<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, 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
(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, 1998 was 6,063,896.
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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
------
12/31/97 6/30/97
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<S> <C> <C>
CURRENT ASSETS:
Cash $ 269 $ 188
Accounts receivable 15,249 21,492
Inventories -- Note B 3,156 3,055
Deferred income taxes 589 565
Prepaid expenses and other current assets -- Note C 3,619 3,674
---------- ----------
Total current assets 22,882 28,974
PROPERTY, PLANT AND EQUIPMENT -- net 35,780 37,822
COST IN EXCESS OF NET ASSETS OF ACQUIRED COMPANIES 4,745 4,871
OTHER ASSETS 1,287 2,152
---------- ----------
Total assets $ 64,694 $ 73,819
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term obligations $ 4,240 $ 4,829
Accounts payable 3,853 5,880
Accrued payroll and employee benefits 2,460 3,833
Accrued expenses -- Note D 2,375 2,651
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Total current liabilities 12,928 17,193
LONG-TERM OBLIGATIONS -- Note E 11,960 14,968
DEFERRED INCOME TAXES 3,262 3,267
CONTINGENCIES -- Note I
STOCKHOLDERS' EQUITY -- Note F:
Common shares 346 346
Additional paid-in capital 23,438 23,347
Less common shares in treasury -- at cost (5,770) (3,153)
Retained earnings 18,530 17,851
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Total stockholders' equity 36,544 38,391
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Total liabilities and stockholders' equity $ 64,694 $ 73,819
========== ==========
</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 per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
12/31/97 12/31/96 12/31/97 12/31/96
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 21,772 $ 22,794 $ 42,373 $ 44,861
Cost of goods sold 17,680 17,193 34,657 34,822
Selling and administrative expenses 2,355 2,895 5,243 5,770
---------- ---------- ---------- ----------
Operating earnings 1,737 2,706 2,473 4,269
Interest expense -- net 323 414 646 875
---------- ---------- ---------- ----------
Earnings before income tax provision 1,414 2,292 1,827 3,394
Income tax provision 498 783 649 1,175
---------- ---------- ---------- ----------
Net earnings $ 916 $ 1,509 $ 1,178 $ 2,219
========== ========== ========== ==========
Basic and diluted net earnings per share -- Note G $ 0.15 $ 0.23 $ 0.19 $ 0.34
========== ========== ========== ==========
</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>
Six months ended
12/31/97 12/31/96
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<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 1,178 $ 2,219
Items not affecting cash:
Depreciation and amortization 3,722 3,483
Deferred income taxes (70) (112)
Current items:
Change in net assets of business to be sold 3,108
Other current items 2,533 (4,707)
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Cash provided by operating activities 7,363 3,991
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FINANCING ACTIVITIES:
Payments of long-term obligations (3,597) (3,780)
Additions to long-term obligations 3,652
Issuance of common shares from exercise of stock options 92 663
Repurchase of common shares (2,618) (1,370)
Dividends paid (499) (514)
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Cash used for financing activities (6,622) (1,349)
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INVESTING ACTIVITIES:
Capital expenditures (1,098) (2,637)
Notes receivable from sale of business (950)
Payments received on notes receivable from sale of business 275
Other -- net 163 99
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Cash used for investing activities (660) (3,488)
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CASH:
Increase (decrease) 81 (846)
Beginning of period 188 1,240
========== ==========
End of period $ 269 $ 394
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
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DEFIANCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 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, 1997.
B - INVENTORIES
<TABLE>
<CAPTION>
12/31/97 6/30/97
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<S> <C> <C>
Raw materials $ 814 $ 1,264
Work in process 1,253 1,300
Finished goods 1,089 491
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$ 3,156 $ 3,055
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</TABLE>
C - PREPAID EXPENSES AND OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
12/31/97 6/30/97
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<S> <C> <C>
Preoperating costs $ 838 $ 914
Pension 825 854
Factory and production supplies 764 706
Insurance 253 220
Other 939 980
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$ 3,619 $ 3,674
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</TABLE>
D - ACCRUED EXPENSES
<TABLE>
<CAPTION>
12/31/97 6/30/97
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<S> <C> <C>
Taxes $ 751 $ 808
Insurance 533 676
Rent 254 253
Interest 176 169
Other 661 745
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$ 2,375 $ 2,651
========== ==========
</TABLE>
E - LONG TERM OBLIGATIONS
The Company has a $6,000 unsecured revolving line of credit with its primary
lender, which expires October 1999. At December 31, 1997, the Company had $5,489
available for borrowing under this facility.
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F - STOCKHOLDERS' EQUITY
The Company adopted a stock repurchase plan in January 1996. During the six
months ended December 31, 1997 the Company repurchased 360,000 shares in open
market transactions for $2,618. As of December 31, 1997, the Company had
repurchased 864,100 shares for $5,770. 1,500,000 shares have been authorized for
repurchase under this plan.
Also during the six months ended December 31, 1997 a total of 7,000 common
shares were issued pursuant to the exercise of stock options by employees. Total
cash received from these option exercises was $92. A summary of the activity
showing common shares issued and outstanding is as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
12/31/97 12/31/96 12/31/97 12/31/96
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Common shares issued and outstanding:
Beginning of period 6,409,896 6,354,550 6,416,896 6,415,750
Issued during period from exercise of options 4,000 196,629 7,000 196,629
Repurchased during period (350,000) (152,000) (360,000) (213,200)
---------- ---------- ---------- ----------
End of period 6,063,896 6,399,179 6,063,896 6,399,179
========== ========== ========== ==========
</TABLE>
The Company paid dividends of $0.04 per common share in each of the first two
quarters of the current fiscal year and in the prior year. Year to date dividend
payments totaled $499.
G - NET EARNINGS PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share." Statement 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is calculated in a manner that is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented and where
necessary, restated to conform to the requirements of Statement 128.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three months ended Six months ended
12/31/97 12/31/96 12/31/97 12/31/96
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income for basic and dilutive earnings per
share $ 916 $ 1,509 $ 1,178 $ 2,219
========== ========== ========== ==========
Denominator:
Average shares outstanding - used for basic
earnings per share 6,095,744 6,427,254 6,256,766 6,416,131
Effect of dilutive securities:
Employee stock options 48,013 82,129 37,386 129,396
---------- ---------- ---------- ----------
Denominator for diluted earnings per share 6,143,757 6,509,383 6,294,152 6,545,527
========== ========== ========== ==========
Basic earnings per share $ 0.15 $ 0.23 $ 0.19 $ 0.34
Diluted earnings per share $ 0.15 $ 0.23 $ 0.19 $ 0.34
</TABLE>
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H - PREOPERATING COSTS
Preoperating costs of a new manufacturing facility in Upper Sandusky, Ohio, were
deferred prior to the start of production in December 1995. These costs were
primarily for labor, rent, utilities and other similar costs required to prepare
the facility for production. Production at this facility relates to a contract
with Eaton Corporation to provide cam follower rollers and axles which runs
through 2001. These costs are being amortized over a thirty-six month period due
to the long-term (over thirty-six month) nature of the contract being performed
at this facility. The unamortized portion totaled $838 and $1,295 at December
31, 1997 and June 30, 1997, respectively. The current portion is included in
"Prepaid Expenses and Other Current Assets" and the long-term portion is
included in "Other Assets" in the Condensed Consolidated Balance Sheet.
I - 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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<PAGE> 8
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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Prior year sales included $104,000 for the quarter and $1,307,000 for the year
to date from business units sold or closed last year. Sales from ongoing
operations declined $918,000, or 4.0 percent for the quarter and $1,181,000, or
2.7 percent for the year to date. Strong sales in the bearings business of cam
follower rollers (CFRs) and axles helped offset continued slow tooling and
testing sales. Bearings sales were up 12.4 percent for the quarter and 12.1
percent for the year to date over last year, primarily from increased sales of
CFRs and axles to Eaton Corporation for new Chrysler automotive requirements.
Continued delays in the release of new prototype and tooling programs from Ford
and Chrysler reduced tooling revenues for the quarter 28.0 percent and for the
year to date 24.5 percent below year-ago levels. These delays were due to
engineering design changes and delays in new platform projects resulting from
changes in the scope of these projects. Testing revenues also declined 15.6
percent this quarter and 12.3 percent for the year to date due to scaled-back
demand from original equipment manufacturers (OEMs) and their Tier One
suppliers.
Gross Profit
- ------------
Prior year gross profit included $106,000 for the quarter and $192,000 for the
year to date from business units sold or closed last year. Gross profit from
ongoing operations, as a percentage of sales, was 18.8 percent for the quarter
and 18.2 percent for the year to date, compared with 24.2 percent for the
quarter and 22.6 percent for the year to date last year. Margins were lower in
the tooling and testing businesses primarily from lower sales volumes. This was
partially offset by higher margins in the bearings business from increased CFR
and axle production levels and efficiencies at the Upper Sandusky, Ohio
facility.
Selling and Administrative (S&A) Expenses
- -----------------------------------------
S&A expenses were $540,000, or 18.7 percent lower for the quarter and $527,000,
or 9.1 percent lower for the year to date compared with last year, primarily
from lower accruals for profit-based incentive plans and cost control efforts.
Interest Expense -- Net
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Interest expense, net of interest income, was 22.0 percent lower for the quarter
and 26.2 percent lower for the year to date compared with year due to lower
average net borrowings at slightly lower interest rates.
Income Tax Provision
- --------------------
The effective income tax rate was 35.2 percent for the quarter and 35.5 percent
for the year to date, compared with 34.2 percent for the quarter and 34.6
percent for the 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 Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
Outlook
- -------
For the second half of the fiscal year, margins are expected to continue to
improve in the bearings business on continued strong sales. Relative to the
tooling business, Ford and Chrysler are now releasing new prototype programs
which had been delayed during the first half of the year, specifically as
relates to die design, pattern, fixture and cutter path work. Strengthening
demand for testing work from OEMs and their Tier One suppliers is also
anticipated during the second half. Management expects a much stronger second
half and continues to believe fiscal 1998 earnings will exceed those of fiscal
1997.
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.
Although the project has not been completed, the Company believes with
modifications to
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<PAGE> 9
existing software and conversions to new software the Year 2000 issue will not
pose significant operational problems for its computer systems. Management
believes work to address the Year 2000 issue will be completed in a timely
fashion and the cost to complete this work will not be material. Management also
believes the Year 2000 issue will not materially affect future financial results
or cause reported financial information not to be indicative of future operating
results or the future financial condition of the Company.
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 affecting 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 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
- -------------------------------
Cash provided by operating activities for the year to date was $7,363,000, which
met working capital needs. Cash provided by current items was $2,533,000,
comprised primarily of a decrease in accounts receivable, partially offset by a
decrease in accounts payable and accrued expenses. At the end of the quarter the
current ratio was 1.77 to 1 compared with 1.69 to 1 at the end of the prior
fiscal year. Working capital was $9,954,000 at the end of the quarter compared
with $11,781,000 at the end of the prior fiscal year.
Interest-bearing (funded) debt decreased by $3,597,000 for the year to date, the
result of scheduled principal payments of $2,443,000 on term debt and a
$1,154,000 reduction of the revolving line of credit. At the end of the quarter,
the debt to total capitalization ratio (funded debt divided by the sum of funded
debt and stockholders' equity) was 30.7 percent compared with 34.0 percent 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 January 23,
1998.
Capital expenditures for the year to date totaled $1,098,000, and at the end of
the quarter the Company had no significant outstanding commitments for capital
expenditures. Based on currently expected levels of business, the Company now
estimates it will spend approximately $3.5 million in the fiscal year relative
to asset replacements, cost reduction programs and productivity improvement
programs. Additional capital expenditures relative to new or increased sales are
currently estimated at $1 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 360,000 of its common shares in open market transactions
for $2,618,000 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 1997. Dividend payments totaled $499,000 for the year to
date. In addition, a quarterly cash dividend of $0.04 per share was declared
January 23, 1998 and is payable March 5, 1998 to shareholders of record as of
February 13, 1998. 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, 1997, a total of 7,000 common
shares were issued pursuant to the exercise of stock options. Total cash
received from these option exercises was $92,000.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders on October 24, 1997
the following individuals were elected to the Board of Directors:
<TABLE>
<CAPTION>
Votes Votes
Term For Withheld
------------- ---------------- ------------------
<S> <C> <C> <C>
James E. Heighway 3 years 5,199,315 243,172
George H. Lewis III 3 years 5,205,965 236,522
John D. Ong 3 years 5,206,265 236,222
</TABLE>
No other proposals were presented at the Company's Annual Meeting.
ITEM 5. OTHER INFORMATION
On January 23, 1998 the Company's board of directors approved a cash
dividend of $0.04 per common share, payable March 5, 1998 to
shareholders of record as of February 13, 1998.
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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<PAGE> 11
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, 1998
--------------------
<TABLE>
<CAPTION>
<S> <C>
DEFIANCE, INC.
By: /s/ Jerry A. Cooper
---------------------------------------------------------
President and Chief Executive Officer
/s/ Michael J. Meier
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Vice President - Finance and Chief Financial Officer
/s/ James L. Treece
---------------------------------------------------------
Chief Accounting Officer
</TABLE>
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 269
<SECURITIES> 0
<RECEIVABLES> 15,249
<ALLOWANCES> 202
<INVENTORY> 3,156
<CURRENT-ASSETS> 22,882
<PP&E> 69,297
<DEPRECIATION> 33,517
<TOTAL-ASSETS> 64,694
<CURRENT-LIABILITIES> 12,928
<BONDS> 16,200
0
0
<COMMON> 346
<OTHER-SE> 36,198
<TOTAL-LIABILITY-AND-EQUITY> 64,694
<SALES> 42,373
<TOTAL-REVENUES> 42,373
<CGS> 34,657
<TOTAL-COSTS> 34,657
<OTHER-EXPENSES> 5,243
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 646
<INCOME-PRETAX> 1,827
<INCOME-TAX> 649
<INCOME-CONTINUING> 1,178
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,178
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
