<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 1-6711
OEA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-2362379
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P. O. BOX 100488 80250
DENVER, COLORADO (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (303) 693-1248
- -----------------------------------------------------------------------------
(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 / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
20,602,248 Shares of Common Stock at June 8, 1999.
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INDEX
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Page No.
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<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Condensed Balance Sheets
April 30, 1999 (unaudited) and July 31, 1998............................. 3
Consolidated Condensed Statements of Operations (unaudited)
Three Months and Nine Months Ended April 30, 1999
and May 1, 1998.......................................................... 4
Consolidated Condensed Statements of Cash Flows (unaudited)
Nine Months Ended April 30, 1999 and May 1, 1998......................... 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................. 16
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.......................................................... 17
ITEM 2. Changes in Securities and Use of Proceeds.................................. 17
ITEM 3. Defaults on Senior Securities.............................................. 17
ITEM 4. Submission of Matters to a Vote of Security Holders........................ 17
ITEM 5. Other Information.......................................................... 17
ITEM 6. Exhibits and Reports on Form 8-K........................................... 17
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OEA, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
ASSETS
April 30, 1999 July 31, 1998
-------------- -------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 3,949 $ 1,920
Accounts Receivable, Net 41,477 43,998
Unbilled Costs and Accrued Earnings 4,652 3,190
Income Taxes Receivable 2,621 12,040
Inventories:
Raw Material and Component Parts 23,726 25,954
Work-in-Process 16,348 17,222
Finished Goods 6,028 11,391
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Total Inventory 46,102 54,567
Prepaid Expenses and Other 850 1,863
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Total Current Assets 99,651 117,578
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Property, Plant and Equipment 284,644 272,411
Less: Accumulated Depreciation 85,199 67,761
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Property, Plant and Equipment, Net 199,445 204,650
Long-term Receivable 3,000 3,000
Investment in Foreign Joint Venture 2,323 2,323
Other Assets 1,211 1,208
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Total Assets $ 305,630 $ 328,759
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LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities:
Accounts Payable 25,408 22,457
Interest Payable 2,239 2,368
Accrued Expenses 6,387 6,636
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Total Current Liabilities 34,034 31,461
Long-term Bank Borrowings 105,000 124,000
Deferred Income Taxes 10,820 10,821
Other 956 971
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Total Liabilities 150,810 167,253
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 13,329 13,201
Retained Earnings 145,347 150,440
Less: Cost of Treasury Shares,
1,410,259 and 1,424,943 (2,120) (2,142)
Equity Adjustment from Translation (3,938) (2,195)
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Total Stockholders' Equity 154,820 161,506
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Total Liabilities and Stockholders' Equity $ 305,630 $ 328,759
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</TABLE>
<PAGE>
OEA, INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
(in thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, May 1, April 30, May 1,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales $ 66,700 $ 63,592 $ 182,927 $ 180,341
Cost of Sales 60,731 76,500 172,578 174,976
----------- ----------- ----------- -----------
Gross Profit (Loss) 5,969 (12,908) 10,349 5,365
General and
Administrative Expenses 3,860 4,236 9,698 8,239
Research and
Development Expenses 834 274 2,574 951
----------- ----------- ----------- -----------
Operating Profit (Loss) 1,275 (17,418) (1,923) (3,825)
Other Income (Expense):
Interest Income 11 73 149 273
Interest Expense (2,034) (1,749) (6,032) (4,125)
Royalty Income & Other, Net 1,023 (4,107) 2,666 (4,243)
----------- ----------- ----------- -----------
(1,000) (5,783) (3,217) (8,095)
----------- ----------- ----------- -----------
Earnings (Loss) Before
Income Tax Benefit 275 (23,201) (5,140) (11,920)
Federal and State
Income Tax Benefit (49) (8,276) (1,746) (4,005)
----------- ----------- ----------- -----------
Net Earnings (Loss) Before
Cumulative Effect of a
Change In Accounting
Principle $ 324 $ (14,925) $ (3,394) $ (7,915)
Cumulative Effect of a Change in
Accounting Principle -- -- -- (10,040)
----------- ----------- ----------- -----------
Net Earnings (Loss) $ 324 $ (14,925) $ (3,394) $ (17,955)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings (Loss) Per Share
Before Cumulative Effect of
a Change in Accounting
Principle - Basic & Diluted $ 0.02 $ (0.72) $ (0.16) $ (0.38)
Cumulative Effect of a Change
in Accounting Principle -
Basic & Diluted $ -- $ -- $ -- $ (0.49)
----------- ----------- ----------- -----------
Earnings (Loss) Per Share -
Basic & Diluted 0.02 (0.72) (0.16) (0.87)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted Average Number of Shares
Outstanding - Basic 20,603,020 20,593,570 20,599,532 20,575,583
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted Average Number of Shares
Outstanding - Diluted 20,916,034 20,602,500 20,823,906 20,588,775
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
<PAGE>
OEA, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
April 30, 1999 May 1, 1998
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<S> <C> <C>
Operating Activities
Net Loss $ (3,394) $ (17,955)
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Cumulative effect of a change in accounting principle -- 10,040
Depreciation and Amortization 17,869 17,046
Decrease in deferred compensation payable (16) --
(Gain) loss on disposal of property, plant, and equipment (7) 4,709
Changes in operating assets and liabilities:
Accounts receivable 1,415 (469)
Unbilled costs and accrued earnings (1,462) (127)
Inventories 8,413 5,342
Prepaid expenses and other 1,013 (537)
Accounts payable and accrued expenses 2,606 (3,661)
Income taxes payable 10,369 (8,749)
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Net cash provided by operating activities 36,806 5,639
Investing Activities:
Capital expenditures (13,820) (41,660)
Proceeds from sale of property, plant, and equipment 10 283
Decrease (increase) in other assets, net (127) 190
----------- ---------
Net cash used in investing activities (13,937) (41,187)
Financing Activities:
Purchases of common stock for treasury -- (43)
Proceeds from issuance of treasury stock 103 310
Capital contributions 47 --
Payment of Dividends (1,699) (6,791)
Increase (decrease) in borrowings, net (19,000) 41,800
----------- ---------
Net cash provided by (used in) financing activities (20,549) 35,276
Effect of exchange rate changes on cash (291) (584)
----------- ---------
Net increase (decrease) in cash and cash equivalents 2,029 (856)
Cash and cash equivalents at beginning of period 1,920 4,138
----------- ---------
Cash and cash equivalents at end of period $ 3,949 $ 3,282
----------- ---------
----------- ---------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The unaudited financial statements furnished above reflect all adjustments
(consisting of normal recurring accruals) which are, in the opinion of OEA's
management, necessary for a fair statement of the results of operations for
the three and nine month periods ended April 30, 1999 and May 1, 1998.
Certain amounts in the fiscal 1998 financial statements have been
reclassified to conform with the fiscal 1999 presentation. These
reclassifications had no material impact on the reported results of
operations.
Refer to the Company's annual financial statements for the year ended July
31, 1998, 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.
NOTE 2 - START-UP COSTS
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 is effective for fiscal years beginning after December
15, 1998. However, the Company elected to adopt Statement of Position 98-5 in
the first quarter of fiscal 1998.
NOTE 3 - COMPREHENSIVE INCOME
During the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standard No. 130, REPORTING COMPREHENSIVE INCOME.
Comprehensive income generally represents all changes in stockholders'
equity, except those resulting from investments or contributions by
stockholders. Total comprehensive income for the first nine months of fiscal
1999 and fiscal 1998 were:
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<CAPTION>
FY 1999 FY 1998
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<S> <C> <C>
Net Loss ($ 3,394) ($17,955)
Equity Adjustment from Translation (1,743) 238
-------- --------
Total Comprehensive Income ($ 5,137) ($17,717)
-------- --------
-------- --------
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<PAGE>
NOTE 4 - SEGMENT INFORMATION
In June 1997, the FASB issued Statement of Financial Accounting Standard No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. The
Statement requires public companies to report certain information about
operating segments in complete sets of financial statements and in condensed
financial statements of interim periods issued to shareholders. Under
Statement No. 131, operating segments are to be determined based on how
management measures performance and makes decisions about allocating
resources. It also requires that public companies report certain information
about their products and services, the geographic areas in which they
operate, and their major customers. Statement No. 131 is effective for fiscal
years beginning after December 15, 1997. The Company will adopt Statement No.
131 in the fourth quarter of the current fiscal year.
NOTE 5 - 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. At the Company's request, this
agreement was again amended on December 10, 1998 to reduce the amount of the
facility to $150 million and to modify the financial debt covenants. The
Company's principal bank is acting as agent for the banks under this
agreement. At April 30, 1999, the Company had $105 million of long term debt
outstanding on this credit facility. All outstanding debt at April 30, 1999
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 of Financial Condition and Results of
Operations - Liquidity and Capital Resources for further information
regarding this credit facility.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OEA,Inc. is referred to herein as "OEA" or the "Company." 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,
impairment inflator prices, inflator and initiator demand, sales volume
increases, the utilization rate of the Company's inflator manufacturing
facility, the timing and benefits of cost reduction programs and improved
manufacturing processes, impairment of carrying value of assets,
implementation of ERP systems, 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, 1998 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, on a percent of sales basis, is shown below:
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<CAPTION>
Comparison of
Three Months Ended
----------------------------------------------------------------
April 30, 1999 May 1, 1998
----------------------------- ------------------------------
Dollars Dollars
(in thousands) % of Sales (in thousands) % of Sales
-------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
Net Sales $ 66,700 100.0% $ 63,592 100.0%
Cost of Sales 60,731 91.1% 76,500 120.3%
-------- ----- --------- -----
Gross Margin 5,969 8.9% (12,908) (20.3%)
General and
Administrative Expenses 3,860 5.8% 4,236 6.7%
Research and
Development Expenses 834 1.3% 274 .4%
-------- ----- --------- -----
Operating Profit (Loss) 1,275 1.9% (17,418) (27.4%)
Other Expense, Net (1,000) (1.5%) (5,783) (9.1%)
-------- ----- --------- -----
Earnings (Loss) Before Tax 275 .4% (23,201) (36.5%)
Income Tax Benefit (49) (.1%) (8,276) (13.0%)
-------- ----- --------- -----
Net Earnings (Loss) Before
Cumulative Effect of a
Change In Accounting
Principle 324 .5% (14,925) (23.5%)
Cumulative Effect of a Change
in Accounting Principle -- -- -- --
-------- ----- --------- -----
Net Earnings (Loss) $ 324 .5% $ (14,925) (23.5%)
-------- ----- --------- -----
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<TABLE>
<CAPTION>
Comparison of
Nine Months Ended
----------------------------------------------------------------
April 30, 1999 May 1, 1998
----------------------------- ------------------------------
Dollars Dollars
(in thousands) % of Sales (in thousands) % of Sales
-------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
Net Sales $182,927 100.0% $ 180,341 100.0%
Cost of Sales 172,578 94.3% 174,976 97.0%
-------- ----- --------- -----
Gross Margin 10,349 5.7% 5,365 3.0%
General and
Administrative Expenses 9,698 5.3% 8,239 4.6%
Research and
Development Expenses 2,574 1.4% 951 .5%
-------- ----- --------- -----
Operating Loss (1,923) (1.0%) (3,825) (2.1%)
Other Expense, Net (3,217) (1.8%) (8,095) (4.5%)
-------- ----- --------- -----
Loss Before Tax Benefit (5,140) (2.8%) (11,920) (6.6%)
Income Tax Benefit (1,746) (.9%) (4,005) (2.2%)
-------- ----- --------- -----
Net Loss Before Cumulative
Effect of a Change in
Accounting Principle (3,394) (1.9%) (7,915) (4.4%)
Cumulative Effect of a Change
in Accounting Principle -- -- (10,040) (5.6%)
-------- ----- --------- -----
Net Loss $ (3,394) (1.9%) $ (17,955) (10.0%)
-------- ----- --------- -----
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</TABLE>
NET SALES
Net sales increased 5% to $66.7 million for the third quarter ended April
30, 1999, as compared to prior-year third quarter sales of $63.6 million.
Net sales for the nine months ended April 30, 1999 were $182.9 million,
as compared to $180.3 million for the prior-year period.
Automotive segment sales increased 5% ($2.4 million) to $54.6 million in
the third quarter and 3% ($4.5 million) to $149.5 million for the first
nine months of fiscal 1999, as compared to the prior-year periods, driven
primarily by increased initiator sales. Inflator unit shipments increased
41% and 31%, respectively, in the third quarter and first nine months, as
compared to the prior-year periods. However, net inflator sales increased
only 5% ($1.9 million) in the third quarter and decreased 0.5% ($0.5
million) for the first nine months, as compared to the prior-year
periods, primarily due to an industry-wide inflator price adjustment that
became effective August 1, 1998. The impact of this adjustment on the
Company was a weighted average inflator price reduction of 23% for the
first nine months of the fiscal year, or an aggregate reduction in net
inflator sales of $32.5 million. The Company believes that this large
reduction in inflator sales price was a market
<PAGE>
adjustment and is not indicative of future price reductions. Initiator
unit shipments to outside customers increased 20% and 37%, respectively,
in the third quarter and first nine months, as compared to the prior-year
periods. The increased unit shipments, partially offset by initiator
price reductions and a shift in initiator product mix, resulted in net
initiator sales increases of 5% ($.6 million) and 15% ($5.2 million),
respectively, for the third quarter and nine months ended April 30, 1999,
as compared to the prior-year periods. Management believes that the
significant increases in both inflator and initiator unit sales reflect
continued strong customer acceptance of the Company's automotive safety
products and increased demand for air bags from both domestic and foreign
automobile manufacturers.
Aerospace segment sales increased 6% ($.7 million) to $12.1 million in
the third quarter, but decreased 5% ($1.9 million) to $33.4 million for
the first nine months of fiscal 1999, as compared to the prior-year
periods. The nine-month decrease was primarily due to a first quarter
slowdown on the Delta program and the timing of foreign sales.
COST OF SALES
Cost of sales for the third quarter ended April 30, 1999 was $60.7
million, as compared to $76.5 million for the same period last year. Cost
of sales for the nine months ended April 30, 1999 was $172.6 million, as
compared to $175.0 million for the comparable period last year.
Automotive segment cost of sales decreased 22% ($14.7 million) to $50.9
million in the third quarter, as compared to the prior year, primarily
due to the effect of last year's $19.0 million one-time charges (see "
Fiscal 1998 One-time Charges" below), partially offset by increased costs
associated with inflator and initiator shipments in the current period.
Automotive cost of sales for the nine months ended April 30, 1999 were
flat at $144.6 million, as compared to the prior-year period.
The Company's new inflator production facility represents 10 million of
the Company's 15 million unit annual inflator capacity. This facility has
been operating significantly below target utilization (23% utilization in
the first quarter; 24% utilization in the second quarter; and 34%
utilization in the third quarter) in fiscal 1999. Although improvement
was made in the third quarter, capacity underutilization continues to put
pressure on the Company's cost structure and automotive margins. Inflator
capacity utilization is expected to increase over time. However, the
Company does not expect to reach target utilization levels until fiscal
2001.
The Company has undertaken a comprehensive automotive cost reduction
program, which includes material cost reductions, productivity
improvements and automation improvements. OEA has made significant
progress over the past nine months in the implementation of this program,
resulting in its return to profitability in the current quarter. The
Company expects to phase in additional cost reductions throughout the
remainder of fiscal 1999 and into fiscal 2000. The Company has identified
and requested customer approval for several design changes that are
expected to reduce material and other costs and to improve productivity.
Due to the nature of OEA's products, both our customers and the
automobile manufacturers must perform significant qualification and
validation testing before design changes can be approved. This process,
including the allocation of significant resources, has taken longer than
originally expected. However, we began to phase in the first series of
cost-down design changes to production in the third quarter and expect to
have more in place by the end of the fourth quarter of this fiscal year.
Additionally, we continue to identify new design changes to our products
that are expected to result in further cost reductions. These will be
presented to our customers and the automobile manufacturers in fiscal
2000.
Aerospace segment cost of sales decreased 9.4% ($1.0 million) to $9.9
million in the third quarter and decreased 7.6% ($2.3 million) to $28.0
million for the nine months ended April 30, 1999, as
<PAGE>
compared to the prior-year periods. These decreases were primarily due to
the reduced aerospace sales and the impact of last year's $1.4 million
inventory obsolescence charge (see "Fiscal 1998 One-time Charges" below),
partially offset by an unfavorable shift in product mix.
GROSS MARGIN
Gross margin for the third quarter ended April 30, 1999 was $6.0 million
(8.9% of net sales), as compared to ($12.9) million (-20.3% of net sales)
for the comparable period last year. Gross margin for the nine months
ended April 30, 1999 was $10.3 million (5.7% of net sales), as compared
to $5.4 million (3.0% of net sales) for the comparable period last year.
Automotive segment gross margin was $3.8 million (6.9% of net automotive
sales) for the third quarter and $4.9 million (3.3% of net automotive
sales) for the first nine months of fiscal 1999, as compared to ($13.4)
million (-25.7% of net automotive sales) and $.4 million (.3% of net
automotive sales), respectively, for the comparable prior-year periods.
Fiscal 1999 gross margins were significantly impacted by the inflator
sales price reduction and delays in the implementation of cost-down
design changes, as well as by initiator price reductions. Prior year
gross margins were significantly impacted by $19.0 million in one-time
charges (see "Fiscal 1998 One-time Charges" below). Improvements in
automotive gross margins resulting from the Company's continued cost
reduction efforts and expected improvements in inflator capacity
utilization will be partially offset by scheduled fiscal year 2000
inflator price reductions of between 3% and 4%. Additionally, the Company
is evaluating certain of its inflator facilities, including its European
facility, to best respond to changing business conditions.
Aerospace segment gross margin was $2.2 million (18.3% of net aerospace
sales) for the third quarter and $5.4 million (16.2% of net aerospace
sales) for the nine months ended April 30, 1999, as compared to $.5
million (4.4% of net aerospace sales) and $5.0 million (14.1% of net
aerospace sales), respectively, for the prior-year periods. The current
year increases in gross margin were primarily the result of last year's
$1.4 million inventory obsolescence reserve (see "Fiscal 1998 One-time
Charges" below), partially offset by the current year decrease in
aerospace sales and an unfavorable shift in product mix.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the third quarter and nine months
ended April 30, 1999 were $3.9 million (5.8% of net sales) and $9.7
million (5.3% of net sales), respectively, as compared to $4.2 million
(6.7% of net sales) and $8.2 million (4.6% of net sales), respectively,
for the comparable prior-year periods. Eliminating the effects of last
year's one-time charges (see "Fiscal 1998 One-time Charges" below), last
year's general and administrative expenses would have been $2.4 million
(3.8% of net sales) and $6.4 million (3.5% of net sales), respectively.
The current year increases were primarily due to the reclassification of
certain expenses from manufacturing overhead (e.g. premium freight),
executive recruiting and relocation costs, and costs associated with the
expansion of the Company's sales and marketing department.
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the third quarter and nine months
ended April 30, 1999 were $.8 million (1.3% of net sales) and $2.6
million (1.4% of net sales), respectively, as compared to $.3 million
(.4% of net sales) and $1.0 million (.5% of net sales), respectively, for
the comparable prior-year periods. This increased R&D effort reflects
continued work on the Company's "smart" (dual-stage) inflators, curtain
inflators, micro-gas generators for seat belt pretensioner systems, and
other new products in early stages of development. The Company believes
its leading technology has been an important part of its success over the
years and plans to continue to invest in research and development to
maintain its technological leadership.
OPERATING PROFIT (LOSS)
The Company recorded an operating profit of $1.3 million (1.9% of net
sales) and an operating loss of $1.9 million (-1.0% of net sales) for the
third quarter and nine months ended April 30, 1999, respectively. The
Company had operating losses of $17.4 million (-27.4% of net sales) and
$3.8 million (-2.1% of net sales) in the comparable prior-year periods.
Eliminating the effects of last year's one-time charges (see "Fiscal 1998
One-time Charges" below), last year's operating profit would have been
$4.8 million (7.6% of net sales) and $18.4 million (10.2% of net sales),
respectively. Fiscal 1999 operating profit was affected by the inflator
price reduction and the increased G&A and R&D costs discussed above.
OTHER INCOME (EXPENSE)
The Company recorded other expenses for the third quarter and nine months
ended April 30, 1999 of $1.0 million (1.5% of net sales) and $3.2 million
(1.8% of net sales), respectively. The Company had other expenses of $5.8
million (9.1% of net sales) and $8.1 million (4.5% of net sales),
respectively, in the comparable prior-year periods. Eliminating the
effects of last year's one-time charges (see "Fiscal 1998 One-time
Charges" below), last year's other expenses would have been $1.1 (1.7% of
net sales) and $3.4 million (1.9% of net sales), respectively. Net
interest expense for the third quarter and nine months ended April 30,
1999 increased $.3 million and $1.9 million, respectively, over the
prior-year periods primarily due to a reduction in capitalized interest.
The increased interest costs were offset by $.7 million and $2.2 million,
respectively, of fixed royalty income recorded in the third quarter and
first nine months of fiscal 1999. Royalty income from the Company's Asian
licensee, Daicel Chemical Industries, is earned throughout the year, with
payment received annually in the fiscal fourth quarter. OEA began
accruing this income on a quarterly basis effective in fiscal 1999 to
reflect quarterly earned income and to improve comparisons between
quarters.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
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" (SOP 98-5). 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." Start-up activities are defined broadly as those
one-time activities related to opening a new facility, introducing a new
product or service, conducting business in a new territory, conducting
business with a new class of customer or beneficiary, initiating a new
process in an existing facility, or commencing some new operation.
<PAGE>
SOP 98-5 is effective for fiscal years beginning after December 15, 1998.
However, the Company elected to adopt SOP 98-5 in its fiscal year 1998.
Accordingly, the Company wrote off the net book value ($10.0 million) of
its start-up and related costs included in the scope of SOP 98-5 as a
one-time adjustment referred to as a Cumulative Effect of a Change in
Accounting Principle in the first quarter of fiscal 1998.
NET EARNINGS
The Company recorded net earnings of $.3 million for the third quarter
and a net loss of $3.4 million for the nine months ended April 30, 1999.
The Company recorded net losses of $14.9 million and $18.0 million in the
comparable prior-year periods. Eliminating the effects of last year's
one-time charges (see "Fiscal 1998 One-time Charges" below) and change in
accounting principle, last year's net earnings (loss) would have been
$2.2 million (3.5% of net sales) and $9.2 million (5.1% of net sales),
respectively. Basic earnings (loss) per share for the third quarter and
nine months ended April 30, 1999 were $.02 and ($.16), respectively, as
compared to ($.72) and ($.87) in the comparable prior-year periods.
Eliminating the effects of last year's one-time charges and change in
accounting principle, last year's basic earnings per share would have
been $.11 and $.45, respectively. The current year earnings were
significantly impacted by the inflator sales price reduction and the
increased G&A and R&D costs discussed above.
REVIEW OF CARRYING VALUE OF ASSETS
The Company is engaged in an in-depth review of the carrying value of its
assets, particularly property, plant and equipment, and believes it may be
necessary to reflect an impairment in the fourth quarter in connection
with aspects of its domestic and international inflator production
facilities. This review is in its early stages and it is impossible at
this time to predict the extent of any impairment or timing of any
write-downs, however, they may be material.
FISCAL 1998 ONE-TIME CHARGES
The Company 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 completely re-implemented the ERP
system, bringing 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 are taken each
quarter-end to ensure the system's accuracy.
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 included 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
would 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. Normal production and customer shipments resumed in April 1998.
<PAGE>
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 consisted of
$.5 million for equipment and personnel relocation and a $4.6 million
charge for idled and/or obsolete equipment and inventory. This
consolidation has generated 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 was an
important milestone toward improving the Company's relationship with this
customer.
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 in the Company's new inflator
production facility. As the Company's high-volume inflator production
lines became more efficient, this low-volume production equipment became
idled and obsolete.
AEROSPACE INVENTORY OBSOLESCENCE
As the Company's aerospace business shifted from traditional
defense/government business to commercial business (satellites and
satellite launch vehicles), a more stringent obsolescence approach became
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 $65.6
million from $78.5 at January 29, 1999. This resulted from reductions in
income taxes receivable, accounts receivable and inventory, and an
increase in accounts payable. During the nine months ended April 30,
1999, the Company made capital expenditures totaling approximately $13.8
million, which were funded from cash flow from operations and 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. At the
Company's request, this agreement was again amended on December 10, 1998
to reduce the amount of the facility to $150 million and to modify the
financial debt covenants. The Company's principal bank is acting as agent
for the banks under this agreement. The interest rate (applicable spread
plus federal funds or LIBOR) is progressive and based upon the Company's
ratio of indebtedness to EBITDA. The spread will fluctuate up or down as
determined by the above ratio. At April 30, 1999, the applicable interest
rate was 7.16%. This credit facility expires on December 18, 2000, and
provides for a twelve-month extension to the termination date at the
Company's option. At April 30, 1999, the Company had $105.0 million of
long-term debt outstanding under this credit facility. Anticipated
working capital requirements, capital expenditures, and facility
expansions are
<PAGE>
expected to be met through borrowings under the credit facility 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. The
problem is complicated and, in fact, consists of three different
problems. Firstly, it has been common practice in computer programming to
identify calendar dates only by the last two digits of the year and to
assume that the first two digits are "19". As a result, automated systems
may interpret "00" as 1900 instead of 2000, and do one of two things:
shut down or make mistakes. Secondly, problems will arise from the fact
that the year 2000 is an irregular leap year. If equipment is not
programmed appropriately and the date February 29, 2000 does not exist in
the software, software applications may malfunction. Finally, the codes
"99" or "00", and "999" or "9999" could mean other things, like "error"
or "miscellaneous". It can be concluded that computer problems may arise
not only on January 1, 2000, but also before the turn of the century and
afterwards. These problems could result in miscalculations or failures
causing disruptions of operations, including, among other things, a
temporary inability to maintain traceability, process transaction, send
invoices, or engage in similar normal business activities.
OEA recognizes that the Year 2000 problem is a serious issue for
businesses, and is committed to making the transition to Year 2000
compliant systems. OEA has had a formal program in place to address and
resolve potential issues associated with the Year 2000 problem since
October 1997, and has devoted significant resources to identify and
replace systems that could be affected by the Year 2000 problem. Our goal
is to prevent the impairment of our critical business operations and
computer processes we share with our suppliers and customers.
OEA PRODUCTS
Because OEA's products do not contain any embedded micro-chips or similar
electronic components that are date sensitive, we do not believe that our
products will require remediation to address the Year 2000 problem.
INFORMATION SYSTEMS
OEA has conducted an inventory of its critical computer systems and has
determined that approximately 95% of such systems now operate with
hardware, operating software and basic business applications software
that has been certified by third party vendors as Year 2000 compliant. In
addition, we have upgraded our human resources, payroll, accounting and
fixed-asset tracking software to the latest versions of such software,
each of which have been certified by the third-party vendor as Year 2000
compliant. We have also installed a Microsoft System Management Server
that will allow us to audit our PC hardware and software and to allow for
the rapid deployment of software updates and service packs that address
any ancillary Year 2000 issues.
The Company's largest Year 2000 project has been the replacement of our
existing inventory control systems with Year 2000 certified inventory
control, manufacturing and accounting systems for our automotive and
aerospace operations. We have installed and are operating these systems
and continue to test them for Year 2000 compliance.
<PAGE>
In addition, we have upgraded all of our telecommunications and
environmental controls technology to systems that have been Year 2000
certified by a third party vendor.
THIRD PARTY SUPPLIERS AND CUSTOMERS
OEA's Year 2000 program also includes assessment of the business impact
on the Company of the failure of third party suppliers and customers to
provide needed products, services, information and payments. We are in
the process of assessing the Year 2000 readiness of each of our suppliers
who is deemed critical to our operations, as well as the Year 2000 status
of our major customers. In addition, OEA and certain of its customers use
Electronic Data Interchange (EDI) to effect business communications,
including orders and shipping information. Our EDI system software has
been upgraded to a system that has been certified by third party vendors
as Year 2000 compliant.
In addition to addressing the Year 2000 problem in these four areas, we
expect to validate our remediation efforts with additional
post-installation testing of certain of our critical computer systems. We
also expect to respond to and initiate requests to test with various
external agents, including certain of our suppliers and customers, after
they ready their systems.
CONTINGENCY PLAN
Our current contingency planning efforts are focused on working to
identify additional sources of supply for critical materials. During
1999, we will continue to assess whether we may experience additional
Year 2000 issues beyond those already addressed. In addition, we will be
assessing other business disruption risks and developing contingency
plans to mitigate such risks. While still too early to identify a
reasonably likely worst case scenario, (i.e. if a second or third tier
supplier were unable to deliver product or if there were an interruption
in a transportation system), we expect to be able to buffer these
potential problems by increasing our raw materials and finished goods
inventory levels during the third and fourth calendar quarters of 1999.
COSTS TO ADDRESS YEAR 2000 ISSUES
The total cost of our Year 2000 remediation project is currently expected
to be approximately $1.5 million. This cost projection does not include
post-installation testing and contingency planning expected to occur in
1999, which could cost up to an additional $100,000. Additionally, it
does not include any costs of business disruptions from supplier or
customer non-performance, which cannot be quantified at this time.
INDEPENDENT VALIDATION AND VERIFICATION
On February 9, 1999, BBK, Ltd., at the request of General Motors,
performed a Year 2000 Readiness Assessment of OEA. The risk assessment
score is based on a statistical model that uses several variables
(acceptance testing, remediation, risk evaluation, planned completion of
inventories, etc.). The assessor then gives a subjective score that
results in a green (low risk), yellow (medium risk), or red (high risk)
rating. Based on this assessment, OEA received a green (low risk of Y2K
failure) rating from BBK.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company sold 4,844 shares of unregistered common stock pursuant
to the exercise of options by key employees in the first half of
fiscal 1999 as follows:
<TABLE>
<CAPTION>
Date Number Aggregate
Of Sale of Shares Offering Price
------- --------- --------------
<S> <C> <C>
10/06/98 4,344 $ 20,272
11/04/98 500 $ 2,333
</TABLE>
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
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>
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 11, 1999 /s/ J. Thompson McConathy
- ------------------- -------------------------
Date J. Thompson McConathy
Vice President Finance
(Principal Financial and Accounting Officer)
June 11, 1999 /s/ Charles B. Kafadar
- ------------------- -------------------------
Date Charles B. Kafadar
Chief Executive Officer
(Principal Executive Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> APR-30-1999
<CASH> 3,949,000
<SECURITIES> 0
<RECEIVABLES> 41,477,000
<ALLOWANCES> 0
<INVENTORY> 46,102,000
<CURRENT-ASSETS> 99,651,000
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0
0
<COMMON> 2,202,000
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