-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CT849e3IOCXvQqYZhY4/u4Q/yr2dOLhmihXe4f4qU12orqfuBtLn2Ag1oZcJN5Xq gYUkBlmFF+YxzgU1s7Zz2w== 0001047469-97-008096.txt : 19971218 0001047469-97-008096.hdr.sgml : 19971218 ACCESSION NUMBER: 0001047469-97-008096 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970927 FILED AS OF DATE: 19971217 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HCC INDUSTRIES INC /DE/ CENTRAL INDEX KEY: 0000316884 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC LIGHTING & WIRING EQUIPMENT [3640] IRS NUMBER: 952691666 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-32207 FILM NUMBER: 97739811 BUSINESS ADDRESS: STREET 1: 4232 TEMPLE CITY BLVD STREET 2: PO BOX 739 CITY: ROSEMEAD STATE: CA ZIP: 91770-1592 BUSINESS PHONE: 2132837500 MAIL ADDRESS: STREET 1: 4232 TEMPLE CITY BLVD STREET 2: PO BOX 739 CITY: ROSEMEAD STATE: CA ZIP: 91770-1592 10-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ___________________ (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: SEPTEMBER 27, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------- ------------ Commission file number: 333-32207 HCC INDUSTRIES INC. (Exact name of Registrant as specified in its charter) DELAWARE 95-2691666 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4232 TEMPLE CITY BLVD., ROSEMEAD, CALIFORNIA 91770 --------------------------------------------------- (Address of principal executive offices) (626) 443-8933 ---------------------------------------------------- (Registrant's telephone number, including area code) ------------------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) --- --- Registrant's Common Stock, outstanding at December 17, 1997 was 134,955 shares. PART I - FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS HCC INDUSTRIES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS ------ SEPTEMBER 27, MARCH 29, 1997 1997 ------------ --------- CURRENT ASSETS: Cash and cash equivalents $11,520 $ 6,841 Restricted cash --- 69,282 Trade accounts receivable, less allowance for doubtful accounts of $58 at September 27, 1997 and $40 at March 29, 1997 8,582 6,904 Inventories 4,351 4,376 Prepaid and deferred income taxes 1,047 756 ------- -------- Total current assets 25,500 88,159 PROPERTY, PLANT AND EQUIPMENT, NET 13,225 12,264 OTHER ASSETS: Intangible assets 5,787 4,507 Deferred financing costs, net 3,551 1,903 Deferred income taxes 3,269 3,269 Restricted cash 5,852 6,039 ------- -------- TOTAL ASSETS $57,184 $116,141 ------- -------- ------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ---------------------------------------------- CURRENT LIABILITIES: Current portion of long-term debt $ 615 $ 3,537 Accounts payable 3,173 2,553 Accrued liabilities 8,460 5,193 Due to stockholders --- 69,282 -------- -------- Total current liabilities 12,248 80,565 LONG TERM LIABILITIES: Long-term debt, net of current portion 91,564 78,916 Other long-term liabilities 9,630 10,000 -------- -------- 113,442 169,481 -------- -------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT): Common stock; $.10 par value; authorized 550,000 shares, issued and outstanding 134,955 shares at September 27, 1997 and 143,569 shares at March 29, 1997 13 14 Accumulated deficit (56,271) (53,354) -------- -------- TOTAL STOCKHOLDERS' DEFICIT (56,258) (53,340) -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 57,184 $116,141 -------- -------- -------- -------- The accompanying notes are an integral part of these condensed consolidated financial statements. 2 HCC INDUSTRIES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (in thousands, except share data)
Three Months Ended Six Months Ended ---------------------------- --------------------------- September 27, September 28, September 27, September 28, 1997 1996 1997 1996 ------------ ------------ ------------ ------------ NET SALES $ 15,556 $ 14,317 $ 31,061 $ 29,064 Cost of goods sold 9,497 9,074 18,816 18,296 -------- -------- -------- -------- GROSS PROFIT 6,059 5,243 12,245 10,768 Selling, general and administrative expenses 2,166 4,710 4,295 6,944 -------- -------- -------- -------- EARNINGS FROM OPERATIONS 3,893 533 7,950 3,824 OTHER INCOME (EXPENSE): Interest and other income 115 126 215 234 Interest expense (2,573) (393) (5,178) (780) -------- -------- -------- -------- Total other expense, net (2,458) (267) (4,963) (546) Earnings before taxes and extraordinary item 1,435 266 2,987 3,278 Taxes on earnings 566 110 1,175 1,284 -------- -------- -------- -------- Earnings before extraordinary item 869 156 1,812 1,994 Extraordinary loss on retirement of debt, net of tax benefit of $640 _ _ (1,002) _ -------- -------- -------- -------- NET EARNINGS $ 869 $ 156 $ 810 $ 1,994 -------- -------- -------- -------- -------- -------- -------- -------- EARNINGS PER SHARE BEFORE EXTRAORDINARY LOSS $ 6.44 $ 0.43 $ 13.29 $ 4.63 Extraordinary loss per share _ _ (7.35) _ -------- -------- -------- -------- NET EARNINGS PER SHARE $ 6.44 $ 0.43 $ 5.94 $ 4.63 -------- -------- -------- -------- -------- -------- -------- -------- Weighted average shares outstanding 134,955 362,133 136,391 430,999 -------- -------- -------- -------- The accompanying notes are an integral part of these condensed consolidated financial statements.
3 HCC INDUSTRIES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) For the Six Months Ended --------------------------- September 27, September 28, 1997 1996 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 810 $ 1,994 Reconciliation of net earnings to net cash provided by operating activities: Depreciation 689 492 Amortization 382 227 Deferred income taxes (404) --- Extraordinary loss 1,002 --- Changes in operating assets and liabilities: (Increase) decrease in trade accounts receivable, net (1,299) 483 Decrease (increase) in inventories 284 (150) Decrease (increase) in other assets 58 (183) Increase in accrued liabilities 2,897 3,586 Increase (decrease) in accounts payable and income taxes payable 1,435 (825) ------- ------ Net cash provided by operating activities 5,854 5,624 CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisition (2,200) --- Purchases of property, plant and equipment (1,317) (449) -------- ------ Net cash used in investing activities (3,517) (449) -------- ------ CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt (80,230) (473) Proceeds from issuance of long-term debt 90,000 11,000 Deferred financing costs (3,700) --- Repurchases of stock (3,728) (13,523) -------- -------- Net cash provided by (used in) financing activities 2,342 (2,996) ------- ------- Net increase in cash and cash equivalents 4,679 2,179 Cash and cash equivalents at beginning of period 6,841 6,647 ------- ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $11,520 $ 8,826 ======= ======= SUPPLEMENTAL NONCASH FINANCING ACTIVITIES: Cash lease obligations --- 625 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 HCC INDUSTRIES INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 27, 1997 1. INTERIM FINANCIAL STATEMENTS: The accompanying unaudited condensed consolidated financial statements of HCC Industries Inc. and Subsidiaries (the "Company"), include all adjustments (consisting of normal recurring entries) which management believes are necessary for a fair presentation of the financial position and results of operations for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Interim financial statements are subject to possible adjustments in connection with the annual audit of the Company's accounts for the full year. The year end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. It is suggested that the accompanying interim financial statements be read in conjunction with the Company's audited financial statements and footnotes as of and for the year ended March 29, 1997. Operating results for the three and six month periods ended September 27, 1997 are not necessarily indicative of the operating results for the full fiscal year. 2. INVENTORIES: Inventories consist of the following (in thousands): September 27, March 29, 1997 1997 ------------- --------- Raw materials and component parts $1,738 $1,910 Work in process 2,613 2,466 ------------- --------- $4,351 $4,376 ============= ========= 3. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consist of the following (in thousands): September 27, March 29, 1997 1997 ------------- --------- Land $3,180 $3,180 Buildings and improvements 5,888 5,450 Furniture, fixtures and equipment 10,562 9,350 ------------- --------- 19,630 17,980 Less accumulated depreciation (6,405) (5,716) ------------- --------- $13,225 $12,264 ============= ========= 5 HCC INDUSTRIES INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 27, 1997 4. BUSINESS ACQUISITION: On June 20, 1997, the Company acquired substantially all of the assets and assumed certain liabilities of Connector Industries of America, a glass-to-metal sealing company. The purchase price included $2,100,000 in cash and a contingent payment of $400,000 based upon the volume of business retained in the immediately subsequent 18 month period. In its last fiscal year of operations, the acquired company generated sales of approximately $3,200,000. The transaction was accounted for as an asset purchase. In conjunction with the acquisition, the Company assigned $1,372,000 to intangibles which will be amortized over a 14 year period on a straight line basis. If the contingent payment becomes payable, such amount will be recorded as additional purchase price consideration and added to intangibles. Pro forma results of operations are not provided as the impact on Company operations is not material. 5. LONG-TERM DEBT: Long-term debt consists of the following (in thousands): September 27, March 29, 1997 1997 ------------- --------- 10 3/4% senior subordinated notes - interest payable semi-annually due May 15, 2007 $90,000 $ --- Tranche A Term Loan --- 30,000 Tranche B Term Loan --- 30,000 12% subordinated notes --- 19,352 Term loan on land, building and improve- ments due August 1997 --- 596 Other 2,179 2,505 ------- ------- 92,179 82,453 Less current portion 615 3,537 ------- ------- $91,564 $78,916 ------- ------- ------- ------- In May 1997, the Company issued $90,000,000 of senior subordinated notes due in May 2007 ("Notes"). Interest is payable semi-annually at 10.75% per annum. Proceeds from the offering were used to (I) retire the Tranche A Term Loan, the Tranche B Term Loan and the 12% subordinated notes, and (ii) provide approximately $3,800,000 (net of offering expenses) for additional working capital needs of the Company. As a result of this refinancing, the Company recorded an extraordinary loss of $1,002,000, net of taxes, in the first quarter of fiscal 1998. Concurrent with the offering, the Company's bank increased the revolving credit facility to an aggregate of $20,000,000. The Company's 10-3/4% Senior Subordinated Notes are guaranteed by all operating subsidiaries of the Company (the "Subsidiary Guarantors"). The guarantee obligations of the Subsidiary Guarantors (which are all direct or indirect wholly owned subsidiaries of the Company) are full, unconditional and joint and several. The aggregate assets, liabilities, earnings, and equity of the Subsidiary Guarantors are substantially equivalent to the total assets, liabilities, earnings, and equity of HCC Industries Inc. and its subsidiaries on a consolidated basis. Separate financial statements of the Subsidiary Guarantors are not included in the accompanying financial statements because management of the Company has determined that separate financial statements of the subsidiary Guarantors would not be material to investors. 6 HCC INDUSTRIES INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 27, 1997 6. CAPITAL STOCK: The Company is authorized to issue an aggregate of 550,000 shares of common stock. These shares may be issued in four different classes (A, B, C or D shares) which differ only in voting rights per share. At September 27, 1997, the 134,955 outstanding shares of common stock were designated as follows: Shares Amount Voting Rights Class Outstanding (in thousands) Per Share ----- ----------- -------------- ------------- A 102,653 $10,000 1 B 27,506 3,000 1 C 4,316 --- None D 480 --- 10 ------- ------- 134,955 $13,000 ------- ------- ------- ------- The remaining 415,045 shares of authorized but unissued common stock are undesignated as to class. Concurrent with the issuance of $90,000,000 of Senior Subordinated Notes in May 1997, the Company repurchased 7,831 shares of Class A and 783 shares of Class B common stock. 7. COMMITMENTS AND CONTINGENCIES: ENVIRONMENTAL As an ongoing facet of the Company's business, it is required to maintain compliance with various environmental regulations. The cost of this compliance is included in the Company's operating results as incurred. These ongoing costs include permitting fees and expenses and specialized effluent control systems as well as monitoring and site assessment costs required by various governmental agencies. In the opinion of management, the maintenance of this compliance will not have a significant effect on the financial position or results of operations of the Company. In August 1994, the U.S. Environmental Protection Agency ("EPA") identified the Company as a potentially responsible party ("PRP") in the El Monte Operable Unit ("EMOU") of the San Gabriel Valley Superfund Sites. In early 1995, the Company and the EPA executed an Administrative Consent Order which requires the Company and other PRP's to perform a Remedial Investigation and Feasibility Study ("RI/FS") for the EMOU. In addition, the Company's facility in Avon, Massachusetts is subject to Massachusetts "Chapter 21E", the State's hazardous site clean-up program. Uncertainty as to (a) the extent to which the Company caused, if at all, the conditions being investigated, (b) the extent of environmental contamination and risks, (c) the applicability of changing and complex environmental laws (d) the number and financial viability of other PRP's, (e) the stage of the investigation and/or remediation, (f) the unpredictability of investigation and/or remediation costs (including as to when they will be incurred), (g) applicable clean-up standards, (h) the remediation (if any) that will ultimately be required, and (i) available technology make it difficult to assess the likelihood and scope of further investigation or remediation activities or to estimate the future costs of such activities if undertaken. In addition, liability under CERCLA is joint and several, and any potential inability of other PRPs to pay their 7 pro rata share of the environmental remediation costs may result in the Company being required to bear costs in excess of its pro rata share. HCC INDUSTRIES INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 27, 1997 7. COMMITMENTS AND CONTINGENCIES, Continued: In fiscal 1997, the Company with the help of independent consultants, determined a range of estimated costs of $9,000,000 to $11,000,000 associated with the various claims and assertions it faces. The time frame over which the Company expects to incur such costs varies with each site, ranging up to 20 years as of March 29, 1997. These estimates are based partly on progress made in determining the magnitude of such costs, experience gained from sites on which remediation is ongoing or has been completed, and the timing and extent of remedial actions required by the applicable governmental authorities. As a result, the Company has accrued $10,000,000 for estimated environmental remediation as of March 29, 1997 which the Company believes to be the best estimate of the liability. Claims for recovery of costs already incurred and future costs have been asserted against various insurance companies. The Company has neither recorded any asset nor reduced any liability in anticipation of recovery with respect to such claims made. The Company believes its reserves are adequate, but as the scope of its obligations becomes more clearly defined, this reserve may be modified and related charges against earnings may be made. OTHER In addition to the above, the Company is involved in other claims and litigation arising in the normal course of business. Based on the advice of counsel and in the opinion of management, the ultimate resolution of these matters will not have a significant effect on the financial position or the results of operations of the Company. 8. RECENTLY ISSUED ACCOUNTING STANDARDS: In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". The standard establishes guidelines for the reporting and display of comprehensive income and its components in financial statements. Disclosure of comprehensive income and its components will be required beginning with the Company's fiscal year ending 1999. Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Income". The standard requires that companies disclose "operating segments" based on the way management disaggregates the company for making internal operating decisions. The new rules will be effective for the Company's 1999 fiscal year end. The Company has not evaluated the impact, if any, of the new standard. 8 PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (IN MILLIONS)
For the Three Months Ended For the Six Months Ended ------------------------------- ------------------------------ Sept. 27, Sept. 28, Sept. 27, Sept. 28, 1997 Percent 1996 Percent 1997 Percent 1996 Percent ---- ------- ----- ------- ---- ------- ---- ------- Net sales $15.6 100.0% $14.3 100.0% $31.1 100.0% $29.1 100.0% Gross profit 6.1 38.9% 5.2 36.6% 12.2 39.4% 10.8 37.0% Selling, general and administrative expenses 2.2 13.9% 4.7 32.9% 4.3 13.8% 6.9 23.9% Earnings from operations 3.9 25.0% 0.5 3.7% 8.0 25.6% 3.8 13.2% Other income/expense (2.5) -15.8% (0.3) -1.9% (5.0) -16.0% (0.5) -1.9% Extraordinary loss (1) 0.0 0.0% 0.0 0.0% (1.0) -3.2% 0.0 0.0% Net earnings $0.9 5.6% $0.2 1.1% $0.8 2.6% $2.0 6.9%
(1) Represents extraordinary loss on retirement of debt, net of tax benefit. COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 27, 1997 ("1998 QUARTER") TO THE THREE MONTHS ENDED SEPTEMBER 28, 1996 ("1997 QUARTER") NET SALES The Company's sales increased by approximately 9.1%, or $1.3 million to $15.6 million for the 1998 Quarter compared to sales of $14.3 million for the 1997 Quarter. This increase was attributable to unit volume increases on the Company's automotive products and increasing demand on non-automotive products. On the automotive side, shipments of airbag initiator products increased significantly due to increased volumes on existing programs. The increased airbag initiator shipments was partially offset by the scheduled completion of a crash sensor product produced for TRW. This program was completed in August 1996. Overall, automotive shipments increased by 13% in the 1998 Quarter compared to the 1997 Quarter. In non-automotive products, the Company experienced continuing growth in its aerospace, industrial and petrochemical products. Net non-automotive shipments increased by 6% in the 1998 Quarter compared to the 1997 Quarter in spite of delays in some key programs. Based on current order volume, the Company expects continued growth in the aerospace, industrial and petrochemical markets. GROSS PROFIT Gross profit increased by approximately 17.3% or $0.9 million, to $6.1 million for the 1998 Quarter compared to $5.2 for the 1997 Quarter. Gross margin increased to 38.9% for the 1998 Quarter from 36.6% for the 1997 Quarter. The increase in gross profit is attributable to the increased sales volume. The increase in gross margin is due to an improved sales mix between product lines coupled with efficiencies gained through increased operating leverage on the higher sales volume. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative ("S,G&A") expenses decreased by approximately 53.2% or $2.5 million to $2.2 million for the 1998 Quarter compared to $4.7 million for the 1997 Quarter. S,G&A expenses as a percent to sales decreased to 13.9% in the 1998 Quarter from 32.9% for the 1997 Quarter. The $2.5 million decrease in S,G&A expenses reflects the elimination of certain non-recurring compensation costs from the 1997 Quarter that were not incurred in the 1998 Quarter. The reduced compensation costs were partially offset by slightly higher costs of supporting the increased sales volume. The improvement in the percentage of S,G&A expenses to sales reflects the overall lower S,G&A expenses coupled with the improved leverage on the fixed portion of those expenses. EARNINGS FROM OPERATIONS Operating earnings increased $3.4 million to $3.9 million for the 1998 Quarter compared to $0.5 million for the 1997 Quarter. Operating margins for the Quarter increased to 25.0% in the 1998 Quarter from 3.7% for the 1997 Quarter. The increase in operating earnings and margin was attributable to the same factors (as discussed above) that contributed to the increase in gross profit and gross margin and improvements in S,G&A expenses as a percent to sales. OTHER EXPENSE, NET Other expense, net increased $2.2 million to $2.5 million in the 1998 Quarter from $0.3 million for the 1997 Quarter. This increase was attributable to the increased interest expense associated with the additional debt incurred to finance the Recapitalization in February 1997. The Company has $92.2 million of indebtedness as of September 27, 1997 compared to $22.4 million at September 28, 1996. NET EARNINGS Net earnings increased by approximately $0.7 million to $0.9 million for the 1998 Quarter from $0.2 million in the 1997 Quarter. The increase in net earnings was primarily attributable to the increase in gross profit and reduced selling, general and administrative expenses partially offset by the additional interest expense as discussed above. COMPARISON OF THE SIX MONTHS ENDED SEPTEMBER 27, 1997 ("1998 PERIOD") TO THE SIX MONTHS ENDED SEPTEMBER 28, 1996 ("1997 PERIOD") NET SALES The Company's sales increased by approximately 6.9%, or $2.0 million to $31.1 million for the 1998 Period compared to sales of $29.1 million for the 1997 Period. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED This increase was attributable to unit volume increases on the Company's automotive products and increasing demand on non-automotive products. On the automotive side, shipments of airbag initiator products increased significantly due to increased volumes on existing programs. The increased airbag initiator shipments was partially offset by the scheduled completion of a crash sensor product produced for TRW. This program was completed in August 1996. Overall, automotive shipments increased by 9% in the 1998 Period compared to the 1997 Period. In non-automotive products, the Company experienced continuing growth in its aerospace, industrial and petrochemical products. Net non-automotive shipments increased by 6% in the 1998 Period compared to the 1997 Period in spite of delays in some key programs. Based on order volume, the Company expects continued growth in the aerospace, industrial and petrochemical markets. GROSS PROFIT Gross profit increased by approximately 13.0% or $1.4 million, to $12.2 million for the 1998 Period compared to $10.8 million for the 1997 Period. Gross margin increased to 39.4% for the 1998 Period from 37.0% for the 1997 Period. The increase in gross profit is attributable to the increased sales volume. The increase in gross margin is primarily attributable to an improved sales mix between product lines coupled with efficiencies gained through increased operating leverage on the higher sales volume. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative ("S,G&A") expenses decreased by approximately 37.7% or $2.6 million to $4.3 million for the 1998 Period compared to $6.9 million for the 1997 Period. S,G&A expenses as a percent to sales decreased to 13.8% in the 1998 Period from 23.9% for the 1997 Period. The $2.6 million decrease in S,G&A expenses reflects the elimination of certain non-recurring compensation costs from the 1997 Period that were not incurred in the 1998 Period. The reduced compensation costs were partially offset by slightly higher costs of supporting the increased sales volume. The improvement in the percentage of S,G&A expenses to sales reflects the overall lower S,G&A expenses coupled with the improved leverage on the fixed portion of those expenses. EARNINGS FROM OPERATIONS Operating earnings increased $4.2 million to $8.0 million for the 1998 Period compared to $3.8 million for the 1997 Period. Operating margins for the Period increased to 25.6% in the 1998 Period from 13.2% for the 1997 Period. The increase in operating earnings and margin was attributable to the same factors (as discussed above) that contributed to the increase in gross profit and gross margin and improvements in S,G&A expenses as a percent to sales. OTHER EXPENSE, NET Other expense, net increased $4.5 million to $5.0 million in the 1998 Period from $0.5 million for the 1997 Period. This increase was attributable to the increased interest expense associated with the additional debt incurred to finance the Recapitalization in February 1997. The Company has $92.2 million of indebtedness as of September 27, 1997 compared to $22.4 million at September 28, 1996. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED NET EARNINGS Net earnings decreased by approximately $1.2 million to $0.8 million for the 1998 Period from $2.0 million in the 1997 Period. The decrease in net earnings was attributable to the $1.0 million of extraordinary loss on retirement of debt and significantly higher interest expense ($4.4 million) which was largely offset by a $4.2 million increase in earnings from operations. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $5.9 million for the 1998 Period compared to $5.6 million for the 1997 Period. The increase of $0.3 million was primarily attributable to cash generated from increases in non-cash expenses (depreciation and amortization) and a decrease in working capital requirements. Net cash used in investing activities was $3.5 million for the 1998 Period compared to $0.5 million for the 1997 Period. The $3.0 million increase was primarily attributable to the $2.2 million business acquisition in June 1997 and an $0.8 million increase in fixed asset additions. As of September 27, 1997, the Company's outstanding indebtedness is $92.2 million, consisting of $90.0 million principal amount of the senior subordinated notes and $2.2 million of other borrowings. The Company amended the Revolving Credit Facility subsequent to the Offering to augment its liquidity requirements by increasing the size of the facility to $20.0 million. Borrowings under the Revolving Credit Facility may be used for general and other corporate purposes. To date, the Company has not used any amounts under the Revolving Credit Facility. Subsequent to the Offering, the Company has $90.0 million in senior subordinated note indebtedness. Interest expense will have a greater proportionate impact on net income in subsequent periods in comparison with the periods before the Recapitalization. The Company is not subject to any amortization requirements under the Notes prior to maturity. The Company believes that cash flow from operations and the availability of borrowings under the Revolving Credit Facility will provide adequate funds for ongoing operations, planned capital expenditures and debt service during the term of such facility. To the extent certain performance thresholds with respect to the Contingent Notes and Contingent Bonuses are met, and such obligations become vested, the Company believes that cash flow from operations and availability of borrowings will be sufficient to fund such obligations. Capital expenditures for fiscal 1998 are expected to focus on vertical integration with investments in equipment to expand manufacturing capacity in machining, glass production, sealing and plating, as well as automation equipment to lower production costs on the high volume production lines. Expected capital expenditures for fiscal 1998 are approximately $3.5 million and will be financed through working capital and the Revolving Credit Facility. On December 8, 1997 the Company signed a new agreement with Special Devices, Inc. ("SDI") through the year 2000. The new agreement provides for price concessions to SDI in consideration of a one year contract extension and abatement of the volume discount from the previous agreement. 12 LIQUIDITY AND CAPITAL RESOURCES, CONTINUED This filing contains statements that are "forward looking statements," and includes, among other things, discussions of the Company's business strategy and expectations concerning market position, future operations, margins, profitability, liquidity and capital resources. Although the Company believes that the expectations reflected in such forward looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. All phases of the operations of the Company are subject to a number of uncertainties, risks and other influences, including general economic conditions, regulatory changes and competition, many of which are outside the control of the Company, any one of which, or a combination of which, could materially affect the results of the Company's operations and whether the forward looking statements made by the Company ultimately prove to be accurate. 13 PART II - OTHER INFORMATION Items 1 through 5 are omitted as they are not applicable. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 12 - Computation of ratio of earnings to fixed charges (b) Reports on Form 8-K - Not applicable SIGNATURES HCC INDUSTRIES INC. DATED: December 17, 1997 /s/ Andrew Goldfarb ------------------ ------------------------------------- President and Chief Executive Officer DATED: December 17, 1997 /s/ Christopher H. Bateman ------------------ ------------------------------------------ Vice President and Chief Financial Officer 14 EX-12 2 EXHIBIT 12 EXHIBIT 12 HCC INDUSTRIES INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (IN THOUSANDS) For the Six Months Ended --------------------------- September 27, September 28, 1997 1996 ------------ ------------ Earnings: Earnings before taxes and extraordinary item $ 2,987 $3,278 Add: Fixed Charges* 5,178 780 ------- ------ $ 8,165 $4,058 ======= ====== * Fixed Charges: Interest expense $ 5,178 $ 780 ------- ------ $ 5,178 $ 780 ======= ====== Ratio of Earnings to Fixed Charges 1.6 5.2 ======= ====== *The ratios of earnings to fixed charges were computed by dividing earnings by fixed charges. For this purpose, "earnings" consist of earnings before taxes and extraordinary item plus fixed charges and "fixed charges" consist of interest expense and amortization of debt issuance costs. EX-27 3 FDS
5 1,000 6-MOS MAR-28-1998 MAR-30-1997 SEP-27-1997 11,520 0 8,640 (58) 4,351 25,500 19,630 (6,405) 57,184 12,248 91,564 0 0 13 (56,271) 57,184 31,061 31,061 18,816 18,816 4,295 18 5,178 2,987 1,175 1,812 0 (1,002) 0 810 5.94 5.94
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