<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the quarterly period ended: AUGUST 3, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________to_______________
Commission file number: 0-19330
SPECIAL DEVICES, INCORPORATED
(Exact name of Registrant as specified in its charter)
DELAWARE 95-3008754
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16830 W. PLACERITA CANYON ROAD, NEWHALL, CALIFORNIA 91321
(Address of principal executive offices)
(805) 259-0753
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
At September 12, 1997, the total number of outstanding shares of registrant's
common stock was 7,728,266.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
October 31, August 3,
1996 1997
----------- -----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 2,592,578 $ 1,954,263
Marketable securities 10,700,000 6,200,000
Accounts receivable, net of allowance of
$155,959 at October 31, 1996 and $190,855 at
August 3, 1997 for doubtful accounts 12,663,230 14,625,815
Inventories 18,298,705 17,694,965
Prepaid expenses 401,645 707,251
Deferred income taxes 670,000 891,000
----------- -----------
Total current assets 45,326,158 42,073,294
----------- -----------
Property, plant and equipment, at cost:
Land 1,611,331 1,611,331
Buildings 7,562,979 7,630,087
Machinery and equipment 35,736,957 40,398,965
Furniture and fixtures 2,221,376 2,576,037
Transportation equipment 3,066,463 2,486,034
Leasehold improvements 2,334,412 2,960,266
Construction in progress (includes land and related costs of
$3,700,000 at October 31, 1996 and $7,240,000 at August 3, 1997) 5,695,185 14,382,969
----------- -----------
58,228,703 72,045,689
Less accumulated depreciation 17,597,716 22,255,710
----------- -----------
40,630,987 49,789,979
----------- -----------
Other assets 202,050 162,050
----------- -----------
$86,159,195 $92,025,323
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
- 2 -
<PAGE> 3
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
October 31, August 3,
1996 1997
----------- -----------
(Unaudited)
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 1,296,973 $ 205,461
Trade accounts payable 3,075,758 2,982,431
Accounts payable to related parties 2,294,688 2,424,847
Accrued payroll and benefits 1,104,613 1,605,642
Accrued expenses 605,881 828,877
Income taxes 1,991,290 1,891,290
----------- -----------
Total current liabilities 10,369,203 9,938,548
Long-term debt, less current portion 3,319,709 2,099,600
Deferred income taxes 2,769,000 2,890,000
----------- -----------
Total liabilities 16,457,912 14,928,148
----------- -----------
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $.01 par value. Authorized
2,000,000 shares; no shares issued or outstanding -- --
Common stock, $.01 par value. Authorized
20,000,000 shares; issued and outstanding
7,675,535 shares at October 31, 1996, and
7,700,862 shares at August 3, 1997
76,756 77,009
Additional paid-in capital 49,911,050 50,134,942
Retained earnings 19,713,477 26,885,224
----------- -----------
Total stockholders' equity 69,701,283 77,097,175
----------- -----------
$86,159,195 $92,025,323
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
- 3 -
<PAGE> 4
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS - UNAUDITED
<TABLE>
<CAPTION>
Three months ended Nine months ended
----------------------------------- -----------------------------------
July 28, August 3, July 28, August 3,
1996 1997 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 25,631,032 $ 36,970,324 $ 72,394,385 $97,299,664
Cost of sales 20,393,517 29,876,026 58,695,232 78,517,404
------------ ------------ ------------ -----------
Gross profit 5,237,515 7,094,298 13,699,153 18,782,260
------------ ------------ ------------ -----------
Operating expenses 1,746,358 2,550,840 5,576,409 7,235,866
------------ ------------ ------------ ----------
Earnings from operations 3,491,157 4,543,458 8,122,744 11,546,394
------------ ------------ ------------ -----------
Other income (expense):
Interest expense (89,177) (67,229) (284,965) (201,157)
Interest income 112,901 75,717 348,942 275,464
Other, net 9,460 3,486 18,071 1,046
------------ ------------ ------------ -----------
Net other income 33,184 11,974 82,048 75,353
------------ ------------ ------------ -----------
Earnings before income taxes 3,524,341 4,555,432 8,204,792 11,621,747
Income taxes 1,376,000 1,760,000 3,171,000 4,450,000
------------ ------------ ------------ -----------
Net earnings $ 2,148,341 $ 2,795,432 $ 5,033,792 $7,171,747
============ ============ ============ ===========
Net earnings per share $ .28 $ .36 $ .65 $ .93
============ ============ ============ ===========
Weighted average common shares
and common equivalents outstanding 7,768,848 7,760,565 7,757,154 7,741,942
============ ============ ============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
- 4 -
<PAGE> 5
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - UNAUDITED
FOR THE NINE MONTHS ENDED AUGUST 3, 1997
<TABLE>
<CAPTION>
Additional Total
Common Stock paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at October 31, 1996 7,675,535 $ 76,756 $49,911,050 $19,713,477 $69,701,283
Issuance of common stock on
exercise of stock options 25,327 253 223,892 -- 224,145
Net earnings (unaudited) -- -- -- 7,171,747 7,171,747
----------- ----------- ----------- ----------- -----------
Balance at August 3, 1997 7,700,862 $ 77,009 $50,134,942 $26,885,224 $77,097,175
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
- 5 -
<PAGE> 6
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
Nine months ended
------------------------------
July 28, August 3,
1996 1997
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 5,033,792 $ 7,171,747
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation 4,011,776 4,657,994
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 271,112 (1,962,585)
(Increase) decrease in inventories (1,894,531) 603,740
(Increase) in prepaid expenses (236,935) (305,606)
Decrease (increase) in deferred income taxes 40,000 (100,000)
Decrease in other assets 281,585 40,000
(Decrease) increase in accounts payable,
accounts payable to related parties and other
accrued expenses (1,105,938) 760,857
Increase (decrease) in income taxes payable 266,470 (100,000)
------------ ------------
Net cash provided by operating activities 6,667,331 10,766,147
------------ ------------
Cash flows from investing activities:
(Purchases) of property, plant and equipment (5,635,148) (13,816,986)
Sales of marketable securities -- 4,500,000
------------ ------------
Net cash (used in) investing activities (5,635,148) (9,316,986)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 119,234 224,145
Payments of long-term debt (952,563) (146,735)
Net advance (repayment) of notes payable to bank -- (2,164,886)
------------ ------------
Net cash (used in) financing activities (833,329) (2,087,476)
------------ ------------
Net increase (decrease) in cash 198,854 (638,315)
Cash at beginning of period 1,928,185 2,592,578
------------ ------------
Cash at end of period $ 2,127,039 $ 1,954,263
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 75,502 $ 211,572
Income taxes 1,940,000 4,907,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
- 6 -
<PAGE> 7
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 3, 1997
(UNAUDITED)
(1) INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
of Special Devices, Incorporated, a Delaware corporation, include all
adjustments (consisting of normal recurring entries) which management believes
are necessary for a fair presentation of the financial position and results of
operations for the periods presented. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
It is recommended that the accompanying financial statements be read in
conjunction with the Company's audited financial statements and footnotes as of
and for the year ended October 31, 1996. Operating results for the nine month
period ended August 3, 1997 are not necessarily indicative of the operating
results for the full fiscal year.
(2) ACCOUNTS RECEIVABLE
Accounts receivable from long-term contracts are as follows:
<TABLE>
<CAPTION>
October 31, August 3,
1996 1997
----------- -----------
<S> <C> <C>
U.S. Government $ 2,299,218 $ 1,085,580
U.S. Government contractors 4,131,795 3,917,842
Commercial customers 6,388,176 9,813,248
----------- -----------
12,819,189 14,816,670
Less allowance for doubtful accounts 155,959 190,855
----------- -----------
Total $12,663,230 $14,625,815
=========== ===========
</TABLE>
- 7 -
<PAGE> 8
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 3, 1997
(Unaudited)
(3) INVENTORIES
Inventories and inventoried costs relating to long-term contracts are
classified as follows:
<TABLE>
<CAPTION>
October 31, August 3,
1996 1997
----------- -----------
<S> <C> <C>
Raw materials and components $ 6,167,337 $ 5,931,150
Work in process 7,278,149 7,172,959
Finished goods 1,020,337 751,162
Inventoried costs relating to
long term contracts, net of
amounts attributed to revenues
recognized to date 3,835,468 4,067,470
----------- -----------
18,301,291 17,922,741
Less progress payments related
to long-term contracts 2,586 227,776
----------- -----------
$18,298,705 $17,694,965
=========== ===========
</TABLE>
Inventoried costs relate to costs of goods currently in progress. There are no
significant inventoried costs relating to the production costs of delivered
units over the estimated average cost of all units expected to be produced.
(4) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
October 31, August 3,
1996 1997
---------- ----------
<S> <C> <C>
Bank borrowings $2,164,886 $ 542,977
Finance company 2,392,295 1,743,838
Other notes 59,501 18,246
---------- ----------
4,616,682 2,305,061
Less current portion 1,296,973 205,461
---------- ----------
$3,319,709 $2,099,600
========== ==========
</TABLE>
In December 1996, the Company signed a new credit agreement (the "Credit
Agreement") with a new bank and replaced its prior credit facility. Under the
prior credit facility, the Company had a term note outstanding which bore
interest at 7.3 percent, the unpaid balance of which was approximately
$1,503,000 at November 30, 1996. The balance of the Term Loan and any other
borrowings outstanding with the former bank were paid at that time. The new
Credit Agreement expires May 1, 1998, and any borrowings under the new Credit
Agreement bear interest at the bank's Reference Rate less .25 percentage point,
or at the Company's option, at LIBOR plus .75 percentage point. The New Credit
Agreement contains two revolving credit facilities. The Company may
- 8 -
<PAGE> 9
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 3, 1997
(Unaudited)
borrow up to $10,000,000 under Facility No. 1, and may borrow up to $12,000,000
under Facility No. 2. Borrowings under both facilities may be used for general
and other corporate purposes. Facility No. 1 may be used for commercial
letters of credit not to exceed $500,000 and for standby letters of credit not
to exceed $6,000,000, which reduce the amount available under the agreement.
In addition, the Company has the option of converting outstanding borrowings,
in increments of not less than $1,000,000, under Facility No. 2 to a 5-year
term loan. Any amounts converted to term debt under Facility No. 2 will bear
interest at the bank's long-term interest rate in effect at the time of such
conversion. As of August 3, 1997, no amounts were outstanding under either
credit facility. The Company had outstanding approximately $5,500,000 of
performance bonds secured by standby letters of credit related to the
development of new facilities (see Footnote 8).
The Company's wholly-owned subsidiary, Scot, Inc. has a term loan with
a bank, secured by certain real property of Scot. The principal balance
outstanding at October 31, 1996, was $582,000, and at August 3, 1997 was
$540,000. The loan is being amortized with monthly payments of approximately
$7,800, including interest, adjusted monthly, at 1.9% over the bank's LIBOR
rate (5.63% at August 3, 1997). Any unpaid principal is due on August 1, 2001.
The finance company notes are secured by related equipment. The first
note is being amortized over 12 years, with interest at prime plus one-half
percent through November 2006, when the note will be fully amortized. Monthly
payments are approximately $23,100. The unpaid balance at August 3, 1997, was
$1,740,000. A second note, which was secured by a Company owned airplane, was
being amortized over 10 years, with interest at prime plus one-half percent
through December 2004, when the note will be fully amortized. In May 1997, the
Company entered into an agreement with its Chairman whereby the Chairman
assumed responsibility for the note, and agreed to buy the airplane at its fair
market value. The Company is liable to Beechcraft Acceptance under the
promissory note in the event the Chairman defaults. The net book value of the
airplane, $523,000, and the balance of the note $530,000, were removed from the
Company's books to reflect this transfer of liability.
(5) STOCKHOLDERS' EQUITY
The Company's amended and restated 1991 Stock Incentive Plan (the
"Plan") is administered by a committee of the Board of Directors which
determines the amount, type, terms and conditions of the awards made pursuant to
the Plan. The Plan provides for issuance of restricted stock, grants of
incentive and non-qualified stock options, stock appreciation rights and
performance share awards. There are 560,000 shares of common stock reserved for
issuance under the Plan.
Pursuant to the Plan, no option may be granted that is exercisable in
less than six months or more than ten years from the grant date. Certain events,
including a change in control of the Company, may accelerate exercise dates,
cause forfeiture of all shares of any restricted stock and terminate all
conditions relating to the realization of any performance awards.
No options were granted during the quarter ended August 3, 1997 and
8,833 options were exercised at prices ranging from $9.50 to $10.00 per share.
At August 3, 1997, there were options outstanding to purchase 322,547 shares,
which options were exercisable with respect to 159,740 shares.
In December 1996, the Company's Stock Option Committee authorized stock
option grants to certain employees via a special grant which is not part of the
1991 Stock Option Plan. Under terms of this authorization, options to purchase
130,000 shares were granted which vest ratably over 5 years from the grant date
and options to purchase 312,000 shares were granted which vest ratably over a
period ranging from 5 to 8 years from the grant date. The grants for the later
options contain vesting acceleration clauses during the first 36 months of the
- 9 -
<PAGE> 10
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 3, 1997
(Unaudited)
option; the acceleration clauses are contingent upon the price of the Company's
Common Stock attaining a certain level, and upon the Company attaining certain
earnings levels. The options were granted at the fair market value of the
stock on the grant date, which was $17.00 per share. These grants were
approved by the Company's shareholders at the Annual Shareholders Meeting in
March 1997.
(6) NET INCOME PER SHARE
Net income per share is computed by dividing net income by the
weighted average number of common stock and common stock equivalents
outstanding during the period. Fully diluted earnings per share are presented
when dilutive.
(7) INCOME TAXES
The provisions for income taxes consist of the following for each
respective nine months ended:
<TABLE>
<CAPTION>
July 28, August 3,
1996 1997
----------- -----------
<S> <C> <C>
Current:
Federal $ 2,437,000 $ 3,868,000
State 728,000 941,000
----------- -----------
$ 3,165,000 $ 4,809,000
=========== ===========
Deferred:
Federal $ (30,000) $ (309,000)
State 36,000 (50,000)
----------- -----------
$ 6,000 $ (359,000)
=========== ===========
Total:
Federal $ 2,407,000 $ 3,559,000
State 764,000 891,000
----------- -----------
$ 3,171,000 $ 4,450,000
=========== ===========
</TABLE>
- 10 -
<PAGE> 11
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 3, 1997
(Unaudited)
Temporary differences which give rise to deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
October 31, August 3,
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Depreciation $(2,769,000) $(3,165,000)
----------- -----------
Deferred tax assets:
Allowance for doubtful accounts 60,000 73,000
Inventory 264,000 575,000
Vacation 153,000 425,000
State taxes 193,000 93,000
----------- -----------
670,000 1,166,000
----------- -----------
Net deferred tax liability $(2,099,000) $(1,999,000)
=========== ===========
</TABLE>
Management believes it is more likely than not that future operations
will generate sufficient taxable income to realize deferred tax assets.
The provisions for income taxes for the nine months ended 1996 and
1997 differ from the provisions that would have resulted by applying the
Federal statutory rates during such periods to the income before income taxes.
The reasons for these differences are as follows:
<TABLE>
<CAPTION>
July 28, August 3,
1996 1997
----------- -----------
<S> <C> <C>
Income taxes at Federal rate $ 2,398,000 $ 3,837,000
State income taxes 773,000 959,000
Other -- (346,000)
----------- -----------
$ 3,171,000 $ 4,450,000
=========== ===========
</TABLE>
(8) COMMITMENTS AND CONTINGENCIES
The Company is a defendant in various pending claims and lawsuits. In
the opinion of the Company's management, after consultation with counsel,
disposition of such matters are not expected to have a material adverse effect
upon the results of operations or the financial position of the Company.
The Company had commitments at August 3, 1997 to acquire capital
equipment, the unpaid cost of which aggregated approximately $3,500,000
primarily for production and other support equipment required for the increased
operations of the Automotive Products Division. In addition, in order to
improve manufacturing efficiencies and to provide facilities for growth, the
Company purchased in October 1996, approximately 280 acres of land in the City
of Moorpark, located in Ventura County, north of Los Angeles, where the Company
plans to build new facilities. Development of the land infrastructure,
including grading, is at a stage of completion which will allow the
construction of the buildings to begin in September 1997. The building
construction is expected to be completed during the Summer of 1998, and the
Company expects to move its entire
- 11 -
<PAGE> 12
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 3, 1997
(Unaudited)
California-based operations, including Automotive Products, Aerospace and the
administrative offices to these new facilities. Total net cost of the project
is estimated at $20,000,000 of which $7,240,000 had been spent at August 3,
1997 and is included in construction in progress in the accompanying condensed
consolidated balance sheet. The Company anticipates spending an additional
approximate $2,000,000 in fiscal year 1997, and approximately $10,760,000 (net
of anticipated proceeds for two commercial lots being offered for sale by the
Company) in fiscal year 1998 to complete this project. The Company has
committed to complete the land infra-structure, the total cost of which is
estimated to be approximately $9,500,000.
The statements above regarding the land purchased by the
Company in Moorpark and the construction of facilities on the land by the
Company are forward-looking statements. Actual results and the timing of those
results may vary depending on various factors including, for example, the
ability of the Company to obtain permits and approvals that do not contain
conditions or restrictions that are unduly restrictive or otherwise
unacceptable to the Company, the Company's not encountering any unforeseen
conditions relating to the property that make completion of the land
infrastructure work or construction work more expensive, difficult or time
intensive than is currently expected, the ability of the contractors and
subcontractors retained by the Company to complete the work on the schedule and
for the costs described above, and other factors which may develop during the
course of this project.
- 12 -
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS FROM OPERATIONS
RESULTS FROM OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED AUGUST 3, 1997 TO THE THREE MONTHS ENDED
JULY 28, 1996
Net Sales
Net sales for the Automotive Products Division were $30,640,000 for
the quarter ended August 3, 1997, compared to net sales of $19,622,000 for the
same period last year. The increase of $11,018,000, or 56.2%, was due to a 93%
increase in units shipped during the current year quarter compared to the
number of units shipped for the same period last year. The increase in units
shipped resulted primarily from increased shipments to Autoliv ASP,
Incorporated ("Autoliv") (formerly Morton International) under terms of a
supplier agreement signed in November 1995. The initiators sold to Autoliv are
generally at lower average unit selling prices than those sold to other
customers, due to simplicity of design, resulting in revenue dollars increasing
at a slower rate than the increase in units sold. Sales to TRW, Inc. as a
percent of Automotive Product Division sales were 60.9% for the current year
third quarter compared to 72.3% for the same period last year, and were 50.4%
of total Company sales in the third quarter compared to 55.4% of total Company
sales for the same period last year. Sales to Autoliv were 27.8% of Automotive
Products Division sales and were 23.0% of total Company sales for the current
year third quarter. Sales to Autoliv were not significant for the same period
last year.
Net sales for the Aerospace Division were $6,330,000 for the current
year third quarter, compared to net sales of $6,009,000 for the same period
last year. The increase of $321,000, or 5.3%, was due to increased demand for
the Division's products in the current period, and was also due to revenues
generated under a new contract for the re-design of a proprietary bomb rack.
Cost of Sales
Cost of sales was $25,388,000 for the Automotive Products Division for
the quarter ended August 3, 1997, compared to cost of sales of $16,484,000 for
the same period last year. The increase of $8,904,000, or 54.0%, was due to
costs associated with increased sales noted above. Gross profit as a percent
of sales was 17.1% in the current period, compared to 15.9% for the same period
last year. The improvement in gross profit as a percent of sales was due to
reductions in scrap, improvements in automated machine yields, and other
manufacturing efficiencies achieved in the current period.
Cost of sales was $4,488,000 for the Aerospace Division for the
quarter ended August 3, 1997, compared to cost of sales of $3,910,000 for the
same period last year. The increase of $578,000, or 14.8%, was due to costs
associated with increased sales of 5.3% noted above. Gross profit as a percent
of sales was 29.1% in the current year period compared to a gross profit as a
percent of sales of 34.9% for the same period last year. The decrease in gross
profit as a percent of sales in the current period was due to the mix of
products shipped compared to the same period last year, and due to certain
start-up costs associated with new long term programs.
Operating Expenses
Operating expenses for each division (Automotive Products and
Aerospace) are comprised of two components. First, each division is charged
those operating expenses incurred directly by that division. Second, each
division is allocated administrative operating expenses incurred by the Company
(which are not directly attributable to a particular division) on an equitable
basis to fairly reflect the benefit received by each division.
Operating expenses for the Automotive Products Division were $1,305,000 for the
quarter ended August 3, 1997, compared to operating expenses of $734,000 for
the same period last year. Operating expenses incurred by the Automotive
Products Division and by the Company increased during the current year third
quarter in response
- 13 -
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS FROM OPERATIONS, CONTINUED
to the increase in initiators produced and sold. The primary areas of increase
were in labor and labor related costs, and in other professional services
costs.
Operating expenses were $1,246,000 for the Aerospace Division for the
quarter ended August 3, 1997, compared to operating expenses of $1,012,000 for
the same period last year. The increase of $234,000, or 23.1%, was the result
of an increase in operating expenses incurred by the Corporate Division and
allocated to the Aerospace Division in the current year period. The increase
in Corporate Division expenses was primarily in labor and labor related costs,
and in other professional services costs.
Other Income and Expense
Other income (expense) net, consists primarily of interest expense on
borrowings and interest income on short-term investments. Other income
(expense), net was $12,000 of income for the quarter ended August 3, 1997,
compared to $33,000 of income for the same period last year. Interest expense
was $67,200 for the quarter ended August 3, 1997, compared to interest expense
of $89,200 for the same period last year. The decrease of $22,000 occurred due
to reduction of long-term debt through scheduled monthly principal payments,
and because the debt for an airplane was transferred to the Company's Chairman
during the quarter (see Footnote 4). Interest income was $75,700 for the
quarter ended August 3, 1997, compared to interest income of $112,900 for the
same period last year. The reduction in interest income was due to lower
average amounts invested in interest bearing securities during the current year
third quarter.
COMPARISON OF THE NINE MONTHS ENDED AUGUST 3, 1997 TO THE NINE MONTHS ENDED
JULY 28, 1996
Net Sales
Net sales for the Automotive Products Division were $79,079,000 for
the nine months ended August 3, 1997, compared to net sales of $56,481,000 for
the same period last year. The increase of $22,598,000, or 40%, was due to an
increase of 69% in units shipped during the first nine months of 1997 compared
to the number of units shipped for the same period last year. The increase in
units shipped resulted primarily from increased shipments to Autoliv under
terms of a supplier agreement signed in November 1995. The initiators sold to
Autoliv are generally at lower average unit selling prices than those sold to
other customers, due to simplicity of design, resulting in revenue dollars
increasing at a slower rate than the increase in units sold. Sales to TRW,
Inc. as a percent of Automotive Products Division sales were 64.0% for the nine
months ended August 3, 1997, compared to 80.0% for the same period last year,
and were 52.0% of total Company sales in the current year compared to 62.4% of
total Company sales for the same period last year.
Net sales for the Aerospace Division were $18,220,000 for the nine
months ended August 3, 1997, compared to net sales of $15,913,000 for the same
period last year. The increase of $2,307,000, or 14.5%, was due to increased
demand for the Division's products in the current year, and was also due to
revenues generated from a new contract for the re-design of a proprietary bomb
rack this year.
Cost of Sales
Cost of sales was $65,787,000 for the Automotive Products Division for
the nine months ended August 3, 1997, compared to cost of sales of $48,342,000
for the same period last year, an increase of $17,445,000, or 36.1%. The
increase was due to costs associated with increased sales noted above. Gross
profit as a percent of sales was 16.8% for the current year period, compared to
gross profit as a percent of sales of 14.4% for the same period last year. The
improvement in gross profit as a percent of sales was due to reductions in
scrap, improvements in automated machine yields, and other manufacturing
efficiencies achieved in the current period.
- 14 -
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS FROM OPERATIONS, CONTINUED
Cost of sales for the Aerospace Division was $12,730,000 for the nine
months ended August 3, 1997, compared to cost of sales of $10,353,000 for the
same period last year. The increase of $2,377,000, or 23.0%, was due to costs
associated with increased sales during the first nine months of 1997. Gross
profit as a percent of sales was 30.1% for the nine months ended August 3,
1997, compared to gross profit as a percent of sales of 34.9% for the same
period last year. The decrease in gross profit as a percent of sales in the
current period was due to the mix of products shipped compared to the same
period last year.
Operating Expenses
Operating expenses for each division (Automotive Products and
Aerospace) are comprised of two components. First, each division is charged
those operating expenses incurred directly by that division. Second, each
division is allocated administrative operating expenses incurred by the Company
(which are not attributable to a particular division) on an equitable basis to
fairly reflect the benefit received by each division.
Operating expenses for the Automotive Products Division were
$3,624,000 for the nine months ended August 3, 1997, compared to operating
expenses of $2,609,000 for the same period last year. The increase of
$1,015,000, or 38.9%, was due primarily to an increase in Corporate expenses
incurred and allocated to the Automotive Products Division, and to a lesser
extent, to labor related cost increases incurred by the Automotive Products
Division. The increase in Corporate expenses was primarily in labor and labor
related costs and in other professional services costs.
Operating expenses for the Aerospace Division were $3,612,000 for the
nine months ended August 3, 1997, compared to operating expenses of $2,967,000
for the same period last year. The increase of $645,000, or 21.7%, was the
result primarily of an increase in Corporate Division expenses which are
allocated to the Aerospace Division. The increase in Corporate expenses was
primarily in labor and labor related costs, and in other professional services
costs.
Other Income and Expense
Other income (expense), net, consists primarily of interest expense on
borrowings and interest income earned on short-term investments. For the nine
months ended August 3, 1997, other income (expense), net, was $75,000 of income
compared to $82,000 of income for the same period last year. Interest income
was $275,000 for the nine months ended August 3, 1997, compared to interest
income of $349,000 for the same period last year. The decrease in interest
income during the first nine months of the current year was due to lower
average amounts invested in interest bearing securities during the year
compared to the same period last year. Interest expense was $201,000 for the
nine months ended August 3, 1997, compared to interest expense of $285,000 for
the same period last year. The decrease in the current year was due to lower
average debt balances this year resulting from scheduled monthly principal
payments.
Liquidity and Capital Resources
The Company's primary sources of capital since its initial public
offering in 1991 have been cash from operations and bank borrowings and, in
fiscal year 1995, an additional public offering of its common stock. In
December 1996, the Company signed a credit agreement (the "Credit Agreement")
with a bank. The Credit Agreement expires May 1, 1998, and any borrowings
under the Credit Agreement bear interest at the bank's Reference Rate (8.5% at
August 3, 1997) less .25 percentage point, or at the Company's option, at LIBOR
(5.63% at August 3, 1997) plus .75 percentage point. The Credit Agreement
contains two revolving credit facilities. The Company may borrow up to
$10,000,000 under Facility No. 1, and may borrow up to $12,000,000 under
Facility No. 2. Borrowings under both facilities may be used for general and
other corporate purposes. Facility No. 1 may be used for commercial letters of
credit not to exceed $500,000 and for stand by letters of credit not to exceed
$6,000,000, which reduce the amount available under the agreement. In
addition, the
- 15 -
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS FROM OPERATIONS, CONTINUED
Company has the option of converting outstanding borrowings in increments of
not less than $1,000,000, under Facility No. 2, to a 5-year term loan. Any
amounts converted to term debt under Facility No. 2 will bear interest at the
Bank's long-term interest rate in effect at the time of such conversion.
Substantially all of the Company's assets are pledged as collateral
under the Credit Agreement. In addition, the Credit Agreement contains
covenants that include requirements to meet certain financial tests and ratios
(including minimum current ratio, debt service ratio, minimum tangible net
worth, maximum debt ratio and maintenance of profitable annual operations) and
restrictions and limitations on the sale of assets, new borrowings, mergers and
purchases of stock. The Company was in compliance with these provisions as of
August 3, 1997. As of August 3, 1997, no amounts were outstanding under either
credit facility.
The Company's wholly owned subsidiary, Scot, Inc. has a term loan with
a bank, which was renewed in August 1996, secured by certain real property of
Scot. The principal balance outstanding under the renewed loan at August 3,
1997, was $540,000. The loan is being amortized with monthly payments of
approximately $7,800, including interest, adjusted monthly, at 1.9% over the
bank's LIBOR rate (5.63% at August 3, 1997). Any unpaid principal is due on
August 1, 2001.
In November 1994, the Company purchased a new airplane from United
Beechcraft, Inc. for $2,210,000. The Company made an initial payment of
$110,500 for the plane and delivered a promissory note with Beech Acceptance
Corporation, Inc. to finance the remaining balance of $2,099,500 over a 12-year
period with interest at prime plus one-half percent. The unpaid balance of
this note at August 3, 1997 was $1,740,000. In December 1994, the Company
purchased a second airplane from United Beechcraft, Inc. for $669,419. The
Company entered into a promissory note with Beech Acceptance, Inc. to finance
the purchase over a 10-year period with interest at prime plus one-half
percent. In May 1997, the Company entered into an agreement with its Chairman
whereby the Chairman assumed responsibility for the note for the second
airplane and agreed to buy the airplane at its fair market value. The Company
is liable to Beechcraft Acceptance under the promissory note in the event the
Chairman defaults. The net book value of the airplane, $523,000, and the
balance of the note, $530,000, were removed from the Company's books to reflect
this transfer of liability. The remaining plane is being used primarily to
transport Company officials between its Newhall, California and Mesa, Arizona
facilities. In addition, the Company leases this airplane for use by third
parties when not in use by the Company in order to defray a portion of the
costs.
During the nine months ended August 3, 1997, the Company generated
cash flow from operations of $10,800,000. Capital expenditures, primarily for
payments related to automated manufacturing equipment and production
facilities, amounted to $13,800,000. Payments of long-term and short-term debt
aggregated $2,300,000. These net cash outflows were funded by cash flow from
operations and the use of existing cash on hand. At August 3, 1997, the
Company had cash and marketable securities on hand of $8,154,000 and additional
borrowing capacity under its Credit Agreement of $16,500,000.
At August 3, 1997, the Company had working capital of $32,135,000
compared to working capital of $34,957,000 at October 31, 1996. The decrease
of $2,822,000 was due to a decrease in cash and marketable securities of
$5,138,000, a decrease in inventory of $604,000, and an increase in accrued
liabilities of $724,000, offset partially by an increase in accounts receivable
of $1,963,000, an increase in prepaid expenses of $306,000, and a decrease in
the current portion of long-term debt of $1,092,000. The decrease in cash
occurred primarily for progress payments on new equipment lines currently being
built for the Company, and to pay for land infra-structure development costs
for the Company's Moorpark project (see below). The decrease in inventory was
the result of more efficient use of inventory in production. The increase in
accounts receivable was the result of higher sales volumes during the period.
The reduction of the current portion of long-term debt was the result of a pay
down of bank borrowings outstanding under the Company's credit facilities.
- 16 -
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS FROM OPERATIONS, CONTINUED
In order to improve manufacturing efficiencies and to provide
facilities for growth, the Company purchased approximately 280 acres of land in
the City of Moorpark, located in Ventura County, north of Los Angeles, in
October 1996, on which the Company plans to build new facilities. Development
of the land infrastructure, including grading, began in January 1997, and is at
a stage of completion which will allow the construction of the buildings to
begin in September 1997. The building construction is expected to be completed
by the Summer of 1998, and the Company expects to move its entire
California-based operations, including Automotive Products, Aerospace and the
administration offices to these new facilities. Total net cost of the project
is estimated at $20,000,000 of which approximately $7,240,000 had been spent by
August 3, 1997, and is included in construction in progress in the accompanying
condensed consolidated balance sheet. The Company anticipates spending an
additional approximate $2,000,000 in fiscal 1997, and approximately $10,760,000
(net of anticipated proceeds for two commercial lots being offered for sale by
the Company) in fiscal 1998 to complete this project.
The statements above regarding the land purchased by the Company in
Moorpark and the construction of facilities on the land by the Company are
forward looking statements. Actual results (including the actual costs
incurred) and the timing of those results may vary depending on various factors
including, for example, the ability of the Company to obtain permits and
approvals that do not contain conditions or restrictions that are unduly
restrictive or otherwise unacceptable to the Company, the Company's not
encountering any unforeseen conditions relating to the property that make
completion of the land infrastructure work or construction more expensive,
difficult or time intensive than is currently expected, the ability of the
contractors and subcontractors retained by the Company to complete the work on
the schedule and for the costs described above, and other factors which may
develop during the course of this project.
The Company anticipates that working capital requirements will
increase during the last quarter of fiscal 1997 and during fiscal 1998, as
compared to fiscal 1996, to support the investment in inventories and accounts
receivable related to the anticipated increased demand for initiators
manufactured by the Company. The Company believes that it can meet its
expected working capital requirements for the foreseeable future from existing
cash and marketable securities on hand, cash flow from operations and
borrowings under its Credit Agreement. The Company had commitments to acquire
capital equipment at August 3, 1997 aggregating approximately $3,500,000
related primarily to additional production equipment, and other support
equipment required for the increased operations of the Automotive Products
Division. In addition, the Company has committed to complete the land
infra-structure related to its Moorpark facility, the total cost of which is
approximately $9,500,000.
The statements above regarding the anticipated increased demand for
initiators and the anticipated increase in working capital requirements are
forward looking statements. Actual results and the timing of those results may
vary depending on various factors including, for example, the development and
acceptance of technologies different from those employed by the Company for the
initiation of airbag systems, competition from new or existing companies for
the Company's existing or future customers, and a slow-down in the world-wide
rate of airbag implementation.
- 17 -
<PAGE> 18
PART II - OTHER INFORMATION
Items 1 through 5 are omitted as they are not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Statement RE: Computation of Per Share Earnings
(b) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPECIAL DEVICES, INCORPORATED
DATED: September 15, 1997 /s/ THOMAS F. TREINEN
-------------------------------- --------------------------------
Thomas F. Treinen
Chairman of the Board and
President
DATED: September 15, 1997 /s/ JOHN T. VINKE
-------------------------------- --------------------------------
John T. Vinke
Vice President Finance and
Chief Financial Officer
- 18 -
<PAGE> 1
Exhibit 11.1
Computation of Earnings per Share
<TABLE>
<CAPTION>
Three months ended Nine months ended
--------------------------- ---------------------------
July 28, August 3, July 28, August 3,
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Primary Earnings per Common and
Common Equivalent Share:
Average Market Price $ 19.34 $ 17.07 $ 19.34 $ 17.26
Weighted average common shares
outstanding during period 7,659,854 7,685,087 7,659,854 7,655,075
Common Stock Equivalents -
Common Stock Options 108,994 75,478 97,300 86,867
----------- ----------- ----------- -----------
Weighted average common and
common equivalent shares 7,768,848 7,760,565 7,757,154 7,741,942
=========== =========== =========== ===========
Net earnings for period $ 2,148,341 $ 2,795,432 $ 5,033,792 $ 7,171,747
=========== =========== =========== ===========
Primary earnings per share $ .28 $ .36 $ .65 $ .93
=========== =========== =========== ===========
Fully Diluted Earnings per Common and
Common Equivalent Share:
Greater of average market price or
closing market price $ 19.34 $ 18.69 $ 19.34 $ 18.69
Weighted average common shares
outstanding during period (from above) 7,659,854 7,685,087 7,659,854 7,655,075
Common Stock Equivalents - Common
Stock Options 108,994 124,761 97,300 124,761
--------- ----------- ----------- -----------
Fully diluted weighted average
common and common equivalent shares 7,768,848 7,809,848 7,757,154 7,779,836
=========== =========== =========== ===========
Net earnings for the period $ 2,148,341 $ 2,795,432 $ 5,033,792 $ 7,171,747
=========== =========== =========== ===========
Fully diluted earnings per share $ .28 $ .36 $ .65 $ .92
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT AUGUST 3, 1997, AND THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE QUARTER AND NINE MONTHS ENDED
AUGUST 3, 1997 AND IS QUALIFIED IN ITS ENTIREY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> AUG-03-1997
<CASH> 1,954,263
<SECURITIES> 6,200,000
<RECEIVABLES> 14,625,815
<ALLOWANCES> (190,855)
<INVENTORY> 17,694,965
<CURRENT-ASSETS> 42,073,294
<PP&E> 72,045,689
<DEPRECIATION> (22,255,710)
<TOTAL-ASSETS> 92,025,323
<CURRENT-LIABILITIES> 9,938,548
<BONDS> 0
0
0
<COMMON> 77,009
<OTHER-SE> 77,020,166
<TOTAL-LIABILITY-AND-EQUITY> 92,025,323
<SALES> 36,970,324
<TOTAL-REVENUES> 36,970,324
<CGS> 29,876,026
<TOTAL-COSTS> 32,426,866
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 70,000
<INTEREST-EXPENSE> 67,229
<INCOME-PRETAX> 4,555,432
<INCOME-TAX> 1,760,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,795,432
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
</TABLE>
