<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: DECEMBER 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4232 TEMPLE CITY BLVD., ROSEMEAD, CALIFORNIA 91770
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(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 February 9, 1998 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
<TABLE>
<CAPTION>
DECEMBER 27, MARCH 29,
1997 1997
------------ ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 9,265 $ 6,841
Restricted cash --- 69,282
Trade accounts receivable, less allowance for
doubtful accounts of $67 at December 27, 1997
and $40 at March 29, 1997 7,891 6,904
Inventories 4,523 4,376
Prepaid and deferred income taxes 1,065 756
------ ------
Total current assets 22,744 88,159
PROPERTY, PLANT AND EQUIPMENT, NET 13,538 12,264
OTHER ASSETS:
Intangible assets 5,715 4,507
Deferred financing costs, net 3,548 1,903
Deferred income taxes 3,269 3,269
Restricted cash 5,964 6,039
TOTAL ASSETS $54,778 $116,141
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------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt $ 726 $ 3,537
Accounts payable 2,699 2,553
Accrued liabilities 5,759 5,193
Due to stockholders --- 69,282
------ ------
Total current liabilities 9,184 80,565
LONG TERM LIABILITIES:
Long-term debt, net of current portion 92,129 78,916
Other long-term liabilities 9,604 10,000
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110,917 169,481
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------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock; $.10 par value; authorized 550,000
shares, issued and outstanding 134,955 shares at
December 27, 1997 and 143,569 shares at March 29, 1997 13 14
Accumulated deficit (56,152) (53,354)
-------- --------
TOTAL STOCKHOLDERS' DEFICIT (56,139) (53,340)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 54,778 $116,141
-------- --------
-------- --------
</TABLE>
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 Nine Months Ended
-------------------------- ---------------------------
December 27, December 28, December 27, December 28,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 15,128 $ 13,769 $ 46,189 $ 42,833
Cost of goods sold 9,508 8,681 28,324 26,977
---------- --------- ---------- ----------
GROSS PROFIT 5,620 5,088 17,865 15,856
Selling, general and administrative expenses 1,736 1,498 6,031 8,442
Non-recurring expense 1,250 10,000 1,250 10,000
---------- --------- ---------- ----------
EARNINGS (LOSS) FROM OPERATIONS 2,634 (6,410) 10,584 (2,586)
OTHER INCOME (EXPENSE):
Interest and other income 157 104 372 338
Interest expense (2,573) (647) (7,751) (1,427)
---------- --------- ---------- ----------
Total other expense, net (2,416) (543) (7,379) (1,089)
Earnings (loss) before taxes and extraordinary item 218 (6,953) 3,205 (3,675)
Taxes (benefit) on earnings (loss) 99 (2,802) 1,274 (1,518)
---------- --------- ---------- ----------
Earnings (loss) before extraordinary item 119 (4,151) 1,931 (2,157)
Extraordinary loss on retirement of debt, net
of tax benefit of $640 -- -- (1,002) --
---------- --------- ---------- ----------
NET EARNINGS (LOSS) $ 119 $ (4,151) $ 929 $ (2,157)
---------- --------- ---------- ----------
---------- --------- ---------- ----------
EARNINGS (LOSS) PER SHARE BEFORE EXTRAORDINARY LOSS $ 0.88 $ (14.15) $ 14.21 $ (5.60)
Extraordinary loss per share 0.00 0.00 (7.37) 0.00
---------- --------- ---------- ----------
NET EARNINGS (LOSS) PER SHARE $ 0.88 $ (14.15) $ 6.84 $ (5.60)
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Weighted average shares outstanding 134,955 293,266 135,912 385,088
---------- --------- ---------- ----------
---------- --------- ---------- ----------
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
3
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the Nine Months Ended
---------------------------
December 27, December 28,
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 929 $ (2,157)
Reconciliation of net earnings to net cash
provided by operating activities:
Depreciation 1,058 865
Amortization 547 346
Deferred income taxes (562) (4,000)
Non-recurring expense -- 10,000
Extraordinary loss 1,002 --
Changes in operating assets and liabilities:
(Increase) in trade accounts receivable, net (608) (119)
Decrease in inventories 112 245
Decrease (increase) in other assets 86 (161)
Increase in accrued liabilities 170 3,780
Increase in accounts payable and income
taxes payable 961 243
-------- --------
Net cash provided by operating activities 3,695 9,042
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisition (2,200) --
Purchases of property, plant and equipment (1,145) (1,337)
Cash collected on note receivable -- 25
-------- --------
Net cash used in investing activities (3,345) (1,312)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (80,408) (1,227)
Proceeds from issuance of long-term debt 90,000 --
Deferred financing costs (3,790) --
Repurchases of stock (3,728) (2,548)
-------- --------
Net cash provided by (used in) financing activities 2,074 (3,775)
-------- --------
Net increase in cash and cash equivalents 2,424 3,955
Cash and cash equivalents at beginning of period 6,841 6,647
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,265 $ 10,602
-------- --------
-------- --------
SUPPLEMENTAL NONCASH FINANCING ACTIVITIES:
Capital lease obligations 854 612
Note payable issued for repurchase of stock -- 11,000
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
4
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
December 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 nine month periods ended December
27, 1997 are not necessarily indicative of the operating results for the full
fiscal year.
2. INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 27, March 29,
1997 1997
------------- ---------
<S> <C> <C>
Raw materials and component parts $ 1,997 $ 1,910
Work in process 2,526 2,466
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$ 4,523 $ 4,376
-------- --------
-------- --------
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 27, March 29,
1997 1997
------------- ---------
<S> <C> <C>
Land $ 3,180 $ 3,180
Buildings and improvements 5,968 5,450
Furniture, fixtures and equipment 11,164 9,350
-------- --------
20,312 17,980
Less accumulated depreciation (6,774) (5,716)
-------- --------
$ 13,538 $ 12,264
-------- --------
-------- --------
</TABLE>
5
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
December 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):
<TABLE>
<CAPTION>
December 27, March 29,
1997 1997
------------- ---------
<S> <C> <C>
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
improvements due August 1997 --- 596
Other 2,855 2,505
-------- --------
92,855 82,453
Less current portion 726 3,537
-------- --------
$ 92,129 $ 78,916
-------- --------
-------- --------
</TABLE>
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
December 27, 1997
6. 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 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.
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.
7
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
December 27, 1997
7. 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 Nine Months Ended
------------------------------------------ ------------------------------------------
Dec. 27, Dec. 28, Dec. 27, Dec. 28,
1997 Percent 1996 Percent 1997 Percent 1996 Percent
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $15.1 100.0% $13.8 100.0% $46.2 100.0% $42.8 100.0%
Gross profit 5.6 37.1% 5.1 37.0% 17.9 38.7% 15.8 36.9%
Selling, general and administrative
expenses 1.7 11.5% 1.5 10.9% 6.0 13.1% 8.4 19.6%
Non-recurring expense 1.3 8.3% 10.0 72.6% 1.3 2.7% 10.0 23.4%
Earnings (loss) from operations 2.6 17.4% (6.4) N/A 10.6 22.9% (2.6) N/A
Other income/(expense) (2.4) (16.0%) (0.5) 3.9% (7.4) (16.0%) (1.1) 2.6%
Extraordinary loss (1) 0.0 0.0% 0.0 0.0% (1.0) (2.2%) 0.0 0.0%
Net earnings (loss) $0.1 0.1% ($4.2) N/A $0.9 2.0% ($2.2) N/A
</TABLE>
(1) Represents extraordinary loss on retirement of debt, net of tax benefit.
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 27, 1997 ("1998 QUARTER") TO THE
THREE MONTHS ENDED DECEMBER 28, 1996 ("1997 QUARTER")
NET SALES
The Company's sales increased by approximately 9.4%, or $1.3 million to
$15.1 million for the 1998 Quarter compared to sales of $13.8 million for the
1997 Quarter.
This increase was attributable to increasing demand in non-automotive
products. The Company experienced strong growth in its aerospace, industrial and
petrochemical products. Net non-automotive shipments increased by approximately
17.2% in the 1998 Quarter compared to the 1997 Quarter. Based on current order
volume, the Company expects continued growth in the aerospace, industrial and
petrochemical markets.
On the automotive side, unit shipments of airbag initiator products
increased significantly due to increased volumes on existing programs and the
development of some new programs. This increased volume was offset by a price
reduction effected under a new three year supply agreement with the Company's
largest customer, Special Devices, Inc. ("SDI") and by the scheduled completion
of the remaining automotive sensor programs for TRW. Overall, revenue from
automotive shipments was flat in the 1998 Quarter compared to the 1997 Quarter.
The new agreement with SDI was effective October 1, 1997 and expires on December
31, 2000.
GROSS PROFIT
Gross profit increased by approximately 9.8% or $0.5 million, to $5.6
million for the 1998 Quarter compared to $5.1 for the 1997 Quarter. Gross
margin increased slightly to 37.1% for the 1998 Quarter from 37.0% for the 1997
Quarter.
The increase in gross profit is attributable to the increased sales volume.
The increase in gross margin is due to 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 increased by
approximately 13.3% or $0.2 million to $1.7 million for the 1998 Quarter
compared to $1.5 million for the 1997 Quarter. S,G&A expenses as a percent to
sales increased to 11.5% in the 1998 Quarter from 10.9% for the 1997 Quarter.
The $0.2 million increase in S,G&A expenses is primarily due to higher
selling expenses incurred in supporting the increased sales volume in the 1998
Quarter compared to the 1997 Quarter. The increase in the percentage of S,G&A
expenses to sales reflects the overall impact of the higher S,G&A expenses as
discussed above.
NON-RECURRING EXPENSE
For the 1998 Quarter, the non-recurring expense was attributable to a $1.3
million financing fee paid in December 1997 to Windward Capital Partners in
connection with securing the financing for the Recapitalization of the Company
in February 1997. For the 1997 Quarter, the $10.0 million charge represents
estimated environmental costs. A $6.0 million escrow was established in the
1997 Quarter to fund the estimated after-tax cost (estimated tax benefit of $4.0
million) associated with these environmental matters.
EARNINGS FROM OPERATIONS
Operating earnings increased $9.0 million to $2.6 million for the 1998
Quarter compared to a loss of $6.4 million for the 1997 Quarter.
The increase in operating earnings and operating margin was primarily
attributable to the $8.8 million reduction in non-recurring expenses in the 1998
Quarter compared to the 1997 Quarter.
OTHER EXPENSE, NET
Other expense, net increased $1.9 million to $2.4 million in the 1998
Quarter from $0.5 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 $92.1 million
of indebtedness as of December 27, 1997 compared to $21.7 million at December
28, 1996.
NET EARNINGS
Net earnings increased by approximately $4.3 million to $0.1 million for
the 1998 Quarter from a loss of $4.2 million in the 1997 Quarter.
The increase in net earnings was primarily attributable to the after tax
impact of the reduction in non-recurring expenses and partially offset by the
increase in interest expense in the 1998 Quarter.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
COMPARISON OF THE NINE MONTHS ENDED DECEMBER 27. 1997 ("1998 PERIOD") TO THE
NINE MONTHS ENDED DECEMBER 28, 1996 ("1997 PERIOD")
NET SALES
The Company's sales increased by approximately 7.9%, or $3.4 million to
$46.2 million for the 1998 Period compared to sales of $42.8 million for the
1997 Period.
This increase was attributable to increasing demand in non-automotive
products. The Company experienced strong growth in its aerospace, industrial and
petrochemical products. Net non-automotive shipments increased by 13.5% in the
1998 Period compared to the 1997 Period. Based on current order volume, the
Company expects continued growth in the aerospace, industrial and petrochemical
markets.
On the automotive side, unit shipments of airbag initiator products
increased significantly due to increased volumes on existing programs and the
development of some new programs. This increased volume was offset by a
price reduction effected under a new three year supply agreement with the
Company's largest customer, Special Devices, Inc. ("SDI") and by the scheduled
completion of the remaining automotive sensor programs for TRW. Overall,
revenue from automotive shipments was flat in the 1998 Period compared to the
1997 Period. The new agreement with SDI was effective October 1, 1997 and
expires on December 31, 2000.
GROSS PROFIT
Gross profit increased by approximately 13.3% or $2.1 million, to $17.9
million for the 1998 Period compared to $15.8 million for the 1997 Period.
Gross margin increased to 38.7% for the 1998 Period from 36.9% 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 28.6% or $2.4 million to $6.0 million for the 1998 Period compared
to $8.4 million for the 1997 Period. S,G&A expenses as a percent to sales
decreased to 13.1% in the 1998 Period from 19.6% for the 1997 Period.
The $2.4 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 higher selling expenses incurred in 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.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
NON-RECURRING EXPENSE
For the 1998 Period, the non-recurring expense was attributable to a $1.3
million financing fee paid in December 1997 to Windward Capital Partners in
connection with securing the financing for the Recapitalization of the Company
in February 1997. For the 1997 Period, the $10.0 million charge represents
estimated environmental costs. A $6.0 million escrow was established in the
1997 Quarter to fund the estimated after-tax cost (estimated tax benefit of $4.0
million) associated with these environmental matters.
EARNINGS FROM OPERATIONS
Operating earnings increased $13.2 million to $10.6 million for the 1998
Period compared to a loss of $2.6 million for the 1997 Period.
The increase in operating earnings and operating margin was primarily
attributable to the $8.8 million reduction in non-recurring expenses, increased
gross profit and lower S,G&A expenses (as discussed above) in the 1998 Period
compared to the 1997 Period.
OTHER EXPENSE, NET
Other expense, net increased $6.3 million to $7.4 million in the 1998
Period from $1.1 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 $92.1 million of
indebtedness as of December 27, 1997 compared to $21.7 million at December 28,
1996.
NET EARNINGS
Net earnings increased by approximately $3.1 million to $0.9 million for
the 1998 Period from a loss of $2.2 million in the 1997 Period.
The increase in net earnings was primarily attributable to the after tax
impact of the significant reduction in non-recurring expenses and partially
offset by the increase in interest expense in the 1998 Period.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $3.7 million for the 1998
Period compared to $9.0 million for the 1997 Period. The decrease of $5.3
million was primarily attributable to increased debt service costs and an
increase in working capital requirements.
Net cash used in investing activities was $3.3 million for the 1998 Period
compared to $1.3 million for the 1997 Period. The $2.0 million increase was
primarily attributable to the $2.2 million business acquisition in June 1997.
12
<PAGE>
As of December 27, 1997, the Company's outstanding indebtedness is $92.1
million, consisting of $90.0 million principal amount of the senior subordinated
notes and $2.1 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
In August 1997, the Company established a Capital Lease Line of $3.0
million for financing manufacturing equipment expiring June 30, 1998. The
agreement provides for thirty-six (36) or sixty (60) month terms with interest
at 2.00% above the bank's index rate. The bank's index rate is the U.S.
Treasury Note bond-equivalent yield per annum corresponding to the average life
of the lease. At December 27, 1997 there was $0.8 million outstanding under the
Capital Lease Line.
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 and Capital Lease Line will
provide adequate funds for ongoing operations, planned capital expenditures and
debt service during the terms of such facilities. 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 Capital Lease Line.
On December 8, 1997 the Company signed a new supply agreement with Special
Devices, Inc. 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.
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: February 9, 1998 s/s Andrew Goldfarb
------------------- ------------------------------------------
President and Chief Executive Officer
DATED: February 9, 1998 s/s Christopher H. Bateman
------------------- ------------------------------------------
Vice President and Chief Financial Officer
14
<PAGE>
HCC INDUSTRIES INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the Nine Months Ended
--------------------------
December 27, December 28,
1997 1996
----------- -----------
<S> <C> <C>
Earnings:
Earnings (loss) before taxes and
extraordinary item $ 3,205 $ (3,675)
Add: Fixed Charges 7,751 1,427
-------- --------
$ 10,956 $ (2,248)
-------- --------
-------- --------
Fixed Charges:
Interest expense $ 7,751 $ 1,427
-------- --------
$ 7,751 $ 1,427
-------- --------
-------- --------
Ratio of Earnings to Fixed Charges 1.4 ---(1)
-------- --------
-------- --------
</TABLE>
Note: 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.
(1) The Company's earnings were insufficient to cover fixed charges for the
nine months ended December 28, 1996.
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-28-1998
<PERIOD-START> MAR-30-1997
<PERIOD-END> DEC-27-1997
<CASH> 9,265
<SECURITIES> 0
<RECEIVABLES> 7,958
<ALLOWANCES> (67)
<INVENTORY> 4,523
<CURRENT-ASSETS> 22,744
<PP&E> 20,312
<DEPRECIATION> (6,774)
<TOTAL-ASSETS> 54,778
<CURRENT-LIABILITIES> 9,184
<BONDS> 92,129
0
0
<COMMON> 13
<OTHER-SE> (56,152)
<TOTAL-LIABILITY-AND-EQUITY> 54,778
<SALES> 46,189
<TOTAL-REVENUES> 46,189
<CGS> 28,324
<TOTAL-COSTS> 28,324
<OTHER-EXPENSES> 7,281
<LOSS-PROVISION> 27
<INTEREST-EXPENSE> 7,751
<INCOME-PRETAX> 3,205
<INCOME-TAX> 1,274
<INCOME-CONTINUING> 1,931
<DISCONTINUED> 0
<EXTRAORDINARY> (1,002)
<CHANGES> 0
<NET-INCOME> 929
<EPS-PRIMARY> 6.84
<EPS-DILUTED> 6.84
</TABLE>
