<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-22974
CMC INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 62-1434910
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OF ORGANIZATION) IDENTIFICATION NO.)
4950 PATRICK HENRY DRIVE, SANTA CLARA, CA 95054
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
-------------------------------
(408) 982-9999
(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 [ ]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LAST PRACTICABLE DATE.
COMMON STOCK, $.01 PAR VALUE - 6,666,571 SHARES
OUTSTANDING AS OF NOVEMBER 30, 1996
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Balance Sheets 3
Statements of Income 4
Statements of Cash Flows 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
</TABLE>
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CMC INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
UNAUDITED
<TABLE>
<CAPTION>
October 31, 1996 July 31, 1996
------------------- ----------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,668 $ 2,977
Accounts receivable, net 21,074 17,231
Accounts and notes receivable from affiliate 6,867 7,842
Inventories 25,976 21,218
Other current assets 1,661 465
--------- ----------
Total current assets 57,246 49,733
Plant and equipment, net 12,058 10,863
Investment in preferred stock of affiliate 5,884 5,884
Other assets 913 954
--------- ----------
$ 76,101 $ 67,434
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable under lines of credit $ 4,544 $ 6,826
Current portion of long-term debt 1,729 1,704
Accounts payable 26,096 15,537
Other current liabilities 4,817 4,752
--------- ----------
Total current liabilities 37,186 28,819
Long-term debt 5,762 6,261
Other liabilities 1,309 1,252
--------- ----------
TOTAL LIABILITIES 44,257 36,332
Stockholders' equity
Common stock 67 67
Additional paid-in capital 30,021 30,015
Retained earnings 2,752 2,016
Equity adjustment for pension liability (996) (996)
--------- ----------
TOTAL STOCKHOLDER'S EQUITY 31,844 31,102
--------- ----------
$ 76,101 $ 67,434
========= ==========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
CMC INDUSTRIES, INC..
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
UNAUDITED
<TABLE>
<CAPTION>
Three months ended October 31,
-------------------------------
1996 1995
--------- ------------
<S> <C> <C>
Net sales $ 41,941 $38,580
Cost of sales 38,441 36,508
-------- -------
Gross profit 3,500 2,072
Selling, general and administrative expenses 1,995 2,069
Nonrecurring charges for restructuring 0 792
-------- -------
Operating income (loss) 1,505 (789)
Interest expense, net 319 346
-------- -------
Income (loss) before income taxes 1,186 (1,135)
Provision (benefit) for income taxes 450 (420)
-------- -------
Net income (loss) $ 736 $ (715)
======== =======
Net income (loss) per common share $ 0.11 $ (0.11)
======== =======
Weighted average shares outstanding 6,996 6,257
======== =======
</TABLE>
See notes to condensed consolidated financial statements.
4
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CMC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended October 31,
------------------------------------
1996 1995
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 736 $ (715)
Adjustments to reconcile net income(loss)
to net cash provided by operating activities:
Depreciation and amortization 481 418
Change in assets and liabilities:
Receivables (2,868) (2,292)
Inventories (4,758) (5,040)
Accounts payable 10,559 8,024
Other assets and liabilities (1,046) 299
-------- -------
Net cash provided by operating activities 3,104 694
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,663) (226)
-------- -------
Net cash used in investing activities (1,663) (226)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under lines of credit,
net (2,282) (145)
Principal payments on long-term debt (474) (376)
Proceeds from issuance of stock 6 0
-------- -------
Net cash used in financing activities (2,750) (521)
-------- -------
Net decrease in cash and cash equivalents (1,309) (53)
Cash and cash equivalents at beginning of period 2,977 89
-------- -------
Cash and cash equivalents at end of period $ 1,668 $ 36
======== =======
</TABLE>
See notes to condensed consolidated financial statements.
5
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CMC INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
reflect all normal recurring adjustments which are, in the opinion of
management, necessary to present fairly the financial position and results of
operations and cash flows in conformity with generally accepted accounting
principles. The results of operations for the interim periods presented are
not necessarily indicative of the results to be expected for the full year.
For further information, refer to the financial statements included in the
Company's Annual Report on Form 10-K for the fiscal year ended July 31, 1996.
Net income per common and common equivalent share has been computed on the
basis of the weighted average number of common shares outstanding and dilutive
common stock equivalent shares outstanding during the respective periods.
Common equivalent shares consist of stock options included in the computation
of net income per share using the treasury stock method.
NOTE 2 - INVENTORIES
The components of inventories were as follows (in thousands):
<TABLE>
<CAPTION>
October 31, July 31,
1996 1996
------------ ---------
<S> <C> <C>
Raw materials and purchased components $19,526 $15,673
Work-in-process 6,037 5,174
Finished goods 413 371
------- -------
$25,976 $21,218
======= =======
</TABLE>
6
<PAGE> 7
CMC INDUSTRIES, INC.
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
CMC Industries, Inc. ("CMC" or the "Company") was incorporated in 1990 to
acquire certain businesses operated from the Company's Corinth, Mississippi
manufacturing facility since 1960. In August 1993, the Company transferred
certain assets and related liabilities associated with its telecommunications
business to Cortelco Systems Holding Corp. ("Cortelco"), a newly-formed company
owned by certain of the Company's existing stockholders, in exchange for
1,000,000 shares of Preferred Stock of Cortelco. These transactions
effectively transferred to Cortelco all of the Company's assets and liabilities
not related to its contract manufacturing business. This restructuring allowed
CMC to focus on contract manufacturing services while Cortelco pursued the
development and distribution of telephones and telecommunications products.
Set forth below are analyses of the Company's results of operations for
the three months ended October 31, 1996.
RESULTS OF OPERATIONS
Net sales for the first quarter of fiscal year 1997 increased by
approximately 9% to $41.9 million from $38.6 million for the corresponding
quarter of the prior year. The increase was accomplished as sales to new
customers offset a decline in sales to the Company's historical customer base.
Gross profit for the first quarter of fiscal 1997 was $3.5 million or 8.3%
of net sales, as compared to $2.1 million or 5.4% of net sales for the first
quarter of fiscal 1996. The gross margin improvement on a year-to-year basis
principally resulted from improved operating efficiency related to higher
volumes and a stronger mix of higher margin new business.
Selling, general and administrative expenses were $2.0 million or 4.8% of
net sales in the first quarter of fiscal 1997, as compared to $2.1 million
(excluding $792,000 of non-recurring charges related to restructuring of the
Company's business) or 5.4% of net sales for the first quarter of fiscal 1996.
Net interest expense for the first quarter of fiscal 1997 was $319,000 as
compared to $346,000 for the corresponding period of the prior year. This
decrease resulted from a reduction in the average debt outstanding when
compared to the fiscal 1996 first quarter.
The Company's effective tax rate was approximately 38% for the first
quarter of fiscal 1997 as compared to 37% for the first quarter of fiscal 1996.
The fluctuation from period to period resulted from the amortization of
goodwill, which was treated as an expense for financial purposes but was not
deductible for tax purposes.
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FACTORS THAT MAY AFFECT THE COMPANY
This report may contain certain forward-looking statements. Actual
results could differ materially from those projected in the forward-looking
statements as a result of certain of the risk factors set forth below and
elsewhere in this document. In addition to the other information contained and
incorporated by reference in this document, the following factors should be
considered carefully in evaluating the Company and its business.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's operating
results are affected by a number of factors, including the mix of manufacturing
projects, capacity utilization, price competition, the degree of automation
that can be used in the assembly process, the efficiencies that can be achieved
by the Company in managing inventories and fixed assets, the timing of orders
from major customers, fluctuations in demand for customer products, the timing
of expenditures in anticipation of increased sales, customer product delivery
requirements, increased costs and shortages of components or labor and economic
conditions generally. All of these factors can cause substantial fluctuations
in the Company's operating results. The Company's expenditures (including, but
not limited to, equipment, inventory and labor) are based, in part, on its
expectations as to future revenues and, to a large extent, are fixed in the
short term. Accordingly, the Company may be unable to adjust spending in a
timely manner to compensate for any unexpected shortfall in revenues, and any
significant shortfall of demand in relation to the Company's expectations or
any material delay or cancellation of customer orders could have an almost
immediate material adverse effect on the Company's operating results. As a
result, it is possible that in some future period, the Company's operating
results could fail to meet the expectations of public market analysts or
investors. In such event, or in the event that adverse conditions prevail or
are perceived to prevail generally or with respect to the Company's business,
the trading price of Company's Common Stock could drop significantly.
The Company's gross profit as a percentage of sales in future periods may
be materially adversely affected by various factors associated with the
Company's production of new product lines, acquisition of new manufacturing
equipment and continued dependence on turnkey contracts (and the inventory
risks inherent therein). Expansion of capacity will result in a higher fixed
cost structure which will require increased revenue and/or significant
improvements in operating efficiencies in order to maintain historical gross
margins. Additionally, the commencement of production of new products
typically involves significant startup costs, lower yields and other
inefficiencies. New products do not generate gross margins as high as products
which have been in volume production for several months. The Company also
expects that competition may continue to intensify, which could also result in
lower gross margins.
CUSTOMER CONCENTRATION; DEPENDENCE ON INDUSTRY TRENDS. A small number of
customers are currently responsible for a significant portion of the Company's
net sales. In the three months ended October 31, 1996 and the fiscal years
1996 and 1995, the Company's four largest customers for such periods accounted
for approximately 62%, 63%, and 69%, respectively, of consolidated net sales.
Any material delay, cancellation or reduction of orders from these or other
customers could have a material adverse effect on the Company's results of
operations.
The percentage of the Company's sales to its major customers may fluctuate
from period to period. Significant reductions in sales to any of these
customers could have a material adverse effect on the Company's results of
operations. In addition, customer contracts can be canceled and volume levels
can be changed or delayed. The timely replacement of canceled, delayed or
reduced contracts with new business cannot be assured. These risks are
exacerbated because a majority of the Company's sales are to customers in the
communications sector of the electronics industry, which is subject to rapid
technological
8
<PAGE> 9
change and product obsolescence. The factors affecting these industries in
general, or any of the Company's major customers in particular, could have a
material adverse effect on the Company's results of operations.
COMPETITION. The electronics manufacturing services industry is comprised
of a large number of companies, several of which have achieved substantial
market share. The Company also faces competition from current and prospective
customers which evaluate the Company's capabilities against the merits of
manufacturing products internally. The Company competes with different
companies depending on the type of service or geographic area. Certain of the
Company's competitors have broader geographic breadth. They also may have
greater manufacturing, financial, research and development and marketing
resources than the Company. The Company believes that the primary basis of
competition in its targeted markets is manufacturing technology, quality,
responsiveness, the provision of value-added services and price. To be
competitive, the Company must provide technologically advanced manufacturing
services, high product quality levels, flexible delivery schedules and reliable
delivery of finished products on a timely and price competitive basis. The
Company currently may be at a competitive disadvantage as to price when
compared to manufacturers with lower cost structures, particularly with respect
to manufacturers with established facilities where labor costs are lower.
SHORTAGES OF ELECTRONICS COMPONENTS. Most of the Company's net sales are
derived from turnkey manufacturing services in which the Company procures
components from third-party suppliers and bears the risk of component
shortages. The electronics industry has been characterized by shortages from
time to time in semiconductor and other components, which shortages have led to
allocations by third-party suppliers. The Company's inability to procure
desired supplies of certain components has in the past led, and may in the
future lead, to some delays in shipments by the Company to its customers.
These delays to date have not had a material adverse effect on the Company's
results of operations. If these component shortages persist or intensify,
however, the Company may not be able to secure quantities required to fulfill
customer orders, which could result in delays in shipments, or cancellation or
delays in customer orders, each of which could have a material adverse effect
on the Company's results of operations.
MANAGEMENT OF GROWTH. There can be no assurance that the Company will
successfully manage the integration of new business. In addition, the Company
may experience certain inefficiencies as it manages geographically dispersed
operations. Should the Company increase its expenditures in anticipation of a
future level of sales which does not materialize, its results of operations
could be materially adversely affected. On occasion, customers may require
rapid increases in production which can place an excessive burden on the
Company's resources. There can be no assurance that the Company will be
capable of meeting the demands placed upon the Company's resources by these or
any other customers.
ENVIRONMENTAL COMPLIANCE. The Company is subject to a variety of
environmental regulations relating to the use, storage, discharge and disposal
of hazardous chemicals used during its manufacturing process. Any failure by
the Company to comply with present and future regulations could subject it to
future liabilities or the suspension of production. In addition, such
regulations could restrict the Company's ability to expand its facilities or
could require the Company to acquire costly equipment or to incur other
significant expenses to comply with environmental regulations. In this regard,
see "Legal Proceedings."
RISK OF DEFECTS. The electronics products manufactured for customers by
the Company are highly complex and may at times contain undetected design
and/or manufacturing errors or failures. Such defects have been discovered in
the past, and there can be no assurance that, despite the Company's quality
control and quality assurance efforts, such defects will not occur in the
future. If such defects occur in quantities or too frequently, the Company's
business and operating results may be materially and adversely affected.
9
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DEPENDENCE ON KEY PERSONNEL AND SKILLED EMPLOYEES. The Company's
continued success depends to a large extent upon the efforts and abilities of
key managerial and technical employees. The loss of services of certain key
personnel could have a material adverse effect on the Company. The Company's
business also depends upon its ability to continue to attract and retain senior
managers and skilled employees. Failure to do so could have a material adverse
effect on the Company's operations.
POSSIBLE VOLATILITY OF MARKET PRICE OF COMMON STOCK. The trading price of
the Company's Common Stock is subject to significant fluctuations in response
to variations in quarterly operating results, general conditions in the
electronics manufacturing services industry as well as the industries of the
Company's customers, and other factors. In addition, the stock market is
subject to price and volume fluctuations which affect the market price for many
high technology companies in particular, and which may be unrelated to
operating performance. There can be no assurance as to the trading price of
the Company's Common Stock at any time in the future.
LIQUIDITY AND CAPITAL RESOURCES
The Company's bank credit facility is comprised of a revolving credit line
of $25.0 million, an $8.0 million term loan amortizing over five years
beginning in February 1995 and a $3.8 million new equipment line. The loan
agreement contains financial covenants related to the Company's net worth and
debt service coverage and restricts capital expenditures. At October 31, 1996,
total borrowings under this facility were $4.5 million under the revolving
credit line and $5.8 million under the term loan.
The Company's operations generated positive cash flow of $3.1 million in
the three months ended October 31, 1996. Cash provided by net income before
depreciation and amortization of $1.2 million and a $10.6 million increase in
accounts payable was partially offset by a $2.9 million increase in trade
receivables, a $4.8 million increase in inventories and $1.0 million change in
other assets and liabilities.
The Company invested approximately $1.7 million in capital expenditures,
primarily to acquire manufacturing equipment, during the first quarter of
fiscal 1997. During this period, the Company used cash of $474,000 million to
repay long-term debt and $2.3 million to reduce borrowings under the Company's
revolving credit line.
The Company's needs for financing in the next twelve months may include
increases in working capital as may be required to support sales growth, if any
(as to which there can be no assurance), and purchases of advanced
manufacturing equipment. The Company expects to meet its short-term liquidity
requirements generally through net cash provided by operations, vendor credit
terms and short-term borrowings under its lines-of-credit. The Company from
time to time evaluates possible business acquisitions and expansion of surface
mount and BGA technology capabilities. The Company may seek additional
financing as needed to pursue growth opportunities, including any expansion of
capacity; however, there can be no assurance that such financing will be
available on terms acceptable to the Company, if at all.
10
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CMC INDUSTRIES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
In December 1993, the Company retained the services of an industrial
safety consultant to assist in quantifying the potential exposure to the
Company in connection with clean-up and related costs of a former manufacturing
site, commonly known as the ITT Telecommunications site in Milan, Tennessee and
more particularly described as a 50.1 acre tract surveyed by Construction
Layout Service of Milan, Tennessee. The consultant initially estimated that
the cost to remove the contaminated soil and deliver it to an appropriate
hazardous waste site would be approximately $200,000. Based upon this advice,
the Company subsequently entered into a voluntary agreement to investigate the
site with the Tennessee Department of Environment and Conservation. In
addition, the Company agreed to reimburse a tenant of the site $115,000 for
expenditures previously incurred to investigate environmental conditions at the
site. The Company recorded a total provision of $320,000 based on these
estimates. In fiscal 1995, an environmental expert concluded that the cost of
a full study combined with short-term and long-term remediation of the site
may cost between $3 and $4 million. During fiscal 1996, the State of
Tennessee's Department of Environment and Conservation named certain potentially
responsible parties ("PRPs") in relation to the former facilities. The Company
was not named as a PRP. However, Alcatel, Inc., a PRP named by the State of
Tennessee's Department of Environment and Conservation and a former owner of
the Company, is seeking indemnification from the Company. To date, Alcatel
has not filed any legal proceedings to enforce its indemnification claim.
However, there can be no assurance that Alcatel will not initiate such
proceedings or that any other third parties will not assert claims against the
Company relating to remediation of the site. In the event any such proceedings
are initiated or any such claim is made, the Company believes it has numerous
defenses which it will vigorously assert. There can be no assurance that if
any proceedings are initiated or any such claim is asserted, defense or
resolution of such matter will not have a material adverse effect on the
Company's financial position or results of operations.
The Company is involved from time to time in litigation incidental to its
business. Management believes that the outcome of current litigation will not
have a material adverse effect upon the results of operations or financial
condition of the Company and will not disrupt the normal operations of the
Company.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. 27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K. No reports on Form 8-K were filed by
the Company during the quarter ended October 31, 1996.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CMC INDUSTRIES, INC.
--------------------
Registrant
Date: December 16, 1996 Matthew G. Landa /s/
-----------------------------
Matthew G. Landa
President and Chief Executive
Officer
Date: December 16, 1996 Andrew J. Moley /s/
-----------------------------
Andrew J. Moley
Executive Vice President and
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AT OCTOBER 31, 1996 AND THE CONDENSED
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDING OCTOBER 31, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> OCT-31-1996
<CASH> 1,668
<SECURITIES> 0
<RECEIVABLES> 27,941
<ALLOWANCES> 0
<INVENTORY> 25,976
<CURRENT-ASSETS> 57,246
<PP&E> 12,058
<DEPRECIATION> 0
<TOTAL-ASSETS> 76,101
<CURRENT-LIABILITIES> 37,186
<BONDS> 5,762
0
0
<COMMON> 67
<OTHER-SE> 31,777
<TOTAL-LIABILITY-AND-EQUITY> 76,101
<SALES> 41,941
<TOTAL-REVENUES> 41,941
<CGS> 38,441
<TOTAL-COSTS> 38,441
<OTHER-EXPENSES> 1,995
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 319
<INCOME-PRETAX> 1,186
<INCOME-TAX> 450
<INCOME-CONTINUING> 736
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 736
<EPS-PRIMARY> 0
<EPS-DILUTED> 11
</TABLE>
