<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 SEPTEMBER 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-14044
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 October 25, 1995 was 6,558,450.
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
DEFIANCE, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED BALANCE SHEET
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(All amounts in thousands)
ASSETS
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<TABLE>
<CAPTION>
9/30/95 6/30/95
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<S> <C> <C>
CURRENT ASSETS:
Cash $303 $1,166
Accounts receivable 22,563 19,835
Inventories 6,614 8,210
Deferred income taxes 445 621
Prepaid expenses and other current assets 4,484 3,316
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Total current assets 34,409 33,148
PROPERTY, PLANT AND EQUIPMENT - net 38,423 35,994
COST IN EXCESS OF NET ASSETS OF ACQUIRED COMPANIES 6,690 6,769
OTHER ASSETS 1,117 1,097
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Total assets $80,639 $77,008
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</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
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<TABLE>
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term obligations $4,510 $4,299
Accounts payable 6,724 6,570
Accrued payroll and employee benefits 2,926 4,385
Accrued expenses 5,481 6,078
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Total current liabilities 19,641 21,332
LONG-TERM OBLIGATIONS 21,264 17,182
DEFERRED INCOME TAXES 2,115 2,198
CONTINGENCIES - Note E
STOCKHOLDERS' EQUITY:
Common shares 328 327
Additional paid-in capital 22,023 21,977
Retained earnings 15,268 13,992
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Total stockholders' equity 37,619 36,296
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Total liabilities and stockholders' equity $80,639 $77,008
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</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 3
DEFIANCE, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENT OF INCOME
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(All amounts in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three months ended
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9/30/95 9/30/94
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<S> <C> <C>
Net sales $26,966 $21,574
Cost of goods sold 21,239 15,897
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Gross profit 5,727 5,677
Selling and administrative expenses 3,003 3,100
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Operating earnings 2,724 2,577
Interest expense -- net 325 270
Other expense (income) 12 (3)
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Earnings before income tax provision 2,387 2,310
Income tax provision 849 809
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Net earnings $1,538 $1,501
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Net earnings per common share $0.23 $0.22
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Common shares issued and outstanding:
Beginning of period 6,543,950 6,516,038
Issued during period 13,500 3,800
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End of period 6,557,450 6,519,838
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Average common shares outstanding:
Shares issued and outstanding 6,550,477 6,517,147
Share equivalents -- outstanding stock options 234,770 193,527
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Average common shares outstanding 6,785,247 6,710,674
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Cash dividends per common share $0.04
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</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 4
DEFIANCE, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
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(All amounts in thousands)
<TABLE>
<CAPTION>
Three months ended
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9/30/95 9/30/94
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<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $1,538 $1,501
Items not affecting cash 1,316 1,016
Current items (4,210) (2,041)
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Cash provided by (used for) operating
activities (1,356) 476
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FINANCING ACTIVITIES:
Payments of long-term obligations (989) (780)
Additions to long-term obligations 5,282 2,149
Issuance of common shares from exercise of stock options 47 11
Dividends paid (262)
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Cash provided by financing activities 4,078 1,380
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INVESTING ACTIVITIES:
Capital expenditures (3,565) (2,505)
Other -- net (20) (11)
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Cash (used for) investing activities (3,585) (2,516)
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CASH:
(Decrease) (863) (660)
Beginning of period 1,166 941
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End of period $303 $281
=========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 5
DEFIANCE, INC. AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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THREE MONTHS ENDED SEPTEMBER 30, 1995
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(All amounts in thousands)
A -- CONSOLIDATED FINANCIAL STATEMENTS
These unaudited interim financial statements 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 Company's annual report on Form 10-K for the year ended
June 30, 1995.
B -- INVENTORIES
<TABLE>
<CAPTION>
9/30/95 6/30/95
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<S> <C> <C>
Raw materials $1,384 $1,293
Work in process 3,835 5,585
Finished goods 612 598
Stores and supplies 783 734
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$6,614 $8,210
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</TABLE>
C -- LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
9/30/95 6/30/95
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<S> <C> <C>
Long-term debt:
Revolving credit borrowings $4,182
Equipment purchase line borrowings 1,100
Variable rate term loan to bank 11,714 $12,000
7% term loan to bank 4,216 4,564
9.5% Industrial Development Revenue Refunding Bond, Series 1991 1,230 1,341
7.35% Urban Development Action Grant 755 767
7.5% Ohio Development term loan 368 414
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Total long-term debt 23,565 19,086
Capitalized lease obligations 2,209 2,395
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Total long-term obligations 25,774 21,481
Less current maturities of long-term obligations 4,510 4,299
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Total long-term obligations less current maturities $21,264 $17,182
======== ========
</TABLE>
The Company has a $6,000 revolving credit facility with Comerica Bank, with
interest at either the prime rate less 100 basis points or the Euro dollar rate
plus 100 basis points, at the Company's option. At September 30, 1995, the
Company had $1,818 available for borrowing under this facility, which expires
October 1997.
The Company also has a $6,000 equipment purchase line of credit with Comerica
Bank, with interest at either the prime rate less 85 basis points or the Euro
dollar rate plus 115 basis points, at the Company's option. At September 30,
1995, the Company had $4,900 available for borrowing under this facility, which
expires July 1996, at which time it may be converted to a five or seven year
term loan at the election of the Company.
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D -- BENEFIT PLANS
On 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 at September 30, 1994 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 has filed the required documents with the PBGC and IRS to terminate
this plan and anticipates the settlement of obligations will occur during the
third quarter of current fiscal year, requiring an additional charge against
income of approximately $200.
E -- 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
many of these matters. In the opinion of management, such litigation is not
expected to 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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Net Sales
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Net sales for the quarter increased 25.0%, or $5,392,000 over last year. About
half of this increase came from "pass-through" sales for work placed with other
companies on behalf of General Motors as part of a contract to supply hard
tooling for the 1997-1/2 Chevrolet Malibu. Not including these pass-through
sales, tooling sales still showed solid gains from this hard tooling contract.
Revenues for testing services also increased substantially over last year due
to increased capacity from a new light truck simulator installed late in fiscal
1995. Sales of precision machined components remained consistent with last
year. Sales of molded and painted plastic parts decreased due to
customer-driven schedule reductions in OEM and after-market work for General
Motors, Ford and Subaru vehicles.
Gross Profit
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Gross profit for the quarter, as a percentage of sales, was 21.2% compared to
26.3% last year. Not including the effect of pass-through sales mentioned
above, gross profit for the quarter was 23.6% of sales. Gross profit was held
back during the quarter by costs related to bringing the new cam follower
roller facility in Upper Sandusky, Ohio on line, lower than anticipated margins
on some hard tooling work due to equipment problems and personnel shortages,
and the decline in sales of molded and painted plastic parts.
Selling and Administrative (S&A) Expenses
- -----------------------------------------
S&A expenses for the quarter decreased $97,000 from last year, and represented
11.1% of sales, as compared to 14.4% last year. Included in S&A expenses last
year was a one-time charge of $250,000 relative to the curtailment of a defined
benefit pension plan (see Note D to the condensed consolidated financial
statements). Excluding the effect of this pension charge, S&A expenses
increased $153,000, or 5.4% over last year.
Interest Expense
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Interest expense (net of interest income) for the quarter increased $55,000, or
20.3%, over last year, due to higher average borrowings at similar interest
rates.
Income Taxes
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Income tax expense, as a percentage of income before taxes, was 35.6% for the
quarter compared to 35.0% for the same period last year. This difference in
effective rates is due to future taxable and deductible amounts considered in
the computation of income taxes as required by Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes".
Outlook
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The Company anticipates financial results in the second fiscal quarter will be
similar to the first quarter due to continued slow automotive customer demand
for molded and painted plastic parts combined with anticipated extended holiday
shutdowns at many of its automotive customers. In the third and fourth fiscal
quarters the Company expects sales to grow even if automotive build rates
remain soft. The new cam follower roller facility in Upper Sandusky, Ohio will
be moving to full production, new molded and painted plastic parts work is
anticipated, and demand for testing and tooling services should remain strong.
The Company also expects margins to improve in the second half of the fiscal
year as it brings on this new business and outsources less tooling work.
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<PAGE> 8
LIQUIDITY AND CAPITAL RESOURCES
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Cash used for operating activities for the quarter was $1,356,000 and working
capital needs were met by borrowings under the revolving line of credit. Cash
used for current items was $4,210,000, mainly comprised of an increase in
accounts receivable and a decrease in accrued payroll and employee benefits.
The receivables increase resulted from 41% of the first quarter's sales
occurring in September from the timing of tooling sales. The decrease in
accrued payroll and employee benefits was primarily due to the payment of
incentive bonuses earned in the prior fiscal year. At the end of the quarter,
the current ratio was 1.75 to 1, compared with 1.56 to 1 at the end of the
prior fiscal year. Working capital also increased in the quarter to $14,768,000
from $11,816,000 at the end of the prior fiscal year.
Funded debt increased during the quarter by $4,293,000 primarily due to
revolving credit borrowings to support working capital requirements discussed
above. At the end of the quarter, the debt to total capitalization ratio was
40.7%, compared with 37.2% at the end of the prior fiscal year. The Company
had a total of approximately $6.7 million available in additional borrowing
capacity under its revolving credit facility and equipment purchase line of
credit.
During the quarter, capital expenditures totaled $3,565,000, and at the end of
the quarter the Company had noncancelable outstanding commitments for capital
expenditures of approximately $2.3 million. Most of the capital spending in
the quarter was in support of expanded production capacity for cam follower
rollers. Based on currently expected levels of business, the Company plans to
spend approximately $5 million in the fiscal year relative to asset
replacements, cost reduction, and productivity improvement programs.
Additional capital expenditures relative to new or increased sales are
currently estimated at $7 million. The Company has secured the necessary
financing to fund its outstanding commitments, and expects to fund its
remaining planned capital expenditures for the fiscal year through operating
cash flow and the equipment purchase facility.
A quarterly cash dividend of $0.04 per share was paid September 5, 1995 to
shareholders of record as of August 15, 1995. In addition, a quarterly cash
dividend of $0.04 per share was declared October 25, 1995 payable December 5,
1995 to shareholders of record as of November 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
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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.
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: October 27, 1995
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DEFIANCE, INC.
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By: /s/ Jerry A. Cooper
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Jerry A. Cooper
President and Chief Executive Officer
/s/ Michael J. Meier
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Michael J. Meier
Vice President -- Finance and Chief Financial
Officer
/s/ James L. Treece
-----------------------------------------
James L. Treece
Chief Accounting Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 303
<SECURITIES> 0
<RECEIVABLES> 22,653
<ALLOWANCES> (212)
<INVENTORY> 6,614
<CURRENT-ASSETS> 34,409
<PP&E> 38,423
<DEPRECIATION> (29,838)
<TOTAL-ASSETS> 80,639
<CURRENT-LIABILITIES> 19,641
<BONDS> 0
<COMMON> 328
0
0
<OTHER-SE> 22,023
<TOTAL-LIABILITY-AND-EQUITY> 80,639
<SALES> 26,966
<TOTAL-REVENUES> 26,966
<CGS> 21,239
<TOTAL-COSTS> 21,239
<OTHER-EXPENSES> 3,015
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 325
<INCOME-PRETAX> 2,387
<INCOME-TAX> 849
<INCOME-CONTINUING> 1,538
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,538
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
