<PAGE>
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: SEPTEMBER 27, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------- ------------
Commission file number: 333-32207
HCC INDUSTRIES INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 95-2691666
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4232 TEMPLE CITY BLVD., ROSEMEAD, CALIFORNIA 91770
---------------------------------------------------
(Address of principal executive offices)
(626) 443-8933
----------------------------------------------------
(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 ( )
--- ---
Registrant's Common Stock, outstanding at December 17, 1997 was
134,955 shares.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
HCC INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
------
SEPTEMBER 27, MARCH 29,
1997 1997
------------ ---------
CURRENT ASSETS:
Cash and cash equivalents $11,520 $ 6,841
Restricted cash --- 69,282
Trade accounts receivable, less allowance for
doubtful accounts of $58 at September 27, 1997
and $40 at March 29, 1997 8,582 6,904
Inventories 4,351 4,376
Prepaid and deferred income taxes 1,047 756
------- --------
Total current assets 25,500 88,159
PROPERTY, PLANT AND EQUIPMENT, NET 13,225 12,264
OTHER ASSETS:
Intangible assets 5,787 4,507
Deferred financing costs, net 3,551 1,903
Deferred income taxes 3,269 3,269
Restricted cash 5,852 6,039
------- --------
TOTAL ASSETS $57,184 $116,141
------- --------
------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 615 $ 3,537
Accounts payable 3,173 2,553
Accrued liabilities 8,460 5,193
Due to stockholders --- 69,282
-------- --------
Total current liabilities 12,248 80,565
LONG TERM LIABILITIES:
Long-term debt, net of current portion 91,564 78,916
Other long-term liabilities 9,630 10,000
-------- --------
113,442 169,481
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock; $.10 par value; authorized
550,000 shares, issued and outstanding
134,955 shares at September 27, 1997 and
143,569 shares at March 29, 1997 13 14
Accumulated deficit (56,271) (53,354)
-------- --------
TOTAL STOCKHOLDERS' DEFICIT (56,258) (53,340)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 57,184 $116,141
-------- --------
-------- --------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ---------------------------
September 27, September 28, September 27, September 28,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 15,556 $ 14,317 $ 31,061 $ 29,064
Cost of goods sold 9,497 9,074 18,816 18,296
-------- -------- -------- --------
GROSS PROFIT 6,059 5,243 12,245 10,768
Selling, general and administrative expenses 2,166 4,710 4,295 6,944
-------- -------- -------- --------
EARNINGS FROM OPERATIONS 3,893 533 7,950 3,824
OTHER INCOME (EXPENSE):
Interest and other income 115 126 215 234
Interest expense (2,573) (393) (5,178) (780)
-------- -------- -------- --------
Total other expense, net (2,458) (267) (4,963) (546)
Earnings before taxes and extraordinary item 1,435 266 2,987 3,278
Taxes on earnings 566 110 1,175 1,284
-------- -------- -------- --------
Earnings before extraordinary item 869 156 1,812 1,994
Extraordinary loss on retirement of debt, net
of tax benefit of $640 _ _ (1,002) _
-------- -------- -------- --------
NET EARNINGS $ 869 $ 156 $ 810 $ 1,994
-------- -------- -------- --------
-------- -------- -------- --------
EARNINGS PER SHARE BEFORE EXTRAORDINARY LOSS $ 6.44 $ 0.43 $ 13.29 $ 4.63
Extraordinary loss per share _ _ (7.35) _
-------- -------- -------- --------
NET EARNINGS PER SHARE $ 6.44 $ 0.43 $ 5.94 $ 4.63
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average shares outstanding 134,955 362,133 136,391 430,999
-------- -------- -------- --------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
</TABLE>
3
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HCC INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
For the Six Months Ended
---------------------------
September 27, September 28,
1997 1996
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 810 $ 1,994
Reconciliation of net earnings to net cash
provided by operating activities:
Depreciation 689 492
Amortization 382 227
Deferred income taxes (404) ---
Extraordinary loss 1,002 ---
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts
receivable, net (1,299) 483
Decrease (increase) in inventories 284 (150)
Decrease (increase) in other assets 58 (183)
Increase in accrued liabilities 2,897 3,586
Increase (decrease) in accounts payable
and income taxes payable 1,435 (825)
------- ------
Net cash provided by operating
activities 5,854 5,624
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisition (2,200) ---
Purchases of property, plant and equipment (1,317) (449)
-------- ------
Net cash used in investing activities (3,517) (449)
-------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (80,230) (473)
Proceeds from issuance of long-term debt 90,000 11,000
Deferred financing costs (3,700) ---
Repurchases of stock (3,728) (13,523)
-------- --------
Net cash provided by (used in)
financing activities 2,342 (2,996)
------- -------
Net increase in cash and cash equivalents 4,679 2,179
Cash and cash equivalents at beginning of period 6,841 6,647
------- ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $11,520 $ 8,826
======= =======
SUPPLEMENTAL NONCASH FINANCING ACTIVITIES:
Cash lease obligations --- 625
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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HCC INDUSTRIES INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 27, 1997
1. INTERIM FINANCIAL STATEMENTS:
The accompanying unaudited condensed consolidated financial statements of HCC
Industries Inc. and Subsidiaries (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.
Interim financial statements are subject to possible adjustments in connection
with the annual audit of the Company's accounts for the full year. The year
end condensed balance sheet data was derived from audited financial statements,
but does not include all disclosures required by generally accepted accounting
principles. It is suggested that the accompanying interim financial statements
be read in conjunction with the Company's audited financial statements and
footnotes as of and for the year ended March 29, 1997. Operating results for
the three and six month periods ended September 27, 1997 are not necessarily
indicative of the operating results for the full fiscal year.
2. INVENTORIES:
Inventories consist of the following (in thousands):
September 27, March 29,
1997 1997
------------- ---------
Raw materials and component parts $1,738 $1,910
Work in process 2,613 2,466
------------- ---------
$4,351 $4,376
============= =========
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following (in thousands):
September 27, March 29,
1997 1997
------------- ---------
Land $3,180 $3,180
Buildings and improvements 5,888 5,450
Furniture, fixtures and equipment 10,562 9,350
------------- ---------
19,630 17,980
Less accumulated depreciation (6,405) (5,716)
------------- ---------
$13,225 $12,264
============= =========
5
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HCC INDUSTRIES INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 27, 1997
4. BUSINESS ACQUISITION:
On June 20, 1997, the Company acquired substantially all of the assets and
assumed certain liabilities of Connector Industries of America, a
glass-to-metal sealing company. The purchase price included $2,100,000 in
cash and a contingent payment of $400,000 based upon the volume of business
retained in the immediately subsequent 18 month period. In its last fiscal
year of operations, the acquired company generated sales of approximately
$3,200,000. The transaction was accounted for as an asset purchase. In
conjunction with the acquisition, the Company assigned $1,372,000 to
intangibles which will be amortized over a 14 year period on a straight line
basis. If the contingent payment becomes payable, such amount will be
recorded as additional purchase price consideration and added to intangibles.
Pro forma results of operations are not provided as the impact on Company
operations is not material.
5. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
September 27, March 29,
1997 1997
------------- ---------
10 3/4% senior subordinated notes - interest
payable semi-annually due May 15, 2007 $90,000 $ ---
Tranche A Term Loan --- 30,000
Tranche B Term Loan --- 30,000
12% subordinated notes --- 19,352
Term loan on land, building and improve-
ments due August 1997 --- 596
Other 2,179 2,505
------- -------
92,179 82,453
Less current portion 615 3,537
------- -------
$91,564 $78,916
------- -------
------- -------
In May 1997, the Company issued $90,000,000 of senior subordinated notes due in
May 2007 ("Notes"). Interest is payable semi-annually at 10.75% per annum.
Proceeds from the offering were used to (I) retire the Tranche A Term Loan, the
Tranche B Term Loan and the 12% subordinated notes, and (ii) provide
approximately $3,800,000 (net of offering expenses) for additional working
capital needs of the Company. As a result of this refinancing, the Company
recorded an extraordinary loss of $1,002,000, net of taxes, in the first
quarter of fiscal 1998. Concurrent with the offering, the Company's bank
increased the revolving credit facility to an aggregate of $20,000,000.
The Company's 10-3/4% Senior Subordinated Notes are guaranteed by all
operating subsidiaries of the Company (the "Subsidiary Guarantors"). The
guarantee obligations of the Subsidiary Guarantors (which are all direct or
indirect wholly owned subsidiaries of the Company) are full, unconditional
and joint and several. The aggregate assets, liabilities, earnings, and
equity of the Subsidiary Guarantors are substantially equivalent to the total
assets, liabilities, earnings, and equity of HCC Industries Inc. and its
subsidiaries on a consolidated basis. Separate financial statements of the
Subsidiary Guarantors are not included in the accompanying financial
statements because management of the Company has determined that separate
financial statements of the subsidiary Guarantors would not be material to
investors.
6
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 27, 1997
6. CAPITAL STOCK:
The Company is authorized to issue an aggregate of 550,000 shares of common
stock. These shares may be issued in four different classes (A, B, C or D
shares) which differ only in voting rights per share. At September 27, 1997,
the 134,955 outstanding shares of common stock were designated as follows:
Shares Amount Voting Rights
Class Outstanding (in thousands) Per Share
----- ----------- -------------- -------------
A 102,653 $10,000 1
B 27,506 3,000 1
C 4,316 --- None
D 480 --- 10
------- -------
134,955 $13,000
------- -------
------- -------
The remaining 415,045 shares of authorized but unissued common stock are
undesignated as to class.
Concurrent with the issuance of $90,000,000 of Senior Subordinated Notes in May
1997, the Company repurchased 7,831 shares of Class A and 783 shares of Class B
common stock.
7. COMMITMENTS AND CONTINGENCIES:
ENVIRONMENTAL
As an ongoing facet of the Company's business, it is required to maintain
compliance with various environmental regulations. The cost of this compliance
is included in the Company's operating results as incurred. These ongoing
costs include permitting fees and expenses and specialized effluent control
systems as well as monitoring and site assessment costs required by various
governmental agencies. In the opinion of management, the maintenance of this
compliance will not have a significant effect on the financial position or
results of operations of the Company.
In August 1994, the U.S. Environmental Protection Agency ("EPA") identified the
Company as a potentially responsible party ("PRP") in the El Monte Operable
Unit ("EMOU") of the San Gabriel Valley Superfund Sites. In early 1995, the
Company and the EPA executed an Administrative Consent Order which requires the
Company and other PRP's to perform a Remedial Investigation and Feasibility
Study ("RI/FS") for the EMOU. In addition, the Company's facility in Avon,
Massachusetts is subject to Massachusetts "Chapter 21E", the State's hazardous
site clean-up program. Uncertainty as to (a) the extent to which the Company
caused, if at all, the conditions being investigated, (b) the extent of
environmental contamination and risks, (c) the applicability of changing and
complex environmental laws (d) the number and financial viability of other
PRP's, (e) the stage of the investigation and/or remediation, (f) the
unpredictability of investigation and/or remediation costs (including as to
when they will be incurred), (g) applicable clean-up standards, (h) the
remediation (if any) that will ultimately be required, and (i) available
technology make it difficult to assess the likelihood and scope of further
investigation or remediation activities or to estimate the future costs of such
activities if undertaken. In addition, liability under CERCLA is joint and
several, and any potential inability of other PRPs to pay their
7
<PAGE>
pro rata share of the environmental remediation costs may result in the
Company being required to bear costs in excess of its pro rata share.
HCC INDUSTRIES INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 27, 1997
7. COMMITMENTS AND CONTINGENCIES, Continued:
In fiscal 1997, the Company with the help of independent consultants,
determined a range of estimated costs of $9,000,000 to $11,000,000 associated
with the various claims and assertions it faces. The time frame over which the
Company expects to incur such costs varies with each site, ranging up to 20
years as of March 29, 1997. These estimates are based partly on progress made
in determining the magnitude of such costs, experience gained from sites on
which remediation is ongoing or has been completed, and the timing and extent
of remedial actions required by the applicable governmental authorities. As a
result, the Company has accrued $10,000,000 for estimated environmental
remediation as of March 29, 1997 which the Company believes to be the best
estimate of the liability.
Claims for recovery of costs already incurred and future costs have been
asserted against various insurance companies. The Company has neither recorded
any asset nor reduced any liability in anticipation of recovery with respect to
such claims made.
The Company believes its reserves are adequate, but as the scope of its
obligations becomes more clearly defined, this reserve may be modified and
related charges against earnings may be made.
OTHER
In addition to the above, the Company is involved in other claims and
litigation arising in the normal course of business. Based on the advice of
counsel and in the opinion of management, the ultimate resolution of these
matters will not have a significant effect on the financial position or the
results of operations of the Company.
8. RECENTLY ISSUED ACCOUNTING STANDARDS:
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". The standard establishes guidelines for the reporting
and display of comprehensive income and its components in financial statements.
Disclosure of comprehensive income and its components will be required
beginning with the Company's fiscal year ending 1999.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Income". The standard requires that
companies disclose "operating segments" based on the way management
disaggregates the company for making internal operating decisions. The new
rules will be effective for the Company's 1999 fiscal year end. The Company
has not evaluated the impact, if any, of the new standard.
8
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (IN MILLIONS)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
------------------------------- ------------------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1997 Percent 1996 Percent 1997 Percent 1996 Percent
---- ------- ----- ------- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $15.6 100.0% $14.3 100.0% $31.1 100.0% $29.1 100.0%
Gross profit 6.1 38.9% 5.2 36.6% 12.2 39.4% 10.8 37.0%
Selling, general and administrative
expenses 2.2 13.9% 4.7 32.9% 4.3 13.8% 6.9 23.9%
Earnings from operations 3.9 25.0% 0.5 3.7% 8.0 25.6% 3.8 13.2%
Other income/expense (2.5) -15.8% (0.3) -1.9% (5.0) -16.0% (0.5) -1.9%
Extraordinary loss (1) 0.0 0.0% 0.0 0.0% (1.0) -3.2% 0.0 0.0%
Net earnings $0.9 5.6% $0.2 1.1% $0.8 2.6% $2.0 6.9%
</TABLE>
(1) Represents extraordinary loss on retirement of debt, net of tax benefit.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 27, 1997 ("1998 QUARTER") TO THE
THREE MONTHS ENDED SEPTEMBER 28, 1996 ("1997 QUARTER")
NET SALES
The Company's sales increased by approximately 9.1%, or $1.3 million to
$15.6 million for the 1998 Quarter compared to sales of $14.3 million for the
1997 Quarter.
This increase was attributable to unit volume increases on the Company's
automotive products and increasing demand on non-automotive products. On the
automotive side, shipments of airbag initiator products increased significantly
due to increased volumes on existing programs. The increased airbag initiator
shipments was partially offset by the scheduled completion of a crash sensor
product produced for TRW. This program was completed in August 1996. Overall,
automotive shipments increased by 13% in the 1998 Quarter compared to the 1997
Quarter.
In non-automotive products, the Company experienced continuing growth in
its aerospace, industrial and petrochemical products. Net non-automotive
shipments increased by 6% in the 1998 Quarter compared to the 1997 Quarter in
spite of delays in some key programs. Based on current order volume, the
Company expects continued growth in the aerospace, industrial and petrochemical
markets.
GROSS PROFIT
Gross profit increased by approximately 17.3% or $0.9 million, to $6.1
million for the 1998 Quarter compared to $5.2 for the 1997 Quarter. Gross
margin increased to 38.9% for the 1998 Quarter from 36.6% for the 1997
Quarter.
The increase in gross profit is attributable to the increased sales
volume. The increase in gross margin is due to an improved sales mix between
product lines coupled with efficiencies gained through increased operating
leverage on the higher sales volume.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("S,G&A") expenses decreased by
approximately 53.2% or $2.5 million to $2.2 million for the 1998 Quarter
compared to $4.7 million for the 1997 Quarter. S,G&A expenses as a percent to
sales decreased to 13.9% in the 1998 Quarter from 32.9% for the 1997 Quarter.
The $2.5 million decrease in S,G&A expenses reflects the elimination of
certain non-recurring compensation costs from the 1997 Quarter that were not
incurred in the 1998 Quarter. The reduced compensation costs were partially
offset by slightly higher costs of supporting the increased sales volume. The
improvement in the percentage of S,G&A expenses to sales reflects the overall
lower S,G&A expenses coupled with the improved leverage on the fixed portion of
those expenses.
EARNINGS FROM OPERATIONS
Operating earnings increased $3.4 million to $3.9 million for the 1998
Quarter compared to $0.5 million for the 1997 Quarter. Operating margins for
the Quarter increased to 25.0% in the 1998 Quarter from 3.7% for the 1997
Quarter.
The increase in operating earnings and margin was attributable to the
same factors (as discussed above) that contributed to the increase in gross
profit and gross margin and improvements in S,G&A expenses as a percent to
sales.
OTHER EXPENSE, NET
Other expense, net increased $2.2 million to $2.5 million in the 1998
Quarter from $0.3 million for the 1997 Quarter. This increase was attributable
to the increased interest expense associated with the additional debt incurred
to finance the Recapitalization in February 1997. The Company has $92.2
million of indebtedness as of September 27, 1997 compared to $22.4 million at
September 28, 1996.
NET EARNINGS
Net earnings increased by approximately $0.7 million to $0.9 million for
the 1998 Quarter from $0.2 million in the 1997 Quarter.
The increase in net earnings was primarily attributable to the increase in
gross profit and reduced selling, general and administrative expenses partially
offset by the additional interest expense as discussed above.
COMPARISON OF THE SIX MONTHS ENDED SEPTEMBER 27, 1997 ("1998 PERIOD") TO THE
SIX MONTHS ENDED SEPTEMBER 28, 1996 ("1997 PERIOD")
NET SALES
The Company's sales increased by approximately 6.9%, or $2.0 million to
$31.1 million for the 1998 Period compared to sales of $29.1 million for the
1997 Period.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
This increase was attributable to unit volume increases on the Company's
automotive products and increasing demand on non-automotive products. On the
automotive side, shipments of airbag initiator products increased significantly
due to increased volumes on existing programs. The increased airbag initiator
shipments was partially offset by the scheduled completion of a crash sensor
product produced for TRW. This program was completed in August 1996. Overall,
automotive shipments increased by 9% in the 1998 Period compared to the 1997
Period.
In non-automotive products, the Company experienced continuing growth in
its aerospace, industrial and petrochemical products. Net non-automotive
shipments increased by 6% in the 1998 Period compared to the 1997 Period in
spite of delays in some key programs. Based on order volume, the Company
expects continued growth in the aerospace, industrial and petrochemical
markets.
GROSS PROFIT
Gross profit increased by approximately 13.0% or $1.4 million, to $12.2
million for the 1998 Period compared to $10.8 million for the 1997 Period.
Gross margin increased to 39.4% for the 1998 Period from 37.0% for the 1997
Period.
The increase in gross profit is attributable to the increased sales
volume. The increase in gross margin is primarily attributable to an improved
sales mix between product lines coupled with efficiencies gained through
increased operating leverage on the higher sales volume.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("S,G&A") expenses decreased by
approximately 37.7% or $2.6 million to $4.3 million for the 1998 Period
compared to $6.9 million for the 1997 Period. S,G&A expenses as a percent to
sales decreased to 13.8% in the 1998 Period from 23.9% for the 1997 Period.
The $2.6 million decrease in S,G&A expenses reflects the elimination of
certain non-recurring compensation costs from the 1997 Period that were not
incurred in the 1998 Period. The reduced compensation costs were partially
offset by slightly higher costs of supporting the increased sales volume. The
improvement in the percentage of S,G&A expenses to sales reflects the overall
lower S,G&A expenses coupled with the improved leverage on the fixed portion of
those expenses.
EARNINGS FROM OPERATIONS
Operating earnings increased $4.2 million to $8.0 million for the 1998
Period compared to $3.8 million for the 1997 Period. Operating margins for the
Period increased to 25.6% in the 1998 Period from 13.2% for the 1997 Period.
The increase in operating earnings and margin was attributable to the
same factors (as discussed above) that contributed to the increase in gross
profit and gross margin and improvements in S,G&A expenses as a percent to
sales.
OTHER EXPENSE, NET
Other expense, net increased $4.5 million to $5.0 million in the 1998
Period from $0.5 million for the 1997 Period. This increase was attributable
to the increased interest expense associated with the additional debt incurred
to finance the Recapitalization in February 1997. The Company has $92.2
million of indebtedness as of September 27, 1997 compared to $22.4 million at
September 28, 1996.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
NET EARNINGS
Net earnings decreased by approximately $1.2 million to $0.8 million for
the 1998 Period from $2.0 million in the 1997 Period.
The decrease in net earnings was attributable to the $1.0 million of
extraordinary loss on retirement of debt and significantly higher interest
expense ($4.4 million) which was largely offset by a $4.2 million increase in
earnings from operations.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $5.9 million for the 1998
Period compared to $5.6 million for the 1997 Period. The increase of $0.3
million was primarily attributable to cash generated from increases in non-cash
expenses (depreciation and amortization) and a decrease in working capital
requirements.
Net cash used in investing activities was $3.5 million for the 1998 Period
compared to $0.5 million for the 1997 Period. The $3.0 million increase was
primarily attributable to the $2.2 million business acquisition in June 1997
and an $0.8 million increase in fixed asset additions.
As of September 27, 1997, the Company's outstanding indebtedness is $92.2
million, consisting of $90.0 million principal amount of the senior
subordinated notes and $2.2 million of other borrowings. The Company amended
the Revolving Credit Facility subsequent to the Offering to augment its
liquidity requirements by increasing the size of the facility to $20.0 million.
Borrowings under the Revolving Credit Facility may be used for general and
other corporate purposes. To date, the Company has not used any amounts under
the Revolving Credit Facility.
Subsequent to the Offering, the Company has $90.0 million in senior
subordinated note indebtedness. Interest expense will have a greater
proportionate impact on net income in subsequent periods in comparison with the
periods before the Recapitalization. The Company is not subject to any
amortization requirements under the Notes prior to maturity.
The Company believes that cash flow from operations and the availability
of borrowings under the Revolving Credit Facility will provide adequate funds
for ongoing operations, planned capital expenditures and debt service during
the term of such facility. To the extent certain performance thresholds with
respect to the Contingent Notes and Contingent Bonuses are met, and such
obligations become vested, the Company believes that cash flow from operations
and availability of borrowings will be sufficient to fund such obligations.
Capital expenditures for fiscal 1998 are expected to focus on vertical
integration with investments in equipment to expand manufacturing capacity in
machining, glass production, sealing and plating, as well as automation
equipment to lower production costs on the high volume production lines.
Expected capital expenditures for fiscal 1998 are approximately $3.5 million
and will be financed through working capital and the Revolving Credit Facility.
On December 8, 1997 the Company signed a new agreement with Special
Devices, Inc. ("SDI") through the year 2000. The new agreement provides for
price concessions to SDI in consideration of a one year contract extension and
abatement of the volume discount from the previous agreement.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
This filing contains statements that are "forward looking statements," and
includes, among other things, discussions of the Company's business strategy
and expectations concerning market position, future operations, margins,
profitability, liquidity and capital resources. Although the Company believes
that the expectations reflected in such forward looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. All phases of the operations of the Company are subject to a
number of uncertainties, risks and other influences, including general economic
conditions, regulatory changes and competition, many of which are outside the
control of the Company, any one of which, or a combination of which, could
materially affect the results of the Company's operations and whether the
forward looking statements made by the Company ultimately prove to be accurate.
13
<PAGE>
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: 12 - Computation of ratio of earnings to fixed charges
(b) Reports on Form 8-K - Not applicable
SIGNATURES
HCC INDUSTRIES INC.
DATED: December 17, 1997 /s/ Andrew Goldfarb
------------------ -------------------------------------
President and Chief Executive Officer
DATED: December 17, 1997 /s/ Christopher H. Bateman
------------------ ------------------------------------------
Vice President and Chief Financial Officer
14
<PAGE>
EXHIBIT 12
HCC INDUSTRIES INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
For the Six Months Ended
---------------------------
September 27, September 28,
1997 1996
------------ ------------
Earnings:
Earnings before taxes and extraordinary item $ 2,987 $3,278
Add: Fixed Charges* 5,178 780
------- ------
$ 8,165 $4,058
======= ======
* Fixed Charges:
Interest expense $ 5,178 $ 780
------- ------
$ 5,178 $ 780
======= ======
Ratio of Earnings to Fixed Charges 1.6 5.2
======= ======
*The ratios of earnings to fixed charges were computed by dividing earnings by
fixed charges. For this purpose, "earnings" consist of earnings before taxes
and extraordinary item plus fixed charges and "fixed charges" consist of
interest expense and amortization of debt issuance costs.
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<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-28-1998
<PERIOD-START> MAR-30-1997
<PERIOD-END> SEP-27-1997
<CASH> 11,520
<SECURITIES> 0
<RECEIVABLES> 8,640
<ALLOWANCES> (58)
<INVENTORY> 4,351
<CURRENT-ASSETS> 25,500
<PP&E> 19,630
<DEPRECIATION> (6,405)
<TOTAL-ASSETS> 57,184
<CURRENT-LIABILITIES> 12,248
<BONDS> 91,564
0
0
<COMMON> 13
<OTHER-SE> (56,271)
<TOTAL-LIABILITY-AND-EQUITY> 57,184
<SALES> 31,061
<TOTAL-REVENUES> 31,061
<CGS> 18,816
<TOTAL-COSTS> 18,816
<OTHER-EXPENSES> 4,295
<LOSS-PROVISION> 18
<INTEREST-EXPENSE> 5,178
<INCOME-PRETAX> 2,987
<INCOME-TAX> 1,175
<INCOME-CONTINUING> 1,812
<DISCONTINUED> 0
<EXTRAORDINARY> (1,002)
<CHANGES> 0
<NET-INCOME> 810
<EPS-PRIMARY> 5.94
<EPS-DILUTED> 5.94
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