<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 MARCH 31, 1995
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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
- ---------------------------------------- ------------
(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 April 30,1995 was 6,541,450.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
DEFIANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(All amounts in thousands)
ASSETS
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<CAPTION>
3/31/95 6/30/94
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<S> <C> <C>
CURRENT ASSETS:
Cash $299 $941
Accounts receivable 17,139 15,872
Inventories 7,387 3,977
Deferred income taxes 463 572
Prepaid expenses and other current assets 2,102 1,417
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Total current assets 27,390 22,779
PROPERTY, PLANT AND EQUIPMENT - net 27,959 23,825
COST IN EXCESS OF NET ASSETS OF ACQUIRED COMPANIES 6,848 7,085
OTHER ASSETS 1,084 846
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Total assets $63,281 $54,535
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LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term obligations $3,412 $2,933
Accounts payable 3,855 2,811
Accrued payroll and employee benefits 3,630 4,044
Accrued expenses 3,590 2,879
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Total current liabilities 14,487 12,667
LONG-TERM OBLIGATIONS 12,060 9,346
DEFERRED INCOME TAXES 2,105 2,348
CONTINGENCIES - Note F
STOCKHOLDERS' EQUITY:
Common shares 327 326
Additional paid-in capital 21,973 21,927
Retained earnings 12,329 7,921
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Total stockholders' equity 34,629 30,174
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Total liabilities and stockholders' equity $63,281 $54,535
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<FN>
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
DEFIANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(All amounts in thousands, except share and per share amounts)
<CAPTION>
Three months ended Nine months ended
-------------------------- ------------------------
3/31/95 3/31/94 3/31/95 3/31/94
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<S> <C> <C> <C> <C>
Net sales $23,085 $19,971 $65,636 $58,883
Cost of goods sold 16,927 14,755 48,393 44,334
--------- --------- --------- ---------
Gross profit 6,158 5,216 17,243 14,549
Selling, general and administrative expenses 3,123 2,633 9,191 8,116
--------- --------- --------- ---------
Operating earnings 3,035 2,583 8,052 6,433
Interest (expense) - net (259) (312) (773) (1,014)
Other income (expense) 9 17 15 23
--------- --------- --------- ---------
Earnings before income tax provision and
cumulative effect of accounting change 2,785 2,288 7,294 5,442
Income tax provision 1,043 746 2,624 1,827
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Earnings before cumulative effect of
accounting change 1,742 1,542 4,670 3,615
Cumulative effect of accounting change - income taxes 564
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Net earnings $1,742 $1,542 $4,670 $4,179
========= ========= ========= =========
Net earnings per common share:
Earnings before cumulative effect of accounting change $0.26 $0.23 $0.70 $0.54
Cumulative effect of accounting change - income taxes 0.09
--------- --------- --------- ---------
Net earnings $0.26 $0.23 $0.70 $0.63
========= ========= ========= =========
Common shares:
Shares outstanding - beginning of period 6,541,450 6,482,592 6,516,038 6,422,270
Shares issued during period 0 29,946 25,412 90,268
--------- --------- --------- ---------
Shares outstanding - end of period 6,541,450 6,512,538 6,541,450 6,512,538
--------- --------- --------- ---------
Average shares outstanding 6,541,450 6,503,499 6,530,227 6,471,711
Average common share equivalents:
Outstanding stock options 156,545 152,067 168,904 173,175
--------- --------- --------- ---------
Weighted average common
shares outstanding 6,697,995 6,655,566 6,699,131 6,644,886
========= ========= ========= =========
Dividends Per Share $0.04 $0.04
========= =========
<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>
Nine months ended
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3/31/95 3/31/94
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<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $4,670 $4,179
Items not affecting cash 3,258 2,423
Current items (4,090) (96)
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Cash provided by operating activities 3,838 6,506
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FINANCING ACTIVITIES:
Retirements and payments of long-term obligations (2,253) (11,701)
Additions to long-term obligations 5,207 8,704
Issuance of common shares from exercise of stock options 48 86
Dividends paid (262)
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Cash provided by (used for) financing activities 2,740 (2,911)
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INVESTING ACTIVITIES:
Purchase of property and equipment (6,988) (3,367)
Proceeds from sale of equipment 5 26
Other - net (237) (8)
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Cash (used for) investing activities (7,220) (3,349)
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CASH:
Increase (decrease) (642) 246
Beginning of period 941 450
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End of period $299 $696
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See notes to condensed consolidated financial statements.
</TABLE>
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<PAGE> 5
DEFIANCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 1995
(All amounts in thousands)
A - CONSOLIDATED FINANCIAL STATEMENTS
These interim financial statements are unaudited and reflect all
adjustments (consisting solely of normal 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.
<TABLE>
B - INVENTORIES
<CAPTION>
3/31/95 6/30/94
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<S> <C> <C>
Raw materials $1,397 $1,319
Work in process 4,680 1,622
Finished goods 626 376
Stores and supplies 684 660
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$7,387 $3,977
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</TABLE>
<TABLE>
C - LONG TERM OBLIGATIONS
<CAPTION>
3/31/95 6/30/94
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<S> <C> <C>
Long-term debt:
Revolving credit borrowings $895 $38
Equipment purchase line borrowings 4,350
7% term loan to bank 4,912 5,956
9.5% Industrial Development Revenue Refunding Bond, Series 1991 1,452 1,785
7.5% Ohio Development term loan 459 590
7.35% Urban Development Action Grant 778 810
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Total long-term debt 12,846 9,179
Capitalized lease obligations 2,626 3,100
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Total long-term obligations 15,472 12,279
Less current maturities of long-term obligations 3,412 2,933
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Total long-term obligations less current maturities $12,060 $9,346
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</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.
At March 31, 1995 the Company had approximately $3,105 available for
borrowing under the revolving credit facility and $5,650 under the under the
equipment purchase line facility.
The Company's financing arrangements also contain various warranties and
covenants. As of March 31, 1995, the Company was in compliance with these
warranties and covenants.
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<PAGE> 6
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.
The Company plans to file the necessary documents with the PBGC and IRS
during the fourth quarter of fiscal 1995 to begin the process of terminating
this pension plan. The Company anticipates the settlement of obligations will
occur during the second or third quarter of fiscal 1996.
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 operations
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
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Sales
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Sales for the year to date were 12%, or $6,753,000, higher than last year,
and for the quarter were 16%, or $3,114,000, 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 services also
increased due to the continued new model development activity by the "Big
Three" and the trend toward outsourcing to preferred suppliers. Tooling
revenues increased primarily due to new work started this year for General
Motors to provide hard tooling for the 1997 Chevrolet Corsica/Beretta. Sales
of molded and painted plastic parts decreased on a year to date basis, but
increased in the quarter as compared to last year.
Gross Profit
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Gross profit for the year to date, as a percentage of sales, increased to
26.3% from 25.0% for the same period in the prior year, and for the quarter
remained virtually the same at 26.7% compared to 26.9% in the prior year. The
increase for the year to date was 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 increased capacity utilization.
Selling, General and Administrative (SG&A) Expenses
- ---------------------------------------------------
SG&A expenses for the year to date increased $915,000 but as a percentage
of sales represented a decrease to 14.0% from 14.1% the prior year. For the
quarter, SG&A expenses decreased to 13.5% from 14.0% of sales, though the
amount represented a $330,000 increase over the same period last year. The
increase in total expenses was due to a one-time charge of $250,000 relative to
the curtailment of a defined benefit pension plan in the first quarter,
increased compensation costs associated with improved earnings, and increased
costs associated with higher sales levels. Excluding the pension charge, SG&A
expenses represented 13.6% 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 $241,000 or 24%
over the same period last year, and for the quarter decreased by $53,000 or 17%
over the same period last year. These decreases were primarily due to lower
average net borrowings at lower rates and capitalizing $124,000 of interest
under the equipment purchase facility in the current year.
Income Taxes
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Income tax expense, as a percentage of income before income taxes, was 36%
for the year to date as compared to 30% 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).
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<PAGE> 8
Outlook
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The Company expects strong demand in each business unit will enable it to
maintain its pattern of sales and earnings improvement over the comparable
prior year period in the fourth quarter, should market conditions in the U.S.
transportation industry remain to be favorable.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash provided by operations for the year to date was $3,838,000, which
along with borrowings under its revolving line of credit met working capital
needs. Inventories increased $3,410,000 primarily due to work in process on
the General Motors "P90" hard tooling project. In addition, accounts receivable
increased by $1,266,000 and accounts payable and accruals increased $1,094,000,
in response to higher sales and production levels. At the end of the quarter,
the Company had a current ratio of 1.89 to 1.
Interest-bearing debt increased $3,193,000 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 $3.1 million and $5.6 million available in additional borrowing
capacity under its revolving and equipment lines of credit, respectively.
The Company purchased $6,988,000 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 $19 million for capital expenditures in fiscal 1995.
Of this amount, approximately $14 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 primarily from its equipment purchase facility and
expects to fund its remaining planned fiscal 1995 capital expenditures through
operating cash flow and the 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 was paid on March 6, 1995,
to shareholders of record as of February 15, 1995. In addition, a quarterly
cash dividend of $0.04 per share was declared on April 26, 1995, payable on
June 5, 1995 to shareholders of record on May 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 5. Other Information
On April 26, 1995, the Company's Board of Directors approved a cash
dividend of $0.04 per share on common stock, payable on June 5, 1995,
to shareholders of record as of May 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: May 9, 1995
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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> 9-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> MAR-31-1995
<CASH> 299
<SECURITIES> 0
<RECEIVABLES> 17,453
<ALLOWANCES> (314)
<INVENTORY> 7,387
<CURRENT-ASSETS> 27,390
<PP&E> 27,959
<DEPRECIATION> (28,431)
<TOTAL-ASSETS> 63,281
<CURRENT-LIABILITIES> 14,487
<BONDS> 12,060
<COMMON> 327
0
0
<OTHER-SE> 21,973
<TOTAL-LIABILITY-AND-EQUITY> 63,281
<SALES> 65,636
<TOTAL-REVENUES> 65,636
<CGS> 48,393
<TOTAL-COSTS> 48,393
<OTHER-EXPENSES> 9,176
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 773
<INCOME-PRETAX> 7,294
<INCOME-TAX> 2,624
<INCOME-CONTINUING> 4,670
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,670
<EPS-PRIMARY> .70
<EPS-DILUTED> .70
</TABLE>
