SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended May 1, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO Section 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
For the transition period from to
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Commission file number 1-6711
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OEA, INC.
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(Exact name of registrant as specified in its charter)
Delaware 36-2362379
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
P. O. Box 100488, Denver, Colorado 80250
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (303) 693-1248
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
20,594,757 Shares of Common Stock at June 10, 1998.
INDEX
Page No.
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Condensed Balance Sheets
May 1, 1998 (unaudited)
and July 31, 1997. . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Condensed Statements
of Earnings (unaudited)
Three Months and Nine Months
Ended May 1, 1998 and
April 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Condensed Statements
of Cash Flows (unaudited) Nine Months
Ended May 1, 1998 and
April 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Condensed Financial
Statements (unaudited) . . . . . . . . . . . . . . . . . . . . 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . 8
ITEM 3. Quantitative and Qualitative Disclosures about Market
Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 14
ITEM 2. Changes in Securities and Use of Proceeds . . . . . . . . 14
ITEM 3. Defaults on Senior Securities . . . . . . . . . . . . . . 14
ITEM 4. Submission of Matters to a Vote of Security Holders . . . 14
ITEM 5. Other Information . . . . . . . . . . . . . . . . . . . . 14
ITEM 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . 14
2
OEA, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
ASSETS
May 1, 1998 July 31, 1997
----------- -------------
Current Assets: (Unaudited)
Cash and Cash Equivalents $ 3,282 $ 4,138
Accounts Receivable, Net 45,764 45,099
Unbilled Costs and Accrued Earnings 4,189 4,062
Income Taxes Receivable 10,061 2,568
Inventories
Raw Material and Component Parts 24,424 39,786
Work-in-Process 23,201 21,107
Finished Goods 17,490 9,513
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65,115 70,406
Prepaid Expenses and Other 1,587 1,046
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Total Current Assets 129,998 127,319
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Property, Plant and Equipment 269,241 238,545
Less: Accumulated Depreciation 64,827 54,651
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Property, Plant and Equipment, Net 204,414 183,894
Cash Value of Life Insurance 20 317
Long-Term Receivable 3,000 3,000
Investment in Foreign Joint Venture 2,323 2,323
Deferred Charges 17,482 13,527
Other Assets 1,210 1,176
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Total Assets $ 358,447 $ 331,556
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LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities:
Accounts Payable $25,341 $27,043
Interest Payable 24 1,431
Accrued Expenses 5,896 6,251
Federal and State Income Taxes 1,306 1,306
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Total Current Liabilities 32,567 36,031
Long-term Bank Borrowings 135,000 93,200
Deferred Income Taxes 14,562 14,562
Other 978 985
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Total Liabilities 183,107 144,778
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Stockholders' Equity:
Common Stock - $.10 par value, Authorized
50,000,000 shares: Issued - 22,019,700
shares 2,202 2,202
Additional Paid-In Capital 13,201 12,956
Retained Earnings 164,604 176,547
Less: Cost of Treasury Shares,
1,424,943 and 1,467,531 (2,142) (2,164)
Equity Adjustment from Translation (2,525) (2,763)
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Total Stockholders' Equity 175,340 186,778
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Total Liabilities and
Stockholders' Equity $358,447 $331,556
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3
OEA, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (Unaudited)
(in thousands, except share data)
Three Months Ended Nine Months Ended
May 1, April 30, May 1, April 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Net Sales $ 63,592 $ 54,397 $ 180,341 $ 151,223
Cost of Sales 77,322 39,890 170,958 107,744
----------- ----------- ----------- -----------
Gross Profit (13,730) 14,507 9,383 43,479
General and Administrative Expenses 4,236 1,740 8,239 5,264
Research and Development Expenses 274 109 951 1,376
----------- ----------- ----------- -----------
Operating Profit (Loss) (18,240) 12,658 193 36,839
Other Income (Expense):
Interest Income 73 62 273 170
Interest Expense (1,749) (94) (4,125) (110)
Other, Net (4,107) 3,453 (4,243) 3,514
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(5,783) 3,421 (8,095) 3,574
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Earnings (Loss) Before Income Taxes (24,023) 16,079 (7,902) 40,413
Federal and State Income Tax Expense (Benefit) (8,671) 5,985 (2,749) 15,409
----------- ----------- ----------- -----------
Net Earnings (Loss) $ (15,352) $ 10,094 $ (5,153) $ 25,004
----------- ----------- ----------- -----------
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Earnings (Loss) Per Share - Basic $ ($0.75) $ 0.49 $ (0.25) $ 1.22
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Earnings (Loss) Per Share - Diluted $ ($0.75) $ 0.49 $ (0.25) $ 1.21
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Weighted Average Number of Shares Outstanding - Basic 20,593,570 20,545,595 20,575,583 20,536,284
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Weighted Average Number of Shares Outstanding - Diluted 20,602,500 20,632,767 20,588,775 20,605,378
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4
OEA, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Nine Months Ended
May 1, April 30,
1998 1997
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Operating Activities:
Net Earnings (Loss) $ (5,153) $ 25,004
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Undistributed earnings of foreign joint venture --- (301)
Gain on sale of foreign joint venture --- (3,243)
Depreciation and amortization 18,857 11,246
Increase in deferred compensation payable --- 92
Loss on disposal of property, plant and equipment 4,709 ---
Changes in operating assets and liabilities:
Accounts receivable (469) (7,018)
Unbilled costs and accrued earnings (127) (53)
Inventories 5,342 (16,884)
Prepaid expenses and other (537) 791
Accounts payable and accrued expenses (3,661) (652)
Income taxes payable (7,493) 1,913
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Net cash provided by operating activities 11,468 10,895
Investing activities:
Additions/(reductions) to investments in and advances to affiliates --- 4,624
Capital expenditures (41,660) (58,856)
Proceeds from sale of property, plant, and equipment 283 ---
Increase in deferred charges (5,829) (7,428)
Increase in other assets, net 190 (6)
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Net cash used in investing activities (47,016) (61,666)
Financing activities:
Purchases of common stock for treasury (43) (117)
Proceeds from issuance of treasury stock 310 488
Payment of dividends (6,791) (6,162)
Increase in borrowings, net 41,800 61,000
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Net cash provided by financing activities 35,276 55,209
Effect of exchange rate changes on cash (584) (574)
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Net increase/(decrease) in cash and cash equivalents (856) 3,864
Cash and cash equivalents at beginning of period 4,138 2,560
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Cash and cash equivalents at end of period $ 3,282 $ 6,424
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5
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The unaudited financial statements furnished above reflect all adjustments
(consisting primarily of normal recurring accruals) which are, in the opinion of
OEA's management, necessary for a fair statement of the results for the three-
month and nine-month periods ended May 1, 1998 and April 30, 1997. Certain
amounts in the 1997 financial statements have been reclassified to conform with
the 1998 presentation. These reclassifications had no impact on the reported
results of operations.
Refer to the Company's annual financial statements for the year ended July 31,
1997, for a description of the accounting policies, which have been continued
without change. Also, refer to the footnotes with those financial statements
for additional details of the Company's financial condition, results of
operations, and changes in financial position. The details in those notes have
not changed, except as a result of normal transactions in the interim.
NOTE 2 - EARNINGS PER SHARE
In February 1997, the FASB issued Statement No. 128, EARNINGS PER SHARE. The
statement simplifies the standards for computing earnings per share ("EPS"), and
requires the presentation of both basic and diluted EPS on the face of the
statement of earnings with supplementary disclosures. Statement No. 128 became
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. The Company has adopted Statement No. 128 for
all periods presented.
Earnings per share of common stock is computed on the basis of the weighted
average number of shares outstanding during the year. The dilutive effects on
reported basic earnings per share from the assumed exercise of stock options
outstanding were 8,930 shares and 13,192 shares, respectively, for the three
months and nine months ended May 1, 1998. The dilutive effects on reported
basic earnings per share were 87,172 shares and 69,094 shares, respectively, for
the prior-year periods.
NOTE 3 - RECENTLY ISSUED PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 130, REPORTING COMPREHENSIVE INCOME.
The Statement establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
Statement No. 130 will be effective for fiscal years beginning after December
15, 1997. The Company will adopt Statement No. 130 during the first quarter of
fiscal year 1999, and does not expect the impact to be material.
In June 1997, the FASB issued Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. The Statement requires public business
enterprises to report certain information about operating segments in complete
sets of financial statements of the enterprise and in condensed financial
statements of interim periods issued to shareholders. It also requires that
public business enterprises report certain information about their products and
services, the geographic areas in which they operate, and their major customers.
Statement No. 131 will be effective for fiscal years beginning after December
15, 1997. The Company will adopt Statement No. 131 in its fiscal year 1999.
In April 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position 98-5, "REPORTING ON THE COSTS OF START-UP
ACTIVITIES." This Statement requires entities to expense costs of start-up
activities as they are incurred and to report the initial adoption as a
cumulative effect of a change in accounting principle as described in Accounting
Principles Board Opinion No. 20, ACCOUNTING CHANGES." Statement of Position No.
98-5 will be effective for fiscal
6
years beginning after December 15, 1998. The Company will adopt Statement of
Position No. 98-5 during the first quarter of its fiscal year 1999. The
cumulative effect upon adoption will result in a one-time charge to income in an
amount equal to the net book value of the Company's start-up costs. A resulting
benefit of this accounting change is the discontinuance of amortization expense
in subsequent periods.
Note 4 - Bank Borrowings
On April 10, 1998, the Company entered into a $180 million Amended and Restated
Revolving Credit Agreement with a group of seven banks. This agreement was
amended on June 11, 1998. The Company's principal bank is acting as agent for
this agreement. At May 1, 1998, the Company had $135 million of long term debt
drawn down on this credit facility. All outstanding debt at May 1, 1998 is
classified as long-term since no portion is either due or expected to be
permanently repaid within the next twelve-month period. Please refer to
Management's Discussion and Analysis - Liquidity and Capital Resources for
further information regarding this credit facility.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This report contains certain forward-looking statements within the meaning of
Section 27E of the Securities Exchange Act of 1934, as amended, including
statements regarding Company strategy, its soundness, the inflator and initiator
market, inflator and initiator demand, sales volume increases, the benefits of
cost reduction programs and improved manufacturing processes, implementation of
ERP systems, correction of quality issues, improved customer relations, year
2000 compliance, as well as other statements or implications regarding future
events. Actual results or events may differ materially from these
forward-looking statements depending on a variety of factors. Reference is made
to the cautionary statements under the caption "Forward-Looking Statements" in
OEA's Annual Report on Form 10-K for the year ended July 31, 1997 and the
Company's report on Form 8-K filed on June 4, 1998 for a description of various
factors that might cause OEA's actual results to differ materially from those
contemplated by such forward-looking statements.
A summary of the principal items included in the consolidated statements of
earnings is shown below:
Comparison of
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Three Months Ended
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May 1, 1998 April 30, 1997
Dollars Dollars
(in thousands) % of Sales (in thousands) % of Sales
-------------- ---------- -------------- ----------
Net Sales 63,592 100.0% 54,397 100.0%
Cost Of Sales 77,322 121.6% 39,890 73.3%
-------------- ---------- -------------- -----------
Gross Margin (13,730) (21.6%) 14,507 26.7%
General and
Administrative Expenses 4,236 6.7% 1,740 3.2%
Research and
Development Expenses 274 0.4% 109 0.2%
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Operating Profit (Loss) (18,240) (28.7%) 12,658 23.3%
Other Income (Expense) (5,783) (9.1%) 3,421 6.3%
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Earnings (Loss) Before Tax (24,023) (37.8%) 16,079 29.6%
Income Tax Expense
(Benefit) (8,671) (13.6%) 5,985 11.0%
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Net Earnings (Loss) (15,352) (24.1%) 10,094 18.6%
-------------- ---------- -------------- -----------
-------------- ---------- -------------- -----------
Comparison of
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Nine Months Ended
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May 1, 1998 April 30, 1997
Dollars Dollars
(in thousands) % of Sales (in thousands) % of Sales
-------------- ---------- -------------- ----------
Net Sales 180,341 100.0% 151,223 100.0%
Cost Of Sales 170,958 94.8% 107,744 71.2%
-------------- ---------- -------------- ----------
Gross Margin 9,383 5.2% 43,479 28.8%
General and
Administrative Expenses 8,239 4.6% 5,264 3.5%
Research and
Development Expenses 951 0.5% 1,376 0.9%
-------------- ---------- -------------- ----------
Operating Profit (Loss) 193 0.1% 36,839 24.4%
Other Income (Expense) (8,095) (4.5%) 3,574 2.4%
-------------- ---------- -------------- ----------
Earnings (Loss) Before Tax (7,902) (4.4%) 40,413 26.7%
Income Tax Expense
(Benefit) (2,749) (1.5%) 15,409 10.2%
-------------- ---------- -------------- ----------
Net Earnings (Loss) (5,153) (2.9%) 25,004 16.5%
-------------- ---------- -------------- ----------
-------------- ---------- -------------- ----------
8
NET SALES
Net sales increased 16.9% to $63.6 million for the three months ended May
1, 1998, and 19.3% for the nine months ended May 1, 1998, as compared to
the prior-year periods, due to increased sales in both the automotive and
nonautomotive segments. The automotive segment sales increased 17.6% ($7.8
million) to $52.2 million in the third quarter, and 18.7% ($22.8 million)
to $145.0 million for the first nine months, as compared to the prior year.
These increases were due to increases in inflator sales of $13.1 million
and $41.1 million for the three and nine months ended May 1, 1998,
respectively, partially offset by lower initiator sales. The increased
inflator sales reflect continued strong customer acceptance of the
Company's inflator program and increased demand for air bags from both
domestic and foreign automobile manufacturers. The reduced initiator sales
resulted from a temporary (one year) reduction in demand from a major
customer. This customer has recently agreed to significantly increase its
commitments for next fiscal year (see "Settlement of Legal Claim" below for
further detail). The nonautomotive segment sales increased by 13.8% ($1.4
million) to $11.4 million for the third quarter, and 21.6% ($6.3 million)
to $35.3 million for the first nine months, as compared to the prior year.
These were primarily due to increases in engineering development contracts
and the Delta satellite launcher program.
COST OF SALES
Cost of sales for the quarter and nine months ended May 1, 1998 were $77.3
million and $171.0 million, respectively, as compared to $39.9 million and
$107.7 million, respectively, for the quarter and nine months ended April
30, 1997. Automotive segment cost of sales for the quarter and nine months
ended May 1, 1998 were $66.3 million and $140.3 million, respectively, as
compared to $30.6 million and $83.8 million, respectively, for the quarter
and nine months ended April 30, 1997. These increases primarily reflect
increased inflator volume, partially offset by reduced initiator volume;
$3.6 million related to a parts shortage resulting in periodic production
shut-downs on the Company's passenger inflator lines; increased overhead
and other costs associated with the Company's new inflator production
facility, which is currently operating below target utilization; and $19.0
million in one-time charges (see "One-Time Charges" below).
Nonautomotive segment cost of sales for the quarter and nine months ended
May 1, 1998 were $11.0 million and $30.7 million, respectively, as compared
to $9.3 million and $24.0 million, respectively, for the quarter and nine
months ended April 30, 1997. These increases primarily reflect higher
segment sales and $1.4 million in one-time charges (see "One-Time Charges"
below).
GROSS MARGIN
Gross margin was ($13.7) million and $9.4 million (-21.6% and 5.2% of net
sales), respectively, for the quarter and nine months ended May 1, 1998, as
compared to $14.5 million and $43.5 million (26.7% and 28.8% of net sales),
respectively, for the comparable prior-year periods. Automotive segment
gross margin was ($14.1) million and $4.7 million (-27.0% and 3.3% of net
automotive sales), respectively, for the quarter and nine months ended May
1, 1998, as compared to $13.8 million and $38.4 million (31.0% and 31.4% of
net automotive sales), respectively, for the comparable prior-year periods.
These decreases in gross margin were primarily due to the increased
inflator costs as discussed above, lower leverage of fixed initiator costs
due to reduced
9
volume and $19.0 million in one-time charges (see "One-Time Charges"
below). Excluding the one-time charges, automotive segment gross margins
would have been $4.9 million and $23.8 million (9.4% and 16.4% of net
sales), respectively, for the quarter and nine months ended May 1, 1998.
Nonautomotive segment gross margins were $.4 million and $4.6 million (3.3%
and 13.1% of net nonautomotive sales), respectively, for the quarter and
nine months ended May 1, 1998, as compared to $.7 million and $5.1 million
(7.4% and 17.5% of net nonautomotive sales), respectively, for the
comparable periods of the prior year. Excluding the $1.4 million one-time
charge, nonautomotive segment gross margins would have been $1.8 million
and $6.0 million (15.6% and 17.1% of net sales), respectively, for the
quarter and nine months ended May 1, 1998.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the quarter and nine months ended
May 1, 1998 were $4.2 million and $8.2 million (6.7% and 4.6% of net
sales), respectively, as compared to $1.7 million and $5.3 million (3.2%
and 3.5% of net sales), respectively, for the comparable periods of the
prior year. These increases were primarily due to a $1.8 million one-time
charge related to the settlement of a legal claim (see "One-Time Charges"
below). Excluding the one-time charge, general and administrative expenses
as a percentage of net sales would have been 3.8% and 3.5%, respectively,
for the quarter and nine months ended May 1, 1998.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the quarter and nine months ended May
1, 1998 were $.3 million and $1.0 million, respectively, as compared to $.1
million and $1.4 million, respectively, for the comparable prior-year
periods. Development costs are not expected to increase significantly from
the current level for the remainder of fiscal year 1998.
OPERATING PROFIT
Operating profit (loss) for the quarter and nine months ended May 1, 1998
was ($18.2) million and $.2 million (-28.7% and .1% of net sales),
respectively, as compared to $12.7 million and $36.8 million (23.3% and
24.4% of net sales), respectively, for the comparable prior-year periods.
Excluding one-time charges, operating profit would have been $4.0 million
and $22.4 million (6.3% and 12.4% of net sales), respectively, for the
quarter and nine months ended May 1, 1998.
OTHER INCOME (EXPENSE)
Other expenses for the quarter and nine months ended May 1, 1998 were
($5.8) million and ($8.1) million, respectively, as compared to other
income of $3.4 million and $3.6 million, respectively, for the comparable
prior-year periods. The current-year periods include a $4.7 million
one-time charge for the disposal of idle and obsolete automotive segment
equipment (see "One-Time Charges" below), while the prior-year periods
include $3.2 million in income for the sale of the Company's foreign joint
venture, Pyrospace S.A. Additionally, the current year includes net
interest expense of $1.7 million and $3.9 million, respectively, for the
quarter and nine months ended May 1, 1998, as compared to $.0 million and
$.1 million, respectively, for the
10
comparable prior-year periods. Interest costs have increased due to the
Company's higher debt level of $135.0 million on May 1, 1998, as compared
to $75.0 million on April 30, 1997. Additionally, the significant capital
assets (i.e. building and equipment) acquired in the prior year have been
installed and placed in service in the current year; therefore, the
interest costs associated with these assets are no longer being
capitalized.
NET EARNINGS
Net earnings (loss) for the quarter and nine months ended May 1, 1998 were
($15.4) million and ($5.2) million, respectively, as compared to $10.1
million and $25.0 million for the comparable prior-year periods. Basic
earnings (loss) per share for the quarter and nine months ended May 1, 1998
were ($.75) and ($.25), respectively, as compared to $.49 and $1.22,
respectively, for the prior-year periods. Excluding one-time charges, net
earnings would have been $1.8 million and $12.0 million, respectively, and
basic earnings per share would have been $.09 and $.58, respectively, for
the quarter and nine months ended May 1, 1998.
ONE-TIME CHARGES
The Company has recognized one-time charges in the fiscal 1998 third quarter of
$17.2 million, net of taxes, or $.84 per share. Explanations of the more
significant charges for the quarter are detailed below.
INVENTORY ADJUSTMENTS
The Company booked inventory adjustments totaling $11.3 million ($7.3 million
after tax) in the fiscal 1998 third quarter primarily related to the start-up of
its new inflator production lines. These adjustments resulted from a
combination of the rapid expansion of the inflator program, including
significant additions in personnel, and system conversion issues associated with
the implementation of a new, fully integrated Enterprise Resource Planning (ERP)
System for the Company's automotive operations. The Company has completely
re-implemented the ERP system and has brought in consultants to review the
system set-up and procedures, and to re-train all employees. Management
believes that this problem is resolved; however, physical inventories will be
taken each quarter-end until it is fully demonstrated that the system is
functioning properly.
DISPOSAL OF INFLATORS
The Company disposed of early production inflators from its new facility for a
total cost of $3.9 million ($2.5 million after tax) in the quarter, which
includes both production and disposal costs. This resulted from a very unusual
quality issue that affected one in ten thousand units. However, due to the
unusual nature of the problem, the actual units affected could not be
identified. The Company's automotive products are propellant-actuated,
life-saving devices and only the highest level of quality is acceptable.
Therefore, all potentially affected units (approximately 130,000 inflators) were
disposed of to ensure that they could not be installed in air bag modules or
automobiles. Corrective action, which management believes will prevent any
future occurrences, was implemented immediately and has been approved by the
Company's customers. Production and customer shipments have resumed.
11
DOMESTIC INITIATOR CONSOLIDATION
The Company incurred costs totaling $5.1 million ($3.2 million after tax) in the
quarter related to the consolidation of its domestic initiator production
operations into its Utah facility. These costs consist of $.5 million for
equipment and personnel relocation and a $4.6 million charge for idled and/or
obsolete equipment and inventory. This consolidation is expected to generate
significant annual cost savings, while maintaining the Company's domestic
initiator capacity of 45 million units. Additionally, the Company's French
facility has a capacity of 20 million units, which supplies the European market
and serves as a back up to its domestic production.
SETTLEMENT OF LEGAL CLAIM
In consideration of new business and improving relations, the Company settled a
lawsuit with a major initiator customer. This resulted in a charge of $2.5
million ($1.6 million after tax) for trade receivables and obsolete inventory.
In return, its customer committed to significantly higher initiator purchases in
fiscal 1999. This resolution is an important milestone toward improving the
Company's relationship with this customer and should benefit both its initiator
and inflator operations.
INFLATOR EQUIPMENT OBSOLESCENCE
The Company wrote off $1.9 million ($1.2 million after tax) of low-volume
inflator production equipment. This equipment was originally purchased to
support customers' requirements by bridging the gap between prototype production
and high-volume production. Now that the Company's new high-volume inflator
production lines are becoming more efficient, this low-volume production
equipment has become idled and obsolete.
AEROSPACE INVENTORY OBSOLESCENCE
As the Company's aerospace business shifts from traditional defense/government
business to commercial business (satellites and satellite launch vehicles), a
more stringent obsolescence approach is required. The new approach was adopted
during the quarter and resulted in a charge of $1.4 million ($.9 million after
tax).
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased during the quarter to $97.4 million from
$105.0 at January 30, 1998. During the nine months ended May 1, 1998, the
Company made capital expenditures totaling approximately $41.7 million, which
were funded from bank borrowings. On April 10, 1998, the Company entered into a
four-year, $180 million Amended and Restated Revolving Credit Agreement with a
group of seven banks. This agreement was amended on June 11, 1998. The
Company's principal bank is acting as agent for this agreement. The interest
rate (applicable margin plus federal funds or LIBOR) is progressive and based
upon the Company's ratio of indebtedness to EBITDA. The margin will fluctuate
up or down as determined by the above ratio. At May 1, 1998, the interest rate
was 6.26%. At the Company's discretion, it may convert all or part of the total
debt to Eurodollar or Alternate Base Rate loan(s). This credit facility expires
on December 18, 2000, and provides for two twelve-month extensions to the
termination date. At May 1, 1998, the Company had $135.0 million of long-term
debt
12
drawn down on this credit facility. Anticipated working capital requirements,
capital expenditures, and facility expansions are expected to be met through
bank borrowings and from internally generated funds.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to maintain traceability, process
transactions, send invoices, or engage in similar normal business activities.
Based on current assessments, the Company is progressing with its modification
and replacement of significant portions of its software so that its computer
systems will properly utilize dates beyond December 31, 1999. The Company
presently believes that with its modifications to existing software and
conversions of new software, the Year 2000 Issue will be mitigated. However, if
such modifications and conversions are not made, or are not completed timely,
the Year 2000 Issue could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company is utilizing both internal and external resources to modify, replace
and test its software for Year 2000 compliance. The Company plans to complete
the Year 2000 project by July 1999. To date, the Company has incurred
approximately $1 million related to the assessment of, and efforts in connection
with, its Year 2000 project. Approximately 75% of which are capitalized costs
related to the purchase and implementation of new computer software and
hardware. The total remaining costs for this project are currently being
assessed and are unknown at this time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company sold 43,750 shares of unregistered common stock pursuant
to the exercise of options by six executive officers and key employees
in the first nine months of fiscal 1998 as follows:
Date Number Aggregate
of Sale Of Shares Offering Price
------- --------- --------------
8/29/97 1,250 $36,500
10/9/97 18,000 $59,625
10/15/97 500 $2,333
10/16/97 1,500 $7,000
11/7/97 4,000 $111,120
12/24/97 500 $9,500
2/6/98 18,000 $84,000
Such sales were made pursuant to the exemption from registration
available under Section 4(2) of the Securities Act of 1993.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amended and Restated Revolving Credit Facility dated April
10, 1998.
27.1 Financial Data Schedule
14
(b) Reports on Form 8-K
(1) Report in connection with Common Share Purchase Rights filed with
the Commission on April 10, 1998.
(2) Cautionary statement for the purpose of the "Safe Harbor"
provisions of the Private Securities Litigation Reform Act of
1995 filed with the Commission on June 4, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OEA, INC.
----------------------------------------
(Registrant)
June 12, 1998 /s/ J. Thompson McConathy
- ------------------------------ ----------------------------------------
Date J. Thompson McConathy
Vice President Finance and CFO
June 12, 1998 /s/ Charles B. Kafadar
- ------------------------------ ----------------------------------------
Date Charles B. Kafadar
President and CEO
16