Defiance, Inc.

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Defiance, Inc.

1111 Chester Ave., Suite 750
Cleveland, Ohio 44114
U.S.A.
(216) 861-6300
Fax: (216) 861-6006

Public Company
Founded: 1905 as Defiance Screw Machine Products
Employees: 729
Sales: $92.1 million (1997)
Stock Exchanges: NASDAQ
SICs: 3542 Machine Tools, Metal Forming Types; 3544 Special Dies & Tools; 3462 Iron & Steel Forgings; 8711 Engineering Services; 6719 Holding Companies, Not Elsewhere Classified

With approximately half of its annual sales to automakers General Motors Corporation, Ford Motor Company, and Chrysler Corporation (the “Big Three”), Defiance, Inc. is carefully attuned to the latest trends in the automotive industry. In the 1990s the major domestic automakers began to insist that their suppliers have broad capabilities, thus allowing the automakers to source more work to fewer suppliers. In order to expand its capabilities and compete with other major automotive suppliers, Defiance transformed itself from being primarily a supplier of precision parts to one that could also offer engineering and testing services as well as prototype and production tooling.

Company Roots

In August 1985 the present Defiance, Inc. was incorporated in Delaware as a holding company for Defiance Precision Products, Inc. The company’s primary business was manufacturing cam follower rollers (CFRs) for truck and automobile engines. It also produced other hardened and ground components for diesel engines. CFRs are miniature roller bearings that connect push rods to valve rocker arms. They were first used primarily in diesel engines to more efficiently move the rocker arms. As pressure grew on the automotive industry to improve fuel efficiency, CFRs became more widely used in gasoline engines as well.

Prior to incorporating in 1985, Defiance Precision Products was a private company that was established following a leveraged buyout of the CFR division of Spartech Corporation in 1981. That CFR division could trace its roots to Defiance Screw Machine Products, which was founded in Defiance, Ohio, in 1905. The company first became involved in the cam roller business in the early 1980s, when General Motors commissioned it to design a miniature roller bearing to reduce valve train friction in diesel car engines. The specialized bearings, known as cam follower rollers (CFRs), became the company’s main product. Demand grew as General Motors began using them in gasoline engines as well as diesels.

Defiance Precision Products launched an initial public offering (IPO) of 750,000 shares on October 17, 1985, at $6 per share. The trading price of the stock rose quickly, and the company decided to make a secondary offering of $1.5 million shares on March 18, 1986, at $10.50 per share. Proceeds from the secondary offering were used for future acquisitions.

Embarked on Acquisitions Program, 1986-87

In December 1986 Defiance acquired SMTC Corporation with offices in Troy, Warren, and Westland, Michigan. It was conveniently located near the major automakers in southeastern Michigan, near Detroit. SMTC, later renamed Defiance Testing and Engineering Services, Inc., provided a full range of testing and simulation services of structural and mechanical systems, primarily for the U.S. transportation industry.

In January 1987 Defiance acquired four related companies: Hy-Form Products, Inc., Vaungarde, Inc., Binderline Development, Inc., and Draftline Engineering Co., in exchange for approximately 190,000 shares of common stock and $8,000 in cash. Hy-Form, Binderline, and Draftline were all located in the metropolitan Detroit area and provided prototype and production tooling systems to Detroit’s Big Three automakers (Ford, General Motors, and Chrysler). They formed the core of what would become Defiance Tooling Systems in the 1990s. Vaungarde, located in Owosso, Michigan, specialized in molding plastic parts using reaction injection molding (RIM) processes; it also was involved in painting plastic parts. Vaungarde served the automotive, heavy truck, agricultural, and recreational vehicle industries. Vaungarde was sold in 1996 when Defiance decided to refocus on its core capabilities.

Debt from Acquisitions Affects Bottom Line

Following that series of acquisitions, Defiance struggled financially for the next several years. In February 1987 it formed a short-lived subsidiary, Prime-Coat Technology, which was sold in April 1988. In fiscal year 1987 (ending June 30) the company reported a net loss of $3.0 million. The loss reflected a loss on operations, with the cost of goods sold, relocation charges, and general expenses exceeding net sales. On top of an operating loss of $1.8 million, the company also had to pay $1.7 million in interest expense.

While operations turned a profit of $603,000 in 1988, the company was saddled with $3.4 million in interest expense associated with its 1987 acquisitions. It reported a net loss of $4.7 million, the largest in its history. The company’s losses in 1987 and 1988 were explained as due to the rapid expansion of the company through acquisitions.

Although the company showed a profit of $2.6 million in 1989, it struggled until 1992, when a new president and CEO was brought in. From 1986 through 1990, the company’s stock price dropped from a high of $12.25 in 1986 to as low as $.37 in 1990.

On July 27, 1989, the company changed its name to Defiance, Inc. It began to separate services from products and include both as part of sales, reflecting the growing importance of its engineering testing and services subsidiary. Services had become a significant source of revenue. For 1990, Defiance reported overall net sales of $60.1 million, with $45.4 million in revenue from product sales and $14.7 million from services. Net earnings were only $176,000, with interest expense continuing to erode the company’s operating earnings.

New CEO and President, 1992

After the company reported another net loss in 1991 of $940,000, Jerry A. Cooper was recruited to replace J. W. Gillis as president and CEO. Prior to joining Defiance, Cooper had been president and CEO of Bettcher Manufacturing Corporation, a metal forming company, since 1990. From 1977 to 1990 he was president and general manager of Mather Seal Company, a subsidiary of Federal-Mogul Corporation. Located in Milan, Michigan, Mather manufactured Teflon seals and other specialty products.

Perceiving that the trend among the Big Three was toward fewer and larger suppliers, Cooper reorganized five of Defiance’s Detroit-area subsidiaries into the Defiance Group in 1992. These subsidiaries provided prototype and hard tooling systems to Detroit’s automakers. The five subsidiaries forming the new Defiance Group were Defiance SMC (Troy-based), Binderline Development (St. Clair Shores), Draftline Engineering Co. (St. Clair Shores), Defiance STS (Westland), and Hy-Form Products (Livonia).

The new group was headed by Joel Bussell, who was recruited from Dana Corporation in September 1992. By grouping the five subsidiaries, which had been marketing their technical capabilities separately, Defiance hoped to position its Detroit-area-based engineering companies as a single source for designing vehicles, parts, and systems from concept to prototype. The individual companies could still separately pursue contracts that would only provide business to one company. Joint marketing capabilities, however, gave Defiance the ability to pursue contracts to engineer automotive systems and even whole vehicles. The five subsidiaries mainly engineered large structural components for automobiles, such as roofs, hoods, doors, and seats, as well as the tooling for those components.

Defiance Tooling Systems Organized in 1993

A further reorganization of the Defiance Group took place in 1993, when Hy-Form was combined with Binderline and Draft-line to form Defiance Tooling Systems, Inc. In 1994 a fourth tooling operation was added when Defiance Tooling Systems leased the equipment of the former Distel Tool & Machine Co. in Warren, Michigan, and renamed it Hy-Form Products Plant Two. The equipment at the former Distel Tool & Machine Co. in Warren was leased to give Defiance Tooling Systems the capability to make hard production dies in addition to the softer prototype dies. As reported in Crain’s Detroit Business, “Stephen Nash, president of Defiance Tooling Systems in Livonia, could see automotive tooling business gravitating to full-service suppliers.”

Company Perspectives:

Defiance, Inc. is recognized as a world-class supplier to the U.S. motor vehicle industry. We specialize in highly engineered products and services where we add value by developing imaginative solutions to our customers’ challenges. Our three core businesses are: 1) Tooling Systems. Defiance Tooling Systems is a leading supplier of the full range of sheet metal product development services, including prototype and production tooling. We help U.S. auto manufacturers bring new models to market in shorter times with higher quality. 2) Testing Services. Defiance Testing & Engineering Services is a leading provider of sophisticated engineering, testing, simulation and validation services to U.S. automakers and their suppliers. We help bring quieter, safer, smoother-running vehicles to market in the shortest amount of time. 3) Precision Products. Defiance Precision Products is a major supplier of cam follower rollers, roller axles and other specialty anti-friction bearings and precision-machined components. Our products improve the efficiency and performance of gas and diesel engines.

After leasing the hard production equipment, Defiance won its biggest contract to date in August 1994: a $9.5 million assignment to produce prototype and production dies for parts on the 1997 replacement for the Chevrolet Corsica and Beretta. With this contract, Defiance Tooling Systems became one of Detroit’s newest full-service die suppliers. As Nash told Crain’s Detroit Business, ’ The GM job definitely puts us in the same league with anybody else in Detroit.”

Nash came to Defiance as head of Hy-Form Products in 1992. The operation had lost money in the previous two years and was facing an uncertain future. Nash was able to turn things around and motivate the company’s 80-plus workers to improve profits and efficiency. One technique he used was to call weekly meetings where employees were given the latest financial figures and allowed to air their concerns. The meetings continued on a monthly basis after the division became profitable. In addition, an annual bonus plan was introduced that tied employee bonuses to companywide financial performance.

Nash also allowed the employees to form committees to look into possible improvements and make recommendations. In 1993 Hy-Form workers identified the need for an in-house computer-design facility to provide added customer convenience and eliminate the cost of subcontracting design work. An ad-hoc employee committee researched the available technology and estimated costs, then made a presentation to parent company Defiance, Inc.’s CEO Jerry Cooper, who gave tentative approval on the spot.

Nash was able to lease the equipment and building formerly occupied by Distel Tooling, one of Detroit’s oldest and most recognized die-makers, after the shop closed in 1992. After hiring Distel Tool’s former plant manager, Sanzio Piacentini, who had 42 years experience in tooling, Defiance Tooling reopened the shop as Hy-Form Plant Two in January 1994. Defiance planned to use the facility for the group’s first major production-die job for a General Motors light truck to be manufactured in Indonesia. With the addition of the new Chevrolet work, employment at the plant was increased to 23 employees.

With approximately 200 employees in Defiance Tooling overall, it was well-positioned to take advantage of the Big Three’s new policy of favoring full-service suppliers. For fiscal 1994 (ending June 30), tooling systems accounted for approximately 25 percent of Defiance, Inc.’s $81.6 million in sales. The company’s remaining sales were divided among Defiance Testing and Engineering Services (approximately 25 percent), Defiance Precision Products (approximately 40 percent), and Vaungarde (10 percent).

New Banking Agreement Reflected Improved Financial Condition, 1994

After reporting net earnings of $909,000 on sales of $69.6 million in 1992, Defiance began to enjoy substantial profitability as the economy became more robust and the automotive industry thrived. In 1993 sales grew to $79.2 million, and net earnings were a respectable $3.4 million. The next year sales were up slightly to $81.6 million, but net earnings increased dramatically to $6 million, Between 1992 and 1994 the company had increased its operating profits from $3.6 million to $9.4 million. During that period services grew from 21 percent of total sales to 27 percent.

In July 1994 Defiance renegotiated its banking arrangements with Comerica Bank, its primary lender, reflecting the company’s improved financial condition. Its term loan, revolving credit borrowings, and Industrial Revenue Bonds were no longer secured. The company was also no longer restricted from paying dividends, and it began to pay a quarterly dividend to shareholders. The bank’s consent would still be required for the company to repurchase its stock or pledge any of its assets.

1995: Company’s Most Profitable Year

The year 1995 got off to a great start, with Defiance reporting a 50 percent increase in net sales for the first quarter (ending September 30), excluding a gain from an accounting change. Net income for the first quarter was $1.5 million, up from $1 million for the same period of the prior year. For the year Defiance reported net sales of $92.5 million, up from $81.6 million in 1994, and net earnings of $6.6 million, up from $6.0 million in 1994. It was the best financial performance in the company’s history. Between 1990 and 1994, the company’s stock price rose from a range of $.37 to over $10 in 1994.

The year 1996 was a challenging one for the company, which opened a new roller plant but was hampered by customer delays on a major new CFR contract. Net sales were a record $104 million, but net earnings dropped to $1.6 million, their lowest level since Cooper joined Defiance in 1992. Higher costs associated with manufacturing precision products resulted in earnings from operations for 1996 of only $5.6 million, down from $11.2 million in 1995.

Net sales for 1997 declined by $11.9 million to $92.1 million. However, net earnings rose to a respectable $4.3 million. During the year Defiance stopped all hard tooling operations in May 1996, and the Vaungarde business was sold in August 1996. Management thought the sale of Vaungarde, which manufactured plastic moldings, would help Defiance better focus on its core operating capabilities. Vaungarde had reported an operating loss for the previous three years, losing $240,000 in 1995 and $834,000 in 1996. Defiance received a total of $3.8 million for its Vaungarde stock.

During 1997 the company’s precision products division increased its sales as a percentage of the company’s overall sales to 49 percent, up from 35 percent in 1996. Defiance Precision Products made specialty anti-friction bearings and precision-machined components. Its principal product was the cam follower roller (CFR). In 1997 Defiance claimed to hold a 40 percent market share of the domestic gasoline engine market for CFRs and was the dominant supplier of CFRs for the diesel engine market.

Management identified several growth opportunities for its precision products subsidiary. These included working with medium-duty truck makers in North America and car and truck makers in Europe to incorporate CFRs into their engines. The company was also actively working to supply CFRs for overhead cam engines at Chrysler, Ford, and General Motors. While CFRs work equally well on overhead cam engines, they were used primarily in push-rod engines, which are commonly found on vans, light trucks, sport-utility vehicles, and larger cars. Defiance Precision Products also had plans to move beyond its role as a component manufacturer and become a supplier of a preassembled valve-train subsystem that would include a roller, axle, and rocker arm. Management was also seeking to find new applications for its bearings and engine components to utilize its capabilities in precision machining, grinding, heat treating, assembly, and medium- to high-volume production.

Defiance Tooling Systems accounted for approximately 22 percent of the company’s sales in 1997. During the year it handled its most complex program to date, a production tooling project for a new Ford van that involved delivering 35 different parts on the same date. During the year the company added to its production capacity by purchasing two new five-axis laser coordinate measurement machines (CMM) and another computer-numeric-controlled (CNC) milling machine.

Defiance Testing and Engineering accounted for approximately 28 percent of the company’s sales in 1997, up from 23 percent in 1995. During the year it formed a joint venture with MIRA, one of the world’s leading independent automotive research and development organizations. Based in England with additional operations in Asia and North America, MIRA could provide full-vehicle development and system integration to complement Defiance Testing and Engineering’s expertise in noise, vibration, and harshness (NVH) testing and analysis. Management felt the need to expand its testing and engineering services capabilities, because automobile manufacturers were outsourcing more testing and requiring suppliers to engineer more of their own products and test them themselves. That is, while the original equipment manufacturers (OEMs) wanted more testing, they did not want to do it themselves, thus creating more business opportunities for Defiance.

Principal Subsidiaries

Defiance Precision Products, Inc.; Hy-Form Products, Inc.; Defiance Testing and Engineering Services, Inc.; Binderline Development, Inc.; Draftline Engineering Company.