investment in CTS Corporation -
Note 3 78,562 77,180
Other Assets 3,037 2,725
Deferred Income Taxes 377
-------- --------
TOTAL ASSETS $136,042 $134,301
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current installments of long-term debt$ 59 $ 63
Accounts payable 5,760 6,284
Accrued expenses and sundry liabilities 14,922 14,616
Federal income taxes payable 953 851
-------- --------
TOTAL CURRENT LIABILITIES 21,694 21,814
Long-term Debt - Note 4 4,411 3,424
Other Liabilities 1,645 1,605
Deferred Income Taxes 1,984
-------- --------
TOTAL LIABILITIES 27,750 28,827
Contingencies - Note 7
Stockholders' Equity:
Preferred stock, par value $1 per share --
authorized 894,000 shares - none issued
Series A Participating Preferred Stock, par
value $1 per share - authorized 106,000
shares - none issued
Stockholders' equity - see accompanying
statement 108,292 105,474
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $136,042 $134,301
======== ========
See accompanying notes to condensed consolidated financial statements.
-2-
<PAGE>
DYNAMICS CORPORATION OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Unaudited
For the three months
ended March 31,
-------------------
1996 1995
------ ------
Net sales $25,982 $25,119
Cost of sales 20,682 18,564
------- -------
Gross profit 5,300 6,555
Selling, general and administrative
expenses 6,370 6,338
------- -------
(1,070) 217
Other income, net - Note 5 117 234
------- -------
Income (loss) before items shown below (953) 451
Income tax charge (benefit) - Note 6 (370) 170
-------- -------
Income (loss) before equity in CTS
Corporation (583) 281
Income from equity investment in CTS
Corporation, net of income tax charge
(benefit) of $(2,332) and $383 - Note 3 4,060 802
------- -------
Net income $ 3,477 $ 1,083
======= =======
Weighted average number of common and
common equivalent shares outstanding 3,827,776 3,846,580
========= =========
Net income per common share $ .91 $ .28
======= =======
Dividends per common share $ .10 $ .10
======= =======
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE>
<TABLE>
DYNAMICS CORPORATION OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(DOLLAR AMOUNTS IN THOUSANDS)
Unaudited
<CAPTION>
Common Stock
(Authorized 10,000,000
voting shares and 600,000
non-voting shares)
-------------------------
Paid-in Total
Shares Additional Retained Deferred Stockholders'
Outstanding* Par Value Capital Earnings Compensation Equity
------------ --------- ---------- -------- ------------ ------------
<C> <C> <C> <C> <C> <C>
Balance at December 31,
1995 3,829,561 $383 $11,623 $93,807 $(339) $105,474
Shares issued and issuable
from treasury pursuant to
benefit plans 10 10
Shares acquired for
treasury and pursuant to
benefit plans (14,324) (1) (46) (277) (324)
Amortization of deferred
compensation 38 38
Net income 3,477 3,477
Cash dividends (383) (383)
--------- ---- ------- ------- ----- --------
Balance at March 31, 1996 3,815,237 $382 $11,587 $96,624 $(301) $108,292
========= ==== ======= ======= ===== ========
<FN>
* Net of shares held in treasury at $.10 par value per share (3,359,924 voting shares at March 31, 1996 and 3,345,600 voting shares
at December 31, 1995). The cumulative cost of treasury shares held at March 31, 1996 amounted to approximately $35,600. Includes
non-voting shares outstanding of 3,695 at March 31, 1996.
See accompanying notes to condensed consolidated financial statements.
</TABLE>
-4-
<PAGE>
DYNAMICS CORPORATION OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS)
Unaudited
March 31, March 31,
1996 1995
-------- --------
Operating activities:
Net income $3,477 $1,083
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization 292 261
Deferred income taxes (2,357) 368
Income from equity investment in CTS
before income taxes (1,728) (1,185)
Dividends from CTS 346 336
Decrease (increase) in other assets 108 (108)
Issuance of Company common stock 10 13
Other--net 78 38
Changes in operating assets and liabilities:
Accounts receivable 1,010 (384)
Inventories 448 (1,880)
Other current assets (179) (131)
Accounts payable, accrued expenses and
sundry liabilities (218) 2,026
Federal income taxes payable 102 442
Increase in assets of division held for
sale (2,956) (179)
------- ------
Net cash provided by (used in) operating
activities (1,567) 700
------ ------
Investing activities:
Purchases of CTS common stock (603)
Purchases of property, plant and equipment (199) (324)
Other 14
------ ------
Net cash used in investing activities (199) (913)
------ ------
Financing activities:
Principal payments under capital
lease obligations (17) (12)
Borrowings under lines of credit 1,000
Purchases of treasury stock (324) (263)
Dividends paid (383) (385)
------ ------
Net cash provided by (used in) financing
activities 276 (660)
------ ------
Decrease in cash and cash equivalents (1,490) (873)
Cash and cash equivalents at beginning of
period 1,767 6,837
------ ------
Cash and cash equivalents at end of period $ 277 $5,964
====== ======
See accompanying notes to condensed consolidated financial statements.
-5-
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
- ----------------------------------------------------------------
The accompanying unaudited condensed consolidated 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 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. Operating results for the three months ended March 31, 1996 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1996. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1995.
Note 1 - Inventories:
Quarterly inventories are estimated based on perpetual inventory records of the
Company and the gross profit method under the first-in, first-out and the last-
in, first-out methods.
Inventories are summarized as follows:
March 31, December 31,
1996 1995
--------- ------------
(in thousands)
Raw materials and supplies $ 7,787 $ 8,772
Work in process 8,495 7,354
Finished goods 6,259 6,863
------- -------
$22,541 $22,989
======= =======
Note 2 - Current Assets of Division Held for Sale:
Current assets of the Fermont division held for sale consist primarily of
accounts receivable, inventories, and advances of $1,472,000 in the current
period to a supplier related to accelerated engine purchases directed by the
Government.
Note 3 - Equity Investment in CTS Corporation:
At March 31, 1996, the Company's holdings aggregated 2,303,100 shares of CTS
Corporation common stock, unchanged from year-end, and the Company's percentage
of equity ownership in CTS remained at 44.1%.
The market value of the Company's investment in CTS amounted to $88,381,000 at
March 31, 1996 and $86,942,000 at December 31, 1995. The market value at May
13, 1996 was $101,336,000. Under the Control Share Acquisitions Chapter of the
Indiana Business Corporation Law, 1,020,000 of the Company's shares of CTS
common stock presently have no voting rights.
-6-
<PAGE>
Note 3 - Equity Investment in CTS Corporation (continued):
Summarized unaudited financial information derived from CTS' Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996 follows:
Three Months Ended
----------------------
March 31, April 2,
1996 1995
-------- -------
(in thousands)
Net sales $80,186 $75,978
======= =======
Gross profit $19,799 $17,273
======= =======
Net earnings $4,414 $3,256
======= =======
The Company's proportionate share of CTS' first quarter earnings in accordance
with the equity method of accounting reflects a change as of January 1, 1996 in
the effective tax rate applied by the Company to its share of CTS' undistributed
earnings. The Company has decided it is appropriate to change the effective tax
rate applied to its share of CTS' income from the corporate tax rate to the
lower rate applicable to dividends received, based on the substantially improved
operating results of CTS and its continuing strong cash flow, as well as the
increasing quarterly dividends declared by CTS. In response to these positive
developments, along with the substantial increase in the market value of the
Company's investment in CTS, the lower dividend received tax rate will now be
utilized by the Company in reporting its share of CTS income. The effect of
this change in the first quarter of 1996 was two-fold: the Company's
proportionate share of CTS' first quarter income was $1,594,000, or $.42 per
share, versus $.30 per share if the corporate tax rate had been used; and the
Company increased reported income by $2,466,000, or $.64 per share, for the
favorable adjustment to taxes previously provided at the corporate rate on the
Company's cumulative share of CTS' undistributed earnings through January 1,
1996.
Note 4 - Long-Term Debt:
The Company borrowed an additional $1,000,000 under its Revolving Credit
Agreement with banks during the quarter ended March 31, 1996.
Note 5 - Other Income, Net:
Three Months Ended
March 31,
------------------
1996 1995
------ ------
(in thousands)
Interest:
Income $ 9 $71
Expense (58) (12)
--- ---
(49) 59
Other, net 166 175
---- ----
$117 $234
==== ====
-7-
<PAGE>
Note 6 - Income Tax Charge (Benefit):
The effective tax rates for the charges (benefits) for the three months ended
March 31, 1996 and 1995 exceeded the Federal statutory rate due to the effect
of state income taxes.
Note 7 - Contingencies:
The Company is a supplier to the United States Government under contracts and
subcontracts on which there are cost allocation, cost allowability and
compliance issues under examination by various agencies or departments of the
Federal government. In the course of the resolution of these issues, the
Company may be required to adjust certain prices or refund certain payments on
its government contracts and subcontracts. The Company believes that any such
price adjustments or refunds will not have a materially adverse effect on the
financial position or results of operations of the Company.
The Company has been notified by the U.S. Environmental Protection Agency
("EPA") that it is a Potentially Responsible Party ("PRP") regarding hazardous
waste cleanup at a non-Company site in Connecticut and at a Company site in
California. Certain of the PRPs at the Connecticut site have agreed with the
EPA to fund a feasibility study at the site and have sued the Company and other
PRPs who have not agreed to share the costs. A property owner neighboring the
Company site in California has sued the Company and others for allegedly causing
contamination at the neighbor's property. In February 1996, the Company settled
the past costs portion of a 1995 lawsuit by a state environmental agency to
recover past and future response costs related to the cleanup of a non-Company
site in Pennsylvania as to which the Company was earlier designated a PRP; and
the Company has also been sued by certain of the PRPs who have agreed with the
state agency to fund other past response costs at that site to recover a portion
of those costs from the Company and other PRPs who have not agreed to
participate in such funding. The Company is also a defendant in two lawsuits
seeking contribution for Superfund cleanup costs relating to two other non-
Company sites in that state. Based upon its knowledge of the extent of the
Company's exposure and current statutes, rules and regulations, management
believes that the anticipated costs resulting from claims and proceedings with
respect to the above mentioned sites, including remediation, the extent and cost
of which are presently unknown, will not materially affect the financial
position of the Company. However, it is possible, but unanticipated at this
time, that future results of operations or cash flow could be materially
affected by an unfavorable resolution of these matters.
With respect to other claims and actions against the Company, it is the opinion
of Management that they will not have a material effect on the financial
position of the Company.
-8-
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
-----------------------------------------------------------------
Financial Condition
-------------------
Results of Operations
- ---------------------
Sales increased $863,000 in the quarter ended March 31, 1996 compared to the
same period a year ago. Sales in the Electrical Appliances and Electronic
Devices segment increased $707,000; increases in sales of electrical appliances
and oscillators were offset in part by a decline in sales of heat dissipating
devices for computers, due to a slowdown in orders by computer manufacturers in
response to a sluggish retail market. Sales in the Fabricated Metal Products
and Equipment segment increased $631,000 due to sales improvements in all
product lines. Sales in the Power and Controlled Environmental Systems segment
declined $475,000, as declines in thermal, custom mobile and power plant product
sales were partially offset by increased sales of transportable medical units.
Gross profit decreased $1,255,000 in the quarter ended March 31, 1996 compared
to the same period a year ago, and declined as a percentage of sales to 20.4%
from 26.1%. Gross profit in the Electrical Appliances and Electronic Devices
segment decreased due to lower sales of higher-margined heat dissipating devices
for computers and competitive pricing pressures on electrical appliances. Gross
profit was significantly lower in the Fabricated Metal Products and Equipment
segment despite the sales increase, primarily due to manufacturing
inefficiencies at the Scranton, Pennsylvania plant. Gross profit was relatively
unchanged in the Power and Controlled Environmental Systems segment due to
product mix on the lower sales volume.
Selling, general and administrative expenses in the quarter ended March 31, 1996
were comparable to such expenses in the same period a year ago.
Other income decreased $117,000, due primarily to a decrease in interest income
of $62,000 and an increase in interest expense of $46,000. The change in those
items results from Company borrowings under its Revolving Credit Agreement in
1996, versus investment of excess funds in the first quarter of 1995.
The Company recorded an income tax benefit of $370,000, a 38.8% tax rate, for
the current period, and an income tax expense of $170,000, a 37.7% tax rate, for
the prior year period. The effective rate for both periods differed from the
Federal statutory rate due to the effect of state income taxes.
Income from the Company's equity investment in CTS Corporation increased
$3,258,000, reflecting CTS' $1,158,000 increase in quarterly net earnings, the
Company's period to period increase in percentage of equity ownership to 44.1%
from 43.1% and a change in the effective tax rate applied by the Company to its
share of CTS' undistributed earnings (see Note 3 - Equity Investment in CTS
Corporation in the Notes to the Condensed Consolidated Financial Statements).
-9-
<PAGE>
Financial Condition
- -------------------
Cash and cash equivalents decreased $1,490,000 during the three months ended
March 31, 1996. Cash of $1,567,000 was used in operating activities,
principally to fund increases in assets of the division held for sale, offset in
part by decreases in accounts receivable and inventories. Cash of $199,000 was
used in investing activities to acquire production equipment. Cash of $276,000
was provided by financing activities, as borrowings increased by $1,000,000 and
the Company funded dividend payments and treasury stock purchases.
Cash at March 31, 1996 amounted to $277,000. During the three month period, the
Company borrowed an additional $1,000,000 for working capital requirements under
its $37,000,000 Revolving Credit Agreement with its banks, bringing the total
borrowings to $4,000,000. The Company presently has $33,000,000 available under
the Agreement, in addition to a $9,000,000 uncommitted line with a bank.
Liquidity and financial resources are considered adequate to fund planned
Company operations, including capital expenditures and payment of dividends and
additional stock purchases, if any. The Company intends to continue its stated
policy of reviewing potential acquisitions of companies and product lines which
it believes would enhance its growth and profitability.
Management anticipates that the Company's deferred tax assets will be realized
based upon its expectation of future taxable income. The Company will require
taxable income of $14,111,000 to realize its deferred tax assets, which are
$4,807,000 at March 31, 1996. Also under applicable carryback provisions of the
Internal Revenue Code, prior years' taxable income could be utilized to realize
a substantial portion of the deferred tax assets.
With respect to environmental matters (see Note 7 - Contingencies in the Notes
to the Condensed Consolidated Financial Statements), the Company incurred costs
of $96,000 for managing hazardous substances or pollutants during the current
three month period, compared to $52,000 for the comparable prior year period.
Also, during the prior year's first quarter, the Company had capital
expenditures at a Company site in California of $17,000 to limit and/or monitor
hazardous substances or pollutants. In complying with federal, state and local
environmental protection statutes and regulations, the Company has altered or
modified certain manufacturing processes and expects to continue to do so in the
future. Such modifications to date have not significantly increased capital
expenditures or materially affected earnings or the competitiveness of the
Company. It is possible, but unanticipated at this time, that future results of
operations or cash flows could be materially affected by an unfavorable
resolution of environmental matters.
With respect to recently issued FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
the Company anticipates no substantial impact on its financial position or
results of operations upon adoption in 1996. The Company accounts for stock-
based compensation in accordance with APB Opinion No. 25, "Accounting for Stock
Issued to Employees." The Company expects no pro forma effect on net income
and earnings per share under FASB Statement No. 123, "Accounting for Stock-
Based Compensation."
-10-
<PAGE>
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
--------------------------------
(b) There were no reports on Form 8-K for the three months ended
March 31, 1996.
-11-
<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.
DYNAMICS CORPORATION OF AMERICA
-------------------------------
(Registrant)
/s/ Patrick J. Dorme
-------------------------------
(Signature)
Patrick J. Dorme
Vice President - Finance and
Chief Financial Officer
Date: May 14, 1996
------------
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 277
<SECURITIES> 0
<RECEIVABLES> 18,653
<ALLOWANCES> 488
<INVENTORY> 22,541
<CURRENT-ASSETS> 50,556
<PP&E> 36,852
<DEPRECIATION> 33,342
<TOTAL-ASSETS> 136,042
<CURRENT-LIABILITIES> 21,694
<BONDS> 4,411
0
0
<COMMON> 382
<OTHER-SE> 107,910
<TOTAL-LIABILITY-AND-EQUITY> 136,042
<SALES> 25,982
<TOTAL-REVENUES> 25,982
<CGS> 20,682
<TOTAL-COSTS> 20,682
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58
<INCOME-PRETAX> (953)
<INCOME-TAX> (370)
<INCOME-CONTINUING> 3,477
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,477
<EPS-PRIMARY> .91
<EPS-DILUTED> .91
</TABLE>
