<PAGE> 1
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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 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-26092
-----------------
C.P. CLARE CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2561471
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
78 CHERRY HILL DRIVE
BEVERLY, MASSACHUSETTS 01915
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (978) 524-6700
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 latest practicable date.
As of December 28, 1997, there were 9,334,907 shares of Common Stock, $.01
par value, outstanding.
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C.P. CLARE CORPORATION
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION: PAGE
Item 1. Financial Statements
Consolidated Condensed Balance Sheets 1
Consolidated Condensed Statements of Operations 2
Consolidated Condensed Statements of Cash Flows 3
Notes to Consolidated Condensed Financial Statements 4-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-13
Item 3 Quantitative and Qualitative Disclosure About Market Risk 14
PART II OTHER INFORMATION:
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Default Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE> 3
C.P. CLARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 28, 1997 MARCH 31, 1997
----------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and investments (Note 4) $ 29,291 $ 37,430
Accounts receivable, less allowance for doubtful accounts 20,428 17,412
Inventories (Note 5) 20,660 20,116
Other current assets 4,909 3,832
-------- --------
Total current assets 75,288 78,790
Property, plant and equipment, net 36,047 28,976
Other assets 2,322 3,404
-------- --------
$113,657 $111,170
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 517 $ 511
Accounts payable 10,855 12,620
Accrued expenses (Note 6) 12,924 14,434
-------- --------
Total current liabilities 24,296 27,565
Long-term debt, net of current portion 638 550
Other long-term liabilities 170 1,789
-------- --------
Total liabilities 25,104 29,904
Stockholders' equity:
Preferred stock, $ .01 par value-
Authorized: 2,500,000 shares
Issued and outstanding: None -- --
Common stock, $ .01 par value-
Authorized: 40,000,000 shares
Issued and outstanding: 9,334,907 shares
and 9,176,657 shares as of December 28, 1997
and March 31, 1997, respectively 93 92
Additional paid-in capital 95,278 94,115
Deferred compensation (219) (409)
Accumulated deficit (5,683) (11,702)
Cumulative translation adjustment (916) (830)
-------- --------
Total stockholders' equity 88,553 81,266
-------- --------
$113,657 $111,170
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated condensed
financial statements.
1
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C.P. CLARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
DEC. 28, 1997 DEC. 29, 1996 DEC. 28, 1997 DEC. 29, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 40,684 $ 31,374 $ 114,555 $ 95,431
Cost of sales 28,071 21,227 78,605 63,437
---------- ---------- ---------- ----------
Gross profit 12,613 10,147 35,950 31,994
Operating expenses:
Selling, general and administrative (Note 8) 7,265 7,607 21,038 21,843
Research and development 2,164 1,605 6,498 4,576
Restructuring costs (credit) (Note 7) -- (500) -- 14,250
---------- ---------- ---------- ----------
Operating income (loss) 3,184 1,435 8,414 (8,675)
Interest income 412 384 1,162 1,285
Interest expense (74) (113) (173) (349)
Other income (expense), net 16 48 152 (100)
---------- ---------- ---------- ----------
Income (loss) before provision for income taxes 3,538 1,754 9,555 (7,839)
Provision for income taxes 1,309 561 3,535 615
---------- ---------- ---------- ----------
Net income (loss) $ 2,229 $ 1,193 $ 6,020 $ (8,454)
========== ========== ========== ==========
Earnings (loss) per common and common share
equivalent (Note 3)
Basic earnings (loss) per share $ 0.24 $ 0.13 $ 0.65 $ (0.94)
========== ========== ========== ==========
Diluted earnings (loss) per share $ 0.22 $ 0.13 $ 0.61 $ (0.94)
========== ========== ========== ==========
Weighted average common and common share
equivalent shares outstanding:
Basic 9,318,452 9,077,934 9,257,446 8,950,584
========== ========== ========== ==========
Diluted 9,956,536 9,392,877 9,890,305 8,950,584
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated condensed
financial statements.
2
<PAGE> 5
C.P. CLARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
----------------------------
DEC. 28, 1997 DEC. 29, 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 6,020 $ (8,454)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Non-cash portion of restructuring charge -- 3,500
Provision for environmental remediation costs 891 2,050
Depreciation and amortization 3,380 3,618
Deferred income tax benefit (56) (20)
Compensation expense associated with stock options 190 148
Changes in assets and liabilities:
Accounts receivable (3,857) 1,589
Inventories (628) (4,302)
Other current assets 843 (968)
Accounts payable (1,614) (1,254)
Accrued expenses and other liabilities (3,866) 7,969
-------- --------
Net cash provided by operating activities 1,303 3,876
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (10,973) (17,111)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments of lines of credit -- (1,218)
Net proceeds from issuance of common stock 145 214
Proceeds from exercise of options and warrants 915 958
Payments of principal on long-term debt -- (572)
Tax benefit of disqualifying disposition of incentive stock options 104 723
-------- --------
Net cash provided by financing activities 1,164 105
-------- --------
EFFECT OF EXCHANGE RATES ON CASH, CASH EQUIVALENTS
AND INVESTMENTS 367 (167)
-------- --------
NET DECREASE IN CASH, CASH EQUIVALENTS AND
INVESTMENTS (8,139) (13,297)
Cash, cash equivalents and investments, beginning of period 37,430 49,082
-------- --------
Cash, cash equivalents and investments, end of period $ 29,291 $ 35,785
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 24 $ 39
======== ========
Income taxes $ 4,813 $ 2,338
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated condensed
financial statements.
3
<PAGE> 6
C.P. CLARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 28, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
1. FISCAL PERIODS
The Company's fiscal year is comprised of either 52 or 53 weeks and ends on
the Sunday closest to March 31 each year. Interim quarters are comprised of 13
weeks unless otherwise noted and end on the Sunday closest to June 30, September
30, December 31 and March 31.
2. INTERIM FINANCIAL STATEMENTS
The unaudited interim consolidated condensed financial statements presented
herein have been prepared in accordance with generally accepted accounting
principles for interim financial statements and with the instructions to Form
10-Q and Regulation S-X pertaining to interim financial statements. Accordingly,
these interim financial statements do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. The financial statements reflect all adjustments and accruals which
management considers necessary for a fair presentation of the Company's
financial position as of December 28, 1997, and results of operations for the
three and nine months ended December 28, 1997 and December 29, 1996. The results
for the interim periods presented are not necessarily indicative of results to
be expected for any future period. The financial statements should be read in
conjunction with the summary of significant accounting policies and notes to
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1997 as filed with the Securities
and Exchange Commission.
3. EARNINGS (LOSS) PER SHARE
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share" replaces the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Basic earnings per share is
calculated by dividing net income (loss) by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution of stock options and warrants that could share in the
earnings of the Company. (Loss) per common share equivalent is computed using
the weighted average number of common shares outstanding during each period.
Basic and diluted earnings per share, as required by SFAS No. 128, are as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- ---------------------------
December 28, December 29, December 28, December 29,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) $ 2,229 $ 1,193 $ 6,020 $ (8,454)
========== ========== ========== ==========
Basic weighted average shares outstanding 9,318,452 9,077,934 9,257,446 8,950,584
Weighted average common equivalent shares 638,084 314,943 632,859 --
---------- ---------- ---------- ----------
Diluted weighted average shares outstanding 9,956,536 9,392,877 9,890,305 8,950,584
========== ========== ========== ==========
Basic earnings per share $ 0.24 $ 0.13 $ 0.65 $ (0.94)
========== ========== ========== ==========
Diluted earnings per share $ 0.22 $ 0.13 $ 0.61 $ (0.94)
========== ========== ========== ==========
</TABLE>
4
<PAGE> 7
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following securities were not included in computing diluted earnings per
share because their effect would be antidilutive.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ -----------------------------
December 28, December 29, December 28, December 29,
1997 1996 1997 1996
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Options to purchase common stock 253,000 731,408 425,250 175,000
</TABLE>
4. CASH, CASH EQUIVALENTS AND INVESTMENTS
The Company considers all highly liquid investment instruments with
maturities of three months or less to be cash equivalents. Short-term
investments are instruments with maturities less than one year. The Company
carries its investments in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Investments at December 28, 1997 and
March 31, 1997 consists principally of overnight and short-term tax exempt
commercial paper and tax exempt variable rate municipal bonds. The Company has
the option to require the issuers of the tax exempt variable rate municipal
bonds to purchase these investments upon 7 days notice. The Company has deemed
these investments to be available-for-sale at both December 28, 1997 and March
31, 1997 and they are carried at cost which approximates market value.
5. INVENTORIES
Inventories include materials, labor and manufacturing overhead, and are
stated at the lower of cost (first-in, first-out) or market and consist of the
following at December 28, 1997 and March 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 28, MARCH 31,
1997 1997
----------- --------
<S> <C> <C>
Raw material $ 9,340 $ 8,905
Work in process 3,599 6,117
Finished goods 7,721 5,094
======= =======
$20,660 $20,116
======= =======
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses consist of the following at December 28, 1997 and
March 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 28, MARCH 31,
1997 1997
----------- --------
<S> <C> <C>
Payroll and benefits $ 4,746 $ 3,768
Restructuring (Note 7) 708 5,884
Environmental remediation (Note 8) 1,460 1,017
Other 6,010 3,765
======= =======
$12,924 $14,434
======= =======
</TABLE>
5
<PAGE> 8
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. RESTRUCTURING COSTS
In fiscal 1997, the Company announced a restructuring of its operations,
primarily in the Company's reed relay business, and recorded a net restructuring
charge of $14,250. The restructuring includes severance-related costs associated
with a workforce reduction of approximately 250 persons on a worldwide basis,
primarily in manufacturing. Also included in the restructuring was the
write-down of certain facilities and intangible assets to their net realizable
value as a result of a facilities realignment and the consolidation of product
lines. The Company incurred approximately $8,366 and $5,176 of these
restructuring charges through the end of fiscal 1997 and for the first nine
months of fiscal 1998, respectively. As of December 28, 1997, the Company had
$708 remaining in accrued restructuring for restructuring activities in process,
but for which payments are due in the future.
8. COMMITMENTS AND CONTINGENCIES
Environmental Matter
The Company accrues for estimated costs associated with known environmental
matters, when such costs are probable and can be reasonably estimated. The
actual costs to be incurred for environmental remediations may vary from
estimates, given the inherent uncertainties in evaluating and estimating
environmental liabilities, including the possible effects of changing laws and
regulations, the stage of the remediation process and the magnitude of
contamination found as the remediation progresses. Management believes the
ultimate disposition of known environmental matters will not have a material
adverse effect upon the liquidity, capital resources, business or consolidated
financial position of the Company. However, one or more environmental matters
could have a significant negative impact on the Company's consolidated financial
results for a particular reporting period.
(i) United States
In connection with the acquisition of the Clare Division of General
Instrument Corporation ("GI") in 1989, the Company purchased a manufacturing
facility located in Chicago. From the acquisition date until January, 1994 the
Company used this facility primarily as office space. During fiscal 1993, the
Company discovered environmental contamination at this facility and voluntarily
reported this discovery to the Illinois Environmental Protection Agency ("IEPA")
and has since been involved in discussions with the IEPA and the U.S.
Environmental Protection Agency regarding the need for remediation. The Company
believes that any environmental contamination predates the Company's acquisition
of the facility from GI. The Company and GI jointly retained an independent
environmental consulting firm to assess the remediation requirements and develop
a plan to voluntarily remediate this property in accordance with federal and
state law such that the property could be used for residential purposes. Prior
to commencing such voluntary remediation, the Company and GI entered into a
cost-sharing agreement, however, both parties have reserved their rights to
litigate concerning the final cost-sharing arrangement. In September 1996, an
independent environmental consulting firm retained by the Company completed
their assessment of the remediation requirements. Based on the consultant's
report and plan of remediation, the Company accrued an additional $750 for
related remediation expenses. The Company also accrued an additional $700
receivable related to GI's portion of the remediation expense.
6
<PAGE> 9
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
During the quarter ended December 29, 1996, the Company and GI began
remediation, however the approved clean-up method produced conditions that were
not acceptable to the community. As a result, the Company determined the most
likely scenario will be to remediate the property to make it usable as
industrial/commercial, rather than residential property, as originally planned.
As of March 31, 1997, the Company had an environmental remediation
liability of $517 and a receivable from GI of $427 related to the remediation of
environmental contamination discovered at the Chicago facility.
During the nine months ended December 28, 1997, the Company paid
approximately $167 and GI paid $320 of remediation costs and related expenses.
At December 28, 1997, the Company has an environmental remediation liability of
$1,110. As of December 28, 1997, GI paid approximately $320 of remediation
costs. Management of the Company, after consultation with its legal counsel,
believes that the realization of this amount from GI is probable.
As the remediation progresses, the Company and GI will address
contamination that has been found on adjacent sites. Management continues to
analyze the estimated environmental remediation liability and has accrued
additional amounts when known events have required revised estimates. However,
given the current stage of the remediation process and the magnitude of
contamination found at the site and adjacent sites, the ultimate disposition of
this environmental matter could have a significant negative impact on the
Company's consolidated financial results for a future reporting period.
(ii) Belgium
In January 1997, the Company completed the sale of the Tongeren
Manufacturing Company (TMC) to Gunther GmbH. Upon the sale of TMC, the Company
has agreed to indemnify Gunther for an amount subsequently reduced to $350, for
established environmental remediation costs, subject to certain conditions and
limitations. The Company accrued this environmental remediation indemnification
as of March 31, 1997.
9. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments", requires disclosure of any significant
derivative or other financial instruments. The Company hedged its net
intercompany trade balance (Belgian francs) which relates to trade sales to
third party customers in the ordinary course of business. At December 28, 1997,
the Company had twelve outstanding Belgian franc ("BF") forward contracts
amounting to 533,570 BF or $14,811 with a gross deferred gain of $168 from the
rollover of such contracts to the planned settlement date. At December 28, 1997,
the Company also had three outstanding Mexican peso ("MXP") forward contracts
amounting to 4,300 MXP or $516. The Mexican peso forward contracts had no
deferred gain or loss. At March 31, 1997, the Company had five outstanding
forward contracts amounting to 170,000 BF or $4,923 with a gross deferred loss
of $28 from the rollover of such contracts to the planned settlement date. The
forward contracts hedge currency transaction exposure resulting from
intercompany trade transactions.
7
<PAGE> 10
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
10. NEW ACCOUNTING STANDARDS
In June 1997, SFAS No. 130 "Reporting Comprehensive Income" was issued,
which establishes standards for reporting and display of comprehensive income
and its components in the financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The adoption of SFAS No. 130 will not have a material effect on the Company's
consolidated results of operations, financial position and cash flows.
Also in June 1997, SFAS No. 131 "Disclosure about Segments of an Enterprise
and Related Information" was issued, which establishes standards for the way
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosure about
products and services, geographic areas, and major customers. SFAS No. 131 is
effective for financial statements for fiscal years beginning after December 15,
1997. Financial statement disclosure for prior periods are required to be
restated. The Company is in the process of evaluating the disclosure
requirements. The adoption of SFAS No. 131 will not have a material effect on
the Company's results of operations, financial position or cash flows.
8
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company's actual results could
differ materially from those set forth in the forward looking statements.
Certain factors that might cause such a difference are discussed in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1997,
as filed with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
The following table sets forth the relative percentage that certain income
and expense items bear to net sales for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- ---------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 28, DECEMBER 29,
1997 1996 1997 1996
-------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0 %
Cost of sales 69.0 67.7 68.6 66.5
----- ----- ----- -----
Gross profit 31.0 32.3 31.4 33.5
Operating expenses:
Selling, general and administrative 17.9 24.2 18.4 22.9
Research and development 5.3 5.1 5.7 4.8
Restructuring costs (credit) -- (1.6) -- 14.9
----- ----- ----- -----
Operating income (loss) 7.8 4.6 7.3 (9.1)
Interest income 1.0 1.2 1.0 1.3
Interest expense (0.2) (0.4) -- (0.4)
Other income (expense), net -- .2 -- (0.1)
----- ----- ----- -----
Income (loss) before income taxes 8.6 5.6 8.3 (8.3)
Provision for income taxes 3.2 1.8 3.1 0.6
----- ----- ----- -----
Net income (loss) 5.4% 3.8% 5.2% (8.9)%
===== ===== ===== =====
</TABLE>
Net Sales. Net sales increased 29.6% in the third quarter of fiscal 1998 to
$40.7 million from $31.4 million for the three months ended December 29, 1996.
Net sales increased 20.1% for the nine months ended December 28, 1997 to $114.6
million from $95.4 million for the same period in fiscal 1997.
9
<PAGE> 12
Net sales by major product category are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- -----------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 28, DECEMBER 29,
1997 1996 1997 1996
-------------- ------------- -------------- --------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Semiconductor products $18.6 $14.8 $51.1 $45.2
Electromagnetic and other products 22.1 16.6 63.5 50.2
</TABLE>
The Company's semiconductor products are primarily used in data
communication applications such as modems and sales have grown significantly
over the last few years as Internet usage has expanded. The Company believes
that the delay in adoption of a standard for 56 Kbps modem technology by the
International Telecommunications Union has slowed the potential growth of the
modem market place as customers postpone buying decisions awaiting a
finalization of the standard.
The Company's electromagnetic products are primarily used in
telecommunication applications such as telephone switching gear and cellular
phones. The continued increased usage of cellular phones has been a growth
driver for the Company's dry reed switch business and we are currently expanding
capacity in this operation. Another area of growth in the electromagnetic
products is the Advanced Magnetic products group which provides application
specific design and manufacturing services for magnetic components to various
industries.
Net sales to customers located outside of the United States increased 52.7%
in the third quarter of fiscal 1998 to $18.5 million from $12.1 million in the
third quarter of fiscal 1997. Net sales to customers located outside the United
States increased 31.1% for the nine months ended December 28, 1997 to $48.7
million from $37.1 million for the nine months ended December 29, 1996. Net
sales to customers in Europe represents 32.1% of the Company's net sales for the
third quarter of fiscal 1998 and increased 84.4% in local currencies and 59.8%
in U.S. dollars compared to the prior year and was impacted by a significant
shifting of production by a key customer from the U.S. to Europe. Net sales to
customers in Asia represent 11.7% of the Company's net sales and increased 49.5%
in local currency and increased 37.9% in U.S. dollars for the quarter compared
to the prior year. C.P. Clare Corporation monitors its currency exposure and
international economic developments and implements appropriate tactics to
minimize the Company's risk. Due to the inherent uncertainty of foreign exchange
markets the Company cannot predict future events in this area. The Company will
continue to focus on new markets and expansion of certain existing international
markets.
During the third quarter of fiscal 1998, several Asian countries
experienced economic problems and a significant weakening of their local
currencies. The Company believes that these issues did not have a material
impact on the financial results for the third quarter of fiscal 1998. However,
the Company does believe that these issues may have a future impact on operating
results as end product demand declines in the Asian markets, credit terms
tighten, and most significantly, Asian competitors with a cheaper currency put
increased pressure on average selling prices for various products.
Gross Profit. The Company's gross profit as a percentage of net sales
decreased to 31.0% in the third quarter of fiscal 1998 from 32.3% in the same
period of fiscal 1997. The Company's gross profit as a percentage of net sales
fell to 31.4% for the nine months ended December 28, 1997 from 33.5% for the
nine months ended December 29, 1996, primarily as a result of the same issues
which affected the third quarter. The decrease in gross profit was primarily
attributable to increased sales volume of the Company's lower margin
electromagnetic products, the impact of the strengthening U.S. dollar on the
Company's international sales and the additional costs associated with the new
semiconductor wafer fabrication facility.
10
<PAGE> 13
Selling, General and Administrative Expense. Selling, general and
administrative expenses decreased in the third quarter of fiscal 1998 to $7.3
million from $7.6 million in the same period of fiscal 1997 and as a percentage
of net sales were 17.9% for the third quarter of fiscal 1998 as compared with
24.2% for the same period of fiscal 1997. The expenses decreased to $21.0
million for the nine months ended December 28, 1997 from $21.8 million for the
nine months ended December 29, 1996 and as a percentage of sales fell to 18.4%
from 22.9%, respectively. The decrease in selling, general and administrative
expenses for the third quarter of fiscal 1998 is the result of the decrease of
$0.4 million in environmental remediation costs from $0.8 million in fical 1997
to $0.4 million in fical 1998. For the nine months ended fiscal 1998, the
decrease in selling, general and administrative expenses is the result of a
$1.2 million decrease in environmental remediation costs from $2.1 million in
fiscal 1997 to $0.9 million in fiscal 1998.
Excluding this environmental charge, selling, general and administrative
expenses would have increased to $6.9 million in the third quarter of fiscal
1998 from $6.8 million in the same period of fiscal 1997 and as a percentage of
net sales would be 17.0% for the third quarter of fiscal 1998 as compared with
21.7% for the same period of fiscal 1997. These expenses would have increased to
$20.1 million for the nine months ended December 28, 1997 from $19.7 million for
the same period of fiscal 1997, but as a percentage of sales would have
decreased to 17.5% from 20.6%, respectively. The increased spending primarily
relates to additional selling and marketing costs resulting from increased
revenue.
Research and Development Expense. Research and development (R&D) expense
increased to $2.2 million for the third quarter of fiscal 1998 from $1.6 million
for the same period in fiscal 1997. R&D expense increased to $6.5 million for
the nine months ended December 28, 1997 from $4.6 million for the nine months
ended December 29, 1996. These increases are primarily due to the increased
investment in new product development, specifically in semiconductor products
The Company plans to continue to increase ongoing investment in research and
development activities.
Restructuring Cost (Credit). The Company recorded a non-recurring charge in
the second quarter of fiscal 1997 of $14.8 million, which was subsequently
reduced by $0.5 million in the third quarter of fiscal 1997, or $12.7 million
($1.42 per share) after income taxes, to restructure operations primarily in the
Company's reed relay business. Restructuring costs include costs for work force
reduction and worldwide facilities realignment. The restructuring costs also
include asset write-downs of $3.5 million. See Note 7 of Notes to Consolidated
Condensed Financial Statements.
Interest Income. Interest income remained constant at $0.4 million for the
third quarter in both fiscal 1998 and 1997 and decreased in the nine months of
fiscal 1998 to $1.2 million from $1.3 million for the same period in fiscal
1997. Interest income is derived from investments in short term commercial paper
and tax exempt municipal bonds.
Interest Expense. Interest expense for the third quarter of both fiscal
1997 and 1998 was comparable at $0.1 million. Interest expense decreased for the
nine months ended December 28, 1997 to $0.2 million from $0.3 million in the
same period of fiscal 1997, primarily as a result of the Company's sale of its
Belgium manufacturing company and the corresponding elimination of the European
line of credit.
Other Income (Expense), net. During the third quarter of both fiscal 1998
and 1997, other income (expense), net is primarily comprised of foreign currency
translation gains. Included in other income (expense), net was income of $0.2
million for the nine months ended December 28, 1997, for a one time royalty
payment received, compared to an expense of ($0.1) million for the nine months
ended December 29, 1996, which is primarily the result of foreign currency
translation losses.
11
<PAGE> 14
Income Taxes. In accordance with generally accepted accounting principles,
the Company has provided for income taxes at its estimated annual effective tax
rate in fiscal 1998 and 1997. Income tax expense increased to $3.5 million for
the nine months ended December 28, 1997 from $0.6 million for the nine months
ended December 29, 1996. In fiscal 1998 and 1997, the Company recorded income
taxes at an effective rate of 37% and 38%, respectively. While the Company
incurred a loss before income taxes for the nine months ended December 29, 1996,
the Company did not record a full benefit for income taxes because the Company
anticipated it will not fully utilize the losses associated with the
restructuring.
TRENDS AND UNCERTAINTIES
CUSTOMER CONCENTRATION
In the third quarter of fiscal 1998, the Company's ten largest customers
accounted for 46% of total net sales. The Company is highly reliant upon
continued revenues from its largest customers and any material delay,
cancellation or reduction of orders from these customers could have a material,
adverse effect on the Company's future results.
INTERNATIONAL OPERATIONS
The Company's international operations are subject to several risks including,
but not limited to, fluctuations in the value of foreign currencies, changes to
import and export duties or regulations, greater difficulty in collecting
accounts receivable and labor unrest. While to date these factors have not had a
material impact on the Company's results, there can be no assurance that there
will not be such an impact in the future.
COMPETITION
C.P. Clare competes with various companies across the world. Certain of the
Company's competitors may have greater manufacturing, engineering or financial
resources than the Company.
RELOCATION OF TAIWAN MANUFACTURING OPERATION TO MEXICO
The Company is currently in the process of closing its assembly operation in
Taiwan and consolidating all relay assembly operations into the existing
operation in Mexico. Although the Company will attempt to achieve this
relocation with minimal disruption to our customers there can be no assurances
that such disruption will not occur and that this transition will be achieved
without a material, adverse impact on a particular reporting period.
COMPLETION OF THE NEW WAFER FABRICATION FACILITY
The Company is currently bringing on line our new semiconductor wafer
fabrication facility in Beverly, Massachusetts. Although this project has
progressed close to the original schedule and budget, there can be no assurance
that this will continue or that there will be no impact to semiconductor
production in future periods.
POSSIBLE VOLATILITY OF MARKET PRICE OF COMMON STOCK
The price of the Company's common stock is subject to significant fluctuations
due to variations in the Company's quarterly results, industry conditions and
general market attitudes regarding high technology companies.
12
<PAGE> 15
RELIANCE ON KEY SUPPLIERS
The Company relies on certain suppliers of raw materials and services for sole
source supply of critical items. There can be no assurance that in the future
the Company's suppliers will be able to meet the Company's needs effectively and
on a timely basis and any such disruption could have a material, adverse impact
on future results.
NEW SYSTEMS
The Company is in the process of implementing an Oracle Enterprise Resource
Planning ("ERP") system for all applications and locations. This new system is
compliant with year 2000 issues. This effort is consuming significant resources
of the Company and implementation of various applications is scheduled
throughout fiscal year 1999. As a result of the systems transition,
Company may experience disruptions which may have material, adverse impact on
the Company's results of operations.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended December 28, 1997, the Company's cash, cash
equivalents and investments decreased by $8.1 million. Operations provided $1.3
million of cash during this period, mainly as a result of net income and
depreciation and amortization, which was offset by an increase in accounts
receivable and a decrease in accounts payables and in other accrued expenses.
The Company used $11.0 million for capital expenditures during the nine months
ended December 28, 1997. Financing activities provided $1.2 million of cash
during the period, primarily from the proceeds from exercises of stock options
and warrants.
In connection with the acquisition of the Clare Division of General
Instrument Corporation in 1989, the Company purchased a manufacturing facility
located in Chicago, Illinois. From the acquisition date, the Company used the
facility primarily as office space. During 1993, the Company discovered evidence
of contamination at this facility. The Company expects to fund the remaining
estimated remediation costs through a negotiated agreement with General
Instrument and from existing cash, cash equivalents and investments and from
funds generated from operations. See Note 8 of Notes to Consolidated Condensed
Financial Statements.
The Company manages its foreign exchange exposure by monitoring its net
monetary position using natural hedges of its assets and liabilities denominated
in local currencies and entering into forward contract hedges with financial
institutions. There can be no assurance that this policy will eliminate all
currency exposure.
The Company believes that cash generated from operations, available cash
and amounts available under its credit agreements will be sufficient to satisfy
its working capital needs and planned capital expenditures through the next 12
to 24 months. However, there can be no assurance that events in the future will
not require the Company to seek additional capital sooner or, if so required,
that adequate capital will be available on terms acceptable to the Company.
13
<PAGE> 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to routine litigation incident to the conduct
of its business. None of such proceedings is considered material to the business
or the financial condition of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
EXHIBIT NO. DESCRIPTION
27.0 Financial Data Schedule (Edgar)
(b) Reports on Form 8-K
The Registrant filed no Current Reports on Form 8-K during
the quarter ended December 28, 1997.
14
<PAGE> 17
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.
C.P. CLARE CORPORATION
By: /s/ Thomas B. Sager
----------------------------------
Thomas B. Sager
Vice President and
Chief Financial Officer
Date: February 11, 1997
15
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