-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RSprYnPA0Mn4TJe+XdN3Z2Z25n3LqQ1MqP3fBmRQyiLM1Bgl4ZFqvcaB4TaAfUFC kX5VSmzDN8PrJyse6mMWaA== 0001047469-99-024060.txt : 19990615 0001047469-99-024060.hdr.sgml : 19990615 ACCESSION NUMBER: 0001047469-99-024060 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990430 FILED AS OF DATE: 19990614 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OEA INC /DE/ CENTRAL INDEX KEY: 0000073864 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 362362379 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06711 FILM NUMBER: 99645762 BUSINESS ADDRESS: STREET 1: 34501 E QUINCY AVE CITY: DENVER STATE: CO ZIP: 80250 BUSINESS PHONE: 3036931248 MAIL ADDRESS: STREET 1: P O BOX 100488 CITY: DENVER STATE: CO ZIP: 80250 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------- FORM 10-Q --------- /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ COMMISSION FILE NUMBER 1-6711 OEA, INC. (Exact name of registrant as specified in its charter) DELAWARE 36-2362379 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) P. O. BOX 100488 80250 DENVER, COLORADO (Zip Code) (Address of principal executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (303) 693-1248 - ----------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 20,602,248 Shares of Common Stock at June 8, 1999. INDEX
Page No. -------- PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Condensed Balance Sheets April 30, 1999 (unaudited) and July 31, 1998............................. 3 Consolidated Condensed Statements of Operations (unaudited) Three Months and Nine Months Ended April 30, 1999 and May 1, 1998.......................................................... 4 Consolidated Condensed Statements of Cash Flows (unaudited) Nine Months Ended April 30, 1999 and May 1, 1998......................... 5 Notes to Consolidated Condensed Financial Statements (unaudited)........... 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................ 8 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk................. 16 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings.......................................................... 17 ITEM 2. Changes in Securities and Use of Proceeds.................................. 17 ITEM 3. Defaults on Senior Securities.............................................. 17 ITEM 4. Submission of Matters to a Vote of Security Holders........................ 17 ITEM 5. Other Information.......................................................... 17 ITEM 6. Exhibits and Reports on Form 8-K........................................... 17
OEA, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands)
ASSETS April 30, 1999 July 31, 1998 -------------- ------------- (Unaudited) Current Assets: Cash and Cash Equivalents $ 3,949 $ 1,920 Accounts Receivable, Net 41,477 43,998 Unbilled Costs and Accrued Earnings 4,652 3,190 Income Taxes Receivable 2,621 12,040 Inventories: Raw Material and Component Parts 23,726 25,954 Work-in-Process 16,348 17,222 Finished Goods 6,028 11,391 ------------- ------------ Total Inventory 46,102 54,567 Prepaid Expenses and Other 850 1,863 ------------- ------------ Total Current Assets 99,651 117,578 ------------- ------------ Property, Plant and Equipment 284,644 272,411 Less: Accumulated Depreciation 85,199 67,761 ------------- ------------ Property, Plant and Equipment, Net 199,445 204,650 Long-term Receivable 3,000 3,000 Investment in Foreign Joint Venture 2,323 2,323 Other Assets 1,211 1,208 ------------- ------------ Total Assets $ 305,630 $ 328,759 ------------- ------------ ------------- ------------ LIABILITIES AND STOCKHOLDERS EQUITY Current Liabilities: Accounts Payable 25,408 22,457 Interest Payable 2,239 2,368 Accrued Expenses 6,387 6,636 ------------- ------------ Total Current Liabilities 34,034 31,461 Long-term Bank Borrowings 105,000 124,000 Deferred Income Taxes 10,820 10,821 Other 956 971 ------------- ------------ Total Liabilities 150,810 167,253 Stockholders' Equity: Common Stock - $.10 par value, Authorized 50,000,000 Shares: Issued - 22,019,700 Shares 2,202 2,202 Additional Paid-In Capital 13,329 13,201 Retained Earnings 145,347 150,440 Less: Cost of Treasury Shares, 1,410,259 and 1,424,943 (2,120) (2,142) Equity Adjustment from Translation (3,938) (2,195) ------------- ------------ Total Stockholders' Equity 154,820 161,506 ------------- ------------ Total Liabilities and Stockholders' Equity $ 305,630 $ 328,759 ------------- ------------ ------------- ------------
OEA, INC. CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) (in thousands, except share data)
Three Months Ended Nine Months Ended April 30, May 1, April 30, May 1, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Net Sales $ 66,700 $ 63,592 $ 182,927 $ 180,341 Cost of Sales 60,731 76,500 172,578 174,976 ----------- ----------- ----------- ----------- Gross Profit (Loss) 5,969 (12,908) 10,349 5,365 General and Administrative Expenses 3,860 4,236 9,698 8,239 Research and Development Expenses 834 274 2,574 951 ----------- ----------- ----------- ----------- Operating Profit (Loss) 1,275 (17,418) (1,923) (3,825) Other Income (Expense): Interest Income 11 73 149 273 Interest Expense (2,034) (1,749) (6,032) (4,125) Royalty Income & Other, Net 1,023 (4,107) 2,666 (4,243) ----------- ----------- ----------- ----------- (1,000) (5,783) (3,217) (8,095) ----------- ----------- ----------- ----------- Earnings (Loss) Before Income Tax Benefit 275 (23,201) (5,140) (11,920) Federal and State Income Tax Benefit (49) (8,276) (1,746) (4,005) ----------- ----------- ----------- ----------- Net Earnings (Loss) Before Cumulative Effect of a Change In Accounting Principle $ 324 $ (14,925) $ (3,394) $ (7,915) Cumulative Effect of a Change in Accounting Principle -- -- -- (10,040) ----------- ----------- ----------- ----------- Net Earnings (Loss) $ 324 $ (14,925) $ (3,394) $ (17,955) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Earnings (Loss) Per Share Before Cumulative Effect of a Change in Accounting Principle - Basic & Diluted $ 0.02 $ (0.72) $ (0.16) $ (0.38) Cumulative Effect of a Change in Accounting Principle - Basic & Diluted $ -- $ -- $ -- $ (0.49) ----------- ----------- ----------- ----------- Earnings (Loss) Per Share - Basic & Diluted 0.02 (0.72) (0.16) (0.87) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Weighted Average Number of Shares Outstanding - Basic 20,603,020 20,593,570 20,599,532 20,575,583 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Weighted Average Number of Shares Outstanding - Diluted 20,916,034 20,602,500 20,823,906 20,588,775 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
OEA, INC. CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED) (in thousands)
Nine Months Ended April 30, 1999 May 1, 1998 -------------- ----------- Operating Activities Net Loss $ (3,394) $ (17,955) Adjustments to reconcile net earnings to net cash provided by operating activities: Cumulative effect of a change in accounting principle -- 10,040 Depreciation and Amortization 17,869 17,046 Decrease in deferred compensation payable (16) -- (Gain) loss on disposal of property, plant, and equipment (7) 4,709 Changes in operating assets and liabilities: Accounts receivable 1,415 (469) Unbilled costs and accrued earnings (1,462) (127) Inventories 8,413 5,342 Prepaid expenses and other 1,013 (537) Accounts payable and accrued expenses 2,606 (3,661) Income taxes payable 10,369 (8,749) ----------- --------- Net cash provided by operating activities 36,806 5,639 Investing Activities: Capital expenditures (13,820) (41,660) Proceeds from sale of property, plant, and equipment 10 283 Decrease (increase) in other assets, net (127) 190 ----------- --------- Net cash used in investing activities (13,937) (41,187) Financing Activities: Purchases of common stock for treasury -- (43) Proceeds from issuance of treasury stock 103 310 Capital contributions 47 -- Payment of Dividends (1,699) (6,791) Increase (decrease) in borrowings, net (19,000) 41,800 ----------- --------- Net cash provided by (used in) financing activities (20,549) 35,276 Effect of exchange rate changes on cash (291) (584) ----------- --------- Net increase (decrease) in cash and cash equivalents 2,029 (856) Cash and cash equivalents at beginning of period 1,920 4,138 ----------- --------- Cash and cash equivalents at end of period $ 3,949 $ 3,282 ----------- --------- ----------- ---------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION The unaudited financial statements furnished above reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of OEA's management, necessary for a fair statement of the results of operations for the three and nine month periods ended April 30, 1999 and May 1, 1998. Certain amounts in the fiscal 1998 financial statements have been reclassified to conform with the fiscal 1999 presentation. These reclassifications had no material impact on the reported results of operations. Refer to the Company's annual financial statements for the year ended July 31, 1998, for a description of the accounting policies, which have been continued without change. Also, refer to the footnotes with those financial statements for additional details of the Company's financial condition, results of operations, and changes in financial position. NOTE 2 - START-UP COSTS In April 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 98-5, "Reporting on the Costs of Start-up Activities." This Statement requires entities to expense costs of start-up activities as they are incurred and to report the initial adoption as a cumulative effect of a change in accounting principle as described in Accounting Principles Board Opinion No. 20, "Accounting Changes." Statement of Position No. 98-5 is effective for fiscal years beginning after December 15, 1998. However, the Company elected to adopt Statement of Position 98-5 in the first quarter of fiscal 1998. NOTE 3 - COMPREHENSIVE INCOME During the first quarter of fiscal 1999, the Company adopted Statement of Financial Accounting Standard No. 130, REPORTING COMPREHENSIVE INCOME. Comprehensive income generally represents all changes in stockholders' equity, except those resulting from investments or contributions by stockholders. Total comprehensive income for the first nine months of fiscal 1999 and fiscal 1998 were:
FY 1999 FY 1998 -------- -------- Net Loss ($ 3,394) ($17,955) Equity Adjustment from Translation (1,743) 238 -------- -------- Total Comprehensive Income ($ 5,137) ($17,717) -------- -------- -------- --------
NOTE 4 - SEGMENT INFORMATION In June 1997, the FASB issued Statement of Financial Accounting Standard No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. The Statement requires public companies to report certain information about operating segments in complete sets of financial statements and in condensed financial statements of interim periods issued to shareholders. Under Statement No. 131, operating segments are to be determined based on how management measures performance and makes decisions about allocating resources. It also requires that public companies report certain information about their products and services, the geographic areas in which they operate, and their major customers. Statement No. 131 is effective for fiscal years beginning after December 15, 1997. The Company will adopt Statement No. 131 in the fourth quarter of the current fiscal year. NOTE 5 - BANK BORROWINGS On April 10, 1998, the Company entered into a $180 million Amended and Restated Revolving Credit Agreement with a group of seven banks. This agreement was amended on June 11, 1998. At the Company's request, this agreement was again amended on December 10, 1998 to reduce the amount of the facility to $150 million and to modify the financial debt covenants. The Company's principal bank is acting as agent for the banks under this agreement. At April 30, 1999, the Company had $105 million of long term debt outstanding on this credit facility. All outstanding debt at April 30, 1999 is classified as long-term since no portion is either due or expected to be permanently repaid within the next twelve-month period. Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources for further information regarding this credit facility. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OEA,Inc. is referred to herein as "OEA" or the "Company." This report contains certain forward-looking statements within the meaning of Section 27E of the Securities Exchange Act of 1934, as amended, including statements regarding Company strategy, its soundness, the inflator and initiator market, impairment inflator prices, inflator and initiator demand, sales volume increases, the utilization rate of the Company's inflator manufacturing facility, the timing and benefits of cost reduction programs and improved manufacturing processes, impairment of carrying value of assets, implementation of ERP systems, year 2000 compliance, as well as other statements or implications regarding future events. Actual results or events may differ materially from these forward-looking statements depending on a variety of factors. Reference is made to the cautionary statements under the caption "Forward-Looking Statements" in OEA's Annual Report on Form 10-K for the year ended July 31, 1998 and the Company's report on Form 8-K filed on June 4, 1998 for a description of various factors that might cause OEA's actual results to differ materially from those contemplated by such forward-looking statements. A summary of the principal items included in the consolidated statements of earnings, on a percent of sales basis, is shown below:
Comparison of Three Months Ended ---------------------------------------------------------------- April 30, 1999 May 1, 1998 ----------------------------- ------------------------------ Dollars Dollars (in thousands) % of Sales (in thousands) % of Sales -------------- ---------- -------------- ---------- Net Sales $ 66,700 100.0% $ 63,592 100.0% Cost of Sales 60,731 91.1% 76,500 120.3% -------- ----- --------- ----- Gross Margin 5,969 8.9% (12,908) (20.3%) General and Administrative Expenses 3,860 5.8% 4,236 6.7% Research and Development Expenses 834 1.3% 274 .4% -------- ----- --------- ----- Operating Profit (Loss) 1,275 1.9% (17,418) (27.4%) Other Expense, Net (1,000) (1.5%) (5,783) (9.1%) -------- ----- --------- ----- Earnings (Loss) Before Tax 275 .4% (23,201) (36.5%) Income Tax Benefit (49) (.1%) (8,276) (13.0%) -------- ----- --------- ----- Net Earnings (Loss) Before Cumulative Effect of a Change In Accounting Principle 324 .5% (14,925) (23.5%) Cumulative Effect of a Change in Accounting Principle -- -- -- -- -------- ----- --------- ----- Net Earnings (Loss) $ 324 .5% $ (14,925) (23.5%) -------- ----- --------- ----- -------- ----- --------- -----
Comparison of Nine Months Ended ---------------------------------------------------------------- April 30, 1999 May 1, 1998 ----------------------------- ------------------------------ Dollars Dollars (in thousands) % of Sales (in thousands) % of Sales -------------- ---------- -------------- ---------- Net Sales $182,927 100.0% $ 180,341 100.0% Cost of Sales 172,578 94.3% 174,976 97.0% -------- ----- --------- ----- Gross Margin 10,349 5.7% 5,365 3.0% General and Administrative Expenses 9,698 5.3% 8,239 4.6% Research and Development Expenses 2,574 1.4% 951 .5% -------- ----- --------- ----- Operating Loss (1,923) (1.0%) (3,825) (2.1%) Other Expense, Net (3,217) (1.8%) (8,095) (4.5%) -------- ----- --------- ----- Loss Before Tax Benefit (5,140) (2.8%) (11,920) (6.6%) Income Tax Benefit (1,746) (.9%) (4,005) (2.2%) -------- ----- --------- ----- Net Loss Before Cumulative Effect of a Change in Accounting Principle (3,394) (1.9%) (7,915) (4.4%) Cumulative Effect of a Change in Accounting Principle -- -- (10,040) (5.6%) -------- ----- --------- ----- Net Loss $ (3,394) (1.9%) $ (17,955) (10.0%) -------- ----- --------- ----- -------- ----- --------- -----
NET SALES Net sales increased 5% to $66.7 million for the third quarter ended April 30, 1999, as compared to prior-year third quarter sales of $63.6 million. Net sales for the nine months ended April 30, 1999 were $182.9 million, as compared to $180.3 million for the prior-year period. Automotive segment sales increased 5% ($2.4 million) to $54.6 million in the third quarter and 3% ($4.5 million) to $149.5 million for the first nine months of fiscal 1999, as compared to the prior-year periods, driven primarily by increased initiator sales. Inflator unit shipments increased 41% and 31%, respectively, in the third quarter and first nine months, as compared to the prior-year periods. However, net inflator sales increased only 5% ($1.9 million) in the third quarter and decreased 0.5% ($0.5 million) for the first nine months, as compared to the prior-year periods, primarily due to an industry-wide inflator price adjustment that became effective August 1, 1998. The impact of this adjustment on the Company was a weighted average inflator price reduction of 23% for the first nine months of the fiscal year, or an aggregate reduction in net inflator sales of $32.5 million. The Company believes that this large reduction in inflator sales price was a market adjustment and is not indicative of future price reductions. Initiator unit shipments to outside customers increased 20% and 37%, respectively, in the third quarter and first nine months, as compared to the prior-year periods. The increased unit shipments, partially offset by initiator price reductions and a shift in initiator product mix, resulted in net initiator sales increases of 5% ($.6 million) and 15% ($5.2 million), respectively, for the third quarter and nine months ended April 30, 1999, as compared to the prior-year periods. Management believes that the significant increases in both inflator and initiator unit sales reflect continued strong customer acceptance of the Company's automotive safety products and increased demand for air bags from both domestic and foreign automobile manufacturers. Aerospace segment sales increased 6% ($.7 million) to $12.1 million in the third quarter, but decreased 5% ($1.9 million) to $33.4 million for the first nine months of fiscal 1999, as compared to the prior-year periods. The nine-month decrease was primarily due to a first quarter slowdown on the Delta program and the timing of foreign sales. COST OF SALES Cost of sales for the third quarter ended April 30, 1999 was $60.7 million, as compared to $76.5 million for the same period last year. Cost of sales for the nine months ended April 30, 1999 was $172.6 million, as compared to $175.0 million for the comparable period last year. Automotive segment cost of sales decreased 22% ($14.7 million) to $50.9 million in the third quarter, as compared to the prior year, primarily due to the effect of last year's $19.0 million one-time charges (see " Fiscal 1998 One-time Charges" below), partially offset by increased costs associated with inflator and initiator shipments in the current period. Automotive cost of sales for the nine months ended April 30, 1999 were flat at $144.6 million, as compared to the prior-year period. The Company's new inflator production facility represents 10 million of the Company's 15 million unit annual inflator capacity. This facility has been operating significantly below target utilization (23% utilization in the first quarter; 24% utilization in the second quarter; and 34% utilization in the third quarter) in fiscal 1999. Although improvement was made in the third quarter, capacity underutilization continues to put pressure on the Company's cost structure and automotive margins. Inflator capacity utilization is expected to increase over time. However, the Company does not expect to reach target utilization levels until fiscal 2001. The Company has undertaken a comprehensive automotive cost reduction program, which includes material cost reductions, productivity improvements and automation improvements. OEA has made significant progress over the past nine months in the implementation of this program, resulting in its return to profitability in the current quarter. The Company expects to phase in additional cost reductions throughout the remainder of fiscal 1999 and into fiscal 2000. The Company has identified and requested customer approval for several design changes that are expected to reduce material and other costs and to improve productivity. Due to the nature of OEA's products, both our customers and the automobile manufacturers must perform significant qualification and validation testing before design changes can be approved. This process, including the allocation of significant resources, has taken longer than originally expected. However, we began to phase in the first series of cost-down design changes to production in the third quarter and expect to have more in place by the end of the fourth quarter of this fiscal year. Additionally, we continue to identify new design changes to our products that are expected to result in further cost reductions. These will be presented to our customers and the automobile manufacturers in fiscal 2000. Aerospace segment cost of sales decreased 9.4% ($1.0 million) to $9.9 million in the third quarter and decreased 7.6% ($2.3 million) to $28.0 million for the nine months ended April 30, 1999, as compared to the prior-year periods. These decreases were primarily due to the reduced aerospace sales and the impact of last year's $1.4 million inventory obsolescence charge (see "Fiscal 1998 One-time Charges" below), partially offset by an unfavorable shift in product mix. GROSS MARGIN Gross margin for the third quarter ended April 30, 1999 was $6.0 million (8.9% of net sales), as compared to ($12.9) million (-20.3% of net sales) for the comparable period last year. Gross margin for the nine months ended April 30, 1999 was $10.3 million (5.7% of net sales), as compared to $5.4 million (3.0% of net sales) for the comparable period last year. Automotive segment gross margin was $3.8 million (6.9% of net automotive sales) for the third quarter and $4.9 million (3.3% of net automotive sales) for the first nine months of fiscal 1999, as compared to ($13.4) million (-25.7% of net automotive sales) and $.4 million (.3% of net automotive sales), respectively, for the comparable prior-year periods. Fiscal 1999 gross margins were significantly impacted by the inflator sales price reduction and delays in the implementation of cost-down design changes, as well as by initiator price reductions. Prior year gross margins were significantly impacted by $19.0 million in one-time charges (see "Fiscal 1998 One-time Charges" below). Improvements in automotive gross margins resulting from the Company's continued cost reduction efforts and expected improvements in inflator capacity utilization will be partially offset by scheduled fiscal year 2000 inflator price reductions of between 3% and 4%. Additionally, the Company is evaluating certain of its inflator facilities, including its European facility, to best respond to changing business conditions. Aerospace segment gross margin was $2.2 million (18.3% of net aerospace sales) for the third quarter and $5.4 million (16.2% of net aerospace sales) for the nine months ended April 30, 1999, as compared to $.5 million (4.4% of net aerospace sales) and $5.0 million (14.1% of net aerospace sales), respectively, for the prior-year periods. The current year increases in gross margin were primarily the result of last year's $1.4 million inventory obsolescence reserve (see "Fiscal 1998 One-time Charges" below), partially offset by the current year decrease in aerospace sales and an unfavorable shift in product mix. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses for the third quarter and nine months ended April 30, 1999 were $3.9 million (5.8% of net sales) and $9.7 million (5.3% of net sales), respectively, as compared to $4.2 million (6.7% of net sales) and $8.2 million (4.6% of net sales), respectively, for the comparable prior-year periods. Eliminating the effects of last year's one-time charges (see "Fiscal 1998 One-time Charges" below), last year's general and administrative expenses would have been $2.4 million (3.8% of net sales) and $6.4 million (3.5% of net sales), respectively. The current year increases were primarily due to the reclassification of certain expenses from manufacturing overhead (e.g. premium freight), executive recruiting and relocation costs, and costs associated with the expansion of the Company's sales and marketing department. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses for the third quarter and nine months ended April 30, 1999 were $.8 million (1.3% of net sales) and $2.6 million (1.4% of net sales), respectively, as compared to $.3 million (.4% of net sales) and $1.0 million (.5% of net sales), respectively, for the comparable prior-year periods. This increased R&D effort reflects continued work on the Company's "smart" (dual-stage) inflators, curtain inflators, micro-gas generators for seat belt pretensioner systems, and other new products in early stages of development. The Company believes its leading technology has been an important part of its success over the years and plans to continue to invest in research and development to maintain its technological leadership. OPERATING PROFIT (LOSS) The Company recorded an operating profit of $1.3 million (1.9% of net sales) and an operating loss of $1.9 million (-1.0% of net sales) for the third quarter and nine months ended April 30, 1999, respectively. The Company had operating losses of $17.4 million (-27.4% of net sales) and $3.8 million (-2.1% of net sales) in the comparable prior-year periods. Eliminating the effects of last year's one-time charges (see "Fiscal 1998 One-time Charges" below), last year's operating profit would have been $4.8 million (7.6% of net sales) and $18.4 million (10.2% of net sales), respectively. Fiscal 1999 operating profit was affected by the inflator price reduction and the increased G&A and R&D costs discussed above. OTHER INCOME (EXPENSE) The Company recorded other expenses for the third quarter and nine months ended April 30, 1999 of $1.0 million (1.5% of net sales) and $3.2 million (1.8% of net sales), respectively. The Company had other expenses of $5.8 million (9.1% of net sales) and $8.1 million (4.5% of net sales), respectively, in the comparable prior-year periods. Eliminating the effects of last year's one-time charges (see "Fiscal 1998 One-time Charges" below), last year's other expenses would have been $1.1 (1.7% of net sales) and $3.4 million (1.9% of net sales), respectively. Net interest expense for the third quarter and nine months ended April 30, 1999 increased $.3 million and $1.9 million, respectively, over the prior-year periods primarily due to a reduction in capitalized interest. The increased interest costs were offset by $.7 million and $2.2 million, respectively, of fixed royalty income recorded in the third quarter and first nine months of fiscal 1999. Royalty income from the Company's Asian licensee, Daicel Chemical Industries, is earned throughout the year, with payment received annually in the fiscal fourth quarter. OEA began accruing this income on a quarterly basis effective in fiscal 1999 to reflect quarterly earned income and to improve comparisons between quarters. CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE In April 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 98-5, "Reporting on the Costs of Start-up Activities" (SOP 98-5). This Statement requires entities to expense costs of start-up activities as they are incurred and to report the initial adoption as a cumulative effect of a change in accounting principle as described in Accounting Principles Board Opinion No. 20, "Accounting Changes." Start-up activities are defined broadly as those one-time activities related to opening a new facility, introducing a new product or service, conducting business in a new territory, conducting business with a new class of customer or beneficiary, initiating a new process in an existing facility, or commencing some new operation. SOP 98-5 is effective for fiscal years beginning after December 15, 1998. However, the Company elected to adopt SOP 98-5 in its fiscal year 1998. Accordingly, the Company wrote off the net book value ($10.0 million) of its start-up and related costs included in the scope of SOP 98-5 as a one-time adjustment referred to as a Cumulative Effect of a Change in Accounting Principle in the first quarter of fiscal 1998. NET EARNINGS The Company recorded net earnings of $.3 million for the third quarter and a net loss of $3.4 million for the nine months ended April 30, 1999. The Company recorded net losses of $14.9 million and $18.0 million in the comparable prior-year periods. Eliminating the effects of last year's one-time charges (see "Fiscal 1998 One-time Charges" below) and change in accounting principle, last year's net earnings (loss) would have been $2.2 million (3.5% of net sales) and $9.2 million (5.1% of net sales), respectively. Basic earnings (loss) per share for the third quarter and nine months ended April 30, 1999 were $.02 and ($.16), respectively, as compared to ($.72) and ($.87) in the comparable prior-year periods. Eliminating the effects of last year's one-time charges and change in accounting principle, last year's basic earnings per share would have been $.11 and $.45, respectively. The current year earnings were significantly impacted by the inflator sales price reduction and the increased G&A and R&D costs discussed above. REVIEW OF CARRYING VALUE OF ASSETS The Company is engaged in an in-depth review of the carrying value of its assets, particularly property, plant and equipment, and believes it may be necessary to reflect an impairment in the fourth quarter in connection with aspects of its domestic and international inflator production facilities. This review is in its early stages and it is impossible at this time to predict the extent of any impairment or timing of any write-downs, however, they may be material. FISCAL 1998 ONE-TIME CHARGES The Company recognized one-time charges in the fiscal 1998 third quarter of $17.2 million, net of taxes, or $.84 per share. Explanations of the more significant charges for the quarter are detailed below. INVENTORY ADJUSTMENTS The Company booked inventory adjustments totaling $11.3 million ($7.3 million after tax) in the fiscal 1998 third quarter primarily related to the start-up of its new inflator production lines. These adjustments resulted from a combination of the rapid expansion of the inflator program, including significant additions in personnel, and system conversion issues associated with the implementation of a new, fully integrated Enterprise Resource Planning (ERP) System for the Company's automotive operations. The Company completely re-implemented the ERP system, bringing in consultants to review the system set-up and procedures, and to re-train all employees. Management believes that this problem is resolved; however, physical inventories are taken each quarter-end to ensure the system's accuracy. DISPOSAL OF INFLATORS The Company disposed of early production inflators from its new facility for a total cost of $3.9 million ($2.5 million after tax) in the quarter, which included both production and disposal costs. This resulted from a very unusual quality issue that affected one in ten thousand units. However, due to the unusual nature of the problem, the actual units affected could not be identified. The Company's automotive products are propellant-actuated, life-saving devices and only the highest level of quality is acceptable. Therefore, all potentially affected units (approximately 130,000 inflators) were disposed of to ensure that they would not be installed in air bag modules or automobiles. Corrective action, which management believes will prevent any future occurrences, was implemented immediately and has been approved by the Company's customers. Normal production and customer shipments resumed in April 1998. DOMESTIC INITIATOR CONSOLIDATION The Company incurred costs totaling $5.1 million ($3.2 million after tax) in the quarter related to the consolidation of its domestic initiator production operations into its Utah facility. These costs consisted of $.5 million for equipment and personnel relocation and a $4.6 million charge for idled and/or obsolete equipment and inventory. This consolidation has generated significant annual cost savings, while maintaining the Company's domestic initiator capacity of 45 million units. Additionally, the Company's French facility has a capacity of 20 million units, which supplies the European market and serves as a back up to its domestic production. SETTLEMENT OF LEGAL CLAIM In consideration of new business and improving relations, the Company settled a lawsuit with a major initiator customer. This resulted in a charge of $2.5 million ($1.6 million after tax) for trade receivables and obsolete inventory. In return, its customer committed to significantly higher initiator purchases in fiscal 1999. This resolution was an important milestone toward improving the Company's relationship with this customer. INFLATOR EQUIPMENT OBSOLESCENCE The Company wrote off $1.9 million ($1.2 million after tax) of low-volume inflator production equipment. This equipment was originally purchased to support customers' requirements by bridging the gap between prototype production and high-volume production in the Company's new inflator production facility. As the Company's high-volume inflator production lines became more efficient, this low-volume production equipment became idled and obsolete. AEROSPACE INVENTORY OBSOLESCENCE As the Company's aerospace business shifted from traditional defense/government business to commercial business (satellites and satellite launch vehicles), a more stringent obsolescence approach became required. The new approach was adopted during the quarter and resulted in a charge of $1.4 million ($.9 million after tax). LIQUIDITY AND CAPITAL RESOURCES The Company's working capital decreased during the quarter to $65.6 million from $78.5 at January 29, 1999. This resulted from reductions in income taxes receivable, accounts receivable and inventory, and an increase in accounts payable. During the nine months ended April 30, 1999, the Company made capital expenditures totaling approximately $13.8 million, which were funded from cash flow from operations and bank borrowings. On April 10, 1998, the Company entered into a four-year, $180 million Amended and Restated Revolving Credit Agreement with a group of seven banks. This agreement was amended on June 11, 1998. At the Company's request, this agreement was again amended on December 10, 1998 to reduce the amount of the facility to $150 million and to modify the financial debt covenants. The Company's principal bank is acting as agent for the banks under this agreement. The interest rate (applicable spread plus federal funds or LIBOR) is progressive and based upon the Company's ratio of indebtedness to EBITDA. The spread will fluctuate up or down as determined by the above ratio. At April 30, 1999, the applicable interest rate was 7.16%. This credit facility expires on December 18, 2000, and provides for a twelve-month extension to the termination date at the Company's option. At April 30, 1999, the Company had $105.0 million of long-term debt outstanding under this credit facility. Anticipated working capital requirements, capital expenditures, and facility expansions are expected to be met through borrowings under the credit facility and from internally generated funds. IMPACT OF THE YEAR 2000 ISSUE The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. The problem is complicated and, in fact, consists of three different problems. Firstly, it has been common practice in computer programming to identify calendar dates only by the last two digits of the year and to assume that the first two digits are "19". As a result, automated systems may interpret "00" as 1900 instead of 2000, and do one of two things: shut down or make mistakes. Secondly, problems will arise from the fact that the year 2000 is an irregular leap year. If equipment is not programmed appropriately and the date February 29, 2000 does not exist in the software, software applications may malfunction. Finally, the codes "99" or "00", and "999" or "9999" could mean other things, like "error" or "miscellaneous". It can be concluded that computer problems may arise not only on January 1, 2000, but also before the turn of the century and afterwards. These problems could result in miscalculations or failures causing disruptions of operations, including, among other things, a temporary inability to maintain traceability, process transaction, send invoices, or engage in similar normal business activities. OEA recognizes that the Year 2000 problem is a serious issue for businesses, and is committed to making the transition to Year 2000 compliant systems. OEA has had a formal program in place to address and resolve potential issues associated with the Year 2000 problem since October 1997, and has devoted significant resources to identify and replace systems that could be affected by the Year 2000 problem. Our goal is to prevent the impairment of our critical business operations and computer processes we share with our suppliers and customers. OEA PRODUCTS Because OEA's products do not contain any embedded micro-chips or similar electronic components that are date sensitive, we do not believe that our products will require remediation to address the Year 2000 problem. INFORMATION SYSTEMS OEA has conducted an inventory of its critical computer systems and has determined that approximately 95% of such systems now operate with hardware, operating software and basic business applications software that has been certified by third party vendors as Year 2000 compliant. In addition, we have upgraded our human resources, payroll, accounting and fixed-asset tracking software to the latest versions of such software, each of which have been certified by the third-party vendor as Year 2000 compliant. We have also installed a Microsoft System Management Server that will allow us to audit our PC hardware and software and to allow for the rapid deployment of software updates and service packs that address any ancillary Year 2000 issues. The Company's largest Year 2000 project has been the replacement of our existing inventory control systems with Year 2000 certified inventory control, manufacturing and accounting systems for our automotive and aerospace operations. We have installed and are operating these systems and continue to test them for Year 2000 compliance. In addition, we have upgraded all of our telecommunications and environmental controls technology to systems that have been Year 2000 certified by a third party vendor. THIRD PARTY SUPPLIERS AND CUSTOMERS OEA's Year 2000 program also includes assessment of the business impact on the Company of the failure of third party suppliers and customers to provide needed products, services, information and payments. We are in the process of assessing the Year 2000 readiness of each of our suppliers who is deemed critical to our operations, as well as the Year 2000 status of our major customers. In addition, OEA and certain of its customers use Electronic Data Interchange (EDI) to effect business communications, including orders and shipping information. Our EDI system software has been upgraded to a system that has been certified by third party vendors as Year 2000 compliant. In addition to addressing the Year 2000 problem in these four areas, we expect to validate our remediation efforts with additional post-installation testing of certain of our critical computer systems. We also expect to respond to and initiate requests to test with various external agents, including certain of our suppliers and customers, after they ready their systems. CONTINGENCY PLAN Our current contingency planning efforts are focused on working to identify additional sources of supply for critical materials. During 1999, we will continue to assess whether we may experience additional Year 2000 issues beyond those already addressed. In addition, we will be assessing other business disruption risks and developing contingency plans to mitigate such risks. While still too early to identify a reasonably likely worst case scenario, (i.e. if a second or third tier supplier were unable to deliver product or if there were an interruption in a transportation system), we expect to be able to buffer these potential problems by increasing our raw materials and finished goods inventory levels during the third and fourth calendar quarters of 1999. COSTS TO ADDRESS YEAR 2000 ISSUES The total cost of our Year 2000 remediation project is currently expected to be approximately $1.5 million. This cost projection does not include post-installation testing and contingency planning expected to occur in 1999, which could cost up to an additional $100,000. Additionally, it does not include any costs of business disruptions from supplier or customer non-performance, which cannot be quantified at this time. INDEPENDENT VALIDATION AND VERIFICATION On February 9, 1999, BBK, Ltd., at the request of General Motors, performed a Year 2000 Readiness Assessment of OEA. The risk assessment score is based on a statistical model that uses several variables (acceptance testing, remediation, risk evaluation, planned completion of inventories, etc.). The assessor then gives a subjective score that results in a green (low risk), yellow (medium risk), or red (high risk) rating. Based on this assessment, OEA received a green (low risk of Y2K failure) rating from BBK. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS The Company sold 4,844 shares of unregistered common stock pursuant to the exercise of options by key employees in the first half of fiscal 1999 as follows:
Date Number Aggregate Of Sale of Shares Offering Price ------- --------- -------------- 10/06/98 4,344 $ 20,272 11/04/98 500 $ 2,333
Such sales were made pursuant to the exemption from registration available under Section 4(2) of the Securities Act of 1993. ITEM 3. DEFAULTS ON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OEA, INC. ------------------------- (Registrant) June 11, 1999 /s/ J. Thompson McConathy - ------------------- ------------------------- Date J. Thompson McConathy Vice President Finance (Principal Financial and Accounting Officer) June 11, 1999 /s/ Charles B. Kafadar - ------------------- ------------------------- Date Charles B. Kafadar Chief Executive Officer (Principal Executive Officer) EX-27.1 2 EXHIBIT 27.1
5 9-MOS JUL-31-1999 AUG-01-1998 APR-30-1999 3,949,000 0 41,477,000 0 46,102,000 99,651,000 284,644,000 85,199,000 305,630,000 34,034,000 0 0 0 2,202,000 152,618,000 305,630,000 182,927,000 182,927,000 172,578,000 184,850,000 3,217,000 0 6,032,000 (5,140,000) (1,746,000) (3,394,000) 0 0 0 (3,394,000) (.16) (.16)
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