<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 January 31, 1997
[ ] Transition report pursuant to Section 13 or 15(d) of theSecurities
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 - 6,843,660 Shares
Outstanding as of February 28, 1997
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited):
<TABLE>
<S> <C> <C>
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>
January 31, 1997 July 31, 1996
---------------- -------------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 3,650 $ 2,977
Accounts receivable, net 28,065 17,231
Accounts and notes receivable from affiliate 7,851 7,842
Inventories 31,599 21,218
Other current assets 1,426 465
-------- --------
Total current assets 72,591 49,733
Plant and equipment, net 11,831 10,863
Investment in preferred stock of affiliate 5,884 5,884
Other assets 906 954
-------- --------
$ 91,212 $ 67,434
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable under lines of credit $ 9,725 $ 6,826
Current portion of long-term debt 1,803 1,704
Accounts payable 35,545 15,537
Other current liabilities 4,782 4,752
-------- --------
Total current liabilities 51,855 28,819
Long-term debt 5,218 6,261
Other liabilities 1,325 1,252
-------- --------
Total liabilities 58,398 36,332
Stockholders' equity
Common stock 67 67
Additional paid-in capital 30,091 30,015
Retained earnings 3,652 2,016
Equity adjustment for pension liability (996) (996)
-------- --------
Total stockholders' equity 32,814 31,102
-------- --------
$ 91,212 $ 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 Six Months Ended
January 31, January 31,
------------------ -------------------
1997 1996 1997 1996
------- ------- ------- --------
<S> <C> <C> <C> <C>
Net sales $56,332 $41,810 $98,273 $ 80,390
Cost of sales 52,396 39,303 90,837 75,811
------- ------- ------- --------
Gross profit 3,936 2,507 7,436 4,579
Selling, general and administrative expenses 2,200 2,005 4,195 4,866
------- ------- ------- --------
Operating income (loss) 1,736 502 3,241 (287)
Interest expense, net 288 429 607 775
------- ------- ------- --------
Income (loss) before income taxes 1,448 73 2,634 (1,062)
Provision (benefit) for income taxes 548 33 998 (387)
------- ------- ------- --------
Net income (loss) $ 900 $ 40 $ 1,636 $ (675)
======= ======= ======= ========
Net income (loss) per common share $ 0.13 $ 0.01 $ 0.23 $ (0.11)
======= ======= ======= ========
Weighted average shares outstanding 7,188 6,304 7,092 6,281
======= ======= ======= ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
CMC Industries, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
UNAUDITED
<TABLE>
<CAPTION>
Six Months Ended January 31,
----------------------------
1997 1996
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,636 $ (675)
Adjustments to reconcile net income (loss) to
net cash provided by
operating activities:
Depreciation and amortization 928 824
Change in assets and liabilities:
Receivables (10,843) 3,064
Inventories (10,381) (2,717)
Accounts payable 20,008 3,485
Other assets and liabilities (836) 177
-------- -------
Net cash provided by operating activities 512 4,158
-------- -------
Cash flows from investing activities:
Capital expenditures (1,870) (2,510)
-------- -------
Net cash used in investing activities (1,870) (2,510)
-------- -------
Cash flows from financing activities:
Borrowings under lines of credit, net 2,899 291
Principal payments on long-term debt (944) (774)
Proceeds from issuance of stock 76 2
-------- -------
Net cash provided by (used in) financing activities 2,031 (481)
-------- -------
Net increase in cash and cash equivalents 673 1,167
Cash and cash equivalents at beginning of period 2,977 89
-------- -------
Cash and cash equivalents at end of period $ 3,650 $ 1,256
======== =======
</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>
January 31, July 31,
1997 1996
------- -------
<S> <C> <C>
Raw materials and purchased components $24,856 $15,673
Work-in-process 2,855 5,174
Finished goods 3,888 371
------- -------
$31,599 $21,218
======= =======
</TABLE>
6
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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.
Set forth below are analyses of the Company's results of operations for
the three months and six months ended January 31, 1997.
RESULTS OF OPERATIONS
Net sales for the second quarter of fiscal year 1997 increased by
approximately 35% to $56.3 million from $41.8 million for the corresponding
quarter of the prior year. Net sales for the first six months of fiscal year
1997 were $98.3 million, a 22% increase over net sales of $80.4 million for the
same period of the prior year. The increases were accomplished as sales to new
customers more than offset a decline in sales to the Company's historical
customer base.
Gross profit for the second quarter of fiscal 1997 was $3.9 million or
7.0% of net sales, as compared to $2.5 million or 6.0% of net sales for the
second quarter of fiscal 1996. Gross profit for the first six months of fiscal
year 1997 was $7.4 million or 7.6% of net sales, as compared to $4.6 million or
5.7% of net sales in the corresponding period of the prior year. 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 $2.2 million or 3.9%
of net sales in the second quarter of fiscal 1997, as compared to $2.0 million
or 4.8% of net sales for the second quarter of fiscal 1996. Such expenses were
$4.2 million or 4.3% of net sales in the first six months of fiscal 1997, as
compared to $4.9 million (including $792,000 of non-recurring restructuring
charges) or 6.1% of net sales for the corresponding period of the prior year.
Selling, general and administrative expenses decreased as a percent of net sales
in the fiscal 1997 periods primarily due to the higher sales achieved during the
periods.
Net interest expense for the second quarter and six months ended
January 31, 1997 was $288,000 and $607,000, respectively, as compared to
$429,000 and $775,000, respectively, for the corresponding periods of the prior
year. These decreases resulted from reductions in the average debt outstanding
when compared to the corresponding periods of the prior year.
The Company's effective tax rate was approximately 38% for the second
quarter of fiscal 1997 as compared to 45% for the second quarter of fiscal 1996.
The Company's effective tax rate was approximately 38% for the six months ended
January 31, 1997, as compared to 36% for the same period of the prior year. 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.
7
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FACTORS THAT MAY AFFECT THE COMPANY
This report may contain certain forward-looking statements. The
Company's actual results could differ materially from those which may be
indicated 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 timing and 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 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 six months ended January 31, 1997 and the fiscal
years 1996 and 1995, the Company's four largest customers in such periods
accounted for approximately 57%, 63%, and 69%, respectively, of consolidated net
sales. Sales to Micron Electronics Inc. accounted for approximately 17% of the
Company's revenues for the six months ended January 31, 1997. 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 the Company's sales are to customers in segments of the
electronics industry subject to rapid technological change and product
obsolescence. The
8
<PAGE> 9
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.
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
9
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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 or not 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 January 31, 1997,
total borrowings under this facility were $9.7 million under the revolving
credit line and $5.5 million under the term loan.
The Company's operations generated positive cash flow of $512,000
during the six months ended January 31, 1997. Cash provided by net income before
depreciation and amortization of $2.6 million and a $20.0 million increase in
accounts payable was partially offset by a $10.8 million increase in trade
receivables, a $10.4 million increase in inventories and an $836,000 change in
other assets and liabilities. The Company believes that the increases in
receivables, inventories and payables were primarily due to, and commensurate
with, the increase in revenues experienced by the Company during this period.
During the six months ended January 31, 1997, the Company used cash of
$1.9 million for capital expenditures, primarily to acquire manufacturing
equipment, and $944,000 to repay long-term debt. During this period, cash of
$2.9 million was provided by increased borrowings under the Company's revolving
credit line.
The Company satisfied the criteria necessary to enact the call
provision on its warrants to purchase the Company's common stock. The warrants
were exercised in February, 1997 (subsequent to the end of the Company's second
fiscal quarter), resulting in an equity infusion to the Company of approximately
$1.24 million in exchange for 165,000 newly issued shares.
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 during the quarter ended
January 31, 1997.
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: March 17, 1997 Matthew G. Landa /s/
-----------------------------------
Matthew G. Landa
President and Chief Executive
Officer
Date: March 17, 1997 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 SHEET AT JANUARY 31, 1997 AND THE CONDENSED
CONSOLIDATED STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 3,650
<SECURITIES> 0
<RECEIVABLES> 35,916
<ALLOWANCES> 0
<INVENTORY> 31,599
<CURRENT-ASSETS> 72,591
<PP&E> 11,831
<DEPRECIATION> 0
<TOTAL-ASSETS> 91,212
<CURRENT-LIABILITIES> 51,855
<BONDS> 0
0
0
<COMMON> 67
<OTHER-SE> 32,747
<TOTAL-LIABILITY-AND-EQUITY> 91,212
<SALES> 98,273
<TOTAL-REVENUES> 98,273
<CGS> 90,837
<TOTAL-COSTS> 90,837
<OTHER-EXPENSES> 4,195
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 607
<INCOME-PRETAX> 2,634
<INCOME-TAX> 998
<INCOME-CONTINUING> 1,636
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,636
<EPS-PRIMARY> .23
<EPS-DILUTED> 0
</TABLE>
