<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, 1998
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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
- ------------------------------------------------------- ----------------------
(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 23, 1998 was
6,003,749.
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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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9/30/98 6/30/98
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<S> <C> <C>
CURRENT ASSETS:
Cash $ 323 $ 2,916
Accounts receivable 19,568 16,679
Inventories -- Note B 3,630 3,801
Deferred income taxes 600 590
Prepaid expenses and other current assets -- Note C 3,023 3,311
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Total current assets 27,144 27,297
PROPERTY, PLANT AND EQUIPMENT -- net 34,461 34,722
COST IN EXCESS OF NET ASSETS OF ACQUIRED COMPANIES 4,557 4,619
OTHER ASSETS 1,322 1,304
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Total assets $ 67,484 $ 67,942
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LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term obligations $ 2,963 $ 3,353
Accounts payable 3,955 4,967
Accrued payroll and employee benefits 3,414 3,707
Accrued expenses -- Note D 1,982 2,648
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Total current liabilities 12,314 14,675
LONG-TERM OBLIGATIONS -- Note E 12,982 9,955
DEFERRED INCOME TAXES 3,252 3,209
CONTINGENCIES -- Note F
STOCKHOLDERS' EQUITY:
Common shares 351 351
Additional paid-in capital 24,141 24,141
Common shares in treasury, at cost -- Note G (6,912) (5,770)
Retained earnings 21,356 21,381
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Total stockholders' equity 38,936 40,103
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Total liabilities and stockholders' equity $ 67,484 $ 67,942
======== ========
</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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9/30/98 9/30/97
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<S> <C> <C>
Net sales $ 21,980 $ 20,601
Cost of goods sold 18,422 16,977
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Gross profit 3,558 3,624
Selling and administrative expenses 2,982 2,888
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Operating earnings 576 736
Interest expense -- net 232 323
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Earnings before income tax provision 344 413
Income tax provision 123 151
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Net earnings $ 221 $ 262
=========== ===========
Common shares issued and outstanding:
Beginning of period 6,161,449 6,416,896
Shares issued during period 3,000
Shares purchased for treasury (157,700) (10,000)
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End of period 6,003,749 6,409,896
=========== ===========
Average outstanding common shares:
Used for basic net earnings per common share 6,126,653 6,417,789
Effect of dilutive securities -- stock options 14,428 40,561
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Used for diluted net earnings per common share 6,141,081 6,458,350
=========== ===========
Basic and diluted net earnings per common share -- Note H $ 0.04 $ 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>
Three months ended
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9/30/98 9/30/97
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<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 221 $ 262
Items not affecting cash:
Depreciation and amortization 1,705 1,844
Deferred income taxes 11 (17)
Changes in current items (4,642) 1,757
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Cash provided by (used for) operating activities (2,705) 3,846
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INVESTING ACTIVITIES:
Capital expenditures (1,155) (493)
Cash received from sale of business -- notes receivable 75 275
Other -- net (56) 158
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Cash used for investing activities (1,136) (60)
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FINANCING ACTIVITIES:
Payments of long-term obligations (1,093) (2,905)
Additions to long-term obligations 3,729
Issuance of common shares from exercise of employee stock options 64
Purchase of common shares for treasury (1,142) (73)
Dividends paid (246) (256)
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Cash provided by (used for) financing activities 1,248 (3,170)
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CASH:
Increase (decrease) (2,593) 616
Beginning of year 2,916 188
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End of period $ 323 $ 804
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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, 1998
(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, 1998.
B -- INVENTORIES 9/30/98 6/30/98
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Raw materials $ 863 $1,628
Work in process 1,285 1,164
Finished goods 1,482 1,009
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$3,630 $3,801
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C -- PREPAID EXPENSES AND OTHER CURRENT ASSETS 9/30/98 6/30/98
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Factory and production supplies $ 813 $ 761
Pension 792 795
Insurance 291 243
Preoperating costs 152 381
Other 975 1,131
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$3,023 $3,311
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The unamortized portion of preoperating costs totaled $152 and $381 at September
30, 1998 and June 30, 1998, respectively. As discussed in the Company's annual
report on Form 10-K for the year ended June 30, 1998, SOP 98-5, issued by
American Institute of Certified Public Accountants in April 1998, requires
preoperating costs capitalized before January 1, 1999 to be written off at that
time, and any future preoperating costs to be expensed as incurred. Since the
balance of these costs will be fully amortized before that date, the adoption of
this SOP will have no effect on the Company's financial position or results of
operations.
D -- ACCRUED EXPENSES 9/30/98 6/30/98
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Taxes $ 580 $ 944
Insurance 498 499
Rent 228 255
Interest 209 186
Other 467 764
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$1,982 $2,648
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E -- LONG TERM-OBLIGATIONS
The Company has a $6,000 unsecured revolving line of credit with its primary
lender which expires October 2000. At September 30, 1998, the Company had $2,271
available for borrowing under this facility. Effective August 19, 1998,
borrowings under this facility carry interest at the prime rate less 125 basis
points. Also effective August 19, 1998, the Company's variable rate terms loans
carry interest at the Euro dollar rate plus 90 basis points. This represents a
25 basis point reduction from the rate spreads previously in effect.
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 Company's consolidated financial position or
results of operations.
G -- COMMON SHARES IN TREASURY
The Company adopted a stock repurchase plan in January 1996. During the three
months ended September 30, 1998, the Company repurchased 157,700 common shares
in open market transactions for $1,142. As of September 30, 1998, the Company
had repurchased a total of 1,021,800 common shares for $6,912. A total of
1,500,000 shares have been authorized for repurchase under this plan.
H -- NET EARNINGS PER COMMON SHARE
All earnings per share amounts for all periods have been presented and where
necessary, restated to conform to the requirements of Statement of Financial
Accounting Standards (SFAS) Statement Number 128, "Earnings per Share."
I -- COMPREHENSIVE INCOME
As of July 1, 1998, the Company adopted SFAS Statement Number 130, "Reporting
Comprehensive Income." Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholder's
equity. During the three months ended September 30, 1998 and 1997, the Company
had no items qualifying as other comprehensive income. As a result, total
comprehensive income was the same as net income.
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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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Net sales increased by $1,379,000, or 6.7 percent, for the quarter compared with
last year despite the General Motors labor strike, which reduced sales for the
quarter from expected levels by approximately $1,100,000. The strike began
affecting shipments of cam follower rollers to General Motors' Delphi Automotive
Systems unit in late June and volumes did not return to previous levels until
the end of August. Despite the strike, sales of cam follower rollers and axles
in total remained consistent with last year's levels primarily as a result of
increased demand for diesel engine cam follower rollers used in heavy-duty truck
applications. Sales of prototype dies and parts were up 12 percent, and revenues
from testing and tooling development services also increased 12 percent over
last year, reflecting increased prototype, tooling and testing activity at the
Big Three and their Tier One suppliers.
Gross Profit
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Gross profit, as a percentage of sales, declined from 17.6 percent last year to
16.2 percent this year, primarily as a result of the General Motors labor
strike. Production nearly stopped at one plant for six weeks, resulting in
significant costs and inefficiencies as workers were laid off in early July,
then called back beginning in mid-August. Management estimates the strike
reduced gross profit for the quarter by about $600,000, or about 6 cents per
share.
Selling and Administrative (S&A) Expenses
- -----------------------------------------
S&A expenses, as a percentage of sales, declined from 14.0 percent last year to
13.6 percent this year primarily from continuing efforts to control costs.
Interest Expense -- Net
- -----------------------
Interest expense, net of interest income, declined $91,000, or 28.2 percent, for
the quarter compared with last year due to lower average net borrowings at
similar interest rates.
Income Taxes
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The effective income tax rate was 35.8% for the quarter, compared with 36.6%
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."
Trends in Operations
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Sales in fiscal 1999 are still expected to increase modestly as compared with
fiscal 1998, leading to higher earnings in fiscal 1999, barring labor
disruptions and assuming the economy and automotive industry remain stable.
All production personnel of the Company's Defiance Precision Products, Inc.
subsidiary (Precision Products) located in Defiance, Ohio are represented by the
United Auto Workers (UAW). The current contract between Precision Products and
the UAW expires November 12, 1998. A new contract is currently being negotiated,
and the Company does not anticipate any difficulties or work stoppages relative
to the renewal of this contract.
Year 2000
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As discussed in the Company's annual report on Form 10-K for the year ended June
30, 1998, the Company has completed its assessment of Year 2000 implications and
has put an action plan in place with the necessary resources dedicated to
resolution. The Company continues to believe that with
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modifications to existing software, conversions to new software, and in some
cases the purchase of new hardware, the Year 2000 issue will not pose
significant operational problems or materially affect future financial results
or the financial condition of the Company. The Company is continuing to make
inquiries of its critical suppliers regarding their Year 2000 readiness and
follow up these inquiries to ensure, to the best of its ability, that these
suppliers will also be Year 2000 compliant.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash used for operating activities was $2,705,000 for the quarter and working
capital needs were met with borrowings from the revolving line of credit. Cash
used for current items was $4,642,000, primarily due to an increase in accounts
receivable and a decrease in payables and accrued expenses. The $2,889,000
increase in accounts receivable was due to substantially higher sales levels at
the end of the current quarter as compared with the end of the previous fiscal
year. The $1,012,000 decrease in payables and $959,000 decrease in accrued
expenses was due to the payment of incentive bonuses earned in the previous
fiscal year, the payment of taxes and the timing of other routine expenditures
at the end of the current quarter. The current ratio increased to 2.20 to 1 at
the end of the quarter from 1.86 to 1 at the end of the previous fiscal year.
Funded debt increased by $2,636,000 during the quarter. Scheduled payments of
long-term obligations totaled $1,093,000 and borrowings on the revolving line of
credit were $3,729,000. The increase in the revolving line of credit was due
primarily to the increase in working capital items discussed above, combined
with borrowings to fund stock repurchases. The debt to total capitalization
ratio remained at a modest 29 percent at the end of the quarter compared with 25
percent at the end of the prior fiscal year. The balance under the revolving
line of credit declined from $3,729,000 at September 30, 1998 to less than
$2,500,000 by October 15, 1998, and is expected to continue to decline during
the current quarter as accounts receivable as of September 30, 1998 are
collected. As a result, the Company had approximately $3,500,000 additional
borrowing capacity under its revolving line of credit at October 15, 1998.
Capital expenditures for the quarter totaled $1,155,000, and outstanding
commitments for capital expenditures totaled approximately $350,000 at the end
of the quarter. The Company currently estimates it will spend from $5,000,000 to
$6,000,000 in fiscal 1999 for capital expenditures, of which approximately
$1,500,000 to $2,000,000 relate to new or increased sales, with the balance for
asset replacements, cost reduction and productivity improvement programs.
Management expects to fund the 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 157,700 of its common shares in open market transactions
for $1,142,000 during the quarter. 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 revolving line of credit.
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 1998. The Company anticipates future quarterly dividends and does not
expect liquidity or capital resources to be materially affected by the payment
of dividends.
Forward-Looking Statements
- --------------------------
The preceding discussions include 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
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<PAGE> 9
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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -- 27. Financial Data Schedule
(b) 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: October 20, 1998
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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
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 323
<SECURITIES> 0
<RECEIVABLES> 19,568
<ALLOWANCES> 127
<INVENTORY> 3,630
<CURRENT-ASSETS> 27,144
<PP&E> 34,461
<DEPRECIATION> 35,358
<TOTAL-ASSETS> 67,484
<CURRENT-LIABILITIES> 12,314
<BONDS> 15,945
0
0
<COMMON> 351
<OTHER-SE> 38,585
<TOTAL-LIABILITY-AND-EQUITY> 67,484
<SALES> 21,980
<TOTAL-REVENUES> 21,980
<CGS> 18,422
<TOTAL-COSTS> 18,422
<OTHER-EXPENSES> 2,982
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 232
<INCOME-PRETAX> 344
<INCOME-TAX> 123
<INCOME-CONTINUING> 221
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 221
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
