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 September 30, 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
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(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 October 30, 1996:
Voting 3,808,071
Non-Voting 3,653
DYNAMICS CORPORATION OF AMERICA
AND SUBSIDIARIES
INDEX
Page No.
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Part I - Financial Information:
Item 1. Financial Statements
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Condensed Consolidated Balance Sheets -
As of September 30, 1996 and December 31, 1995 2
Condensed Consolidated Statements of
Income - For the Three and Nine Months
Ended September 30, 1996 and 1995 3
Condensed Consolidated Statement of
Stockholders' Equity - For the Nine
Months Ended September 30, 1996 4
Condensed Consolidated Statements of
Cash Flows - For the Nine Months
Ended September 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial
Statements 6 - 9
Item 2. Management's Discussion and
---------------------------
Analysis of Results of Operations
---------------------------------
and Financial Condition 10 - 13
-----------------------
Part II - Other Information:
Item 6. Exhibits and Reports on Form 8-K 14
--------------------------------
Signature Page 15
Part 1 - Financial Information
Item 1 - Financial Statements
- -----------------------------
DYNAMICS CORPORATION OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AT SEPTEMBER 30, 1996 (Unaudited) and DECEMBER 31, 1995
(DOLLAR AMOUNTS IN THOUSANDS)
September 30, December 31,
ASSETS 1996 1995
------ ------------ -----------
Current Assets:
Cash and cash equivalents $ 979 $ 1,767
Accounts Receivable, less allowances of
$658 and $613 22,511 19,898
Inventories - Note 1 23,314 23,440
Other current assets 2,188 1,254
Deferred income taxes 4,447 4,434
-------- --------
TOTAL CURRENT ASSETS 53,439 50,793
Property, Plant and Equipment - at cost,
less accumulated depreciation and
amortization of $36,609 and $36,048 5,064 4,164
Equity Investment in CTS Corporation -
Note 2 81,877 77,180
Other Assets 2,066 2,164
Deferred Income Taxes 119
-------- --------
TOTAL ASSETS $142,565 $134,301
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current installments of long-term debt$ 1,051 $ 63
Accounts payable 6,373 6,284
Accrued expenses and sundry liabilities 14,853 14,616
Federal income taxes payable 1,245 851
-------- --------
TOTAL CURRENT LIABILITIES 23,522 21,814
Long-term Debt - Note 3 5,136 3,424
Other Liabilities 1,615 1,605
Deferred Income Taxes 1,984
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TOTAL LIABILITIES 30,273 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 112,292 105,474
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $142,565 $134,301
======== ========
See accompanying notes to condensed consolidated financial statements.
-2-
DYNAMICS CORPORATION OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Unaudited
For the three months For the nine months
ended September 30, ended September 30,
-------------------- -------------------
1996 1995 1996 1995
------- ------- ------- ------
Net sales $35,008 $30,384 $96,198 $84,944
Cost of sales 27,476 23,212 77,063 64,404
------- ------- ------- -------
Gross profit 7,532 7,172 19,135 20,540
Selling, general and administrative
expenses 6,487 7,038 19,070 20,162
------- ------- ------- -------
1,045 134 65 378
Other income (expense), net -
Note 4 (384) (109) (486) 236
------- ------- ------- -------
Income (loss) from continuing
operations before items shown
below 661 25 (421) 614
Income tax charge (benefit) -
Note 5 291 (988) (122) (768)
------- ------- ------- -------
Income (loss) from continuing
operations before equity in
CTS Corporation 370 1,013 (299) 1,382
Income from equity investment in CTS
Corporation 1,868 1,079 7,902 3,081
------- ------- ------- -------
Income from continuing operations 2,238 2,092 7,603 4,463
Reclassification of provision for
Fermont disposition, net of taxes -
Note 6 352 251 649
------- ------- ------- -------
Net income $ 2,238 $ 2,444 $ 7,854 $ 5,112
======= ======= ======= =======
Weighted average number of common
and common equivalent shares
outstanding 3,817,784 3,837,119 3,821,532 3,841,071
========= ========= ========= =========
Income per common share:
Continuing operations $ .59 $ .55 $ 1.99 $ 1.16
Reclassification of provision for
Fermont disposition .09 .07 .17
------- ------- ------- -------
Net income $ .59 $ .64 $ 2.06 $ 1.33
======= ======= ======= =======
Dividends per common share $ .10 $ .10 $ .20 $ .20
======= ======= ======= =======
<FN>
See accompanying notes to condensed consolidated financial statements.
-3-
DYNAMICS CORPORATION OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(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,
1995 3,829,561 $383 $11,623 $93,807 $(339) $105,474
Shares issued and issuable
from treasury pursuant to
benefit plans 11 11
Shares acquired for
treasury and pursuant to
benefit plans (17,585) (2) (121) (284) (407)
Amortization of deferred
compensation and related
tax benefit 37 88 125
Net income 7,854 7,854
Cash dividends (765) (765)
--------- ---- ------- ------- ----- --------
Balance at September 30,
1996 3,811,976 $381 $11,550 $100,612 $(251) $112,292
========= ==== ======= ======== ===== ========
<FN>
* Net of shares held in treasury at $.10 par value per share (3,363,185 voting
shares at September 30, 1996 and 3,345,600 voting shares at December 31, 1995).
The cumulative cost of treasury shares held at September 30, 1996 amounted to
approximately $35,700. Includes non-voting shares outstanding of 3,653 at
September 30, 1996.
See accompanying notes to condensed consolidated financial statements.
-4-
DYNAMICS CORPORATION OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS)
Unaudited
September 30, September 30,
1996 1995
------------- -------------
Operating activities:
Net income $ 7,854 $5,112
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 1,020 891
Deferred income taxes (2,116) 1,338
Income from equity investment in CTS
before income taxes (5,872) (4,581)
Dividends from CTS 1,175 1,009
Gain on sale of property (198)
Decrease (increase) in other assets 98 (510)
Increase (decrease) in other liabilities 10 (266)
Issuance of Company common stock 11 18
Other--net 125 149
Changes in operating assets and
liabilities:
Accounts receivable (2,613) (3,203)
Inventory 126 (4,666)
Other current assets (934) (72)
Accounts payable, accrued expenses
and sundry liabilities 326 1,885
Federal income taxes payable 394 (270)
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Net cash used in operating activities (396) (3,364)
------- -------
Investing activities:
Purchases of CTS common stock (603)
Purchases of property, plant and
equipment (1,920) (1,061)
Proceeds from sale of property 200
Proceeds from note receivable 476
------- -------
Net cash used in investing activities (1,920) (988)
-------- -------
Financing activities:
Principal payments under capital
lease obligations (50) (125)
Borrowings under lines of credit 2,750
Purchases of treasury stock (407) (386)
Dividends paid (765) (768)
------- -------
Net cash provided by (used in)
financing activities 1,528 (1,279)
------- -------
Decrease in cash and cash equivalents (788) (5,631)
Cash and cash equivalents at beginning
of period 1,767 6,837
------- -------
Cash and cash equivalents at end of
period $ 979 $ 1,206
======= =======
See accompanying notes to condensed consolidated financial statements.
-5-
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 nine months ended September 30, 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. Financial statements
for prior periods have been reclassified to include Fermont Division in the
results of operations of the Company (see Note 6).
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:
September 30, December 31,
1996 1995
------------- -----------
(in thousands)
Raw materials and supplies $ 6,695 $ 8,660
Work in process 9,676 7,560
Finished goods 6,540 6,863
------- -------
22,911 23,083
------- -------
Inventories subject to progress billings 885 1,233
Progress billings (482) (876)
------- -------
403 357
------- -------
$23,314 $23,440
======= =======
Note 2 - Equity Investment in CTS Corporation:
At September 30, 1996, the Company's holdings aggregated 2,303,100 shares of CTS
Corporation ("CTS") 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 $97,018,000 at
September 30, 1996 and $86,942,000 at December 31, 1995. The market value at
November 11, 1996 was $94,715,000. 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-
Note 2 - Equity Investment in CTS Corporation (continued):
Summarized unaudited financial information derived from CTS' Quarterly Report on
Form 10-Q for the quarter ended September 29, 1996 follows:
Three Months Ended Nine Months Ended
------------------ -----------------
September 29, October 1, September 29, October 1,
1996 1995 1996 1995
-------- -------- -------- --------
(in thousands)
Net sales $ 76,457 $ 73,890 $240,463 $226,281
======== ======== ======== ========
Gross profit $ 20,726 $ 18,345 $ 62,399 $ 54,766
======== ======== ======== ========
Net earnings $ 5,060 $ 4,218 $ 14,814 $ 12,116
======== ======== ======== ========
The Company's proportionate share of CTS' 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 decided it is appropriate to change the 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. With the new rate, the Company's reported
share of CTS' net earnings for the three and nine months ended September 30,
1996 increased by $493,000 ($.13 per share) and $3,923,000 ($1.03 per share),
respectively. Included in the nine month increase is $2,466,000 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 3 - Long-term Debt:
During the nine months ended September 30, 1996, the Company borrowed an
additional $2,750,000 under its Revolving Credit Agreement with banks.
Note 4 - Other Income (Expense), Net:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
(in thousands)
Interest:
Income $ 4 $ 49 $ 17 $184
Expense (88) (13) (215) (39)
--- --- ---- ---
(84) 36 (198) 145
Environmental response
costs (320) (520)
Sale of property and
leasehold rights 198
Staff reduction costs (125) (125)
Other, net 20 (20) 232 18
----- ----- ----- ----
$(384) $(109) $(486) $236
===== ===== ===== ====
-7-
Note 5 - Income Tax Charge (Benefit):
The effective tax rate for the three months ended September 30, 1996 exceeded
the Federal statutory rate due to the effect of state income taxes. The
effective tax benefit rate for the nine months ended September 30, 1996 is less
than the Federal statutory benefit rate due to the effect of minimum state tax
obligations. Included in net income for the three and nine months ended
September 30, 1995 is an income tax benefit of $998,000, or $.26 per share,
reflecting a favorable resolution of prior year tax matters. Exclusive of this
tax benefit, the effective tax rate for such periods exceeds the Federal
statutory rate due to the effect of state income taxes, offset in part in the
nine month period by state tax credits.
Note 6 - Reclassification of Provision for Fermont Disposition:
Effective April 1, 1996, the Condensed Consolidated Statements of Income include
the operations of the Fermont Division, which previously had been accounted for
as a division held for sale. Although it continues to seek a buyer for this
operation, the Company decided to bid on new contracts in addition to the now
$82.1 million contract previously awarded to Fermont by the government.
Therefore, Fermont's operations have been reclassified in the Company's results
of operations for prior periods.
Included in assets on the Consolidated Balance Sheet as of September 30, 1996
are current assets of Fermont totaling $5,201,000, consisting primarily of
accounts receivable, inventories, and advances to a supplier of $765,000 related
to accelerated engine purchases directed by the Government, and noncurrent
assets (property, plant and equipment) totaling $1,081,000.
Included in liabilities are current liabilities of Fermont totaling $1,588,000,
consisting primarily of accounts payable, salaries, wages and benefits and
taxes.
Fermont's sales for the three months ended September 30, 1996 and 1995 were
$6,427,000 and $307,000, respectively, and its operating profit (loss) was
$1,267,000 and $(612,000), respectively. Fermont's sales for the nine months
ended September 30, 1996 and 1995 were $14,403,000 and $2,247,000, respectively,
and its operating profit (loss) was $1,017,000 and $(1,425,000), respectively.
Fermont's results included the settlement in September, 1996 of a government
contract claim which increased sales revenue by $1,937,000 and operating profits
by $1,386,000, net of amounts due to subcontractors and other costs.
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.
-8-
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, having agreed with the
EPA to fund a feasibility study at the site, sued the Company to recover a share
of those costs, and in September a $287,000 judgment was entered against the
Company in that suit. The Company has elected to participate in the allocation
of responsibility proceedings conducted by the PRP group formed in connection
with the Superfund site in the vicinity of the California site; and the suit
against the Company by a property owner neighboring the Company site for
allegedly causing contamination at the neighbor's property has been
discontinued. 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 flows 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.
-9-
Item 2. Management's Discussion and Analysis of Results of Operations and
-----------------------------------------------------------------
Financial Condition
-------------------
Results of Operations - Three Months Ended September 30, 1996 Compared
----------------------------------------------------------------------
to Three Months Ended September 30, 1995
----------------------------------------
Sales increased $4,624,000 or 15.2%. Sales in the Electrical Appliances and
Electronic Devices segment decreased $838,000. Sales of electrical appliances
declined $577,000, due primarily to sales declines for consumer products which
were partially offset by sales gains for commercial products. Sales of heat
dissipating devices, especially for computer microprocessors, decreased
$202,000, and sales of frequency control devices also declined modestly. Sales
in the Fabricated Metal Products and Equipment segment increased $993,000, due
to sales improvements in air and door products. Sales in the Power and
Controlled Environmental Systems segment increased $4,469,000. Sales of engine
generator sets improved by $6,120,000, due primarily to First Article deliveries
under the $82.1 million government contract and sales revenue of $1,937,000
recorded as a result of the Company's settlement with the Government of its 3KW
contract termination claim. A sharp sales decline for power plant products and
a modest decline for custom mobile products were partially offset by sales
increases for transportable medical units and thermal products.
Gross profit improved $360,000 but declined as a percentage of sales to 21.5%
from 23.6%. Gross profit in the Electrical Appliances and Electronic Devices
segment decreased due to lower sales of higher-margined heat dissipating devices
for computers and increased overhead on frequency control devices. Gross profit
decreased slightly on electrical appliances due to sales mix. Gross profit was
unchanged in the Fabricated Metal Products and Equipment segment. Gross profit
increased in the Power and Controlled Environmental Systems segment, due
primarily to the Fermont 3KW contract termination settlement offset by
unfavorable gross margins on power plant products.
Selling, general and administrative expenses decreased $551,000 due primarily to
reductions in advertising expenditures, relocation costs and sales commissions.
Other expense, net increased $275,000, as net interest expense was $120,000
higher due to the Company borrowing under its Revolving Credit Agreement in the
current period versus investing excess funds in the prior period. In addition,
the Company recorded an expense of $320,000 in the current period to provide for
environmental response costs, including a $287,000 judgment entered against the
Company in a lawsuit by certain PRPs to recover feasibility study costs at a
non-Company hazardous waste site in Connecticut. Staff reduction costs of
$125,000 were recorded in the prior period at the Company's Waring Products
Division.
Income tax expense of $291,000 was recorded in the current period versus a net
income tax benefit of $988,000 in the prior period, which included a tax benefit
of $998,000, or $.26 per share, recorded to reflect a favorable resolution of
prior year tax matters. The effective tax rates were 44% for the current period
and 40% for the prior period (exclusive of the tax benefit). The effective tax
rates were higher than the applicable Federal statutory rate of 34% because of
the effect of state income taxes.
-10-
Income from the Company's equity investment in CTS Corporation increased
$789,000, reflecting CTS' increase in quarterly net earnings, the Company's
period to period increase in percentage of equity ownership to 44.1% from 43.1%
and, most significantly, a change in the effective tax rate applied by the
Company to its share of CTS' undistributed earnings. The change in the tax rate
(see Note 2 - Equity Investment in CTS Corporation in the Notes to the Condensed
Consolidated Financial Statements) resulted in a $493,000 increase in the
Company's reported share of CTS' earnings in the current quarter.
Effective April 1, 1996, the Fermont Division's results of operations are
included in the Company's results of operations (see Note 6 - Reclassification
of Provision for Fermont Disposition in the Notes to the Condensed Consolidated
Financial Statements). Reported results for prior periods have been
reclassified, including a $352,000 reversal of a reserve for Fermont's
disposition recorded in the prior period.
Results of Operations - Nine Months Ended September 30, 1996 Compared to Nine
- -----------------------------------------------------------------------------
Months Ended September 30, 1995
- -------------------------------
Sales increased $11,254,000 or 13.2%. Sales in the Electrical Appliances and
Electronic Devices segment decreased $559,000. Sales of heat dissipating
devices declined $2,030,000, due principally to reduced orders from computer
manufacturers and the military, and startup delays in manufacturing new
customer-designed products. Sales of electrical appliances increased
$1,176,000, due primarily to sales improvements in the commercial product line,
and sales of frequency control devices increased $295,000, as oscillator sales
improved. Sales in the Fabricated Metal Products and Equipment segment
increased $2,132,000 due to sales improvements in air and door products. Sales
in the Power and Controlled Environmental Systems segment improved $9,681,000.
Sales of engine generator sets increased $12,156,000 due to First Article
deliveries under a government contract and sales revenue of $1,937,000 recorded
as a result of the Company's settlement with the Government of its 3KW contract
termination claim. Sales declines for power plant, custom mobile and thermal
products totaling $5,511,000 were partially offset by increased sales of
$3,036,000 for transportable medical units.
Gross profit declined $1,405,000 and as a percentage of sales to 19.9% from
24.2%. Gross profit in the Electrical Appliances and Electronic Devices segment
decreased due to lower sales of higher-margined heat dissipating devices for
computers, offset in part by improved sales of higher-margined commercial
appliances. Gross profit declined in the Fabricated Metal Products and
Equipment segment due to manufacturing inefficiencies at the Scranton,
Pennsylvania plant. Gross profit increased in the Power and Controlled
Environmental Systems segment due primarily to the 3KW contract termination
settlement offset by unfavorable gross margins on power plant products.
Selling, general and administrative expenses decreased $1,092,000 due
principally to reductions in advertising expenditures, performance-related
incentive costs and relocation costs.
Other income (expense) was a net expense of $486,000 for the current period
compared to income of $236,000 for the prior period. Net interest income
(expense) had an unfavorable variance of $343,000, as interest expense increased
$176,000 due to borrowings under the Company's Revolving Credit
-11-
Agreement and interest income declined $167,000 from the prior period, which
included $74,000 of income from a note receivable. The Company recorded
expenses of $520,000 in the current period to provide for environmental response
costs, including a $287,000 judgment against the Company involving a non-Company
site in Connecticut and $200,000 to provide for the Company's share of costs
associated with a Company site in California. Other miscellaneous items
increased income $214,000 over the prior period.
Income tax benefit decreased $646,000, as a tax benefit of $998,000, or $.26 per
share, was recorded in the prior period, reflecting a favorable resolution of
prior year tax matters. The effective tax rates were 29% for the current period
and 37.5% for the prior period (exclusive of the tax benefit). The effective
tax benefit rate for the current period was less than the Federal statutory rate
of 34% due to the effect of minimum state tax obligations. The effective tax
rate for the prior period exceeded the Federal statutory rate due to the effect
of state income taxes.
Income from the Company's equity investment in CTS Corporation increased
$4,821,000, reflecting CTS' improvement in period to period net earnings, the
Company's period to period increase in percentage of equity ownership to 44.1%
from 43.1% and, most significantly, a change in the effective tax rate applied
by the Company to its share of CTS' undistributed earnings. The change in tax
rate (see Note 2 - Equity Investment in CTS Corporation in the Notes to the
Condensed Consolidated Financial Statements) resulted in a $3,923,000 increase
in the Company's reported share of CTS' nine month earnings.
Effective April 1, 1996, the Fermont Division's results of operations are
included in the Company's results of operations (see Note 6 - Reclassification
of Provision for Fermont Disposition in the Notes to the Condensed Consolidated
Financial Statements). Reported results for prior periods have been
reclassified, resulting in reversals of the reserve for Fermont's disposition of
$251,000 and $649,000 for the nine months ended September 30, 1996 and 1995,
respectively.
Financial Condition
- -------------------
Cash and cash equivalents decreased $788,000 during the nine months ended
September 30, 1996. Cash of $396,000 was used in operating activities,
principally to fund increases in accounts receivable and other current assets,
offset in part by dividends from CTS. Cash of $1,920,000 was used in investing
activities to purchase equipment. Cash of $1,528,000 was provided by financing
activities, as borrowings increased by $2,750,000 and the Company funded
dividend payments and treasury stock purchases.
Cash at September 30, 1996 amounted to $979,000. During the nine month period,
the Company borrowed $2,750,000 for working capital requirements under its
$37,000,000 Revolving Credit Agreement with its banks, bringing the total
borrowings to $5,750,000. Subsequent to September 30, the Company repaid
$1,000,000 of its debt, and presently has $32,250,000 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, 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.
-12-
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 $14,100,000 to realize its deferred tax assets, which are
$4,566,000 at September 30, 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 recorded costs
of $433,000 and $859,000 for managing hazardous substances or pollutants during
the current three and nine month periods, respectively (including $320,000 and
$520,000 in Other Income (Expense) for environmental response costs), compared
to $104,000 and $228,000 for the prior periods. 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.
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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 September 30,
1996.
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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
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(Registrant)
/s/ Patrick J. Dorme
--------------------------------
(Signature)
Patrick J. Dorme
Vice President - Finance and
Chief Financial Officer
Date: November 13, 1996
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