UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 2-14850
DEVON GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 03-0212800
(State of Incorporation) (I.R.S. Employer Identification No.)
281 Tresser Boulevard, Suite 501, Stamford, Connecticut 06901-3227
(Address of principal executive offices)
Registrant's telephone number, including area code (203) 964-1444
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
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding as of February 7, 1996
Common Stock 7,379,317
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<TABLE>
PART I
Item 1 - Financial Statements
DEVON GROUP, INC.
Condensed Consolidated Statements of Income
(Unaudited)
(in thousands, except per share data)
<CAPTION>
For the Three Months For the Nine Months
Ended December 31, Ended December 31,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Sales $ 66,112 $ 61,505 $189,342 $169,311
Operating costs and expenses:
Cost of sales 40,482 36,906 111,668 100,406
Selling, general, and
administrative 15,477 14,612 46,489 42,478
Income from operations 10,153 9,987 31,185 26,427
Interest income (expense), net 169 (127) 474 (584)
Other income (expense), net 347 (130) 1,133 230
Income before income taxes 10,669 9,730 32,792 26,073
Provision for income taxes 4,321 3,989 13,281 10,690
Net income $ 6,348 $ 5,741 $ 19,511 $ 15,383
Net income per common share $ .86 $ .78 $ 2.66 $ 2.11
Average common shares outstanding 7,375 7,325 7,327 7,295
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
DEVON GROUP, INC.
Condensed Consolidated Balance Sheets
As of December 31, 1995 and March 31, 1995
(in thousands, except share and per share data)
<CAPTION>
December 31, March 31,
Assets 1995 1995
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 20,695 $ 16,965
Receivables, less allowance for doubtful
accounts of $2,440 at December 31, 1995
and $1,852 at March 31, 1995 45,909 32,272
Inventories, at lower of cost or market:
Raw materials 2,855 2,390
Work-in-process 13,490 13,774
Finished goods 2,545 2,685
Total inventories 18,890 18,849
Deferred income tax benefit 3,385 3,385
Prepaid expenses and other current assets 5,743 4,781
Total current assets 94,622 76,252
Property, plant, and equipment, net 50,088 52,430
Deferred charges and other assets 1,162 1,179
Excess of cost over fair value of net 6,691 3,575
assets acquired
$152,563 $133,436
Liabilities and Stockholders' Equity
Current Liabilities:
Current installments of long-term debt $ 111 $ 311
Accounts payable 7,496 8,920
Accrued expenses 12,934 11,406
Accrued compensation 9,580 8,907
Income taxes 2,883 3,518
Total current liabilities 33,004 33,062
Long-term debt, excluding current installments 2,031 2,091
Deferred and other compensation 5,439 5,205
Deferred income taxes 4,925 4,925
Stockholders' equity:
Common Stock, $0.01 par value. Authorized
30,000,000 shares; issued 8,304,317 shares
at December 31, 1995 and 8,203,817 shares
at March 31, 1995 83 82
Additional paid-in capital 33,264 32,471
Retained earnings 86,486 66,975
119,833 99,528
Less: Shares of common stock held in treasury,
at cost; 925,000 at December 31, 1995
and 875,000 at March 31, 1995 (12,669) (11,375)
Total stockholders' equity 107,164 88,153
$152,563 $133,436
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
DEVON GROUP, INC.
Condensed Consolidated Statements of Cash Flows
For the nine months ended December 31, 1995 and 1994
(Unaudited)
(in thousands)
<CAPTION>
1995 1994
<S> <C> <C>
Net cash provided by operating activities $13,976 $15,165
Cash flows from investing activities:
Capital expenditures (5,594) (5,514)
Payments for purchases of subsidiaries, net of
cash acquired (3,892) (135)
Net cash used in investing activities (9,486) (5,649)
Cash flows from financing activities:
Proceeds from long-term borrowings - 12,100
Payments of long-term debt (260) (21,330)
Proceeds from the exercise of stock options 794 602
and other
Purchase of treasury stock (1,294) -
Net cash used in financing activities (760) (8,628)
Net increase in cash and cash equivalents 3,730 888
Cash and cash equivalents, beginning of period 16,965 1,606
Cash and cash equivalents, end of period $20,695 $ 2,494
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
DEVON GROUP, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 1995
(Unaudited)
(1) The condensed consolidated financial statements reflect the
operations of the Company and its subsidiaries, all of
which are wholly-owned except for Portal Aird Imports Pty.
Ltd. ("Portal Aird") (see note 5). All significant
intercompany transactions have been eliminated in
consolidation. In the opinion of management, all
adjustments, consisting only of normal recurring
adjustments necessary for a fair presentation of the
results for the unaudited periods, have been included.
Results of operations for the periods included in the
report are not necessarily indicative of the results for
the full year.
Reference should be made to the "Annual Report of
Corporation Form 10-K" for the fiscal year ended March 31,
1995 (including its notes to consolidated financial
statements) filed with the Securities and Exchange Commission.
(2) Net income per common share is computed on the basis of the
weighted average number of common shares outstanding during
the three- and nine-month periods ended December 31, 1995
and 1994. Options outstanding were not included in the
1995 or 1994 computations of net income per share as their
effect was not material.
(3) For purposes of the Statements of Cash Flows, the Company
considers all short-term investments to be cash equivalents
since the investments are highly liquid with maturities of
three months or less.
(4) Property, plant, and equipment is net of accumulated
depreciation of $77,193,000 and $69,586,000 at December 31,
1995 and March 31, 1995, respectively.
(5) Effective April 1, 1994 the Company acquired a 50% interest
in Portal Aird for $135,000 in cash. Located in Adelaide,
South Australia, Portal Aird is a distributor of posters
and related products. This investment is included in
"Deferred charges and other assets" in the accompanying
balance sheets. Effective January 13, 1995, the Company
acquired the business of Ahrens Interactive, Inc.
("Ahrens"). Located in Chicago, Illinois, Ahrens is a
developer of interactive multimedia products and services
for the corporate, retail, advertising, and publishing
markets. The excess of the purchase price ($381,000 in
cash and a $200,000 note payable) over the fair value of
net assets acquired was $407,000. Effective July 31, 1995,
the Company acquired Proof Positive/Farrowlyne Associates,
Inc. ("PP/FA") for $4,000,000 in cash. Located in
Evanston, Illinois, PP/FA is a provider of editorial and
creative services to the publishing industry, primarily in
the educational sector. The excess of the purchase price
over the fair value of assets acquired was $3,370,000.
(6) In March 1995, the Company's Board of Directors authorized
the purchase of up to 700,000 shares of its outstanding
common stock in the open market from time to time. During
the first quarter of fiscal 1996, under this authorization,
50,000 shares were repurchased.
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Consolidated sales increased $4,607,000, or 7.5%, and
$20,031,000, or 11.8%, respectively, for the three- and nine-
month periods ended December 31, 1995 versus the comparable prior
year periods. The increases are primarily the result of the pre-
press business where revenues increased $4,495,000 and
$15,165,000, respectively, for the three- and nine-month periods.
Increased creative, design, photographic, and composition
services provided to retail advertising customers continued to
positively affect comparisons with the prior year periods. This
was partially offset by a decrease in work for textbook
publishers. At the publishing subsidiary sales for the three-
month period decreased $148,000. At the outset of the quarter,
Portal Publications experienced a temporary surge in holiday
orders. However, as the quarter progressed and retailers became
wary of a relatively weak holiday selling season, traditional pre-
holiday restocking orders slowed significantly. Despite this,
sales of Portal cards and calendars were up while posters and
accessories such as gift totes and T-shirts were down. Sales for
the nine-month period were $3,129,000 over the prior year period,
reflecting strong sales of the Portal card and matted product
lines. In the magazine printing business sales increased
$260,000 and $1,737,000, respectively, for the three- and nine-
month periods ended December 31, 1995, primarily due to increased
paper sales.
Gross profit as a percentage of sales was 38.8% and 41.0%,
respectively, for the three- and nine-month periods ended
December 31, 1995, as compared to 40.0% and 40.7% for the
comparable prior year periods. For the current quarter, gross
profit margins at both the publishing and magazine printing
subsidiaries decreased versus the prior year period, while that
of the pre-press business was virtually unchanged. At the
magazine printing subsidiary the reduction reflects the increased
cost of direct materials, primarily paper, partially offset by a
reduction in overhead charges and direct labor. At the
publishing subsidiary the decrease is primarily due to higher
material costs, including packaging, and an increase in the cost
of labor and acquiring imagery. For the nine-month period ended
December 31, 1995, the gross profit margin improved at both the
pre-press and publishing subsidiaries reflecting the benefit of
operating leverage on relatively fixed overhead costs, while
margins at the magazine printing business decreased primarily due
to higher raw material costs partially offset by a reduction in
direct labor and depreciation charges.
Selling, general, and administrative expenses (SG&A) as a
percentage of sales were 23.4% and 24.6%, respectively, for the
three- and nine-month periods ended December 31, 1995 versus
23.8% and 25.1%, for the comparable prior year periods. For the
quarter, improvements at the publishing and magazine printing
subsidiaries, due mostly to the growth in noncommissionable
sales, offset an increase at the pre-press subsidiary, due mostly
to costs related to this quarter's release of DigiZINE, a retail
magazine on CD-ROM. For the nine-month period ended December 31,
1995, the improvement reflects lower compensation-related
expenses due to an increase in noncommissionable sales at the
Company's pre-press and publishing subsidiaries.
<PAGE>
Interest income increased $207,000 and $609,000 respectively, for
the three- and nine-month periods ended December 31, 1995, while
interest expense decreased $89,000 and $449,000 for the
comparable prior year periods. The increases in interest income
reflect earnings from short-term investments. The decreases in
interest expense reflect the repayment of all borrowings under
the Company's bank line of credit during the fourth quarter of
fiscal 1995.
Other income (expense) for the three-month period ended December
31, 1994 included a charge of $415,000 related to the sale of the
publishing subsidiary's contract art and framing operations.
Excluding this charge, other income (expense) for the three- and
nine-month periods ended December 31, 1995 increased versus the
comparable prior year periods primarily due to the advantageous
sale of scrap paper at the printing subsidiary during a period
when paper prices have been dramatically affected by shortages.
The effective income tax rate was 40.5% for the three- and nine-
month periods ended December 31, 1995, versus 41.0% for the prior
year periods.
As a result of the foregoing, net income per share increased
$.08, or 10.3%, and $.55, or 26.1%, respectively, versus the
prior year quarter and nine-month periods.
Liquidity and Capital Resources
During the nine-month periods ended December 31, 1995 and 1994
the Company generated cash from operating activities of
$13,976,000 and $15,165,000, respectively. Despite the increase
in net income for the current period, the amount of cash
generated this year declined versus the prior year comparable
period as that period was positively affected by collection of an
unusually high level of accounts receivable generated at fiscal
year-end 1994 at the pre-press subsidiary. For the nine-month
period ended December 31, 1995, cash provided by operating
activities and existing short-term investments were used to fund
capital expenditures and the acquisition of PP/FA in August 1995.
For the nine-months ended December 31, 1994, cash provided by
operating activities was used to fund capital expenditures and
reduce long-term debt.
Recently Issued Financial Accounting Standards
Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" ("SFAS No. 121") requires that long-lived
assets and certain intangible assets to be held and used by the
Company be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable. SFAS No. 121 further requires that assets in this
category to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell. The Company will be
required to adopt SFAS No. 121 for its fiscal year ending March
31, 1997, however, it is not expected that such adoption will
have a material impact on the Company's financial position or
results of operations.
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" has recently been issued. The
Company has not yet made a determination as to its impact.
<PAGE>
DEVON GROUP, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company, in the ordinary course of business, is
contingently liable on pending lawsuits and claims. Based
upon advice from legal counsel, these pending items are not
expected to have a material effect on the Company's
consolidated financial position or results of operations.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
None
b. Reports on Form 8-K.
None
<PAGE>
SIGNATURE
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.
DEVON GROUP, INC.
Date: February 13, 1996 s\Bruce K. Koch
Bruce K. Koch
Executive Vice President,
Operations and Finance and
Chief Financial Officer
(Principal Financial Officer)
s\Robert H. Donovan
Robert H. Donovan
Senior Vice President, Finance
and Treasurer
(Principal Accounting Officer)
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