1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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: MAY 4, 1997
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 June 13, 1997, the total number of outstanding shares of registrant's common
stock was 7,699,362.
2
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
October 31, May 4,
1996 1997
----------- -----------
(Unaudited)
Current assets:
Cash $ 2,592,578 $ 915,572
Marketable securities 10,700,000 6,200,000
Accounts receivable, net of allowance of
$155,900 at October 31, 1996 and $180,400
at May 4, 1997 for doubtful accounts 12,663,230 14,745,411
Inventories 18,298,705 19,490,680
Prepaid expenses 401,645 871,217
Deferred income taxes 670,000 726,000
----------- -----------
Total current assets 45,326,158 42,948,880
----------- -----------
Property, plant and equipment, at cost:
Land 1,611,331 1,611,331
Buildings 7,562,979 7,618,814
Machinery and equipment 35,736,957 38,395,258
Furniture and fixtures 2,221,376 2,459,683
Transportation equipment 3,066,463 3,155,453
Leasehold improvements 2,334,412 2,508,726
Construction in progress (includes land and related
costs of $3,700,000 at October 31, 1996 and
$5,320,000 at May 4, 1997) 5,695,185 10,998,552
----------- -----------
58,228,703 66,747,817
Less accumulated depreciation 17,597,716 20,752,562
----------- -----------
40,630,987 45,995,255
----------- -----------
Other assets 202,050 175,383
----------- -----------
$86,159,195 $89,119,518
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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3
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
October 31, May 4,
1996 1997
----------- -----------
(Unaudited)
Current liabilities:
Current portion of long-term debt $ 1,296,973 $ 1,038,604
Trade accounts payable 3,075,758 4,027,805
Accounts payable to related parties 2,294,688 1,219,002
Accrued payroll and benefits 1,104,613 1,684,602
Accrued expenses 605,881 351,489
Income taxes 1,991,290 1,006,290
----------- -----------
Total current liabilities 10,369,203 9,327,792
Long-term debt, less current portion 3,319,709 2,644,980
Deferred income taxes 2,769,000 2,925,000
----------- -----------
Total liabilities 16,457,912 14,897,772
----------- -----------
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
7,675,535 shares, at October 31, 1996, and
7,692,029 shares at May 4, 1997
76,756 76,921
Additional paid-in capital 49,911,050 50,055,033
Retained earnings 19,713,477 24,089,792
----------- -----------
Total stockholders' equity 69,701,283 74,221,746
----------- -----------
$86,159,195 $89,119,518
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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4
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
Three months ended Six months ended
-------------------------- --------------------------
April 28, May 4, April 28, May 4,
1996 1997 1996 1997
----------- ----------- ----------- -----------
Net sales $24,221,910 $32,791,946 $46,763,353 $60,329,340
Cost of sales 19,717,945 26,400,843 38,301,715 48,641,378
----------- ----------- ---------- -----------
Gross profit 4,503,965 6,391,103 8,461,638 11,687,962
----------- ----------- ---------- -----------
Operating expenses 2,085,868 2,459,161 3,830,051 4,685,026
----------- ----------- ---------- -----------
Operating income 2,418,097 3,931,942 4,631,587 7,002,936
----------- ----------- ---------- -----------
Other income (expense):
Interest expense (80,262) (55,750) (195,788) (133,928)
Interest income 116,770 81,756 236,041 199,747
Other 910 (762) 8,611 (2,440)
----------- ----------- ---------- -----------
Net other income 37,418 25,244 48,864 63,379
----------- ----------- ---------- -----------
Income before income taxes 2,455,515 3,957,186 4,680,451 7,066,315
Income taxes 930,000 1,495,000 1,795,000 2,690,000
----------- ----------- ---------- -----------
Net income $ 1,525,515 $ 2,462,186 $2,885,451 $ 4,376,315
=========== =========== =========== ===========
Net income per share $ 0 .20 $ .32 $ .37 $ .56
=========== =========== =========== ===========
Weighted average common shares
outstanding and common equivalents 7,754,242 7,782,193 7,748,446 7,747,637
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
- 4 -
5
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - UNAUDITED
FOR THE SIX MONTHS ENDED MAY 4, 1997
Common Stock Additional Total
------------------------ paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
--------- ----------- ----------- ----------- -------------
Balance at October 31, 1996 7,675,535 $ 76,756 $49,911,050 $19,713,477 $69,701,283
Issuance of common stock on
exercise of stock options 16,494 165 143,983 -- 144,148
Net income (unaudited) -- -- -- 4,376,315 4,376,315
--------- ----------- ----------- ----------- -----------
Balance at May 4, 1997 7,692,029 $ 76,921 $50,055,033 $24,089,792 $74,221,746
========= =========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
- 5 -
6
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Six months ended
-----------------------------
April 28, May 4,
1996 1997
----------- -----------
Cash flows from operating activities:
Net income $ 2,885,451 $ 4,376,315
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 2,646,663 3,154,846
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 2,582,249 (2,082,181)
(Increase) in inventories (1,917,896) (1,191,975)
(Increase) in prepaid expenses (63,286) (469,572)
Decrease (increase) in deferred tax asset 61,000 (56,000)
Decrease in other assets 101,057 26,667
(Decrease) increase in accounts payable,
accounts payable to related parties and other
accrued expenses (1,780,500) 201,958
(Decrease) in income taxes payable (87,200) (985,000)
(Decrease) increase in net deferred tax liability (50,000) 156,000
----------- -----------
Net cash provided by operating activities 4,377,538 3,131,058
----------- -----------
Cash flows from investing activities:
(Purchases) of property, plant and equipment (4,114,438) (8,519,114)
(Purchases) sales of marketable securities -- 4,500,000
----------- -----------
Net cash (used in) investing activities (4,114,438) (4,019,114)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options 75,744 144,148
(Payments) of long-term debt (633,961) (933,098)
----------- -----------
Net cash provided by (used in) financing activities (558,217) (788,950)
----------- -----------
Net (decrease) in cash (295,117) (1,677,006)
Cash at beginning of period 1,928,185 2,592,578
----------- -----------
Cash at end of period $ 1,633,068 $ 915,572
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 175,180 $ 157,100
Income taxes $ 1,940,000 $ 1,960,000
=========== ===========
See accompanying notes to condensed consolidated financial statements.
- 6 -
7
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
May 4, 1997
(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 suggested 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, 1996. Operating results for the six month period ended May 4, 1997 are not
necessarily indicative of the operating results for the full fiscal year.
(2) ACCOUNTS RECEIVABLE
Accounts receivable are as follows:
October 31, May 4,
1996 1997
----------- -----------
U.S. Government $ 2,299,218 $ 924,947
U.S. Government Subcontractors 4,131,795 3,746,573
Commercial Customers 6,388,176 10,254,329
----------- -----------
12,819,189 14,925,849
Less allowance for doubtful accounts 155,959 180,438
----------- -----------
Total $12,663,230 $14,745,411
=========== ===========
(3) INVENTORIES
Inventories and inventoried costs relating to long-term contracts are
classified as follows:
October 31, May 4,
1996 1997
----------- -----------
Raw materials and components $ 6,167,337 $ 5,705,747
Work in process 7,278,149 8,720,473
Finished goods 1,020,337 1,243,607
Inventoried costs relating to
long term contracts, net of
amounts attributed to revenues
recognized to date 3,835,468 3,953,839
----------- -----------
18,301,291 19,623,666
Less progress payments related
to long-term contracts 2,586 132,986
----------- -----------
$18,298,705 $19,490,680
=========== ===========
Inventoried costs relate to costs of products currently in progress. There
are no significant inventoried costs
- 7 -
8
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
May 4, 1997
(Unaudited)
relating to the production costs of delivered units over the estimated average
cost of all units expected to be produced.
(4) NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consisted of the following:
October 31, May 4,
1996 1997
---------- ----------
Bank borrowings $2,164,886 $1,306,112
Finance company 2,392,295 2,348,854
Other notes 59,501 28,618
---------- ----------
4,616,682 3,683,584
Less current portion 1,296,973 1,038,604
---------- ----------
$3,319,709 $2,644,980
========== ==========
In December 1996, the Company signed a new credit agreement (the "Credit
Agreement") with a new bank and replaced its prior credit facility. Under the
prior credit facility, the Company had a term note outstanding which bore
interest at 7.3 percent, the unpaid balance of which was approximately
$1,503,000 at November 30, 1996. The balance of the Term Loan and any other
borrowings outstanding with the former bank were paid at that time. The new
Credit Agreement expires May 1, 1998, and any borrowings under the new Credit
Agreement bear interest at the bank's Reference Rate less .25 percentage point,
or at the Company's option, at LIBOR plus .75 percentage point. The New Credit
Agreement contains two revolving credit facilities. The Company may borrow up to
$10,000,000 under Facility No. 1, and may borrow up to $12,000,000 under
Facility No. 2. Borrowings under both facilities may be used for general and
other corporate purposes. Facility No. 1 may be used for commercial letters of
credit not to exceed $500,000 and for standby letters of credit not to exceed
$6,000,000, which reduce the amount available under the agreement. In addition,
the Company has the option of converting outstanding borrowings, in increments
of not less than $1,000,000, under Facility No. 2 to a 5-year term loan. Any
amounts converted to term debt under Facility No. 2 will bear interest at the
bank's long-term interest rate in effect at the time of such conversion. As of
May 4, 1997, $750,000 was outstanding under Facility No. 2, and no amounts were
outstanding under Facility No. 1. In addition, the Company had outstanding
approximately $5,500,000 of performance bonds secured by standby letters of
credit related to the development of new facilities (see Footnote 8).
The Company's wholly-owned subsidiary, Scot, Inc. has a term loan with a
bank, secured by certain real property of Scot. The principal balance
outstanding at October 31, 1996, was $582,000, and at May 4, 1997 was $556,100.
The loan is being amortized with monthly payments of approximately $13,000,
including interest of 10.0%, through August 2001, at which time the remaining
balance is due.
The finance company notes are secured by related equipment. The first note
is being amortized over 12 years, with interest at prime plus one-half percent
through November 2006, when the note will be fully amortized.
Monthly payments are approximately $23,100. The unpaid balance at May 4, 1997,
was $1,773,400. The second note is being amortized over 10 years, with interest
at prime plus one-half percent through December 2004, when the note will be
fully amortized. Monthly payments are approximately $7,100. The unpaid balance
at May 4, 1997 was $530,700.
- 8 -
9
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
May 4, 1997
(Unaudited)
(5) STOCK INCENTIVE
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 conditions of the 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 or 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.
No options were granted during the quarter ended May 4, 1997 and 6,666
options were exercised at prices ranging from $6.75 to $10.00 per share. At May
4, 1997, there were options outstanding to purchase 332,214 shares, which
options were exercisable with respect to 135,689 shares.
In December 1996, the Company's Stock Option Committee authorized stock
option grants to certain employees via a special grant which is not part of the
1991 Stock Option Plan. Under terms of this authorization, options to purchase
130,000 shares were granted which vest ratably over 5 years from the grant date,
options to purchase 312,000 shares vest ratably over a period ranging from 5 to
8 years from the grant date. The grants for the later options contain vesting
acceleration clauses during the first 36 months of the option; the acceleration
clauses are contingent upon the price of the Company's Common Stock attaining a
certain level, and upon the Company attaining certain earnings levels. The
options were granted at the fair market value of the stock on the grant date,
which was $17.00 per share. These grants were approved by the Company's
shareholders at the Annual Shareholders Meeting in March 1997.
(6) INCOME PER SHARE
Net income per share is computed by dividing net income by the weighted
average number of common stock and dilutive 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
May 4, 1997
(Unaudited)
(7) INCOME TAXES
The provisions for income taxes consist of the following for each
respective six months ended:
April 28, May 4,
1996 1997
---------- ----------
Current:
Federal $1,320,000 $2,074,000
State 400,000 516,000
---------- ----------
$1,720,000 $2,590,000
========== ==========
Deferred:
Federal $ 20,000 $ 72,000
State 55,000 28,000
---------- ----------
$ 75,000 $ 100,000
========== ==========
Total:
Federal $1,340,000 $2,146,000
State 455,000 544,000
---------- ----------
$1,795,000 $2,690,000
========== ==========
Temporary differences which give rise to deferred tax assets and
liabilities are as follows:
October 31, May 4,
Deferred tax liabilities: 1996 1997
----------- -----------
Depreciation $(2,769,000) $(2,925,000)
=========== ===========
Deferred tax assets:
Allowance for doubtful accounts $ 60,000 $ 69,000
Inventory 264,000 534,000
Vacation 153,000 70,000
State taxes 193,000 53,000
----------- -----------
670,000 726,000
----------- -----------
Net deferred tax liability $(2,099,000) $(2,199,000)
=========== ===========
Management believes it is more likely than not that future operations will
generate sufficient taxable income to realize deferred tax assets.
- 10 -
11
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
May 4, 1997
(Unaudited)
The provisions for income tax expense for the six months ended 1996 and
1997 differ from the provisions that would have resulted from applying the
Federal statutory rates during such periods to the income before income taxes.
The reasons for these differences are as follows:
April 28, May 4,
1996 1997
----------- -----------
Income taxes at Federal rate $ 1,591,000 $ 2,402,000
State income taxes 435,000 636,000
Other (231,000) (348,000)
----------- -----------
$ 1,795,000 $ 2,690,000
=========== ===========
(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.
The Company had commitments at May 4, 1997 to acquire capital equipment, at
cost aggregating approximately $6,000,000, primarily for production and other
support equipment required for the increased operations of the Automotive
Products Division. In addition, in order to improve manufacturing efficiencies
and to provide facilities for growth, the Company purchased in October 1996,
approximately 280 acres of land in the City of Moorpark, located in Ventura
County, north of Los Angeles, where the Company plans to build new facilities.
Development of the land infrastructure, including grading, began in January
1997, and is expected to be at a stage of completion which will allow the
construction of the buildings to begin in July 1997. The building construction
is expected to be completed during the Spring of 1998, and the Company expects
to move its entire California-based operations, including Automotive Products,
Aerospace and the administrative offices to these new facilities. Total net cost
of the project is estimated at $20,000,000 of which $5,320,000 had been spent at
May 4, 1997 and is included in construction in progress in the accompanying
condensed consolidated balance sheet. The Company anticipates spending an
additional approximate $7,000,000 in fiscal year 1997, and approximately
$8,000,000 in fiscal year 1998 to complete this project. The Company has
committed to complete the land infra-structure, the total cost of which is
estimated to be approximately $9,500,000.
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 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.
- 11 -
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MAY 4, 1997 TO THE THREE MONTHS ENDED
APRIL 28, 1996
Net Sales
The majority of air-bag initiators sold by the Company are sold to TRW and
Morton International (Morton). The initiators sold to TRW are more complex, and
contain a higher material content, than the initiators sold to Morton, and
consequently are sold for a higher average unit price than the initiators sold
to Morton.
Net sales for the Automotive Products Division increased by $5,858,000, or
30.8%, to $24,863,000 for the quarter ended May 4, 1997 compared to sales of
$19,005,000 for the same quarter of the previous year. The increase in sales
represents an approximate 56% increase in units shipped in the current year
quarter compared to the same quarter last year, offset by a reduction in the
average unit selling price of an initiator. The increase in the number of
initiators sold was due to increased shipments primarily to a major new customer
in the current period, and because of increased demand from existing customers.
The increased demand for initiators reflects increasing implementation of
airbags for cars produced in the United States, and accelerating rates of
implementation of airbags in European and Pacific Rim countries. Sales to TRW as
a percent of Automotive Products Division sales were 62.2% for the second
quarter, compared to 84.0% for the same period last year, and were 47.2% of
total Company sales in the second quarter compared to 65.9% of total Company
sales for the same period last year. Sales to Morton were 23.1% of Automotive
Products Division sales and were 17.5% of total Company sales for the current
year second quarter. Sales to Morton were not significant for the comparable
period last year.
Net sales for the Aerospace Division were $7,929,000 for the second
quarter, an increase of $2,712,000, or 52.0% compared to sales of $5,217,000 for
the second quarter last year. The increase in sales was the result of shipments
against new contracts awarded during the last half of fiscal year 1996,
primarily on commercial satellite launch vehicles and on a re-design of a
bomb-rack.
Cost of Sales
Cost of sales for the Automotive Products Division increased by $4,578,000,
or 28.1%, to $20,843,000 for the three months ended May 4, 1997, compared to
cost of sales of $16,265,000 for the same period of 1996. Gross profit as a
percent of sales was 16.1% for the second quarter compared to 14.4% for the same
period last year. The average sales price of an initiator decreased by 16% in
the second quarter of the current year compared to the same period last year,
however, this was more than offset by a) improved yields from automated
equipment; b) lower unit material costs; and c) a larger revenue base over which
overhead costs were spread.
Cost of sales for the Aerospace Division increased by $2,105,000, or 61.0%
to $5,558,000, compared to cost of sales of $3,453,000 for the same period last
year. The dollar increase in cost of sales was due to the cost of increased
sales in the current year second quarter. Gross profit as a percent of sales was
29.9% in the second quarter compared to 33.8% for the same quarter last year.
The decrease in gross profit percent during the current year was due to the mix
of products shipped.
Operating Expenses
Operating expenses for each division (Automotive Products and Aerospace)
are comprised of two components. First, each division is allocated those
operating expenses incurred 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 operating division. During the comparable periods
these expenses have been allocated equally to each division.
- 12 -
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
Operating expenses for the Automotive Products Division increased by
$145,000, or 13.6%, to $1,213,000 for the three months ended May 4, 1997
compared to operating expenses of $1,068,000 for the same period in 1996. The
increase in operating expenses was incurred to support the increase in units
shipped in the current year quarter.
Operating expenses for the Aerospace Division increased by $228,000, or
22.4%, to $1,246,000 in the second quarter compared to operating expenses of
$1,018,000 for the same quarter last year. The increase in operating expenses
was incurred to support the higher level of sales in the current year quarter.
Other Income and Expense
Other income (expense) consists primarily of interest income and interest
expense. Net other income (expense) was $25,000 income in the second quarter of
1997, compared to other income of $37,000 for the same period last year.
Interest income was $82,000 in the second quarter of 1997 compared to interest
income of $117,000 for the second quarter of last year. The reduction in
interest income was the result of lower average balances of invested funds
during the current year quarter. Interest expense was $56,000 in the second
quarter of 1997, compared to interest expense of $80,000 for the same period
last year. The decrease of $24,000 was the result of average balance outstanding
for long-term debt being reduced in the current period as a result of scheduled
principal payments.
COMPARISON OF THE SIX MONTHS ENDED MAY 4, 1997 TO THE SIX MONTHS ENDED APRIL 28,
1996
Net Sales
The majority of air-bag initiators sold by the Company are sold to TRW and
Morton. The initiators sold to TRW are more complex, and contain a higher
material content, than the initiators sold to Morton, and consequently are sold
for a higher average unit price than the initiators sold to Morton.
Sales for the Automotive Products Division were $48,439,000 for the six
months ended May 4, 1997, compared to sales of $36,859,000 for the comparable
period of the preceding year. The increase in sales represents an approximate
55% increase in units shipped for the first six months of the current fiscal
year compared to the same period last year, offset partially by a reduction in
the average unit selling price of an initiator due primarily to the mix of
products sold to TRW and Morton. The increase of $11,580,000, or 31.4%, was the
result of increased shipments of initiators primarily to a major new customer in
the current period and because of increased demand from existing customers. The
increased demand for initiators reflects increasing implementation of airbags
for cars produced in the United States and accelerating rates of implementation
of airbags in European and Pacific Rim countries. Sales to TRW as a percent of
the Division's total sales were 66.0% for the first six months of the current
fiscal year compared to 84.1% for the same period last year, and were 53.0% of
total Company sales this year compared to 66.3% for the same period last year.
Sales to Morton were 21.5% of Automotive Products Division sales and were 17.2%
of total company sales for the six months ended May 4, 1997. Sales to Morton
were not significant for the comparable period last year.
Sales for the Aerospace Division were $11,890,000 for the first six months of
the current year, compared to sales of $9,904,000 for the same period last year,
an increase of $1,986,000 or 20.1%. The increase in sales was the result of
shipments against new contracts awarded during the last half of fiscal year
1996, primarily on commercial satellite launch vehicles and on a re-design of a
military bomb rack.
Cost of Sales
Cost of sales for the Automotive Products Division were $40,399,000 for the
first six months of the current fiscal year, compared to cost of sales of
$31,858,000 for the same period last year. The increase of $8,541,000, or 26.8%,
was the result of increased costs associated with increased sales during the
same period. Gross profit
- 13 -
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
as a percent of sales was 16.6% for the current six month period compared to
13.6% for the same period last year. The increase was due to the a) improved
yields from automated equipment; b) reduced material costs; and c) a larger
revenue base over which overhead costs were spread, offset partially by a
reduction of 15% in the average sales price of an initiator in the current year
period compared to the same period last year. The reduction in average unit
selling price was due primarily to a change in mix of products sold to TRW and
Morton.
Cost of sales for the Aerospace Division increased $1,798,000, or 27.9%, to
$8,242,000 for the first six months of the current year, compared to cost of
sales of $6,444,000 for the same period last year. The dollar increase in cost
of sales was due to the cost of increased sales during the current period. Gross
profit as a percent of sales was 30.7% in the current period, compared to 34.9%
last year, due to the mix of products shipped in the current year.
Operating Expenses
Operating expenses for each division (Automotive Products and Aerospace)
are comprised of two components. First, each division is allocated those
operating expenses incurred 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 operating division. During the comparable periods
these expenses have been allocated equally to each division.
Operating expenses for the Automotive Products Division were $2,319,000 for
the first six months of the current fiscal year, an increase of $443,000, or
23.6%, compared to operating expenses of $1,876,000 for the same period last
year. The increase occurred primarily for more personnel required to support the
55% increase in the number of initiators sold during the current year period and
from an increase in allocated Corporate expenses. The increase in Corporate
expenses occurred primarily in increased personnel required to support the
increased level of operations this year.
Operating expenses for the Aerospace Division were $2,366,000 for the first
six months of the current fiscal year, an increase of $412,000, or 21.1%,
compared to operating expenses of $1,954,000 last year. The increase in
operating expenses was the result of higher corporate expenses allocated to the
Aerospace Division in the current year compared to the same period last year.
The increase in corporate expenses occurred primarily in increased personnel
required to support the growth in operations in the current year.
Other Income and Expense
Other income (expense) consists primarily of interest income and interest
expense. Net other income was $63,000 in the first six months of 1997, compared
to other income of $49,000 for the same period last year. Interest income was
$200,000 in the first six months of 1997 compared to interest income of $236,000
for the same period last year. The reduction in interest income was due to lower
average balances invested in the current year period. Interest expense was
$134,000 in the first six months of 1997, compared to interest expense of
$196,000 for the same period last year. The decrease of $62,000 was the result
of the average balance outstanding for long-term debt being reduced with
regularly scheduled principal payments.
Liquidity and Capital Resources
The Company's primary sources of capital since its initial public offering
in 1991 have been cash from operations and bank borrowings and, in fiscal year
1995, an additional public offering of its common stock. In December 1996, the
Company signed a credit agreement (the "Credit Agreement") with a bank. The
Credit Agreement expires May 1, 1998, and any borrowings under the Credit
Agreement bear interest at the bank's Reference Rate (8.5% at May 4, 1997) less
.25 percentage point, or at the Company's option, at LIBOR (5.69% at May 4,
1997) plus .75 percentage point. The Credit Agreement contains two revolving
credit facilities. The
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15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS, CONTINUED
Company may borrow up to $10,000,000 under Facility No. 1, and may borrow up to
$12,000,000 under Facility No. 2. Borrowings under both facilities may be used
for general and other corporate purposes. Facility No. 1 may be used for
commercial letters of credit not to exceed $500,000 and for stand by letters of
credit not to exceed $6,000,000, which reduce the amount available under the
agreement. In addition, the Company has the option of converting outstanding
borrowings in increments of not less that $1,000,000, under Facility No. 2, to a
5-year term loan. Any amounts converted to term debt under Facility No. 2 will
bear interest at the bank's long-term interest rate in effect at the time of
such conversion.
Substantially all of the Company's assets are pledged as collateral under
the Credit Agreement. In addition, the Credit Agreement contains covenants that
include requirements to meet certain financial test 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 these provisions as of May 4, 1997. As
of May 4, 1997, $750,000 was outstanding under Facility No. 2, and no amounts
were outstanding under Facility No. 1.
The Company's wholly owned subsidiary, Scot, Inc. has a term loan with a
bank, which was renewed in August 1996, secured by certain real property of
Scot. The principal balance outstanding under the renewed loan at May 4, 1997,
was $556,100. 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
(5.84% at May 4, 1997). Any unpaid principal is due on August 1, 2001.
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 delivered a promissory note with Beech Acceptance Corporation,
Inc. to finance the remaining balance of $2,099,500 over a 12-year period with
interest at prime plus one-half percent. The unpaid balance of this note at May
4, 1997 was $1,773,400. 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, Inc. to finance the purchase over a
10-year period with interest at prime plus one-half percent. The unpaid balance
of this note at May 4, 1997 was $530,706. 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 by third
parties when not in use by the Company in order to defray a portion of the
costs.
During the six months ended May 4, 1997, the Company generated cash flow
from operations of $3,131,000. Capital expenditures, primarily for payments
related to automated manufacturing equipment and new production facilities,
amounted to $8,519,000. Principal payments of long-term bank debt aggregated
$933,000. These net cash outflows were funded by cash flow from operations and
the use of existing cash on hand. At May 4, 1997, the Company had cash and
marketable securities on hand of $7,116,000 and additional borrowing capacity
available under its Credit Agreement of $15,750,000.
At May 4, 1997, the Company had working capital of $33,621,000 as compared
to working capital of $34,957,000 at October 31, 1996. The decrease of
$1,336,000 is due primarily to a decrease in cash and marketable securities of
$6,177,000, an increase in accounts payable and accrued expenses of $202,000 and
an increase in deferred income taxes payable of $156,000, offset partially by an
increase in accounts receivable and inventories of $2,082,000 and $1,192,000,
respectively, a decrease in income taxes payable of $985,000, and an increase in
prepaid expenses of $470,000. The increase in accounts receivable was due to the
increase in sales since October 31, 1996. The increase in inventories was due
primarily to higher levels of raw materials purchases and work-in-process
required to support the increasing production and shipping volume of the
Automotive Products Division. The decrease in cash occurred primarily for
progress payments on new equipment lines currently being produced for the
Company, and to pay for land infra-structure development costs for the Company's
Moorpark project (see below).
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16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS, CONTINUED
In order to improve manufacturing efficiencies and to provide facilities
for growth, the Company purchased approximately 280 acres of land in the City of
Moorpark, located in Ventura County, north of Los Angeles, in October, 1996, on
which the Company plans to build new facilities. Development of the land
infrastructure, including grading, began in January 1997, and is expected to be
at a stage of completion which will allow the construction of the buildings to
begin in July, 1997. The building construction is expected to be completed
during the Spring of 1998, and the Company expects to move its entire
California-based operations, including Automotive Products, Aerospace and the
administration offices to these new facilities. Total net cost of the project is
estimated at $20,000,00 of which approximately $5,320,000 had been spent by May
4, 1997, and is included in construction in progress in the accompanying
condensed consolidated balance sheet. The Company anticipates spending an
additional approximate $7,000,000 in fiscal 1997, and approximately $8,000,000
in fiscal 1998 to complete this project.
The Company anticipates that working capital requirements will increase
during the last half of fiscal 1997 and during fiscal 1998, as compared to
fiscal 1996, 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 and marketable
securities on hand, cash flow from operations and borrowings under its Credit
Agreement. The Company had commitments to acquire capital equipment at May 4,
1997 aggregating approximately $6,000,000 related primarily to additional
production equipment, and other support equipment required for the increased
operations of the Automotive Products Division. In addition, the Company has
committed to complete the land infra-structure related to its Moorpark facility,
the total cost of which is approximately $9,500,000.
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17
PART II - OTHER INFORMATION
Items 1 through 3 are omitted as they are not applicable.
Item 4. Submission of matters to a vote of stockholders.
The Company's Annual Stockholders' Meeting was held on March 19, 1997
at which time the stockholders voted to re-elect Thomas F. Treinen
and Samuel Levin as directors to serve until the 2000 Annual
Stockholders' Meeting. The voting was as follows:
Election of Directors
Thomas F. Samuel
Votes Treinen Levin
----- --------- ---------
For 6,078,237 6,074,032
Withheld 58,358 62,563
Abstain -- --
Broker non-vote -- --
Against -- --
In addition, the shareholders ratified the 1996 Key Employee Stock Option and
1996 Performance Stock Option grants. The vote was 4,632,020 for, 112,594
against, 39,096 abstain, and 1,352,885 broker non-votes.
Item 5. is omitted or it is 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: June 13, 1997
------------- --------------------------
Chairman of the Board and
President
DATED: June 13, 1997
------------- --------------------------
Vice President Finance and
Chief Financial Officer
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