Matthew-
The May 12 edition of The Wall Street Transcript (TWST) had an interview with Mason Carter, CEO and Charles Huber, Chairman, of Merrimac. Since the gentlemen had no serious differences (in fact, they seem to have a mutual admiration society in operation) I'll refer to them as "MRM" in the following summary. The interview descibes a company undergoing a major transformation while remaining within its area of competency.
MRM describes itself as a designer, manufacturer and marketer of high performance signal processing components and sub-assemblies. About 71% of sales come from the US, 12% from Europe, 14% from the Pacific Rim and three percent elsewhere. I was surprised to learn that nearly 50% of sales are going to commercial applications.
The industry segment with which they are involved which has the greatest growth rate is in wireless communications, where MRM's growth has lagged. They are, however, beginning to focus on that segment. They also see significant growth in the commercial satellite market, radar and missilie guidance systems. They have realized that in the commercial market they can build a standard platform that comprises roughly 80% of the value of products shipped to customers. The other 20% would be mission specific. This represents a major departure in MRM's way of doing business which traditionally provided totally customized products with little commonality across applications or between customers. A key focus of the "new" MRM is to reduce the time between receipt of an order to shipping the product.
With respect to consolidation of the industry, MRM said, "The losers are starting to drop. The viable companies are being acquired ... The companies that were good in the past are getting better. We will keep ourselves in their league. But there are going to be some bloody casualties in the process."
Regarding itself, MRM said, "In the past no one questioned that we had good engineering and good products. There was a smugness about our pricing, which overshadowd everyting else and totally masked the fact that we were mortgaging the future. ... We were capturing less than five to 10% of nay given market for any given product that we made. ... Merrimac has traditionally been an engineering design and prototype business with very little volue production. In other words, we would design, provide prototypes and then, in almost every instance, a competitor would be successful in securing the production order. ... Clearly the pulse of the company, the heart of the company, is no longer the engineering deparment. It's the company-wide drive to serve the customer."
Regarding the future MRM said, "We are going to be able to increase the size of this company tenfold. ... We are going to achieve substantial gains in sales. Our sales growth over the next two or three years is going to be nothing short of astounding. So in order to be profitable we are going to have to make a huge investment in fixed assets. We are now buying $500,000 machines so that we can process 1,000 unit orders we never dreamed of. ... We are growing our traditional high-rel and military business in terms of ongoing production requirements. That is something we never did before. The area that is most new to us is the commercial marketplace. Certainly wireless offers the greatest opportunity. We believe there is a second wave of technology that we can capitalize on. We are going to be a contender in commercial. A development program is undersay. It is well resourced (sic). We are highly confident that we have found the answer to a common platform technology that will allow us to serve cross markets in a highly competitive fashion." They also noted that they are eyeing "highly select" acquisitions. Concerning a merger MRM said, "We had a meeting with a competitor about our size. Their culture and approach was so irreconcilably different from ours that even though a statistician would have said that this is a dream deal, it made no sense."
In response to TWST's question about financial targets, MRM replied, "Clearly the pardigm shift for the company is 'Profitable Growth'. Growth was not a mandate over the last decade with prior management. That is the case now. Beyond that I underline the word profitable. ... We believe that we are implementing the formula that it takes to ensure that the growth we seek is profitable. ... We now measure profit on return on investment and return on assets. We don't measure simply in terms of profit margin. ... What we have done is set variable compensation programs internally so that everyone on the team, every co-worker will have an opportunity to earn an incentive by achieving the profitable growth targets that we have set."
MRM indicated they will have substantial capital needs in upcoming years. I cited the sizeable equipment purchases to become a volume manufacturer. MRM noted "We are looking to reinvest in capital equipment in our two centers for growth, West Caldwell, N.J. and San Jose Costa Rica, 10 percent of our projected sales for the year. Beyond that we are going to be reinvesting another five to six percent of those total sales in major product development programs."
TWST asked if shareholder valuation was a high priority. MRM responded "No. My priority is results. I've been in the stock market for 35 years. Whatever happens to us will be the market whims applied to our solid results."
These guys seem to have a well thought out business plan. Hope it works,
Larry |
