<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, 1996
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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 April 24, 1996 was 6,513,550.
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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
<TABLE>
<CAPTION>
3/31/96 6/30/95
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<S> <C> <C>
CURRENT ASSETS:
Cash $143 $1,166
Accounts receivable 22,410 19,835
Inventories 5,489 8,210
Deferred income taxes 227 621
Prepaid expenses and other current assets 3,283 3,316
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Total current assets 31,552 33,148
PROPERTY, PLANT AND EQUIPMENT -- net 40,278 35,994
COST IN EXCESS OF NET ASSETS OF ACQUIRED COMPANIES 6,533 6,769
OTHER ASSETS 2,718 1,097
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Total assets $81,081 $77,008
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term obligations $4,961 $4,299
Accounts payable 5,461 6,570
Accrued payroll and employee benefits 3,641 4,385
Accrued expenses 3,588 6,078
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Total current liabilities 17,651 21,332
LONG-TERM OBLIGATIONS 23,490 17,182
DEFERRED INCOME TAXES 2,024 2,198
CONTINGENCIES -- Note G
STOCKHOLDERS' EQUITY:
Common shares 329 327
Additional paid-in capital 22,047 21,977
Retained earnings 15,882 13,992
Less common shares in treasury -- at cost (342)
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Total stockholders' equity 37,916 36,296
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Total liabilities and stockholders' equity $81,081 $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 Nine months ended
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3/31/96 3/31/95 3/31/96 3/31/95
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<S> <C> <C> <C> <C>
Net sales $25,724 $23,085 $77,326 $65,636
Cost of goods sold 21,459 16,927 63,133 48,393
Selling and administrative expenses 2,995 3,123 8,798 9,191
--------- --------- --------- ---------
Operating earnings 1,270 3,035 5,395 8,052
Interest expense -- net 528 259 1,269 773
Other (income) (5) (9) (15) (15)
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Earnings before income tax provision 747 2,785 4,141 7,294
Income tax provision 273 1,043 1,464 2,624
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Net earnings $474 $1,742 $2,677 $4,670
========= ========= ========= =========
Net earnings per common share $0.07 $0.26 $0.40 $0.70
========= ========= ========= =========
Common shares issued and outstanding:
Beginning of period 6,573,450 6,541,450 6,543,950 6,516,038
Issued during period 29,500 25,412
Repurchased during period (59,900) (59,900)
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End of period 6,513,550 6,541,450 6,513,550 6,541,450
--------- --------- --------- ---------
Average common shares outstanding:
Shares issued and outstanding 6,546,627 6,541,450 6,554,604 6,530,227
Share equivalents -- outstanding stock options 143,520 156,545 178,887 168,904
--------- --------- --------- ---------
Average common shares outstanding 6,690,147 6,697,995 6,733,491 6,699,131
========= ========= ========= =========
Cash dividends per common share $0.04 $0.04 $0.12 $0.04
========= ========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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DEFIANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(All amounts in thousands)
<TABLE>
<CAPTION>
Nine months ended
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3/31/96 3/31/95
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<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $2,677 $4,670
Items not affecting cash 4,558 3,258
Current items (4,086) (4,090)
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Cash provided by operating activities 3,149 3,838
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FINANCING ACTIVITIES:
Payments of long-term obligations (3,148) (2,253)
Additions to long-term obligations 10,119 5,207
Issuance of common shares from exercise of stock options 71 48
Repurchase of common shares (342)
Dividends paid (787) (262)
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Cash provided by financing activities 5,913 2,740
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INVESTING ACTIVITIES:
Capital expenditures (8,247) (6,988)
Preoperating costs (1,677)
Other -- net (161) (232)
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Cash used for investing activities (10,085) (7,220)
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CASH:
Decrease (1,023) (642)
Beginning of period 1,166 941
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End of period $143 $299
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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
NINE MONTHS ENDED MARCH 31, 1996
(All amounts in thousands, except share amounts)
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>
3/31/96 6/30/95
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<S> <C> <C>
Raw materials $1,575 $1,293
Work in process 2,566 5,585
Finished goods 635 598
Stores and supplies 713 734
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Total inventories $5,489 $8,210
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</TABLE>
C -- LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
3/31/96 6/30/95
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<S> <C> <C>
Long-term debt:
Revolving credit borrowings $4,519
Equipment purchase line borrowings 5,600
Variable rate term loan to bank 10,857 $12,000
7% term loan to bank 3,520 4,564
9.5% Industrial Development Revenue Refunding Bond, Series 1991 1,045 1,341
7.35% Urban Development Action Grant 731 767
7.5% Ohio Development term loan 274 414
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Total long-term debt 26,546 19,086
Capitalized lease obligations 1,905 2,395
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Total long-term obligations 28,451 21,481
Less current maturities of long-term obligations 4,961 4,299
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Total long-term obligations less current maturities $23,490 $17,182
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</TABLE>
At March 31, 1996, the Company had $1,881 available under its revolving credit
and equipment purchase line facilities with Comerica Bank. Borrowings under
the revolving credit facility 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 -- TREASURY STOCK
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
outstanding common shares over a three-year period. Shares purchased will be
held by the Company as Treasury Stock.
During the quarter ended March 31, 1996, 59,900 common shares were repurchased
in open market transactions for $342.
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 March 31, 1996 was $2,412, of which $904
is reflected in other current assets and $1,508 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 -- 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 IRS approval 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 June 30, 1996 would require a
pre-tax charge against income of approximately $750.
G -- 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 11.4% for the quarter and 17.8% for the year to date over
last year. Revenues from Testing Services increased substantially for the
quarter and year to date as a result of additional capacity from the new light
truck simulator installed late in fiscal 1995, combined with increased testing
work for Chrysler Corporation. Revenues from Tooling Systems were up for the
quarter and year to date primarily from a contract with General Motors to
supply hard tooling for their 1997 Chevrolet Malibu, with about two-thirds of
the increase due to "pass-through" sales for work placed with other companies.
This contract was completed April 1996. Sales of cam follower rollers at the
Precision Machined Components unit were down slightly for the quarter and year
to date. Demand for gasoline engine rollers was sluggish and did not recover
as quickly as expected from General Motors' delay in ramping up production of
its new light truck series, and some impact was felt from the General Motors'
brake plant strike. Demand for diesel engine rollers was affected by lower
heavy-duty truck build rates. Sales at Vaungarde for the quarter were slightly
ahead of last year, but for the year to date remained significantly below last
year due to decreased demand for molded and painted plastic parts from 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 16.6% for the quarter and 18.4% for
the year to date, compared with 26.7% and 26.3% for the quarter and year to
date last year. Profitability pressures experienced in the first half of the
fiscal year continued to affect margins in the third fiscal quarter. Profit
margins expected on the General Motors hard tooling project were not achieved
due to equipment problems and personnel shortages. Gross profit was also
adversely impacted by substantially lower sales at Vaungarde for the year to
date. The new cam follower roller facility in Upper Sandusky, Ohio, began
limited production in the second fiscal quarter and continued to experience low
productivity and start-up issues concerned with equipment transfers and the
training of new personnel. In addition, cost of goods sold for the current
quarter includes $226,000 of preoperating cost amortization (see Note E to the
Condensed Consolidated Financial Statements).
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 $128,000
lower than the same period last year, and for the year to date were $143,000
lower than last year. As a percentage of sales, S&A expenses were 11.6% for
the quarter and 11.4% for the year to date, compared with 13.5% and 13.6% for
the quarter and year to date last year, excluding the effect of the one-time
pension charge. Current year S&A expenses reflect substantially lower accruals
for incentive bonuses than the prior year.
Interest Expense -- Net
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Interest expense, net of interest income, increased $269,000 for the quarter
and $496,000 for the year to date over last year due to higher average net
borrowings at similar interest rates.
Income Tax Provision
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The effective income tax rate was 36.5% for the quarter and 35.4% for the year
to date, compared with 37.5% and 36.0% 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".
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<PAGE> 8
Outlook
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Management does not expect profit for the fourth fiscal quarter ending June 30,
1996 to equal the 28 cents a share posted in the fourth fiscal quarter last
year, but does look for a significant improvement over the current fiscal
quarter. The General Motors hard tooling project was completed in April and
the working capital investment is now being recovered. In addition, shipments
of cam follower rollers are expected to increase in the fourth fiscal quarter
as full production levels are attained in support of General Motors' light
truck requirements and limited shipments begin to Eaton Corporation for
Chrysler. Full production levels for Chrysler are expected by mid-summer. 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. The contract with Eaton to provide cam
follower rollers for its Chrysler automotive requirements should provide about
$8 million of additional business in fiscal 1997. This contract, which runs
through 2001, also extended the Company's 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 considering all the options
available to it. The Company was approached in January by another company
expressing interest in the possible purchase of Vaungarde, and discussions are
continuing.
The preceding discussion includes forward-looking statements based on
management's current expectations, which are subject to a number of risks and
uncertainties that could materially affect demand for the Company's products
and services, thereby impacting future results of operations, financial
condition or cash flows. Demand for the Company's products and services is
affected by consumer demand in the domestic automotive and heavy-duty truck
industries and the resulting levels of production, as well as competition from
other suppliers to these industries. Demand is also affected by the level of
new model development at OEMs (original equipment manufacturers) and the
resulting need for prototyping, tooling and testing services. Demand is also
sensitive to general economic conditions, such as growth, inflation, interest
rates and unemployment levels.
LIQUIDITY AND CAPITAL RESOURCES
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Cash provided by operating activities for the year to date was $3,149,000
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
$4,086,000. Accounts receivable increased from higher sales levels in the
current quarter as compared with the fourth quarter of fiscal 1995. Accrued
expenses decreased from payments of incentive bonuses accrued in the prior year
and payments for equipment received and accrued for in June 1995. At the end
of the quarter, the current ratio was 1.79 to 1, compared with 1.55 to 1 at the
end of the prior fiscal year. Working capital at the end of the quarter was
$13,901,000, compared with $11,816,000 at the end of the prior fiscal year.
Funded debt increased $6,970,000 from the end of the prior fiscal year. Of
this increase, $4,519,000 was from revolving credit borrowings to support
working capital requirements. The remaining $2,451,000 increase was in support
of capital expenditures. At the end of the quarter, debt to total
capitalization ratio was 43%, compared with 37% at the end of the prior fiscal
year. At March 31, 1996 the Company had a total of $1,881,000 available in
additional borrowing capacity under its revolving credit and equipment purchase
line facilities.
For the year to date, capital expenditures totaled $8,247,000, 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 $4,000,000 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
$7,000,000 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.
In January 1996, the Company adopted a stock repurchase plan (see Note D to the
Condensed Consolidated Financial Statements). 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 in accordance with the Company's loan covenants with
Comerica Bank and will not adversely impact the Company's ability to fund
capital
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<PAGE> 9
expenditures, acquisitions, or its business operations. During the quarter
ended March 31, 1996, 59,900 common shares were repurchased in open market
transactions for $342,000.
A quarterly cash dividend of $0.04 per share was paid March 5, 1996 to
shareholders of record as of February 15, 1995. In addition, a quarterly cash
dividend of $0.04 per share was declared April 24, 1996, payable June 5, 1996
to shareholders of record as of May 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.
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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27. Financial Data Schedule.
(b) Reports on Form 8-K
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No reports on Form 8-K were 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: April 25, 1996
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DEFIANCE, INC.
By: /s/ Jerry A. Cooper
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President and Chief Executive Officer
/s/ Michael J. Meier
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Vice President - Finance and Chief Financial Officer
/s/ James L. Treece
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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-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 143
<SECURITIES> 0
<RECEIVABLES> 22,410
<ALLOWANCES> (201)
<INVENTORY> 5,489
<CURRENT-ASSETS> 31,552
<PP&E> 40,278
<DEPRECIATION> (32,011)
<TOTAL-ASSETS> 81,081
<CURRENT-LIABILITIES> 17,651
<BONDS> 0
<COMMON> 329
0
0
<OTHER-SE> 22,047
<TOTAL-LIABILITY-AND-EQUITY> 81,081
<SALES> 77,326
<TOTAL-REVENUES> 77,236
<CGS> 63,133
<TOTAL-COSTS> 63,133
<OTHER-EXPENSES> 8,798
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,269
<INCOME-PRETAX> 4,141
<INCOME-TAX> 1,464
<INCOME-CONTINUING> 2,677
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,677
<EPS-PRIMARY> .40
<EPS-DILUTED> .40
</TABLE>
