UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) |
For the fiscal year ended: March 30, 2002
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) |
For the transition period from to
Commission file number: 333-32207
HCC INDUSTRIES INC.
(Exact name of Registrant as specified in its charter)
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Delaware |
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95-2691666 |
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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4232 Temple City Blvd., Rosemead, California 91770 |
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(Address of principal executive offices) |
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(626) 443-8933 |
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(Registrant’s telephone number, including area code) |
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Securities registered pursuant to Section 12 (b) of the Act:
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Title of each class |
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Name of each exchange on which registered |
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None |
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None |
Securities registered pursuant to Section 12 (g) of the Act:
10 ¾% Senior Subordinated Notes Due 2007
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Registrant’s Common Stock, outstanding at March 30, 2002 was 137,945 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Documents referenced on Exhibits Index, which begins on page 45
HCC INDUSTRIES INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
2
General
Except where the context indicates otherwise, the term “Company” means HCC Industries Inc. and its wholly owned subsidiaries Hermetic Seal Corporation, Glasseal Products, Inc., Sealtron, Inc., Norfolk Avon Realty Trust, HCC Industries International, HCC Machining Company, Inc. and HCC Foreign Sales Corporation.
The Company was incorporated in Delaware in 1985 and is one of the largest custom manufacturers of high precision hermetically sealed electronic connection devices in the United States. High precision hermetic seals are used primarily to permit the flow of electricity across a barrier used to separate different atmospheric media (such as gas or liquid to air or vacuum) existing on opposite sides of the barrier. A hermetic seal is generally accomplished through the creation of a glass-to-metal seal (“GTMS”). The hermetic seals manufactured by the Company generally fall into four categories - terminals, headers, connectors and microelectronics packages. A “terminal” is a device characterized by having only a single contact pin, while a “header” has multiple contact pins inserted in a frame. A “connector” is a type of terminal or header which can be mechanically coupled to or uncoupled from another connection. A “microelectronic package” is a container for thick and thin film substrates onto which hybrid circuitry has been etched. The Company operates in the premium segment of the market by providing high precision GTMS, custom designed to meet specific customer requirements. Each GTMS generally consists of a metal body or housing, metal contact pins, and an insulator fabricated from glass, ceramic or glass/ceramic mixtures. GTMS range in size from a two foot long, eight inch diameter cylindrical connector utilized for through-hull communication links for nuclear submarines, to a 40/1000 inch outside diameter (12/1000 inch inside diameter) implant to measure pressure in the heart chamber.
The Company believes that it has been an industry leader in the design and manufacture of GTMS since it developed its GTMS process in 1945. The Company has developed over 75,000 different configurations, primarily for the following industries: (1) automotive (for use in, for example, the initiators in airbags and seat belt pretensioners); (2) aerospace and military electronics (for use in, for example, gyro guidance devices, flight instrumentation, jet engine controls, and space suit controls); (3) test and measurement (for use in, for example, temperature and pressure transducers, infrared detection instrumentation, electro-optical devices and fuel injection monitoring devices); (4) medical electronics (for use in, for example, pacemakers, kidney dialysis machines and devices for monitoring vital life signs); (5) telecommunications (for use in, for example, fiber optics); and (6) energy (for use in, for example, oil drilling equipment and downhole logging instrumentation and for conventional and nuclear electric power generating plants).
The demand for the Company’s products is largely dependent on the telecommunication, automotive and aerospace industries. Sales to the Company’s largest customer accounted for approximately 23% of consolidated sales for the fiscal year ended March 30, 2002. The Company stopped selling products to this customer in March 2002. Sales to the Company’s ten largest customers accounted for approximately 43% of consolidated sales during the 2002 fiscal year. Approximately 70% of the Company’s consolidated sales for fiscal 2002 were to customers with which the Company had contractual agreements, sole source relationships, letters of intent or long-term purchase orders. A substantial portion of these business relationships are informal and certain of the Company’s contractual arrangements may be terminated at will.
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Competitive Strengths
The Company believes that it has the following competitive strengths:
Long-Term Customer Relationships. Many of the Company’s customers have been customers for over twenty years. The Company believes that both automotive and aerospace OEMs continue to seek long-term partnerships with fewer core suppliers. The Company’s relationships are strengthened by the fact that many of its arrangements with its customers provide for the Company to act as the sole source of supply for the customer. The Company estimates that approximately 70% of the Company’s consolidated sales for fiscal year 2002 were from contractual agreements, sole source relationships, letters of intent or long-term purchase orders.
Market Leadership. A number of the Company’s products hold leading market positions in their respective niche markets. The Company focuses on high margin custom products in a highly fragmented supplier base.
Commitment to Quality and Service. The Company believes that its commitment to provide consistent, high quality products and services and flexible manufacturing and custom designed products at competitive prices, forms the basis for its strong and diversified customer relationships. The Company manufactures most of its parts to specific customer requirements. The Company utilizes Statistical Process Control, Design Failure Mode Effects Analysis, Process Failure Mode Analysis, and a strict adherence to complete manufacturing documentation in order to manufacture high quality products for internal use as well as external customer sales. The Company’s four operating subsidiaries are registered to ISO 9001.
Proprietary Technology. The Company operates in the automotive, aerospace and general industrial technologies markets in which products typically require sophisticated engineering and production techniques. The Company designs and manufactures new products to fulfill customer needs, and has developed proprietary manufacturing technology since its founding in 1945. The Company believes that this proprietary technology helps enable it to attract and retain customers who require customized, high tolerance products. The Company estimates that it has produced over 75,000 different variations of GTMS.
Low Cost Operations. The Company believes that its extensive “in-house” capabilities and vertical integration are competitive advantages that have allowed it to become a low cost producer. By controlling the tolerance of the component parts, the Company has been able to reduce scrap and to increase the yields of its products. Furthermore, the Company is continually developing and assessing its programs designed to increase efficiency and enhance economies of scale in order to further reduce costs.
Diverse Products and Customers. The Company has a diverse customer base, with sales of numerous product variations to approximately 1,000 customers in fiscal 2002. Over the past several years, the Company has recognized consistent long-term growth in sales of GTMS products to the telecommunication, automotive, aerospace and general industrial markets.
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Business Strategy
The Company’s strategy is to expand its business through:
Focusing on Core Strengths. The Company continues to focus on what it believes are its core strengths and to invest in those businesses that are consistent with those strengths and which exhibit high growth potential. Core strengths include the timely custom design and manufacturing of high tolerance, high reliability components and the effective program management of long term contracts and supply agreements.
Leveraging Customer Relationships. The Company works closely with its customers to jointly develop and design new products and to improve the performance and lower the cost of the Company’s customers’ products. The Company has sole source supply contracts, shares product development, and enters into other teaming arrangements with its key customers to further strengthen and broaden its relationships. The Company believes that this strategy, together with the successful performance under existing contracts has led to additional long-term business from key existing customers and new customers.
Pursuing Selective Acquisitions. The Company intends to pursue selective acquisitions and to add products and capabilities that are complementary to its existing operations. Priority is expected to be given to acquiring businesses whose products can be manufactured in the Company’s existing facilities (“fold-in” acquisitions). The Company’s operations are characterized by a relatively high level of operating leverage; therefore, such fold-in acquisitions should allow the Company to allocate costs across broader synergistic product lines and represent additional volume through the Company’s existing facilities which should provide opportunities to improve profitability.
Expanding Internationally. The Company is considering the expansion of its operations in Europe. The primary motivation in a geographic expansion would most likely be to service the growth of its current customers’ operations as they expand their production operations abroad.
Industries
The Company estimates the total size of the GTMS market to be $600 million, with approximately one-half estimated to be the specialized, high precision segments in which the Company competes. The Company believes based upon internal analysis that the market for high-end hermetically sealed products is extremely fragmented, with no other competitor offering the same breadth of products as the Company. The Company believes that its focus on the high-end, custom segment of the GTMS market enables it to achieve higher margins.
The Company sells its products to five principal industries: (i) the telecommunication industry for use in optical networking components; (ii) the automotive parts industry for use in airbag initiators, seat belt pretensioners, climate control devices and anti-lock braking systems; (iii) the aerospace industry for use primarily in commercial and military aviation and electronics; (iv) general industry for use primarily in process control, and other industrial and medical applications; and (v) the petrochemical industry, for use primarily in oil and gas downhole logging equipment.
Telecommunication
The Company designs and manufactures highly engineered hermetic packaging used to facilitate the infrastructure outbuild of fiber optic telecommunications, supporting global internet communications. The Company has a strong position in the current OC-192 technology, as well as qualified designs for a variety of next generation products for increased speed and bandwidth.
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Automotive
The Company provides GTMS products used in initiators for airbag devices. At present, each airbag device requires at least one initiator (the device that deploys the airbag). The automotive airbag industry has undergone dynamic growth over the recent past stemming from increased consumer demand for automotive safety devices and federal regulations requiring such devices. Regulations adopted by the National Highway Traffic Safety Administration require that airbags be the automatic frontal crash protection system used for both the driver and front passenger in 100% of all passenger automobiles, light trucks and vans manufactured for sale in the United States.
Although not mandated by law, initiator-based safety systems are also employed in automobiles produced and sold in Europe and Asia, although fewer than in the U. S. The systems utilized in Europe and Asia include airbag systems similar to those in use in the U. S. and seat-belt pretensioners that employ initiators. While the majority of airbag initiators manufactured for use in cars outside the U. S. employ plastic initiators, there is a trend toward using GTMS in such products due to their increased reliability.
Commercial and Military Aviation and Electronics
The Company provides hermetic seals that are used for a number of different applications in commercial and military aviation and electronics, primarily to protect guidance and sensor devices from the effects of changes in atmospheric conditions. The Company believes based upon internal estimates that GTMS products are utilized in almost every model of commercial aircraft currently in production and its customers include essentially all major aerospace suppliers. The Company’s sales to the aerospace industry are dependent to a certain extent on new construction of commercial and military aircraft. The Company competes with a number of different suppliers in this market, based on quality, delivery and price.
General and Industrial
The Company provides GTMS used in pressure and temperature transducers (sensors), industrial process control equipment, capacitor end-seals for electronic devices and other industrial and medical applications. The Company believes that its ability to help customers develop products to meet demanding specifications allows for significant opportunities within this market segment, including those customers not currently served by the Company’s products. The Company also believes that the increased sophistication of equipment and increased level of automation being used in industrial applications will increase demand for GTMS products.
Petrochemical
The Company provides GTMS used for downhole logging equipment in the oil and gas industry primarily under long-term contracts to oil field equipment and service companies. The Company’s sales to this industry during any period are somewhat dependent on the current level of exploration and drilling in the oil and gas industry and current demand for and price of crude oil. The Company believes that it is one of only two significant providers of GTMS to this industry. The Company expects that the trend toward more sophisticated measurement-while-drilling equipment in the petrochemical industry is likely to lead to more demand for the Company’s products.
Customers and Applications
The Company has approximately 1,000 active customers. The Company’s ten largest customers accounted for approximately 43% of net sales for fiscal year 2002. The Company’s largest customer, Special Devices, Inc. (“SDI”) (a manufacturer of airbag initiators), represented approximately 23% of consolidated sales for the fiscal year ended March 30, 2002. The Company stopped selling product to SDI in March 2002. Currently, the Company is in the process of transitioning its capacity to other manufacturers of initiators and micro gas generators for the production of airbags and seat belt pretensioners. However, these programs and relationships with other customers will take time to develop and there is no assurance the Company will
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be able to ultimately regain its previous market share in these products. Approximately 70% of the Company’s consolidated sales for fiscal year 2002 were to customers with which the Company had contractual agreements, sole source relationships, letters of intent or long-term purchase orders. The Company only begins to manufacture products upon receipt of a purchase order.
The following table sets forth the Company’s principal end-user markets, certain applications for its products and certain of the Company’s customers in fiscal year 2002.
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End Markets |
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Telecommunication |
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Automotive |
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Aerospace |
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Industrial/Petrochemical |
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Applications: |
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Optical
Switching |
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Airbag
Initiators |
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Jet Engine
Monitors |
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Process
Control Sensors |
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Customers*: |
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Agere |
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SDI |
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Honeywell |
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Druck, Ltd. |
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Specific example of product application: |
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Modulator |
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Airbag initiator |
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Temperature Sensors |
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High pressure electrical bulkheads for downhole use (oil exploration) |
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What the product does: |
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Optical shutter to create binary code for laser transmission along fiber. |
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Electric current flows from crash sensor through initiator to begin inflation of the airbag. |
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Passes electric current from sensors that detect excessive heat and/or fire in aircraft |
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Carries electrical signals between geological formation measurement tools and sensors. |
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Result: |
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Higher speed data transmission. |
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Airbag is inflated in approximately 6 to 14 milliseconds |
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Warning signal and automatic release of fire retardant |
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Allows precise measurement of geology while protecting sensitive equipment from extreme heat and pressure. |
* Other than SDI, all of the customers listed represented individually less than 5% of the Company’s consolidated sales for fiscal year 2002.
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Manufacturing Process
A GTMS is made by assembling three sets of component parts (metal contacts or pins, glass bead(s) and an outer metal housing or shell) on a graphite fixture. This assembly is put through a controlled atmosphere furnace at approximately 1,800 degrees Fahrenheit until the glass becomes molten. The graphite fixture is used to hold the components in place while the glass is molten. As the assembly cools, a physical and/or chemical bond is formed between the glass and the shell as well as the glass and the pin, thus forming a hermetic seal.
The Company believes that its extensive “in-house” capabilities are a key competitive advantage that has allowed it to become a low cost producer. By specifically controlling the tolerance of the component parts, the Company believes that it is able to increase the end yields of its product. This attention to quality throughout the manufacturing process also helps to ensure the timely delivery of its products. It also enables the Company to respond very quickly to prototype and new product development opportunities.
The Company manufactures most of its parts to specific customer requirements. All three of the Company’s operating subsidiaries use Computer Aided Design (“CAD”) to produce the drawings and specifications required by the customer. The Company estimates that it has produced over 75,000 different variations to GTMS since 1945. This extensive library of designs enables the Company to suggest design changes to its customers that reduce manufacturing costs without sacrificing quality and therefore reduce the cost to the customer (value engineering).
The Company has made a significant investment in Computer Numerically Controlled (“CNC”) machining equipment in order to manufacture the metal shells and pins to demanding customer specifications. The Company also machines most of its own graphite fixtures thereby allowing it to maintain process quality. Many of the glass preforms used in the Company’s products are manufactured internally as well. The Company has many proprietary formulas for glass and glass/ceramic mixtures that it has developed in over 50 years of manufacturing. In addition, the Company has extensive capabilities in selective plating of precious and non-precious metals.
The Company utilizes Statistical Process Control (“SPC”), Design Failure Mode Effects Analysis, Process Failure Mode Effects Analysis and a strict adherence to complete manufacturing documentation in order to manufacture high quality products for internal use as well as external customer sales. The Company believes that its knowledge and use of these procedures give the Company a competitive advantage. Hermetic, Glasseal, Sealtron and HCC Machining are ISO 9001 registered. The ISO 9001 registration, an international standard of quality, should facilitate business expansion in Europe.
Marketing and Sales
The Company’s products are marketed throughout the Unites States to customers in a wide variety of industries, both by Company-employed salespersons, who work out of the Company’s plants, and by a number of independent regional manufacturers’ sale representatives. The 16 Company-employed salespersons receive a base salary plus bonus potential. Sales in Europe are through two sales offices located in Northampton, England and Paris, France. As part of the Company’s growth strategy, the Company believes that it can capture an increasing share of the business outside the United States. Sales into the EU accounted for approximately 12% (2002), 11% (2001), and 10% (2000), of consolidated sales by HCC. Economic, political, governmental and regulatory conditions in such international markets could adversely affect the Company’s ability to successfully enter or operate in such markets. Therefore, no assurances can be given that the Company’s attempts to expand its business into such international markets will be successful. The Company currently has 8 independent regional manufacturers-sales representatives spread geographically across North America and Europe. These representatives, who do not exclusively sell the Company’s products, are remunerated on a commission basis. The Company believes there is a significant opportunity to increase its sales through expansion of its sales and distribution efforts, both within the markets it currently serves and in new markets.
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Competition
The Company believes based upon internal analysis that most of the Company’s competitors in the GTMS sector of the industry in which it competes are smaller and have less technological and manufacturing expertise than the Company. The Company believes that it occupies a favorable competitive position because of its experience in engineering and production techniques and also its extensive vertical integration. Price has generally been a less significant competitive factor than the quality and design of the GTMS because their cost typically is a small percentage of the total cost of the end products in which they are used and because of the importance of the uses to which many of the Company’s products are put. In addition, products for airbag initiators are qualified for particular new automotive models and new products are subject to design and process verification testing (prior to which there are no sales) which typically takes 8 to 24 months and, therefore, helps to inhibit new entry into the market.
Backlog
As of March 30, 2002, the Company had a backlog of $25.2 million compared to $52.4 million as of March 31, 2001. The Company sells a majority of its products pursuant to contractual agreements, sole source relationships, letters of intent or long-term purchase orders, each of which may permit early termination by the customer. However, due to the specialized, highly engineered nature of the Company’s product, it is not practical in many cases for customers to shift their business to other suppliers without incurring significant switching and opportunity costs.
Employees
At March 30, 2002, the Company had approximately 575 employees, substantially all of whom were located in the United States. None of the Company’s employees are subject to a union contract. The Company considers its relations with its employees to be excellent.
Raw Materials
The Company obtains raw materials, component parts and supplies from a variety of sources and generally from more than one supplier. The Company’s principal raw materials are steel and glass. The Company’s suppliers and sources of raw materials are based in the United States and the Company believes that its sources are adequate for its needs for the foreseeable future. The loss of any one supplier would not have a material adverse effect on the Company’s financial condition or results of operations.
Environmental Matters
The Company’s operations are subject to numerous environmental laws, including those regulating air emissions and discharges to water, and the storage, handling and disposal of solid and hazardous waste. The Company believes that it is in substantial compliance with such laws and regulations. Because environmental laws are becoming increasingly more stringent, the Company’s environmental capital expenditures and costs for environmental compliance may increase in the future.
Under certain environmental laws, in particular CERCLA, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Generally, liability under CERCLA is joint and several and remediation can extend to properties owned by third parties. Persons who arrange for the disposal or treatment of hazardous or toxic substances or otherwise cause the release of such substances into the environment may also be liable under such laws for the costs of removal or remediation of such substances at a disposal or treatment facility or other location where the substances have migrated or come to be located, whether or not such facility or location is or ever was operated by such person and regardless of whether the method of disposal or treatment was legal at the time. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for the presence of such hazardous or toxic substances, and the liability under such laws has been interpreted to be strict, joint and several unless the harm is divisible and there is a reasonable basis for the allocation of responsibility. In addition, the presence of hazardous or toxic substances, or the
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failure to properly remedy such property may adversely affect the market value of the property, as well as the owner’s ability to sell or lease the property. The Company has potential liability under environmental laws for the remediation of contamination at two of its facilities (see Item 3 for further discussion of environmental matters).
Facilities
The Company’s principal executive offices are owned by the Company and are located in the Hermetic Seal facility located in Rosemead, California. Additionally, the Company has operating facilities in El Monte, California, Lakewood, New Jersey, and Reading, Ohio, as set forth below. The Company also owns approximately 47,400 square feet of plant and office space in Avon, Massachusetts, which is currently vacant.
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Location |
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Owned/Leased |
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Square Feet |
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Rosemead, CA |
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Owned |
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37,000 |
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El Monte, CA |
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Owned |
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110,000 |
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Lakewood, NJ |
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Owned |
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50,000 |
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Reading, OH |
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Owned |
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37,000 |
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Environmental Matters
Rosemead, California
Regional Groundwater Contamination. A portion of the San Gabriel Valley in which the Rosemead facility is located was designated by the EPA as a federal Superfund site in 1984. The Company has been named as a potentially responsible party (“PRP”) under CERCLA for the El Monte Operable Unit. If the Rosemead facility contributed to the regional contamination, such contribution is in connection with alleged spills of the degreasing solvent tetracholoroethylene (PCE).
Many other companies are believed to be contributors to the groundwater contamination in the El Monte Operable Unit. The Company and 18 other such companies have formed the Northwest El Monte Community Task Force (the “Task Force”) to undertake the investigation of the remediation, to identify other potential contributors and potentially to undertake required remediation. In March of 1995, the Task Force entered into a Consent Administrative Order with the EPA to perform a Remedial Investigation and Feasibility Study (RI/FS) of the El Monte Operable Unit. The RI/FS was completed in 1999 and the EPA issued an interim record of decision. The RI/FS costs of approximately $2,400,000 to date have been funded with about one-quarter of the costs coming from governmental entities and the balance paid pursuant to a confidential interim allocation agreement of Task Force members. To date an additional $2,200,000 has been spent or committed to be spent to undertake early remediation efforts on a voluntary basis. In addition, the Task Force, in conjunction with Southern California Water Company, received a $650,000 grant through the San Gabriel Valley Water Quality Authority (“WQA”) to upgrade remediation facilities in connection with the remediation of the deep aquifer on the west side of the El Monte Operable Unit in 2001. Those facilities have been installed. In 2002, an additional $3,250,000 grant was awarded by the WQA to undertake further shallow and deep aquifer remediation as well as pay for ongoing operations and maintenance of the deep aquifer remedy. It is anticipated that an agreement between the Task Force and the EPA to undertake the balance of the remediation required consistant with the record of decision will be executed by December 2002.
On-site/Soil and Groundwater Cleanup Costs. In addition to the Operable Unit Remediation costs, the Company has voluntarily undertaken both on-site soil and groundwater remediation. In 1995, the Company installed a soil vapor extraction system. To date, the remediation system has removed over 99% of contaminants in the soil.
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The Company has installed a groundwater extraction system in conjunction with a neighboring facility. This system extracts contaminated water from the shallow aquifer and pumps the water for use in our neighbor’s manufacturing process prior to discharge to the municipal sanitary sewer. The system has been operational since August 1996 and is designed to capture contaminated groundwater from under the Company’s property before it impacts the regional groundwater flow. Although the system has been successful, it is premature to determine how long it will be needed to remediate the groundwater to acceptable levels, or if the operation of the system will be discontinued and replaced with a regional groundwater remediation program.
The Company believes that its financial liability with respect to regional groundwater contamination may be substantially reduced by acting on its own initiative to commence early remediation of groundwater contamination under its property.