Ed Curry Speaks

MCAA has the great good luck to have Ed Curry, former COO of Moore Products, and partner in Curry and Hurd LLC talk as always. Joining Ed this year are Kurt Lipsky and Marlin Underwood. Lipsky is Director of Finance and Personnel from Acromag, and Underwood is Director of Finance of Magnetrol. Reporting Groups. There are 9 public companies, 5 over $60 million. Bunches are smaller. Curry deliberately doesn't show slides long enough to copy them, and they are not permitted in the handouts. Public Companies in the measurement control and automation industry. We have surveyed these companies. 06 Companies, growth is 18.2% from $74,206,946 to 87,721,507 billion with operating income growth of 24.1% Performance comparisons: Danaher PI is far and away the most profitable, with Ametek, Rockwell, Emerson, Omron ABB AP, Schneider, part of Siemens, GE, Honeywell, Eurotherm, ABB PA Parker Hannifin, all over 6% operating income as a percent of revenue. The big international companies are the lower income and growth rates, but don't count on that, because it is partly because of different accounting standards. Opeating leverage. Growth is a combination of organic and acquisition related growth. Some even mentioned price increases. Underwood said that he agreed that leverage is a key. LIpsky said that looking at R&D from 5 years ago, the numbers have gone down, which is kind of surprising. Many end markets are noted as strong with oil and gas, end energy mentioned in almost all annual reports. Some European and Asian headquartered companies lag US companies in performance. Significant growth in revenue and operating income for the past two years. 2006 was the first year in many that the minimum was a positive number. If you did only 5 or 6% you're at the bottom of the barrel. Participating public companies COGS 56.3 vs 55.5 selling: 15.5 vs 15.4 10.6 operating income to 16.8 since 2002. G&A has grown from 7.4 to 9.2 since 2002. But R&D is down from 2002. It would appear that this is due to the consolidation in the industry. What is the driver for the increase in G&A? It is partly Sarbanes-Oxley. At Wheeling-Pittsburg, the cost of audit+SOX was 6x the cost of the prior year. Danaher, Ametek, Emerson tout the organic growth but it is really about 50/50 acquisition. Gross profit has jumped to nearly 45% since 2002. Selling expenses and G&A are nearly flat, with G&A moving up just a little bit. Income from operations is really strong at nearly 18% for two years now. Inventory turns have gone from 6 to 8 since 2002. Customers are even starting to pay. Collection period has dropped from 64 to 60 days since 2002.  The two smaller size groups are spending nearly twice as much R&D as the public companies. They have smaller selling costs, but larger G&A which is likely due to the differences in private company accounting. There's a segregation of marketing and selling in the larger companies, and there is better identification of costs, especially in solution selling. It is likely to be channel related as well, since group 2 and 3 companies often use indirect channels. Group 2 companies improved from 11.8 to 14.2 opeating income. Even the smaller companies are up in income from operations, but G&A is also up, tied to executive compensation and commissions. In a five year comparison, cost of sales is down in both Group 2 and 3, with a larger G&A and cost of sales. This is a pretty dramatic time for growth and profit extensions. Groups 1, 2, and 3 are all converging on 46 to 47% gross profit. Selling expenses are maintaining flat, for all groups. Smaller inventory turns numbers for smaller companies.  Inventory planning may be easier in larger companies. Net sales per employee is increasing for all three groups. The public companies and the Group 1s have the lower gross profit, smaller companies have the higher gross profit. But the public companies have higher income from operations. Strong relults again. There are some companies with modest profitability even in this very strong year. "This generally reflects the capital goods purchases in the process industries." Acquisitions are a substitute for R&D. Now for the manufacturers' reps. They went from 0.5 to 2.9% income from operations. G&A stayed the same. What do you know today, that you wished you knew a year ago? Why?