SPEECH 3/9/07, Association for Corporate Growth
THE HUSCO STORY
THE JOURNEY (1986 – 2006)
Good afternoon. This is my second time to speak to this distinguished group, and I look forward to updating you on the HUSCO story. Since we have attendees who may not know HUSCO, I would like to provide a description of the journey we have pursued and are pursuing.
In July 1984 I joined HUSCO as a general manager after developing a strategic plan for the business in 1983. A key part of that plan was to establish European operations. After the plan was accepted by AMCA International, HUSCO’s parent, I was given the opportunity to make it happen. The business had shrunk to $13 Million in sales in 1983 from a peak of $35 Million in 1979, as many of HUSCO’s major customers had relocated operations to Japan and/or Europe due to a very strong Dollar.
For those of you who question the value of golf in business, I have a story for you. In the fall of 1984 I had an opportunity to play golf with Bill Holland, the new president of AMCA International who in 1980 had purchased the Koehring Corporation of which HUSCO was a part. I asked Bill what his priorities for AMCA were, and he indicated his number one priority was to fix the highly leveraged balance sheet. As I drove home that evening, I realized that the implication of this answer was the divesture of a number of operations, and I immediately commenced my efforts to buy HUSCO. I was rebuffed 3 times before a company called Texas Hydraulics made a verbal offer to buy another AMCA business called “Benton Harbor Engineering” which manufactured hydraulic cylinders, but only if AMCA would consider including HUSCO in the package. This offer incented AMCA to reassess its position concerning HUSCO and we were put in play. I responded with a reasonably attractive offer for HUSCO which was accepted by AMCA predicated on a demonstration of my ability to adequately finance the deal. I had one small problem: I did not have any real money, but it was the 1980’s, and anything was possible. After an extended search, I engaged Wayne Oldenburg from Reinhart Boerner and Dave Drury from Price Waterhouse to act as my advisors. The creative deal we structured was completed in roughly 3 months, and we were able to purchase HUSCO without the use of venture capital by securing $4 Million of subordinated debt from AMCA and only 3% of the purchase price was pure equity. The $500K equity investment required mortgaging everything except my youngest child who was only 3 at the time. The deal was completed December 7, 1985 an auspicious day.
Sadly, the 3% of price in equity evaporated the first month of operations as we received a highly unexpected legal bill from Reinhart Boerner. The bill was received at 5:00 p.m. on Christmas Eve with a request that payment be made by December 31. Never let it be said that Wayne was not a master of timing and value pricing! After contemplation and prayer, I decided to pay the bill which was 6 times the original estimate and 3 times the November estimate. We immediately switched our legal work to Minahan & Peterson which was eventually acquired by Quarles and Brady. Over the past twenty years we have had a partnership with Quarles which has produced approximately $10 Million of billings, the trustee of our various family trusts, plus my son’s father-in-law. That’s a service mentality for you! We do continue to use Reinhart’s Bill Flynn for bank transactions, and I play golf with Dick Van Buren on occasion, a prince of a guy.
On January 2nd, 1986, we began our first year as a new company with 100% leverage. I am going to review our progress since then in five-year increments. Before I proceed, however, I should briefly explain our business. HUSCO is a manufacturer of custom designed hydraulic and electrohydraulic controls for use on on-highway vehicles and off-highway equipment. Our products provide “intelligence” to machinery, and our mission is simple: Make Machines Smarter.
During the first five years, our focus was generating financial viability, establishing European manufacturing and engineering operations, penetrating Deere, Caterpillar and JCB where HUSCO had virtually no sales, and resolving a major conflict with our Japanese licensee. We were able to grow the business from $22 Million to $44 Million and were able to pay off ahead of time (at a $0.5 Million discount of course) the $4 Million subordinated debt from AMCA. In 1990 I hired our tax partner from Price Waterhouse, Jim Gannon, to become our CFO, and he proceeded to cause a recession which drove our sales down 25%. My staff thought I was a bit nuts to hire a tax partner from PW for a $40 Million business, but Jim was hired to help us grow beyond a $100 Million business and he has been critical to our success.
In the late 80’s an opportunity to provide John Deere’s AG Division HUSCO product in lieu of their own manufactured product was identified and ultimately obtained. The two resulting programs with Deere each required investments of over $10 Million each prior to production, or roughly 3 times our net worth at the time. The penetration of the AG business and continued growth in market share of the construction and material handling businesses worldwide allowed HUSCO to grow to over $100 Million by 1995, our tenth anniversary.
In the early 90’s we did our second strategic plan which identified the automotive business as future potential for HUSCO. During 1996 to 1999, we worked on a number of projects involving high technology suspension systems before we were successful with Mercedes which resulted in an 8-year contract. We sold Mercedes on using HUSCO for an expensive ($500/car) and critical subsystem on their high end vehicles (S-Class, SL, and CL) even though we had never done any business with an automobile company, were located 4000 miles from their manufacturing facilities, and did not own the property we needed to construct a new non-union facility to house the complex and very expensive semi-automated equipment required to manufacture the most difficult hydraulic components ever specified. We spent approximately $15 Million to construct a facility in Whitewater, Wisconsin, design the product and install our most sophisticated manufacturing cell we have ever designed. Convincing a very conservative high end German automobile company to use HUSCO was one heck of a sales job! The $100 Million contract launched our new automotive products division which has been managed by Mark Sefcik, a Harvard Business School graduate I recruited to be the project manager for the Mercedes program. In 1999 we established a sales and service operation in China, and by 2000 our total business had grown to approximately $160 Million.
During the period of 2001-2006, we built a manufacturing facility in China, expanded our Whitewater facility over 100%, established an aggressive global sourcing operation to help insulate us from significant swings in the value of the dollar which hurt us competitively in 2001-2002, developed what we believe will be an industry changing technology called INCOVA and initiated efforts to penetrate the Indian market. By the end of 2006, we had grown HUSCO to roughly $250 Million in size.
WHERE ARE WE GOING NOW?
During the next ten years, we plan to establish global manufacturing and procurement operations which allow HUSCO to seamlessly provide products that are globally competitive in all the major markets. We believe that when we have highly effective manufacturing operations located in major markets plus globally competitive material costs, our operations can service these major markets competitively.
HUSCO runs a different race by spending approximately 8% of its sales in engineering and R&D in order to insure our technology is superior to the competition. This level is four times the industry average. We are now introducing a new technology which we refer to as INCOVA which is the result of a $25 Million ten-year product development effort. Before we start making real money on INCOVA, we will have invested $40 to $50 Million. Our goal for this technology is to change the world of hydraulics and develop a new, highly profitable business for HUSCO which should produce more than $100 Million in annual control systems sales for off highway equipment within five years. We are also developing numerous new product line platforms which will allow us to consolidate our technical leadership in traditional products while increasing our market share.
Our latest foray into international markets is the construction of a new 70,000 sq. ft. facility in Pune, India which will serve as a manufacturing and R&D center. We expect to grow annual sales from zero to $20 Million in roughly 24 months and plan to recruit up to 100 engineers by 2010. Our goal in India is to be the dominant supplier while establishing an engineering center that allows us to accomplish four meaningful goals.
- The first is to do engineering for major projects on a 24-hour clock and reduce time to market by 30% to 40%.
- The second is to further penetrate the India market with products specifically designed by our Pune organization for this rapidly growing marketplace.
- The third is to use lower cost engineering resources in order to pursue smaller to medium size customers in North America and Europe which traditionally have been served by fluid power distributors.
Let me explain this last point. Unlike most participants in this business, HUSCO has focused its business development efforts on the big global players. I am an elephant hunter! As our penetration of these large customers has increased dramatically over the past twenty years, it has created a need to focus on the smaller and medium size manufacturers which provide excellent profitability potential. It is difficult for us to justify going after these customers with the high cost of engineering in the US. However, with guidance/project management from the US and European technical organizations, our India engineers will be able to provide engineering designs cost effectively for smaller applications.
- Another goal of the Pune engineering organization is to serve as back up for high level analytical expertise we have in Waukesha. By backing up our US PhDs with similarly trained engineers in India, we can save 75% and be secure that we can continue to provide these services in the event any of our key people in the US become unavailable.
- The last goal is to develop products/services and/or services for a yet to be defined new business.
In the Automotive Division product and market development efforts are focused on automotive and diesel engine efficiency emissions. We have developed automotive technology for cam phasing, cylinder deactivation, diesel emission treatment, and fuel injection pump controls, that result in reduced emissions. We are in a “sweet spot” of new technology for automotive manufacturers, but unfortunately our biggest customers (the Big Three) are bleeding profusely.
For off-highway equipment markets, we believe that 2014 Tier 4 emissions limitations will require equipment to be designed in fundamentally different ways. HUSCO believes that through the use of our INCOVA technology, which saves more that 20% in energy while providing better controllability and productivity, we can integrate our knowledge of engines and work function controls to minimize engine transients which cause substantial pollution in diesel engines. This is a fascinating potential which could dramatically increase our business long term.
My most important personal goal will be to transition HUSCO to second generation leadership and ownership. A critical step was recruiting Austin Ramirez last summer after he finished his MBA at Stanford. To have second generation family involvement in a private business requires two crucial characteristics: Passion and superb capability. Luckily, Austin possesses both. His sister, Abby, who graduates from Stanford this year with an MBA also participates through her BOD role. We have a fifteen year management succession plan whose first major milestone will occur in approximately three years.
So what is the takeaway? I believe the critical skill I brought to HUSCO was the strategic ability to evaluate major risks in light of our core competences and the leadership to acquire and marshal the necessary resources to execute effectively. Being able to tolerate the stress and uncertainty inherent with the many challenges we encountered while investing huge amounts of money when success was far from certain was and remains crucial to growing HUSCO; risks which would not have been possible to take as part of a public entity.
STEWARDSHIP
I now would like to take a few minutes to talk about the implications of the financial success that HUSCO has provided our family and other employee/owners at HUSCO. Our family believes God has made us temporary stewards of our homes, HUSCO, financial assets, etc. A core value I have tried to instill at HUSCO is to use our success to make the world a better place. We believe that private companies in particular have the ability to focus and lever philanthropic efforts in ways that public companies cannot. For the Ramirez family, this focus has been primarily in the field of education. We have endowed athletic scholarships at the University of Virginia which helped produce 8 straight ACC swimming champions. We established a chair for fluid power at Georgia Tech which was an important factor in securing the fluid power industry’s first NSF grant. We provide scholarships to promising high school graduates which total approximately 130 four year scholarships at any given time. We help fund major school expansions at the United Community Center and funded the creation of a mandatory summer school program which helped drive extraordinary academic success. UCC now serves as a national model for delivering academic excellence at an inner city school serving minority students.
Currently, Becky and I are focusing our personal attention on providing Christian education in Central America. We are working with an organization called Missionary Ventures, and we have a long term joint goal to provide Christian education to a million children each year within the next 30+ years. We believe these children can become a force for positive and permanent structural change in their communities, cities and countries.
The takeaway here is that we were able to lever good institutions to become greater than they originally conceived, much like HUSCO. I believe that each of us who has been successful in business or professional activities has a personal and corporate responsibility to use this success to benefit the world at large. God has provided our family with inordinate financial success, and with that success comes responsibility. This responsibility extends not only to how we manage HUSCO but how we interact with the community and the world at large. I believe HUSCO in difficult times was divinely guided. This divine guidance has helped us to be successful, and the challenge for me and my successors is to use this success to glorify God.
Thank you for your time and attention. If there is time, I will be happy to answer any questions or talk to you individually.