<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 2, 1999
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)
<TABLE>
<CAPTION>
DELAWARE 95-3008754
-------- ----------
<S> <C>
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
14370 WHITE SAGE ROAD, MOORPARK, CALIFORNIA 93021
-------------------------------------------------
(Address of principal executive offices)
(805) 553-1200
----------------------------------------------------
(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 June 16, 1999, the total number of outstanding shares of registrant's common
stock was 3,706,889.
<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 2,
1998 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 1,248,130 $ 95,403
Accounts receivable, net of allowance of
$385,109 at October 31, 1998 and $171,733
at May 2, 1999 for doubtful accounts 19,410,344 21,977,472
Inventories 16,609,014 20,695,906
Prepaid expenses 545,834 2,647,337
Deferred income taxes 1,366,000 1,366,000
------------ ------------
Total current assets 39,179,322 46,782,118
------------ ------------
Property, plant and equipment, at cost:
Land 1,611,331 1,611,331
Buildings 9,332,173 29,402,991
Machinery and equipment 59,482,401 68,323,698
Furniture and fixtures 3,337,788 3,834,229
Transportation equipment 331,069 454,054
Leasehold improvements 3,928,569 4,755,331
Construction in progress (includes land and related
costs of $25,562,000 at October 31, 1998 and
$10,700,000 at May 2,1999) 38,236,428 17,845,324
------------ ------------
116,259,759 126,226,958
Less accumulated depreciation 31,488,641 38,281,362
------------ ------------
84,771,118 87,945,596
------------ ------------
Deferred financing cost, net of amortization
of $293,832 at May 2, 1999 -- 8,521,081
Other assets 668,678 372,677
------------ ------------
$124,619,118 $143,621,472
============ ============
</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 2,
1998 1999
------------- -------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 2,109,562 $ 816,666
Trade accounts payable 9,361,350 11,793,746
Accounts payable to related parties 269,727 205,260
Accrued payroll and benefits 2,161,240 2,439,010
Accrued expenses 5,015,987 6,454,127
Income taxes 4,590,183 --
-------------
Total current liabilities 23,508,049 21,708,809
Long-term debt, less current portion 416,125 174,400,000
Deferred income taxes 3,415,000 3,415,000
------------- -------------
Total liabilities 27,339,174 199,523,809
------------- -------------
Commitments and contingencies -- --
Redeemable common stock -- 26,124,997
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
7,809,801 shares at October 31, 1998
and 3,706,889 shares at May 2, 1999 78,098 29,716
Additional paid-in capital 51,363,891 72,853,215
Retained earnings 45,837,955 (154,910,265)
------------- -------------
Total stockholders' equity 97,279,944 (82,027,334)
------------- -------------
$ 124,619,118 $ 143,621,472
============= =============
</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 3, May 2, May 3, May 2,
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 45,114,061 $ 42,442,450 $ 85,846,434 $ 80,158,232
Cost of sales 34,968,556 35,225,068 67,491,983 65,948,946
------------ ------------ ------------ ------------
Gross profit 10,145,505 7,217,382 18,354,451 14,209,286
------------ ------------ ------------ ------------
Operating expenses 3,197,771 3,820,283 5,854,715 6,196,630
Recapitalization costs -- 438,817 -- 16,076,206
------------ ------------ ------------ ------------
Total operating expenses 3,197,771 4,259,100 5,854,715 22,272,836
------------ ------------ ------------ ------------
Operating income (loss) 6,947,734 2,958,282 12,499,736 (8,063,550)
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (49,463) (4,364,546) (99,950) (6,926,157)
Interest income 28,680 1,245 94,989 2,023
Other (4,077) (455,680) (9,923) (351,563)
------------ ------------ ------------ ------------
Net other income (expense) (24,860) (4,818,981) (14,884) (7,275,697)
------------ ------------ ------------ ------------
Earnings (loss) before income taxes 6,922,874 (1,860,699) 12,484,852 (15,339,247)
Income taxes 2,875,000 -- 5,050,000 (3,300,000)
------------ ------------ ------------ ------------
Net earnings (loss) $ 4,047,874 $ (1,860,699) $ 7,434,852 $(12,039,247)
============ ============ ============ ============
</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 2, 1999
<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, 1998 7,809,801 $ 78,098 $ 51,363,891 $ 45,837,955 $ 97,279,944
Record acquisition transaction (3,367,618) (41,029) 22,614,324 (163,716,330) (141,143,035)
Record redeemable common stock (735,294) (7,353) -- (24,992,643) (24,999,996)
Accreted put premium on
Redeemable common stock -- -- (1,125,000) -- (1,125,000)
Net loss -- -- -- (12,039,247) (12,039,247)
------------- --------- ------------- ------------- -------------
Balance at May 2, 1999 3,706,889 $ 29,716 $ 72,853,215 $(154,910,265) $ (82,027,334)
============= ========= ============= ============= =============
</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 3, May 2,
1998 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 7,434,852 $ (12,039,247)
Adjustments to reconcile net earnings income to net
cash provided by (used in) operating activities:
Depreciation 3,920,713 6,792,721
Amortization of deferred financing fees -- 293,832
Changes in assets and liabilities:
(Increase) in accounts receivable (3,094,904) (2,567,128)
(Increase) in inventories (2,739,385) (4,086,892)
(Increase) in prepaid expenses (398,549) (2,101,503)
(Increase) in deferred tax asset (125,000) --
Decrease in other assets 26,666 296,001
(Decrease) increase in accounts payable,
accounts payable to related parties and other
accrued expenses 1,467,783 4,083,838
(Decrease) increase in income taxes payable 109,000 (4,590,183)
Increase (decrease) in net deferred tax liability (25,000) --
------------- -------------
Net cash provided by operating activities 6,576,176 (13,918,561)
------------- -------------
Cash flows from investing activities:
Purchases of property, plant and equipment (16,246,209) (8,817,878)
Transfers of internally built equipment -- (1,149,321)
Sales of marketable securities 6,750,000 --
------------- -------------
Net cash (used in) investing activities (9,496,209) (9,967,199)
------------- -------------
Cash flows from financing activities:
Recapitalization costs -- (141,102,005)
Repurchase of common stock (41,029)
Draws on lines of credit -- 5,450,000
Proceeds from issuance of long-term debt -- 170,000,000
Payment of deferred financing fees -- (8,814,913)
Repayment of long-term debt -- (2,759,020)
Proceeds from exercise of stock options 348,590 --
(Payments) proceeds from long-term debt 654,015 --
-------------
Net cash (used in) provided by financing activities 1,002,605 22,733,033
------------- -------------
Net (decrease) in cash (1,917,428) (1,152,727)
Cash at beginning of period 2,415,335 1,248,130
------------- -------------
Cash at end of period $ 497,907 $ 95,403
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 100,233 $ 1,598,038
Income taxes $ 5,091,000 $ 3,055,000
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-6-
<PAGE> 7
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 2, 1999
(UNAUDITED)
(1) COMPANY OPERATIONS
Special Devices, Incorporated, a Delaware corporation (the "Company"),
designs and manufactures highly reliable precision engineered pyrotechnic
devices. These devices are used predominantly in vehicle airbag and other
automotive safety systems as well as in various aerospace applications.
On December 15, 1998, the Company consummated a recapitalization (the
"Recapitalization") in which all shares of the Company's common stock, other
than those retained by certain members of management and certain other
shareholders (the "Continuing Shareholders"), were converted into the right to
receive $34 per share in cash. The Continuing Shareholders retained
approximately 41.3% of the common equity of the Company while new investors
acquired the balance of the equity interests in the Company.
(2) INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
of the Company 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, 1998. Operating results for
the six month period ended May 2, 1999 are not necessarily indicative of the
operating results which may be expected for the full fiscal year.
(3) ACCOUNTS RECEIVABLE
Accounts receivable are as follows:
<TABLE>
<CAPTION>
October 31, May 2,
1998 1999
----------- -----------
<S> <C> <C>
Commercial Customers $13,591,228 $14,485,875
U.S. Government 2,273,366 2,301,910
U.S. Government Subcontractors 3,930,859 5,361,420
----------- -----------
19,795,453 22,149,205
Less allowance for doubtful accounts 385,109 171,733
----------- -----------
Total $19,410,344 $21,977,472
=========== ===========
</TABLE>
-7-
<PAGE> 8
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 2, 1999
(UNAUDITED)
(4) INVENTORIES
Inventories and inventoried costs relating to long-term contracts are classified
as follows:
<TABLE>
<CAPTION>
October 31, May 2,
1998 1999
----------- -----------
<S> <C> <C>
Raw materials and components $ 6,294,434 $ 5,378,325
Work in process 3,677,720 3,387,815
Finished goods 1,650,654 1,662,994
Inventoried costs relating to
long term contracts, net of
amounts attributed to revenues
recognized to date 6,810,037 10,266,772
----------- -----------
18,432,845 20,695,906
Less progress payments related
to long-term contracts 1,823,831 --
----------- -----------
$16,609,014 $20,695,906
=========== ===========
</TABLE>
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.
(5) NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
October 31, May 2,
1998 1999
------------ ------------
<S> <C> <C>
Bank Revolver $ 2,050,000 $ 5,450,000
Senior Term Loan -- 69,766,666
Other bank borrowings 475,687 --
Senior Subordinated Notes -- 100,000,000
------------ ------------
2,525,687 175,216,666
Less current portion 2,109,562 816,666
------------ ------------
Total long-term debt $ 416,125 $174,400,000
============ ============
</TABLE>
At October 31, 1998, $2,050,000, was outstanding under a credit
agreement, which was paid in full December 15, 1998, in connection with the
Recapitalization. This credit agreement was then terminated. In addition, at
October 31, 1998, the Company had outstanding approximately $3,518,000 of
performance bonds secured by standby letters of credit.
The Company's wholly-owned subsidiary, Scot, Inc. had a term loan with a
bank, secured by certain real property of Scot. The principal balance
outstanding at October 31, 1998, was $475,687. The loan was repaid in full on
December 15, 1998.
-8-
<PAGE> 9
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 2, 1999
(UNAUDITED)
As part of the Recapitalization, the Company entered into a new credit
facility (the "New Credit Facility") with a syndicate of banks, which consists
of a $25,000,000 Revolving Credit Facility ("Revolver") and a $70,000,000 Senior
Term Loan.
The Company's revolving credit facility (the "Revolver") bears interest
at the bank's Base Rate plus an applicable margin (an effective rate of 9.5% at
May 2, 1999). The Company has the option of converting all or a portion of the
balance outstanding under the Revolver to a Eurodollar Loan, for one, two, three
or six month periods, to bear interest at the Eurodollar Rate plus an applicable
margin (an effective rate of 7.75% at May 2,1999). As of May 2, 1999, $5,450,000
was outstanding under the Revolver of which $4,500,000 was outstanding as
Eurodollar Loans. In addition, the Company had approximately $2,500,000 of
letters of credit outstanding under the Revolver, which reduces the amount of
additional borrowing available. Total amount available under the Revolver at May
2, 1999 was $17,050,000.
The Senior Term Loan is a seven year loan which bears interest at the
Eurodollar Rate plus an applicable margin (an effective rate of 8.375% at May 2,
1999). The loan contains several financial and operating covenants which the
Company must meet on a quarterly basis. As of May 2, 1999, the Company was in
compliance with all such covenants. Substantially all of the Company's assets
are pledged as collateral under the New Credit Facility. As required under the
terms of the New Credit Facility, effective March 16, 1999, the Company entered
into an interest rate protection agreement. The terms of the agreement relate to
the notional amount of $35,000,000 of the total $70,000,000 original principal
amount. This agreement set the rate at 5.42% plus 175 basis points, requiring
quarterly interest payments starting June 17, 1999 through March 17, 2001.
Principal payments under the Senior Term Loan are required as follows
for the fiscal years ended October 31:
<TABLE>
<S> <C>
1999 $ 700,000
2000 700,000
2001 700,000
2002 10,000,000
2003 16,700,000
Thereafter 41,200,000
----------
$70,000,000
===========
</TABLE>
In addition, as part of the Recapitalization, the Company sold
$100,000,000 of Senior Subordinated Notes. The Notes are due in December 2008,
and bear interest at 11 3/8%. Interest is payable semi-annually, commencing
June 15, 1999.
-9-
<PAGE> 10
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 2, 1999
(UNAUDITED)
(6) INCOME TAXES
The provisions for income taxes consist of the following for each
respective six months ended:
<TABLE>
<CAPTION>
May 3, May 2,
1998 1999
----------- -----------
<S> <C> <C>
Current:
Federal $ 4,116,000 $(2,900,000)
State 1,084,000 (400,000)
----------- -----------
$ 5,200,000 $(3,300,000)
=========== ===========
Deferred:
Federal $ (93,000) $ --
State (57,000) --
----------- -----------
$ (150,000) $ --
=========== ===========
Total:
Federal $ 4,023,000 $(2,900,000)
State 1,027,000 (400,000)
----------- -----------
$ 5,050,000 $(3,300,000)
=========== ===========
</TABLE>
Of the total recapitalization costs of $16,076,200, approximately
$5,000,000 consist of certain fees related to the Recapitalization which may not
deductible for income tax purposes.
Temporary differences which give rise to deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
October 31, May 2,
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax liabilities: - Non-current:
Depreciation $(3,415,000) $(3,415,000)
=========== ===========
Deferred tax assets - current:
Allowance for doubtful accounts $ 117,000 $ 117,000
Inventory 472,000 472,000
Vacation 451,000 451,000
State taxes 326,000 326,000
----------- -----------
1,366,000 1,366,000
----------- -----------
Net deferred tax (liability) asset $(2,049,000) $(2,049,000)
=========== ===========
</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 2, 1999
(UNAUDITED)
The provisions for income tax expense for the six month period presented
below 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 3, May 2,
1998 1999
----------- -----------
<S> <C> <C>
Income taxes at Federal rate $ 3,976,000 $(5,117,000)
State income taxes 1,124,000 (1,316,000)
Tax benefit of certain recapitalization costs -- 3,133,000
Other (50,000) --
----------- -----------
$ 5,050,000 $(3,300,000)
=========== ===========
</TABLE>
(7) COMMITMENTS AND CONTINGENCIES
Certain of the outstanding shares of common stock held by the continuing
shareholders (additional rollover shares) are subject to the right, under
certain conditions, to require the Company to purchase all or a portion of the
additional rollover shares at a price per share based on a formula. Accordingly,
the additional rollover shares have been recorded as redeemable common stock.
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 is 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 2, 1999 to acquire capital equipment,
at cost, aggregating approximately $800,000, primarily for production and other
support equipment required for the 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 has built new facilities. Total
cost of the project is estimated at approximately $32,500,000 of which
$30,700,000 had been spent at May 2, 1999 and is included in construction in
progress or building accounts in the accompanying condensed consolidated balance
sheet. The Company anticipates spending approximately $1,800,000 in the
remainder of fiscal year 1999 to complete this project. In April 1999, the
Company sold two commercial lots developed as part of this project, the proceeds
of which have reduced the net project cost to approximately $30,000,000.
-11-
<PAGE> 12
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 2, 1999
(UNAUDITED)
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.
(8) SUBSEQUENT EVENTS
On February 18, 1999, an accidental explosion occurred at the Company's
Newhall facility, resulting in the death of one employee. The Company suspended
all production at Newhall for four days to conduct a thorough investigation of
the accident along with California OSHA, and suspended the blending of
pyrotechnic powders for approximately two weeks. Concurrently, the Company
implemented contingency manufacturing plans to meet customer demand for existing
inventory and production from our Mesa facility. No building or equipment, other
than one transport vehicle, were damaged in the accident. The Company resumed
full production at Newhall on March 4, 1999. California OSHA's investigation of
the accident is continuing.
Results for the first half of Fiscal 1999 were lower than the results
the Company achieved in the first half of Fiscal 1998 due primarily to costs
relating to the Company's relocation to the Moorpark facility, including the
operation of duplicative facilities during the period and the manufacturing
inefficiencies inherent with the commencement of new manufacturing operations.
In addition, unit-price concessions the Company made to a leading automotive
initiator customer in exchange for anticipated volume increases expected in the
second half of fiscal 1999 contributed to a decline in results in the first half
of fiscal 1999. Finally, the slowdown in production at Newhall as a result of
the February 1999 accidental explosion and resulting investigation impacted our
second quarter results. The Company maintains insurance coverage including a
business interruption policy, under which it expects to recover much of these
costs. No estimates of recovery under the policy have yet been made.
The Company expected all required approvals from customers to commence
production of automotive initiators at its Moorpark facility by the end of the
second quarter of fiscal 1999. The Company actually received its final customer
approvals on June 1, 1999, and the Company currently expects to complete the
move to Moorpark by the end of June 1999. As a result, the Company has had to
continue operating automotive initiator lines at its Newhall facility for longer
than expected. Although the costs of operating both facilities are now expected
to continue during the third quarter of fiscal 1999, the near-term completion of
its move has allowed the company to begin to eliminate redundant staffing and
commence other cost containment efforts, including a reduction in its workforce
of approximately 280 people (or approximately 21% of total employees) on May 3,
1999.
On June 9, 1999, John M. Cuthbert, the Company's President and Chief
Executive Officer, and John T. Vinke, Vice President Finance and Chief Financial
Officer, separated from the Company to pursue other business interests. Mr.
Cuthbert continues to serve as a director of the Company, as well as a
consultant. George A. Sawyer and Joseph A. Stroud have been appointed Chief
Executive Officer, and Chief Financial Officer, respectively, of the Company.
Both Mr. Sawyer and Mr. Stroud are members of the general partner of J.F. Lehman
Equity Investors I, L.P. ("JFLEI") and have significant experience in
manufacturing/operations. JFLEI and affiliates sponsored the recapitalization of
the Company in December 1998.
-12-
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MAY 2, 1999 TO THE THREE MONTHS ENDED MAY
3, 1998
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 decreased by $4,119,000,
or 11.4%, to $31,976,000 for the quarter ended May 2, 1999 compared to sales of
$36,095,000 for the same quarter of the previous year. The decrease was a result
of contractual price decreases in the current period, offset partially by an
appropriate 6% increase in units shipped in the second quarter of 1999 versus
the same period in 1998. Sales to TRW as a percent of the Division's total sales
were 49.5% for the second quarter of the current fiscal year as well as the same
period last year, and were 37.4% of total Company sales this year compared to
39.8% for the same period last year. Sales to Autoliv were 31.5% of Automotive
Products Division sales in the second quarter of the current fiscal year as
compared to 28.1% for the same period last year, and were 23.8% of total Company
sales for the three months ended May 2, 1999, compared to 22.6% of total Company
sales for the same period last year.
Net sales for the Aerospace Division increased by $1,447,000, or 16.0%,
to $10,466,000 for the quarter ended May 2, 1999 compared to sales of $9,019,000
for the second quarter last year. The increase in sales in the second quarter of
1999 was due to increased shipments of products used on several missile programs
and commencement of production and deliveries related to the bomb ejector
program.
Cost of Sales
Cost of sales for the Automotive Products Division decreased $570,000,
or 2.0%, to $28,503,000 for the quarter ended May 2, 1999, compared to cost of
sales of $29,073,000 for the same quarter last year. The Division's gross profit
margin was 10.9% for the second quarter of 1999, compared to 19.5% for the same
quarter last year. The decrease in margin reflects the reduction of initiators
shipped, unit price concessions made to the Company's leading automotive
initiator customers in exchange for anticipated volume increases expected in the
second half of fiscal 1999 and increased costs and certain inefficiencies
related to a delay in the completion of the Company's move to the new facility
in Moorpark, which delay is partially attributable to the accidental explosion
at the Company's Newhall facility on February 18, 1999. The delay in completing
the move is due to the fact that required approvals from customers to commence
production of automotive initiators at the Moorpark facility were not received
until June 1999. As a result, the Company has had to continue operating
automotive initiator lines at its Newhall facility for longer than anticipated.
The Company has received all required approvals, and the Company expects to
complete its move to the Moorpark facility by the end of June 1999. Although the
costs of operating both facilities are now expected to continue during the third
quarter of fiscal 1999, the near-term completion of the Company's move has
allowed it to begin to eliminate redundant staffing and commence other cost
containment efforts, including a reduction in its workforce of approximately 280
people (or approximately 21% of the workforce) on May 3, 1999.
Cost of sales for the Aerospace Division increased $826,000, or 14.0% to
$6,722,000 for the quarter ended May 2, 1999, compared to cost of sales of
$5,896,000 for the comparable quarter last year. Gross profit as a percent of
sales was 35.8% for the second quarter of 1999 compared to 34.6% for the same
quarter last year. The increase in gross profit as a percent of sales was
primarily attributable to the mix of products shipped in the second quarter of
fiscal 1999.
-13-
<PAGE> 14
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 those operating
expenses directly incurred by that division. Second, each division is allocated
administrative expenses incurred by the Company (which are not attributable to a
particular division) on an equitable basis to reflect fairly the benefit
received by each operating division. Administrative expenses incurred by the
Company for allocation to each division were approximately the same amount for
the second quarter of 1999 compared to the same period last year.
Operating expenses for the Automotive Products Division increased by
$41,000, or 2.4%, to $1,743,000 in the second quarter of 1999, compared to
operating expenses of $1,702,000 for the same period last year. As a percentage
of sales, operating expenses were 5.5% compared to 4.3% for the same period last
year as a result of increased operating costs associated with the Company's move
to the Moorpark facility.
Operating expenses for the Aerospace Division increased by $581,000, or
38.8%, to $2,077,000 for the quarter ended May 2, 1999, compared to operating
expenses of $1,496,000 for the same period last year. As a percentage of sales,
operating expenses were 19.8% for the quarter ended May 2, 1999, compared to
11.4% for the same period last year. The increase in operating expenses in the
current year is due primarily to the increase in the incentive program tied to
increased sales, operating income and profitability in the Aerospace Division.
Recapitalization Costs
The Company incurred approximately $16,100,000 in one-time pre-tax
charges in connection with the Recapitalization (representing approximately
$5,600,000 in professional advisory fees and approximately $10,500,000 of
compensation expenses relating to stock option exercises). As a result of these
charges, the Company incurred a net loss in the six months ended May 2, 1999.
Because this loss resulted directly from the one-time charges incurred in
connection with the Recapitalization, the Company believes this loss will have
no material impact on its ongoing operations or liquidity.
Other Income and Expense
Other income (expense) consists primarily of interest income and
interest expense. Interest expense was $4,365,000 in the second quarter of
fiscal 1999 compared to interest expense of $49,000 for the second quarter last
year. The increase of $4,316,000 was the result of increased debt outstanding in
the second quarter of 1999, compared to the same period of 1998, resulting from
the Company's Recapitalization in December 1998. Interest income was $1,245 in
the second quarter of fiscal 1999, compared to interest income of $29,000 for
the same period last year. The decrease was the result of lower average amounts
invested in interest bearing securities during the 1999 fiscal quarter.
-14-
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
COMPARISON OF THE SIX MONTHS ENDED MAY 2, 1999 TO THE SIX MONTHS ENDED MAY 3,
1998
Net Sales
Sales for the Automotive Products Division were $62,419,000 for the six
months ended May 2, 1999 compared to sales of $71,843,000 for the comparable
period of the preceding year. The decrease in sales is primarily the result of
the price concessions made to customers in exchange for anticipated volume
increases anticipated in the second half of fiscal 1999. The number of
initiators sold was approximately the same in the first six months of this year
compared to the same period last year. Sales to TRW as a percent of the
Division's total sales were 52.8% for the first six months of the current fiscal
year compared to 50.1% for the same period last year, and were 41.1% of total
Company sales this year compared to 41.9% for the same period last year. Sales
to Autoliv were 30.9% of Automotive Products Division sales in the first six
months of fiscal 1999 as compared to 30.3% for the same period last year and
were 24.0% of total Company sales for the six months ended May 2, 1999, compared
to 25.3% of total Company sales for the same period last year.
Sales for the Aerospace Division increased by $3,736,000, or 26.7%, to
$17,739,000 for the first six months of the current year, compared to sales of
$14,003,000 for the same period last year. The increase in sales was the result
of increased shipments of products used on several missile programs and
increased shipments of the bomb ejector program in the current year.
Cost of Sales
Cost of sales for the Automotive Products Division was $54,317,000 for
the first six months of the current fiscal year, compared to cost of sales of
$58,121,000 for the same period last year. The decrease of $3,804,000, or 6.5%,
was the result of decreased costs associated with decreased sales during the
same period. Gross profit as a percent of sales was 13.0% for the current six
month period compared to 19.1% for the same period last year. The reduction in
gross profit percent was due to the reasons discussed under Cost of Sales for
the comparison of the three months ended May 2, 1999 and May 3, 1998.
Cost of sales for the Aerospace Division increased $2,261,000, or 24.1%,
to $11,632,000 for the first six months of the current year, compared to cost of
sales of $9,371,000 for the same period last year. Gross profit as a percent of
sales was 34.4% in the current period, compared to 33.1% last year, due to the
mix of products shipped in the current year.
Operating Expenses
Operating expenses for the Automotive Products Division were $2,994,000
for the first six months of the current fiscal year, a decrease of $463,000, or
13.4%, compared to operating expenses of $3,457,000 for the same period last
year. As a percentage of sales, operating expenses were 4.7% compared to 4.8%
for the same period last year. The decrease in expenses is related to a
reduction in revenues.
Operating expenses for the Aerospace Division were $3,203,000 for the
first six months of the current fiscal year, an increase of $806,000, or 33.6%,
compared to operating expenses of $2,397,000 last year. As a percentage of
sales, operating expenses were 17.9% compared to 17.1% for the same period last
year. The increase in operating expenses is due primarily to the increase in
incentive program costs related to increased operating income in the Aerospace
Division.
-15-
<PAGE> 16
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. Interest income was $2,000 in the first six months of 1999
compared to interest income of $95,000 for the same period last year. The
reduction in interest income was due to lower average cash balances invested in
interest-bearing securities in the current year period. Interest expense was
$6,632,000 in the first six months of 1999, compared to interest expense of
$100,000 for the same period last year. The increase is the result of interest
incurred on new long-term debt associated with the Recapitalization.
Liquidity and Capital Resources
The Recapitalization had a substantial impact on the Company's capital
structure. The recapitalized Company is significantly more highly leveraged and
accordingly, the Recapitalization resulted in substantial changes to the
Company's debt-to-equity ratio and its debt service requirements.
The Company's principal sources of liquidity are cash flow from
operations and borrowings under its Credit Facility. The Company's principal
uses of cash are debt service requirements, capital expenditures, research and
development and working capital.
As part of the Recapitalization, the Company entered into a Credit
Facility which consists of a $25,000,000 Revolving Credit Facility and a
$70,000,000 Senior Term Loan. As of May 2, 1999, the Company had $5,450,000
outstanding on the Revolving Credit Facility. In addition, the Company had
approximately $2,500,000 of letters of credit outstanding. The Senior Term Loan
was fully drawn at closing of the Recapitalization.
The Company anticipates that working capital requirements will increase
in fiscal 1999, as compared to fiscal 1998 to service the Company's new
long-term debt incurred in connection with the Recapitalization and to support
the investment in accounts receivable related to the anticipated increased
demand for initiators manufactured by the Company. The Company had commitments
to acquire capital equipment at May 2, 1999 aggregating approximately $800,000
related primarily to additional production equipment and other support equipment
required for the increased operations of the Automotive Products Division. The
Company believes that it can meet its expected working capital requirements for
the foreseeable future from cash from operations and borrowings under its Credit
Facility.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement establishes accounting and reporting standards for derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This Statement is
effective for all fiscal years beginning after December 15, 1999. We believe
that the adoption of SFAS No. 133 will not have a material impact on our
financial reporting.
-16-
<PAGE> 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company has only limited involvement in derivative financial
instruments and does not hold or issue them for trading purposes. Certain
amounts borrowed under the Company's Credit Facility are at variable rates and
the Company is thus subject to market risk resulting from interest rates and the
Company is thus subject to market risk resulting from interest rate
fluctuations. The Company has entered into an interest rate swap arrangement to
alter interest rate exposure, as described below. This arrangement allows the
Company to raise long-term borrowings at floating rates and effectively swap
them into fixed rates that are lower than those available to the Company if
fixed rate borrowings were made directly. Under interest rate swaps, the Company
agrees with another party to exchange, at specified intervals, the difference
between fixed-rate and floating-rate amounts calculated by reference to an
agreed notional principal amount.
In March 1999, as required under its Credit Facility, the Company
entered into an interest rate swap agreement with the agent under the Credit
Facility. Under the swap agreement, which is in the notional principal amount of
$35 million, the Company will be required to pay a fixed rate of 5.42% to the
agent on each March 17, June 17, September 17 and December 17, commencing on
June 17, 1999. On those same dates, the Company will receive a floating-rate
payment from the agent based on the three-month LIBOR rate. The swap agreement
terminates on March 7, 2001.
The Company also is exposed to market risks related to fluctuations in
interest rates on the Senior Notes it issued in December 1998. For fixed rate
debt such as the Senior Notes, changes in interest rates generally affect the
fair value of the debt instrument. The Company does not have an obligation to
repay the Senior Notes prior to maturity in December 2008 and, as a result,
interest-rate risk and changes in fair value should not have a significant
impact on the Company.
-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 - None.
(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 16, 1999 /s/ GEORGE A. SAWYER
------------------------- ------------------------------------
Chief Executive Officer
Director
DATED: June 16, 1999 /s/ JOSEPH A. STROUD
------------------------- ------------------------------------
Executive Vice President Finance and
Chief Financial Officer
Director
-18-
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