FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (TMF Debit)

Hadco Corporation
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12A Manor Parkway
Salem, NH 03079
(603) 898-8000 http://www.hadco.com:8080

UNION CITY, CA (May 19, 1997)/FOOLWIRE/ --- Hadco Corporation released their second quarter 1997 results on May 8th. Net sales for the second quarter of $180.7 million were up 105% from $88.1 million in Q2 of 1996 and up 62% from Q1 1997. Second quarter PCB pricing was flat from Q1. Layer count and product density per product shipped during the quarter increased versus the first quarter of 1997. Net income was $10 million or $0.91 per share compared to $0.71 per share in Q2 1996 and $0.81 per share in Q1 1997, excluding the non-recurring writeoffs.

MAJOR CUSTOMERS. Solectron was their largest customer and accounted for approximately 13% of sales. The top 5 customers in the quarter were Solectron, Sun Microsystems, Cabletron, Compaq, and Northern Telecom. Sun Microsystems was about 5.3% of sales during the quarter. The top 5 customers represent approximately 33% of sales.

PROFIT MARGIN. The gross profit margin was 21.3% for the quarter versus 23.7% in Q1 1997. This decrease resulted from lower overall gross margins from the Zycon operations including ongoing startup expenses associated with the production facility in Malaysia and costs associated with expansion of capacity and technological capability at various of their facilities.

OPERATING EXPENSES. Operating expenses were 10% of net sales. Operating expenses include R&D costs, amortization expenses, and SG&A expenses. Some of these expenses are fixed in nature and there may be a decline in their issue in the future. They are focusing on getting better volume prices from their suppliers both here and in Malaysia. They are really focusing on how they can make most efficient use of the capital equipment they have in the business between all three volume facilities so they don't have duplication they don't need. They are also focusing on ramping up the Malaysian facility as it comes along and they are very optimistic that it will be producing more product and more profitably a lot sooner than people anticipated. Those are the things they are doing to keep operating expenses under control and to reduce them.

SALES FORCE TRANSITION. They are in the process of making a transition in terms of the sales force and the entire sales force will be compensated and motivated the way the Hadco people had been as they exit this fiscal year. They have already, in a number of cases, terminated the manufacturer's reps that were associated with some of the Zycon territories and have either put the direct people in or spread the direct people across those territories or let the Hadco people who were already there do that. They continue to ramp up international sales fairly aggressively. There are a number of developing opportunities, particularly with the addition of the Malaysian operations. One of the things, from a strategy standpoint, they want to do is be able to introduce the Malaysia production into other parts of the world, not just back to the US. In that light, they have hired a direct sales manager who will be based in Singapore and will build a direct organization in Southeast Asia. In addition to that, they have appointed an international sales manager who is adding to their sales staff in Europe as well as in Canada and South America. There are a number of activities going on to support establishing a foot-hold in other markets which hopefully will put a good deal of demand on their assets.

OPERATING INCOME. Operating income was 11.3% for the quarter as compared to 14.2% for Q1 1997. They saw continuous improvement in the operating performance of all the Zycon operations and particularly in the Santa Clara facility. The operating margin for the quarter, excluding the losses in Malaysia and amortization of goodwill, would have been 13.3%.

TAX RATE. The anticipated tax rate for 1997 has been revised and is now expected to be 40.5% for the year. This is lower than the 43% they had previously thought which is due to a recent Internal Revenue regulation relating to the Malaysia entity structure and also a more thorough review and understanding of the Malaysia tax structure.

BOOKINGS, A/R, INVENTORY. Net bookings for the quarter increased to $197 million. Backlog at the end of the quarter was $144 million versus $129 million for the previous quarter and represents about a 6-week lead time. They are comfortable with that lead time -- it is short enough that they don't lose business and is long enough that they aren't living on the hairy edge. Inventory was $37.3 million. Accounts receivable was approximately $85 million at the end of the quarter. They haven't seen better margins on new business being booked for Q3.

REVENUE CYCLES. They were asked whether the revenues came in consistently over the three months or if there was back- or front-end loading. They responded that they run their quarters level-loaded because, due to the nature of their business, it is extremely disruptive to get into a hockey-stick formation shipping schedule.

CAPITAL EXPENDITURES. Capital expenditures for the quarter and year to date were $18.6 and $36.5 million respectively. Capital expenditures were focused acrossed all of their assets. Inner-layer capacity, drilling capacity, automated optical inspection capacity and capability would be the three primary areas for capital expenses and there is obviously carryover from prior year and prior quarter. They almost always continuously add capacity in one dimension or another. It is certainly in their plans to continue to fill out the capacity and capability in the plants that exist right now. For the full year, they anticipate spending something on the order of $70-75 million.

ACQUISITION INTEGRATION. They are now 15 weeks into the acquisition of Zycon and have their first full quarter as a combined company behind them. They couldn't be happier with the progress the teams have made in bringing the two companies together. They are identifying and realizing operating income opportunities for all of their operations as a result of the team integration activities. The proof is in the numbers. When they contemplated the acquisition, they announced that the combination would be dilutive in the first year. The transaction has become accretive to Hadco in the first full quarter since the acquisition. The Zycon division contributed approximately $70 million of revenue during the quarter. The good news is that they still have a lot of work to do, which they view as very positive.

MARGINS AND EFFICIENCIES AT ZYCON FACILITY. The utilization of the Zycon facility, as in all Hadco plants, is a moving target depending on how you measure it. One of the reasons they were very attracted to the acquisition itself was because they felt that with some redeployment of some capital expenditures into some specific areas, that they could actually leverage up the capability and capacity of the Santa Clara volume facility. They believe they are achieving that to a certain degree already, but still have some work to go through to get more capacity and they believe there is more. The current utilization with the gates that are in place would be fairly consistent with the Hadco utilization of its volume facilities. They think the difference might be that with some very focused and specific capital expenditures in several areas, they could increase the bandwidth of the capacity in that plant a little bit quicker than even their own facilities right now. With respect to the margins, they are clearly below Hadco's operating model and have been since the acquisition or before. Hadco made some very significant gains in the Santa Clara facility which is the largest facility in the Zycon operation. That is the good news and, as they said, it did have a positive contribution to earnings for the company after all of the associated acquisition costs. So, they are very pleased with their performance at that facility immediately after the acquisition. They would expect that the Santa Clara facility and, frankly, all of the Zycon entities over the next year to year-and-a-half to come up to the Hadco model of financial performance. That is their expectation.

VOLUME FACILITY UTILIZATION IMPROVEMENTS. Hadco and Zycon have shared customers from day one and they have, since the acquisition, moved customers between all of their large plants to maximize the capacity utilization at all of the facilities based upon the mix. It is not a customer issue that improved the capacity utilization at the Zycon facility, it is a process, a procedure, and a capital expenditure focus that Hadco put on it when they came in. They think the thing that has really happened to make the Zycon facility more effective is that they have been able to better load the work across the three volume plants and have been able to manage the load such that it is balanced. They make good use of all of the resources. They have also been able to take larger segments of very difficult customer programs for, for example, buried capacitor material, etc. and load that across the three volume facilities. What they think we are seeing is a merger of the customer basing across them. They have had a transfer of work that had traditionally been done just in the Zycon facility moved to Hadco facilities and vice versa to better balance the workload and reduce bottlenecks and improve yields. They have focused the teams between the two facilities to look at how they could make use of those assets and the mangement has been very focused in a team effort on how to do that. They have been sharing best practices across the three volume facilities specifically and are seeing the benefits of that.

ZYCON'S MALAYSIAN OPERATIONS. The Malaysian operation continues to progress at or better than their expectations. They are confident that this operation will be the beginning of their Asian operation center. During the quarter they hosted five new customer visits and already have five additional visits scheduled for this quarter. More importantly, they have built and shipped product for 16 different customers and their Malaysian-specific backlog continues to grow. As anticipated, the Malaysian operation continues to be in a loss position. It is at or better than their business model as they did the acquisition so they are very happy with it. They expect it is likely the operation will not break even before the end of the calendar year although certainly their objective would be to accelerate that. If they are able to attain that, it is a win for them. They expect to break even, as they understand it today, and it is obviously mix and price dependent, at about $24 million. Their revenue rate in Q1 for Malaysia operations was approximately $1.8 million for the quarter and it is approximately $4 million in Q2. They are increasing the output of panels produced by Malaysia weekly by loading more work in there and putting more production level equipment in. They have increased the number of drills, the number of AOI machines, the number of panels that can be plated, etc. So they are ramping it up very fast and they are producing on literally a 4-5 week schedule. So their backlog hasn't necessarily gotten big, but the panel output has increased substantially and will continue to increase substantially.

BACKPLANE BUSINESS. For the backplane business, on a shipment basis through six months they are annualized at $68 million. They started that business nearly 10 years ago. But the big ramp up in putting surface-mount components on has been in the last 24 months. So, it literally went from an $8 million business to this level in 2.5-3 years with the fastest ramp being last year. While there is some shifting in programs going on in that whole marketplace, they are very optimistic about how that business continues to grow and the opportunities they see for it. The variety of customers they have in the backplane range from the networking space to the workstation space and also some telecommunications. They include Sun Microsystems, Cisco Systems, Mitel, etc. The company was asked if they shipped any backplanes from the Zycon backplane facility. They answered that they did ship product from that facility and are shipping product from it today. They have the capability and capacity there to do more.

CHIP PACKAGING. They were asked about the chip packaging, which is an area Hadco was exploring, and whether that had the potential to become a ramp up similar to the backplane. They responded that they are very optimistic about the kind of substrates they are producing in the Oswego facility for chip packaging. There are a number of programs where they are actually producing products that are going out and then they have a number of others that are going out in quantity but are still in qualification by the customers. That business is ramping up very fast in terms of units produced and they think it has a great growth potential. But they are not in a position to say it will ramp to $68 million in the next 24 months because they are trying to find what the market is for organic substrates versus ceramic, etc. and are developing that. They believe that has great potential for a whole new business offering over the next several years. The organic substrate is a laminated substrate that is significantly more cost competitive than other substrates the chips could be placed on. It will be, they believe, the substrate of choice for the chip packaging people. Initially the margins have the opportunity to be very good, but like any electronic product they are going to have the opportunity to decline over time. One of the areas they think will be very competitive and will be able to garner significant share at a higher margin is the smaller production runs and the quick-turn production runs out of their Oswego facility while they continue to learn about that product and build that product.

NEW CIRCUIT BOARD STRATEGIES. They were asked to talk about their small hole formation strategy and what processes and equipment they are looking at to address the continued decrease in the size of the holes in the printed circuit boards they build. They are very committed and are well along the way to have that as a volume process by the end of this calendar year. There are a number of approaches that are being discussed in the marketplace and are under development, etc. Inside Hadco for the last 1.5 years, they have had 13 different projects going for this. They are working to reduce the number of projects and to put their focus on 3 areas with one other area they continue to investigate. The first area is the use of lasers to replace mechanical drills. In that light they have just put into production (not for volume, but for initial quantities for testing) a laser out in California and a different kind of laser in Oswego, and a third laser in New Hampshire. They are each a little different and have different capabilities. They are running detailed comparisons of their productivity and capability etc. so they can make a decision of which ones they will use in volume and in which facility. They will have a good answer on lasers as they get into the early Summer and be in a position to know what they are doing there. The second area they are working on is the use of the IBM process which uses dry film as the photo-imageable media. They licensed this from IBM and are working with IBM in their Oswego facility because this process is out of Endicott NY and Oswego and Endicott are literally down the road from each other. They are also working with a series of suppliers to see to it that they can get the most cost-effective film to support that process. The third area they are working on is a liquid photo-imageable process and they are working with a supplier to develop a commercially usable media. That is happening primarily in the New Hampshire facility. They believe the way this will come out is that they will have a larger capability initially with lasers, a film-based process toward the end of this year, and then the liquid version early next year. Then they will decide whether they stay with film or stay with liquid because they will want to have the most cost-effective solution.

BUSINESS CONDITIONS DURING Q2. Net sales were the strongest ever in the company's history. They are very pleased with the performance of all of the Hadco operations as sales and earnings continue to grow year over year and sequentially. They experienced strong multi-layer printed circuit demand during the quarter which really drove the results. Shipments from the value-added manufacturing segment of the business were 8.8% or $16 million for the quarter, which is lower than Q1. This sequential decrease is a result of several customers adjusting their product build schedules as they transition several of their product lines. This represents a short-term adjustment in demand, but over the longer term they anticipate continued strong growth in this product area. During the quarter they hosted 18 customer visits to their two value-added facilites and captured new business from five new customers. During fiscal 1997, they also introduced their rapid product response initiative to meet backplane quick-turn assembly needs and they have seen that 62% of these rapid response activities have resulted in follow-on commercial orders. So they remain very optimistic about the prospects for this fast-growing part of their business. They are seeing a lot of activity from offshore competitors in the 6-layer and 8-layer products. But they don't see any in the 12-layer area, in the fine line kind of product.

STRATEGY AND COMPETITION. There is no real lack of good competition in their industry and they believe their strategy is working. They continue to differentiate themselves with their customers as the high-technology leader in the industry. Their investments are focused on new products and processes that provide their customers with a competitive advantage in their markets. Their strategy is very simple -- to be the leader in providing time-to-market interconnect solutions in quantities from prototypes to commercial production. They will do this through acquisitions as well as their reinvestment in current assets.

CUSTOMER ENVIRONMENT. They remember the cautious comments they made on the call last year about the environment. They are very optimistic about their opportunity and about the opportunities of their customers they are serving and the segments they are participating in. Hadco has really refined their offering and their position and the recognition of their position in the higher-tech, higher-layer count, fine line, dense, interconnect products that is servicing the telecommunication and computing and all of the processor kinds of products that are being built today -- a year ago they don't think they had the level of recognition by their customers that they have today. They think the acquisition of Zycon further solidified their position at the top of that technological opportunity triangle as a premier supplier in that part of the business. They think they have also demonstrated to those customers that Hadco can clearly give them the prototype, pre-production, and design assistance; then all the way through to volume manufacturing. They can literally support a program lifecycle. Those program lifecycles are very short and customers want to find a supplier who can support a broad base of technology all the way from the concept to full production. In the last year they have really improved their position in the marketplace. Their customers, while they have been going through a sorting out and consolidation in the networking area, for example, they have become more involved with Hadco in their solutions for those products because Hadco brings to them a variety of technologies and solutions and the customers' business is very robust and the demand is very robust. Hadco does have any customers telling them that they are going to slow down or pull their programs back. It is a very different environment from a year ago.

PRICING. They believe they are very cost competitive in the customer base. They believe they are probably, for the technologies they produce, one of the most cost competitive companies in the world. They try to sell value as opposed to price. They sell value through the set of services, technology, quality, and yields in the plants and all the other things. But, they also have to benchmark themselves against all their competition and they have to be able to be price competitive. And they think, for the most part they are, and they are not afraid to be price competitive and aggressive to get programs from customers and to get the lion's share of their business, particularly in the markets Hadco tries to compete in.

VISIBILITY ON INDUSTRY TRENDS. As far as visibility, those who have watched the industry for any period of time understand that the visibility is fairly short. They can see somewhat clearly out about one quarter and then have a very strong sense from their customers their MRP schedules and their demand requirements as they project them. That gives Hadco a very good sense of what demand looks like another quarter out. Beyond two quarters, they are out there with their customers, their MRPs, and their marketing projections. It was only one year ago that many of those marketing projections and MRPs were falling apart. It can be fragile and the visibility can be short, but they have about 6 months of reasonable visibility. For the customer segments and the customer segments that they serve the growth appears to be relatively strong -- in the 20%+ growth rate. 20% is a growth rate Hadco targeted as a company on a year-over-year basis for the past couple of years and fortunately they have been able to beat that objective.

COMPETITIVE ADVANTAGE FOR CUSTOMERS. They have met with a number of their customers and they think all of them are faced with a great deal of competition. In the networking space there is a great deal of competition and consolidation going on between those companies. They are focusing on how they can offer a more robust solution to their customers. There is a lot of product transitioning going on. In a number of ways, Hadco has been the beneficiary of that because the more robust solutions these companies want to offer in a smaller package requires denser, more complex, technically capable product and they need to be able to ramp those products in a short product lifecycle timeframe. Hadco can do that for them. So, in some ways Hadco has been the beneficiary of some of the churning that has been going on in the end markets. Technology is one of the competitive tools their customers are using.

STATUS OF THEIR OFFERING. They are still in registration with the offering of common shares and convertible securities as filed with the SEC on January 18th. They have concluded their review with the SEC for the current offering. They will continue to evaluate the market conditions and the various recapitalization and timing options for the company.

In conclusion, they continue to be very positive about the outlook for the interconnect business and for their company. The second quarter continues to be filled with a high level of activity for both Hadco and their industry. Their goal is to demonstrate performance through results and customer satisfaction. They are working very hard to eliminate seasonality from their business and will continue to grow the business.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.