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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JANUARY 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 0-12102
HADCO CORPORATION
-----------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2393279
- ------------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation organization) Identification No.)
12A MANOR PARKWAY, SALEM, NEW HAMPSHIRE 03079
- --------------------------------------- -----
(Address of principal executive offices) (Zip Code)
TELEPHONE (603) 898 8000
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.
Registrant has 13,134,192 shares of Common Stock, $0.05 Par Value, outstanding
at March 11, 1998.
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HADCO CORPORATION AND SUBSIDIARIES
INDEX
PART I PAGE
Financial Information:
Consolidated Condensed Balance Sheets as of
JANUARY 31, 1998 and OCTOBER 25, 1997, respectively ...... 3
Consolidated Condensed Statements of Operations
for the Quarter ended JANUARY 31, 1998 and
JANUARY 25, 1997 respectively............................. 4
Consolidated Condensed Statements of Cash Flows
for the three months ended JANUARY 31, 1998
and JANUARY 25, 1997 respectively......................... 5
Notes to Consolidated Condensed Financial
Statements................................................ 6
Management's Discussion and Analysis of Results
of Operations and Financial Condition...................... 16
PART II
Other Information.......................................... 19
Signatures................................................. 20
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HADCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
(In thousands)
ASSETS
------
January 31, October 25,
1998 1997
----------- -----------
Current Assets:
Cash and cash equivalents .................... $ 9,813 $ 12,171
Short-term investments ....................... 1,582 1,562
Accounts receivable, net of allowance for
doubtful accounts of $1,750 in 1998 and
$1,700 in 1997, respectively ................. 99,912 92,222
Inventories .................................. 54,016 46,000
Deferred tax asset ........................... 10,982 10,483
Prepaid and other expenses ................... 4,232 4,245
-------- --------
Total current assets ........................ 180,537 166,683
Property, Plant and Equipment, net ............. 239,819 231,490
Acquired Intangible Assets, net ................ 97,870 101,131
Other Assets ................................... 7,601 3,213
-------- --------
$525,827 $502,517
======== ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Short-term debt, current portion of long-term
debt and capital lease obligations .......... $ 4,793 $ 5,064
Accounts payable ............................ 69,382 68,594
Accrued payroll and other employee benefits . 22,733 28,279
Accrued taxes ............................... 8,669 1,775
Other accrued expenses ...................... 8,443 9,278
--------- ---------
Total current liabilities ........... 114,020 112,990
--------- ---------
Long-Term Debt and Capital Lease Obligations,
net of current portion ...................... 118,769 109,716
--------- ---------
Deferred Tax Liability ....................... 31,185 30,685
--------- ---------
Other Long-Term Liabilities .................. 9,192 9,214
--------- ---------
Commitments and Contingencies ................
Stockholders' investment:
Common stock, $.05 par value-
Authorized 25,000 shares
Issued and outstanding 13,114 in 1998 and
13,086 in 1997 ............................... 657 655
Paid-in Capital .............................. 168,843 168,246
Deferred Compensation ........................ (93) (117)
Retained Earnings ............................ 83,254 71,128
--------- ---------
Total stockholders' investment ............. 252,661 239,912
--------- ---------
$ 525,827 $ 502,517
========= =========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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HADCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands, except share data)
Quarter Ended
-------------
January 31, January 25,
1998 1997
----------- -----------
Net Sales ..................................................... $ 198,276 $ 111,536
Cost of Sales ................................................. 159,208 85,159
----------- -----------
Gross Profit ............................................. 39,068 26,377
Operating Expenses ............................................ 17,784 10,820
Write-off of acquired in-process
research and development ................................. - 78,000
----------- -----------
Income (Loss) From Operations ................................. 21,284 (62,443)
Interest and Other Income, (net) .............................. 533 880
Interest Expense .............................................. (2,099) (933)
----------- -----------
Income (Loss) Before
Provision for Income Taxes .................................... 19,718 (62,496)
Provision for Income Taxes .................................... 7,591 6,665
----------- -----------
Net Income (Loss) ............................................. $ 12,127 $ (69,161)
=========== ===========
Income (loss) per common and common equivalent Shares (Note 1)
Basic Net Income (Loss) Per Share ........................ $ 0.93 $ (6.64)
=========== ===========
Diluted Net Income (Loss) Per Share ...................... $ 0.90 $ (6.64)
=========== ===========
Weighted average common and common equivalent Shares (Note 1)
Basic .................................................... 13,095,776 10,413,306
=========== ===========
Diluted .................................................. 13,504,957 10,413,306
=========== ===========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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HADCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
Three Months Ended
------------------
January 31, January 25,
1998 1997
----------- -----------
Total Cash Provided From Operations Activities ............................... $ 7,653 $ 8,331
Cash Flows From Investing Activities:
Purchases of short-term investments ..................................... (2,020) 6,137
Maturities of short-term investments .................................... 2,000 --
Purchases of property, plant and equipment .............................. (19,366) (11,011)
Acquisition of Zycon Corp. .............................................. -- (209,661)
-------- ---------
Net Cash Used In Investing Activities ........................................ (19,386) (214,535)
Cash Flows From Financing Activities:
Principal payments under capital lease obligations ...................... (255) (413)
Principal payments of long-term debt .................................... (969) (33,690)
Proceeds from issuance of long-term debt ................................ 10,000 215,000
Proceeds from exercise of stock options ................................. 147 328
Tax benefit from stock options .......................................... 452 1,018
-------- ---------
Net Cash Provided by Financing Activities .................................... 9,375 182,243
-------- ---------
Net decrease in Cash and Cash Equivalents .................................... (2,358) (23,961)
Cash and Cash Equivalents Beginning of Period ................................ 12,171 32,786
-------- ---------
Cash and Cash Equivalents End of Period ...................................... $ 9,813 $ 8,825
======== =========
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest ............................................................... $ 1,407 $ 311
======== =========
Income taxes (net of refunds) ......................................... $ 322 $ 405
======== =========
Acquisition of Zycon Corporation
Fair value of assets acquired ........................................... $ 212,509
Liabilities assumed ..................................................... (114,993)
Cash Paid ............................................................... (204,885)
Acquisition costs incurred .............................................. (7,600)
Write-off of acquired in-process
research and development ............................................... 78,000
---------
Goodwill ................................................................ $ (36,969)
=========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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HADCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hadco Corporation's (the "Company") principal products are complex
multilayer rigid printed circuits and backplane assemblies. The
consolidated financial statements reflect the application of certain
accounting policies. For information as to the significant accounting
policies followed by the Company and other financial and operating
information, see this note and elsewhere in the accompanying notes to
consolidated condensed financial statements, as well as the Company's Form
10-K as filed with the Securities and Exchange Commission (SEC) on January
16, 1998; These financial statements should be read in conjunction with the
financial statements included in the above-referenced SEC filing.
SHORT TERM INVESTMENTS
The Company's investments in held-to-maturity securities are as follows:
(in thousands)
January 31, October 25,
1998 1997
----------- -----------
Fair Fair
Market Market
Cost Value Cost Value Maturity
---- ----- ---- ----- --------
Certificate of Deposit ........ $1,582 $1,582 $1,562 $1,562 Within 1 year
====== ====== ====== ======
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's Malaysian subsidiary is the United
States dollar. Accordingly, all remeasurement gains and losses resulting
from transactions denominated in currencies other than United States
dollars are included in the consolidated statements of operations. To date,
the resulting gains and losses have not been material.
RECLASSIFICATION
The Company has reclassified certain prior year information to conform with
the current year's presentation.
INTERIM FINANCIAL STATEMENTS
The accompanying consolidated balance sheet as of January 31, 1998, and the
consolidated statements of operations and cash flows for the three month
periods ended January 25, 1997 and January 31, 1998 are unaudited but, in
the opinion of management, include all adjustments (consisting of normal,
recurring adjustments) necessary for a fair presentation of results for
these interim periods. Results of operations for the interim period are not
necessarily indicative of results to be expected for the entire year or any
future period.
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HADCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
NET INCOME (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 or loss by the weighted average number
of common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution of stock options that could share in the
earnings of the Company. Diluted income (loss) per common share is computed
using the weighted average number of common and common equivalent shares
outstanding during each period. For those periods where a net loss is
reported, stock options are not considered; as their effect would be
anti-dilutive.
Basic and diluted income (loss) per share, as required by SFAS No. 128, are
as follows:
Three Months Ended
January 31, January 25,
1998 1997
----------- -----------
(in thousands except per share data)
Income (Loss) ............................... $12,127 $(69,161)
======= ========
Basic weighted average shares outstanding .... 13,096 10,413
Weighted average common equivalent shares .... 409 -
------- --------
Diluted weighted average shares outstanding .. 13,505 10,413
======= ========
Basic Net Income (Loss) Per Share ............ $ 0.93 $ (6.64)
======= ========
Diluted Net Income (Loss) Per Share .......... $ 0.90 $ (6.64)
======= ========
These financial statements have been prepared and presented based on the
new standard. Prior period amounts have been restated to conform to current
year presentation. For the three month periods ended January 31, 1998 and
January 25, 1997, 485,290 and -0- anti-dilutive weighted shares,
respectively, have been excluded from the number of potential common shares
outstanding.
2. ACQUISITION OF ZYCON
On January 10, 1997, the Company acquired substantially all of the
outstanding common stock of Zycon Corporation ("Zycon"). The acquisition
was accounted for as a purchase in accordance with Accounting Principles
Board Opinion No. 16, and accordingly, Zycon's operating results since
January 10, 1997 are included in the accompanying consolidated financial
statements. Unaudited pro forma operating results for the Company, assuming
the acquisition of Zycon occurred on October 29, 1995 are as follows:
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HADCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
2. ACQUISITION OF ZYCON (CONTINUED)
Three Months Ended
------------------------------
(in thousands, except per
share data)
January 31, January 25,
1998 1997
----------- -----------
Net Sales ......................... $198,276 $172,547
Net Income ........................ 12,127 8,274
Basic Net Income (Loss) Per Share . $ 0.93 $ 0.76
Diluted Net Income (Loss) Per Share $ 0.90 $ 0.76
For purposes of these pro forma operating results, the in-process R&D was
assumed to have been written off prior to October 29, 1995, so that the
operating results presented include only recurring costs.
3. INVENTORIES
Inventories are stated at the lower of cost, first-in, first-out (FIFO), or
market and consist of the following (in thousands):
January 31, October 25,
1998 1997
----------- -----------
Raw Materials ......... $19,143 $14,167
Work-in-process ....... 34,873 31,833
------- -------
$54,016 $46,000
======= =======
4. INTANGIBLE ASSETS
The Company has assessed the realizability of its acquired intangible
assets in accordance with SFAS No.121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of. Under SFAS
No. 121, the Company is required to assess the valuation of its long-lived
assets, including intangible assets, based on the estimated cash flows to
be generated by such assets.
5. LINES OF CREDIT
The Company has an unsecured Revolving Credit Agreement, as amended, (the
"Agreement") with a group of banks. The Agreement provides for direct
borrowings or letters of credit for up to $400 million and expires January
8, 2002. Borrowings under the Agreement bear interest, at the Company's
option, at either; (i) the Eurodollar Rate plus the Applicable Eurodollar
Rate Margin (both as defined in the Agreement) ranging between .5% and
1.1375%, based on certain financial ratios of the Company, or (ii) the Base
Rate, as defined. The Company is required to pay a quarterly commitment fee
ranging from .2% to .375% per annum, based on certain financial ratios of
the Company, of the unused commitment under the Agreement. If the Company
obtains certain debt financing, as defined, the banks may require the
Company to repay up to $150,000,000 of amounts
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HADCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
LINES OF CREDIT (CONTINUED)
outstanding under the Agreement. At January 31, 1998, borrowings of
$110,000,000 were outstanding under the agreement at a weighted average
interest rate of 6.34%.
The Agreement places several restrictions on the Company, including
limitations on mergers, acquisitions and sales of a substantial portion of
its assets, as well as certain limitations on liens, guarantees, additional
borrowings, changes in the Company's capitalization, as defined, and
investments. The Agreement also requires the Company to maintain certain
financial covenants, including minimum levels of consolidated net worth, a
maximum ratio of funded debt to EBITDA, maximum capital expenditures and
minimum interest coverage, as defined, during the term of the Agreement.
At January 31, 1998, the Company was in compliance with all loan covenants.
The Company has a line of credit arrangement with a Malaysian bank
denominated in Malaysian ringgits and U.S. dollars for aggregate borrowings
of approximately $4.0 million for the purpose of acquiring land, facilities
and equipment for the Company's Malaysian subsidiary. The arrangement is
renewable annually. At January 31, 1998, there were no amounts outstanding
under this arrangement.
6. LONG TERM DEBT
January 31, October 25,
1998 1997
----------- ------------
(in thousands)
Loan agreements in connection with the expansion of a building
The loans bear interest at rates from 1%to 7% through March,
2011 and are collateralized by property and an
irrevocable letter of credit .................................. $ 801 $ 820
Revolving credit agreement (Note 5) ........................... 110,000 100,000
Obligations under capital leases .............................. 12,761 13,960
-------- --------
123,562 114,780
Less - Current portion ........................................ 4,793 5,064
-------- --------
$118,769 $109,716
======== ========
7. SUBSEQUENT EVENT
In February 1998, the Company entered into an agreement to acquire the
outstanding common stock of Continental Circuits Corp., an Arizona based
manufacturer of printed circuits, for approximately $185 million or $23.90
per share. It is currently expected that if this transaction is
successfully completed, its completion will occur in the second quarter of
fiscal 1998 and will be accounted for as a purchase business combination in
accordance with APB No. 16 "Accounting for Business Combinations."
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HADCO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the matters
discussed below or elsewhere in this quarterly report including, without
limitation, "Environmental Matters," are forward-looking statements that
involve risks and uncertainties. The Company makes such forward-looking
statements under the provisions of the "Safe Harbor" section of the Private
Securities Litigation Reform Act of 1995. Any forward-looking statements
should be considered in light of the factors described below under "Factors
That May Affect Future Results." Actual results may vary materially from
those projected, anticipated or indicated in any forward-looking
statements. In this quarterly report, the words "anticipates," "believes,"
"expects," "intends," "future," "could," and similar words or expressions
(as well as other words or expressions referencing future events,
conditions or circumstances) identify forward-looking statements.
RESULTS OF OPERATIONS
FIRST QUARTER
Net sales for the three months ended January 31, 1998 increased 77.8% over
the three months ended January 25, 1997. The increase resulted from several
factors including the acquisition of Zycon, which added $63.4 million to
printed circuit net sales in the quarter, and an increase in both backplane
and printed circuit net sales excluding Zycon. Backplane assembly net sales
increased due to higher product volume and shipments. Printed circuit net
sales increased due to higher production volume and shipments and a shift
toward products with more layers and greater densities. In addition,
average pricing for printed circuits decreased slightly for the first
quarter of 1998 over the same period in 1997. Net sales from backplane
assemblies increased to 20.5% of net sales (excluding Zycon printed circuit
net sales) from 18.1% in the first quarter of 1997.
The gross profit margin decreased to 19.7% in the three months ended
January 31, 1998 from 22.3% in the comparable period in fiscal 1997. The
decrease resulted from increased investment in new capacity and
technologies at certain facilities, start-up expenses for the west coast
backplane operation, and lower overall gross margins from the Zycon
operations (including ongoing start-up expenses associated with the volume
production facility in Malaysia).
Operating expenses, as a percent of net sales, decreased to 9.0% in the
three months ended January 31, 1998 from 9.7% in the comparable period in
fiscal 1997 due to increased net sales and the fixed nature of the
Company's operating expenses.
Income (loss), as a percent of net sales, from operations decreased to
10.7% in the three months ended January 31, 1998 from 13.9% in the
comparable period in fiscal 1997, primarily as a result of the same factors
affecting gross profits.
Interest income decreased in the first quarter of 1998 as compared to the
first quarter of 1997 due to lower average cash balances available for
investing. Interest expense increased in the first quarter of 1998 as
compared to the first quarter of 1997, due to an increase in outstanding
debt relating to the acquisition of Zycon.
The Company includes in operating expenses charges for actual expenditures
and accruals, based on estimates, for environmental matters. To the extent
and in amounts Hadco believes circumstances warrant, it will continue to
accrue and charge to operating expenses cost estimates relating to
environmental matters. The Company 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 of such environmental matters
could have a significant negative impact on the Company's consolidated
financial results for a particular reporting period.
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HADCO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER (CONTINUED)
The Company believes that excess capacity may exist in the printed circuit
and electronic assembly industries, as well as fluctuating growth rates in
the electronics industry as a whole. Both factors could have a material
adverse effect on future orders and pricing. Despite these beliefs
regarding the electronics industry as a whole, it should be noted that the
Company has historically needed to increase its own manufacturing capacity
to maintain and expand its market position. However, the Company's
manufacturing capacity needs could change at any time or times in the
future. The Company also believes that the potential exists for a shortage
of materials in such industries, which could have a material adverse effect
on future unit costs. In response to such concerns, the Company engages in
the normal industry practices of maintaining primary and secondary vendors
and diversifying its customer base. There can be no assurances, however,
that such measures would be sufficient to protect the Company against any
shortages of materials.
INCOME TAXES
In accordance with generally accepted accounting principles, the Company
provides for income taxes on an interim basis, using its effective annual
income tax rate. The Company anticipates an effective annual income tax
rate for fiscal 1998 of 38.5%, which is slightly less than the combined
federal and state statutory rates. The effective rate was increased by
amortization of goodwill which is not tax deductible, and was offset by the
tax benefit of the Company's foreign sales corporation and various state
investment tax credits. The effective tax rate for fiscal 1998 is based on
current tax laws.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1998, the Company had working capital of approximately $66.5
million and a current ratio of 1.58, compared to working capital of
approximately $53.7 million and a current ratio of 1.48 at October 25,
1997. Cash, cash equivalents and short-term investments at January 31, 1998
were approximately $11.4 million, a decrease of $2.3 million from
approximately $13.7 million at October 25, 1997.
In December 1997, the Company negotiated a $400 million unsecured senior
revolving credit loan facility with a group of banks, which amended and
restated an existing credit facility (the "Amended Credit Facility").
Interest on loans outstanding under the Amended Credit Facility is, at the
Company's option, bear interest at either (1) the Eurodollar Rate, plus the
Applicable Eurodollar Rate Margin (both as defined in "Amended Credit
Facility"). Or (2) the Base Rate as defined in the Amended Credit
Facility. At January 31, 1998, $110 million was outstanding under the
Amended Credit Facility. The Amended Credit Facility matures in January
2002. See Note 5 to Notes to Consolidated Condensed Financial Statements.
The Company believes its existing working capital and borrowing capacity,
coupled with the funds generated from the Company's operations will be
sufficient to fund its anticipated working capital, capital expenditure and
debt payment requirements through fiscal 1998. Because the Company's
capital requirements cannot be predicted with certainty, however, there is
no assurance that the Company will not require additional financing during
this period. There is no assurance that any additional financing will be
available on terms satisfactory to the Company or not disadvantageous to
the Company's security holders. The Company intends to draw on the Amended
Credit Facility in connection with its proposed acquisition of Continental
Circuits Corp. should such transaction be successfully consummated. See
Note 7 to Notes to Consolidated Condensed Financial Statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a changing environment that involves a number of
risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks.
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HADCO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DEPENDENCE ON ELECTRONICS INDUSTRY
The Company's principal customers are electronics OEMs and contract
manufacturers in the computing (mainly workstations, servers, mainframes,
storage and notebooks), data communications/telecommunications and
industrial automation industries, including process controls, automotive,
medical and instrumentation. These industry segments, and the electronics
industry as a whole, are characterized by intense competition, relatively
short product life-cycles and significant fluctuations in product demand.
In addition, the electronics industry is generally subject to rapid
technological change and product obsolescence. Discontinuance or
modifications of products containing components manufactured by the Company
could have a material adverse effect on the Company's business, financial
condition and results of operations. Further, the electronics industry is
subject to economic cycles and has in the past experienced, and is likely
in the future to experience, recessionary periods. A recession or any other
event leading to excess capacity or a downturn in the electronics industry
would likely result in intensified price competition, reduced gross margins
and a decrease in unit volume, all of which would have a material adverse
effect on the Company's business, financial condition and results of
operations.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have varied and may continue to
fluctuate significantly. At times in the past, the Company's net sales and
net income have decreased from the prior quarter. Operating results are
affected by a number of factors, including the timing and volume of orders
from and shipments to customers relative to the Company's manufacturing
capacity, level of product and price competition, product mix, the number
of working days in a particular quarter, trends in the electronics industry
and general economic factors. In recent years, the Company's gross margins
have varied primarily as a result of capacity utilization, product mix,
lead times, volume levels and complexity of customer orders. There can be
no assurance that the Company will be able to manage the utilization of
manufacturing capacity or product mix in a manner that would maintain or
improve gross margins or the Company's business, financial condition and
results of operations. The timing and volume of orders placed by the
Company's customers vary due to customer attempts to manage inventory,
changes in customers' manufacturing strategies and variation in demand for
customer products. An interruption in manufacturing resulting from
shortages of parts or equipment, fire, earthquake or other natural
disaster, equipment failure or otherwise would have a material adverse
effect on the Company's business, financial condition and results of
operations. The Company's expense levels are relatively fixed and are
based, in part, on expectations of future revenues. Consequently, if
revenue levels are below expectations, this occurrence is likely to
materially adversely affect the Company's business, financial condition and
results of operations. Results of operations in any period are not
necessarily indicative of the results to be expected for any future period.
Due to all of the foregoing factors, it is possible that in some future
quarter the Company's operating results may be below the expectations of
public market analysts and investors. Such an event could have a material
adverse effect on the price of the Company's Common Stock.
VARIABILITY OF ORDERS
The level and timing of orders placed by the Company's customers vary due
to a number of factors, including customer attempts to manage inventory,
changes in the customers' manufacturing strategies and variation in demand
for customer products due to, among other things, technological change, new
product introductions, product life-cycles, competitive conditions or
general economic conditions. Since the Company generally does not obtain
long-term purchase orders or commitments from its customers, it must
anticipate the future volume of orders based on discussions with its
customers. A substantial portion of sales in a given quarter may depend on
obtaining orders for products to be manufactured and shipped in the same
quarter in which those orders are received. The Company relies on its
estimate of anticipated future volumes when making
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HADCO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
VARIABILITY OF ORDERS (CONTINUED)
commitments regarding the level of business that it will seek and accept,
the mix of products that it intends to manufacture, the timing of
production schedules and the levels and utilization of personnel and other
resources. A variety of conditions, both specific to the individual
customer and generally affecting the customer's industry, may cause
customers to cancel, reduce or delay orders that were previously made or
anticipated. A significant portion of the Company's released backlog at any
time may be subject to cancellation or postponement without penalty. The
Company cannot assure the timely replacement of canceled, delayed or
reduced orders. Significant or numerous cancellations, reductions or delays
in orders by a customer or group of customers could materially adversely
affect the Company's business, financial condition and results of
operations.
ACQUISITIONS
In February 1998, the Company entered into an agreement to acquire all of
the outstanding stock of Continental Circuits Corp., ("Continental")
pursuant to a cash tender offer for all of the outstanding shares of common
for approximately $185 million or $23.90 per share. If completed
successfully, the tender offer is expected to be completed in the second
fiscal quarter of 1998. See Note 7 to Notes to Consolidated Condensed
Financial Statements.
The Company acquired 100% of the capital stock of Zycon, a manufacturer of
electronic interconnect products, on January 10, 1997 (the "Zycon
acquisition"). Zycon currently operates as a wholly-owned subsidiary of the
Company under the name Hadco Santa Clara, Inc. The Company has limited
experience in integrating acquired companies or technologies into its
operations. Therefore, there can be no assurance that the Company will
operate any acquired business profitably in the future. Contemporaneous
with the Zycon acquisition, nine senior management personnel of Zycon were
terminated. There can be no assurance that the Company will not be
materially adversely affected by such terminations or that the Company will
be able to retain key personnel at any acquired business. Accordingly,
operating expenses associated with the acquired business may have a
material adverse effect on the Company's business, financial condition and
results of operations in the future.
The Company may from time to time pursue the acquisition of other
companies, assets, products or technologies. The Company may incur
additional indebtedness in connection with a future business acquisition,
and the incurrence of substantial amounts of debt in connection with future
acquisitions could increase the risk of the Company's operations. If the
Company's cash flow and existing working capital are not sufficient to fund
its general working capital requirements or to service its indebtedness,
the Company would have to raise additional funds through the sale of its
equity securities, the refinancing of all or part of its indebtedness or
the sale of assets or subsidiaries. There can be no assurance that any of
these sources of funds would be available in amounts sufficient for the
Company to meet its obligations. The cost of debt financing may also impair
the ability of the Company to maintain adequate working capital or to make
future acquisitions. In addition, the issuance of additional shares of
Common Stock in connection with future acquisitions could be dilutive to
existing investors. Acquisitions involve a number of operating risks that
could materially adversely affect the Company's operating results,
including the diversion of management's attention to assimilate the
operations, products and personnel of the acquired companies, the
amortization of acquired intangible assets, and the potential loss of key
employees of the acquired companies. Furthermore, acquisitions may involve
businesses in which the Company lacks experience. There can be no assurance
that the Company will be able to manage one or more acquisitions
successfully, or that the Company will be able to integrate the operations,
products or personnel gained through any such acquisitions without a
material adverse effect on the Company's business, financial condition and
results of operations.
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14
HADCO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPETITION
The electronic interconnect industry is highly fragmented and characterized
by intense competition. The Company believes that its major competitors are
the large U.S. and international independent and captive producers that
also manufacture multilayer printed circuits and provide backplane and
other electronic assemblies. Some of these competitors have significantly
greater financial, technical and marketing resources, greater name
recognition and a larger installed customer base than the Company. In
addition, these competitors may have the ability to respond more quickly to
new or emerging technologies, may adapt more quickly to changes in customer
requirements and may devote greater resources to the development, promotion
and sale of their products than the Company.
During periods of recession or economic slowdown in the electronics
industry and other periods when excess capacity exists, electronics OEMs
become more price sensitive, which could have a material adverse effect on
interconnect pricing. In addition, the Company believes that price
competition from printed circuit manufacturers in Asia and other locations
with lower production costs may play an increasing role in the printed
circuit markets in which the Company competes. This price competition from
Asian printed circuit manufacturers may intensify in times of Asian
economic turmoil, currency devaluations or financial market instability,
such as many Asian countries are currently experiencing. Moreover, the
Company's basic interconnect technology is generally not subject to
significant proprietary protection, and companies with significant
resources or international operations may enter the market. Increased
competition could result in price reductions, reduced margins or loss of
market share, any of which could materially adversely affect the Company's
business, financial condition and results of operations.
The demand for printed circuits has continued to be affected by the
development of smaller, more powerful electronic components requiring less
printed circuit area. Expansion of the Company's existing products or
services could expose the Company to new competition. Moreover, new
developments in the electronics industry could render existing technology
obsolete or less competitive and could potentially introduce new
competition into the industry. There can be no assurance that the Company
will continue to compete successfully against present and future
competitors or that competitive pressures faced by the Company will not
have a material adverse effect on the Company's business, financial
condition and results of operations.
TECHNOLOGICAL CHANGE, PROCESS DEVELOPMENT AND PROCESS DISRUPTION
The market for the Company's products and services is characterized by
rapidly changing technology and continuing process development. The future
success of the Company's business will depend in large part upon its
ability to maintain and enhance its technological capabilities, develop and
market products and services that meet changing customer needs and
successfully anticipate or respond to technological changes, on a
cost-effective and timely basis. In addition, the electronic interconnect
industry could in the future encounter competition from new technologies
that render existing electronic interconnect technology less competitive or
obsolete, including technologies that may reduce the number of printed
circuits required in electronic components. There can be no assurance that
the Company will effectively respond to the technological requirements of
the changing market. To the extent the Company determines that new
technologies and equipment are required to remain competitive, the
development, acquisition and implementation of such technologies and
equipment are likely to continue to require significant capital investment
by the Company. There can be no assurance that capital will be available
for this purpose in the future or that investments in new technologies will
result in commercially viable technological processes or that there will be
commercial applications for these technologies. Moreover, the Company's
business involves highly complex manufacturing processes that have in the
past and could in the future be subject to periodic failure or disruption.
Process disruptions can result in delays in certain product shipments.
There can be no assurance that failures or disruptions will not occur in
the future. The loss of revenue and earnings to the Company from such a
technological change, process development or process disruption, as well as
any
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15
HADCO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TECHNOLOGICAL CHANGE, PROCESS DEVELOPMENT AND PROCESS DISRUPTION
(CONTINUED)
disruption of the Company's operations resulting from a natural disaster
such as an earthquake, fire or flood, could have a material adverse effect
on the Company's business, financial condition and results of operations.
MALAYSIA FACILITY
Hadco Santa Clara (formerly Zycon) completed construction of a volume
manufacturing facility for printed circuits in Malaysia in fiscal 1997.
Hadco's management has no experience in operating foreign manufacturing
facilities, and there can be no assurance that the Company will operate the
new facility on a profitable basis. The Company expects that the Malaysia
facility may continue to incur operating losses during future quarters of
operations as a result of various factors, including, without limitation,
initial operating inefficiencies, other start-up costs, and price
competition for the products which the Company intends to produce at the
new facility. International operations are also subject to a number of
risks, including unforeseen changes in regulatory requirements, exchange
rates, tariffs and other trade barriers, misappropriation of intellectual
property, currency fluctuations, and political and economic instability.
Malaysia and other Asian countries have recently experienced economic
turmoil and a significant devaluation of their local currencies. There can
be no assurance that this period of Asian economic turmoil will not result
in increased price competition, restrictions on the transfer of funds
overseas, employee turnover, labor unrest, the reversal of current policies
encouraging foreign investment and trade, or other domestic Asian economic
problems that could materially adversely affect the Company. Therefore,
there can be no assurance that economic problems in Malaysia or other Asian
countries will not have a material adverse impact on the Company's
business, financial condition or results of operations.
CUSTOMER CONCENTRATION
During the past several years, the Company's sales to a small number of its
customers have accounted for a significant percentage of the Company's
annual net sales. During fiscal 1995, 1996 and 1997, the Company's ten
largest customers accounted for approximately 46%, 48% and 47% of net
sales, respectively, and 43% in fiscal 1996 on a pro forma basis including
Zycon. In fiscal 1997, Solectron accounted for approximately 15% of the net
sales of the Company. The Company generally does not obtain long-term
purchase orders or commitments from its customers, and the orders received
by the Company generally require delivery within 90 days. Given the
Company's strategy of developing long-term purchasing relationships with
high growth companies, the Company's dependence on a number of its most
significant customers may increase. There can be no assurance that the
Company will be able to identify, attract and retain customers with high
growth rates or that the customers that it does attract and retain will
continue to grow. Although there can be no assurance that the Company's
principal customers will continue to purchase products and services from
the Company at current levels, the Company expects to continue to depend
upon its principal customers for a significant portion of its net sales.
The loss of or decrease in orders from one or more major customers could
have a material adverse effect on the Company's business, financial
condition and results of operations.
MANUFACTURING CAPACITY
The Company believes its long-term competitive position depends in part on
its ability to increase manufacturing capacity. The Company may obtain such
additional capacity through acquisitions or expansion of its current
facilities. Either approach would require substantial additional capital,
and there can be no assurance that such capital will be available from cash
generated by current operations. Further, there can be no assurance that
the Company will be able to acquire sufficient capacity or successfully
integrate and manage such additional facilities. In addition, the Company's
expansion of its manufacturing capacity has significantly increased and
will continue to significantly increase its fixed costs, and the future
profitability of the Company will depend on its ability to utilize its
manufacturing capacity in an effective manner. The
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16
HADCO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANUFACTURING CAPACITY (CONTINUED)
failure to obtain sufficient capacity or to successfully integrate and
manage additional manufacturing facilities could adversely affect the
Company's relationships with its customers and materially adversely affect
the Company's business, financial condition and results of operations. The
Company has a large manufacturing facility in Santa Clara, California, and
an earthquake or other natural disaster in that area that results in an
interruption of manufacturing at such facility would have a material
adverse effect on the Company's business, financial condition and results
of operations.
MANAGEMENT OF GROWTH
The Company has initiated significant expansion, including geographic
expansion, of its operations, which has placed, and will continue to place,
significant demands on the Company's management, operational, technical and
financial resources. These demands are compounded by the Zycon acquisition
and the proposed acquisition of Continental Circuits Corp. The Company
expects that expansion will require additional management personnel and the
development of further expertise by existing management personnel. The
Company's ability to manage growth effectively, particularly given the
increasing scope of its operations, will require it to continue to
implement and improve its operational, financial and management information
systems as well as to further develop the management skills of its managers
and supervisors and to train, motivate and manage its employees. The
Company's failure to effectively manage future growth, if any, could have a
material adverse effect on the Company's business, financial condition and
results of operations. Competition for personnel is intense, and there can
be no assurance that the Company will be able to attract, assimilate or
retain additional highly qualified employees in the future, especially
engineering personnel. The failure to hire and retain such personnel could
have a material adverse effect on the Company's business, financial
condition and results of operations.
ENVIRONMENTAL MATTERS
The Company is subject to a variety of local, state and federal
environmental laws and regulations relating to the storage, use, discharge
and disposal of chemicals, solid waste and other hazardous materials used
during its manufacturing process, as well as air quality regulations and
restrictions on water use. When violations of environmental laws occur, the
Company can be held liable for damages and the costs of remedial actions
and can also be subject to revocation of permits necessary to conduct its
business. Any such revocations could require the Company to cease or limit
production at one or more of its facilities, which could have a material
adverse effect on the Company's business, financial condition and results
of operations. Moreover, the Company's failure to comply with present and
future regulations could restrict the Company's ability to expand its
facilities or could require the Company to acquire costly equipment or to
incur other significant expenses to comply with environmental regulations.
Environmental laws could become more stringent over time, imposing greater
compliance costs and increasing risks and penalties associated with
violation. The Company operates in several environmentally sensitive
locations and is subject to potentially conflicting and changing regulatory
agendas of political, business and environmental groups. Changes or
restrictions on discharge limits, emissions levels, or material storage or
handling might require a high level of unplanned capital investment and/or
relocation. There can be no assurance that compliance with new or existing
regulations will not have a material adverse effect on the Company's
business, financial condition and results of operations.
AVAILABILITY OF RAW MATERIALS AND COMPONENTS
While the Company has not entered into any supply agreements and does not
have any guaranteed sources of raw materials or components, it routinely
purchases raw materials and components from several key material suppliers.
Although alternative material suppliers are currently available, a
significant unplanned event at a
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17
HADCO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
AVAILABILITY OF RAW MATERIALS AND COMPONENTS (CONTINUED)
major supplier could have a material adverse effect on the Company's
operations. Hadco Santa Clara has experienced shortages of certain types of
raw materials in the past. The potential exists for shortages of certain
types of raw materials or components and any such future shortages or price
fluctuations in raw materials could have a material adverse effect on the
Company's manufacturing operations and future unit costs, thereby
materially adversely affecting the Company's business, financial condition
and results of operations. Product changes and the overall demand for
electronic interconnect products could increase the industry's use of new
laminate materials, standard laminate materials, multilayer blanks,
electronic components and other materials, and therefore such materials may
not be readily available to the Company in the future. Electronic
components used by the Company in producing backplane assemblies are
purchased by the Company and, in certain circumstances, the Company may
bear the risk of component price fluctuations.
There can be no assurance that shortages of certain types of electronic
components will not occur in the future. Component shortages or price
fluctuations could have a material adverse effect on the Company's
backplane assembly business, thereby materially adversely affecting the
Company's business, financial condition and results of operations. To the
extent that the Company's backplane assembly business expands as a
percentage of the Company's net sales, component shortages and price
fluctuations could, to a greater extent, materially adversely affect the
Company's business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends to a large extent upon the continued
services of key managerial and technical employees, none of whom, except
for the President/Chief Executive Officer, is bound by an employment
agreement or a non-competition agreement. The President/Chief Executive
Officer's non-competition agreement is for one year after the termination
of his employment with the Company. The loss of the services of any of the
Company's key employees could have a material adverse effect on the
Company. The Company believes that its future success depends on its
continuing ability to attract and retain highly qualified technical,
managerial and marketing personnel. Competition for such personnel is
intense, especially for engineering personnel, and there can be no
assurance that the Company will be able to attract, assimilate or retain
such personnel. If the Company is unable to hire and retain key personnel,
the Company's business, financial condition and results of operations may
be materially adversely affected.
INTELLECTUAL PROPERTY
The Company's success depends in part on its proprietary techniques and
manufacturing expertise, particularly in the area of complex multilayer
printed circuits. The Company has few patents and relies primarily on trade
secret protection of its intellectual property. There can be no assurance
that the Company will be able to protect its trade secrets or that others
will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to the Company's trade
secrets. In addition, litigation may be necessary to protect the Company's
trade secrets, to determine the validity and scope of the proprietary
rights of others or to defend against claims of patent infringement. If any
infringement claim is asserted against the Company, the Company may seek to
obtain a license of the other party's intellectual property rights. There
is no assurance that a license would be available on reasonable terms or at
all. Litigation with respect to patents or other intellectual property
matters could result in substantial costs and diversion of management and
other resources and could have a material adverse effect on the Company's
business, financial condition and results of operations.
17
18
HADCO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
VOLATILITY OF STOCK PRICE
The Company's Common Stock has experienced significant price volatility
historically, and such volatility may continue to occur in the future.
Factors such as announcements of large customer orders, order
cancellations, new product introductions by the Company or competitors or
general conditions in the electronics industry, as well as quarterly
variations in the Company's actual or anticipated results of operations,
may cause the market price of the Company's Common Stock to fluctuate
significantly. Furthermore, the stock market has experienced extreme price
and volume fluctuations in recent years, which has had a substantial effect
on the market price for securities issued by many technology companies,
often for reasons unrelated to the operating performance of the specific
companies. These broad market fluctuations may materially adversely affect
the price of the Company's Common Stock. There can be no assurance that the
market price of the Company's Common Stock will not experience significant
fluctuations in the future, including fluctuations that are unrelated to
the Company's performance.
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19
HADCO CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits
3.1 - Amendment to Restated Articles of Organization dated March 4, 1998.
*10.1 - Outside Directors Compensation Plan of 1998.
*10.2 - Employee Stock Purchase Plan of November 17, 1997 (filed as Exhibit
10.1 to the Registration Statement No. 333-47589 on Form S-8 and
incorporated herein by reference.
(*) Indicates a management contract or any compensatory plan, contract or
arrangement required to be filed as an exhibit.
(b) Reports on From 8-K
None
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20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
Hadco Corporation
Date: March 11, 1998 By: /s/ TIMOTHY P. LOSIK
------------------------
Timothy P. Losik
Chief Financial Officer,
Senior Vice President