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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, 1997
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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, 1997 was
6,437,596.
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DEFIANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(All amounts in thousands)
<TABLE>
<CAPTION>
ASSETS
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3/31/97 6/30/96
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<S> <C> <C>
CURRENT ASSETS:
Cash $125 $1,240
Accounts receivable 18,993 16,615
Inventories 4,852 3,312
Deferred and refundable income taxes 1,033 1,058
Prepaid expenses and other current assets 2,020 2,383
Net assets of business to be sold 3,108
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Total current assets 27,023 27,716
PROPERTY, PLANT AND EQUIPMENT -- net 38,185 39,516
COST IN EXCESS OF NET ASSETS OF ACQUIRED COMPANIES 4,934 5,122
OTHER ASSETS 2,441 2,414
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Total assets $72,583 $74,768
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<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term obligations $4,186 $5,051
Accounts payable 3,903 4,908
Accrued payroll and employee benefits 3,891 3,578
Accrued expenses 3,827 4,642
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Total current liabilities 15,807 18,179
LONG-TERM OBLIGATIONS 17,152 18,134
DEFERRED INCOME TAXES 2,943 3,017
CONTINGENCIES -- Note F
STOCKHOLDERS' EQUITY:
Common shares 345 328
Additional paid-in capital 23,074 22,047
Retained earnings 16,745 14,545
Less common shares in treasury -- at cost (2,892) (891)
Minimum pension liability (591) (591)
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Total stockholders' equity 36,681 35,438
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Total liabilities and stockholders' equity $72,583 $74,768
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</TABLE>
See notes to condensed consolidated financial statements.
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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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3/31/97 3/31/96 3/31/97 3/31/96
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<S> <C> <C> <C> <C>
Net sales $22,314 $25,724 $67,175 $77,326
Cost of goods sold 17,812 21,459 52,634 63,133
Selling and administrative expenses 3,020 2,990 8,790 8,783
----------- ----------- ----------- -----------
Operating earnings 1,482 1,275 5,751 5,410
Interest expense -- net 394 528 1,269 1,269
----------- ----------- ----------- -----------
Earnings before income tax provision 1,088 747 4,482 4,141
Income tax provision 335 273 1,510 1,464
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Net earnings $753 $474 $2,972 $2,677
=========== =========== =========== ===========
Net earnings per common share $0.12 $0.07 $0.46 $0.40
=========== =========== =========== ===========
Common shares issued and outstanding:
Beginning of period 6,399,179 6,573,450 6,415,750 6,543,950
Issued during period 141,917 338,546 29,500
Repurchased during period (93,500) (59,900) (306,700) (59,900)
----------- ----------- ----------- -----------
End of period 6,447,596 6,513,550 6,447,596 6,513,550
----------- ----------- ----------- -----------
Average common shares outstanding:
Shares issued and outstanding 6,437,900 6,546,627 6,423,282 6,554,604
Share equivalents -- outstanding stock options 19,366 143,520 93,255 178,887
----------- ----------- ----------- -----------
Average common shares outstanding 6,457,266 6,690,147 6,516,537 6,733,491
=========== =========== =========== ===========
Cash dividends per common share $0.04 $0.04 $0.12 $0.12
=========== =========== =========== ===========
</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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3/31/97 3/31/96
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<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $2,972 $2,677
Items not affecting cash:
Depreciation and amortization 5,346 4,189
Deferred income taxes (314) 143
Current items:
Change in net assets of business to be sold 3,108
Other current items (4,655) (3,860)
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Cash provided by operating activities 6,457 3,149
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FINANCING ACTIVITIES:
Payments of long-term obligations (4,421) (3,148)
Additions to long-term obligations 2,574 10,119
Issuance of common shares from exercise of stock options 1,043 71
Repurchase of common shares (2,001) (342)
Dividends paid (772) (787)
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Cash provided by (used for) financing activities (3,577) 5,913
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INVESTING ACTIVITIES:
Capital expenditures (3,141) (8,247)
Preproduction costs (1,677)
Notes receivable from sale of business (950)
Other -- net 96 (161)
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Cash used for investing activities (3,995) (10,085)
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CASH:
Decrease (1,115) (1,023)
Beginning of period 1,240 1,166
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End of period $125 $143
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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, 1997
(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>
3/31/97 6/30/96
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<S> <C> <C>
Raw materials $1,139 $784
Work in process 2,126 1,417
Finished goods 815 315
Stores and supplies 772 796
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$4,852 $3,312
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</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 March 31, 1997, the Company had $3,426 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 March 31, 1997 have
been reduced by one-half of this amount.
D - STOCKHOLDERS' EQUITY
The Company adopted a stock repurchase plan in January 1996. During the nine
months ended March 31, 1997 the Company repurchased 306,700 shares in open
market transactions for $2,001. As of March 31, 1997, the Company had
repurchased a total of 464,400 shares for $2,892.
Also during the nine months ended March 31, 1997 a total of 338,546 common
shares were issued pursuant to the exercise of stock options by employees. Total
cash received from these option exercises was $1,043.
The Company paid dividends of $0.04 per common share in each of the first three
quarters of the fiscal year. Year to date dividend payments totaled $772.
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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 the Company
terminated the plan and settled all obligations of this plan. A pretax charge to
income of $632 was recorded 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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NET SALES
Sales for the quarter were $3,410,000, or 13.3% lower than last year, and for
the year to date were $10,151,000, or 13.1% lower than last year. Included in
last year's sales, however, are $18,831,000 from the former hard tooling and
Vaungarde businesses, compared with $1,307,000 this year, on a year-to-date
basis. The hard tooling venture was shut down in May 1996 and Vaungarde was sold
in August 1996.
Sales from the remaining core business units were $1,384,000, or 6.6% higher
than last year, and for the year to date were $7,373,000, or 12.6% higher than
last year. Sales of gasoline engine cam follower rollers and axles remained
significantly ahead of last year for the quarter and year to date from new
business for General Motors' light truck engine applications started last year
and increased sales to Eaton Corporation for existing Ford and new Chrysler
automotive requirements. Sales of diesel engine rollers and axles were up
slightly for the quarter and year to date, consistent with the overall
heavy-duty truck market. Revenues from testing services were down slightly this
quarter, reflecting a slowdown in OEM demand for product validation testing.
Year to date testing revenues are at about the same level as last year. Revenues
from tooling systems remained ahead of last year's pace for the quarter and year
to date. A stronger prototype market has helped increase demand for the
Company's soft tooling services from automotive OEM's.
OPERATING EARNINGS
Operating earnings, as a percentage of sales, without the effect of the one-time
pension charge or the former hard tooling and Vaungarde businesses, were 9.5%
and 9.6% for the quarter and year to date, compared with 10.3% and 11.5% for the
same periods last year. Production start-up issues, equipment problems and
training personnel at the new Upper Sandusky cam follower roller and axle
facility continued to reduce margins this quarter. Continuing soft demand for
product validation testing by OEMs held back testing margins, though tooling
margins improved with the strengthening prototype market.
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INTEREST EXPENSE -- NET
Interest expense, net of interest income, was unchanged for the nine months year
to date and decreased $134,000 for the quarter compared with last year due to
lower average net borrowings at similar interest rates.
INCOME TAX PROVISION
The effective income tax rate was 30.8% for the quarter and 33.7% for the year
to date, compared with 33.7% and 35.4% 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
Management expects production levels with improved efficiencies to increase
during the fourth fiscal quarter as the Precision Products unit takes on more of
Eaton's Chrysler automotive requirements. Management believes earnings can
exceed the $0.23 per share mark attained in the prior year's fourth quarter if
new testing and tooling programs are released by the OEMs as expected, Chrysler
CFR and axle production ramps up as anticipated and efficiencies continue to
improve at the Upper Sandusky facility.
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 $6,457,000 which,
along with borrowings under the revolving line of credit, met working capital
needs. Cash used for current items was $1,547,000, 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 $3,918,000 in accounts receivable
and inventories relative to more tooling and testing contracts in process and
higher CFR and axle production levels at March 31, 1997 compared to June 30,
1996, and a decrease of $1,507,000 in payables and accruals from the payment of
incentives accrued at June 30, 1996 and for equipment received and accrued for
at June 30, 1996. At the end of the quarter, just $578,000, or 3%, of accounts
receivable were over 60 days old. The current ratio stood at 1.71 to 1 at the
end of the quarter, compared with 1.53 to 1 at the end of the prior fiscal year.
Working capital also increased to $11,216,000 from $9,537,000 at the end of the
prior fiscal year.
Funded debt decreased by $1,847,000 for the year to date. Principal payments for
long-term obligations totaling $4,421,000 were partially offset by $2,574,000 of
borrowings under the revolving credit facility. At the end of the quarter, debt
to total capitalization ratio was 36.8% compared with 39.5% at the end of the
prior fiscal year. The Company had $3,426,000 available in additional borrowing
capacity under its revolving credit facility at March 31, 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 $643,000 less over the last three months of the
fiscal year than
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originally scheduled.
Capital expenditures for the year to date totaled $3,141,000, and at the end of
the quarter the Company had no significant outstanding commitments for capital
expenditures. The majority of the year-to-date capital spending was for the
remaining equipment necessary to produce cam follower rollers and axles at the
Upper Sandusky, Ohio, facility. The Company now estimates it will spend a total
of less than $4 million in the fiscal year for capital expenditures. The Company
has the necessary financing capacity available, if required, to fund any
outstanding commitments and plans to fund its remaining capital expenditures for
the fiscal year through operating cash flow.
The Company repurchased 306,700 of its common shares in open market transactions
for $2,001,000 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 and in March 1997. Dividend payments totaled
$772,000 for the year to date. In addition, a quarterly cash dividend of $0.04
per share was declared April 23, 1997, payable June 5, 1997 to shareholders of
record as of May 15, 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 nine months ended March 31, 1997, a total of 338,546 common
shares were issued pursuant to the exercise of stock options by employees. Total
cash received from these option exercises was $1,043,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27. Financial Data Schedule.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were 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: April 25, 1997
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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-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 125
<SECURITIES> 0
<RECEIVABLES> 18,993
<ALLOWANCES> (243)
<INVENTORY> 4,852
<CURRENT-ASSETS> 27,023
<PP&E> 38,185
<DEPRECIATION> 31,078
<TOTAL-ASSETS> 72,583
<CURRENT-LIABILITIES> 15,807
<BONDS> 1,324
<COMMON> 345
0
0
<OTHER-SE> 23,074
<TOTAL-LIABILITY-AND-EQUITY> 72,583
<SALES> 67,175
<TOTAL-REVENUES> 67,175
<CGS> 52,634
<TOTAL-COSTS> 52,634
<OTHER-EXPENSES> 8,790
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,269
<INCOME-PRETAX> 4,482
<INCOME-TAX> 1,510
<INCOME-CONTINUING> 2,972
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,972
<EPS-PRIMARY> .46
<EPS-DILUTED> .46
</TABLE>
