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<DAILY TROUBLE>
Tuesday, June 8, 1999
Breed Technologies, Inc.
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Website:
www.breedtech.com
Phone:
941-668-6049
Price
(6/7/99): $2 3/8
HOW DID IT FIND TROUBLE?
If a stock comes to a screeching halt in the forest -- do the airbags activate? For shareholders of auto restraint specialist Breed Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BDT)") else Response.Write("(NYSE: BDT)") end if %> that is but one of the many questions left to ponder by the skid marks. Equity roadkill is never pretty, and Breed has dropped a long way to find itself weighed down by debt as the headlights grow larger and farther apart.
Just five years ago Breed stock was fetching as much as $44 a share. Auto safety was all the rage and as more and more car manufacturers added airbags to their new models, Breed was there filling orders for the components. The newfound riches put the company hot on the acquisition trail, scooping up airbag, steering wheel, and seat belt makers aplenty. Breed in.
Breed out. Over the last few years the company's inability to reap the expected synergies of its acquisitions and the ever-growing hurdle of debt service has turned an explosively profitable company into one mired in losses. Breed bleed indeed.
BUSINESS DESCRIPTION
Named after founder Allen Breed, the Florida-based company is the third-largest occupant safety equipment supplier in the world. The company specializes in air bags, seat belts, steering wheels, and crash-sensing electronics.
Allen's wife, Johnnie Breed, serves as Chairman and CEO. She was inducted into the Tampa Bay Business Hall of Fame in 1997.
FINANCIAL FACTS
Income Statement 12-month sales: $1554.2 million 12-month income: ($253.2 million)* 12-month EPS: ($6.77)* Profit Margin: N/A Market Cap: $91.7 million (*Excluding extraordinary items.) Balance Sheet Cash: $25.9 million Current Assets: $465.4 million Current Liabilities: $1070.2 million Long-term Debt: $361.9 million Ratios Price-to-earnings: N/A Price-to-sales: 0.06
HOW COULD YOU HAVE SEEN IT COMING?
Let's hit the brakes and go into reverse. If we go back to 1996, we find a company at its financial peak. Thanks to high-margin air bag product sales, the company earned $2 a share.
While most auto components may have been commoditized, the demand for air bags was swelling as carmakers sought to expand that safety feature beyond the luxury lines. That found Breed commanding and scoring a juicy 21% in operating margins with gross margins just above 30%.
But, when the company acquired the auto safety restraints business of AlliedSignal -- the country's largest supplier of steering wheels and third-largest producer of air bags -- in 1997, margins were destined to contract. Our own Louis Corrigan analyzed the deal and reported that the acquired businesses' operating margins were less than half of Breed's. Ouch.
But the $750 million deal was a red flag too. Once air bags became standard in most new cars, there was little room for Breed to breed earnings growth. The Allied acquisition signaled the end of a company growing organically and the beginning of one that would pad the top line through acquisitions.
Not helping matters much was the fact that Detroit was also changing. With Chrysler going from riches to rags to riches, the Big Three got leaner. They learned how to value-engineer better cars at lower prices -- with the suppliers picking up most of the tab. The air was leaking out of more than one tire for Breed, and it wasn't that hard to gauge.
WHERE TO FROM HERE?
Next month Breed begins a new fiscal year. A lone analyst is projecting earnings of $1.05 a share. Can Breed really be selling for just three times next year's earnings? Probably not. The estimate may already be obsolete -- especially in light of the fact that Wall Street expected the company to also turn a profit last quarter and it didn't.
The debt the company took on in its buying spree continues to grow. With just $366.3 million in current assets minus inventory and more than $1 billion in current liabilities, the company sports a grim quick ratio of 0.3. An ideal ratio would be anything above 1.5. The slippery financial footing has not been lost on Moody's or Standard & Poor's. Both credit-rating agencies recently downgraded the quality of Breed's debt.
Like a speeding driver sans seat belts and a functional air bag, there is a lot of risk here. Breed has not flourished now, during the kindest of economic climates, where big-ticket purchases are taking place due to booming consumer confidence. If demand weakens, Breed may run into problems trying to keep up with the mounting bills. Breed better right itself fast -- the headlights are getting larger and hotter.
--Rick Aristotle Munarriz ([email protected])
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