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UNITED STATES
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 January 29, 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.
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(Exact name of registrant as specified in its charter)
Delaware 36-2362379
- -------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
P. O. Box 100488, Denver, Colorado 80250
- ----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
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.
20,599,601 Shares of Common Stock at March 10, 1999.
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INDEX
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<CAPTION>
PAGE NO.
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Condensed Balance Sheets
January 29, 1999 (unaudited)
and July 31, 1998.................................................... 4
Consolidated Condensed Statements of Operations (unaudited)
Three Months and Six Months Ended January 29, 1999
and January 30, 1998................................................. 5
Consolidated Condensed Statements of Cash Flows (unaudited)
Six Months Ended January 29, 1999
and January 30, 1998................................................. 6
Notes to Consolidated Condensed Financial Statements (unaudited) ........... 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 9
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk................ 15
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings........................................................ 16
ITEM 2. Changes in Securities and Use of Proceeds................................ 16
ITEM 3. Defaults on Senior Securities............................................ 16
ITEM 4. Submission of Matters to a Vote of Security Holders...................... 16
ITEM 5. Other Information........................................................ 17
ITEM 6. Exhibits and Reports on Form 8-K......................................... 17
</TABLE>
3
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OEA, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
ASSETS
<TABLE>
<CAPTION>
January 29, 1999 July 31, 1998
---------------- -------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 2,976 $ 1,920
Accounts Receivable, Net 43,973 43,998
Unbilled Costs and Accrued Earnings 2,811 3,190
Income Taxes Receivable 9,033 12,040
Inventories
Raw Material and Component Parts 23,975 25,954
Work-in-Process 21,509 17,222
Finished Goods 2,852 11,391
--------- ---------
48,336 54,567
Prepaid Expenses and Other 1,173 1,863
Total Current Assets 108,302 117,578
Property, Plant and Equipment 284,298 272,411
Less: Accumulated Depreciation 79,469 67,761
--------- ---------
Property, Plant and Equipment, Net 204,829 204,650
Long-Term Receivable 3,000 3,000
Investment in Foreign Joint Venture 2,323 2,323
Other Assets 1,210 1,208
--------- ---------
Total Assets $ 319,664 $ 328,759
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities:
Accounts Payable 21,675 22,457
Interest Payable 2,201 2,368
Accrued Expenses 5,948 6,636
--------- ---------
Total Current Liabilities 29,824 31,461
Long-term Bank Borrowings 121,000 124,000
Deferred Income Taxes 10,821 10,821
Other 958 971
--------- ---------
Total Liabilities 162,603 167,253
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 13,249 13,201
Retained Earnings 145,023 150,440
Less: Cost of Treasury Shares,
1,420,099 and 1,424,943 (2,134) (2,142)
Equity Adjustment from Translation (1,279) (2,195)
--------- ---------
Total Stockholders' Equity 157,061 161,506
--------- ---------
Total Liabilities and Stockholders' Equity $ 319,664 $ 328,759
--------- ---------
--------- ---------
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4
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OEA, INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(in thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 29, January 30, January 29, January 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $ 59,434 $ 59,414 $ 116,227 $ 116,749
Cost of Sales 56,563 51,305 111,847 98,476
------------ ------------ ------------ ------------
Gross Profit 2,871 8,109 4,380 18,273
General and Administrative Expenses 3,113 2,118 5,837 4,003
Research and Development Expenses 735 376 1,741 677
------------ ------------ ------------ ------------
Operating Profit (977) 5,615 (3,198) 13,593
Other Income (Expense):
Interest Income 104 69 138 200
Interest Expense (2,082) (1,401) (3,998) (2,376)
Royalty Income & Other, Net 1,531 (291) 1,643 (137)
------------ ------------ ------------ ------------
(447) (1,623) (2,217) (2,313)
------------ ------------ ------------ ------------
Earnings Before Income Taxes (1,424) 3,992 (5,415) 11,280
Federal and State Income Taxes (423) 1,614 (1,697) 4,270
------------ ------------ ------------ ------------
Net Earnings (Loss) Before
Cumulative Effect of a Change
In Accounting Principle $ (1,001) $ 2,378 $ (3,718) $ 7,010
Cumulative Effect of a Change
in Accounting Principle --- --- --- (10,040)
------------ ------------ ------------ ------------
Net Earnings (Loss) $ (1,001) $ 2,378 $ (3,718) $ (3,030)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Earnings (Loss) Per Share Before
Cumulative Effect of a Change in
Accounting Principle -
Basic and Diluted $ (0.05) $ 0.12 $ (0.18) $ 0.34
Cumulative Effect of a Change in
Accounting Principle -
Basic and Diluted $ --- $ --- $ --- $ (0.49)
------------ ------------ ------------ ------------
Earnings (Loss) Per Share -
Basic and Diluted (0.05) 0.12 (0.18) (0.15)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted Average Number of
Shares Outstanding - Basic 20,599,574 20,576,208 20,597,779 20,566,693
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted Average Number of
Shares Outstanding - Diluted 20,850,302 20,610,612 20,753,654 20,596,784
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
5
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OEA, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
January 29, 1999 January 30, 1998
---------------- ----------------
<S> <C> <C>
Operating Activities
Net Loss $ (3,718) $ (3,030)
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 11,692 10,867
Decrease in deferred compensation payable (13) ---
Gain (Loss) on disposal of property, plant, and equipment (5) 3
Changes in operating assets and liabilities:
Accounts Receivable 165 (3,758)
Unbilled costs and accrued earnings 379 (127)
Inventories 6,315 (7,883)
Prepaid expenses and other 692 (598)
Accounts Payable and accrued expenses (1,941) (7,339)
Income taxes payable 3,006 2,985
---------------- ----------------
Net cash provided by operating activities 16,572 1,160
Investing Activities:
Capital expenditures (11,006) (30,757)
Proceeds from sale of property, plant, and equipment 8 255
Increase in other assets, net (82) (80)
---------------- ----------------
Net cash used in investing activities (11,080) (30,582)
Financing Activities:
Purchases of common stock for treasury --- (43)
Proceeds from issuance of treasury stock 22 226
Capital contributions 33 ---
Payment of Dividends (1,699) (6,791)
Increase/(decrease) in borrowings, net (3,000) 34,800
---------------- ----------------
Net cash provided by/(used in) financing activities (4,644) 28,192
Effect of exchange rate changes on cash 208 (161)
---------------- ----------------
Net increase/(decrease) in cash and cash equivalents 1,056 (1,391)
Cash and cash equivalents at beginning of period 1,920 4,138
---------------- ----------------
Cash and cash equivalents at end of period $ 2,976 $ 2,747
---------------- ----------------
---------------- ----------------
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6
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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 six month periods ended January 29, 1999 and January 30, 1998.
Certain amounts in the fiscal 1998 financial statements have been
reclassified to conform with the fiscal 1999 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, 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. The details in
those notes have not changed, except as a result of normal transactions in
the interim.
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, ("SFAS
130"). Comprehensive income generally represents all changes in stockholders'
equity, except those resulting from investments or contributions by
stockholders. Total comprehensive income (loss) for the first six months of
fiscal 1999 and fiscal 1998 were:
<TABLE>
<CAPTION>
FY 1999 FY 1998
--------- ---------
<S> <C> <C>
Net Loss ($ 3,718) ($ 3,030)
Equity Adjustment from Translation 916 (127)
--------- ---------
Total Comprehensive Income (Loss) ($ 2,802) ($ 3,157)
--------- ---------
--------- ---------
</TABLE>
7
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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 January 29, 1999, the Company had $121 million of long term
debt drawn down on this credit facility. All outstanding debt at January 29,
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.
8
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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, inflator
prices, inflator and initiator demand, sales volume increases, the utilization
rate of the Company's inflator manufacturing facility, the benefits of cost
reduction programs and improved manufacturing processes, 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:
<TABLE>
<CAPTION>
Comparison of
Three Months Ended
------------------
January 29, 1999 January 30, 1998
---------------- ----------------
Dollars Dollars
(in thousands) % of Sales (in thousands) % of Sales
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Sales $ 59,434 100.0% $ 59,414 100.0%
Cost of Sales 56,563 95.2% 51,305 86.4%
-------------- -------------- -------------- --------------
Gross Margin 2,871 4.8% 8,109 13.6%
General and
Administrative Expenses 3,113 5.2% 2,118 3.6%
Research and
Development Expenses 735 1.2% 376 .6%
-------------- -------------- -------------- --------------
Operating Profit (Loss) (977) (1.6%) 5,615 9.5%
Other Income (Expense) (447) (.8%) (1,623) (2.7%)
-------------- -------------- -------------- --------------
Earnings (Loss) Before Tax (1,424) (2.4%) 3,992 6.7%
Income Tax Expense (Benefit) (423) (.7%) 1,614 2.7%
-------------- -------------- -------------- --------------
Net Earnings (Loss) Before
Cumulative Effect of a Change
In Accounting Principle (1,001) (1.7%) 2,378 4.0%
Cumulative Effect of a
Change in Accounting Principle --- --- --- ---
-------------- -------------- -------------- --------------
Net Earnings (Loss) $ (1,001) (1.7%) $ 2,378 4.0%
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
9
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<TABLE>
<CAPTION>
Comparison of
Six Months Ended
------------------
January 29, 1999 January 30, 1998
---------------- ----------------
Dollars Dollars
(in thousands) % of Sales (in thousands) % of Sales
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Sales $ 116,227 100.0% $ 116,749 100.0%
Cost of Sales 111,847 96.2% 98,476 84.3%
-------------- -------------- -------------- --------------
Gross Margin 4,380 3.8% 18,273 15.7%
General and
Administrative Expenses 5,837 5.0% 4,003 3.4%
Research and
Development Expenses 1,741 1.5% 677 .6%
-------------- -------------- -------------- --------------
Operating Profit (Loss) (3,198) (2.8%) 13,593 11.6%
Other Income (Expense) (2,217) (1.9%) (2,313) (2.0%)
-------------- -------------- -------------- --------------
Earnings (Loss) Before Tax (5,415) (4.7%) 11,280 9.7%
Income Tax Expense (Benefit) (1,697) (1.5%) 4,270 3.7%
-------------- -------------- -------------- --------------
Net Earnings (Loss) Before
Cumulative Effect of a Change
In Accounting Principle (3,718) (3.2%) 7,010 6.0%
Cumulative Effect of a
Change in Accounting Principle --- --- (10,040) (8.6%)
-------------- -------------- -------------- --------------
Net Earnings (Loss) $ (3,718) (3.2%) $ (3,030) (2.6%)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
NET SALES
Net sales were $59.4 million for both the quarter ended January 29, 1999
and the quarter ended January 30, 1998. Net sales for the six months
ended January 29, 1999 were down by less than 0.5% to $116.2 million, as
compared to the prior-year period, due to a reduction in aerospace
sales, substantially offset by an increase in automotive sales.
Automotive segment sales increased 1% ($.6 million) to $48.4 million in
the second quarter and 2% ($2.1 million) to $94.9 million for the first
half of fiscal 1999, as compared to the prior-year periods, driven by
increased initiator sales. Inflator unit shipments increased 21% and
26%, respectively, in the second quarter and first half, as compared to
the prior-year periods. Total inflator shipments exceeded 3.3 million
units for the first half of fiscal 1999. However, an industry-wide
inflator price adjustment became effective August 1, 1998. The impact on
the Company was a weighted average inflator price reduction of 23% in
the first half of the fiscal year, or $10 million each quarter. The
Company believes that this large reduction in inflator sales price was a
market adjustment and is not representative of future price reductions.
The effects of the price reduction, combined with a shift in inflator
product mix, caused inflator sales to decrease by $2.1 million and $2.4
million, respectively, for the quarter and six months ended January 29,
1999, as
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compared to the prior-year periods. Initiator unit shipments to
outside customers increased 51% and 47%, respectively, in the second
quarter and first half, as compared to the prior-year periods. Total
initiator shipments exceeded 12.2 million units for the first half of
fiscal 1999. This unit increase, partially offset by initiator price
reductions and a shift in initiator product mix, resulted in an
initiator sales increase of $2.7 million and $4.5 million, respectively,
for the quarter and six months ended January 29, 1999, as compared to
the prior-year periods. The significant increases in both inflator and
initiator unit sales reflect continued strong customer acceptance of the
Company's automotive safety products and increased demand for air bags
from both domestic and foreign automobile manufacturers. Inflator unit
shipments are expected to continue to increase quarter over quarter
throughout the remainder the year.
Aerospace segment sales decreased 5% ($.6 million) to $11.0 million in
the second quarter and 11% ($2.6 million) to $21.4 million for the first
half of fiscal 1999, as compared to the prior-year periods. These
decreases were primarily due to a reduction in unbilled sales, a first
quarter slowdown on the Delta program and the timing of foreign sales.
COST OF SALES
Cost of sales for the second quarter ended January 29, 1999 was $56.6
million, as compared to $51.3 million for the same period last year.
Cost of sales for the six months ended January 29, 1999 was $111.8
million, as compared to $98.5 million for the comparable period last
year, primarily due to the increased volume in the automotive segment.
Automotive segment cost of sales increased 13.6% ($5.7 million) to $47.5
million in the second quarter and increased 18.5% ($14.6 million) to
$93.7 million in the first half of fiscal 1999, as compared to the
prior-year periods. This reflects the 26% increase in inflator shipments
and the 47% increase in initiator shipments, partially offset by the
effects of the Company's cost reduction programs. As a percentage of
sales, cost of sales increased from 87% and 85%, respectively, in the
prior-year second quarter and first half to 98% and 99%, respectively,
in the current-year periods. These increases reflect the inflator sales
price reduction discussed in "Net Sales" above and increased costs
associated with the Company's new inflator production facility, which
was not fully operational for the entire prior-year period, but were
partially offset by cost reductions achieved in the first half of fiscal
1999.
The new inflator production facility represents 10 million of the
Company's 15 million annual inflator capacity. This facility has been
operating significantly below target utilization (23% utilization in the
first quarter and 24% utilization in the second quarter) in fiscal 1999.
Significant underutilization of inflator capacity puts tremendous
pressure on the Company's cost structure and automotive margins.
However, as inflator volumes increase in the third and fourth quarters
of this year, the new facility's utilization rate is expected to
increase significantly by the end of the fiscal year.
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 in the first half of fiscal 1999. For example, the unit cost of
a generation 1 passenger inflator in the second quarter of fiscal 1999
was 19% less than the fiscal 1998 average unit cost for the same
inflator. The Company expects to phase in additional cost reductions
throughout the second half of fiscal 1999 and thereafter. 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 receive approvals late in the second quarter for the first series of
design changes and now expect to have them substantially into production
by the end of the third quarter of this fiscal year.
Aerospace segment cost of sales decreased 4.7% ($.4 million) to $9.0
million in the second quarter and decreased 6.5% ($1.3 million) to $18.2
million in the first half of fiscal 1999, as compared to the prior-year
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periods. These decreases were primarily due to the reduced aerospace
sales and an unfavorable shift in product mix.
GROSS MARGIN
Gross margin for the second quarter ended January 29, 1999 was $2.9
million (4.8% of net sales), as compared to $8.1 million (13.6% of net
sales) for the comparable period last year. Gross margin for the six
months ended January 29, 1999 was $4.4 million (3.8% of net sales), as
compared to $18.3 million (15.7% of net sales) for the comparable period
last year, primarily due to lower automotive segment margins.
Automotive segment gross margin was $.9 million (1.9% of net automotive
sales) for the second quarter and $1.2 million (1.3% of net automotive
sales) for the first half of fiscal 1999, as compared to $6.0 million
(12.5% of net automotive sales) and $13.8 million (14.8% of net
automotive sales), respectively, for the comparable prior-year periods.
These decreases in gross margin were primarily due to the inflator sales
price reduction discussed above. Eliminating the effects of the inflator
price reduction, automotive gross margin would have been $10.9 million
(18.7% of net automotive sales) for the second quarter and $21.2 million
(18.5% of net automotive sales) for the first half of fiscal 1999.
Automotive gross margins are expected to improve in future quarters as
the Company's cost reduction efforts continue to phase in and as sales
volumes continue to increase throughout the second half of the year.
Aerospace segment gross margin was $2.0 million (17.8% of net aerospace
sales) for the second quarter and $3.2 million (15.0% of net aerospace
sales) for the first half of fiscal 1999, as compared to $2.1 million
(18.2% of net aerospace sales) and $4.5 million (18.8% of net aerospace
sales), respectively, for the prior-year periods. These decreases in
gross margin were primarily due to the decrease in aerospace sales and
the unfavorable shift in product mix.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the second quarter and first
half ended January 29, 1999 were $3.1 million (5.2% of net sales) and
$5.8 million (5.0% of net sales), respectively, as compared to $2.1
million (3.6% of net sales) and $4.0 million (3.4% of net sales),
respectively, for the comparable prior-year periods. These increases
were primarily due to the reclassification of certain expenses from
manufacturing overhead, such as premium freight. General and
administrative expenses were also impacted by costs associated with the
expansion of the Company's sales and marketing department.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the second quarter and first half
of fiscal 1999 were $.7 million and $1.7 million, respectively, as
compared to $.4 million and $.7 million, 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.
OPERATING PROFIT
The Company recorded operating losses for the second quarter and first
half of fiscal 1999 of $1.0 million (-1.6% of net sales) and $3.2
million (-2.8% of net sales), respectively. The Company had operating
profits of $5.6 million (9.5% of net sales) and $13.6 million (11.6% of
net sales) in the comparable prior-year periods. These reductions were
primarily due to 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 second quarter and first
half of fiscal 1999 of $.4 million and $2.2 million, respectively. The
Company had other expenses of $1.6 million and $2.3 million in the
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comparable prior-year periods. Net interest expense for the second
quarter and first half increased $.6 million and $1.7 million,
respectively, over the prior-year periods primarily due to a reduction
in capitalized interest. The increased interest costs were substantially
offset by $1.5 million of fixed royalty income, which was recorded in
the second quarter. 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 the fiscal 1999 second quarter
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.
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 losses for the second quarter and first half of
fiscal 1999 of $1.0 million and $3.7 million, respectively. The Company
had net earnings (losses) of $2.4 million and ($3.0) million in the
comparable prior-year periods. Basic earnings (loss) per share for the
second quarter and first half of fiscal 1999 were ($.05) and ($.18),
respectively, as compared to $.12 and ($.15) in the comparable
prior-year periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased during the quarter to $78.5
million from $92.3 at October 30, 1998, primarily due to a reduction in
cash and accounts receivable. During the first half of fiscal 1999, the
Company made capital expenditures totaling approximately $11.0 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 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 January 29, 1999, the applicable
interest rate was 7.04%. 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 January 29, 1999, the Company had $121.0
million of long-term debt outstanding under this credit facility.
Anticipated working capital requirements, capital expenditures, and
facility expansions are expected to be met through borrowings under the
credit facility and from internally generated funds.
13
<PAGE>
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.
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
14
<PAGE>
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 tear
supplier were unable to deliver product or if there were an interruption
in a transportation system), we will 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 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
15
<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
At the Company's annual shareholders' meeting held on January 14,
1999, nine directors were elected, the amendment to the OEA, Inc.
Employee Stock Option Plan was adopted, and the OEA, Inc. Directors'
Compensation Plan was adopted.
The Amendment to the Employee Stock Option Plan increased the number
of shares of Common Stock reserved for issuance from 600,000 shares
to 1,350,000 shares. The Amendment also prohibits, without the
further approval of the shareholders of the Company, the Board of
Directors from authorizing the amendment of any outstanding Option to
reduce the Option Price. A detailed description of the Amendment was
included in and is incorporated by reference from the Registrant's
definitive proxy statement, as amended, for its 1999 annual
shareholders' meeting, which was filed with the Securities and
Exchange Commission on December 15, 1998.
The OEA, Inc. Directors' Compensation Plan is divided into two
separate programs. The Compensation Choice Program allows each
eligible director to make an annual choice to be paid Director's
Compensation in cash, Common Stock, Stock Options, or a combination
thereof. The second program, or the Deferred Compensation Program,
allows for each eligible director to decide to defer some or all of
his annual Director's Compensation for payment at a later date. A
detailed description of the Directors' Compensation Plan was included
in and is incorporated by reference from the Registrant's definitive
proxy statement, as amended, for its 1999 annual shareholders'
meeting, which was filed with the Securities and Exchange Commission
on December 15, 1998.
16
<PAGE>
RESULTS OF SHAREHOLDERS' VOTING AT ANNUAL MEETING
<TABLE>
<CAPTION>
VOTES CAST
-----------------------------------------
No Proxy Total Shares
Directors Elected: For Against Withheld Received Outstanding
------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Robert J. Schultz, Chairman 18,363,126 --- 251,245 1,985,230 20,599,601
Charles B. Kafadar 18,394,085 --- 220,286 1,985,230 20,599,601
George S. Ansell 18,324,522 --- 289,849 1,985,230 20,599,601
Erwin H. Billig 18,321,064 --- 293,307 1,985,230 20,599,601
James R. Burnett 18,392,652 --- 221,719 1,985,230 20,599,601
Richard L. Corbin 18,389,170 --- 225,201 1,985,230 20,599,601
Philip E. Johnson 18,395,689 --- 218,682 1,985,230 20,599,601
Donald E Miller 18,381,853 --- 232,518 1,985,230 20,599,601
Lewis W. Watson 18,345,629 --- 268,742 1,985,230 20,599,601
</TABLE>
<TABLE>
<CAPTION>
Broker No Proxy Total Shares
For Against Withheld Non-Votes Received Outstanding
------------ ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OEA, Inc. Employee Stock
Option Plan Amendment 10,466,829 1,591,983 309,697 6,245,862 1,985,230 20,599,601
OEA, Inc. Directors'
Compensation Plan 11,222,504 988,381 157,624 6,245,862 1,985,230 20,599,601
</TABLE>
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
Form 8-K filed with the Securities and Exchange Commission
on February 19, 1999.
17
<PAGE>
THIS PAGE
INTENTIONALLY LEFT BLANK
18
<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)
March 12, 1999 /s/ J. Thompson McConathy
- ------------------------- ----------------------------
Date J. Thompson McConathy
Vice President Finance
(Principal Financial Officer)
March 12, 1999 /s/ Charles B. Kafadar
- ------------------------- ----------------------------
Date Charles B. Kafadar
Chief Executive Officer
(Principal Executive Officer)
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> JAN-29-1999
<CASH> 2,976,000
<SECURITIES> 0
<RECEIVABLES> 43,973,000
<ALLOWANCES> 0
<INVENTORY> 48,336,000
<CURRENT-ASSETS> 108,302,000
<PP&E> 284,298,000
<DEPRECIATION> 79,469,000
<TOTAL-ASSETS> 319,664,000
<CURRENT-LIABILITIES> 29,824,000
<BONDS> 0
0
0
<COMMON> 2,202,000
<OTHER-SE> 154,859,000
<TOTAL-LIABILITY-AND-EQUITY> 319,664,000
<SALES> 116,227,000
<TOTAL-REVENUES> 116,227,000
<CGS> 111,847,000
<TOTAL-COSTS> 119,425,000
<OTHER-EXPENSES> 2,217,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,998,000
<INCOME-PRETAX> (5,415,000)
<INCOME-TAX> (1,697,000)
<INCOME-CONTINUING> (3,718,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,718,000)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
