1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended: JULY 28, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________to_______________
Commission file number: 0-19330
SPECIAL DEVICES, INCORPORATED
(Exact name of Registrant as specified in its charter)
DELAWARE 95-3008754
- ---------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16830 W. PLACERITA CANYON ROAD, NEWHALL, CALIFORNIA 91321
(Address of principal executive offices)
(805) 259-0753
(Registrant's telephone number, including area code)
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. X YES _____ NO
At September 10, 1996, the total number of outstanding shares of registrant's
common stock was 7,667,604.
2
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
October 31, July 28,
1995 1996
----------- -------------
(Unaudited)
Current assets:
Cash and equivalents $ 12,628,185 $ 12,827,039
Accounts receivable, net of allowance of
$216,604 at October 31, 1995 and $209,715 at
July 28, 1996 for doubtful accounts 12,562,082 12,290,970
Inventories 17,239,608 19,134,139
Prepaid expenses 299,506 536,442
Deferred income taxes 591,000 551,000
----------- -----------
Total current assets 43,320,381 45,339,590
---------- ----------
Property, plant and equipment, at cost:
Land 1,559,827 1,611,331
Buildings 4,941,897 7,552,408
Machinery and equipment 28,646,606 31,447,907
Furniture and fixtures 1,778,829 2,011,992
Transportation equipment 3,008,482 3,045,239
Leasehold improvements 2,124,280 2,247,905
Construction in progress 5,050,924 4,829,213
---------- -----------
47,110,845 52,745,995
Less accumulated depreciation 12,195,400 16,207,176
---------- ----------
34,915,445 36,538,819
---------- ----------
Other assets 385,050 103,465
----------- --------------
$ 78,620,876 $ 81,981,874
========== ==========
See accompanying notes to condensed consolidated financial statements.
- 2 -
3
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
October 31, July 28,
1995 1996
----------- ------------
(Unaudited)
Current liabilities:
Current portion of long-term debt $1,864,710 $1,838,569
Trade accounts payable 4,314,767 3,541,192
Accounts payable to related parties 1,573,660 1,431,561
Accrued payroll and benefits 1,721,332 1,556,538
Accrued expenses 548,862 523,395
Income taxes 127,101 278,571
---------- -----------
Total current liabilities 10,150,432 9,169,826
Long-term debt, less current portion 4,026,574 3,100,152
Deferred income taxes 2,390,000 2,505,000
---------- -----------
Total liabilities 16,567,006 14,774,978
---------- ----------
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $.01 par value. Authorized
2,000,000 shares; no shares issued or outstanding - -
Common stock, $.01 par value. Authorized
20,000,000 shares; issued and outstanding
7,655,076 shares at October 31, 1995, and
7,667,271 shares at July 28, 1996
76,551 76,772
Additional paid-in capital 49,711,881 49,830,894
Retained earnings 12,265,438 17,299,230
---------- ----------
Total stockholders' equity 62,053,870 67,206,896
---------- ----------
$ 78,620,876 $ 81,981,874
========== ==========
See accompanying notes to condensed consolidated financial statements.
- 3 -
4
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
Three months ended Nine months ended
--------------------------- ---------------------------
July 30, July 28, July 30, July 28,
1995 1996 1995 1996
------------ ------------- ------------ -------------
Net sales $28,973,464 $25,631,032 $76,218,853 $72,394,385
Cost of sales 23,774,143 20,393,517 62,709,043 58,695,232
----------- ----------- ----------- -----------
Gross profit 5,199,321 5,237,515 13,509,810 13,699,153
----------- ----------- ----------- -----------
Operating expenses 2,153,726 1,746,358 5,432,168 5,576,409
----------- ----------- ----------- -----------
Operating income 3,045,595 3,491,157 8,077,642 8,122,744
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (134,736) (89,177) (859,471) (284,965)
Interest income 227,131 112,901 227,131 348,942
Other, net 10,395 9,460 5,675 18,071
----------- ----------- ----------- -----------
Net other income (expense) 102,790 33,184 (626,665) 82,048
----------- ----------- ----------- -----------
Income before income taxes 3,148,835 3,524,341 7,414,977 8,204,792
Income taxes 1,259,000 1,376,000 2,966,000 3,171,000
----------- ----------- ----------- -----------
Net income $ 1,889,385 $ 2,148,341 $ 4,448,977 $ 5,033,792
=========== =========== =========== ===========
Net income per share $.25 $.28 * $.69 $.65
=========== =========== =========== ===========
Weighted average common shares
and common equivalents outstanding 7,628,969 7,768,848 *6,441,468 7,757,154
=========== =========== =========== ===========
* Amounts have been restated to reflect properly the sale of 1,770,000 shares
of Common Stock effective May 1, 1995.
See accompanying notes to condensed consolidated financial statements.
- 4 -
5
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - UNAUDITED
FOR THE NINE MONTHS ENDED JULY 28, 1996
Additional Total
Common paid-in Retained Stockholders'
Stock Capital Earnings Equity
-------- ---------- ----------- -------------
Balance at October 31, 1995 $76,551 $49,711,881 $12,265,438 $62,053,870
Issuance of common stock on
exercise of stock options 221 119,013 - 119,234
Net income (unaudited) - - 5,033,792 5,033,792
------- ----------- ----------- -----------
Balance at July 28, 1996 $76,772 $49,830,894 $17,299,230 $67,206,896
======= =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
- 5 -
6
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Nine months ended
----------------------------
July 30, July 28,
1995 1996
------------ -----------
Cash flows from operating activities:
Net income $ 4,448,977 $ 5,033,792
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 3,140,447 4,011,776
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (6,455,614) 271,112
(Increase) in inventories (1,155,442) (1,894,531)
Decrease (increase) in prepaid expenses 98,448 (236,935)
(Increase) decrease in deferred taxes (49,000) 40,000
Decrease in other assets 47,307 281,585
(Decrease) in accounts payable,
accounts payable to related parties and other
accrued expenses (722,429) (1,105,938)
Increase in income taxes payable 873,000 266,470
------------ -----------
Net cash provided by operating activities 225,694 6,667,331
------------ -----------
Cash flows from investing activities:
Purchases of property, plant and equipment (10,363,618) (5,635,148)
------------ -----------
Net cash (used in) investing activities (10,363,618) (5,635,148)
------------ -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 29,691,341 119,234
Proceeds from issuance of long-term debt 6,220,521 -
Payments of long-term debt (904,389) (952,563)
Net advance (repayment) of notes payable to bank (13,560,000) -
------------ -----------
Net cash provided by (used in) financing activities 21,447,473 (833,329)
------------ -----------
Net increase in cash 11,309,549 198,854
Cash at beginning of period 481,135 12,628,185
------------ -----------
Cash at end of period $ 11,790,684 $12,827,039
============ ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 863,452 $ 75,502
Income taxes 2,410,500 1,940,000
============ ===========
See accompanying notes to condensed consolidated financial statements.
- 6 -
7
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 28, 1996
(UNAUDITED)
(1) INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of
Special Devices, Incorporated, a Delaware corporation, include all adjustments
(consisting of normal recurring entries) which management believes are necessary
for a fair presentation of the financial position and results of operations for
the periods presented. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is recommended that
the accompanying financial statements be read in conjunction with the Company's
audited financial statements and footnotes as of and for the year ended October
31, 1995. Operating results for the nine month period ended July 28, 1996 are
not necessarily indicative of the operating results for the full fiscal year.
(2) ACCOUNTS RECEIVABLE
Accounts receivable from long-term contracts are as follows:
October 31, July 28,
1995 1996
----------- ------------
U.S. Government $ 374,305 $ 17,769
U.S. Government Subcontractors 4,579,129 5,823,107
Commercial Customers 7,825,252 6,659,809
----------- -----------
12,778,686 12,500,685
Less allowance for doubtful accounts 216,604 209,715
----------- -----------
Total $12,562,082 $12,290,970
=========== ===========
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8
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 28, 1996
(Unaudited)
(3) INVENTORIES
Inventories and inventoried costs relating to long-term contracts are
classified as follows:
October 31, July 28,
1995 1996
----------- ------------
Raw materials and components $ 4,998,400 $ 5,044,332
Work in process 5,766,087 10,015,803
Finished goods 1,103,141 538,923
Inventoried costs relating to
long term contracts, net of
amounts attributed to revenues
recognized to date 5,568,687 3,755,203
---------- ----------
17,436,315 19,354,261
Less progress payments related
to long-term contracts 196,707 220,122
----------- -----------
$17,239,608 $19,134,139
=========== ===========
Inventoried costs relate to costs of goods currently in progress. There are no
significant inventoried costs relating to the production costs of delivered
units over the estimated average cost of all units expected to be produced.
(4) LONG-TERM DEBT
Long-term debt consists of the following:
October 31, July 28,
1995 1996
----------- -----------
Bank term notes $ 3,201,339 $ 2,426,004
Finance company 2,667,555 2,499,397
Other notes 22,390 13,320
----------- -----------
5,891,284 4,938,721
Less current portion 1,864,710 1,838,569
----------- -----------
$ 4,026,574 $ 3,100,152
=========== ===========
The bank term notes consist of a $5,000,000 term note payable in 60 equal
installments of $83,333 plus interest at a fixed annual rate of 7.3 percent.
The unpaid balance at July 28, 1996, was $1,833,000. The Company's wholly-owned
subsidiary, Scot, Inc. also has a term loan with a bank, which was renewed in
July, 1996, secured by certain real property of Scot. The principal balance
outstanding under the renewed loan at July 28, 1996, was $593,000. The loan is
being amortized with monthly payments of approximately $7,800, including
interest, adjusted monthly, at 1.9% over the bank's LIBOR rate. Any unpaid
principal is due on August 1, 2001.
- 8 -
9
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 28, 1996
(Unaudited)
The finance company notes are secured by related equipment. The first note
is being amortized over 12 years, with interest at 5.9% through November 1996,
and with interest at prime plus one-half percent through November 2006, when the
note will be fully amortized. Monthly payments are approximately $20,300
through November 1996. The unpaid balance at July 28, 1996, was $1,866,000.
The second note is being amortized over 10 years, with interest of 4.9% through
December 1996, and with interest at prime plus one-half percent through December
2004, when the note will be fully amortized. Monthly payments are approximately
$7,100 through December 1996. The unpaid balance at July 28, 1996 was $574,000.
(5) STOCKHOLDERS' EQUITY
The Company's amended and restated 1991 Stock Incentive Plan (the "Plan")
is administered by a committee of the Board of Directors which determines the
amount, type, terms and condition of any awards made pursuant to the Plan. The
Plan provides for issuance of restricted stock, grants of incentive and
non-qualified stock options, stock appreciation rights and performance share
awards. There are 560,000 shares of common stock reserved for issuance under
the plan.
Pursuant to the Plan, no option may be granted that is
exercisable in less than six months nor more than ten years from the grant
date. Certain events, including a change in control of the Company, may
accelerate exercise dates, cause forfeiture of all shares of any restricted
stock and terminate all conditions relating to the realization of any
performance awards.
During the quarter ended July 28, 1996, options to purchase 112,000 shares
were granted with an exercise price of $17.75, and options to purchase 25,000
shares were granted with an exercise price of $17.25. Both exercise prices
represent the fair market value of the Company's common stock on the date of
grant. During the quarter ended July 28, 1996, 4,499 shares of common stock
were exercised at prices ranging from $9.50 to $10.00. At July 28, 1996,
there were outstanding options for 337,377 shares of which 113,880 of such
options were exercisable.
(6) NET INCOME PER SHARE
Net income per share is computed by dividing net income by the weighted
average number of common stock and common stock equivalents outstanding during
the period. Fully diluted earnings per share are presented when dilutive.
- 9 -
10
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 28, 1996
(Unaudited)
(7) INCOME TAXES
Effective November 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 requires a change to the "asset and liability method" of accounting for
income taxes from the "deferred method" of accounting for income taxes which was
required by Accounting Principles Board Opinion No. 11 ("APB 11"). Under SFAS
109, deferred tax assets and liabilities are recognized with respect to the tax
consequences attributable to the differences between the financial statement
carrying values and the tax basis of existing assets and liabilities. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to the taxable income in the years in which these temporary differences
are expected to be recovered or settled. Further, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Under the deferred method, deferred
taxes were not adjusted for subsequent change in tax rates.
There was no cumulative effect on the prior years financial statements as a
result of this adoption on November 1, 1993. Deferred income taxes at October
31, 1995 and July 28, 1996 reflect the impact of "temporary differences" between
assets and liabilities for financial reporting purposes and their carrying
values as measured by tax laws. These temporary differences are determined in
accordance with SFAS 109 and are more inclusive in nature than the "timing
differences" as determined under previously applicable accounting principles.
The provisions for income taxes consist of the following for each
respective nine month period ended:
July 28, July 30,
1995 1996
----------- ----------
Current:
Federal $2,306,000 $2,437,000
State 682,000 728,000
--------- ----------
$2,988,000 $3,165,000
========= ==========
Deferred:
Federal $ (28,000) $ (30,000)
State 6,000 36,000
----------- ----------
$ (22,000) $ 6,000
=========== ==========
Total:
Federal $2,278,000 $2,407,000
State 688,000 764,000
---------- ----------
$2,966,000 $3,171,000
========== ==========
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11
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 28, 1996
(Unaudited)
Temporary differences which give rise to deferred tax assets and
liabilities are as follows:
October 31, July 28,
1995 1996
----------- -----------
Deferred tax liabilities:
Depreciation $(2,390,000) $(2,505,000)
=========== ===========
Deferred tax assets:
Allowance for doubtful accounts 87,000 111,000
Inventory 80,000 71,000
Vacation 268,000 308,000
Other reserves 36,000 -
State taxes 120,000 61,000
----------- -----------
591,000 551,000
----------- -----------
Net deferred tax liability $(1,799,000) $(1,954,000)
=========== ===========
Management believes it is more likely than not that future operations will
generate sufficient taxable income to realize deferred tax assets.
The provisions for income taxes for the nine months ended 1995 and 1996
differ from the provisions that would have resulted by applying the Federal
statutory rates during such periods to the income before income taxes. The
reasons for these differences are as follows:
July 30, July 28,
1995 1996
---------- ----------
Income taxes at Federal rate $2,428,000 $2,398,000
State taxes, net of Federal benefit 538,000 773,000
---------- ----------
$2,966,000 $3,171,000
========== ==========
(8) COMMITMENTS AND CONTINGENCIES
The Company is a defendant in various pending claims and lawsuits. In the
opinion of the Company's management, after consultation with counsel,
disposition of such matters are not expected to have a material adverse effect
upon the results of operations or the financial position of the Company.
At July 28, 1996, the Company had commitments to acquire capital equipment
aggregating approximately $1,000,000, related primarily to additional
production equipment, and other support equipment required for the increased
operations of the Automotive Products Division. In addition, in order to
improve manufacturing
- 11 -
12
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 28, 1996
(Unaudited)
efficiencies and to provide facilities for growth, the Company has entered into
an escrow to acquire approximately 280 acres of land in the City of Moorpark
located in Ventura County, north of Los Angeles. The closing of this escrow is
contingent upon the Company receiving the necessary permits and zoning
approvals required for completion of this project. The Company anticipates
closing this escrow in October 1996, completing the land infrastructure work by
late Spring of 1997, and completing facility construction by the end of 1997.
Total capital expenditures are estimated at approximately $18,000,000, of which
approximately $1,242,000 had been expended at July 28, 1996. The Company
anticipates additional expenditures of approximately $2,675,000 in fiscal 1996,
approximately $12,700,000 in fiscal 1997, and approximately $1,383,000 in
fiscal 1998 for completion of this project.
The statements above regarding the land purchased by the Company in Moorpark
and the construction of facilities on the land by the Company are
forward-looking statements. Actual results (including the actual costs
incurred) and the timing of those results may vary depending on various
factors including, for example, the ability of the Company to obtain permits
and approvals that do not contain conditions or restrictions that are unduly
restrictive or otherwise unacceptable to the Company, the Company's not
encountering any unforeseen conditions relating to the property that make
completion of the land infrastructure work or construction more expensive,
difficult or time intensive than is currently expected, the ability of the
contractors and subcontractors retained by the Company to complete the work
on the schedule and for the costs described above, and other factors
which may develop during the course of this project.
- 12 -
13
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
JULY 28, 1996
(Unaudited)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS FROM OPERATIONS
RESULTS FROM OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JULY 28, 1996 TO THE THREE MONTHS ENDED
JULY 30, 1995
Net Sales
Net sales for the Automotive Products Division were $19,622,000 for the
quarter ended July 28, 1996, compared to net sales of $21,169,000 for the same
period last year. The decrease of $1,547,000, or 7.3%, was the result of a
reduction in the average unit selling price of an initiator which the Company
absorbed effective August 1, 1995, offset partially by an increase in units
shipped during the current year third quarter compared to the number of units
shipped for the same period last year. The increase in units shipped was due
to increased shipments of initiators used in airbag systems. Sales to TRW,
Inc. as a percent of Automotive Product Division sales were 72.3% for the
current year third quarter compared to 81.4% for the same period last year, and
were 55.4% of total Company sales in the third quarter compared to 59.5% of
total Company sales for the same period last year.
Net sales for the Aerospace Division were $6,009,000 for the current year
third quarter, compared to net sales of $7,804,000 for the same period last
year. The decrease of $1,795,000, or 23.0%, was due primarily to a reduction
in shipments of products used in the Hellfire and TOW missile programs in the
current period compared to the same period last year.
Cost of Sales
Cost of sales was $16,484,000 for the Automotive Products Division for the
quarter ended July 28, 1996, compared to cost of sales of $18,373,000 for the
same period last year. The decrease of $1,889,000, or 10.3%, was due to the
reduction in sales in the current year third quarter. Gross profit as a percent
of sales was 15.9% in the current period, compared to 13.2% for the same period
last year. The improvement in gross profit as a percent of sales was due to
reductions in scrap, improvements in automated machine yields, and other
manufacturing efficiencies achieved in the current period.
Cost of sales was $3,910,000 for the Aerospace Division for the quarter
ended July 28, 1996, compared to cost of sales of $5,401,000 for the same
period last year. The decrease of $1,491,000, or 27.6%, was due to the
reduction in sales in the current period compared to the same period last year.
Gross profit as a percent of sales was 34.9% in the current year period compared
to a gross profit percent of 30.8% for the same period last year. The increase
in gross profit as a percent of sales in the current period is due to the mix of
products shipped compared to the same period last year.
Operating Expenses
Operating expenses for each division (Automotive Products and Aerospace)
are comprised of two components. First, each division is charged those
operating expenses incurred directly by that division. Second, each division
is allocated administrative operating expenses incurred by the Company (which
are not directly attributable to a particular division) on an equitable basis
to fairly reflect the benefit received by each division.
- 13 -
14
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
JULY 28, 1996
(Unaudited)
Operating expenses for the Automotive Products Division were $734,000 for
the quarter ended July 28, 1996, compared to operating expenses of $981,000 for
the same period last year. Operating expenses incurred by the Automotive
Products Division and by the Company were approximately the same as last year,
however, a greater percent of Company incurred operating expenses were
allocated to the Aerospace Division in the current period, resulting in a
decrease of $247,000, or 25.2%, in operating expenses in the current year
period compared to the same period last year.
Operating expenses were $1,012,000 for the Aerospace Division for the
quarter ended July 28, 1996, compared to operating expenses of $1,172,000 for
the same period last year. The decrease of $160,000, or 13.7%, was the result
of an increase in operating expenses allocated to the Aerospace Division in the
current year period, offset by a reduction in operating expenses incurred
directly by the Aerospace Division in response to lower sales in the current
year period.
Other Income and Expense
Other income (expense) net, consists primarily of interest expense on
borrowings and interest income on short-term investments. Other income
(expense), net was $33,000 of income for the quarter ended July 28, 1996,
compared to $103,000 of income for the same period last year. Interest expense
was $89,200 for the quarter ended July 28, 1996, compared to interest expense
of $134,700 for the same period last year. The decrease of $45,500 resulted as
long-term debt, which is being paid on a monthly basis, had a lower average
balance outstanding in the current period. Interest income was $112,900 for
the quarter ended July 28, 1996, compared to interest income of $227,100 for
the same period last year. Although the amounts invested during the current
period were approximately the same as amounts invested for the comparable
period last year, investments in the current year were primarily in tax-free
instruments (as opposed to taxable instruments last year), which yield a
similar rate, after income taxes, as taxable investments but which pay a lower
actual rate.
COMPARISON OF THE NINE MONTHS ENDED JULY 28, 1996 TO THE NINE MONTHS ENDED JULY
30, 1995
Net Sales
Net sales for the Automotive Products Division were $56,481,000 for the
nine months ended July 28, 1996, compared to the net sales of $54,262,000 for
the same period last year. The increase of $2,219,000, or 4.1%, was the result
of an increase in units shipped in the current year period, partially offset by
a reduction in average unit selling price of an initiator which the Company
absorbed effective August 1, 1995. The increase in units shipped was due to
increased shipments of initiators used in airbag systems to each of the
Company's customers. Sales to TRW, Inc. as a percent of Automotive Products
Division sales were 80.0% for the nine months ended July 28, 1996, compared to
87.0% for the same period last year, and were 62.4% of total Company sales in
the current year compared to 62.0% of total Company sales for the same period
last year.
Net sales for the Aerospace Division were $15,913,000 for the nine months
ended July 28, 1996, compared to net sales of $21,957,000 for the same period
last year. The decrease of $6,044,000, or 27.5%, was due primarily to a
reduction in shipments of products used in the Hellfire and TOW missile
programs, and also due to a reduction in shipments of certain replacement parts
used in military crew escape systems in the current year compared to the same
period last year.
Cost of Sales
Cost of sales was $48,342,000 for the Automotive Products Division for the
nine months ended July 28,
- 14 -
15
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
JULY 28, 1996
(Unaudited)
1996, compared to cost of sales of $47,117,000 for the same period last year,
an increase of $1,224,000, or 2.6%. Gross profit as a percent of sales was
14.4% for the current year period, compared to gross profit as a percent of
sales of 13.2% for the same period last year. The improvement in gross profit
as a percent of sales was due to reductions in scrap, improvements in automated
machine yields, and other manufacturing efficiencies achieved in the current
period.
Cost of sales for the Aerospace Division was $10,353,000 for the nine
months ended July 28, 1996, compared to cost of sales of $15,592,000 for the
same period last year. The decrease of $5,239,000, or 33.6%, was the result of
reduced sales in the current year. Gross profit as a percent of sales was
34.9% for the nine months ended July 28, 1996, compared to gross profit as a
percent of sales of 29.0% for the same period last year. The increase in gross
profit as a percent of sales in the current period is due to the mix of
products shipped compared to the same period last year.
Operating Expenses
Operating expenses for each division (Automotive Products and Aerospace)
are comprised of two components. First, each division is charged those
operating expenses incurred directly by that division. Second, each division
is allocated administrative operating expenses incurred by the Company (which
are not attributable to a particular division) on an equitable basis to fairly
reflect the benefit received by each division.
Operating expenses for the Automotive Products Division were $2,609,000
for the nine months ended July 28, 1996, compared to operating expenses of
$2,608,000 for the same period last year. Actual expense incurred by the
division increased in the current year to support the increase in the number of
units produced this year. These cost increases were offset by a greater
percent of Company incurred operating expenses allocated to the Aerospace
Division in the current year. Total Company administrative expenses (which are
allocated to each division) were approximately the same for the first nine
months of 1996 compared to the same period last year.
Operating expenses for the Aerospace Division were $2,967,000 for the nine
months ended July 28, 1996, compared to operating expenses of $2,824,000 for
the same period last year. The increase of $143,000, or 5.1%, was the result
primarily of an increase in allocation of Company administrative expenses to
the Aerospace Division in the current year compared to the same period last
year.
Other Income and Expense
Other income (expense), net, consists primarily of interest expense on
borrowings and interest income earned on short-term investments. For the nine
months ended July 28, 1996, other income (expense), net, was $82,000 income
compared to $627,000 expense for the same period last year. Interest income was
$349,000 for the nine months ended July 28, 1996, compared to interest income of
$227,000 for the same period last year. Interest expense was $285,000 for the
nine months ended July 28, 1996, compared to interest expense of $859,000 for
the same period last year. In May 1995, the Company sold 1,770,000 shares of
its Common Stock in an underwritten public offering. A portion of the net
proceeds (which totaled approximately $29,400,000) were used to liquidate all
borrowings outstanding under the Company's revolving line of credit
(approximately $14,000,000), and approximately $11,400,000 of the proceeds were
invested in short-term interest bearing marketable securities. The reduction in
bank borrowings and the increase in investments in marketable securities were
the primary reasons for the changes noted in the current year in interest
expense and interest income.
Liquidity and Capital Resources
The Company's primary sources of capital since its initial public offering
in 1991 have been cash from
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16
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
JULY 28, 1996
(Unaudited)
operations and bank borrowings and, in fiscal year 1995, an additional public
offering of its common stock.
Pursuant to a credit agreement (the "Credit Agreement") with its bank, the
Company currently has in place a revolving credit facility (the "Revolver") and
a $5,000,000, five-year term loan (the "Term Loan"). Under the terms of the
Revolver (as amended in October 1995), the Company may borrow up to a maximum of
$6,500,000 in advances from November 1, 1995 through March 1, 1997. As of July
28, 1996, there were no amounts outstanding under the Revolver. Proceeds
advanced under the Revolver may be used to support working capital needs and
capital expenditures. The Revolver expires and becomes due on March 1, 1997.
The Term Loan, the principal balance of which is amortized on a monthly
basis, bears interest at a fixed rate per annum of 7.30% and had an outstanding
principal balance of $1,833,000 at July 28, 1996. Proceeds from the term loan
were applied to repay a prior credit facility with a different bank. The Term
Loan is required to be fully amortized by May 1, 1998.
The Company's wholly owned subsidiary, Scot, Inc., has a term loan with a
bank, which was renewed in July, 1996, secured by certain real property of Scot.
The principal balance outstanding under the renewed loan at July 28, 1996, was
$593,000. The loan is being amortized with monthly payments of approximately
$7,800, including interest, adjusted monthly, at 1.9% over the bank's LIBOR
rate. Any unpaid principal is due on August 1, 2001.
Substantially all of the Company's assets are pledged under the Credit
Agreement. In addition, the Credit Agreement contains covenants that include
requirements to meet certain financial tests and ratios (including minimum
current ratio, debt service ratio, minimum tangible net worth, maximum debt
ratio and maintenance of profitable annual operations) and restrictions and
limitations on the sale of assets, new borrowings, mergers and purchases of
stock. The Company was in compliance with all Credit Agreement covenants at
July 28, 1996.
In November 1994, the Company purchased a new airplane from United
Beechcraft, Inc. for $2,210,000. The Company made an initial payment of $110,500
for the plane, and entered into a promissory note with Beech Acceptance
Corporation, Inc. to finance the remaining balance of $2,099,500 over a 12-year
period. In December 1994, the Company purchased a second airplane from United
Beechcraft, Inc. for $669,419. The Company entered into a promissory note with
Beech Acceptance Corporation, Inc. to finance the purchase over a 10-year
period. The planes are being used primarily to transport Company officials
between its Newhall, California and Mesa, Arizona facilities. In addition,
the Company leases the first airplane for use to third parties when not in use
by the Company in order to defray a portion of the costs. As of July 28, 1996,
the principal balances due under the two promissory notes were $1,866,000 and
$574,000, respectively.
During the nine months ended July 28, 1996, the Company generated cash flow
from operations of $6,667,000. Capital expenditures, primarily for payments
related to automated manufacturing equipment and production facilities, amounted
to $5,635,000. Principal payments of long-term debt aggregated $953,000.
These net cash outflows were funded by cash flow from operations and the use
of existing cash on hand. At July 28, 1996, the Company had cash on hand of
$12,827,000 and additional borrowing capacity under its Credit Agreement of
$6,500,000.
At July 28, 1996, the Company had working capital of $36,170,000 as
compared to working capital of $33,170,000 at October 31, 1995. The increase of
$3,000,000 was due primarily to an increase in inventories of $1,895,000, an
increase in prepared expenses of $237,000, and a decrease in accounts payable
and accrued expenses of $1,106,000, offset partially by a decrease in accounts
receivable of $271,000. The increase in inventories was due primarily to higher
levels of raw material purchases and work-in-process required to support the
increasing production and shipping volume of the Automotive Products Division.
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17
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
JULY 28, 1996
(Unaudited)
In order to improve manufacturing efficiencies and to provide facilities
for growth, the Company has entered into an escrow to acquire approximately 280
acres of land in the City of Moorpark located in Ventura County, north of Los
Angeles. The closing of this escrow is contingent upon the Company receiving
the necessary permits and zoning approvals required for completion of this
project. The Company anticipates closing this escrow in October 1996,
completing the land infrastructure work by late Spring 1997, and completing the
facility construction by the end of 1997. Total capital expenditures are
estimated at approximately $18,000,000, of which approximately $1,242,000 had
been expended at July 28, 1996. The Company anticipates additional expenditures
of approximately $2,675,000 in fiscal 1996, approximately $12,700,000 in fiscal
1997, and approximately $1,383,000 in fiscal 1998, for completion of this
project.
The statements above regarding the land purchased by the Company in
Moorpark and the construction of facilities on the land by the Company are
forward looking statements. Actual results (including the actual costs
incurred) and the timing of those results may vary depending on various factors
including, for example, the ability of the Company to obtain permits and
approvals that do not contain conditions or restrictions that are unduly
restrictive or otherwise unacceptable to the Company, the Company's not
encountering any unforeseen conditions relating to the property that make
completion of the land infrastructure work or construction more expensive,
difficult or time intensive than is currently expected, the ability of the
contractors and subcontractors retained by the Company to complete the work on
the schedule and for the costs described above, and other factors which may
develop during the course of this project.
The Company anticipates that working capital requirements will increase in
1996 as compared to 1995 to support the investment in inventories and accounts
receivable related to the anticipated increased demand for initiators
manufactured by the Company. The Company believes that it can meet its expected
working capital requirements for the foreseeable future from existing cash on
hand, cash flow from operations and borrowings under its Credit Agreement. The
Company had commitments to acquire capital equipment at July 28, 1996
aggregating approximately $1,000,000 related primarily to additional production
equipment, and other support equipment required for the increased operations of
the Automotive Products Division.
The statements above regarding the anticipated increased demand for
initiators and the anticipated increase in working capital requirements are
forward looking statements. Actual results and the timing of those results may
vary depending on various factors including, for example, the development and
acceptance of technologies different from those employed by the Company for the
initiation of airbag systems, competition from new or existing companies for
the Company's existing or future customers, and a slow-down in the world-wide
rate of airbag implementation.
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18
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 28, 1996
(Unaudited)
PART II - OTHER INFORMATION
Items 1 through 5 are omitted as they are not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Statement RE: Computation of Per Share Earnings
(b) Reports on Form 8-K - None
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.
SPECIAL DEVICES, INCORPORATED
DATED: September 10, 1996 /s/ THOMAS F. TREINEN
----------------------- ------------------------------------
Thomas F. Treinen
Chairman of the Board and
President
DATED: September 10, 1996 /s/ JOHN T. VINKE
----------------------- ------------------------------------
John T. Vinke
Vice President Finance and
Chief Financial Officer
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