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, 1996
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 11, 1997
Common Stock 7,283,817
<PAGE>
<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,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Sales $ 70,047 $ 66,112 $ 200,990 $ 189,342
Operating costs and expenses:
Cost of sales 43,864 40,482 124,352 111,668
Selling, general, and
administrative 16,666 15,477 49,748 46,489
Income from operations 9,517 10,153 26,890 31,185
Interest income (expense), net 181 169 648 474
Other income, net 460 347 1,070 1,133
Income before income taxes 10,158 10,669 28,608 32,792
Provision for income taxes 4,063 4,321 11,443 13,281
Net income $ 6,095 $ 6,348 $ 17,165 $ 19,511
Net income per common share $ .83 $ .86 $ 2.32 $ 2.66
Average common shares outstanding 7,378 7,375 7,386 7,327
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
DEVON GROUP, INC.
Condensed Consolidated Balance Sheets
As of December 31, 1996 and March 31, 1996
(in thousands, except share and per share data)
December 31, March 31,
Assets 1996 1996
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 22,084 $ 27,749
Receivables, less allowance for doubtful
accounts of $2,276 at December 31, 1996
and $2,477 at March 31, 1996 54,382 39,629
Inventories, at lower of cost or market:
Raw materials 2,005 2,726
Work-in-process 17,086 15,115
Finished goods 2,889 2,486
Total inventories 21,980 20,327
Deferred income tax benefit 3,430 3,430
Prepaid expenses and other current assets 5,957 6,079
Total current assets 107,833 97,214
Property, plant, and equipment, net 53,379 51,522
Deferred charges and other assets 1,932 1,111
Excess of cost over fair value of net
assets acquired 6,635 6,579
$169,779 $156,426
Liabilities and Stockholders' Equity
Current Liabilities:
Current installments of long-term debt $ 110 $ 110
Accounts payable 7,492 9,439
Accrued expenses 12,112 9,963
Accrued compensation 9,510 9,493
Income taxes 1,523 1,634
Total current liabilities 30,747 30,639
Long-term debt, excluding current installments 1,951 2,003
Deferred and other compensation 6,417 6,413
Deferred income taxes 4,413 4,413
Stockholders' equity:
Common Stock, $0.01 par value. Authorized
30,000,000 shares; issued 8,379,317 shares at
December 31, 1996 and 8,304,317 shares at
March 31, 1996 84 83
Additional paid-in capital 34,991 34,538
Retained earnings 108,171 91,006
143,246 125,627
Less: Shares of common stock held in treasury,
at cost; 1,099,500 at December 31, 1996
and 925,000 at March 31, 1996 (16,995) (12,669)
Total stockholders' equity 126,251 112,958
$169,779 $156,426
</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, 1996 and 1995
(Unaudited)
(in thousands)
1996 1995
<S> <C> <C>
Net cash provided by operating activities $ 9,050 $13,976
Cash flows from investing activities:
Capital expenditures (10,391) (5,594)
Payments for purchases of subsidiaries, net of
cash acquired (400) (3,892)
Net cash used in investing activities (10,791) (9,486)
Cash flows from financing activities:
Payments of long-term debt (52) (260)
Proceeds from the exercise of stock options and other 454 794
Purchase of treasury stock (4,326) (1,294)
Net cash used in financing activities (3,924) (760)
Net increase (decrease) in cash and cash equivalents (5,665) 3,730
Cash and cash equivalents, beginning of period 27,749 16,965
Cash and cash equivalents, end of period $22,084 $20,695
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
DEVON GROUP, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 1996
(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 Publications
Pty. Ltd. ("Portal Aird"). 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,
1996 (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, 1996
and 1995. Options outstanding were not included in the
1996 or 1995 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 $83,780,000 and $77,175,000 at December 31,
1996 and March 31, 1996, respectively.
(5) Effective July 31, 1995, the Company acquired Proof
Positive/Farrowlyne Associates, Inc. (PP/FA) for $4,000,000 in cash
and contingent consideration predicated on future earnings
of which $400,000 has been earned and paid to date.
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 net assets acquired was
$3,770,000 including the additional contingent
consideration. Nobart, Inc., acquired effective March 1,
1996, is a full-service design, art, photography, and
production studio located in Chicago, Illinois. The
purchase price of $1,217,000 was equal to the net book
value of assets acquired.
(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 nine-month periods ended December 31, 1996 and 1995,
under this authorization, 174,500 and 50,000 shares,
respectively, were repurchased.
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Sales:
Consolidated sales increased $3,935,000, or 6.0%, and
$11,648,000, or 6.2%, for the three- and nine-month periods ended
December 31, 1996. For the three-month period revenues increased
in the pre-press and publishing subsidiary while the magazine
printing business experienced a slight decline. The increase for
the nine-month period ended December 31, 1996 reflects growth at
each of the Company's subsidiaries.
Pre-press
Revenues for Black Dot Group increased $1,766,000, or 4.9%, and
$6,195,000, or 6.6%, respectively, for the three- and nine-month
periods ended December 31, 1996. Revenues for the three-month
period increased primarily due to creative pre-press work for new
retail advertising accounts, increased creative work for textbook
publishers, incremental volume from Nobart, and additional work
for Kmart, all of which combined to offset lower Sears revenues.
For the nine-months ended December 31, 1996, the increase versus
the prior year period reflects new retail advertising accounts,
incremental revenues from Nobart and PP/FA, and sales from the
Company's developing multimedia business. Partially offsetting
these factors were reductions in billings to Sears and Kmart
reflecting price reductions included in the five-year contract
extensions.
Publishing
Devon Publishing Group's sales increased $2,370,000, or 14.5%,
and $4,539,000, or 8.3%, for the three- and nine-month periods
ended December 31, 1996, reflecting increased revenues at each of
its businesses. At Portal, sales of cards were again especially
strong reflecting the success of the Geddes imagery and
incremental Boynton revenues, while revenues for the three-month
period also benefited from the addition of die-cut postcards and
photo albums to Portal's product offerings. At The Winn Devon
Art Group, an increase in revenues from the upscale Devon
Editions poster line was partially offset by reduced framing
revenues.
Printing
Sales at Graftek Press, Inc. decreased $201,000, or 1.5%, for the
three-month period and increased $914,000, or 2.2%, for the nine-
month period ended December 31, 1996 versus the comparable prior
year periods. For both periods, value-added sales (which exclude
paper) were up 6.5% and 6.0%, respectively, primarily due to
increased commercial printing revenues and work for catalog
publishers.
Gross Profit:
Gross profit as a percentage of sales was 37.4%, and 38.1%,
respectively, for the three- and nine-month periods ended
December 31, 1996 versus 38.8%, and 41.0%, for the comparable
prior year periods. For the three-month period ended December
31, 1996, the decrease was primarily due to a reduction at the
pre-press subsidiary partially offset by improvements at the
publishing and magazine printing businesses. In the pre-press
subsidiary, the decrease was primarily due to increased labor
<PAGE>
costs associated with the transition of Nobart into the Black Dot
Group, higher outside service costs related to new retail
advertising customers, further development of the interactive
multimedia business, and the effects of the Sears and Kmart price
concessions. The improvements in the publishing and magazine
printing businesses were primarily due to reduced material costs.
For the nine-month period, a decrease in gross profit margin at
the pre-press subsidiary was partially offset by an improvement
in the magazine printing business, while the gross profit margin
in the publishing subsidiary remained in line with the prior year
period. In the pre-press subsidiary the decline was due to the
aforementioned factors. At the printing business, lower material
costs contributed to its margin improvement.
Selling, General, and Administrative Expenses:
Selling, general, and administrative expenses as a percentage of
sales were 23.8%, and 24.8%, respectively, for the three- and
nine-month periods ended December 31, 1996 versus 23.4% and 24.6%
for the comparable prior year periods. For the quarter, the
increase is primarily the result of higher royalties in the
publishing subsidiary, reflecting the popularity of Geddes and
Boynton, and higher costs in the pre-press subsidiary
attributable to the fiscal 1996 acquisition of Nobart and PP/FA
which were partially offset by a reduction in incentive-based
compensation expenses at the pre-press subsidiary. For the nine-
month period ended December 31, 1996, the modest increase is
primarily due to the aforementioned royalties at the publishing
subsidiary.
Interest Income (Expense):
Net interest income increased $12,000 and $174,000, respectively,
for the three- and nine-month periods ended December 31, 1996
reflecting an increase in the level of average short-term
investments over the prior year periods.
Income Taxes:
The effective income tax rate was 40.0% for the three- and nine-
month periods ended December 31, 1996 versus 40.5% for the prior
year periods.
Net Income:
As a result of the foregoing, net income per share decreased
$.03, or 3.5%, and $.34, or 12.8%, respectively, versus the prior
year three- and nine-month periods.
Liquidity and Capital Resources
During the nine-month period ended December 31, 1996, cash
provided by operating activities was $9,050,000, versus
$13,976,000, for the prior year period. The change reflects a
$2,346,000 decrease in net income versus the prior year period as
well as a $2,585,000 increase in working capital requirements.
The increased working capital requirements were primarily due to
higher inventory levels in the pre-press business as its customer
base expands and higher levels of accounts receivable in the
publishing business attributable to increased sales volume and
the timing of payments. These factors were partially offset by a
decrease in accounts receivable in the printing subsidiary which
is also attributable to the timing of payments received in fiscal
1997. For the nine-month period ended December 31, 1996, cash
provided by operating activities and short-term investments were
used for capital expenditures and the purchase of treasury stock.
<PAGE>
For the nine-month period ended December 31, 1995, cash from
operating activities was used for capital expenditures, the
purchase of treasury stock, and the acquisition of PP/FA.
Recently Issued Financial Accounting Standards
Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of" 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.
In October 1995, Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation", was
issued. The Company currently does not plan to change its method
of accounting for stock-based compensation; however, SFAS No. 123
will require additional footnote disclosure relating to the
effect of using a fair value-based method of accounting for stock-
based compensation costs for its fiscal year ending March 31, 1997.
<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, 1997 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)
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000040542
<NAME> R DONOVAN
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1.0
<CASH> 22084
<SECURITIES> 0
<RECEIVABLES> 56658
<ALLOWANCES> 2276
<INVENTORY> 21980
<CURRENT-ASSETS> 107833
<PP&E> 137159
<DEPRECIATION> 83780
<TOTAL-ASSETS> 169779
<CURRENT-LIABILITIES> 30747
<BONDS> 0
<COMMON> 84
0
0
<OTHER-SE> 126167
<TOTAL-LIABILITY-AND-EQUITY> 169779
<SALES> 200990
<TOTAL-REVENUES> 200990
<CGS> 124352
<TOTAL-COSTS> 124352
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 501
<INTEREST-EXPENSE> 133
<INCOME-PRETAX> 28608
<INCOME-TAX> 11443
<INCOME-CONTINUING> 17165
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17165
<EPS-PRIMARY> 2.32
<EPS-DILUTED> 0
</TABLE>
