-----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, SbmddslfsMe79kUh8JiKpHct8rTXDcW5bN2SNxxM4a0e/mo4ZPW4jltw2trX9Q+O f3JhWkAvu/dh7B7zrQKCeQ== 0001047469-98-039765.txt : 19981111 0001047469-98-039765.hdr.sgml : 19981111 ACCESSION NUMBER: 0001047469-98-039765 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980926 FILED AS OF DATE: 19981110 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: 98741508 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 FORM 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 26, 1998 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 November 10, 1998 was 135,495 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 26, MARCH 28, 1998 1998 ------------- --------- CURRENT ASSETS: Cash and cash equivalents $ 13,610 $ 13,441 Trade accounts receivable, less allowance for doubtful accounts of $58 at September 26, 1998 and $40 at March 28, 1998 9,568 10,136 Inventories 4,568 4,610 Prepaid and deferred income taxes 2,960 260 Other current assets 390 416 -------- -------- Total current assets 31,096 28,863 PROPERTY, PLANT AND EQUIPMENT, NET 18,400 14,617 OTHER ASSETS: Intangible assets 5,499 5,643 Deferred financing costs 3,341 3,532 Deferred income taxes 4,192 4,192 Restricted cash 6,179 6,013 -------- -------- TOTAL ASSETS $ 68,707 $ 62,860 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current portion of long-term debt $ 905 $ 897 Accounts payable 2,423 2,947 Accrued liabilities 7,427 6,384 Income taxes payable (1,677) 1,752 -------- -------- Total current liabilities 12,432 11,980 LONG TERM LIABILITIES: Long-term debt, net of current portion 100,859 98,201 Other long-term liabilities 9,534 9,619 -------- -------- 122,825 119,800 -------- -------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT): Common stock; $.10 par value; authorized 550,000 shares, issued and outstanding 134,955 shares 13 13 Accumulated deficit (54,131) (56,953) -------- -------- TOTAL STOCKHOLDERS' DEFICIT (54,119) (56,940) -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 68,707 $ 62,860 -------- -------- -------- --------
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 26, September 27, September 26, September 27, 1998 1997 1998 1997 ------------- ------------- ------------- ------------- NET SALES $ 17,159 $ 15,556 $ 35,406 $ 31,061 Cost of goods sold 10,496 9,497 21,429 18,816 ---------- --------- --------- --------- GROSS PROFIT 6,663 6,059 13,977 12,245 Selling, general and administrative expenses 2,109 2,166 4,197 4,295 ---------- --------- --------- --------- EARNINGS FROM OPERATIONS 4,554 3,893 9,780 7,950 OTHER INCOME (EXPENSE): Interest and other income 175 115 352 215 Interest expense (2,764) (2,573) (5,486) (5,178) ---------- --------- --------- --------- Total other expense, net (2,589) (2,458) (5,134) (4,963) Earnings before taxes and extraordinary item 1,965 1,435 4,646 2,987 Taxes on earnings 775 566 1,824 1,175 ---------- --------- --------- --------- Earnings before extraordinary item 1,190 869 2,822 1,812 Extraordinary loss on retirement of debt, net of tax benefit of $640 --- --- --- (1,002) ---------- --------- --------- --------- NET EARNINGS $ 1,190 $ 869 $ 2,822 $ 810 ---------- --------- --------- --------- ---------- --------- --------- ---------
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 26, September 27, 1998 1997 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 2,822 $ 810 Reconciliation of net earnings to net cash provided by operating activities: Depreciation 819 689 Amortization 335 382 Deferred income taxes (2,700) (404) Extraordinary loss -- 1,002 Changes in operating assets and liabilities: Decrease (increase) in trade accounts receivable, net 568 (1,299) Decrease in inventories 42 284 (Increase) decrease in other assets (140) 58 Increase in accrued liabilities 958 2,897 (Decrease) increase in accounts payable and income taxes payable (599) 1,435 ------- -------- Net cash provided by operating activities 2,105 5,854 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (4,219) (1,317) Business acquisition -- (2,200) ------- -------- Net cash used in investing activities (4,219) (3,517) ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt (479) (80,230) Proceeds from issuance of long-term debt 2,762 90,000 Deferred financing costs --- (3,700) Repurchases of stock --- (3,728) ------- -------- Net cash provided by financing activities 2,283 2,342 ------- -------- Net increase in cash and cash equivalents 169 4,679 Cash and cash equivalents at beginning of period 13,441 6,841 ------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $13,610 $ 11,520 ------- -------- ------- -------- SUPPLEMENTAL NONCASH FINANCING ACTIVITIES: Capital lease obligations 383 ---
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 26, 1998 1. INTERIM FINANCIAL STATEMENTS: The accompanying unaudited condensed consolidated financial statements of HCC Industries Inc. and Subsidiaries (the "Company"), include all adjustments (consisting of normal recurring entries) which management believes are necessary for a fair presentation of the financial position and results of operations for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The year end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. It is suggested that the accompanying interim financial statements be read in conjunction with the Company's audited financial statements and footnotes as of and for the year ended March 28, 1998. Operating results for the three and six month periods ended September 26, 1998 are not necessarily indicative of the operating results for the full fiscal year. 2. INVENTORIES: Inventories consist of the following (in thousands):
September 26, March 28, 1998 1998 -------------- ----------- Raw materials and component parts $ 2,179 $ 2,340 Work in process 2,389 2,270 -------- -------- $ 4,568 $ 4,610 -------- -------- -------- --------
3. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consist of the following (in thousands):
September 26, March 28, 1998 1998 -------------- ----------- Land $ 4,025 $ 3,180 Buildings and improvements 8,520 5,988 Furniture, fixtures and equipment 13,832 12,607 -------- -------- 26,377 21,775 Less accumulated depreciation (7,977) (7,158) -------- -------- $ 18,400 $ 14,617 -------- -------- -------- --------
5 HCC INDUSTRIES INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 26, 1998 4. LONG-TERM DEBT: Long-term debt consists of the following (in thousands):
September 26, March 28, 1998 1998 -------------- ----------- 10 3/4% Senior Subordinated Notes - interest payable semi-annually; due May 15, 2007 $ 90,000 $ 90,000 Subordinated Notes due Selling Shareholders - 12% interest payable semi-annually; due March 28, 2001 2,500 2,500 Subordinated Bonus Notes - 10% interest payable semi-annually; due March 28, 2001 3,000 3,000 Term loans on land, building and improvements - 8% interest payable monthly; due May 2008 2,762 --- Other 3,502 3,598 ---------- --------- 101,764 99,098 Less current portion 905 897 ---------- --------- $ 100,859 $ 98,201 ---------- --------- ---------- ---------
5. CAPITAL STOCK: The Company is authorized to issue an aggregate of 550,000 shares of common stock. These shares may be issued in four different classes (A, B, C or D shares) which differ only in voting rights per share. At September 26, 1998, the 134,955 outstanding shares of common stock were designated as follows:
Shares Voting Rights Class Outstanding Amount 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. 6 HCC INDUSTRIES INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 26, 1998 6. COMMITMENTS AND CONTINGENCIES: ENVIRONMENTAL As an ongoing facet of the Company's business, it is required to maintain compliance with various environmental regulations. The cost of this compliance is included in the Company's operating results as incurred. These ongoing costs include permitting fees and expenses and specialized effluent control systems as well as monitoring and site assessment costs required by various governmental agencies. In the opinion of management, the maintenance of this compliance will not have a significant effect on the financial position or results of operations of the Company. In August 1994, the U.S. Environmental Protection Agency ("EPA") identified the Company as a potentially responsible party ("PRP") in the El Monte Operable Unit ("EMOU") of the San Gabriel Valley Superfund Sites. In early 1995, the Company and the EPA executed an Administrative Consent Order which requires the Company and other PRP's to perform a Remedial Investigation and Feasibility Study ("RI/FS") for the EMOU. In addition, the Company's facility in Avon, Massachusetts is subject to Massachusetts "Chapter 21E", the State's hazardous site clean-up program. Uncertainty as to (a) the extent to which the Company caused, if at all, the conditions being investigated, (b) the extent of environmental contamination and risks, (c) the applicability of changing and complex environmental laws (d) the number and financial viability of other PRP's, (e) the stage of the investigation and/or remediation, (f) the unpredictability of investigation and/or remediation costs (including as to when they will be incurred), (g) applicable clean-up standards, (h) the remediation (if any) that will ultimately be required, and (i) available technology make it difficult to assess the likelihood and scope of further investigation or remediation activities or to estimate the future costs of such activities if undertaken. In addition, liability under CERCLA is joint and several, and any potential inability of other PRPs to pay their pro rata share of the environmental remediation costs may result in the Company being required to bear costs in excess of its pro rata share. In fiscal 1997, the Company with the help of independent consultants, determined a range of estimated costs of $9,000,000 to $11,000,000 associated with the various claims and assertions it faces. The time frame over which the Company expects to incur such costs varies with each site, ranging up to 20 years as of March 28, 1998. These estimates are based partly on progress made in determining the magnitude of such costs, experience gained from sites on which remediation is ongoing or has been completed, and the timing and extent of remedial actions required by the applicable governmental authorities. As a result, the Company accrued $10,000,000 in fiscal 1997 for existing estimated environmental remediation and other related costs which the Company believes to be the best estimate of the liability. As of September 26, 1998, the accrual for estimated environmental costs was $9,534,000. 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. Pursuant to the Recapitalization Agreement, the Selling Group has agreed to indemnify the Company with respect to the after-tax costs of contingent environmental and other liabilities, subject to a cap for all indemnified liabilities of $30 million. Pursuant to the Recapitalization Agreement, a $6.0 million interest bearing escrow account was established by the selling stockholders (the "Deferred Amount") to secure indemnity claims of the Company and others, including with respect to environmental liabilities. Any environmental costs, net of tax benefit, are expected to be funded from the escrow account. Actual expenditures for environmental remediation were $45,000 for the quarter ended September 26, 1998 and $381,000 for the fiscal year ended March 28, 1998. 7 HCC INDUSTRIES INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 26, 1998 6. COMMITMENTS AND CONTINGENCIES, Continued: Other On March 3, 1998, Walter Neubauer, formerly the largest shareholder of the Company and presently one of the largest shareholders of Special Devices, Inc., the Company's largest customer, filed a lawsuit in California Superior Court against the Company and certain other stockholders alleging (i) breach of fiduciary duty, (ii) fraud, (iii) negligent misrepresentation, (iv) negligence, (v) violations of corporations code and (vi) breach of contract. The allegations primarily relate to the Company's exercise of a 1995 option to acquire Mr. Neubauer's stock in August 1996. The former stockholder is seeking damages of $40.0 million. Based upon the Company's analysis of the current facts, it is management's belief that the Company should ultimately prevail in this matter, although there can be no assurance in this regard at this time. On May 7, 1998, the Company filed a lawsuit against the former stockholder in California Superior Court alleging (i) breach of contract, (ii) intentional interference with business relations and (iii) interference with prospective business advantage. All allegations relate to violations of the noncompetition agreement executed by the former stockholder in August 1996. The Company is seeking damages of $50.0 million. In addition to the above, the Company is involved in other claims and litigation arising in the normal course of business. Based on the advice of counsel and in the opinion of management, the ultimate resolution of these matters will not have a significant effect on the financial position or the results of operations of the Company. 8 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. 26, SEPT. 27, SEPT. 26, SEPT. 27, 1998 PERCENT 1997 PERCENT 1998 PERCENT 1997 PERCENT ---- ------- ---- ------- ---- ------- ---- ------- Net sales $17.2 100.0% $15.6 100.0% $35.4 100.0% $31.1 100.0% Gross profit 6.7 38.8% 6.1 38.9% 14.0 39.5% 12.2 39.4% Selling, general and administrative expenses 2.1 12.3% 2.2 13.9% 4.2 11.9% 4.3 13.8% Earnings from operations 4.6 26.5% 3.9 25.0% 9.8 27.6% 8.0 25.6% Other income/expense (2.6) -15.1% (2.5) -15.8% (5.1) -14.5% (5.0) -16.0% Extraordinary loss (1) 0.0 0.0% 0.0 0.0% 0.0 0.0% (1.0) -3.2% Net earnings $1.2 6.9% $0.9 5.6% $2.8 8.0% $0.8 2.6%
(1) Represents extraordinary loss on retirement of debt, net of tax benefit. COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 26, 1998 ("1999 QUARTER") TO THE THREE MONTHS ENDED SEPTEMBER 27, 1997 ("1998 QUARTER") NET SALES The Company's net sales increased by approximately 10.3% or $1.6 million to $17.2 million for the 1999 Quarter compared to sales of $15.6 million for the 1998 Quarter. The increase was due to increasing demand in all product lines. Sales to existing aerospace, industrial process control, and petrochemical customers increased significantly in the 1999 Quarter. Net non-automotive shipments increased by approximately 19% in the 1999 Quarter compared to the 1998 Quarter. Based on current order volume, the Company expects continued, but slower growth in the aerospace, industrial process control and petrochemical markets. On the automotive side, unit shipments of airbag initiator products increased moderately due to increased volumes on existing programs and the development of some new programs. The Company's airbag initiator shipments to its largest customer, Special Devices, Inc. ("SDI") increased 13% for the 1999 Quarter compared to the 1998 Quarter. This increased volume was offset by a price reduction effected under a new three year supply agreement with SDI. The new agreement with SDI was effective October 1, 1997 and expires on December 31, 2000. Overall, revenue from all automotive shipments decreased approximately 1% in the 1999 Quarter compared to the 1998 Quarter. Based on current order volume, the Company expects flat revenue from automotive products over the next quarter. GROSS PROFIT Gross profit increased by approximately 9.8% or $0.6 million, to $6.7 million for the 1999 Quarter compared to $6.1 for the 1998 Quarter. Gross margin decreased slightly to 38.8% for the 1999 Quarter from 38.9% for the 1998 Quarter. The increase in gross profit is attributable to the increased sales volume. The gross margin as a percent to sales was relatively unchanged in the 1999 Quarter compared to the 1998 Quarter. 9 10 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 4.5% to $2.1 million for the 1999 Quarter compared to $2.2 million for the 1998 Quarter. S,G&A expenses as a percent to sales decreased to 12.3% in the 1999 Quarter from 13.9% for the 1998 Quarter. Selling expenses decreased slightly in lieu of higher sales volume reflecting increased non-commissioned sales. Additionally, the Company enjoyed a slight decrease in general and administrative expenses which were a result of lower contingent compensation accruals. The improvement in the percentage of S,G&A expenses to sales reflects the decreased overall costs and improved leverage on the fixed portion of those expenses. EARNINGS FROM OPERATIONS Operating earnings increased 17.9% or $0.7 million to $4.6 million for the 1999 Quarter compared to $3.9 million for the 1998 Quarter. Operating margins increased to 26.5% in the 1999 Quarter from 25.0% for the 1998 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 (which is predominantly net interest expense) increased 4.0% or $0.1 million to $2.6 million in the 1999 Quarter compared to $2.5 million in the 1998 Quarter. The $0.1 million increase was attributable to interest expense on the mortgages incurred in the Company's May 1998 purchase of a facility in El Monte, California of approximately 110,000 square feet (of which the Company was leasing approximately 38,000 square feet). The Company has $101.8 million of indebtedness as of September 26, 1998 compared to $92.2 million at September 27, 1997. NET EARNINGS Net earnings increased by approximately $0.3 million to $1.2 million for the 1999 Quarter from $0.9 million in the 1998 Quarter. The increase in net earnings was primarily attributable to the increase in gross profit in the 1999 Quarter. COMPARISON OF THE SIX MONTHS ENDED SEPTEMBER 26, 1998 ("1999 PERIOD") TO THE SIX MONTHS ENDED SEPTEMBER 27, 1997 ("1998 PERIOD") NET SALES The Company's net sales increased by approximately 13.8% or $4.3 million to $35.4 million for the 1999 Period compared to sales of $31.1 million for the 1998 Period. This increase was attributable to increasing demand in all product lines. The Company experienced strong growth in its aerospace, industrial and petrochemical products. Net non-automotive shipments increased approximately 15.5% in the 1999 Period compared to the 1998 Period. Based on 11 current order volume, the Company expects continued, but slower growth in the aerospace, industrial process control and petrochemical markets. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED On the automotive side, unit shipments of airbag initiator products increased moderately due to increased volumes on existing programs and the development of some new programs. The Company's airbag initiator shipments to its largest customer, Special Devices, Inc. ("SDI") increased 36.5% for the 1999 Period compared to the 1998 Period. This increased volume was mostly offset by a price reduction effected under a new three year supply agreement with SDI. The new agreement with SDI was effective October 1, 1997 and expires on December 31, 2000. Overall, revenue from all automotive shipments increased approximately 11.9% in the 1999 Period compared to the 1998 Period. Based on current order volume, the Company expects flat revenue from automotive products over the next quarter. GROSS PROFIT Gross profit increased by approximately 14.8% or $1.8 million, to $14.0 million for the 1999 Period compared to $12.2 for the 1998 Period. Gross margin increased slightly to 39.5% for the 1999 Period from 39.4% for the 1998 Period. The increase in gross profit is attributable to the increased sales volume. The gross margin as a percent to sales was relatively unchanged in the 1999 Period compared to the 1998 Period. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative ("S,G&A") expenses decreased by approximately 2.3% to $4.2 million for the 1999 Period compared to $4.3 million for the 1998 Period. S,G&A expenses as a percent to sales decreased to 11.9% in the 1999 Period from 13.8% for the 1998 Period. Selling expenses decreased slightly in lieu of higher sales volume reflecting increased non-commissioned sales. Additionally, the Company enjoyed a slight decrease in general and administrative expenses which were a result of lower contingent compensation accruals. The improvement in the percentage of S,G&A expenses to sales reflects the decreased overall costs and improved leverage on the fixed portion of those expenses. EARNINGS FROM OPERATIONS Operating earnings increased 22.5% or $1.8 million to $9.8 million for the 1999 Period compared to $8.0 million for the 1998 Period. Operating margins increased to 27.6% in the 1999 Period from 25.6% for the 1998 Period. The significant increase in operating earnings and margin was attributable to the same factors (as discussed above) that contributed to the increase in gross profit and gross margin and improvements in S,G&A expenses as a percent to sales. OTHER EXPENSE, NET Other expense, net (which is predominantly net interest expense) increased 2.0% or $0.1 million to $5.1 million in the 1999 Period compared to $5.0 million in the 1998 Period. The $0.1 million increase was attributable to additional interest expense incurred with the additional indebtedness and net of increased interest income recognized in the 1999 Period compared to the 1998 Period. The Company has $101.8 million of long-term debt as of September 26, 1998 compared to $92.2 million at September 27, 1997. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED NET EARNINGS Net earnings increased by approximately $2.0 million to $2.8 million for the 1999 Period from $0.8 million in the 1998 Period. The significant increase in net earnings was primarily attributable to the increase in gross profit recognized in the 1999 Period and the extraordinary loss associated with early retirement of debt in the 1998 Period. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $2.1 million for the 1999 Period compared to $5.9 million for the 1998 Period. The decrease of $3.8 million was primarily attributable to a reduction in income taxes payable and an increase in working capital requirements. Net cash used in investing activities was $4.2 million for the 1999 Period compared to $3.5 million for the 1998 Period. The $0.7 million increase was attributable to the Company's May 1998 purchase of a facility in El Monte, California of approximately 110,000 square feet (of which the Company was leasing approximately 38,000 square feet). In addition, included in the $3.5 million of cash used in investing activities in the 1998 Period was $2.2 million for the acquisition of a business which did not recur in the 1999 Period. Net cash provided by financing activities was $2.3 million for both the 1999 and 1998 Periods. The $2.3 million provided in the 1999 Period resulted from the $2.8 million of mortgages associated with the Company's May 1998 purchase of a facility in El Monte, California of approximately 110,000 square feet and approximately $0.5 million of principal repayments on existing debt. As of September 26, 1998, the Company's outstanding long-term debt is $101.8 million. The Company has a Revolving Credit Facility up to $20.0 million and is collateralized by accounts receivable and inventories. At September 26, 1998 there was $15.8 million available under the Revolving Credit Facility. Borrowings under the Revolving Credit Facility may be used for general and other corporate purposes. To date, the Company has not used any amounts under the Revolving Credit Facility. The Company believes that cash flow from operations and the availability of borrowings under the Revolving Credit Facility will provide adequate funds for ongoing operations, planned capital expenditures and debt service during the term of such facility. 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 1999 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 1999 are approximately $7.7 million and will be financed through working capital, the Revolving Credit Facility and a mortgage on the acquired El Monte property. YEAR 2000 ISSUE The Year 2000 readiness issue, which is common to most businesses, arises from the inability of information systems, and other time and date sensitive products and systems to properly recognize and process date-sensitive information or system failures. Assessments of the potential cost and effects of Year 2000 issues vary significantly among businesses, and it is extremely difficult to predict the actual impact. Recognizing this uncertainty, management is continuing to actively analyze, assess and plan for various Year 2000 issues across its businesses. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED The Year 2000 issue has an impact on both information technology ("IT") systems and non-IT systems, such as manufacturing systems and physical facilities including, but not limited to, security systems and utilities. Although management believes that a majority of the Company's IT systems are Year 2000 ready, such systems still have to be tested for Year 2000 readiness. The Company is replacing or upgrading those systems that are identified as non-Year 2000. Certain IT systems previously identified as non-Year 2000 compliant are being upgraded or replaced which should be complete by June 30, 1999. Non-IT system issues are more difficulty to identify and resolve. The Company is actively identifying non-IT Year 2000 issues concerning its products and services, as well as its physical facility locations. As non-IT areas are identified, management formulates the necessary actions to ensure minimal disruption to its business processes. Although management believes that its efforts will be successful and the costs will be immaterial (i.e., less than $25,000) to its consolidated financial position and results of operations, it also recognizes that any failure or delay could cause a potential impact. The Year 2000 readiness of its customers varies. The Company is not investigating whether or not its customers are evaluating and/or preparing their own systems. These efforts by customers to address Year 2000 issues may affect the demand for certain products and services; however, the impact to the revenue or any change in revenue patterns is highly uncertain. The Company has also initiated efforts to assess the Year 2000 readiness of its key suppliers and business partners. The Company's direction of this effort is to ensure the adequacy of resources and supplies to minimize any potential business interruptions. Management plans to complete this part of its Year 2000 readiness plan in the early part of calendar 1999. While the Company continues to believe the Year 2000 issue described above will not materially affect its consolidated financial position or results of operations, it remains uncertain as to what extent, if any, the Company may be impacted. 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. 15 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: November 10, 1998 /s/ Andrew Goldfarb ----------------- ------------------------------------- President and Chief Executive Officer DATED: November 10, 1998 /s/ Christopher H. Bateman ----------------- ------------------------------------- Vice President and Chief Financial Officer 16 EX-12 2 EXHIBIT 12 HCC INDUSTRIES INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (IN THOUSANDS)
For the Six Months Ended ------------------------------- September 26, September 27, 1998 1997 ------------- ------------- Earnings: Earnings before taxes and extraordinary item $ 4,646 $ 2,987 Add: Fixed Charges* 5,486 5,178 -------- -------- $ 10,132 $ 8,165 -------- -------- -------- -------- * Fixed Charges: Interest expense $5,486 $5,178 -------- -------- $5,486 $5,178 -------- -------- Ratio of Earnings to Fixed Charges 1.8 1.6 -------- -------- -------- --------
* 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. 17 EX-27 3 EXHIBIT 27
5 1,000 6-MOS APR-03-1999 MAR-29-1998 SEP-26-1998 13,610 0 9,626 (58) 4,568 31,096 26,377 (7,977) 68,707 12,432 100,859 0 0 13 (54,131) 68,707 35,406 35,406 21,429 21,429 4,197 18 5,486 4,646 1,824 2,822 0 0 0 2,822 20.911 20.911
-----END PRIVACY-ENHANCED MESSAGE-----