<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 26, 1998
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 February 9, 1999 was 135,495 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)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 26, MARCH 28,
1998 1998
------------ ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 13,161 $ 13,441
Trade accounts receivable, less allowance for
doubtful accounts of $67 at December 26, 1998
and $40 at March 28, 1998 9,448 10,136
Inventories 4,264 4,610
Prepaid and deferred income taxes 3,139 260
Other current assets 260 416
--------- ---------
Total current assets 30,272 28,863
PROPERTY, PLANT AND EQUIPMENT, NET 18,831 14,617
OTHER ASSETS:
Intangible assets 5,427 5,643
Deferred financing costs 3,246 3,532
Deferred income taxes 4,192 4,192
Restricted cash 6,176 6,013
--------- ---------
TOTAL ASSETS $ 68,144 $ 62,860
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,044 $ 897
Accounts payable 2,149 2,947
Accrued liabilities 4,684 6,384
Income taxes payable 2,248 1,752
--------- ---------
Total current liabilities 10,125 11,980
LONG TERM LIABILITIES:
Long-term debt, net of current portion 101,304 98,201
Other long-term liabilities 9,486 9,619
--------- ---------
120,915 119,800
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock; $.10 par value; authorized 550,000 shares,
issued and outstanding 135,495 shares at December 26,
1998 and 134,955 shares at March 28, 1998 14 13
Additional paid-in capital 200 ---
Accumulated deficit (52,985) (56,953)
--------- ---------
TOTAL STOCKHOLDERS' DEFICIT (52,771) (56,940)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 68,144 $ 62,860
--------- ---------
--------- ---------
</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 26, December 27, December 26, December 27,
1998 1997 1998 1997
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
NET SALES $ 15,297 $ 15,128 $ 50,703 $ 46,189
Cost of goods sold 9,558 9,508 30,987 28,324
--------- --------- --------- ---------
GROSS PROFIT 5,739 5,620 19,716 17,865
Selling, general and administrative expenses 1,266 1,736 5,463 6,031
Non-recurring expense --- 1,250 --- 1,250
--------- --------- --------- ---------
EARNINGS FROM OPERATIONS 4,473 2,634 14,253 10,584
OTHER INCOME (EXPENSE):
Interest and other income 168 157 520 372
Interest expense (2,747) (2,573) (8,233) (7,751)
--------- --------- --------- ---------
Total other expense, net (2,579) (2,416) (7,713) (7,379)
Earnings before taxes and extraordinary item 1,894 218 6,540 3,205
Taxes on earnings 748 99 2,572 1,274
--------- --------- --------- ---------
Earnings before extraordinary item 1,146 119 3,968 1,931
Extraordinary loss on retirement of debt, net
of tax benefit of $640 --- --- --- (1,002)
--------- --------- --------- ---------
NET EARNINGS $ 1,146 $ 119 $ 3,968 $ 929
--------- --------- --------- ---------
--------- --------- --------- ---------
</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 26, December 27,
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 3,968 $ 929
Reconciliation of net earnings to net cash provided
by operating activities:
Depreciation 1,243 1,058
Amortization 502 547
Deferred income taxes (2,879) (562)
Extraordinary loss --- 1,002
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts receivable, net 688 (608)
Decrease in inventories 346 112
(Increase) decrease in other assets (7) 86
(Decrease) increase in accrued liabilities (1,833) 170
(Decrease) increase in accounts payable and income
taxes payable (302) 961
--------- ---------
Net cash provided by operating activities 1,726 3,695
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,479) (1,145)
Business acquisition --- (2,200)
--------- ---------
Net cash used in investing activities (1,479) (3,345)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (728) (80,408)
Proceeds from sale of stock 201 ---
Proceeds from issuance of long-term debt --- 90,000
Deferred financing costs --- (3,790)
Repurchases of stock --- (3,728)
--------- ---------
Net cash (used in) provided by financing activities (527) 2,074
--------- ---------
Net (decrease) increase in cash and cash equivalents (280) 2,424
Cash and cash equivalents at beginning of period 13,441 6,841
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,161 $ 9,265
--------- ---------
--------- ---------
SUPPLEMENTAL NONCASH FINANCING ACTIVITIES:
Mortgage indebtedness 2,762 ---
Capital lease obligations 1,216 854
</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 26, 1998
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.
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 28,
1998. Operating results for the three and nine month periods ended December
26, 1998 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 26, March 28,
1998 1998
------------ ----------
<S> <C> <C>
Raw materials and component parts $ 1,878 $ 2,340
Work in process 2,386 2,270
-------- ---------
$ 4,264 $ 4,610
-------- ---------
-------- ---------
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 26, March 28,
1998 1998
------------ ----------
<S> <C> <C>
Land $ 4,025 $ 3,180
Buildings and improvements 8,618 5,988
Furniture, fixtures and equipment 14,589 12,607
--------- ---------
27,232 21,775
Less accumulated depreciation (8,401) (7,158)
--------- ---------
$ 18,831 $ 14,617
--------- ---------
--------- ---------
</TABLE>
5
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
December 26, 1998
4. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 26, March 28,
1998 1998
----------- ----------
<S> <C> <C>
10 3/4% Senior Subordinated Notes - interest payable
semi-annually; due May 15, 2007 $ 90,000 $ 90,000
Subordinated Notes due Selling Shareholders -
12% interest payable semi-annually; due March 28, 2001 2,500 2,500
Subordinated Bonus Notes - 10% interest payable
semi-annually; due March 28, 2001 3,000 3,000
Term loans on land, building and improvements -
8% interest payable monthly; due May 2008 2,762 ---
Other 4,086 3,598
--------- --------
102,348 99,098
Less current portion 1,044 897
--------- --------
$ 101,304 $ 98,201
--------- --------
--------- --------
</TABLE>
5. 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 December 26, 1998, the
135,495 outstanding shares of common stock were designated as follows:
<TABLE>
<CAPTION>
Shares Voting Rights
Class Outstanding Amount Per Share
----- ----------- ---------- ----------
<S> <C> <C> <C> <C>
A 103,193 $ 11,000 1
B 27,506 3,000 1
C 4,316 --- None
D 480 --- 10
-------- --------
135,495 $ 14,000
-------- --------
-------- --------
</TABLE>
The remaining 414,505 shares of authorized but unissued common stock are
undesignated as to class.
6
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
December 26, 1998
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 28, 1998. 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 accrued $10,000,000 in fiscal 1997 for
existing estimated environmental remediation and other related costs which
the Company believes to be the best estimate of the liability. As of December
26, 1998, the accrual for estimated environmental costs was $9,486,000.
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.
Pursuant to the Recapitalization Agreement, the Selling Group has agreed to
indemnify the Company with respect to the after-tax costs of contingent
environmental and other liabilities, subject to a cap for all indemnified
liabilities of $30 million. Pursuant to the Recapitalization Agreement, a
$6.0 million interest bearing escrow account was established by the selling
stockholders (the "Deferred Amount") to secure indemnity claims of the
Company and others, including with respect to environmental liabilities. Any
environmental costs, net of tax benefit, are expected to be funded from the
escrow account. Actual expenditures for environmental remediation were
$19,000 for the quarter ended December 26, 1998 and $90,000 for the nine
months ended December 26, 1998.
7
HCC INDUSTRIES INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
December 26, 1998
6. COMMITMENTS AND CONTINGENCIES, Continued:
OTHER
On March 3, 1998, Walter Neubauer, formerly the largest shareholder of the
Company and presently one of the largest shareholders of Special Devices,
Inc., the Company's largest customer, filed a lawsuit in California Superior
Court against the Company and certain other stockholders alleging (i) breach
of fiduciary duty, (ii) fraud, (iii) negligent misrepresentation, (iv)
negligence, (v) violations of corporations code and (vi) breach of contract.
The allegations primarily relate to the Company's exercise of a 1995 option
to acquire Mr. Neubauer's stock in August 1996. The former stockholder is
seeking damages of $40.0 million. Based upon the Company's analysis of the
current facts, it is management's belief that the Company should ultimately
prevail in this matter, although there can be no assurance in this regard at
this time.
On May 7, 1998, the Company filed a lawsuit against the former stockholder in
California Superior Court alleging (i) breach of contract, (ii) intentional
interference with business relations and (iii) interference with prospective
business advantage. All allegations relate to violations of the
noncompetition agreement executed by the former stockholder in August 1996.
The Company is seeking damages of $50.0 million.
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
<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. 26, Dec. 27, Dec. 26, Dec. 27,
1998 Percent 1997 Percent 1998 Percent 1997 Percent
-------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 15.3 100.0% $ 15.1 100.0% $ 50.7 100.0% $ 46.2 100.0%
Gross profit 5.7 37.5% 5.6 37.1% 19.7 38.9% 17.9 38.7%
Selling, general and
administrative expenses 1.3 8.4% 1.7 11.5% 5.5 10.8% 6.0 13.1%
Non-recurring expense 0.0 0.0% 1.3 8.3% 0.0 0.0% 1.3 2.7%
Earnings from operations 4.5 29.1% 2.6 17.4% 14.2 28.1% 10.6 22.9%
Other income/expense (2.6) -16.8% (2.4) -16.0% (7.7) -15.2% (7.4) -16.0%
Extraordinary loss (1) 0.0 0.0% 0.0 0.0% 0.0 0.0% (1.0) -2.2%
Net earnings $ 1.1 7.5% $ 0.1 0.1% $ 4.0 7.8% $ 0.9 2.0%
</TABLE>
(1) Represents extraordinary loss on retirement of debt, net of tax benefit.
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 26, 1998 ("1999 QUARTER") TO THE
THREE MONTHS ENDED DECEMBER 27, 1997 ("1998 QUARTER")
NET SALES
The Company's net sales increased by approximately 1.3% or $0.2 million
to $15.3 million for the 1999 Quarter compared to sales of $15.1 million for
the 1998 Quarter. The modest increase was due to an increase in automotive
shipments which was almost wholly offset by a decrease in non-automotive
shipments. Sales to existing aerospace, industrial process control, and
petrochemical customers decreased approximately 3% in the 1999 Quarter
compared to the 1998 Quarter. Based on current order volume, the Company
expects weakness in the aerospace, industrial process control and
petrochemical markets in the next two quarters.
On the automotive side, overall unit shipments of airbag initiator
products increased moderately due to the development of some new programs.
The Company's airbag initiator unit shipments to its largest customer,
Special Devices, Inc. ("SDI") decreased 7% for the 1999 Quarter compared to
the 1998 Quarter. The decrease in units shipped to SDI was offset by
significantly increased shipments on initiator products to other automotive
customers. Overall, automotive revenue increased approximately 8% for the
1999 Quarter compared to the 1998 Quarter.
GROSS PROFIT
Gross profit increased by approximately 1.8% or $0.1 million, to $5.7
million for the 1999 Quarter compared to $5.6 for the 1998 Quarter. Gross
margin increased slightly to 37.5% for the 1999 Quarter from 37.1% for the
1998 Quarter.
The increase in gross profit is attributable to the increased sales
volume. The slight increase in gross margin is due to efficiencies gained
through 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 23.5%
to $1.3 million for the 1999 Quarter compared to $1.7 million for the 1998
Quarter. S,G&A expenses as a percent to sales decreased to 8.4% in the 1999
Quarter from 11.5% for the 1998 Quarter.
The decrease in selling, general and administrative expenses were a
result of lower contingent compensation accruals, and slightly lower
commission costs. The improvement in the percentage of S,G&A expenses to
sales reflects the decreased overall costs.
NON-RECURRING EXPENSE
There was no non-recurring expense recorded in the 1999 Quarter. For the
1998 Quarter, the non-recurring expense was attributable to a $1.3 million
financing fee.
EARNINGS FROM OPERATIONS
Operating earnings increased 73.1% or $1.9 million to $4.5 million for
the 1999 Quarter compared to $2.6 million for the 1998 Quarter. Operating
margins increased to 29.1% in the 1999 Quarter from 17.4% for the 1998
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, lower S,G&A expenses and the absence of the non-recurring expense in
the 1999 Quarter.
OTHER EXPENSE, NET
Other expense, net (which is predominantly net interest expense)
increased 8.3% or $0.2 million to $2.6 million in the 1999 Quarter compared
to $2.4 million in the 1998 Quarter. The $0.2 million increase was primarily
attributable to interest expense incurred on additional indebtedness and
partially offset by increased interest income in the 1999 Quarter. The
Company has $102.3 million of indebtedness as of December 26, 1998 compared
to $92.1 million at December 27, 1997.
NET EARNINGS
Net earnings increased by approximately $1.0 million to $1.1 million for
the 1999 Quarter from $0.1 million in the 1998 Quarter.
The increase in net earnings was primarily attributable to the increase
in earnings from operations in the 1999 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 26, 1998 ("1999 PERIOD") TO THE
NINE MONTHS ENDED DECEMBER 27, 1997 ("1998 PERIOD")
NET SALES
The Company's net sales increased by approximately 9.7% or $4.5 million
to $50.7 million for the 1999 Period compared to sales of $46.2 million for
the 1998 Period.
This increase was attributable to increasing demand in all product
lines. The Company experienced moderate growth in its aerospace, industrial
and petrochemical products. Net non-automotive shipments increased
approximately 6.7% in the 1999 Period compared to the 1998 Period. Based on
current order volume, the Company expects weakness in the aerospace,
industrial process control and petrochemical markets in the next two quarters.
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. The Company's airbag initiator shipments to
its largest customer, Special Devices, Inc. ("SDI") increased 21.5% for the
1999 Period compared to the 1998 Period. This increased volume was mostly
offset by a price reduction effected under a supply agreement with SDI. The
agreement with SDI was effective October 1, 1997 and expires on December 31,
2000. Unit shipments of initiator products to other automotive customers
increased significantly during the 1999 Period. Overall, revenue from all
automotive shipments increased approximately 14.9% in the 1999 Period
compared to the 1998 Period.
GROSS PROFIT
Gross profit increased by approximately 10.1% or $1.8 million, to $19.7
million for the 1999 Period compared to $17.9 for the 1998 Period. Gross
margin increased slightly to 38.9% for the 1999 Period from 38.7% for the
1998 Period.
The increase in gross profit is attributable to the increased sales
volume. The gross margin as a percent to sales was relatively unchanged in
the 1999 Period compared to the 1998 Period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("S,G&A") expenses decreased by
approximately 8.3% to $5.5 million for the 1999 Period compared to $6.0
million for the 1998 Period. S,G&A expenses as a percent to sales decreased
to 10.8% in the 1999 Period from 13.1% for the 1998 Period.
The decrease in selling, general and administrative expenses were a
result of lower contingent compensation accruals, and slightly lower
commission costs. The improvement in the percentage of S,G&A expenses to
sales reflects the decreased overall costs.
NON-RECURRING EXPENSE
There was no non-recurring expense recorded in the 1999 Period. For the
1998 Period, the non-recurring expense was attributable to a $1.3 million
financing fee.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
EARNINGS FROM OPERATIONS
Operating earnings increased 34.0% or $3.6 million to $14.2 million for
the 1999 Period compared to $10.6 million for the 1998 Period. Operating
margins increased to 28.1% in the 1999 Period from 22.9% for the 1998 Period.
The significant increase in operating earnings and margin was
attributable to the same factors (as discussed above) that contributed to the
increase in gross profit, lower S,G&A expenses and the absence of the
non-recurring expense.
OTHER EXPENSE, NET
Other expense, net (which is predominantly net interest expense)
increased 4.1% or $0.3 million to $7.7 million in the 1999 Period compared to
$7.4 million in the 1998 Period. The $0.3 million increase was attributable
to interest expense incurred on additional indebtedness and partially offset
by increased interest income in the 1999 Period. The Company has $102.3
million of indebtedness as of December 26, 1998 compared to $92.1 million at
December 27, 1997.
NET EARNINGS
Net earnings increased by approximately $3.1 million to $4.0 million for
the 1999 Period from $0.9 million in the 1998 Period.
The significant increase in net earnings was primarily attributable to
the increase in earnings from operations in the 1999 Period.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1.7 million for the 1999
Period compared to $3.7 million for the 1998 Period. The decrease of $2.0
million was primarily attributable to an increase in estimated income tax
payments and an increase in working capital requirements.
Net cash used in investing activities was $1.5 million for the 1999
Period compared to $3.4 million for the 1998 Period. The $1.9 million
decrease was primarily attributable to an expenditure in the 1998 Period of
$2.2 million for the acquisition of a business.
Net cash used in financing activities was $0.5 million for the 1999
Period compared to $2.1 million provided in the 1998 Period. The $0.5 million
used in the 1999 Period resulted from approximately $0.7 million of principal
repayments on existing debt partially offset by $0.2 million provided by
proceeds from the sale of stock.
As of December 26, 1998, the Company's outstanding indebtedness is $102.3
million. The Company has a Revolving Credit Facility up to $20.0 million and
is collateralized by accounts receivable and inventories. At December 26,
1998 there was $15.5 million available under the Revolving Credit Facility.
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.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
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 1999 are expected to focus on
investments in management information systems, 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 within fiscal 1999 are
approximately $7.0 million and will be financed through working capital, the
Revolving Credit Facility and a mortgage on the newly acquired El Monte
property.
YEAR 2000 ISSUE
The Year 2000 readiness issue, which is common to most businesses,
arises from the inability of information systems, and other time and date
sensitive products and systems to properly recognize and process
date-sensitive information or system failures. Assessments of the potential
cost and effects of Year 2000 issues vary significantly among businesses, and
it is extremely difficult to predict the actual impact. Recognizing this
uncertainty, management is continuing to actively analyze, assess and plan
for various Year 2000 issues across its business. The products manufactured
by the Company do not have issues related to Year 2000 functionality.
The Year 2000 issue has an impact on both information technology ("IT")
systems and non-IT systems, such as manufacturing systems and physical
facilities including, but not limited to, security systems and utilities.
Although management believes that a majority of the Company's IT systems are
Year 2000 ready, such systems still have to be tested for Year 2000
readiness. The Company is replacing or upgrading those systems that are
identified as non-Year 2000. Certain IT systems previously identified as
non-Year 2000 compliant are being upgraded or replaced which should be
complete by June 30, 1999. Non-IT system issues are more difficult to
identify and resolve. The Company is actively identifying non-IT Year 2000
issues concerning its physical facility locations. As non-IT areas are
identified, management formulates the necessary actions to ensure minimal
disruption to its business processes. Although management believes that its
efforts will be successful and the costs will be insignificant to its
consolidated financial position and results of operations, management also
recognizes that any failure or delay could cause a potential negative impact.
Independent of the Company's efforts to prepare for Year 2000 readiness,
the Company has purchased and is implementing a new management information
system. This new system is Year 2000 compliant and is scheduled to be
operational in mid 1999.
The Year 2000 readiness of its customers varies. The Company is not
investigating whether or not its customers are evaluating and/or preparing
their own systems. These efforts by customers to address Year 2000 issues may
affect the demand for certain products and services; however, the impact to
the revenue or any change in revenue patterns is highly uncertain.
The Company has also initiated efforts to assess the Year 2000 readiness
of its key suppliers and business partners. The Company's direction of this
effort is to ensure the adequacy of resources and supplies to minimize any
potential business interruptions. Management plans to complete this part of
its Year 2000 readiness plan in the early part of calendar 1999. While the
Company continues to believe the Year 2000 issue described above will not
materially affect its consolidated financial position or results of
operations, it remains uncertain as to what extent, if any, the Company may
be impacted.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, 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, capital resources and Year 2000 issues.
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.
14
<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, 1999 s/s Andrew Goldfarb
---------------- -------------------------------------
President and Chief Executive Officer
DATED: February 9, 1999 s/s Christopher H. Bateman
----------------- ------------------------
Vice President and Chief Financial Officer
15
<PAGE>
EXHIBIT 12
<TABLE>
<CAPTION>
HCC INDUSTRIES INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
For the Nine Months Ended
--------------------------
December 26, December 27,
1998 1997
------------ ------------
<S> <C> <C>
Earnings:
Earnings before taxes and extraordinary item $ 6,540 $ 3,205
Add: Fixed Charges* 8,233 7,751
------- -------
$14,773 $10,956
------- -------
------- -------
* Fixed Charges:
Interest expense $ 8,233 $ 7,751
------- -------
$ 8,233 $ 7,751
------- -------
------- -------
Ratio of Earnings to Fixed Charges 1.8 1.4
------- -------
------- -------
</TABLE>
*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. Fixed Charges consist of
interest expense and amortization of debt issuance costs.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-03-1999
<PERIOD-START> MAR-29-1998
<PERIOD-END> DEC-26-1998
<CASH> 13,161
<SECURITIES> 0
<RECEIVABLES> 9,515
<ALLOWANCES> (67)
<INVENTORY> 4,264
<CURRENT-ASSETS> 30,272
<PP&E> 27,232
<DEPRECIATION> (8,401)
<TOTAL-ASSETS> 68,144
<CURRENT-LIABILITIES> 10,125
<BONDS> 101,304
0
0
<COMMON> 14
<OTHER-SE> (52,785)
<TOTAL-LIABILITY-AND-EQUITY> 68,144
<SALES> 50,703
<TOTAL-REVENUES> 50,703
<CGS> 30,987
<TOTAL-COSTS> 30,987
<OTHER-EXPENSES> 5,463
<LOSS-PROVISION> 27
<INTEREST-EXPENSE> 8,233
<INCOME-PRETAX> 6,540
<INCOME-TAX> 2,572
<INCOME-CONTINUING> 3,968
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,968
<EPS-PRIMARY> 29.285
<EPS-DILUTED> 29.285
</TABLE>
