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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 SEPTEMBER 30, 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 October 24, 1997 was
6,059,896.
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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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9/30/97 6/30/97
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<S> <C> <C>
CURRENT ASSETS:
Cash $ 804 $ 188
Accounts receivable 17,019 21,492
Inventories 4,294 3,761
Deferred and refundable income taxes 600 565
Prepaid expenses and other current assets 2,967 2,968
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Total current assets 25,684 28,974
PROPERTY, PLANT AND EQUIPMENT -- net 36,762 37,822
COST IN EXCESS OF NET ASSETS OF ACQUIRED COMPANIES 4,808 4,871
OTHER ASSETS 1,445 2,152
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Total assets $ 68,699 $ 73,819
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LIABILITIES AND STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES:
Current maturities of long-term obligations $ 4,673 $ 4,829
Accounts payable 3,473 4,060
Accrued payroll and employee benefits 3,269 3,833
Accrued expenses 3,363 4,471
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Total current liabilities 14,778 17,193
LONG-TERM OBLIGATIONS 12,219 14,968
DEFERRED INCOME TAXES 3,315 3,267
CONTINGENCIES -- Note F
STOCKHOLDERS' EQUITY:
Common shares 346 346
Additional paid-in capital 23,410 23,347
Retained earnings 17,857 17,851
Less common shares in treasury -- at cost (3,226) (3,153)
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Total stockholders' equity 38,387 38,391
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Total liabilities and stockholders' equity $ 68,699 $ 73,819
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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
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9/30/97 9/30/96
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<S> <C> <C>
Net sales $ 20,601 $ 22,067
Cost of goods sold 16,977 17,629
Selling and administrative expenses 2,888 2,875
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Operating earnings 736 1,563
Interest expense -- net 323 461
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Earnings before income tax provision . 413 1,102
Income tax provision 151 392
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Net earnings $ 262 $ 710
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Net earnings per common share $ 0.04 $ 0.11
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Common shares issued and outstanding:
Beginning of period 6,416,896 6,415,750
Issued during period 3,000
Repurchased during period (10,000) (61,200)
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End of period 6,409,896 6,354,550
Average common shares outstanding:
Shares issued and outstanding 6,417,789 6,405,009
Share equivalents -- outstanding stock options 26,758 176,663
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Average common shares outstanding 6,444,547 6,581,672
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Cash dividends per common share $ 0.04 $ 0.04
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</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>
THREE MONTHS ENDED
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9/30/97 9/30/96
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<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 262 $ 710
Items not affecting cash:
Depreciation and amortization 1,844 1,738
Deferred income taxes (17) (17)
Current items:
Change in net assets of business to be sold 3,108
Other current items 1,757 (2,706)
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Cash provided by operating activities 3,846 2,833
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FINANCING ACTIVITIES:
Payments of long-term obligations (2,905) (1,185)
Additions to long-term obligations 1,035
Issuance of common shares from exercise of stock options 64
Repurchase of common shares (73) (391)
Dividends paid (256) (256)
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Cash used for financing activities (3,170) (797)
INVESTING ACTIVITIES:
Capital expenditures (493) (2,132)
Notes receivable from sale of business (950)
Payments received on notes receivable from sale of business 275
Other -- net 158 59
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Cash used for investing activities (60) (3,023)
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CASH:
Increase (decrease) 616 (987)
Beginning of period 188 1,240
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End of period $ 804 $ 253
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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
THREE MONTHS ENDED SEPTEMBER 30, 1997
(All amounts in thousands, except share and per 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, 1997.
B -- INVENTORIES
<TABLE>
<CAPTION>
9/30/97 6/30/96
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<S> <C> <C>
Raw materials $1,049 $1,264
Work in process 1,288 1,300
Finished goods 1,210 491
Stores and supplies 747 706
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$4,294 $3,761
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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 1999. At September 30, 1997, the Company had all
$6,000 available for borrowing under this facility.
D -- STOCKHOLDERS' EQUITY
The Company adopted a stock repurchase plan in January 1996. During the three
months ended September 30, 1997 the Company repurchased 10,000 shares in open
market transactions for $73. As of September 30, 1997 the Company had
repurchased a total of 514,400 shares for $3,226.
Subsequent to September 30, 1997 the Company repurchased an additional 350,000
shares in open market transactions for $2,545. As of October 24, 1997 the
Company had repurchased a total of 864,100 shares for $5,771.
Also, on October 24, 1997 the Company's board of directors approved an increase
in the maximum number of shares that may be repurchased under the plan to
1,500,000 from 1,000,000.
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<PAGE> 6
E -- NET EARNINGS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Number 128 (SFAS 128), "Earnings per Share",
which must be adopted by the Company for all financial statements issued after
December 15, 1997. At that time, the Company will be required to change the
method used to compute earnings per share and to restate earnings per share for
all prior periods, including interim periods. Under the new requirements for
calculating basic earnings per share, the dilutive effect of stock options will
not be included. Early adoption of SFAS 128 is not permitted. Proforma earnings
per share, computed as if the Company had adopted SFAS 128 for each period
presented are as follows:
<TABLE>
<CAPTION>
9/30/97 9/30/96
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<S> <C> <C>
Basic earnings per common share $0.04 $0.11
Diluted earnings per common share $0.04 $0.11
</TABLE>
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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Sales for the quarter were $1,466,000, or 6.6% lower than last year. Included in
last year's sales, however, are $1,203,000 from the former Vaungarde business
unit which was sold in August 1996.
Sales from the remaining core business units were $263,000, or 1.3% lower than
last year. Sales of gasoline engine cam follower rollers (CFRs) and axles were
up 12% over last year primarily from increased sales to Eaton Corporation for
new Chrysler automotive requirements. However, delays in the release of new
prototype and tooling programs from Ford and Chrysler reduced tooling revenues
21% below last year. Testing revenues were also 9% lower than last year,
reflecting scaled back demand from OEMs and Tier One automotive suppliers.
Operating Earnings
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Operating earnings, without the effect of the former Vaungarde business, were
3.6% of sales for the quarter compared with 7.8% for the same period last year.
Margins were negatively affected primarily by soft demand for tooling and
testing work. CFR and axle production levels increased, however, with
considerably improved efficiencies this quarter at the Upper Sandusky facility.
Interest Expense -- Net
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Interest expense, net of interest income, decreased $138,000 for the quarter
compared with last year due to lower average net borrowings at similar interest
rates.
Income Tax Provision
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The effective income tax rate was 36.6% for the quarter, compared with 35.6%
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 Statement of Financial Accounting Standards Number 109, "Accounting for
Income Taxes."
Outlook
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Regarding the full year, management continues to anticipate new testing and
tooling programs for Ford and Chrysler will get back on schedule, Chrysler CFR
and axle production will continue to ramp up as anticipated, and operating
efficiencies will continue to improve at the Upper Sandusky plant. Assuming the
year progresses as anticipated, management expects substantial improvement in
the second quarter compared with the first, followed by a much stronger second
half. Management continues to believe earnings for the current fiscal year will
exceed those of last year.
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> 8
LIQUIDITY AND CAPITAL RESOURCES
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Cash provided by operating activities for the quarter was $3,846,000, which met
working capital needs. Cash provided by current items was $1,757,000, primarily
due to a decrease in accounts receivable, partially offset by a decrease in
payables and accrued expenses and a slight increase in inventories. The current
ratio stood at 1.75 to 1 at the end of the quarter, compared with 1.69 to 1 at
the end of the prior fiscal year.
Funded debt decreased by $2,904,000 for the quarter. Principal payments for
long-term obligations totaled $1,239,000 and the revolving line of credit was
reduced by $1,665,000. At the end of the quarter, the debt to total
capitalization ratio was 30.6% compared with 34.0% at the end of the prior
fiscal year. The Company had all $6,000,000 available in additional borrowing
capacity under its revolving credit facility at September 30, 1997.
Capital expenditures for the quarter totaled $493,000, and at the end of the
quarter the Company had no significant outstanding commitments for capital
expenditures. The Company estimates it will spend approximately $6,000,000 in
the fiscal year for capital expenditures, of which approximately $1,000,000
relate to new or increased sales and approximately $5,000,000 relate to asset
replacements, cost reduction and productivity improvement programs. The Company
plans to fund its remaining capital expenditures for the year through operating
cash flow, though the Company has the necessary financing capacity available
should it be required.
The Company repurchased 10,000 of its common shares in open market transactions
for $73,000 during the quarter. As discussed in Note D to the Condensed
Consolidated Financial Statements, subsequent to September 30, 1997 the Company
repurchased an additional 350,000 shares in open market transactions for
$2,545,000. These share purchases were funded by borrowings under the revolving
line of credit. The balance under the revolving line of credit was $3,050,000 on
October 24, 1997, with $2,950,000 available for borrowing. 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 to shareholders in
September 1997. In addition, a quarterly cash dividend of $0.04 per share was
declared October 24, 1997, payable December 5, 1997 to shareholders of record as
of November 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.
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> 9
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, 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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 804
<SECURITIES> 0
<RECEIVABLES> 17,205
<ALLOWANCES> 186
<INVENTORY> 4,294
<CURRENT-ASSETS> 25,684
<PP&E> 69,171
<DEPRECIATION> 32,409
<TOTAL-ASSETS> 68,699
<CURRENT-LIABILITIES> 14,778
<BONDS> 16,893
0
0
<COMMON> 346
<OTHER-SE> 38,041
<TOTAL-LIABILITY-AND-EQUITY> 68,699
<SALES> 20,601
<TOTAL-REVENUES> 20,601
<CGS> 16,977
<TOTAL-COSTS> 16,977
<OTHER-EXPENSES> 2,888
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 323
<INCOME-PRETAX> 413
<INCOME-TAX> 151
<INCOME-CONTINUING> 262
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 262
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
