<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, 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
-------------------------------- ------------------------
(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 January 28, 1997 was 6,438,050.
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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>
12/31/96 6/30/96
-------------- ---------------
CURRENT ASSETS:
<S> <C> <C>
Cash $394 $1,240
Accounts receivable 17,633 16,615
Inventories 4,067 3,312
Deferred and refundable income taxes 1,040 1,058
Prepaid expenses and other current assets 2,341 2,383
Net assets of business to be sold 3,108
-------------- ---------------
Total current assets 25,475 27,716
PROPERTY, PLANT AND EQUIPMENT -- net 39,257 39,516
COST IN EXCESS OF NET ASSETS OF ACQUIRED COMPANIES 4,997 5,122
OTHER ASSETS 2,666 2,414
-------------- ---------------
Total assets $72,395 $74,768
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term obligations $3,624 $5,051
Accounts payable 2,835 4,908
Accrued payroll and employee benefits 2,997 3,578
Accrued expenses 4,065 4,642
-------------- ---------------
Total current liabilities 13,521 18,179
LONG-TERM OBLIGATIONS 19,433 18,134
DEFERRED INCOME TAXES 3,004 3,017
CONTINGENCIES -- Note F
STOCKHOLDERS' EQUITY:
Common shares 339 328
Additional paid-in capital 22,701 22,047
Less common shares in treasury -- at cost (2,261) (891)
Minimum pension liability (591) (591)
Retained earnings 16,249 14,545
-------------- ---------------
Total stockholders' equity 36,437 35,438
-------------- ---------------
Total liabilities and stockholders' equity $72,395 $74,768
============== ===============
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 3
<TABLE>
<CAPTION>
DEFIANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(All amounts in thousands, except share and per share amounts)
Three months ended Six months ended
12/31/96 12/31/95 12/31/96 12/31/95
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net sales $22,794 $24,636 $44,861 $51,602
Cost of goods sold 17,193 20,435 34,822 41,674
Selling and administrative expenses 2,902 2,800 5,779 5,803
--------------- -------------- -------------- ---------------
Operating earnings 2,699 1,401 4,260 4,125
Interest expense -- net 414 416 875 741
Other expense (income) (7) (22) (9) (10)
--------------- -------------- -------------- ---------------
Earnings before income tax provision 2,292 1,007 3,394 3,394
Income tax provision 783 342 1,175 1,191
--------------- -------------- -------------- ---------------
Net earnings $1,509 $665 $2,219 $2,203
=============== ============== ============== ===============
Net earnings per common share $0.23 $0.10 $0.34 $0.33
=============== ============== ============== ===============
Common shares issued and outstanding:
Beginning of period 6,354,550 6,557,450 6,415,750 6,543,950
Issued during period 196,629 16,000 196,629 29,500
Repurchased during period (152,000) (213,200)
--------------- -------------- -------------- ---------------
End of period 6,399,179 6,573,450 6,399,179 6,573,450
--------------- -------------- -------------- ---------------
Average common shares outstanding:
Shares issued and outstanding 6,427,254 6,566,618 6,416,131 6,558,548
Share equivalents -- outstanding stock options 82,129 157,988 129,396 196,379
--------------- -------------- -------------- ---------------
Average common shares outstanding 6,509,383 6,724,606 6,545,527 6,754,927
=============== ============== ============== ===============
Cash dividends per common share $0.04 $0.04 $0.08 $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
12/31/96 12/31/95
-------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $2,219 $2,203
Items not affecting cash:
Depreciation and amortization 3,483 2,588
Deferred income taxes (112) 206
Current items:
Change in net assets of business to be sold 3,108
Other current items (4,707) (1,431)
-------------- ---------------
Cash provided by operating activities 3,991 3,566
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FINANCING ACTIVITIES:
Payments of long-term obligations (3,780) (2,085)
Additions to long-term obligations 3,652 6,997
Issuance of common shares from exercise of stock options 663 71
Repurchase of common shares (1,370)
Dividends paid (514) (525)
-------------- ---------------
Cash provided by (used for) financing activities (1,349) 4,458
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INVESTING ACTIVITIES:
Capital expenditures (2,637) (7,023)
Preproduction costs (1,924)
Notes receivable from sale of business (950)
Other -- net 99 (37)
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Cash used for investing activities (3,488) (8,984)
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CASH:
Decrease (846) (960)
Beginning of period 1,240 1,166
-------------- ---------------
End of period $394 $206
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</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 5
DEFIANCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 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, 1996.
B - INVENTORIES
<TABLE>
<CAPTION>
12/31/96 6/30/96
-------------- ---------------
<S> <C> <C>
Raw materials $1,023 $784
Work in process 1,551 1,417
Finished goods 743 315
Stores and supplies 750 796
-------------- ---------------
$4,067 $3,312
============== ===============
</TABLE>
C - LONG TERM OBLIGATIONS
The Company has a $6,000 unsecured revolving line of credit with its primary
lender, which expires October 1998. Borrowings under this facility are at rates
below prime. At January 20, 1997, the Company had $3,619 available for borrowing
under this facility.
In December 1996, the Company borrowed $1,285 under this facility to prepay
principal payments due from January 1997 through June 1997 on its two variable
rate term loans to take advantage of the differential in interest rates.
Principal repayments under these two term loans will resume July 1997.
Accordingly, current maturities of long term obligations at December 31, 1996
have been reduced by this amount.
D -- STOCKHOLDERS' EQUITY
The Company adopted a stock repurchase plan in January 1996. During the six
months ended December 31, 1996 the Company repurchased 213,200 shares in open
market transactions for $1,370. As of December 31, 1996, the Company had
repurchased a total of 370,900 shares for $2,261.
Also during the six months ended December 31, 1996 a total of 196,629 common
shares were issued pursuant to the exercise of stock options by employees. Total
cash received from these option exercises was $663.
The Company paid dividends of $0.04 per common share in each of the first two
quarters of the fiscal year. Year to date dividend payments totaled $514.
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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 in September 1996 to terminate
this plan and distribute all the plan's assets. On January 22, 1997, after the
end of the current reporting period, the Company terminated the plan and settled
all obligations of this plan. A pretax charge to income of approximately $632
will be required in the quarter ended March 31, 1997 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."
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
- ---------------------
Net Sales
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Sales for the quarter were $1,842,000, or 7.5% below last year, and for the year
to date were $6,741,000, or 13.1% below last year. Included in last year's year
to date sales are $14.3 million from the former hard tooling and Vaungarde
businesses. This year's sales include only $1.3 million from Vaungarde, which
was sold in August 1996. The hard tooling venture was shut down in May 1996.
Sales from the remaining core business units were up 25% for the quarter and 17%
for the year to date. Sales of gasoline engine cam follower rollers and axles
were up over 50% for the quarter and year to date from new business for General
Motors' light truck engine applications and increased sales to Eaton Corporation
for their Ford automotive requirements. Sales of diesel engine rollers and axles
were up slightly for the quarter and year to date, reflective of the overall
heavy-duty truck market. Revenues from testing services were up modestly for the
quarter and year to date from increased noise and vibration testing and product
engineering work for tier one automotive suppliers. Revenues from tooling
systems were up significantly this quarter, bringing the year to date to about
the same level as last year. Demand for soft tooling and die design services
from automotive OEMs improved after the Big Three resolved their UAW contract
issues.
Operating Earnings
- ------------------
Operating earnings, as a percentage of sales, were 11.8% for the quarter and
9.5% for the year to date, compared with 5.7% and 8.0% for the quarter and year
to date last year. Not including the former hard tooling and Vaungarde
businesses, operating margins last year were 11.8% and 13.1% for the quarter and
year to date.
Operating earnings from the remaining core businesses were $2,593,000 for the
quarter compared with $2,127,000 last year, and $4,258,000 year to date compared
with $4,897,000 last year. While there was a $466,000 improvement this quarter
over last year, operating earnings for the first six months trailed last year by
$639,000. Production start-up issues and training personnel at the new Upper
Sandusky facility continued to adversely affect cam follower roller and axle
margins, though notable improvement in cycle times and efficiencies were
attained by the second quarter's end. Continuing soft demand for product
validation testing by OEMs held back testing margins, though tooling margins
improved with the strengthening prototype market.
Interest Expense -- Net
- -----------------------
Interest expense, net of interest income, was unchanged for the quarter and was
up 18% for the year to date over last year due to higher average net borrowings
at similar interest rates. In addition, $146,000 of interest was capitalized
during the first six months last year.
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Income Tax Provision
- --------------------
The effective income tax rate was 34.2% for the quarter and 34.6% for the year
to date, compared with 34.0% 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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Looking ahead at the rest of the fiscal year, management expects earnings will
exceed last year's like quarters, assuming the automotive market and the economy
remain reasonably stable. If new testing and tooling programs are released as
advertised, and if Chrysler cam follower roller and axle production ramps up as
anticipated, management expects the fourth fiscal quarter to be the best of the
year. Earnings in the third fiscal quarter will be impacted by a one-time charge
of six or seven cents a share for the termination of a pension plan this
January. With these uncertainties, management now estimates the fiscal year
should finish in a range from 80 to 90 cents a share.
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.
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<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
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Cash provided by operating activities for the year to date was $3,991,000 which,
along with borrowings under the revolving line of credit, met working capital
needs. Cash used for current items was $1,599,000, comprised primarily of a
decrease of $3,108,000 in net assets of business to be sold (reflecting the
August 1996 sale of Vaungarde), an increase of $1,773,000 in receivables and
inventory relative to higher sales and production levels at December 31, 1996
compared to June 30, 1996, and a decrease of $3,231,000 in payables and accruals
from the payment of incentives accrued at June 30, 1996, the timing of trade
payables relative to production levels and payments for equipment received and
accrued for at June 30, 1996. At the end of the quarter the current ratio was
1.88 to 1, compared with 1.53 to 1 at the end of the prior fiscal year. Working
capital also increased to $11,954,000 from $9,537,000 at the end of the prior
fiscal year.
Funded debt decreased by $128,000 for the year to date. Principal payments for
long-term obligations totaling $3,780,000 were offset by $3,652,000 of
borrowings under the revolving credit facility. At the end of the quarter, debt
to total capitalization ratio was 38.8% compared with 39.5% at the end of the
prior fiscal year. The Company had $3,619,000 available in additional borrowing
capacity under its revolving credit facility at January 20, 1997. As discussed
in Note C to the Condensed Consolidated Financial Statements, the Company
borrowed $1,285,000 in December 1996 under this facility to prepay principal
payments due from January 1997 through June 1997 on its two variable rate term
loans to take advantage of the differential in interest rates. Principal
repayments under these two term loans will resume July 1997. Consequently, the
Company's principal repayments will be $1,285,000 less over the last six months
of the fiscal year than originally scheduled.
Capital expenditures for the year to date totaled $2,637,000, 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 for the year
to date 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.
The Company repurchased 213,200 of its common shares in open market transactions
for $1,370,000 for the year to date. 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.
Quarterly cash dividends of $0.04 per share were paid to shareholders in
September and December 1996. Dividend payments totaled $514,000 for the year to
date. In addition, a quarterly cash dividend of $0.04 per share was declared
January 22, 1997, payable March 5, 1997 to shareholders of record as of February
14, 1997. The Company anticipates future quarterly dividends, and does not
expect liquidity or capital resources to be materially affected by the payment
of dividends.
Also during the six months ended December 31, 1996, a total of 196,629 common
shares were issued pursuant to the exercise of stock options by employees. Total
cash received from these option exercises was $663,000.
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<PAGE> 10
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders on October 23, 1996,
the following individuals were elected to the Board of Directors:
<TABLE>
<CAPTION>
Votes Votes
Term For Withheld
---------- ----------- ----------
<S> <C> <C> <C>
Richard W. Lock 2 years 5,160,244 19,555
Thomas H. Roulston II 3 years 5,160,244 19,555
Scott D. Roulston 3 years 5,160,244 19,555
</TABLE>
No other proposals were presented at the Company's Annual Meeting.
Item 5. Other Information
On January 22, 1997, the Company's board of directors approved a
cash dividend of $0.04 per common share, payable March 5, 1997 to
shareholders of record as of February 14, 1997.
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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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 28, 1997
--------------------
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-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 394
<SECURITIES> 0
<RECEIVABLES> 17,633
<ALLOWANCES> (193)
<INVENTORY> 4,067
<CURRENT-ASSETS> 25,475
<PP&E> 39,257
<DEPRECIATION> 30,835
<TOTAL-ASSETS> 72,395
<CURRENT-LIABILITIES> 13,521
<BONDS> 0
<COMMON> 339
0
0
<OTHER-SE> 22,701
<TOTAL-LIABILITY-AND-EQUITY> 72,395
<SALES> 44,861
<TOTAL-REVENUES> 44,861
<CGS> 34,822
<TOTAL-COSTS> 34,822
<OTHER-EXPENSES> 5,779
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 875
<INCOME-PRETAX> 3,394
<INCOME-TAX> 1,175
<INCOME-CONTINUING> 2,219
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,219
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
</TABLE>
