<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 MARCH 31, 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
----------------------
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, 1998 was 6,099,381.
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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
------
3/31/98 6/30/97
-------------- ---------------
<S> <C> <C>
CURRENT ASSETS:
Cash $1,702 $188
Accounts receivable 16,637 21,492
Inventories -- Note B 3,914 3,055
Deferred income taxes 607 565
Prepaid expenses and other current assets -- Note C 3,278 3,674
-------------- ---------------
Total current assets 26,138 28,974
PROPERTY, PLANT AND EQUIPMENT -- net 34,703 37,822
COST IN EXCESS OF NET ASSETS OF ACQUIRED COMPANIES 4,682 4,871
OTHER ASSETS 1,314 2,152
============== ===============
Total assets $66,837 $73,819
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term obligations $3,778 $4,829
Accounts payable 4,811 5,880
Accrued payroll and employee benefits 3,452 3,833
Accrued expenses -- Note D 2,800 2,651
-------------- ---------------
Total current liabilities 14,841 17,193
LONG-TERM OBLIGATIONS -- Note E 10,718 14,968
DEFERRED INCOME TAXES 3,287 3,267
CONTINGENCIES -- Note F
STOCKHOLDERS' EQUITY -- Note G:
Common shares 347 346
Additional paid-in capital 23,499 23,347
Less common shares in treasury -- at cost (5,771) (3,153)
Retained earnings 19,916 17,851
-------------- ---------------
Total stockholders' equity 37,991 38,391
============== ===============
Total liabilities and stockholders' equity $66,837 $73,819
============== ===============
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 3
DEFIANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(All amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
3/31/98 3/31/97 3/31/98 3/31/97
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net sales $23,236 $22,314 $65,609 $67,175
Cost of goods sold 17,749 17,812 52,406 52,634
Selling and administrative expenses 2,697 2,388 7,940 8,158
Other charges -- Note H 632 632
--------------- -------------- -------------- ---------------
Operating earnings 2,790 1,482 5,263 5,751
Interest expense -- net 277 394 923 1,269
--------------- -------------- -------------- ---------------
Earnings before income tax provision 2,513 1,088 4,340 4,482
Income tax provision 884 335 1,533 1,510
--------------- -------------- -------------- ---------------
Net earnings $1,629 $753 $2,807 $2,972
=============== ============== ============== ===============
Basic and diluted net earnings per share -- Note I $0.26 $0.12 $0.45 $0.46
=============== ============== ============== ===============
</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>
Nine months ended
3/31/98 3/31/97
-------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $2,807 $2,972
Items not affecting cash:
Depreciation and amortization 5,584 5,346
Deferred income taxes (82) (314)
Current items:
Change in net assets of business to be sold 3,108
Other current items 2,891 (4,655)
-------------- ---------------
Cash provided by operating activities 11,200 6,457
-------------- ---------------
FINANCING ACTIVITIES:
Payments of long-term obligations (5,301) (4,421)
Additions to long-term obligations 2,574
Issuance of common shares from exercise of stock options 154 1,043
Repurchase of common shares (2,618) (2,001)
Dividends paid (742) (772)
-------------- ---------------
Cash used for financing activities (8,507) (3,577)
-------------- ---------------
INVESTING ACTIVITIES:
Capital expenditures (1,591) (3,141)
Notes receivable from sale of business (950)
Payments received on notes receivable from sale of business 275
Other -- net 137 96
-------------- ---------------
Cash used for investing activities (1,179) (3,995)
-------------- ---------------
CASH:
Increase (decrease) 1,514 (1,115)
Beginning of period 188 1,240
============== ===============
End of period $1,702 $125
============== ===============
</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, 1998
(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>
3/31/98 6/30/97
-------------- --------------
<S> <C> <C>
Raw materials $1,400 $1,264
Work in process 1,620 1,300
Finished goods 894 491
============== ==============
$3,914 $3,055
============== ==============
</TABLE>
C -- PREPAID EXPENSES AND OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
3/31/98 6/30/97
-------------- --------------
<S> <C> <C>
Preoperating costs $609 $914
Pension 810 854
Factory and production supplies 633 706
Insurance 156 220
Other 1,070 980
============== ==============
$3,278 $3,674
============== ==============
</TABLE>
D -- ACCRUED EXPENSES
<TABLE>
<CAPTION>
3/31/98 6/30/97
-------------- --------------
<S> <C> <C>
Taxes $1,115 $808
Insurance 445 676
Rent 254 253
Interest 179 169
Other 807 745
============== ==============
$2,800 $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 March 31, 1998 the Company had all $6,000
available for borrowing under this facility.
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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.
G -- STOCKHOLDERS' EQUITY
The Company adopted a stock repurchase plan in January 1996. During the nine
months ended March 31, 1998 the Company repurchased 360,000 shares in open
market transactions for $2,618. As of March 31, 1998 the Company had repurchased
864,100 shares for $5,770. A total of 1,500,000 shares have been authorized for
repurchase under this plan.
Also during the nine months ended March 31, 1998 a total of 16,637 common shares
were issued pursuant to the exercise of stock options by employees. Total cash
received from these option exercises was $154. A summary of the activity showing
common shares issued and outstanding is as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
3/31/98 3/31/97 3/31/98 3/31/97
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Common shares issued and outstanding:
Beginning of period 6,063,896 6,399,179 6,416,896 6,415,750
Issued during period from exercise of options 9,637 141,917 16,637 338,546
Repurchased during period (93,500) (360,000) (306,700)
--------------- -------------- -------------- ---------------
End of period 6,073,533 6,447,596 6,073,533 6,447,596
=============== ============== ============== ===============
</TABLE>
The Company paid dividends of $0.04 per common share in each of the first three
quarters of the current fiscal year and in the prior year. Year to date dividend
payments totaled $742.
H -- OTHER CHARGES
The Company terminated a previously curtailed defined-benefit pension plan at
one of its subsidiaries during 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 of Benefits," a one-time charge of $632 was made in the quarter
ended March 31, 1997 when the plan was terminated and all obligations were
settled.
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<PAGE> 7
I -- 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 Nine months ended
3/31/98 3/31/97 3/31/98 3/31/97
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Numerator:
Net income for basic and dilutive earnings per
share $1,629 $753 $2,807 $2,972
=============== ============== ============== ===============
Denominator:
Average shares outstanding - used for basic
earnings per share 6,066,038 6,437,900 6,194,118 6,423,282
Effect of dilutive securities:
Employee stock options 52,650 19,366 42,399 93,255
--------------- -------------- -------------- ---------------
Denominator for diluted earnings per share 6,118,688 6,457,266 6,236,517 6,516,537
=============== ============== ============== ===============
Basic earnings per share $0.26 $0.12 $0.45 $0.46
Diluted earnings per share $0.26 $0.12 $0.45 $0.46
</TABLE>
J -- 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 $609 and $1,295 at March 31,
1998 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.
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<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Net Sales
- ---------
Prior year sales included $1,307,000 for the year to date from business units
sold or closed during the first half last year. Sales from ongoing operations
were up $922,000, or 4.1 percent, for the quarter and were down $259,000, or 0.4
percent, for the year to date. Strong sales in the bearings business combined
with improved demand for tooling helped offset continued weakness in testing for
the quarter. Bearings sales were up 22.0 percent for the quarter and 15.4
percent for the year to date primarily from increased sales of cam follower
rollers and axles to Eaton Corporation for their Chrysler automotive
requirements. Sales of diesel engine rollers and axles were also up, reflective
of the overall heavy-duty truck market. Tooling revenues were up 0.8 percent for
the quarter as a result of new work started in the second fiscal quarter for
Ford. However, they were down 15.5 percent for the year to date as a result of
delays in the release of new prototype and tooling programs from both Ford and
Chrysler during the first half this year. 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 were down 23.7 the quarter and 16.1
percent for the year to date due to continued scaled-back demand from automotive
original equipment manufacturers (OEMs) and Tier One suppliers.
Gross Profit
- ------------
Prior year gross profit included $192,000 for the year to date from business
units sold or closed during the first half last year. Gross profit for the
quarter from ongoing operations, as a percentage of sales, was 23.6 percent,
compared with 20.2 percent in the prior year. Strong growth in bearings sales,
supported by continued increases in production levels and efficiencies at the
Upper Sandusky, Ohio, facility, contributed to substantially improved margins in
the bearings business. Tooling margins also improved slightly for the quarter,
though testing margins remained behind last year due to soft demand. Gross
profit for the year to date from ongoing operations, as a percentage of sales,
was 20.1 percent, compared with 21.8 percent in the prior year, largely due to
delays in the release of automotive tooling and prototype programs in the first
half of the fiscal year and soft demand for testing work.
Selling and Administrative (S&A) Expenses
- -----------------------------------------
S&A expenses were $309,000, or 12.9 percent, higher for the quarter due to the
timing of expenditures as compared with the prior year, and remained $218,000,
or 2.7 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
- -----------------------
Interest expense, net of interest income, was 29.7 percent lower for the quarter
and 27.3 percent lower for the year to date compared with last 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 35.3 percent
for the year to date, compared with 30.8 percent for the quarter and 33.7
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 last quarter of the fiscal year, sales and margins in the bearings
business should remain well ahead of last year. Management also anticipates
continued new prototype and tooling programs at normal levels, though demand for
testing
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<PAGE> 9
could remain sluggish. Based on these current expectations, management continues
to anticipate fiscal 1998 earnings in excess of fiscal 1997 levels.
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 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 $11,200,000,
which met working capital needs. Cash provided by current items was $2,891,000,
comprised primarily of a substantial decrease in accounts receivable, partially
offset by a decrease in accounts payable and an increase in inventories. At the
end of the quarter the current ratio was 1.76 to 1 compared with 1.69 to 1 at
the end of the prior fiscal year. Working capital was $11,297,000 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 $5,301,000 for the year to date, the
result of scheduled principal payments of $3,636,000 on term debt and a
$1,665,000 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 27.6 percent compared with 34.0 percent at
the end of the prior fiscal year. At March 31, 1998, the Company had all
$6,000,000 available in additional borrowing capacity under its revolving credit
facility along with $1,702,000 in cash.
Capital expenditures for the year to date totaled $1,591,000, 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 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 less than $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.
In August 1996, the Company sold its Vaungarde, Incorporated subsidiary. The
Company extended a $950,000 note to the purchaser as part of the transaction.
All scheduled payments have been received to date. These payments, totaling
$275,000, have all been received during the current fiscal year.
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.
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<PAGE> 10
During the nine months ended March 31, 1998, a total of 16,637 common shares
were issued pursuant to the exercise of stock options. Total cash received from
these option exercises was $154,000.
Quarterly cash dividends of $0.04 per share were paid to shareholders in
September and December 1997 and March 1998. Dividend payments totaled $742,000
for the year to date. In addition, a quarterly cash dividend of $0.04 per share
was declared April 24, 1998 and is payable June 5, 1998 to shareholders of
record as of May 15, 1998. The Company anticipates future quarterly dividends,
and does not expect liquidity or capital resources to be materially affected by
the payment of dividends.
ITEM 5. OTHER INFORMATION
On April 24, 1998 the Company's board of directors approved a cash
dividend of $0.04 per common share, payable June 5, 1998 to
shareholders of record as of May 15, 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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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 28, 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
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,702
<SECURITIES> 0
<RECEIVABLES> 16,637
<ALLOWANCES> 236
<INVENTORY> 3,914
<CURRENT-ASSETS> 26,138
<PP&E> 69,407
<DEPRECIATION> 34,704
<TOTAL-ASSETS> 66,837
<CURRENT-LIABILITIES> 14,841
<BONDS> 10,718
0
0
<COMMON> 347
<OTHER-SE> 37,644
<TOTAL-LIABILITY-AND-EQUITY> 66,837
<SALES> 65,609
<TOTAL-REVENUES> 65,609
<CGS> 52,406
<TOTAL-COSTS> 52,406
<OTHER-EXPENSES> 7,940
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 923
<INCOME-PRETAX> 4,340
<INCOME-TAX> 1,533
<INCOME-CONTINUING> 2,807
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,807
<EPS-PRIMARY> .45
<EPS-DILUTED> .45
</TABLE>
