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, 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: 0-7304
DYNAMICS CORPORATION OF AMERICA
(Exact name of registrant as specified in its charter)
NEW YORK 13-0579260
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
475 Steamboat Road, Greenwich, Connecticut 06830-7197
(Address of principal executive offices) (Zip Code)
(203) 869-3211
(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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of April 29, 1995:
Voting 3,830,421
Non-Voting 4,630
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, 1995 and December 31, 1994 2
Condensed Consolidated Statements of
Income - For the Three Months
Ended March 31, 1995 and 1994 3
Condensed Consolidated Statement of
Stockholders' Equity - For the Three
Months Ended March 31, 1995 4
Condensed Consolidated Statements of
Cash Flows - For the Three Months
Ended March 31, 1995 and 1994 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
Part 1 - Financial Information
Item 1 - Financial Statements
DYNAMICS CORPORATION OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AT MARCH 31, 1995 (Unaudited) and DECEMBER 31, 1994
(DOLLAR AMOUNTS IN THOUSANDS)
March 31, December 31,
ASSETS 1995 1994
Current Assets:
Cash and cash equivalents $ 5,964 $ 6,837
Accounts Receivable, less allowances of
$519 and $604 15,598 15,214
Inventories - Note 1 19,773 17,893
Other current assets 3,182 3,065
Current assets of division held for sale -
Note 2 1,364 1,185
Deferred income taxes 5,412 5,418
TOTAL CURRENT ASSETS 51,293 49,612
Property, Plant and Equipment - at cost, less
accumulated depreciation and amortization of
$32,713 and $32,454 3,535 3,472
Equity Investment in CTS Corporation - Note 3 70,743 69,291
Other Assets 1,827 1,719
Deferred Income Taxes 83
TOTAL ASSETS $127,398 $124,177
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current installments of long-term debt $ 111 $ 126
Accounts payable 5,508 4,454
Accrued expenses and sundry liabilities 16,620 15,648
Federal income taxes payable 2,448 2,006
TOTAL CURRENT LIABILITIES 24,687 22,234
Long-term Debt 404 401
Other Liabilities 1,817 1,817
Deferred Income Taxes 279
TOTAL LIABILITIES 27,187 24,452
Contingencies - Note 6
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 100,211 99,725
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $127,398 $124,177
See accompanying notes to condensed consolidated financial statements.
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DYNAMICS CORPORATION OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(DOLLAR AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Unaudited
For the three months
ended March 31,
1995 1994
Net sales $25,119 $22,716
Cost of sales 18,564 16,689
Gross profit 6,555 6,027
Selling, general and administrative expenses 6,338 5,751
217 276
Other income, net - Note 4 234 50
Income before items shown below 451 326
Provision for income taxes - Note 5 170 113
Income before equity in CTS Corporation 281 213
Income from equity investment in CTS Corporation,
net of income tax charges of $383 and $13 802 720
Net income $ 1,083 $ 933
Weighted average number of common and common
equivalent shares outstanding 3,846,580 3,885,886
Net income per common share $ .28 $ .24
Dividends per common share $ .10 $ .10
See accompanying notes to condensed consolidated financial statements.
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DYNAMICS CORPORATION OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1995
(DOLLAR AMOUNTS IN THOUSANDS)
Unaudited
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
Balance at December 31, 1994 3,846,677 $385 $11,698 $88,133 $(491) $99,725
Shares issued and issuable
from treasury pursuant to
benefit plans 283 13 13
Shares acquired for
treasury and pursuant to
benefit plans (11,236) (1) (47) (215) (263)
Amortization of deferred
compensation 38 38
Net income 1,083 1,083
Cash dividends (385) (385)
Balance at March 31, 1995 3,835,724 $384 $11,664 $88,616 $(453) $100,211
<FN>
* Net of shares held in treasury at $.10 par value per share (3,339,437 voting shares at March 31, 1995 and 3,328,484
voting shares at December 31, 1994). The cumulative cost of treasury shares held at March 31, 1995 amounted to
approximately $35,100. Includes non-voting shares outstanding of 4,670 at March 31, 1995.
See accompanying notes to condensed consolidated financial statements.
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DYNAMICS CORPORATION OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(DOLLAR AMOUNTS IN THOUSANDS)
Unaudited
March 31, March 31,
1995 1994
Operating activities:
Net income $1,083 $ 933
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization 261 265
Deferred income taxes 368 (22)
Income from equity investment in
CTS before income taxes (1,185) (733)
Dividends from CTS 336 192
Increase in other assets (108)
Issuance of Company common stock 13 13
Other--net 38 15
Changes in operating assets and liabilities:
Accounts receivable (384) (100)
Inventory (1,880) (1,951)
Other current assets (131) (49)
Accounts payable, accrued expenses
and sundry liabilities 2,026 717
Federal income taxes payable 442 128
Increase in current assets of division held
for sale (179) (198)
Net cash provided by (used in) operating
activities 700 (790)
Investing activities:
Purchases of CTS common stock (603) (90)
Purchases of property, plant and equipment (324) (146)
Other 14 12
Net cash used in investing activities (913) (224)
Financing activities:
Principal payments under capital
lease obligations and mortgages (12) (228)
Purchases of treasury stock (263) (326)
Dividends paid (385) (389)
Net cash used in financing activities (660) (943)
Decrease in cash and cash equivalents (873) (1,957)
Cash and cash equivalents at beginning of period 6,837 8,969
Cash and cash equivalents at end of period $5,964 $7,012
See accompanying notes to condensed consolidated financial statements.
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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, 1995 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1995. 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, 1994.
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,
1995 1994
(in thousands)
Raw materials and supplies $7,697 $7,579
Work in process 7,488 6,791
Finished goods 4,648 3,391
19,833 17,761
Inventories subject to progress billings 401 666
Progress billings (461) (534)
(60) 132
$19,773 $17,893
Note 2 - Division Held for Sale - Fermont Division:
On March 23, 1995, the Department of the Army notified the Company's Fermont
Division that its contract with Fermont for the supply of 3KW generator sets
had been terminated completely, for the convenience of the Government. The
Company is proceeding with the preparation of a proposal to the Government for
compensation due Fermont as a result of this termination for convenience.
On April 21, 1995, the U.S. Army Materiel Command ("AMC") advised the Company
that AMC had determined there was some merit to the protest filed by Libby
Corporation ("Libby") with the U.S. Government Accounting Office concerning the
award to Fermont by the U.S. Army Aviation and Troop Command ("ATCOM") of a
$57.8 million contract to manufacture tactical quiet generator sets ("TQ
Contract"). AMC has directed ATCOM to reevaluate the submissions of Libby and
Fermont and to review its evaluation process leading to the award of the TQ
Contract to Fermont on January 13, 1995. Pursuant to AMC's recommendation, on
April 25, 1995 ATCOM ordered Fermont to stop all work called for by the TQ
Contract. Fermont is taking the necessary steps to comply with ATCOM's order
and also has begun efforts to provide support to sustain ATCOM's award of the
TQ Contract to Fermont following reevaluation. The Company believes the TQ
Contract was properly awarded to Fermont and expects that the reevaluation by
ATCOM and AMC will affirm the award to Fermont.
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Note 3 - Equity Investment in CTS Corporation:
At March 31, 1995, the Company's holdings aggregated 2,242,100 shares of CTS
common stock, increased from 2,222,100 shares at December 31, 1994, and the
Company's percentage of equity ownership in CTS increased to 43.1% from 42.9%.
The market value of the Company's investment in CTS amounted to $70,626,000 at
March 31, 1995 and $61,663,000 at December 31, 1994. The market value at May
11, 1995 was $73,989,000. 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.
Summarized unaudited financial information derived from CTS' Quarterly Report
on Form 10-Q for the quarter ended April 2, 1995 follows:
Three Months Ended
April 2, April 3,
1995 1994
(in thousands)
Net sales $75,978 $64,357
Gross earnings $17,273 $15,597
Net earnings $3,256 $2,490
Certain reclassifications have been made by CTS for all years presented in
their financial statements to conform to the classifications adopted by CTS in
1995.
Note 4 - Other Income, Net:
Three Months Ended
March 31,
1995 1994
(in thousands)
Interest:
Income $71 $52
Expense (12) (27)
59 25
Other, net 175 25
$234 $50
Note 5 - Provision for Income Taxes:
The effective tax rate for the three months ended March 31, 1995 exceeds the
Federal statutory rate due to the effect of state income and franchise taxes.
The effective tax rate for the three months ended March 31, 1994 approximates
the Federal statutory rate.
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Note 6 - 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 of the Company.
In October 1994, the Company, after notifying the Consumer Products Safety
Commission, commenced a recall of approximately 2,700 electronic toasters
manufactured in the United Kingdom by a third party and distributed in the U.S.
by the Company's Waring Products Division, because of a defect in the
electronic timer on the units. The Company has advised the manufacturer that
it will seek full indemnity from the manufacturer, as provided in the agreement
between the parties, for all costs of the recall. The U.K. manufacturer has
not responded to the Company's demand for indemnification. It is not possible
to reasonably estimate the extent of the Company's liability at this time.
However, the costs of the recall are not expected to materially affect the
financial position 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 addition, in late March,
1995, the Company was sued by a state environmental agency to recover response
costs related to the cleanup of a non-Company site in Pennsylvania as to which
the Company was earlier designated a PRP. The Company is also a defendant in
two lawsuits seeking contribution towards the 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.
With respect to other claims and actions against the Company, it is the opinion
of Management that such matters will not have a material effect on the
financial position of the Company.
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Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations
Sales increased $2,403,000 in the quarter ended March 31, 1995 compared to the
same period a year ago. Sales in the Electrical Appliances and Electronic
Devices segment increased $1,060,000. Continued growth in sales of heat
dissipating devices for computer microprocessors and a significant improvement
in sales of oscillators caused sales of electronic devices to increase
$2,661,000. Sales of consumer electrical appliances declined $1,601,000 due to
reduced product placement and competitive pressure at the retail level. Sales
in the Fabricated Metal Products and Equipment segment increased slightly, as
modest increases in door product and systems sales were offset by a decline in
air product sales. Sales in the Power and Controlled Environmental Systems
segment increased $1,236,000 due to shipments on a power plant products order
with a major foreign customer and increased custom mobile sales, which were
partially offset by sales declines on transportable medical units and thermal
products.
Gross profit increased $528,000 in the quarter ended March 31, 1995 compared to
the same period a year ago but decreased as a percentage of sales to 26.1% from
26.5%. Gross profit in the Electrical Appliances and Electronic Devices
segment increased due to greater sales of heat dissipating devices and
increased overhead absorption on quartz crystal products, offset in part by a
decline in sales volume of consumer electrical appliances. Gross profit was
relatively unchanged in the Fabricated Metal Products and Equipment and Power
and Controlled Environmental Systems segments, but significantly lower as a
percentage of sales in the latter segment due to material cost overruns.
Selling, general and administrative expenses increased $587,000 in the quarter
ended March 31, 1995 compared to the same period a year ago, due in part to
increases in incentive compensation tied to performance and the Company's stock
price, higher commission expenses on heat dissipating devices and power plant
products and higher professional fees.
Other income increased $184,000, due primarily to recognition of $74,000 of
income resulting from a restructuring of the note acquired in the 1992 sale of
the Company's investment in Farmhand, Inc., which note was paid off in full in
April of 1995, and a market value recovery of $40,000 in the unrealized loss
reserve for the Company's marketable securities.
The provision for income taxes increased $57,000 due principally to the
$125,000 increase in income before taxes. The income tax rate in the quarter
ended March 31, 1995 increased to 37.7% compared to 34.7% for the same period a
year ago, due to the effect of foreign tax credits in the prior year's quarter.
Income from the Company's equity investment in CTS Corporation increased
$82,000, reflecting CTS' $766,000 increase in quarterly net earnings and the
Company's period to period increase in percentage of equity ownership to 43.1%
from 37.2%, reduced by the provision for deferred income taxes on the Company's
proportionate share of the undistributed earnings of CTS Corporation, which was
not required in last year's first quarter.
Financial Condition
Cash and cash equivalents decreased $873,000 during the three months ended
March 31, 1995. Cash of $700,000 was provided by operating activities, while
cash of $913,000 was used in investing activities, primarily to purchase CTS
common stock and to acquire production equipment. Cash of $660,000 was used in
financing activities, principally to fund the Company's dividend payment and
treasury stock purchases.
-9-
Cash at March 31, 1995 amounted to $5,964,000. During the quarter, the Company
did not borrow under its $37,000,000 Revolving Credit Agreement or its
$9,000,000 uncommitted line with its banks. The entire amount of these credit
facilities is available for use by the Company.
Liquidity and financial resources are considered adequate to fund planned
Company operations, including capital expenditures and payment of dividends.
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 $16,958,000 ($16,375,000 of ordinary income and $583,000 of
capital gain income) to realize its deferred tax assets of $5,412,000 at March
31, 1995.
With respect to the stop work order and protest concerning the TQ Contract (see
Note 2 - Division Held for Sale - Fermont Division in the Notes to the
Condensed Consolidated Financial Statements), the Company believes that the TQ
Contract was properly awarded to Fermont and expects that the reevaluation by
ATCOM and AMC will affirm the award to Fermont. A protracted reevaluation
could result in delays in first article prototype testing and approval and in
production of TQ generator sets, the costs of which may be recoverable from the
Government.
With respect to environmental matters (see Note 6 - Contingencies in the Notes
to the Condensed Consolidated Financial Statements), the Company has accrued
$12,000 for mandated expenditures at a Company site in California during the
quarter, compared to similar accrued expenses of $72,000 for the comparable
prior year period. Also, during the current year's quarter, the Company had
capital expenditures at the Company site in California of $17,000 to limit 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 the product recall by the Company's Waring Products Division
(see Note 6 - Contingencies in the Notes to the Condensed Consolidated
Financial Statements), the impact on the Company's results of operations and
cash flows cannot be quantified at this time. However, the costs of the recall
are not expected to materially affect the financial condition of the Company.
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Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
(b) On March 30, 1995, the Company reported on Form 8-K under
Item 5, Other Events, that on March 23, 1995 the Department
of the Army notified the Company's Fermont Division
("Fermont") that its contact with Fermont for the supply of
3KW generator sets had been terminated completely, for the
convenience of the Government. The Company is proceeding
with the preparation of a proposal to the Government for
compensation due Fermont as a result of this termination
for convenience.
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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 12, 1995
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