<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, 1996
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-14044
--------
DEFIANCE, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 34-1526359
------------------------------- -------------------
(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
--------------
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
----- -----
The number of Common Shares outstanding at October 25, 1996 was 6,431,937.
<PAGE> 2
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
DEFIANCE, INC. AND SUBSIDIARIES
-------------------------------
CONDENSED CONSOLIDATED BALANCE SHEET
------------------------------------
(All amounts in thousands)
--------------------------
ASSETS
------
<TABLE>
<CAPTION>
9/30/96 6/30/96
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 253 $ 1,240
Accounts receivable 17,703 16,615
Inventories 3,792 3,312
Deferred and refundable income taxes 1,029 1,058
Prepaid expenses and other current assets 2,653 2,383
Net assets of business to be sold 3,108
-------- --------
Total current assets 25,430 27,716
PROPERTY, PLANT AND EQUIPMENT -- net 40,202 39,516
COST IN EXCESS OF NET ASSETS OF ACQUIRED COMPANIES 5,059 5,122
OTHER ASSETS 2,935 2,414
-------- --------
Total assets $ 73,626 $ 74,768
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term obligations $ 4,976 $ 5,051
Accounts payable 4,230 4,908
Accrued payroll and employee benefits 3,103 3,578
Accrued expenses 4,693 4,642
-------- --------
Total current liabilities 17,002 18,179
LONG-TERM OBLIGATIONS 18,059 18,134
DEFERRED INCOME TAXES 3,065 3,017
CONTINGENCIES -- Note F
STOCKHOLDERS' EQUITY:
Common shares 328 328
Additional paid-in capital 22,047 22,047
Less common shares in treasury -- at cost (1,282) (891)
Minimum pension liability (591) (591)
Retained earnings 14,998 14,545
-------- --------
Total stockholders' equity 35,500 35,438
-------- --------
Total liabilities and stockholders' equity $ 73,626 $ 74,768
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
- 2 -
<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
------------------
9/30/96 9/30/95
----------- ----------
<S> <C> <C>
Net sales $ 22,067 $ 26,966
Cost of goods sold 17,629 21,239
Selling and administrative expenses 2,877 3,003
----------- ----------
Operating earnings 1,561 2,724
Interest expense -- net 461 325
Other expense (income) (2) 12
-------------------------
Earnings before income tax provision 1,102 2,387
Income tax provision 392 849
----------- ----------
Net earnings $ 710 $ 1,538
=========== ==========
Net earnings per common share $ 0.11 $ 0.23
=========== ==========
Common shares issued and outstanding:
Beginning of period 6,415,750 6,543,950
Issued during period 13,500
Repurchased during period (61,200)
-------------------------
End of period 6,354,550 6,557,450
----------- ----------
Average common shares outstanding:
Shares issued and outstanding 6,405,009 6,550,477
Share equivalents -- outstanding stock options 176,663 234,770
=========== ==========
Average common shares outstanding 6,581,672 6,785,247
=========================
Cash dividends per common share $ 0.04 $ 0.04
=========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
- 3 -
<PAGE> 4
DEFIANCE, INC. AND SUBSIDIARIES
-------------------------------
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
----------------------------------------------
(All amounts in thousands)
<TABLE>
<CAPTION>
Three months ended
------------------
9/30/96 9/30/95
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 710 $ 1,538
Items not affecting cash:
Depreciation and amortization 1,738 1,215
Deferred income taxes (17) 101
Current items:
Change in net assets of business to be sold 3,108
Other current items (2,706) (4,210)
------- -------
Cash provided by (used for) operating activities 2,833 (1,356)
------- -------
FINANCING ACTIVITIES:
Payments of long-term obligations (1,185) (989)
Additions to long-term obligations 1,035 5,282
Issuance of common shares from exercise of stock options 47
Repurchase of common shares (391)
Dividends paid (256) (262)
------- -------
Cash provided by (used for) financing activities (797) 4,078
------- -------
INVESTING ACTIVITIES:
Capital expenditures (2,132) (3,565)
Notes receivable from sale of business (950)
Other -- net 59 (20)
------- -------
Cash (used for) investing activities (3,023) (3,585)
------- -------
CASH:
Decrease (987) (863)
Beginning of period 1,240 1,166
------- -------
End of period $ 253 $ 303
======= =======
</TABLE>
See notes to condensed consolidated financial statements
- 4 -
<PAGE> 5
DEFIANCE, INC. AND SUBSIDIARIES
-------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 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, 1996.
B -- INVENTORIES
<TABLE>
<CAPTION>
9/30/96 6/30/96
------- -------
<S> <C> <C>
Raw materials $ 920 $ 784
Work in process 1,682 1,417
Finished goods 437 315
Stores and supplies 753 796
------ ------
$3,792 $3,312
====== ======
</TABLE>
C -- LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
9/30/96 6/30/96
------- -------
<S> <C>
Long-term debt:
Revolving credit borrowings $ 1,035
Variable rate term loan to bank due 2004 5,929 $ 6,000
Variable rate term loan to bank due 2003 10,000 10,429
7% term loan to bank 2,824 3,172
9.5% Industrial Development Revenue Refunding Bond, Series 1991 786 897
7.35% Urban Development Action Grant 711 720
7.5% Ohio Development term loan 176 225
------- -------
Total long-term debt 21,461 21,443
Capitalized lease obligations 1,574 1,742
------- -------
Total long-term obligations 23,035 23,185
Less current maturities of long-term obligations 4,976 5,051
------- -------
Total long-term obligations less current maturities $18,059 $18,134
======= =======
</TABLE>
Revolving credit borrowings are made under a $6,000 facility with the Company's
primary lender. At September 30, 1996 the Company had $4,965 available for
borrowing under this facility, which expires October 1998.
- 5 -
<PAGE> 6
D -- TREASURY STOCK
The Company adopted a stock repurchase plan during the year ended June 30, 1996.
During the quarter ended September 30, 1996, the Company repurchased 61,200
common shares in open market transactions for $391. As of September 30, 1996 the
Company has repurchased a total of 218,900 shares for $1,282.
E -- BENEFIT PLANS
Future benefits under a defined benefit pension plan covering approximately
fifty salaried employees at one subsidiary were curtailed in October 1994. The
Company received approval from the PBGC and IRS during the quarter ended
September 30, 1996 to terminate this plan. The Company anticipates the
settlement of obligations will occur during the quarter ended March 31, 1997.
This settlement will require an additional charge against income, which the
Company currently estimates at $800.
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
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.
- 6 -
<PAGE> 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
- ---------------------
Net Sales
- ---------
Net sales for the quarter were down 18%, or $4.9 million, from last year.
Included in last year's sales are $7.8 million from the Company's former
Vaungarde and hard tooling units, while this year's sales include $1.2 million
from Vaungarde alone. Vaungarde was sold in August 1996, and the hard tooling
venture was shut down in May 1996. Sales at the three remaining core business
units were up 9%, from $19.2 million to $20.9 million. Sales of gasoline engine
cam follower rollers and axles were up substantially from new business for
General Motors' light truck engine applications, while sales of diesel engine
rollers and axles remained consistent with last year. Revenues from testing
services were up slightly from increased product engineering work for new
customers. Revenues from tooling systems were down somewhat due to the soft
market for prototype work in Detroit during the quarter as automakers focused on
negotiations with the United Auto Workers.
Gross Profit
- ------------
Gross profit margin for the quarter was 20.1%, compared to 21.2% last year.
Start-up issues related to installation of the remaining equipment and training
of personnel for new Chrysler cam follower rollers and axles to be manufactured
at Upper Sandusky, Ohio affected margins this quarter. Margins were also
affected by the soft prototype market discussed above.
Selling and Administrative (S&A) Expenses
- -----------------------------------------
S&A expenses for the quarter were $126,000 lower than last year, but as a
percentage of sales increased to 13.0% from 11.1% last year. As discussed above,
included in last year's sales are $7.8 million from the Company's former
Vaungarde and hard tooling units, while this year's sales include $1.2 million
from Vaungarde alone. This $6.6 million change from last year renders less
meaningful the comparison of S&A expenses as a percentage of sales. The decrease
of $126,000 in S&A expenses is primarily due to lower incentive accruals in the
current year, combined with S&A costs associated with the Vaungarde and hard
tooling units included in last year's results.
Interest Expense -- Net
- -----------------------
Interest expense (net of interest income) for the quarter increased $136,000, or
42%, over last year from higher average borrowings at similar interest rates. In
addition, $73,000 of interest was capitalized during the first quarter last
year.
Income Tax Provision
- --------------------
Income tax expense, as a percentage of income before taxes, was 35.6% for both
the current quarter and for the same period last year. Differences can occur in
effective rates 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
- -------
Management continues to believe current year earnings can return to fiscal 1995
levels. Management believes most of the impact of the start-up issues at the
Upper Sandusky, Ohio, facility has already been reflected in the first fiscal
quarter this year, and this plant should be at expected production levels during
the second fiscal quarter as shipments of rollers and axles to Eaton Corporation
for its Chrysler automotive requirements begin. The Company is also currently
seeing a significant increase in tooling-related business for the second fiscal
quarter as Ford and Chrysler have resolved their UAW contract issues.
- 7 -
<PAGE> 8
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash provided by operating activities for the quarter was $2,833,000 which,
along with borrowings under the revolving line of credit, met working capital
needs. Cash provided by current items was $402,000, comprised primarily of a
decrease of $3.1 million in net assets of business to be sold (reflecting the
August 1996 sale of Vaungarde), an increase of $1.6 million in receivables and
inventory relative to higher sales and production levels at September 30, 1996
compared to June 30, 1996, and a decrease of $1.1 million in payables and
accruals from the payment of incentives accrued at June 30, 1996 and the timing
of trade payables relative to production levels. At the end of the quarter, the
current ratio was 1.50 to 1, compared with 1.53 to 1 at the end of the prior
fiscal year. Working capital also decreased during the quarter to $8,428,000
from $9,537,000 at the end of the prior fiscal year.
Funded debt decreased during the quarter by $150,000. Scheduled principal
payments of long-term obligations totaling $1,035,000 were offset by $1,035,000
of borrowings under the revolving credit facility. At the end of the quarter,
the debt to total capitalization ratio was 39.4% compared with 39.5% at the end
of the prior fiscal year. The Company had $4,965,000 available in additional
borrowing capacity under its revolving credit facility at September 30, 1996.
During the quarter, capital expenditures totaled $2,132,000, and at the end of
the quarter the Company had noncancelable outstanding commitments for capital
expenditures of less than $1 million. Most of the capital spending in the
quarter was for the remaining equipment necessary to produce cam follower
rollers and axles at the Upper Sandusky, Ohio, facility. Based on currently
expected levels of business, the Company continues to estimate it will spend
approximately $4 million in the fiscal year relative to asset replacements, cost
reduction, and productivity improvement programs. Additional capital
expenditures relative to new or increased sales continue to be estimated at $2
million. The Company has the necessary financing capacity available, if
required, to fund its outstanding commitments and expects to fund its remaining
planned capital expenditures for the fiscal year through operating cash flow.
During the quarter, the Company repurchased 61,200 of its common shares in open
market transactions for $391,000. The Company anticipates repurchases of its
common shares will continue, with any such repurchases funded from operating
cash flow or loans from its primary lender under the existing revolving credit
facility. Any such borrowings will be made in accordance with the Company's loan
covenants with its primary lender and will not adversely impact the Company's
ability to fund capital expenditures, acquisitions or its business operations.
A quarterly cash dividend of $0.04 per share was paid September 5, 1996 to
shareholders of record as of August 15, 1996. In addition, a quarterly cash
dividend of $0.04 per share was declared October 23, 1996, payable December 5,
1996 to shareholders of record as of November 15, 1996. The Company anticipates
future quarterly dividends, and does not expect liquidity or capital resources
to be materially affected by the payment of dividends.
- 8 -
<PAGE> 9
PART II - OTHER INFORMATION
- ---------------------------
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 August 8, 1996 to
announce a definitive agreement to sell all the outstanding common
shares of its Vaungarde, Incorporated subsidiary to Quoin, Inc.
Registrant also filed a report on Form 8-K on August 19, 1996 to
report completion of the sale of all common shares of Vaungarde,
Incorporated to Quoin, Inc. for $2,829,000 in cash, $413,000 of
assigned liquid assets and $950,000 of notes receivable.
- 9 -
<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: October 29, 1996
----------------
DEFIANCE, INC.
--------------
By: /s/ Jerry A. Cooper
-------------------------------------
Jerry A. Cooper
President and Chief Executive Officer
/s/ Michael J. Meier
-------------------------------------
Michael J. Meier
Vice President -- Finance and Chief Financial Officer
/s/ James L. Treece
-------------------------------------
James L. Treece
Chief Accounting Officer
- 10 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 253
<SECURITIES> 0
<RECEIVABLES> 17,703
<ALLOWANCES> (193)
<INVENTORY> 3,792
<CURRENT-ASSETS> 25,430
<PP&E> 40,202
<DEPRECIATION> 29,521
<TOTAL-ASSETS> 73,626
<CURRENT-LIABILITIES> 17,002
<BONDS> 0
<COMMON> 329
0
0
<OTHER-SE> 22,047
<TOTAL-LIABILITY-AND-EQUITY> 73,626
<SALES> 22,067
<TOTAL-REVENUES> 22,067
<CGS> 17,629
<TOTAL-COSTS> 17,629
<OTHER-EXPENSES> 2,877
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 461
<INCOME-PRETAX> 1,102
<INCOME-TAX> 392
<INCOME-CONTINUING> 710
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 710
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
