October 12, 1998

TMF Interview With Hadco Treasury Manager Rich Gerrity

SALEM, N.H. (Oct. 2, 1998) -- Greg Markus visited Hadco Corp. (Nasdaq: HDCO) headquarters in Salem, New Hampshire and interviewed Rich Gerrity, the company's treasury manager. Among his duties, Gerrity handles a share of inquiries from investors and analysts.

As discussed in the company's most recent 10-Q statement and the S-4 filing in connection with a recent debt offering, Hadco is the largest manufacturer of advanced electronic interconnect products in North America. Its principal products are multilayer printed circuit boards and backplane assemblies. Hadco provides customers with a range of products and services that includes development, design, quick-turn prototype, pre-production, volume products, and backplane assembly. The company operates 11 facilities in the U.S. and one in Malaysia.

Hadco's net sales for the third quarter (ending August 1) were $201.4 million resulting in a net loss of $6.9 million, a net loss of $0.52 per share. Included in the net loss were restructuring charges of $1.1 million (or $0.05 per share) relating to a restructuring announced on July 31. On a pro-forma, net sales were $215.5 million and diluted EPS was $0.86 in the year-ago period. Backlog at the end of the third quarter was $128.7 million, versus $125.6 million for the previous quarter.

Q: Thanks for taking time for this interview, Mr. Gerrity. Perhaps we could start off by having you say a bit about what Hadco does?

A: Hadco's main business is making printed circuit boards (PCBs). Our primary customer markets are high-end networking and telecommunications equipment. We also sell into the industrial automation market, but that's a much smaller percentage of the business. Our principal customers include Solectron (NYSE: SLR), Jabil (NYSE: JBL), Cabletron (NYSE: CS), Northern Telecom (NYSE: NT), Sun Microsystems (Nasdaq: SUNW), Cisco (Nasdaq: CSCO), Celestica, SCI Systems (NYSE: SCI), and so forth.

About 80% of our revenues come from printed circuit board production, and about 20% from backplane manufacture, or what we call value-added manufacturing. The term "backplane" comes from the fact that those boards were typically in the back of the finished product -- the desktop computer, for example. The backplane would include the connectors for your monitor, your printer, and so forth. In our value-added manufacturing we're increasingly no longer just making the backplane; we're also doing box-build and cage-build -- the sheet metal that encloses the backplane.

Hadco has tech centers in Watsonville, California and in Haverhill, Massachusetts, the latter of which is a consolidation of a former Hadco facility here in Salem with a larger Zycon facility in Haverhill. The tech centers do quickturn work, prototype boards, small-quantity custom runs, and testing new production technologies. An example of the last is our research on producing Teflon PCBs. Customers in the communications industry -- such as Nortel (NYSE: NT) or Lucent (NYSE: LU) -- like the Teflon boards because that material cuts down on electrical interference. But Teflon is a difficult material to work with, and Hadco is among the first in North America to successfully work with Teflon in a volume environment.

Hadco's operations are primarily in North America, with one facility in Malaysia, a result of the Zycon acquisition, completed in January 1997. The Malaysian operation had just gotten going when we acquired it. We are now qualifying customers there and selling product through there, with a revenue run rate of $8 million to $9 million per quarter. We're looking to continue to grow that business. Most of the product built there is shipped back to North America. Overall, about 80% of Hadco's revenues are from the U.S., 10% from Canada, and 10% from Asia-Pacific.

Q: How has business been recently, and where do you see things going in 1999?

A: We had a challenging third quarter, as we discussed back in August. A lot of that was the result of softness in demand and inventory correction issues, some of which was fallout from the turmoil in Asian markets. There had also been some pricing pressures, part of which was contributed by Hadco's own aggressiveness on pricing as we tried to maximize our business. We also had to manage bringing on line the assets we acquired from Zycon and Continental.

We've since seen some stabilization of pricing -- more along the lines of a normal 3% range versus the 6-8% price erosion we had experienced last quarter. That's an encouraging sign. Keep in mind that pricing is driven by the amount of technology that's in the board -- the layer counts -- and so it's difficult to make blanket statements about pricing. We're working diligently on bringing margins back up and pressing our vendors to reduce our costs in response to marketplace demands. We've also seen some encouraging signs on the demand side.

We're comfortable with analysts' estimates of around a $0.07 loss for the [fourth] quarter, which ends in October, on about $210 million to $215 million in revenues, and we're hoping that there may be some upside, as our stated goal is to try to break even in the quarter.

As for 1999, we're hopeful that some of the order levels we've been seeing recently are sustainable. It's hard to measure that precisely, though, because almost half of our revenue flows through the contract electronic assemblers -- the Jabils, the Solectrons, and so forth -- although we also have good relations with the original equipment manufacturers. For example, a lot of our Solectron business comes from our relationship with Sun Micro. We try to have good relationships with both the OEMs and the contract assemblers, and many OEMs will specify in their contracts with the assemblers that they source Hadco.

Q: What sort of bookings and order visibility do you have in being able to make projections?

A: Our lead times had been in the range of about four weeks for firm orders. More recently, they have been stretching to around the six-week range. So that's about the limit of the visibility we're most comfortable with. Beyond that, customers provide projections of their needs in terms of a 12-month rolling forecast, but those are for planning purposes only and are not firm orders. The backplane contracts are "lumpier" by nature than the PCB contracts are, and so it's difficult to forecast backplane revenues with precision.

Q: Who are Hadco's main competitors? From an investor's standpoint, what would the comparison set be?

The comparison set for Hadco in North America includes Praegitzer (Nasdaq: PGTZ), Merix (Nasdaq: MERX) and Altron (Nasdaq: ALRN) [which recently signed an agreement to be acquired by Sanmina (Nasdaq: SANM)]. Hadco purchased two of the better-known competitors in Zycon and Continental. In Taiwan, competitors include Compeq and Wus. The Taiwanese shops are increasingly competitive, where competitiveness is measured by the layer-count of the PCBs that the facility can produce. Their capabilities are moving up into the twelve-layer boards. Part of the reason for Hadco acquiring Zycon was to give us more insight into what was happening in that part of the world and to be able to serve customers with facilities located there.

The most challenging part of the Zycon acquisition was getting our customers to visit the facility and get it qualified to manufacture customers' products. When we acquired Zycon, we initiated an aggressive program to get customers there in order to qualify that site. This has allowed us to move to that facility more and more of the work that's appropriate for it.

Q: You took on some debt in connection with the acquisitions. How are you managing that?

A: This summer we peeled off a portion of that into the longer-term market with our 10-year notes [$200 million in senior subordinated notes at 9.5%]. That left us with $160 million under our revolving loan facility. Altogether, we see that as very manageable. With the new assets we acquired, there's a fair amount of amortization and depreciation. So from a cash flow and EBITDA perspective, Hadco is healthy.

Q: I remember reading a couple of years ago about some environmental programs that Hadco has. Electronics can be a pretty dirty industry. Can you tell us more about your programs?

A: That's a bit outside of my area, but Lee Wilmont is our person in charge of that. He's on a national industry committee for environmental issues, and he's been very involved in making Hadco a leader in that. We view environmental issues as very important -- for the health and safety of our employees and from an economic perspective. By operating cleanly, you also tend to operate efficiently: if you can reduce waste, you're saving money. Hadco has worked with national, state, and local agencies in developing programs and standards.

Q: Can you tell us a bit about Hadco's approach to shareholder relations? I notice, for example, that in your third-quarter earnings release, you published the phone number for the conference call and made a taped replay available.

A: I've been involved in investor relations and public relations here for a little over a year now, as our CFO, Tim Losik, has begun to take on management of operations in our Eastern region. Tim Matthews, our corporate controller, is the other individual involved in investor relations. We're still learning and getting better at it. We try to be as helpful as we can be, recognizing that there are certain times toward the end of each quarter when as a matter of policy we're not able to say much about current conditions.

Q: Hadco's fiscal year concludes at the end of this month. When will the annual meeting be held?

A: Our annual meeting will take place on March 3.

Q: Thanks very much, Mr. Gerrity.

A: Glad to help.

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