UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

 

 

Commission file number: 333-32207

 

 

 

HCC INDUSTRIES INC.
(Exact name of Registrant as specified in its charter)

 

 

 

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 ý No o

 

 

Registrant’s Common Stock, outstanding at August 12, 2002 was 137,945 shares.

 

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PART I - FINANCIAL INFORMATION

Item 1.    Condensed Consolidated Financial Statements

 

 

HCC INDUSTRIES INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except share data)

 

 

		June 29,			March 30,
		2002			2002
		(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	7,266		$	10,990
Trade accounts receivable, less allowance for doubtful accounts of $79 (2003) and $70 (2002)		7,088			8,356
Inventories		5,713			6,016
Income taxes receivable		1,254			506
Prepaid and other current assets		1,264			1,130
Total current assets		22,585			26,998
Property, Plant and Equipment, net		24,283			24,895
Other Assets:
Intangible assets		4,461			4,486
Deferred financing costs		1,648			1,732
Deferred income taxes		1,623			1,623
Restricted cash		5,875			5,901
Total assets		$	60,475		$	65,635
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Current portion of long-term debt		$	2,040		$	2,109
Accounts payable		935			1,475
Accrued liabilities		6,000			8,661
Total current liabilities		8,975			12,245
Long Term Liabilities:
Long-term debt, net of current portion		86,165			86,627
Other long-term liabilities		7,867			8,174
		103,007			107,046
Commitments and contingencies
Stockholders’ Equity (Deficit):
Common stock; $.10 par value; authorized 550,000 shares, issued and outstanding 137,945 shares		14			14
Additional paid-in capital		360			360
Accumulated deficit		(42,906		)	(41,785		)
Total stockholders’ deficit		(42,532		)	(41,411		)
Total liabilities and stockholders’ deficit		$	60,475		$	65,635

 

The accompanying notes are an integral part of these consolidated financial statements.

 

2

 

 

HCC INDUSTRIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(in thousands, except share data)

Unaudited

 

 

		Three Months Ended
		June 29,			June 30,
		2002			2001
NET SALES		$	10,591		$	18,790
Cost of goods sold		8,597			12,583
GROSS PROFIT		1,994			6,207
Selling, general and administrative expenses		1,473			1,916
EARNINGS FROM OPERATIONS		521			4,291
OTHER INCOME (EXPENSE):
Interest and other income		39			74
Interest expense		(2,429		)	(2,465		)
Total other expense, net		(2,390		)	(2,391		)
Earnings (loss) before taxes (benefit)		(1,869		)	1,900
Taxes (benefit) on earnings (loss)		(748		)	760
NET EARNINGS (LOSS)		$	(1,121	)	$	1,140

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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HCC INDUSTRIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Unaudited

 

 

		Three Months Ended
		June 29,			June 30,
		2002			2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)		$	(1,121	)	$	1,140
Reconciliation of net earnings (loss) to net cash used in operating activities:
Depreciation		670			621
Amortization		109			157
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts receivable, net		1,268			(179		)
Decrease (increase) in inventories		303			(349		)
(Increase) decrease in other assets and income taxes receivable		(856		)	730
(Decrease) in accounts payable		(540		)	(620		)
(Decrease) in accrued and other liabilities		(2,968		)	(3,438		)
Net cash used in operating activities		(3,135		)	(1,938		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(58		)	(1,057		)
Net cash used in investing activities		(58		)	(1,057		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt		(1,622		)	(515		)
Proceeds from issuance of long-term debt		1,091			—
Net cash used in financing activities		(531		)	(515		)
Net (decrease) in cash and cash equivalents		(3,724		)	(3,510		)
Cash and cash equivalents at beginning of period		10,990			8,896
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	7,266		$	5,386

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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HCC INDUSTRIES INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 29, 2002

 

 

 

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 30, 2002.  Operating results for the three-month period ended June 29, 2002 are not necessarily indicative of the operating results for the full fiscal year.

 

The Company grants uncollateralized credit to its customers who are located in various geographical areas.  Estimated credit losses and returns have been provided for in the financial statements and, to date, have been within management’s expectations.

 

 

2.             INVENTORIES:

 

                Inventories consist of the following (in thousands):

 

3.             PROPERTY, PLANT AND EQUIPMENT:

 

                Property, plant and equipment consist of the following (in thousands):

 

 

 

5

 

 

4.             LONG-TERM DEBT:

 

                Long-term debt consists of the following (in thousands):

 

 

The Company has a Revolving Credit Facility up to $8.0 million, which is collateralized by accounts receivable, inventory and equipment.  Borrowings under the Revolving Credit Facility may be used for general and other corporate purposes.  The Revolving Credit Facility includes covenants requiring maintenance of certain financial ratios.  At June 29, 2002, the Company was not in compliance with the required ratios.  There are no borrowings outstanding under the Revolving Credit Facility.

 

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 June 29, 2002, the 137,945 outstanding shares of common stock were designated as follows:

 

 

The remaining 412,055 shares of authorized but unissued common stock are undesignated as to class.

 

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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.  The RI/FS was completed in 1999 and the EPA issued an interim record of decision.  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 PRP’s 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 cost estimate and accrued $10,000,000 for existing estimated environmental remediation and other related costs.  The time frame over which the Company expects to incur such costs varies with each site, ranging up to 20 years. This estimate is based 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 of June 29, 2002, the accrual for estimated environmental costs was $7,867,000.  Actual expenditures for environmental remediation were $307,000 for the three months ended June 29, 2002 and $528,000 for the fiscal year ended March 30, 2002.  The Company believes its accrual is adequate, but as the scope of its obligations becomes more clearly defined, this accrual may be modified and related charges against earnings may be made.

 

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.

 

 

7

 

 

Other

 

                                                On August 2, 2002, the Company filed a lawsuit in California Superior Court (Case GC030102, Hermetic Seal Corporation, HCC Industries Inc. vs. Special Devices, Inc.) against SDI and certain other fictitious defendants alleging various claims of breaches of contract.  The allegations primarily relate to SDI’s failure to tender payment to the Company for shipments of parts the Company manufactured and delivered pursuant to various purchase orders and/or agreements and its breach of exclusivity requirements.  The ultimate resolution of these claims is not expected to have a material impact on the results of operations or financial position of the Company.

 

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.

 

 

7.             RECENT ACCOUNTING PRONOUNCEMENTS:

 

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Accounting for Business Combinations" and No. 142 ("SFAS 142"), "Goodwill and Other Intangibles", effective for fiscal years beginning after December 15, 2001.  Under the new rules, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but is subject to annual impairment tests in accordance with the Statements.  Other intangibles assets will continue to be amortized over their estimated useful lives.

 

Application of the non-amortization provisions of SFAS 142 did not result in a significant impact of the operating results of the Company.  Under SFAS 142, goodwill must be assigned to reporting units and measured for impairment based upon fair value of the reporting units.  The Company has not yet completed the initial impairment test of goodwill under SFAS 142.

 

 

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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
		June 29,					June 30,
		2002			Percent		2001			Percent
Net sales		$	10.6		100.0	%	$	18.8		100.0	%
Gross profit		2.0			18.9	%	6.2			33.0	%
Selling, general and administrative expenses		1.5			14.2	%	1.9			10.1	%
Earnings from operations		0.5			4.7	%	4.3			22.9	%
Other income/expense		(2.4		)	-22.6	%	(2.4		)	-12.8	%
Net earnings (loss)		$	(1.1	)	-10.4	%	$	1.1		5.9	%

 

Comparison of the Three Months Ended June 29, 2002 (“2003 Quarter”) to the Three Months Ended June 30, 2001 (“2002 Quarter”)

 

Net Sales

 

                The Company’s net sales decreased significantly by 43.6% or $8.2 million to $10.6 million for the 2003 Quarter compared to sales of $18.8 million for the 2002 Quarter.

 

                Sales to existing aerospace, industrial process control, and petrochemical customers decreased by approximately 22% in the 2003 Quarter compared to the 2002 Quarter.  Based on current order volume, the Company expects weakness in the aerospace, industrial process control and petrochemical markets to continue over the next quarter.

 

                On the automotive side, revenue from airbag and seat belt initiator products decreased due to the termination of the supply agreement with Special Devices, Inc. (“SDI”), formerly the Company’s largest customer.  The Company stopped selling product to SDI in March 2002.  Overall, revenue from all automotive shipments decreased approximately 78% in the 2003 Quarter compared to the 2002 Quarter.  The Company is aggressively pursuing additional opportunities in the automotive market.  The Company expects the significant decrease in revenue from SDI will be partially offset by increases in unit shipments on new and existing programs to other automotive customers over the next several quarters.  On the whole, the Company expects significantly lower revenues from automotive products during fiscal 2003.

 

                The Company has continued to develop a significant market presence in the telecommunications markets through component products designed for optical networking infrastructure.  Shipments of these products decreased dramatically as the market collapsed.  Sales of these products decreased by approximately 80% in the 2003 Quarter compared to the 2002 Quarter.  Based on current order volume and industry reports, the Company expects continued weakness in the telecommunications markets over the next several quarters at a minimum.

 

 

9

 

 

Gross Profit

 

                Gross profit decreased by approximately 67.7% or $4.2 million, to $2.0 million for the 2003 Quarter compared to $6.2 for the 2002 Quarter.  Gross margin decreased to 18.9% for the 2003 Quarter from 33.0% for the 2002 Quarter.

 

                The decrease in gross profit is attributable to the decreased sales volume.  The decrease in gross margin was primarily attributable to the significant decrease in revenue and the corresponding impact of fixed overhead costs leveraged against lower revenue.  The ongoing weakness in sales will continue to impact gross profitability and gross margin.

 

 

Selling, General and Administrative Expenses

 

                Selling, general and administrative (“S,G&A”) expenses decreased by approximately 21.1% or  $0.4 million to $1.5 million for the 2003 Quarter compared to $1.9 million for the 2002 Quarter.  S,G&A expenses as a percent to sales increased to 14.2% in the 2003 Quarter from 10.1% for the 2002 Quarter.

 

                Selling expenses decreased approximately 3% in the 2003 Quarter compared to the 2002 Quarter.  This decrease was primarily attributable to decreased selling commissions on the lower sales volume.   G&A expenses overall were lower in the 2003 Quarter as compared to the 2002 Quarter due to decreased compensation costs.  The increased percentage of S,G&A expenses to sales reflects the fixed portion of those expenses leveraged over the lower revenue.

 

 

Earnings from Operations

 

                Operating earnings decreased 88.4% or $3.8 million to $0.5 million for the 2003 Quarter compared to $4.3 million for the 2002 Quarter.  Operating margins decreased to 4.7% in the 2003 Quarter from 22.9% for the 2002 Quarter.

 

                The decrease in operating earnings and margin was attributable to the same factors as discussed above.

 

 

Other Expense, net

 

                Other expense, net (which is predominantly net interest expense) was flat at $2.4 million in the 2003 and 2002 Quarters.  The Company has $88.2 million of indebtedness as of June 29, 2002 compared to $90.5 million at June 30, 2001.

 

 

Net Earnings

 

                Net earnings decreased by approximately $2.2 million to a net loss of $1.1 million for the 2003 Quarter from net earnings of $1.1 million in the 2002 Quarter.

 

                The decrease in net earnings was primarily attributable to the decrease in earnings from operations in the 2003 Quarter.

 

 

 

10

 

 

Liquidity and Capital Resources

 

                Net cash used in operating activities was $3.1 million for the 2003 Quarter compared to $1.9 million used in operating activities for the 2002 Quarter.  The increase of $1.2 million of cash used was primarily attributable to the decrease in net earnings.  The cash used in operating activities is impacted in the Company's first and third quarters by the semi-annual interest payments on the Senior Subordinated Notes.

 

                Net cash used in investing activities was $0.1 million for the 2003 Quarter compared to $1.1 million for the 2002 Quarter. 

 

                Net cash used in financing activities was $0.5 million for the 2003 Quarter compared to $0.5 million for the 2002 Quarter.  During the 2003 Quarter, the Company refinanced approximately $1.1 million of term debt at 9.63% fixed interest to a lower fixed rate of 7.30%.

 

                As of June 29, 2002, the Company’s outstanding long-term debt is $88.2 million.  The Company has a Revolving Credit Facility up to $8.0 million, which is collateralized by accounts receivable, inventory and equipment.  Borrowings under the Revolving Credit Facility may be used for general and other corporate purposes.  The Revolving Credit Facility includes covenants requiring maintenance of certain financial ratios.  At June 29, 2002, the Company was not in compliance with the required ratios.  There are no borrowings outstanding under the Revolving Credit Facility.

 

                The Company is currently in discussion with its bank for a waiver of the non-compliant ratios.  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.

 

                Capital expenditures for fiscal 2003 are expected to focus on repairs and maintenance of existing equipment.  Expected capital expenditures for fiscal 2003 will be approximately $0.5 to $0.75 million and will be financed through working capital.

 

                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.

 

 

Recent Accounting Pronouncements

 

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Accounting for Business Combinations" and No. 142 ("SFAS 142"), "Goodwill and Other Intangibles", effective for fiscal years beginning after December 15, 2001.  Under the new rules, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but is subject to annual impairment tests in accordance with the Statements.  Other intangibles assets will continue to be amortized over their estimated useful lives.

 

Application of the non-amortization provisions of SFAS 142 did not result in a significant impact of the operating results of the Company.  Under SFAS 142, goodwill must be assigned to reporting units and measured for impairment based upon fair value of the reporting units.  The Company has not yet completed the initial impairment test of goodwill under SFAS 142.

 

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

                The Company is exposed to market risk from changes in interest rates on the Company’s Revolving Credit Facility.  At June 29, 2002, the Company had no outstanding borrowings under the line of credit and, therefore, changes in interest rates would have no impact on the Company’s results of operations.

 

 

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PART II - OTHER INFORMATION

 

Items 1 through 5 are omitted as they are not applicable.

 

Item 6.            Exhibits and Reports on Form 8-K

 

 

 

 

SIGNATURES

 

 

				HCC INDUSTRIES INC.
DATED:	August 12, 2002			/s/	Richard Ferraid
				President and Chief Executive Officer
DATED:	August 12, 2002			/s/	Christopher H. Bateman
				Vice President and Chief Financial Officer

 

 

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