<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, 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
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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 29, 1996 was 6,573,450.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DEFIANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(All amounts in thousands)
ASSETS
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<TABLE>
<CAPTION>
12/31/95 6/30/95
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<S> <C> <C>
CURRENT ASSETS:
Cash $206 $1,166
Accounts receivable 21,674 19,835
Inventories 6,779 8,210
Deferred income taxes 215 621
Prepaid expenses and other current assets 3,233 3,316
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Total current assets 32,107 33,148
PROPERTY, PLANT AND EQUIPMENT -- net 40,586 35,994
COST IN EXCESS OF NET ASSETS OF ACQUIRED COMPANIES 6,612 6,769
OTHER ASSETS 3,058 1,097
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Total assets $82,363 $77,008
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</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term obligations $4,643 $4,299
Accounts payable 7,125 6,570
Accrued payroll and employee benefits 2,804 4,385
Accrued expenses 5,930 6,078
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Total current liabilities 20,502 21,332
LONG-TERM OBLIGATIONS 21,750 17,182
DEFERRED INCOME TAXES 2,066 2,198
CONTINGENCIES -- Note F
STOCKHOLDERS' EQUITY:
Common shares 328 327
Additional paid-in capital 22,047 21,977
Retained earnings 15,670 13,992
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Total stockholders' equity 38,045 36,296
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Total liabilities and stockholders' equity $82,363 $77,008
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</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 3
DEFIANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(All amounts in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
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12/31/95 12/31/94 12/31/95 12/31/94
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<S> <C> <C> <C> <C>
Net sales $24,636 $20,977 $51,602 $42,551
Cost of goods sold 20,435 15,569 41,674 31,466
Selling and administrative expenses 2,800 2,968 5,803 6,068
--------- --------- --------- ---------
Operating earnings 1,401 2,440 4,125 5,017
Interest expense -- net 416 244 741 514
Other (income) (22) (3) (10) (5)
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Earnings before income tax provision 1,007 2,199 3,394 4,508
Income tax provision 342 773 1,191 1,581
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Net earnings $665 $1,426 $2,203 $2,927
========= ========= ========= ==========
Net earnings per common share $0.10 $0.22 $0.33 $0.44
========= ========= ========= ==========
Common shares issued and outstanding:
Beginning of period 6,557,450 6,519,838 6,543,950 6,516,038
Issued during period 16,000 21,612 29,500 25,412
--------- --------- --------- ---------
End of period 6,573,450 6,541,450 6,573,450 6,541,450
--------- --------- --------- ---------
Average common shares outstanding:
Shares issued and outstanding 6,566,618 6,532,330 6,558,548 6,524,738
Share equivalents -- outstanding stock options 157,988 156,370 196,379 174,949
--------- --------- --------- ---------
Average common shares outstanding 6,724,606 6,688,700 6,754,927 6,699,687
========= ========= ========= =========
Cash dividends per common share $0.04 $0.08
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 4
DEFIANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(All amounts in thousands)
<TABLE>
<CAPTION>
Six months ended
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12/31/95 12/31/94
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<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $2,203 $2,927
Items not affecting cash 2,794 2,179
Current items (1,431) (2,228)
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Cash provided by operating activities 3,566 2,878
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FINANCING ACTIVITIES:
Payments of long-term obligations (2,085) (1,419)
Additions to long-term obligations 6,997 3,601
Issuance of common shares from exercise of stock options 71 48
Dividends paid (525)
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Cash provided by financing activities 4,458 2,230
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INVESTING ACTIVITIES:
Capital expenditures (7,023) (5,206)
Preproduction costs (1,924)
Other -- net (37) (10)
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Cash used for investing activities (8,984) (5,216)
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CASH:
Decrease (960) (108)
Beginning of period 1,166 941
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End of period $206 $833
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</TABLE>
See notes to condensed consolidated financial statements.
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DEFIANCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1995
(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>
12/31/95 6/30/95
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<S> <C> <C>
Raw materials $1,665 $1,293
Work in process 3,752 5,585
Finished goods 548 598
Stores and supplies 814 734
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$6,779 $8,210
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</TABLE>
C - LONG TERM OBLIGATIONS
<TABLE>
<CAPTION>
12/31/95 6/30/95
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<S> <C> <C>
Long-term debt:
Revolving credit borrowings $3,997
Equipment purchase line borrowings 3,000
Variable rate term loan to bank 11,286 $12,000
7% term loan to bank 3,868 4,564
9.5% Industrial Development Revenue Refunding Bond, Series 1991 1,119 1,341
7.35% Urban Development Action Grant 743 767
7.5% Ohio Development term loan 321 414
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Total long-term debt 24,334 19,086
Capitalized lease obligations 2,059 2,395
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Total long-term obligations 26,393 21,481
Less current maturities of long-term obligations 4,643 4,299
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Total long-term obligations less current maturities $21,750 $17,182
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</TABLE>
At December 31, 1995, the Company had $2,003 and $3,000 available under its
revolving credit and equipment purchase line facilities, respectively, with
Comerica Bank. Borrowings under the revolving credit facility at December 31,
1995 were at a combination of the prime rate less 100 basis points and the
Eurodollar rate plus 100 basis points. Borrowings under the equipment purchase
line facility and variable rate term loan were at the Eurodollar rate plus 115
basis points.
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D - BENEFIT PLANS
In October 1994, future benefits under a defined benefit pension plan covering
approximately fifty salaried employees at one subsidiary were curtailed. A
$250 one-time charge was accrued in September 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" ("SFAS No. 88"). In July 1995, the Company filed
documents with the Pension Benefit Guaranty Corporation (the "PBGC") and the
Internal Revenue Service (the "IRS") to terminate this plan. As of the filing
date of this report, the Company has not received approval from the IRS to
proceed with terminating the plan and settling the plan obligations. An
additional charge to income may be required under SFAS No. 88 upon settlement
of obligations. The amount of this charge is sensitive to changes in market
interest rates in effect when obligations are settled. Based upon current
market interest rates, the Company estimates terminating the plan during the
quarter ended March 31, 1996 would require a pre-tax charge against income of
approximately $650.
E - PREOPERATING COSTS
Certain preoperating costs of a new plant at one of the Company's subsidiaries
were deferred until the plant started production in December 1995. These costs
are being amortized over a 36-month period beginning December 1995. The
unamortized balance of these costs at December 31, 1995 was $2,884, of which
$961 is reflected in other current assets and $1,923 is reflected in other
assets. In the Company's annual report on Form 10-K for the year ended June
30, 1995, the Company indicated it would use a 24-month amortization period for
these costs. Based upon the length of customer contracts related to production
at this facility, management believes a 36-month amortization period is more
appropriate.
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 is not expected
to have a material effect on the consolidated financial position or results of
operations of the Company.
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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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Revenues increased 17.4% for the quarter and 21.3% for the year to date over
last year. Most of this increase was from a Tooling Systems contract with
General Motors to supply hard tooling for their 1997 Chevrolet Malibu, although
about two-thirds of the total revenue increase was due to "pass-through" sales
for work placed with other companies. Revenues from Testing Services also
increased substantially for the quarter and year to date due to increased
capacity from the new light truck simulator installed late in fiscal 1995.
Sales of cam follower rollers at the Precision Machined Components unit were
down slightly from last year for the quarter and year to date, the result of
lower automotive and truck build rates this year combined with longer than
usual customer holiday shutdowns. Sales at Vaungarde fell significantly below
last year for the quarter and year to date from decreased demand for molded and
painted plastic parts for original equipment manufacturers and after-market
automotive and recreational vehicle customers.
GROSS PROFIT
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Gross profit, as a percentage of sales, was 17.1% for the quarter and 19.2% for
the year to date, compared with 25.8% and 26.1% for the quarter and year to
date last year. Gross profit percentage for the quarter and year to date was
affected by a number of factors. Gross profit margins expected on the General
Motors hard tooling project were not achieved due to ongoing equipment problems
at the leased hard tooling facility and personnel shortages caused by near-full
employment of skilled workers in Detroit. Gross profit was also impacted by
substantially lower sales at Vaungarde as compared with the prior year. The
new cam follower roller facility in Upper Sandusky, Ohio, began limited
production in the second fiscal quarter with low productivity normal for a new
plant, and was also affected by a four-month delay by General Motors in
converting to cam follower rollers on their light trucks.
SELLING AND ADMINISTRATIVE ("S&A") EXPENSES
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S&A expenses in the prior year included a one-time charge of $250,000 relative
to the curtailment of a defined benefit pension plan during the first quarter.
Excluding the effect of this charge, S&A expenses for the quarter were $168,000
lower than the same period last year, and for the year to date were $15,000
lower than last year. As a percentage of sales, S&A expenses were 11.4% for
the quarter and 11.2% for the year to date, compared with 14.1% and 13.7% for
the quarter and year to date last year, excluding the effect of the one-time
pension charge.
INTEREST EXPENSE -- NET
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Interest expense, net of interest income, increased 44% for the quarter and 70%
for the year to date over last year due to higher average net borrowings at
slightly lower interest rates.
INCOME TAX PROVISION
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The effective income tax rate was 34.0% for the quarter and 35.1% for the year
to date, compared with 35.2% and 35.1% for the quarter and year to date last
year. Differences in effective rates are due to future taxable amounts
considered in the computation of income taxes for the current year as required
by SFAS No. 109, "Accounting for Income Taxes".
OUTLOOK
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Management does not expect profit for the third fiscal quarter ending March 31,
1996 to equal the 26 cents a share posted last year, but does look for
improvement over the 10 cents reported this quarter. Management also expects
the fourth fiscal quarter ended June 30, 1996 to show solid improvement in
earnings over the third quarter as the General Motors hard tooling project
should be completed this April. In addition, shipments of cam follower rollers
are expected to increase substantially in the fourth fiscal quarter as full
production levels are attained in support of General Motors' light truck
requirements and we began limited shipments to Eaton
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<PAGE> 8
Corporation for Chrysler. For fiscal 1997, management believes earnings will
resume their previous growth trend, exceeding fiscal 1995 levels, assuming the
automotive market and the economy remain reasonably strong. A contract recently
received from Eaton Corporation to provide cam follower rollers for its Chrysler
automotive requirements should provide about $8 million of additional business
in fiscal 1997. This new contract, which runs through 2001, also extends the
Company's current agreement with Eaton through 2001 to provide cam follower
rollers for its Ford automotive requirements. Management believes this, along
with the additional light truck business from General Motors, should positively
impact fiscal 1997 earnings. At Vaungarde, obtaining new sales and returning to
profitability currently remain the top priorities for Vaungarde management.
Longer term, the Company is considering the strategic fit of Vaungarde within
Defiance, and is weighing all the options available to it. The Company was
recently approached by another company expressing interest in the possible
purchase of Vaungarde, and discussions are in a preliminary stage.
LIQUIDITY AND CAPITAL RESOURCES
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Cash provided by operating activities for the year to date was $3,566,000
which, along with borrowings under the revolving line of credit, met working
capital needs. Cash used for current items for the year to date was
$1,431,000. Accounts receivable increased from higher sales levels, and
accrued payroll and employee benefits decreased from the payment of prior year
end bonuses and incentives. At the end of the quarter, the current ratio was
1.57 to 1, compared with 1.56 to 1 at the end of the prior fiscal year.
Working capital at the end of the quarter was $11,605,000, compared with
$11,816,000 at the end of the prior fiscal year.
Funded debt increased $4,912,000 from the end of the prior fiscal year. Of
this increase, $3,997,000 was from revolving credit borrowings to support
working capital requirements. The remaining $915,000 net increase in long-term
obligations was in support of capital expenditures. At the end of the quarter,
the debt to total capitalization ratio was 41.0%, compared with 37.2% at the
end of the prior fiscal year. At December 31, 1995 the Company had a total of
$5,003,000 available in additional borrowing capacity under its revolving
credit and equipment purchase line facilities.
For the year to date, capital expenditures totaled $7,023,000, and at the end
of the quarter the Company had noncancelable outstanding commitments for
capital expenditures of approximately $3,000,000. Most of the year to date
capital spending was in support of expanded production capacity for cam
follower rollers. Based on currently expected levels of business, the Company
plans to spend approximately $5,000,000 in the fiscal year relative to asset
replacements, cost reduction, and productivity improvement programs. Capital
expenditures relative to new or increased sales are currently estimated at
$8,000,000 for the fiscal year. 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 line facility.
A quarterly cash dividend of $0.04 per share was paid December 5, 1995 to
shareholders of record as of November 15, 1995. In addition, a quarterly cash
dividend of $0.04 per share was declared January 24, 1996, payable March 5,
1996 to shareholders of record as of February 15, 1996. The Company
anticipates future quarterly dividends, and does not expect its liquidity or
capital resources to be materially affected by the payment of dividends.
On January 24, 1996, the Company's board of directors adopted the Defiance,
Inc. Stock Repurchase Plan. This plan was effective January 24, 1996, and
authorizes the repurchase of up to 1,000,000 shares of the Company's 6,573,450
currently outstanding common shares over a three-year period. Shares purchased
will be held by the Company as Treasury Stock. This program is flexible, and
the board of directors and management believe it can be implemented without
detracting from the Company's business strategies or investment opportunities.
Stock repurchases will be funded from operating cash flow or loans from
Comerica Bank under the existing revolving credit facility. Any such
borrowings will be made so as to not violate the Company's loan covenants with
Comerica Bank or adversely impact the Company's ability to fund capital
expenditures, acquisitions, or its business operations.
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<PAGE> 9
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders on October 25, 1995, the
following individual was elected to the Board of Directors for a three
year term:
Votes Votes
For Withheld
-------- --------
Jerry A. Cooper 5,449,221 25,750
No other proposals were presented at the Company's Annual Meeting.
Item 5. Other Information
On January 24, 1996, the Company's board of directors approved a cash
dividend of $0.04 per common share, payable March 5, 1996 to
shareholders of record as of February 15, 1996.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - 27. Financial Data Schedule.
(b) Reports on Form 8-K
Registrant filed a report on Form 8-K on January 30, 1996, to report the
following under Item 5 "Other Events". On January 24, 1996, the
Company's board of directors adopted the Defiance, Inc. Stock
Repurchase Plan. This plan was effective January 24, 1996, and
authorizes the repurchase of up to 1,000,000 shares of the Company's
6,573,450 currently outstanding common shares, over a three-year period.
Shares purchased will be held by the Company as Treasury Stock. A copy
of the plan document, press release, and letter of consent from Comerica
Bank were filed as exhibits.
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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: January 31, 1996
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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> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 206
<SECURITIES> 0
<RECEIVABLES> 21,264
<ALLOWANCES> (170)
<INVENTORY> 6,779
<CURRENT-ASSETS> 32,107
<PP&E> 40,586
<DEPRECIATION> (32,107)
<TOTAL-ASSETS> 82,363
<CURRENT-LIABILITIES> 20,502
<BONDS> 0
<COMMON> 328
0
0
<OTHER-SE> 22,047
<TOTAL-LIABILITY-AND-EQUITY> 82,363
<SALES> 51,602
<TOTAL-REVENUES> 51,602
<CGS> 41,674
<TOTAL-COSTS> 41,674
<OTHER-EXPENSES> 5,803
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 741
<INCOME-PRETAX> 3,394
<INCOME-TAX> 1,191
<INCOME-CONTINUING> 2,203
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,203
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
</TABLE>
