<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 30, 2000
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 October 23, 2000 was 137,945 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>
SEPTEMBER 30, APRIL 1,
2000 2000
------------- ----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 9,813 $ 14,537
Trade accounts receivable, less allowance for
doubtful accounts of $82 at September 30, 2000
and $51 at April 1, 2000 11,333 10,041
Inventories 4,500 4,515
Income taxes receivable --- 2,255
Prepaid and other current assets 891 728
------------- ----------
Total current assets 26,537 32,076
PROPERTY, PLANT AND EQUIPMENT, NET 24,364 21,605
OTHER ASSETS:
Intangible assets 4,919 5,063
Deferred financing costs 2,240 2,727
Deferred income taxes 4,100 4,100
Restricted cash 6,146 6,197
------------- ----------
TOTAL ASSETS $ 68,306 $ 71,768
============= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt $ 6,952 $ 6,994
Accounts payable 3,762 2,950
Income taxes payable 964 ---
Accrued liabilities 8,701 8,877
------------- ----------
Total current liabilities 20,379 18,821
LONG TERM LIABILITIES:
Long-term debt, net of current portion 87,111 97,475
Other long-term liabilities 8,860 9,178
------------- ----------
116,350 125,474
------------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock; $.10 par value; authorized 550,000
shares, issued and outstanding 137,945 shares
at September 30, 2000 and 135,495 shares at
April 1, 2000 14 14
Additional paid-in capital 326 200
Accumulated deficit (48,384) (53,920)
------------- ----------
TOTAL STOCKHOLDERS' DEFICIT (48,044) (53,706)
------------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 68,306 $ 71,768
============= ==========
</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)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- ----------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
------------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
NET SALES $ 20,211 $ 14,280 $ 38,728 $ 26,498
Cost of goods sold 12,959 9,790 25,319 18,936
------------- ----------- ------------- ----------
GROSS PROFIT 7,252 4,490 13,409 7,562
Selling, general and administrative expenses 2,357 1,549 4,318 3,119
------------- ----------- ------------- ----------
EARNINGS FROM OPERATIONS 4,895 2,941 9,091 4,443
OTHER INCOME (EXPENSE):
Interest and other income 162 182 352 374
Interest expense (2,666) (2,830) (5,528) (5,657)
------------- ----------- ------------- ----------
Total other expense, net (2,504) (2,648) (5,176) (5,283)
EARNINGS (LOSS) BEFORE TAXES
AND EXTRAORDINARY ITEM 2,391 293 3,915 (840)
Taxes (benefit) on earnings (loss) 956 114 1,566 (328)
------------- ----------- ------------- ----------
Earnings (loss) before extraordinary item 1,435 179 2,349 (512)
Extraordinary gain on retirement of debt, net
of taxes of $2,125 3,187 --- 3,187 ---
------------- ----------- ------------- ----------
NET EARNINGS (LOSS) $ 4,622 $ 179 $ 5,536 $ (512)
============= =========== ============= ==========
</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)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
----------------------------------------
SEPTEMBER 30, OCTOBER 2,
2000 1999
----------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 5,536 $ (512)
Reconciliation of net earnings (loss) to net cash provided
by operating activities:
Depreciation 974 965
Amortization 326 334
Extraordinary gain (3,187) ---
Non-cash stock compensation 76 ---
Deferred income taxes --- (526)
Changes in operating assets and liabilities:
(Increase) in trade accounts receivable, net (1,292) (939)
Decrease in inventories 15 143
(Increase) in other assets (112) (129)
(Decrease) in other liabilities (494) (540)
Increase (decrease) in accounts payable and
Income taxes payable/receivable 1,906 (420)
----------------- ----------------
Net cash provided by (used in) operating activities 3,748 (1,624)
----------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (3,111) (1,569))
----------------- ----------------
Net cash used in investing activities (3,111) (1,569)
----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock 50 ---
Early retirement of debt (4,598) ---
Principal payments on long-term debt (813) (581)
----------------- ----------------
Net cash used in financing activities (5,361) (581)
----------------- ----------------
Net decrease in cash and cash equivalents (4,724) (3,774)
Cash and cash equivalents at beginning of period 14,537 17,395
----------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,813 $ 13,621
================= ================
SUPPLEMENTAL NONCASH FINANCING ACTIVITIES:
Capital lease obligations and mortgages $ 622 $ 536
================= ================
</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
September 30, 2000
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 April 1,
2000. Operating results for the three and six month periods ended September
30, 2000 are not necessarily indicative of the operating results for the full
fiscal year.
2. INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, APRIL 1,
2000 2000
------------- ---------
<S> <C> <C>
Raw materials and component parts $ 2,898 $ 3,036
Work in process 1,602 1,479
------------- ---------
$ 4,500 $ 4,515
============ =========
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, APRIL 1,
2000 2000
------------- ---------
<S> <C> <C>
Land $ 4,017 $ 4,017
Buildings and improvements 9,293 9,160
Furniture, fixtures and equipment 22,642 19,043
------------- ---------
35,952 32,220
Less accumulated depreciation (11,588) (10,615)
------------- ---------
$ 24,364 $ 21,605
============= =========
</TABLE>
5
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2000
4. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, APRIL 1,
2000 2000
------------- ----------
<S> <C> <C>
10-3/4% Senior Subordinated Notes - interest payable
semi-annually; due May 15, 2007 $ 79,785 $ 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;
$3,000,000 due March 28, 2001 and
$1,085,000 due April 3, 2002 4,085 4,085
Term loans on land, building and improvements -
8% interest payable monthly; due may 2008 2,762 2,762
Other 4,931 5,122
------------- ----------
94,063 104,469
Less current portion 6,952 6,994
------------- ----------
$ 87,111 $ 97,475
============= ==========
</TABLE>
During the six months ended September 30, 2000, the Company purchased for
retirement $10.2 million face value of it's 10.75% Senior Subordinated Notes for
$4.6 million in cash. The transaction resulted in an extraordinary gain on the
early retirement of debt of $3.2 million, net of taxes of $2.1 million.
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. In June 2000, the Company
sold 2,450 shares of Class A common stock to the Company's Chairman for $50,000.
In conjunction with this transaction, the Company recorded non-cash compensation
of $76,000 in the quarter ended July 1, 2000. At September 30, 2000, the 137,945
outstanding shares of common stock were designated as follows:
<TABLE>
<CAPTION>
SHARES VOTING RIGHTS
CLASS OUTSTANDING AMOUNT PER SHARE
----- ----------- ---------- -------------
<S> <C> <C> <C>
A 105,643 $ 11,000 1
B 27,506 3,000 1
C 4,316 --- None
D 480 --- 10
----------- ----------
137,945 $ 14,000
=========== ==========
</TABLE>
The remaining 412,055 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
September 30, 2000
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
September 30, 2000, the accrual for estimated environmental costs was
$8,860,000. Actual expenditures for environmental remediation were $122,000
for the quarter ended September 30, 2000 and $238,000 for the fiscal year
ended April 1, 2000.
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.
7
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2000
6. COMMITMENTS AND CONTINGENCIES, Continued:
OTHER
On March 3, 1998, Walter Neubauer, a former stockholder of the Company and a
current stockholder of SDI, filed a lawsuit in California Superior Court (Case
BC186937; Walter Neubauer vs. Andrew Goldfarb, et. al.) 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 an option to acquire Mr. Neubauer's stock in August
1996. In September 1999, five of the six claims were dismissed upon a summary
judgment motion made by the Company, including all of the claims against the
Company. The remaining claim is against Andrew Goldfarb for alleged violations
of oral representations.
On May 7, 1998, the Company filed a lawsuit against Mr. Neubauer 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 Mr. Neubauer in August 1996. A preliminary injunction was granted in
September 1998. 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 SIX MONTHS ENDED
----------------------------------------- ----------------------------------------
SEPT. 30, OCT. 2, SEPT. 30, OCT. 2,
2000 PERCENT 1999 PERCENT 2000 PERCENT 1999 PERCENT
--------- ------- ------- ------- --------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $20.2 100.0% $14.3 100.0% $38.7 100.0% $26.4 100.0%
Gross profit 7.3 35.9% 4.5 31.4% 13.4 34.6% 7.6 28.5%
Selling, general and administrative
expenses 2.4 11.7% 1.5 10.8% 4.3 11.1% 3.1 11.8%
Earnings from operations 4.9 24.2% 2.9 20.6% 9.1 23.5% 4.4 16.8%
Other income/expense (2.5) (12.4%) (2.6) (18.5%) (5.2) (13.4%) (5.3) (19.9%)
Extraordinary gain, net 3.2 15.8% --- 0.0% 3.2 8.2% --- 0.0%
Net earnings (loss) $4.6 22.9% $0.2 1.3% $5.5 14.3% $(0.5) -1.9%
</TABLE>
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2000 ("2001 QUARTER") TO THE
THREE MONTHS ENDED OCTOBER 2, 1999 ("2000 QUARTER")
NET SALES
The Company's net sales increased by approximately $5.9 million or 41%
to $20.2 million for the 2001 Quarter compared to sales of $14.3 million for the
2000 Quarter. The significant increase was due to increased demand in all of the
Company's product lines. Sales to existing aerospace, industrial process
control, and petrochemical customers increased by approximately 31% in the 2001
Quarter compared to the 2000 Quarter. Based on current order volume, the Company
expects the strong demand in the aerospace, industrial process control and
petrochemical markets to continue in the next several quarters.
The Company has continued to develop a significant market presence in
the telecom markets through component products designed for fiber-optic
applications. Sales of these products increased by $3.6 million in the 2001
Quarter compared to the 2000 Quarter. Based on industry reports, the Company
expects continued strong demand in these markets for several years. At the
current growth rate of order volume, this market will become the largest market
for the Company's products within 12 months.
On the automotive side, unit shipments of airbag initiator products
increased moderately due to customer demand on several existing programs. The
Company's airbag initiator unit shipments to its largest customer, Special
Devices, Inc. ("SDI") increased 1% for the 2001 Quarter compared to the 2000
Quarter. Overall, revenue from all automotive products increased approximately
6% in the 2001 Quarter compared to the 2000 Quarter. The Company expects a
consistent unit demand for the next quarter, but also expects pricing pressure
to increase in the automotive markets.
GROSS PROFIT
Gross profit increased by approximately 62% or $2.8 million, to $7.3
million for the 2001 Quarter compared to $4.5 million for the 2000 Quarter.
Gross margin increased to 36% for the 2001 Quarter from 31% for the 2000
Quarter.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
The increase in gross profit is attributable to the significant
increase in sales volume in the 2001 Quarter. The increase in gross margin was
primarily attributable to the significant increase in revenue and the
corresponding impact of fixed overhead costs leveraged on higher sales revenue.
Pricing in the Company's automotive products was consistent between the two
quarters.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("S,G&A") expenses increased 60% to
$2.4 million for the 2001 Quarter compared to $1.5 million for the 2000 Quarter.
S,G&A expenses as a percent to sales increased to 12% in the 2001 Quarter from
11% for the 2000 Quarter.
The overall increase in S,G&A expenses was due to higher compensation
costs and higher commissions on sales in the 2001 Quarter compared to the 2000
Quarter. The higher commissions reflected the increased sales volume subject to
commissions. The higher compensation costs reflect additional costs under
management incentive plans.
EARNINGS FROM OPERATIONS
Operating earnings increased by $2.0 million or 69% to $4.9 million for
the 2001 Quarter compared to $2.9 million for the 2000 Quarter. Operating
margins increased to 24% in the 2001 Quarter from 21% for the 2000 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.
OTHER EXPENSE, NET
Other expense, net (which is predominantly net interest expense) was
down slightly at $2.5 million for the 2001 Quarter compared to $2.6 million for
the 2000 Quarter. As discussed below, the Company purchased for retirement $10.2
million of it's 10.75% Senior Subordinated Notes during the quarter. Interest
expense in the future will decrease by $1.1 million per year as a result of the
purchase. The Company has $94.1 million of indebtedness as of September 30, 2000
compared to $103.1 million at October 2, 1999.
EXTRAORDINARY GAIN, NET
During the 2001 Quarter, the Company purchased for retirement $10.2
million face value of it's 10.75% Senior Subordinated Notes for $4.6 million in
cash. The transaction resulted in an extraordinary gain on the early retirement
of debt of $3.2 million, net of taxes of $2.1 million. The purchase of this
indebtedness will result in an after-tax yield to maturity of 20.3%.
NET EARNINGS
Net earnings increased by approximately $4.4 million to $4.6 million
for the 2001 Quarter from $0.2 million in the 2000 Quarter.
The substantial improvement in net earnings was due to an increase of
$1.2 million in after tax operating earnings of the Company coupled with the
$3.2 million extraordinary gain on the retirement of debt.
10
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
COMPARISON OF THE SIX MONTHS ENDED SEPTEMBER 30, 2000 ("2001 PERIOD") TO THE SIX
MONTHS ENDED OCTOBER 2, 1999 ("2000 PERIOD")
NET SALES
The Company's net sales increased by approximately $12.2 million or 47%
to $38.7 million for the 2001 Period compared to sales of $26.4 million for the
2000 Period. The significant increase was due to increasing demand in all
product lines. Sales to existing aerospace, industrial process control, and
petrochemical customers increased by 36% in the 2001 Period compared to the 2000
Period. Based on current order volume, the Company expects continued strong
demand in the aerospace, industrial process control and petrochemical markets to
continue in the next several quarters.
The Company has continued to develop a significant market presence in
the telecom markets through component products designed for fiber optic
applications. Sales of these products increased by $5.1 million in the 2001
Period compared to the 2000 Period. Based on industry reports, the Company
expects continued strong demand in these markets for several years. At the
current growth rate of order volume, this market will become the largest market
for the Company's products within 12 months.
On the automotive side, unit shipments of airbag initiator products
increased due to customer demand on existing programs. The Company's airbag
initiator unit shipments to its largest customer, Special Devices, Inc. ("SDI")
increased 8% for the 2001 Period compared to the 2000 Period. This increase
combined with increased volume on other automotive products. Overall, revenue
from all automotive shipments increased 17% in the 2001 Period compared to the
2000 Period. The Company expects a consistent unit demand for the next quarter,
but also expects pricing pressure to increase in the automotive markets. Pricing
was consistent in the 2001 Period compared to the 2000 Period.
GROSS PROFIT
Gross profit increased by $5.8 million or 76% to $13.4 million for the
2001 Period compared to $7.6 million for the 2000 Period. Gross margin increased
to 34.6% for the 2001 Period from 28.5% for the 2000 Period.
The increase in gross profit is attributable to the significant
increase in sales volume in the 2001 Period. The increase in gross margin was
primarily attributable to the significant increase in revenue and the
corresponding impact of fixed overhead costs leveraged on higher sales revenue
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("S,G&A") expenses increased by
$1.2 million or 39% to $4.3 million for the 2001 Period compared to $3.1 million
for the 2000 Period. S,G&A expenses as a percent to sales decreased slightly to
11% in the 2001 Period from 12% for the 2000 Period.
The overall increase in S,G&A expenses was due to higher compensation
costs and higher commissions on sales in the 2001 Period compared to the 2000
Period. The higher commissions reflected the increased sales volume subject to
commissions. The higher compensation costs reflect additional costs under
management incentive plans.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
EARNINGS FROM OPERATIONS
Operating earnings increased by $4.7 million or 107% to $9.1 million
for the 2001 Period compared to $4.4 million for the 2000 Period. Operating
margins increased to 23.5% in the 2001 Period from 16.8% for the 2000 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 and gross margin and improvement in S,G&A expenses as a
percent to sales.
OTHER EXPENSE, NET
Other expense, net (which is predominantly net interest expense)
decreased slightly to $5.2 million in the 2001 Period compared to $5.3 million
in the 2000 Period. As discussed below, the Company purchased for retirement
$10.2 million of it's 10.75% Senior Subordinated Notes during the 2001 Period.
Interest expense in the future will decrease by $1.1 million per year as a
result of the purchase. The Company has $94.1 million of indebtedness as of
September 30, 2000 compared to $103.1 million at October 2, 1999.
EXTRAORDINARY GAIN, NET
During the 2001 Period, the Company purchased for retirement $10.2
million face value of it's 10.75% Senior Subordinated Notes for $4.6 million in
cash. The transaction resulted in an extraordinary gain on the early retirement
of debt of $3.2 million, net of taxes of $2.1 million. The purchase of this
indebtedness will result in an after-tax yield to maturity of 20.3%.
NET EARNINGS
Net earnings increased by approximately $6.0 million to $5.5 million
for the 2001 Period from a net loss of $0.5 million in the 2000 Period.
The substantial improvement in net earnings was due to an increase of
$2.8 million in after tax operating earnings of the Company coupled with the
$3.2 million extraordinary gain on the retirement of debt.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $3.8 MILLION for the 2001
Period compared to $1.6 million used in operating activities for the 2000
Period. The increase of $5.4 MILLION of cash generated was primarily
attributable to the increase in net earnings and an increase in accounts payable
and INCOME TAXES payable OFFSET BY THE EXTRAORDINARY GAIN ON THE RETIREMENT OF
DEBT.
Net cash used in investing activities was $3.1 million for the 2001
Period compared to $1.6 million for the 2000 Period.
Net cash used in financing activities was $5.4 MILLION for the 2001
Period, DUE PRIMARILY TO THE PURCHASE OF THE 10.75% SENIOR SUBORDINATED NOTES,
compared to $0.6 million for the 2000 Period.
As of September 30, 2000, the Company's outstanding long-term debt is
$94.1 million. The Company has a Revolving Credit Facility up to $20.0 million,
which is collateralized by accounts receivable and inventories. At September 30,
2000 there was $18.6 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.
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.
Capital expenditures for fiscal 2001 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 2001 are approximately $4.5 million and
will be financed through working capital, the Revolving Credit Facility and/or
purchase money indebtedness.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on
the Company's Revolving Credit Facility. At September 30, 2000, the Company had
no outstanding borrowings under the line of credit and, therefore, changes in
interest rates would have no impact on the Company's results of operations.
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: 10.2.3 - 4th Amendment to Credit Agreement
12.1 - Computation of ratio of earnings to fixed charges
(b) Reports on Form 8-K - Not applicable
SIGNATURES
HCC INDUSTRIES INC.
DATED: October 27, 2000 s/s Richard L. Ferraid
---------------- -----------------------------------------------
President and Chief Executive Officer
DATED: October 27, 2000 s/s Christopher H. Bateman
---------------- -----------------------------------------------
Vice President and Chief Financial Officer
14
