<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 1994
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-14044
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DEFIANCE, INC.
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(Exact name of registrant as specified in its charter)
Delaware 34-1526359
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1111 Chester Ave., Suite 750
Cleveland, Ohio 44114-3516
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (216) 861-6300
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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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The number of Common Shares outstanding at January 31, 1995 was 6,541,450.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
DEFIANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(All amounts in thousands)
ASSETS
------
<CAPTION>
12/31/94 6/30/94
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<S> <C> <C>
CURRENT ASSETS:
Cash $833 $941
Accounts receivable 15,244 15,872
Inventories 5,519 3,977
Deferred income taxes 503 572
Prepaid expenses and other current assets 1,409 1,417
---------- ----------
Total current assets 23,508 22,779
PROPERTY, PLANT AND EQUIPMENT - net 27,188 23,825
COST IN EXCESS OF NET ASSETS OF ACQUIRED COMPANIES 6,927 7,085
OTHER ASSETS 857 846
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Total assets $58,480 $54,535
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term obligations $3,144 $2,933
Accounts payable 2,916 2,811
Accrued payroll and employee benefits 3,010 4,044
Accrued expenses 2,541 2,879
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Total current liabilities 11,611 12,667
LONG-TERM OBLIGATIONS 11,556 9,346
DEFERRED INCOME TAXES 2,164 2,348
CONTINGENCIES - Note F
STOCKHOLDERS' EQUITY:
Common shares 327 326
Additional paid-in capital 21,974 21,927
Retained earnings 10,848 7,921
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Total stockholders' equity 33,149 30,174
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Total liabilities and stockholders' equity $58,480 $54,535
========== ==========
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
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<PAGE> 3
<TABLE>
DEFIANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(All amounts in thousands, except share and per share amounts)
<CAPTION>
Three months ended Six months ended
------------------ ----------------
12/31/94 12/31/93 12/31/94 12/31/93
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $20,977 $19,677 $42,551 $38,912
Cost of goods sold 15,569 14,777 31,466 29,578
--------- --------- --------- ---------
Gross profit 5,408 4,900 11,085 9,334
Selling, general and administrative expenses 2,968 2,874 6,068 5,483
--------- --------- --------- ---------
Operating earnings 2,440 2,026 5,017 3,851
Interest (expense) - net (244) (360) (514) (702)
Other income (expense) 3 (16) 5 5
--------- --------- --------- ---------
Earnings before income tax provision and
cumulative effect of accounting change 2,199 1,650 4,508 3,154
Income tax provision 773 580 1,581 1,081
--------- --------- --------- ---------
Earnings before cumulative effect of
accounting change 1,426 1,070 2,927 2,073
Cumulative effect of accounting change - income taxes 564
--------- --------- --------- ---------
Net earnings $1,426 $1,070 $2,927 $2,637
========= ========= ========= =========
Net earnings per common share:
Earnings before cumulative effect of accounting
change $0.22 $0.16 $0.44 $0.31
Cumulative effect of accounting change - income
taxes 0.09
--------- --------- --------- ---------
Net earnings $0.22 $0.16 $0.44 $0.40
========= ========= ========= =========
Common shares:
Shares outstanding - beginning of period 6,519,838 6,444,001 6,516,038 6,422,270
Shares issued during period 21,612 38,591 25,412 60,322
--------- --------- --------- ---------
Shares outstanding - end of period 6,541,450 6,482,592 6,541,450 6,482,592
--------- --------- --------- ---------
Average shares outstanding 6,532,330 6,473,146 6,524,738 6,456,163
Average common share equivalents:
Outstanding stock options 156,370 174,750 174,949 183,500
--------- --------- --------- ---------
Weighted average common
shares outstanding 6,688,700 6,647,896 6,699,687 6,639,663
========= ========= ========= =========
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
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<PAGE> 4
<TABLE>
DEFIANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(All amounts in thousands)
<CAPTION>
Six months ended
----------------
12/31/94 12/31/93
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<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $2,927 $2,637
Items not affecting cash 2,179 1,521
Current items (2,228) 55
--------- ---------
Cash provided by operating activities 2,878 4,213
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FINANCING ACTIVITIES:
Retirements and payments of long-term obligations (1,419) (10,003)
Additions to long-term obligations 3,601 8,363
Issuance of common shares from exercise of stock options 48 71
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Cash provided by (used for) financing activities 2,230 (1,569)
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INVESTING ACTIVITIES:
Purchase of property and equipment (5,206) (2,560)
Proceeds from sale of equipment 4
Other - net (10) (18)
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Cash (used for) investing activities (5,216) (2,574)
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CASH:
Increase (decrease) (108) 70
Beginning of period 941 450
--------- ---------
End of period $833 $520
========= =========
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
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<PAGE> 5
DEFIANCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1994
(All amounts in thousands)
A - CONSOLIDATED FINANCIAL STATEMENTS
These interim financial statements are unaudited and reflect all
adjustments (consisting solely of recurring adjustments) that, in the opinion
of management, are necessary for a fair statement of results of the interim
periods presented. This report includes information condensed from and should
be read in conjunction with the financial statements included in the Company's
annual report on Form 10-K for the year ended June 30, 1994.
B - INVENTORIES
<TABLE>
<CAPTION>
12/31/94 6/30/94
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<S> <C> <C>
Raw materials $1,148 $1,319
Work in process 3,335 1,622
Finished goods 281 376
Stores and supplies 755 660
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$5,519 $3,977
======== ========
</TABLE>
C - LONG TERM OBLIGATIONS
<TABLE>
<CAPTION>
12/31/94 6/30/94
-------- --------
<S> <C> <C>
Long-term debt:
Revolving credit borrowings $630 $38
Equipment purchase line borrowings 3,087
7% term loan to bank 5,260 5,956
9.5% Industrial Development Revenue Refunding Bond, Series 1991 1,563 1,785
7.5% Ohio Development term loan 503 590
7.35% Urban Development Action Grant 789 810
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Total long-term debt 11,832 9,179
Capitalized lease obligations 2,868 3,100
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Total long-term obligations 14,700 12,279
Less current maturities of long-term obligations 3,144 2,933
-------- --------
Total long-term obligations less current maturities $11,556 $9,346
======== ========
</TABLE>
In July 1994, the Company renegotiated its banking arrangement with its
primary lender, Comerica Bank. Under this new arrangement, the revolving credit
borrowings, equipment purchase line borrowings, 7% term loan, and 9.5%
Industrial Revenue Bonds are now unsecured.
The revolving credit facility expires in October 1996 and the maximum
amount that may be borrowed is $4,000. Borrowings under this facility are at
the prime interest rate less 25 basis points, or at the Euro dollar rate plus
185 basis points. The Company is required to pay a fee of 1/8% on the unused
portion of the facility. At December 31, 1994 the Company had approximately
$3,411 available for borrowing under this facility.
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<PAGE> 6
As part of the July 1994 banking arrangement with Comerica Bank, the
Company received a $10,000 equipment purchase line of credit, to help fund its
capital spending plans for fiscal 1995. This facility expires in July 1995, at
which time it may be converted to a five or seven year term loan at the
election of the Company. Borrowings under this facility are at the prime
interest rate less 75 basis points, or at the Euro dollar rate plus 135 basis
points. There is no fee on the unused portion of the facility. At December
31, 1994 the Company had approximately $6,913 available for borrowing under
this facility.
D - BENEFIT PLANS
Effective October 1, 1994, future benefits under a defined benefit pension
plan covering approximately fifty salaried employees at one subsidiary were
curtailed. A one-time charge of $250 was accrued in the first fiscal quarter
in accordance with Statement of Financial Accounting Standards No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits." Company contributions under an
existing 401(k) plan were enhanced to replace these future benefits.
E - INCOME TAXES
Effective July 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method as required by
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109). Prior year's financial statements were not restated. The
cumulative effect of adopting SFAS 109 was to increase net income by $564 in
the quarter ended September 30, 1993.
F - CONTINGENCIES
The Company is involved in various litigation arising in the normal course
of business. It is not possible to determine the ultimate liability, if any,
in these matters. In the opinion of management such litigation will not have a
material effect on the consolidated financial position or results of
operatiions of the Company.
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<PAGE> 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
- - - ---------------------
Sales
- - - ------
Sales for the year to date were 9%, or $3,639,000, higher than last year,
and for the quarter were 7%, or $1,300,000, higher than last year. Sales at
each of the Company's three core business units increased on a year to date
basis. The largest portion of this increase was in cam follower rollers, due
to continued strong engine build rates at the Company's automotive and diesel
customers, combined with new business for Eaton Corporation under the $1.7
million contract announced in January 1994. Sales of testing and tooling
services also increased as new model development activity by the "Big Three"
remained strong. Sales of molded and painted plastic parts decreased on a year
to date basis.
Gross Profit
- - - ------------
Gross profit for the year to date, as a percentage of sales, increased to
26.1% from 24.0%, and for the quarter increased to 25.8% from 24.9%, over the
same periods in the prior year. These increases were due to higher sales in
the Company's core business units, which generally experience higher margins,
coupled with lower sales of molded and painted plastic products, which generally
experience lower margins, along with continued productivity improvement.
Selling, General and Administrative (SG&A) Expenses
- - - ---------------------------------------------------
SG&A expenses for the year to date increased $585,000 and represented
14.3% of sales, as compared to 14.1% during the same period last year. For the
quarter, SG&A expenses decreased to 14.1% from 14.6% of sales, though the
amount represented a $94,000 increase over the same period last year. This
increase was due in part to a one-time charge of $250,000 relative to the
curtailment of a defined benefit pension plan in the first quarter, and in
part to increased compensation costs associated with improved earnings.
Excluding the pension charge, SG&A expenses represented 13.7% of sales on a
year to date basis, down from last year.
Interest Expense (Net of Interest Income)
- - - -----------------------------------------
Net interest expense for the year to date decreased by $188,000 or 27%
over the same period last year, and for the quarter decreased by $116,000 or
32% over the same period last year. These decreases were primarily due to
lower average net borrowings at lower rate and capitalizing $59,000 of interest
under the equipment purchase facility in the current year.
Income Taxes
- - - ------------
Income tax expense, as a percentage of income before income taxes, was 35%
for the year to date as compared to 29% for the same period last year. This
difference in effective rates is due to future taxable amounts that must be
considered in the computation of income taxes for the current year as required
by SFAS No. 109 (see Note E to the condensed consolidated financial
statements).
Outlook
- - - -------
The Company expects that continued strong demand in its core business
units will enable it to maintain its pattern of sales and earnings improvement
over comparable prior year periods, should market conditions in the U.S.
transportation industry remain to be favorable.
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<PAGE> 8
LIQUIDITY AND CAPITAL RESOURCES
- - - -------------------------------
Cash provided by operations for the year to date was $2,878,000, which met
working capital needs. Inventories increased $1,542,000 due to work in process
on the General Motors "P90" hard tooling project. In addition, accrued payroll
and employee benefits decreased $1,034,000 due to the payment of incentive
bonuses earned in the prior fiscal year. At the end of the quarter, the
Company had a current ratio of 2.02 to 1.
Interest-bearing debt increased $2,421,000 primarily from borrowings under
the equipment purchase facility. At the end of the quarter, the Company had a
debt to total capitalization ratio of 31%, up just slightly from 29% at the
prior year end. Also as of the end of the quarter, the Company had
approximately $3.4 million and $6.9 million available in additional borrowing
capacity under its revolving and equipment lines of credit, respectively.
The Company purchased $5,206,000 of equipment for the year to date, and
had outstanding commitments to purchase approximately $2.3 million of equipment
at the end of the quarter. Most of the equipment purchased in the current year
was to support the expansion of production capacity for cam follower rollers.
Based on currently expected levels of business, the Company now plans to spend
a total of approximately $20 million for capital expenditures in fiscal 1995.
Of this amount, approximately $15 million relates to new or increased sales,
including $10 million for equipment for a third production facility for the
Company's Precision Products subsidiary to support expanded manufacturing
capacity. The Company has secured the necessary financing to fund its current
outstanding commitments and expects to fund its remaining planned fiscal 1995
capital expenditures through operating cash flow and the $10 million equipment
purchase facility.
On January 25, 1995, the board of directors declared the Company's first
cash dividend to holders of its common stock since it became publicly owned in
1985. A quarterly cash dividend of $0.04 per share will be paid on March 6,
1995, to shareholders of record as of February 15, 1995. The Company
anticipates future quarterly dividends, and does not expect its liquidity or
capital resources to be materially affected by the payment of dividends.
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<PAGE> 9
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on November 16,
1994, the following individuals were elected to the Board of Directors
for a three year term:
<TABLE>
<CAPTION>
Votes Votes
For Withheld
---------- ---------
<S> <C> <C>
Hector R. Ortino 4,819,198 325,940
George H. Lewis, III 4,819,198 325,940
James E. Heighway 4,819,198 325,940
</TABLE>
The following proposals were approved at the Company's Annual Meeting:
<TABLE>
<CAPTION>
Affirmative Negative Votes
Votes Votes Withheld
---------- --------- ---------
<S> <C> <C> <C> <C>
1. Approve an amendment to the Company's Certificate
of Incorporation to increase the authorized number of
shares of capital stock and common stock 4,669,053 437,535 38,550
2. Approve the 1994 Nonemployee Director Stock
Option Plan. 4,765,489 326,664 52,985
</TABLE>
Item 5. Other Information
On January 25, 1995, the Company's Board of Directors approved a cash
dividend of $0.04 per share on common stock, payable on March 6, 1995,
to shareholders of record as of February 15, 1995.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - 27 Financial Data Schedule.
(b) No reports on Form 8-K have been filed during the current quarter.
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<PAGE> 10
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.
Date: February 8, 1995
---------------------
DEFIANCE, INC.
By: /s/ Jerry A. Cooper
------------------------------
President and Chief Executive Officer
/s/ Michael J. Meier
------------------------------
Vice President - Finance and Chief
Financial Officer
/s/ James L. Treece
------------------------------
Chief Accounting Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 833
<SECURITIES> 0
<RECEIVABLES> 15,244
<ALLOWANCES> 0
<INVENTORY> 5,519
<CURRENT-ASSETS> 23,508
<PP&E> 27,188
<DEPRECIATION> 2,082
<TOTAL-ASSETS> 58,480
<CURRENT-LIABILITIES> 11,611
<BONDS> 11,556
<COMMON> 327
0
0
<OTHER-SE> 21,974
<TOTAL-LIABILITY-AND-EQUITY> 58,480
<SALES> 42,551
<TOTAL-REVENUES> 42,551
<CGS> 31,466
<TOTAL-COSTS> 31,466
<OTHER-EXPENSES> 6,063<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 514
<INCOME-PRETAX> 4,508
<INCOME-TAX> 1,581
<INCOME-CONTINUING> 2,927
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,927
<EPS-PRIMARY> .44
<EPS-DILUTED> .44
<FN>
<F1> SG&A minus other income.
</FN>
</TABLE>
