Hermetic Seal Maker’s Record Punctured : HCC, Shackled by Acquisitions, Posts First Quarterly Loss in 15 Years
On Mt. Olympus, the Greek gods’ messenger, Hermes, was said to have invented a magical seal. Thus, the term hermetic for an airtight seal.
In Encino, a father-and-son team has exploited Hermes’ legacy to build a company with annual sales of about $38 million that appears to be the biggest independent maker of hermetic seals.
But after years of smooth sailing, the company, HCC Industries, has run into a few snags, largely because it bought a pair of money-losing, Boston-area companies that relied at least partly on the slumping computer industry. Last quarter, the two subsidiaries gave HCC, whose hermetic insulating devices are used mainly by electronics firms, its first quarterly operating loss in 15 years.
HCC also is in a period of transition. Its professorial chairman, Jack Goldfarb, stepped aside as chief executive in September when he turned 70, relinquishing the role of CEO to his son, Andrew, 38, a former schoolteacher who was president.
Solid Record
The younger Goldfarb will preside over a company with a solid record of growth but the prospect of further losses at the troubled subsidiaries.
The transition from father to son has been smooth, both men say. But working with family is not always easy, even when the parties are as mild-mannered as the Goldfarbs, who hold about 19% of HCC’s stock.
“It’s a good thing, but it’s also a difficult thing,” Andrew Goldfarb said. “If my children wanted to come into the business with me, I’d probably tell them to go someplace else.”
HCC makes a variety of electronic components, including pressure sensors and power transformers, but hermetic seals accounted for 56% of its sales last year, and the Goldfarbs have decided to focus on that end of the business.
Hermetic seals only sound like reclusive sea lions. Generically, the term means any kind of tight seal, but in electronics it applies to precision glass or ceramic insulators that keep connections pure and delicate instruments free of interference. Light bulbs and old-fashioned vacuum tubes have primitive hermetic seals that bond their glass and metal parts.
HCC’s seals are far more sophisticated, though, and go into advanced equipment for everything from submarines to heart implants.
Since going public in 1971, HCC has relied principally on hermetic seals. In recent years, its growth was speeded partly through acquisitions funded by long-term debt. Sales for fiscal 1985 ended March 30 were up 25% over fiscal 1984, which in turn rose 81% over fiscal 1983.
Net Income Flat
But net income was flat for three years, and in this fiscal year’s third quarter ended Dec. 28, HCC lost $660,000.
Most of that loss was non-recurring: $278,000 was an accounting adjustment for the sale of HCC’s interest in an Israeli company that made electronic sensors and $148,000 was set aside to cover the anticipated cost of a Texas liability suit. The case was brought against HCC’s former Anaheim machine tool division before HCC owned it.
There also was an operating loss of $234,000 from the two HCC units: Merrimack Magnetics, which makes computer components, and Hermetite, now one of the four HCC hermetic sealing divisions.
Of the two acquisitions, Merrimack is more clearly a mistake, analysts say. HCC paid $6 million for the troubled company in October, 1982, hoping to capitalize on Merrimack’s niche as a maker of custom-designed power transformers and line conditioners for such customers as IBM, Wang and Data General.
Unfortunately for HCC, the computer industry was headed for a downturn, and Merrimack faced competition from a wave of cheap imports.
Price Decline
“Price has been squeezed dramatically in Merrimack’s market over the past 2 1/2 years,” said Andrew Goldfarb, estimating the decline at 20% to 40%.
HCC doesn’t break out divisional results, but Merrimack’s losses are sufficient for the Goldfarbs to acknowledge some regrets. Nevertheless, Andrew Goldfarb insisted, “someday, reasonably soon, the computer industry will have to sell on quality again and not just on price,” and then Merrimack will turn around.
Meanwhile, HCC closed Merrimack’s plant in Franklin, N. H., consolidating its operations in Lowell, Mass., to cope with declining sales. Merrimack’s sales fell to $7 million last year from $15 million in 1982.
Hermetite, acquired last fall, used to make 35% to 40% of its sales to the semiconductor industry and the rest to military users. But the semiconductor slump dampened Hermetite’s business, leaving a company much bigger than its sales justified. Layoffs and attrition cut costs but, like Merrimack, Hermetite is expected to lose money in the current quarter.
Market Share
Nonetheless, HCC appears to have the largest market share among independent companies vying for the $100-million to $150-million annual market in glass-to-metal seals. HCC holds that position even though it doesn’t emphasize volume. Instead, it specializes in expensive, hard-to-fill orders that require the most skills--and yield the most profits.
“They’ve developed a reputation for making the really tough, state-of-the-art product,” said Stanley Lanzert, an analyst with Drexel Burnham Lambert brokerage firm.
Lanzert said he considers HCC well-managed, and wasn’t disturbed by the Merrimack and Hermetite deals.
“When you make acquisitions, it’s easy in hindsight to throw mud in someone’s face,” he said. “These two didn’t work, but they’ve made other acquisitions that have done well.”
Two of those are Glasseal and Sealtron, hermetic sealing companies acquired in 1983. Both are performing well, the Goldfarbs say.
Berkeley Graduate
Another acquisition of sorts was Andy Goldfarb, a 1960s Berkeley graduate who loved teaching but became frustrated with the bureaucratic politics of that profession. He joined the business in 1976, and in 1983 became president and chief operating officer. As CEO, he is likely to become chairman when his father retires.
HCC was started as Hermetic Seal Corp. in Nutley, N. J., in 1945. Jack Goldfarb, an engineer from New York who made his mark in military research during World War II, was hired in 1962 as an operations consultant. Nine years later he and two partners bought the company, by then based in Southern California, and took it public. Annual sales at the time were about $1.5 million.
For the fiscal year ended March 30, 1985, HCC earned $1.0 million on sales of $37.8 million, down from earnings of $1.1 million on sales of $30.2 million the year before. Earnings in fiscal 1985 were lower mainly because of an extraordinary loss of $326,000 from the early retirement of $4.6 million in long-term debt.
HCC had to pay slightly more than market value to get the bonds back but says it was worth the cost because its cash was earning substantially less than the interest it was paying on the bonds.
Without that item, earnings would have been $1.4 million.
