<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended: MAY 3, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from__________ to__________
Commission file number: 0-19330
SPECIAL DEVICES, INCORPORATED
(Exact name of Registrant as specified in its charter)
DELAWARE 95-3008754
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16830 W. PLACERITA CANYON ROAD, NEWHALL, CALIFORNIA 91321
---------------------------------------------------------
(Address of principal executive offices)
(805) 259-0753
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] YES [ ] NO
At June 15, 1998, the total number of outstanding shares of registrant's common
stock was 7,809,801.
<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, May 3,
1997 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 2,415,335 $ 497,907
Marketable securities 6,750,000 --
Accounts receivable, net of allowance of
$44,126 at October 31, 1997 and $120,028
at May 3, 1998 for doubtful accounts 18,192,877 21,287,781
Inventories 14,554,614 17,293,999
Prepaid expenses 503,430 901,979
Deferred income taxes 991,000 1,116,000
------------ ------------
Total current assets 43,407,256 41,097,666
------------ ------------
Property, plant and equipment, at cost:
Land 1,611,331 1,611,331
Buildings 7,963,637 7,981,595
Machinery and equipment 44,080,413 51,369,183
Furniture and fixtures 2,844,116 3,135,584
Transportation equipment 2,486,034 2,536,582
Leasehold improvements 3,314,332 3,790,049
Construction in progress (includes land and related
costs of $9,440,000 at October 31, 1997 and
$14,790,000 at May 3,1998) 17,942,985 26,064,733
------------ ------------
80,242,848 96,489,057
Less accumulated depreciation 23,974,540 27,895,253
------------ ------------
56,268,308 68,593,804
Other assets 148,716 122,050
------------ ------------
$ 99,824,280 $109,813,520
============ ============
</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, May 3,
1997 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 944,793 $ 689,649
Trade accounts payable 6,175,501 6,153,823
Accounts payable to related parties 1,471,748 1,823,425
Accrued payroll and benefits 1,929,420 2,068,662
Accrued expenses 1,491,360 2,489,902
Income taxes payable 1,257,872 1,366,872
------------ ------------
Total current liabilities 13,270,694 14,592,333
Long-term debt, less current portion 2,056,766 2,965,925
Deferred income taxes 3,140,000 3,115,000
------------ ------------
Total liabilities 18,467,460 20,673,258
------------ ------------
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
7,771,167 shares, at October 31, 1997, and
7,799,801 shares at May 3, 1998 77,712 77,998
Additional paid-in capital 50,887,737 51,236,041
Retained earnings 30,391,371 37,826,223
------------ ------------
Total stockholders' equity 81,356,820 89,140,262
------------ ------------
$ 99,824,280 $109,813,520
============ ============
</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 Six months ended
-------------------------------- --------------------------------
May 4, May 3, May 4, May 3,
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 32,791,946 $ 45,114,061 $ 60,329,340 $ 85,846,434
Cost of sales 26,400,843 34,968,556 48,641,378 67,491,983
------------ ------------ ------------ ------------
Gross profit 6,391,103 10,145,505 11,687,962 18,354,451
------------ ------------ ------------ ------------
Operating expenses 2,459,161 3,197,771 4,685,026 5,854,715
------------ ------------ ------------ ------------
Earnings from operations 3,931,942 6,947,734 7,002,936 12,499,736
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (55,750) (49,463) (133,928) (99,950)
Interest income 81,756 28,680 199,747 94,989
Other (762) (4,077) (2,440) (9,923)
------------ ------------ ------------ ------------
Net other income (expense) 25,244 (24,860) 63,379 (14,884)
------------ ------------ ------------ ------------
Earnings before income taxes 3,957,186 6,922,874 7,066,315 12,484,852
Income taxes 1,495,000 2,875,000 2,690,000 5,050,000
------------ ------------ ------------ ------------
Net earnings $ 2,462,186 $ 4,047,874 $ 4,376,315 $ 7,434,852
============ ============ ============ ============
Basic net earnings per share $ .32 $ .52 $ .57 $ .96
============ ============ ============ ============
Weighted average shares outstanding 7,685,512 7,781,254 7,663,029 7,777,604
============ ============ ============ ============
Diluted net earnings per share $ .32 $ .50 $ .56 $ .92
============ ============ ============ ============
Weighted average shares outstanding 7,782,193 8,084,704 7,747,637 8,052,886
============ ============ ============ ============
</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 SIX MONTHS ENDED MAY 3, 1998
<TABLE>
<CAPTION>
Common Stock Additional Total
--------------------------- paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at October 31, 1997 7,771,167 $ 77,712 $50,887,737 $30,391,371 $81,356,820
Issuance of common stock on
exercise of stock options 28,634 286 348,304 -- 348,590
Net earnings (unaudited) -- -- -- 7,434,852 7,434,852
--------- ----------- ----------- ----------- -----------
Balance at May 3, 1998 7,799,801 $ 77,998 $51,236,041 $37,826,223 $89,140,262
========= =========== =========== =========== ===========
</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>
Six months ended
--------------------------------
May 4, May 3,
1997 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 4,376,315 $ 7,434,852
Adjustments to reconcile net earnings income to net
cash provided by (used in) operating activities:
Depreciation 3,154,846 3,920,713
Changes in assets and liabilities:
(Increase) in accounts receivable (2,082,181) (3,094,904)
(Increase) in inventories (1,191,975) (2,739,385)
(Increase) in prepaid expenses (469,572) (398,549)
(Increase) in deferred tax asset (56,000) (125,000)
Decrease in other assets 26,667 26,666
Increase in accounts payable,
accounts payable to related parties and other
accrued expenses 201,958 1,467,783
(Decrease) increase in income taxes payable (985,000) 109,000
Increase (decrease) in net deferred tax liability 156,000 (25,000)
------------ ------------
Net cash provided by operating activities 3,131,058 6,576,176
------------ ------------
Cash flows from investing activities:
(Purchases) of property, plant and equipment (8,519,114) (16,246,209)
Sales of marketable securities 4,500,000 6,750,000
------------ ------------
Net cash (used in) investing activities (4,019,114) (9,496,209)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options 144,148 348,590
(Payments) proceeds from long-term debt (933,098) 654,015
------------ ------------
Net cash (used in) provided by financing activities (788,950) 1,002,605
------------ ------------
Net (decrease) in cash (1,677,006) (1,917,428)
Cash at beginning of period 2,592,578 2,415,335
------------ ------------
Cash at end of period $ 915,572 $ 497,907
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 157,100 $ 100,233
Income taxes $ 3,832,000 $ 5,091,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-6-
<PAGE> 7
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 3, 1998
(UNAUDITED)
(1) INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of
Special Devices, Incorporated, a Delaware corporation, include all adjustments
(consisting of normal recurring entries) which management believes are necessary
for a fair presentation of the financial position and results of operations for
the periods presented. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that the
accompanying financial statements be read in conjunction with the Company's
audited financial statements and footnotes as of and for the year ended October
31, 1997. Operating results for the six month period ended May 3, 1998 are not
necessarily indicative of the operating results which may be expected for the
full fiscal year.
(2) ACCOUNTS RECEIVABLE
Accounts receivable are as follows:
<TABLE>
<CAPTION>
October 31, May 3,
1997 1998
----------- -----------
<S> <C> <C>
Commercial Customers $11,897,328 $15,826,034
U.S. Government 1,295,349 1,890,206
U.S. Government Subcontractors 5,044,326 3,691,569
----------- -----------
18,237,003 21,407,809
Less allowance for doubtful accounts 44,126 120,028
----------- -----------
Total $18,192,877 $21,287,781
=========== ===========
</TABLE>
(3) INVENTORIES
Inventories and inventoried costs relating to long-term contracts are
classified as follows:
<TABLE>
<CAPTION>
October 31, May 3,
1997 1998
----------- -----------
<S> <C> <C>
Raw materials and components $ 4,840,722 $ 5,001,480
Work in process 6,234,248 8,952,696
Finished goods 920,809 518,004
Inventoried costs relating to
long term contracts, net of
amounts attributed to revenues
recognized to date 2,558,835 3,633,322
----------- -----------
14,554,614 18,105,502
Less progress payments related
to long-term contracts -- 811,503
----------- -----------
$14,554,614 $17,293,999
=========== ===========
</TABLE>
-7-
<PAGE> 8
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 3, 1998
(UNAUDITED)
Inventoried costs relate to costs of products 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) NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
October 31, May 3,
1997 1998
---------- ----------
<S> <C> <C>
Bank borrowings $ 530,530 $ 503,488
Bank revolver 750,000 1,500,000
Finance company 1,713,641 1,652,086
Other notes 7,388 --
---------- ----------
3,001,559 3,655,574
Less current portion 944,793 689,649
---------- ----------
$2,056,766 $2,965,925
========== ==========
</TABLE>
The Company has a Credit Agreement with a bank, which was renewed in April
1998, which expires May 1, 2000. Borrowings under the 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 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. 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. At October 31,
1997, and May 3, 1998, $750,000 and $1,500,000, respectively, was outstanding
under Facility No. 2, and no amounts were outstanding under Facility No. 1. In
addition, the Company had outstanding approximately $5,500,000 of performance
bonds secured by standby letters of credit related to the development of new
facilities (see Footnote 8).
The Company's wholly-owned subsidiary, Scot, Inc. has a term loan with a
bank, secured by certain real property of Scot. The principal balance
outstanding at October 31, 1997, was $530,500, and at May 3, 1998 was $503,500.
The loan is being amortized with monthly payments of approximately $7,800,
including interest of 1.9% over the bank's LIBOR rate (5.72% at May 3, 1998),
adjusted monthly through August 2001, at which time the remaining balance is
due.
The finance company note is secured by related equipment. The 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 October 31, 1997 was $1,713,600,
and at May 3, 1998 was $1,652,100.
-8-
<PAGE> 9
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 3, 1998
(UNAUDITED)
(5) STOCK INCENTIVE
The Company's amended and restated 1991 Stock Incentive Plan (the "Plan") is
administered by a committee of the Board of Directors which determines the
amount, type, terms and conditions of the awards made pursuant to the Plan. The
Plan provides for issuance of restricted stock, grants of incentive and
non-qualified stock options, stock appreciation rights and performance share
awards. There are 560,000 shares of common stock reserved for issuance under the
Plan.
Pursuant to the Plan, no option may be granted that is exercisable in less
than six months or more than ten years from the grant date. Certain events,
including a change in control of the Company, may accelerate exercise dates,
cause forfeiture of all shares of any restricted stock and terminate all
conditions relating to the realization of any performance awards.
No options were granted during the quarter ended May 3, 1998 and 11,134
options were exercised at prices ranging from $9.50 to $17.75 per share. At May
3, 1998, there were options outstanding to purchase 243,272 shares, which
options were exercisable with respect to 127,905 shares.
In December 1996, the Company's Stock Option Committee authorized stock
option grants to certain employees via a special grant which is not part of the
1991 Stock Option Plan. Under terms of this authorization, options to purchase
130,000 shares were granted which vest ratably over 5 years from the grant date,
options to purchase 312,000 shares vest ratably over a period ranging from 5 to
8 years from the grant date. The grants for the later options contain vesting
acceleration clauses during the first 36 months of the option; the acceleration
clauses are contingent upon the price of the Company's Common Stock attaining a
certain level, and upon the Company attaining certain earnings levels. As of May
3, 1998, options to purchase 312,000 shares have vested under the acceleration
clauses, and options to purchase 26,000 shares have vested due to the passage of
time. The options were granted at the fair market value of the stock on the
grant date, which was $17.00 per share.
(6) NET EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to fully diluted earnings per share. Earnings
per share amounts for the prior period have been restated to conform to
Statement 128 requirements.
Basic net earnings per share is computed by dividing net earnings by the
weighted average number of common stock outstanding during the period. Diluted
net earnings per share is computed by dividing net earnings by the weighted
average number of common stock and dilutive stock equivalents outstanding during
the period.
-9-
<PAGE> 10
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 3, 1998
(UNAUDITED)
(7) INCOME TAXES
The provisions for income taxes consist of the following for each respective
six months ended:
<TABLE>
<CAPTION>
May 4, May 3,
1997 1998
----------- -----------
<S> <C> <C>
Current:
Federal $ 2,074,000 $ 4,116,000
State 516,000 1,084,000
----------- -----------
$ 2,590,000 $ 5,200,000
Deferred:
Federal $ 72,000 $ (93,000)
State 28,000 (57,000)
----------- -----------
$ 100,000 $ (150,000)
=========== ===========
Total:
Federal $ 2,146,000 $ 4,023,000
State 544,000 1,027,000
----------- -----------
$ 2,690,000 $ 5,050,000
=========== ===========
</TABLE>
Temporary differences which give rise to deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
October 31, May 3,
Deferred tax liabilities: - Non-current: 1997 1998
---------------------------------------- ----------- -----------
<S> <C> <C>
Depreciation $(3,140,000) $(3,115,000)
=========== ===========
Deferred tax assets -current:
-----------------------------
Allowance for doubtful accounts $ 22,000 $ 46,000
Inventory 506,000 722,000
Vacation 445,000 296,000
State taxes 18,000 52,000
----------- -----------
991,000 1,116,000
----------- -----------
Net deferred tax liability $(2,149,000) $(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.
-10-
<PAGE> 11
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 3, 1998
(UNAUDITED)
The provisions for income tax expense for the six months ended 1997 and 1998
differ from the provisions that would have resulted from applying the Federal
statutory rates during such periods to the income before income taxes. The
reasons for these differences are as follows:
<TABLE>
<CAPTION>
May 4, May 3,
1997 1998
----------- -----------
<S> <C> <C>
Income taxes at Federal rate $ 2,402,000 $ 3,976,000
State income taxes 636,000 1,124,000
Other (348,000) (50,000)
----------- -----------
$ 2,690,000 $ 5,050,000
=========== ===========
</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 May 3, 1998 to acquire capital equipment, at
cost aggregating approximately $3,900,000, 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 is currently building new
facilities. Total net cost of the project is estimated at approximately
$28,000,000 of which $14,800,000 had been spent at May 3, 1998 and is included
in construction in progress in the accompanying condensed consolidated balance
sheet. The Company anticipates spending approximately an additional 12,000,000
in fiscal year 1998 and approximately $5,200,000 in fiscal year 1999 to complete
this project. The Company plans to sell two commercial lots being developed as
part of this project, the proceeds of which are expected to reduce the net
project cost to approximately $28,000,000. The Company has committed to complete
the building construction, the total cost of which is estimated to be
approximately $16,000,000.
The statements above regarding the land purchased by the Company in
Moorpark, the construction of facilities on that land by the Company, and the
amount and timing of expenditures are forward-looking statements. Actual results
and the timing of those results may vary depending on various factors including,
for example, the ability of the Company to obtain permits and approvals that do
not contain conditions or restrictions that are unduly restrictive or otherwise
unacceptable to the Company, the Company's not encountering any unforeseen
conditions relating to the property that make completion of the land
infrastructure work or construction more expensive, difficult or time intensive
than is currently expected, the ability of the contractors and subcontractors
retained by the Company to complete the work on the schedule and for the costs
described above, and other factors which may develop during the course of this
project.
-11-
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MAY 3, 1998 TO THE THREE MONTHS ENDED MAY
4, 1997
Net Sales
The majority of air-bag initiators sold by the Company are sold to TRW and
Autoliv ASP Incorporated (formerly Morton International). The initiators sold to
TRW are more complex, and contain a higher material content, than the initiators
sold to Autoliv, and consequently are sold for a higher average unit price than
the initiators sold to Autoliv.
Net sales for the Automotive Products Division increased by $11,232,000, or
45.2%, to $36,095,000 for the quarter ended May 3, 1998 compared to sales of
$24,863,000 for the same quarter of the previous year. The increase in sales
represents an approximate 68.8% increase in units shipped in the current year
quarter compared to the same quarter last year, offset by a reduction in the
average unit selling price of an initiator, and by a greater number of
initiators sold to Autoliv as a percent of total initiators sold during the
quarter. The increase in the number of initiators sold was due to the use of
airbags as the primary means of compliance with the federal regulations which
require automatic frontal crash protection systems for the driver and front
passenger. Sales to TRW as a percent of Automotive Products Division sales were
49.7% for the second quarter, compared to 62.2% for the same period last year,
and were 39.7% of total Company sales in the second quarter compared to 47.2% of
total Company sales for the same period last year. Sales to Autoliv were 28.5%
of Automotive Products Division sales and were 22.8% of total Company sales for
the current year second quarter, compared to 23.1% of Automotive Products
Division and 17.5% of total Company sales for the same period last year.
Net sales for the Aerospace Division were $9,019,000 for the second quarter,
an increase of $1,090,000, or 13.8% compared to sales of $7,929,000 for the
second quarter last year. The increase in sales was the result of increased
shipments of products used on several missile programs and due to entering the
production phase of the bomb ejector program in the current year.
Cost of Sales
Cost of sales for the Automotive Products Division increased by $8,230,000,
or 39.5%, to $29,073,000 for the three months ended May 3, 1998, compared to
cost of sales of $20,843,000 for the same period of 1997. Gross profit as a
percent of sales was 19.5% for the second quarter compared to 16.1% for the same
period last year. The increase in margin reflects the effects of continuing
improved yields from automated equipment, reduced material costs, and a larger
revenue base over which overhead costs were spread, partially offset by a 14%
decrease in the average sales price in the second quarter of the current year
compared to the same period last year. In addition to the effort to reduce
average unit production cost by improving yields from existing automated
equipment, the Automotive Products Division is continuing its focus on cost
reduction by: a) reducing material cost through vertical integration and
strategic alliances with key vendors; b) reducing scrap; and c) redesigning
certain initiator parts.
Cost of sales for the Aerospace Division increased by $338,000, or 6.1% to
$5,896,000, compared to cost of sales of $5,558,000 for the same period last
year. Gross profit as a percent of sales was 34.6% in the second quarter
compared to 29.9% for the same quarter last year. The increase in gross profit
percent during the current quarter was due to the mix of products shipped, as
well as increased efforts to review and control variable production overhead
expenses.
-12-
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
Operating Expenses
Operating expenses for each division (Automotive Products and Aerospace) are
comprised of two components. First, each division is charged directly those
operating expenses incurred by that division. Second, each division is allocated
administrative operating expenses incurred by the Company (which are not
attributable to a particular division) on an equitable basis to fairly reflect
the benefit received by each operating division. Total administrative expenses
(which are allocated) for the second quarter of 1998 were approximately the same
as total administrative expenses (which are allocated) for the same period last
year. In 1998 these costs have been allocated approximately 70% to the
Automotive Products Division; in 1997 these costs were allocated approximately
equally to each division.
Operating expenses for the Automotive Products Division increased by
$489,000, or 40.3%, to $1,702,000 for the three months ended May 3, 1998
compared to operating expenses of $1,213,000 for the same period in 1997. As a
percentage of sales, operating expenses were 4.7% compared to 4.9% for the same
period last year. The dollar increase in operating expenses was incurred to
support the 68.8% increase in units shipped in the current year quarter. The
improved margin reflects the effects of fixed operating expenses being spread
across a higher level of sales in the current year quarter, as well as the
results of efforts to control variable expenses.
Operating expenses for the Aerospace Division increased by $250,000, or
20.1%, to $1,496,000 in the second quarter compared to operating expenses of
$1,246,000 for the same quarter last year. As a percentage of sales, operating
expenses were 16.6% compared to 15.7% for the same period last year. The
increase in operating expenses occurred to support the higher level of sales in
the current year quarter.
Other Income and Expense
Other income (expense) consists primarily of interest income and interest
expense. Net other income (expense) was $25,000 expense in the second quarter of
1998, compared to other income of $25,000 for the same period last year.
Interest income was $29,000 in the second quarter of 1998 compared to interest
income of $82,000 for the second quarter of last year. The reduction in interest
income was the result of lower average balances of invested funds during the
current year quarter. Interest expense was $49,000 in the second quarter of
1998, compared to interest expense of $56,000 for the same period last year. The
decrease of $7,000 was the result of lower average balances outstanding for
long-term debt in the current period as a result of scheduled principal
payments.
COMPARISON OF THE SIX MONTHS ENDED MAY 3, 1998 TO THE SIX MONTHS ENDED MAY 4,
1997
Net Sales
The majority of air-bag initiators sold by the Company are sold to TRW and
Autoliv ASP Incorporated (formerly Morton International). The initiators sold to
TRW are more complex, and contain a higher material content, than the initiators
sold to Autoliv, and consequently are sold for a higher average unit price than
the initiators sold to Autoliv.
Sales for the Automotive Products Division were $71,843,000 for the six
months ended May 3, 1998, compared to sales of $48,439,000 for the comparable
period of the preceding year. The increase in sales represents an approximate
76.5% increase in units shipped for the first six months of the current fiscal
year compared to the same period last year, offset partially by a reduction in
the average unit selling price of an initiator due primarily to the mix of
products sold to TRW and Autoliv. The increase of $23,404,000, or 48.3%, was the
result of the increased demand for initiators which reflects increasing
implementation of airbags for cars produced in the United States and
accelerating rates of implementation of airbags in European and Pacific Rim
countries. Sales to TRW as a percent of the Division's total sales were 50.1%
for the first six months of the current fiscal year compared to 66.0% for the
same period last year, and were 41.9% of total Company sales this
-13-
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
year compared to 53.0% for the same period last year. Sales to Autoliv were
30.3% of Automotive Products Division sales and were 25.3% of total company
sales for the six months ended May 3, 1998, compared to 21.5% of Automotive
Products Division and 17.2% of total Company sales for the
same period last year.
Sales for the Aerospace Division were $14,004,000 for the first six months
of the current year, compared to sales of $11,890,000 for the same period last
year, an increase of $2,114,000 or 17.8%. The increase in sales was the result
of continued shipments of products used on several missile programs and due to
entering the production phase of the bomb ejector program in the current year.
Cost of Sales
Cost of sales for the Automotive Products Division was $58,121,000 for the
first six months of the current fiscal year, compared to cost of sales of
$40,399,000 for the same period last year. The increase of $17,722,000, or
43.9%, was the result of increased costs associated with increased sales during
the same period. Gross profit as a percent of sales was 19.1% for the current
six month period compared to 16.6% for the same period last year. The increase
was due to a) improved yields from automated equipment; b) reduced material
costs; and c) a larger revenue base over which overhead costs were spread,
offset partially by a reduction of 16% in the average sales price of an
initiator in the current year period compared to the same period last year. The
reduction in average unit selling price was due primarily to a change in mix of
products sold to TRW and Autoliv.
Cost of sales for the Aerospace Division increased $1,129,000, or 13.7%, to
$9,371,000 for the first six months of the current year, compared to cost of
sales of $8,242,000 for the same period last year. Gross profit as a percent of
sales was 33.1% in the current period, compared to 30.7% last year, due to the
mix of products shipped in the current year.
Operating Expenses
Operating expenses for each division (Automotive Products and Aerospace) are
comprised of two components. First, each division is charged directly those
operating expenses incurred by that division. Second, each division is allocated
administrative operating expenses incurred by the Company (which are not
attributable to a particular division) on an equitable basis to fairly reflect
the benefit received by each operating division. Total administrative expenses
(which are allocated) for the first six months of 1998 were approximately the
same as total administrative expenses (which are allocated) for the same period
last year. In 1998 these costs have been allocated approximately 70% to the
Automotive Products Division; in 1997 these costs were allocated approximately
equally to each division.
Operating expenses for the Automotive Products Division were $3,457,000 for
the first six months of the current fiscal year, an increase of $1,138,000, or
49.1%, compared to operating expenses of $2,319,000 for the same period last
year. As a percentage of sales, operating expenses were 4.8% compared to 4.8%
for the same period last year. The increase in expenses occurred primarily for
more personnel required to support the 76.5% increase in the number of
initiators sold during the current year period and from an increase in allocated
Corporate expenses. The increase in Corporate expenses occurred primarily in
increased personnel required to support the increased level of operations this
year.
Operating expenses for the Aerospace Division were $2,397,000 for the first
six months of the current fiscal year, an increase of $31,000, or 1.3%, compared
to operating expenses of $2,366,000 last year. As a percentage of sales,
operating expenses were 17.1% compared to 19.9% for the same period last year.
The Aerospace Division incurred small increases in certain operating costs in
1998, offset by a smaller percent of Corporate expenses allocated.
-14-
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
Other Income and Expense
Other income (expense) consists primarily of interest income and interest
expense. Net other income (expense) was $15,000 expense in the first six months
of 1998, compared to other income of $63,000 for the same period last year.
Interest income was $95,000 in the first six months of 1998 compared to interest
income of $200,000 for the same period last year. The reduction in interest
income was due to lower average balances invested in the current year period.
Interest expense was $100,000 in the first six months of 1998, compared to
interest expense of $134,000 for the same period last year. The decrease of
$34,000 was the result of the average balance outstanding for long-term debt
being reduced with regularly scheduled principal payments.
Liquidity and Capital Resources
The Company's primary sources of capital since its initial public offering
in 1991 have been cash from operations and bank borrowings and, in fiscal year
1995, an additional public offering of its common stock. In December 1996, the
Company signed a credit agreement (the "Credit Agreement") with a bank which was
renewed in April 1998. The Credit Agreement expires May 1, 2000. Any borrowings
under the Credit Agreement bear interest at the bank's Reference Rate (8.5% at
May 3, 1998) less .25 percentage point, or at the Company's option, at LIBOR
(5.63% at May 3, 1998) 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 Company
has the option of converting outstanding borrowings in increments of not less
that $1,000,000, under Facility No. 2, to a 5-year term loan. Any amounts
converted to term debt under Facility No. 2 will bear interest at the bank's
long-term interest rate in effect at the time of such conversion.
Substantially all of the Company's assets are pledged as collateral under
the Credit Agreement. In addition, the Credit Agreement contains covenants that
include requirements to meet certain financial 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 May 3, 1998. As
of May 3, 1998, $1,500,000 was outstanding under Facility No. 2, and no amounts
were outstanding under Facility No. 1.
The Company's wholly owned subsidiary, Scot, Inc. has a term loan with a
bank, which was renewed in August 1996, secured by certain real property of
Scot. The principal balance outstanding under the renewed loan at May 3, 1998,
was $503,500. 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
(5.72% at May 3, 1998). Any unpaid principal is due on August 1, 2001.
In November 1994, the Company purchased a new airplane from United
Beechcraft, Inc. for $2,210,000. The Company made an initial payment of $110,500
for the plane and delivered a promissory note with Beech Acceptance Corporation,
Inc. to finance the remaining balance of $2,099,500 over a 12-year period with
interest at prime plus one-half percent. The unpaid balance of this note at May
3, 1998 was $1,652,100. The plane is being used primarily to transport Company
officials between its Newhall, California and Mesa, Arizona facilities. In
addition, the Company leases the airplane for use by third parties when not in
use by the Company in order to defray a portion of the costs.
During the six months ended May 3, 1998, the Company generated cash flow
from operations of $6,576,200. Capital expenditures, primarily for payments
related to automated manufacturing equipment and new production facilities,
amounted to $16,246,200. Principal payments of long-term debt aggregated
$88,600. These net cash outflows were funded by cash flow from operations and
the use of existing cash on hand. At May 3, 1998, the
-15-
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
Company had cash and marketable securities on hand of $498,000 and additional
borrowing capacity available under its Credit Agreement of $15,000,000.
At May 3, 1998, the Company had working capital of $26,505,000 as compared
to working capital of $30,137,000 at October 31, 1997. The decrease of
$3,632,000 was due primarily to a decrease in cash and marketable securities of
$8,667,000, an increase in accounts payable of $329,000, and an increase in
accrued liabilities of $1,138,000, offset partially by an increase in accounts
receivable of $3,095,000, an increase in inventories of $2,739,000 and an
increase in prepaid expenses of $399,000. The decrease in cash was the result of
increased expenditures for capital equipment and the completion of the Moorpark
facility currently under construction. The increase in accounts payable and
accrued liabilities, and in accounts receivable and inventories, occurred to
support the increased level of operations this year.
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 is currently building new facilities. Total net cost of the project
is estimated at approximately $28,000,000, of which $14,800,000 had been spent
at May 3, 1998 and is included in construction in progress in the accompanying
condensed consolidated balance sheet. The Company anticipates spending
approximately an additional $12,000,000 in fiscal year 1998 and approximately
$5,200,000 in fiscal year 1999 to complete this project. The Company plans to
sell two commercial lots being developed as part of this project, the proceeds
of which are expected to reduce the net project cost to approximately
$28,000,000. The Company has committed to complete the building construction,
the total cost of which is estimated to be approximately $16,000,000. The
Company believes it has available adequate cash and marketable securities, cash
flow from operations, and borrowing capacity to adequately finance this project.
The Company believes additional term financing is available for this project to
the extent required, however there can be no assurance that such financing will
be available when required.
The Company anticipates that working capital requirements will increase in
1998 as compared to 1997 to support the investment in inventories and accounts
receivable related to the anticipated increased demand for initiators
manufactured by the Company. The Company believes that it can meet its expected
working capital requirements for the foreseeable future from existing cash and
marketable securities on hand, cash flow from operations and borrowings under
its Credit Agreement. The Company had commitments to acquire capital equipment
at May 3, 1998 aggregating approximately $3,900,000 related primarily to
additional production equipment, and other support equipment required for the
increased operations of the Automotive Products Division.
The statements above regarding the land purchased by the Company in
Moorpark, the construction of facilities on that land by the Company, and the
amounts and timing of expenditures are forward-looking statements. Actual
results and the timing of those results may vary depending on various factors
including, for example, the ability of the Company to obtain permits and
approvals that do not contain conditions or restrictions that are unduly
restrictive or otherwise unacceptable to the Company, the Company's not
encountering any unforeseen conditions relating to the property that make
completion of the land infrastructure work or construction more expensive,
difficult or time intensive that is currently expected, and 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 statements above regarding the anticipated increased demand for
initiators, the anticipated increase in working capital requirements and the
Company's expectations regarding its ability to meet such requirements are
forward-looking statements. Actual 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, a slow-down in the world-wide rate of airbag implementation, the
inability of the Company to negotiate an extension of its existing credit
agreement or a replacement facility, anticipated expenditures exceeding amounts
-16-
<PAGE> 17
currently budgeted by the Company, and the occurrence of unanticipated expenses.
PART II - OTHER INFORMATION
Items 1 through 3 are omitted as they are not applicable.
Item 4. Submission of matters to a vote of stockholders. The Company's Annual
Stockholders' Meeting was held on March 25, 1998 at which time the
stockholders voted to re-elect Messrs. J. Nelson Hoffman, Robert S.
Ritchie and Jack B. Watson as directors to serve until the 2001 Annual
Stockholders' Meeting. The voting was as follows:
Election of Directors
<TABLE>
<CAPTION>
J. Nelson Robert S. Jack B.
Votes Hoffman Ritchie Watson
----- ------- ------- ------
<S> <C> <C> <C>
For 5,512,536 5,504,963 5,503,787
Withheld 4,853 12,426 13,602
Abstain -- -- --
Broker non-vote -- -- --
Against -- -- --
</TABLE>
Item 5. is omitted or it is not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Statement RE: Computation of Per Share Earnings
(b) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPECIAL DEVICES, INCORPORATED
DATED: June 15, 1998 /s/ THOMAS F. TREINEN
------------------------------------
Chairman of the Board and
President
DATED: June 15, 1998 /s/ JOHN T. VINKE
------------------------------------
Vice President Finance and
Chief Financial Officer
-17-
<PAGE> 1
Exhibit 11.1
Computation of Earnings per Share
<TABLE>
<CAPTION>
Three months ended Six months ended
May 4, May 3, May 4, May 3,
--------------------------- ---------------------------
1997 1998 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic net earning per share:
Weighted average common shares
outstanding during the period 7,685,512 7,781,254 7,663,029 7,777,604
========== ========== ========== ==========
Net earnings for the period-unaudited $2,462,186 $4,047,874 $4,376,315 $7,434,852
---------- ---------- ---------- ----------
Basic net earnings per share $ .32 $ .52 $ .57 $ .96
========== ========== ========== ==========
Diluted net earnings per share:
Weighted average common shares
outstanding during the period 7,679,512 7,781,254 7,655,075 7,777,604
Common stock equivalents 102,681 303,450 92,562 275,282
---------- ---------- ---------- ----------
7,782,193 8,084,704 7,747,637 8,052,886
========== ========== ========== ==========
Net earnings for the period-unaudited $2,462,186 $4,047,874 $4,376,315 $7,434,852
========== ========== ========== ==========
Diluted net earnings per share $ .32 $ .50 $ .56 $ .92
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT MAY 3, 1998, AND THE CONDENSED
CONSOLIDATED STATEMENT OF EARNINGS FOR THE SIX MONTHS ENDED MAY 3, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> MAY-03-1998
<CASH> 497,907
<SECURITIES> 0
<RECEIVABLES> 21,287,781
<ALLOWANCES> (120,028)
<INVENTORY> 17,293,999
<CURRENT-ASSETS> 41,097,666
<PP&E> 96,489,057
<DEPRECIATION> (27,895,253)
<TOTAL-ASSETS> 109,813,520
<CURRENT-LIABILITIES> 14,592,333
<BONDS> 0
0
0
<COMMON> 77,998
<OTHER-SE> 89,062,264
<TOTAL-LIABILITY-AND-EQUITY> 109,813,520
<SALES> 85,846,434
<TOTAL-REVENUES> 85,846,434
<CGS> 67,491,983
<TOTAL-COSTS> 73,346,698
<OTHER-EXPENSES> (14,884)
<LOSS-PROVISION> 204,156
<INTEREST-EXPENSE> 99,950
<INCOME-PRETAX> 12,484,852
<INCOME-TAX> 5,050,000
<INCOME-CONTINUING> 7,434,852
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,434,852
<EPS-PRIMARY> .96
<EPS-DILUTED> .92
</TABLE>
